Grupa Azoty Zakłady Chemiczne Police Group

Transcription

1 Directors Report on the activities of Grupa Azoty Zakłady Chemiczne Police S.A. and the Grupa Azoty Zakłady Chemiczne Police S.A. Group Grupa Azoty Zakłady Chemiczne Police Group

2 This Directors Report presents the key events which occurred in the 12 months ended December 31st 2017 at the Grupa Azoty Zakłady Chemiczne Police Group and Grupa Azoty Zakłady Chemiczne Police S.A., the Group s parent, including results of their operations, as well as a description of relevant risks and threats. It also presents financial and nonfinancial indicators, if material for the assessment of the Group s and the parent s condition, as well as additional explanations on the amounts presented in the consolidated and separate financial statements. Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 2 of 82

3 Contents 1. General information about the Group Organisation and structure Changes in the organisational structure Company organisational and equity ties Management of the Group Parent s organisational chart Changes in key management policies The Group s workforce Business overview Key information Overview of key products Sales markets and supply sources Significant agreements Significant events Growth strategy and policy Strategy Directions of development Growth prospects and market strategy Key investments in Poland and abroad Key equity investments Feasibility of investment plans Significant R&D achievements Financial condition of the Group Assessment of factors and one-off events having a material impact on the Group s activities and financial results Market overview Key financial and economic data Segments financial results Operating expenses Structure of assets, equity and liabilities Financial ratios Management of capital and assets Bank deposits Borrowings Loans advanced Sureties and guarantees received and issued Material off-balance-sheet items Financial instruments Expected financial condition Risk, threats and growth prospects Significant risk factors and threats Strategic management Management of fixed production assets Comprehensive customer support Availability of feedstock and materials Financial management Grupa Azoty Group s significant external and internal growth factors External factors Internal factors Equity and other securities and its major shareholders Total number and par value of Company shares, holdings of Company shares by supervisory and management personnel, and interests of such persons in the Company s related entities Treasury shares held by the Parent, Group companies and persons acting on their behalf Shares of the Parent Statement of compliance with corporate governance standards Corporate governance code applicable to the Parent and the place where the text of the code is available to the public Declaration of applying the recommendations contained in the Best Practice for WSE Listed Companies Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 3 of 82

4 8.3. Internal control and risk management systems Management standards and systems Shareholding structure Special control powers of holders of securities Restrictions on voting rights Restrictions on the transferability of securities Rules governing appointment and removal of the management staff. Powers of the management staff, including in particular the authority to resolve to issue or buy back shares Rules governing amendments to the Parent s Articles of Association Operation of the General Meeting Composition and operation of the Company s management and supervisory bodies Diversity policy Remuneration policy Agreements between the Parent and Management Board members Sponsorship, charitable or similar activities Entertainment expenses, legal costs, marketing costs, public relations and social communication expenses, and management consultancy fees Other material information and events Qualified auditor Environmental performance Awards and distinctions Supplementary information Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 4 of 82

5 1. General information about the Group 1.1. Organisation and structure As at December 31st 2017, the Grupa Azoty Zakłady Chemiczne Police Group (the Group ) comprised Grupa Azoty Zakłady Chemiczne Police S.A. (the Parent, the Company ), and: nine subsidiaries (in which the Parent held ownership interests above 50%), including two companies in liquidation, one indirect subsidiary, two associates (in which the Parent held ownership interests below 50%), including one company in liquidation bankruptcy. Table 1. Parent s equity interests in subordinated entities as at December 31st 2017 Entity Registered office/address Share capital % of shares held by the Parent directly indirectly Grupa Azoty Police Serwis Sp. z o.o. Koncept Sp. z o.o. Supra Agrochemia Sp. z o.o. Transtech Usługi Sprzętowe i Transportowe Sp. z o.o. Grupa Azoty Africa S.A. w likwidacji (in liquidation) Zarząd Morskiego Portu Police Sp. z o.o. PDH Polska S.A. ul. Kuźnicka 1, Police, Poland ul. Kuźnicka 1, Police, Poland ul. Monopolowa 6, Wrocław, Poland ul. Kuźnicka 1, Police, Poland Route de Ngor Villa No. 12, Dakar, Senegal ul. Kuźnicka 1, Police, Poland ul. Kuźnicka 1, Police, Poland 9, , , ,000 thousand , , African Investment Group S.A. (AFRIG S.A.) Route de Ngor Villa No. 12, Dakar, Senegal 340,000 thousand Infrapark Police S.A. w likwidacji (in liquidation) ul. Kuźnicka 1, Police, Poland 14, budchem Sp. z o.o. in liquidation bankruptcy Kemipol Sp. z o.o. ul. Moczyńskiego 8/10, Szczecin, Poland ul. Kuźnicka 6, Police, Poland 1, , AFRIG Trade SARL Route de Ngor Villa No. 12, Dakar, Senegal 33,000 thousand Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 5 of 82

6 Figure 1. Structure of the Group as at December 31st 2017: The Parent Grupa Azoty Zakłady Chemiczne Police S.A. The Company has for decades been a leading European manufacturer of fertilizers and one of the largest Polish chemical companies. With significant volumes of sales to foreign markets, the Company is also one of the largest Polish exporters. The Company s advantages include a titanium white unit of a type unique in Poland, the size of its ammonia, phosphoric acid and sulfuric acid production, and the strong position in the market for compound mineral fertilizers. Internationally, the Company is appreciated not only for its fertilizer production and sales volumes, but also for contributing to the development of the chemical industry and global agriculture. The Company pays due regard to CSR matters, engaging in projects that support local communities and regional development. Liaising with local authorities, Grupa Azoty Zakłady Chemiczne Police S.A. supports vocational education, with a particular focus on professions useful to the Company. The Company has also established links with higher education institutions, sharing expertise with students majoring in chemistry, environmental protection, management and marketing. Upon graduation, some of them move on to become Company employees. In 2017, the Company took a number of measures to adapt its business to the changing market conditions, which helped mitigate the impact of negative market trends. A flexible business strategy and cost optimisation, following an in-depth analysis of the economic viability of individual projects, as well as decisions anticipating any signals of market developments, underpinned the Company s solid financial results. Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 6 of 82

7 Group subsidiaries: Grupa Azoty POLICE Serwis Sp. z o.o. The subsidiary was registered on March 15th 2002 under No by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company s business includes overhauls and project execution in the mechanical and construction industries (construction of systems and apparatuses, including those made of plastics, maintenance services, workshop services, treatment of metals, and technical supervision services), project execution and technical and engineering services in the areas of automation and power engineering, repairs of control and instrumentation equipment and power generation plant and equipment, plant engineering in automatics and power generation, including plant engineering in process control and visualisation systems. Koncept Sp. z o.o. The subsidiary was registered on September 6th 2001 under No by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company s business consists in the provision of design services for the construction, assembly, mechanical, electrical, automation and measurement, and technological industries (including preparation of expenditure and investment estimates). The company specialises in design work for the chemical industry (manufacture of ammonia, urea, compound fertilizers, phosphoric and sulfuric acid, and titanium pigment), as well as printing and binding services. Supra Agrochemia Sp. z o.o. The subsidiary was registered in the Commercial Register on December 29th 2000 and later reregistered in the National Court Register under No by the District Court for Wrocław- Fabryczna of Wrocław, 6th Commercial Division of the National Court Register. Its business comprises revitalising post-industrial sites owned by the company and preparing them for the purposes of redevelopment projects. Transtech Usługi Sprzętowe i Transportowe Sp. z o.o. The subsidiary was registered on April 2nd 2001 under No by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The company provides transport services, plant and equipment services, and workshop services (repair of battery-electric trucks, stackers, passenger cars, delivery vans, lorries, loaders, diggers, bulldozers and mobile cranes) as well as periodic inspection services. Grupa Azoty Africa S.A. w likwidacji (in liquidation) The company has been in liquidation since May 12th Zarząd Morskiego Portu Police Sp. z o.o. The subsidiary was registered on December 13th 2004 under No by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The Municipality of Police holds a minority interest in the company. The company s business comprises sea port operation, port construction, property management, research work, sea and inland shipping, and coastal water transportation services. The subsidiary is a port authority within the meaning of the Act on Sea Ports and Harbours. PDH Polska S.A. The subsidiary was registered on September 24th 2015 under No by the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register. The company s purpose is to construct a PDH unit for propylene production with related infrastructure, auxiliary systems and inter-unit connections, and extension of the Police sea port facilities to include a handling terminal for chemicals that would provide the required logistics infrastructure for receiving and storing the raw material. Infrapark Police S.A. w likwidacji (in liquidation) The company is in liquidation and is not conducting any business. Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 7 of 82

8 African Investment Group S.A. (AFRIG S.A.) The subsidiary, with its registered office in Senegal, was entered in the commercial register (RC) under No. SN-DKR-2002-B On August 28th 2013, the Company purchased a majority interest in that subsidiary. The subsidiary s business consists in licenced exploration for phosphate rock and supervision over the preparation of the related documentation. After the reporting date, the company began to wind up its activities. AFRIG Trade SARL The subsidiary is winding up its activities. Associates: Budchem Sp. z o.o. w upadłości likwidacyjnej (in liquidation bankruptcy) The company was registered in the Commercial Register on October 14th 1999 and later reregistered in the National Court Register under No by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is WB Technika Sp. z o.o. The company is in liquidation bankruptcy and does not trade. Kemipol Sp. z o.o. The company was registered in the Commercial Register on December 18th 1990 and later reregistered in the National Court Register under No by the District Court of Szczecin, 13th Commercial Division of the National Court Register. The majority shareholder is Kemira Kemi AB from Sweden. The remaining shares are held by the Company and Bank Ochrony Środowiska S.A. The company s business consists in the manufacturing and sale of chemicals for water purification and wastewater treatment Changes in the organisational structure Share capital increase at PDH Polska S.A. On April 5th 2017, the General Meeting of PDH Polska S.A. passed a resolution to increase the company s share capital by way of issue of 5,200,000 new shares. The Company subscribed for 2,917,875 new shares in PDH Polska S.A., with a par value and issue price of PLN 10 per share 1. Following the closing of the subscription, the Company was allotted all the subscribed shares. On July 14th 2017, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the increase in PDH Polska S.A. s share capital. 2 On November 10th 2017, the extraordinary general meeting of PDH Polska S.A. resolved to increase the company s share capital by PLN 124,000 thousand through an issue of 12.4m new series D shares, which will be paid and subscribed for in 2018 by the existing shareholders, and to expand the PDH project to include the construction of a propylene production unit with auxiliary systems and inter-unit connections 3. as well as section 4.5 of this Report. Distribution of assets of Infrapark Police S.A. w likwidacji (in liquidation) On July 28th and September 12th 2017, INFRAPARK Police S.A. w likwidacji (in liquidation), a subsidiary, took measures to distribute among its shareholders the assets which remained after all claims of creditors have been satisfied and secured, and therefore transferred the ownership of property, plant and equipment and the usufruct of land to the following shareholders: the Municipality of Police and the Company. Capital increase at Zarząd Morskiego Portu Police Sp. z o.o. On December 21th 2017, the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital of Zarząd Morskiego Portu Police Sp. z o.o. by PLN 24 thousand as a result of a contribution made by the For details, see Current Report No. 16/2017 of March 29th 2017; and Current Report No. 18/2017 of March 31st For details, see Current Report No. 33/2017 of July 18th For details, see Current Report No. 38/2017 of October 5th 2017, Current Report No. 40/2017 of October 18th 2017, and Current Report No. 42/2017 of November 10th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 8 of 82

9 Municipality of Police. Following registration of the capital increase, the Company s shareholding in Zarząd Morskiego Portu Police Sp. z o.o. fell from 99.98% to 99.91% Company organisational and equity ties Grupa Azoty Police Serwis Sp. o.o. holds one share in African Investment Group S.A. and has the right of representation on the company s Executive Board. African Investment Group S.A. holds one share in Grupa Azoty Africa S.A w likwidacji (in liquidation). As at December 31st 2017, the proportion of the Company s voting rights in its subsidiaries and associates was equal to the Company s respective interest interests held in these companies. 2. Management of the Group 2.1. Parent s organisational chart Figure 2.Parent organisational chart as at December 31st 2015 Management Board President of the Management Board, Chief Executive Officer GB Security Office GO Public Relations Office GD Central Dispatch Division GM Marketing Division GK Internal Audit Division GU Safety Department GF Finance Department GR Strategy and Development Department GZ Human Resources and Management Department GH Fertilizer Sales Department GT Technical Safety Department GC Strategic Procurement Department GN Fertilizers Business Unit GA Nitro Business Unit GP Pigments Business Unit GE Power Centre GL Logistics Centre GI Infrastructure Centre GJ Laboratory Analysis Centre On February 7th 2018, the Tendering Department was established, with its employees transferred from other Departments. It reports directly to the CEO Changes in key management policies The most important changes in the management policies in the reporting period included: Amendment to the Company s Articles of Association (Resolution No. 39 of the Annual General Meeting of July 3rd 2017 to amend the Company s Articles of Association) 4 to ensure compliance with the Act of December 16th 2016 on State Property Management amendments to and restatement of the Rules of Procedure for the Supervisory Board (Resolution No. 158/VII/17 of the Supervisory Board of December 28th 2017 concerning the Rules of Procedure for the Supervisory Board) to ensure compliance with the Act of December 16th 2016 on State Property Management, amendments to and restatement of the Rules of Procedure for the Audit Committee (Resolution No. 159/VII/17 of the Supervisory Board of December 28th 2017 concerning the Rules of Procedure for the Audit Committee of the Supervisory Board) to ensure compliance with the Act of May 11th 2017 on Statutory Auditors, Audit Firms, and Public Oversight. 4 For details, see Current Report No. 30/2017 of July 3rd 2017, and Current Report No. 31/2017 of July 3rd Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 9 of 82

10 2.3. The Group s workforce Table 2. Number of employees at the Grupa Azoty Zakłady Chemiczne Police Group As at As at Employee group Dec Dec Women Men Women Men Blue collar employees 257 2, ,048 White collar employees Total 633 2, ,719 Table 3. Number of employees at the Parent As at Employee group Dec As at Dec Women Men Women Men Blue collar employees 254 1, ,451 White collar employees Total 541 1, ,902 Table 4. Number of employees at consolidated subsidiaries* As at Employee group Dec As at Dec Women Men Women Men Blue collar employees White collar employees Total * excluding the Parent Table 5. Number of Group employees: annual average and at the end of 2017 Employee group Annual average At year end Women Men Women Men Blue collar employees 257 2, ,143 White collar employees Total 625 2, ,811 Table 6. Number of employees at the Parent: average for the year and as at the end of 2017 Employee group Annual average At year end Women Men Women Men Blue collar employees 254 1, ,526 White collar employees Total 535 1, ,978 Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 10 of 82

11 Table 7. Number of employees at consolidated subsidiaries: annual average and at the end of 2017* Employee group Annual average At year end Women Men Women Men Blue collar employees White collar employees Total * excluding the Parent Table 8. Employee turnover at the Group from January 1st to December 31st Women Men New hires Departures Total Table 9. Employee turnover at the Parent from January 1st to December 31st Women Men New hires Departures Total Table 10. Structure of the Group s workforce by education Item Year University Total or workforce equivalent Secondary Vocational Primary Number of employees , , Number of employees , , Table 11. Structure of the Parent s workforce by education Item Year University Total or workforce equivalent Secondary Vocational Primary Number of employees , , Number of employees , Table 12. Structure of the Group s workforce by length of service Item Year up to 5 years 6 10 years years Number of employees 2017 Number of employees % % % 314 9% % % Above 20 years 1,869 54% 1,945 59% Table 13. Structure of the Parent s workforce by length of service Item Year up to 5 years 6 10 years years Number of employees 2017 Number of employees % % % % % % Above 20 years 1,380 55% 1,430 59% Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 11 of 82

12 3. Business overview 3.1. Key information The Group s performance remains strongly correlated with the Parent s market environment. This correlation has been present since the Company commenced its operations. The Parent is a leading manufacturer of chemicals in the region and a significant one in the European Union. Currently, it operates in two segments: Fertilizers, Pigments and Other Activities, through three business units and four support centres: Fertilizers Business Unit, Nitro Business Unit, Pigments Business Unit, Power Centre, Logistics Centre, Infrastructure Centre, Laboratory Analysis Centre. Fertilizers Business Unit The Fertilizers Business Unit is the largest organisational unit within the Company in terms of revenue and production volumes. The output includes compound NP, NPK and NS fertilizers, as well as phosphoric and sulfuric acids. The Parent is the largest manufacturer of these compound fertilizers and acids in Poland and one of the largest in Europe. Products of the Fertilizers Business Unit are sold in Poland and on foreign markets (including Europe and South America, as well as Africa and Asia). Key products of the Fertilizers Business Unit are POLIFOSKA and POLIDAP, which are well recognised fertilizer brands in Poland. The POLIFOSKA brand has become a generic name for compound fertilizers in Poland, recognised for its superior quality and functional properties. The POLIFOSKA brand has a high concentration of pure constituents, chemical uniformity of fertilizer grains and high assimilability of constituents. Nitro Business Unit The Nitro Business Unit is one of Poland s leading manufacturers of ammonia and urea. The products are marketed both on the domestic and export markets. Urea is sold for agricultural and technological applications. An important business line within the unit is the manufacture and sale of urea solutions: NOXy (AdBlue ), a 32.5% urea solution, and Pulnox, a 40% urea solution. NOXy (AdBlue ) is used in the automotive industry to reduce nitrogen oxide emissions from diesel engines. A steady rise in the consumption of NOXy is expected in Europe in the coming years given the increasingly stringent regulations aimed at reducing atmospheric emissions of exhaust fumes. Pulnox is also used as a reducing agent in vehicle emissions control technologies. It is widely used in large power units, which generate harmful substances in the processes of burning fossil fuels, including nitrogen and sulphur oxides. Thanks to Pulnox, power and heat producers can meet stringent EU standards on industrial emissions. The range of products offered by the Nitro Business Unit is supplemented by ammonia water (Likam ). These products are manufactured at production plants which are constantly modernised and upgraded, with an emphasis on occupational safety and environmental protection. Pigments Business Unit The principal activity of the Pigments Business Unit is the manufacture and sale of titanium white and associated semi-products: iron sulfate and hydrolytic acid. The Unit is the leader in the domestic market of titanium white and operates a well-developed export network. Titanium dioxide-based pigments, marketed under the TYTANPOL brand, are manufactured using state-ofthe-art technology which meets stringent environmental requirements. Thanks to their versatility, efficiency, durability, safety in use and non-toxic nature, they are widely used and pigmented products have excellent aesthetic and protective properties. Titanium white is used, among others, in the production of paints and varnishes, printing inks, plastics, as well as papers and laminates. The consistent high product quality and professional advice on product use have been recognised the Unit has received many awards and honours such as EUROPRODUKT 2004, MEDAL EUROPEJSKI 2004 (European Medal), the Highest Quality Certificate (2007) and the Teraz Polska Badge of Quality (2012). Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 12 of 82

13 Power Centre The Power Centre produces heat (in the form of hot steam), electricity and feedwater, distributes energy and compressed air, and purchases electricity and heat (steam) for the Company s needs. It operates state-of-the-art generating units, ensuring reliable supplies of heat, electricity and feedwater. The Centre also sells electricity, hot steam and heating water as well as fly ash to external customers, and is also responsible for energy management across the organisation. In addition, the Centre generates electricity using high-efficiency co-generation technology, and therefore is able to obtain co-generation certificates, which are transferable property rights. Logistics Centre The Logistics Centre is responsible for shipping, transport, packaging and distribution of feedstock, raw materials and Company s products, and the operation and maintenance of port infrastructure. In the transport processes, it is important to ensure continuity of supplies, product dispatch handling, transport organisation and services, and operation of ports owned by the Company. There are two port facilities (a sea port and a barge port), which have bulk cargo trans-shipment wharves and trans-shipment stations to handle ammonia and sulfuric acid. The product dispatch process involves efficient fertilizer storage, packaging and distribution. The logistics system handles over 3m tonnes of bulk cargo annually (ca. 1.5m tonnes of feedstock and raw materials and ca. 1.5m tonnes of products). Infrastructure Centre The Infrastructure Centre is responsible for managing technical infrastructure, production and distribution of cooling and demineralised water, wastewater treatment, and waste landfilling. It is a support centre established for comprehensive management of land and building properties owned by the Company. The Centre carries out inspections required under applicable laws and standards, and manages repairs and maintenance of the production assets. It is also responsible for procurement and storage of technical materials. The Centre s operations are environmentally friendly, as evidenced by the presence of rare species of flora and fauna in areas adjacent to the Company s wastewater treatment plant and the phosphogypsum landfill unit. Laboratory Analysis Centre The Laboratory Analysis Centre satisfies all needs of internal customers regarding chemical analyses of feedstock supplies, implementation of technological processes, evaluation of the quality of finished goods and semi-finished products, environmental protection, OHS, and implementation of new technical and technological solutions. The Centre also provides similar laboratory services to the Company s external customers. It operates in accordance with the Integrated Management System based on PN-EN ISO 9001 and PN-EN ISO 14001, PN-EN ISO and PN-EN ISO/IEC 17025: Overview of key products The Parent s principal business is the manufacture of fertilizers and nitrogen compounds (PKD Z) and the manufacture of dyes and pigments (PKD Z). Its non-core activities comprise the manufacture of other inorganic basic chemicals (PKD Z). Under its Company s Articles of Association, the Company may also conduct other activities necessary to ensure proper operation of its business, including procurement of raw materials, as well as distribution and marketing of products. The Company s main commercial products include: compound fertilizers - NP 5 (MAP, DAP) and NPK 6 mineral fertilizers manufactured using monoand bi-ammonium phosphate and potassium salt, with secondary nutrient additives (sulfur, magnesium) and microelements NS fertilizer - nitrogen-based fertilizer with sulfur and magnesium, a granulated mixture of ammonia sulphate, urea and magnesite nitrogen fertilizer - urea liquid ammonia 32.5% urea solution for automotive applications - NOXy (AdBlue ) 5 NP fertilizers - compound fertilizers with two primary nutrients: nitrogen (N) and phosphorus (P). NPK fertilizers - compound fertilizers with three primary nutrients: nitrogen (N), phosphorus (P) and potassium (K) 6 Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 13 of 82

14 titanium white - a group of titanium dioxide-based white pigments. The Parent produces high volumes of sulfuric and phosphoric acid to obtain semi-finished products for the manufacture of its key commercial products. Using its semi-finished products, by-products and waste products as inputs, the Company also manufactures: hexafluorosilicic acid, dried iron (II) sulfate production Table 14. Parent s production volumes by product [tonnes] Product 2017 production volume 2016 production volume % change Compound fertilizers 1,157,600 1,142, % Urea 399, , % Ammonia 557, , % Titanium white 38,566 37, % AdBlue 145, , % Sulfuric acid 750, , % Phosphoric acid 374, , % 2017 sales Table 15. Consolidated revenue by product Product Revenue 2017 Revenue 2016 % change Compound fertilizers 1,458,570 1,485, % Urea 363, , % Ammonia 241, , % Titanium white 370, , % Other 165, , % Total 2,599,577 2,417, % In 2017, revenue from sale of compound fertilizers and urea was PLN 1,822,230 thousand, accounting for 70% of total revenue. Figure 3. Revenue by main product groups and other sales 9% 3% 4% 14% 56% 14% Compound fertilizers Titanium white Urea Ammonia NOXy (AdBlue ) Other Revenue from sale of compound fertilizers was PLN 1,458,570 thousand in 2017, having decreased by 1.79% year on year, primarily due to lower prices, which however were largely offset by higher sales volumes. Revenue from sale of urea and ammonia was PLN 363,660 thousand and PLN 241,735 thousand, respectively, having increased on 2016 mainly due to higher sales volumes. The strong Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 14 of 82

15 demand for and constrained supply of titanium white helped negotiate higher selling prices of the product and, as a consequence, led to a 25.61% increase in revenue from its sale Sales markets and supply sources In the reporting period, the Group s revenue from sales on the Polish market was PLN 1,613,659 thousand. Relative to 2016, its share in total revenue declined by 2 pp, while the share of exports increased by 2 pp, to 38%. Domestic and export sales accounted for 69% and 31% of total fertilizer sales, respectively. The key export markets were Germany, the United Kingdom, Hungary, Denmark, Spain, the Czech Republic, Mozambique and Uruguay. Combined sales to those countries accounted for 74% of total export sales. Sales of titanium white on the domestic market accounted for 44% of total sales of the product, with exports making up the remaining 56%. The key export markets were Germany, Italy, France, Sweden, Denmark, Ivory Coast and Belgium. Combined sales to those countries accounted for 89% of total export sales. Forty per-cent of chemicals manufactured by the Group was placed on the domestic market, and 60% was exported, with the key export markets being Germany, Sweden, the Netherlands, Slovakia, Italy and the Czech Republic. Combined sales to those countries accounted for 91% of total export sales. Figure 4. The Group s sales by geographies (by revenue)* 100% 90% North America 0.2% South America European Union 35.0% Africa 1.3% Other Europe 1.1% Asia 0.2% 80% 70% 60% 50% 40% 30% 20% Other Africa South America European Union Poland Poland 60.8% 1.4% 10% 0% *EU member states, excluding Poland No customer/trading partner of the Company accounted for more than 10% of the Parent s revenue in In the case of suppliers, only PGNiG S.A., a gas fuel supplier, exceeded the 10% threshold (20.6%). Sources of strategic raw materials 2017 saw a year-on-year decrease in prices of most key raw materials for fertilizer production, including phosphorites, potassium chloride, sulfur and sulfuric acid. However, prices of natural gas, ilmenite, titanium slag and fine coal increased relative to Phosphate rock For most of 2017, prices of phosphate rock continued the downward trend observed since late In the second quarter, the global supply of phosphorites was disrupted, but this did not halt the decline in prices on international markets. Flooding forced Bayovar, a major Peruvian phosphorite mine, to stop producing, and some of the long-standing customers had to seek supplies from other sources. In China, the government s environmental controls were extended to include phosphorite producers, which adversely affected the output and supply, and led to shortages of phosphates. China, which is self-sufficient in terms of phosphate rock production, imported small quantities of Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 15 of 82

16 this commodity in In early October and in November, the trend reversed, with most suppliers raising phosphorite prices in the fourth quarter of Potassium chloride Early 2017 was a busy period on the potassium chloride market (spring sowing season), relative to the fourth quarter of In Europe, potassium chloride producers raised their prices by an average of 2%. To reduce the accumulated stocks and support the upward trend in prices, a major US producer of potassium chloride ceased production entirely from one of its mines in January and temporarily reduced production from other mines. In the second quarter, the price of potassium salt in most markets strengthened, despite subdued demand. The only major markets with strong buying potential were Brazil and, early in the quarter, the U.S. The rise in potassium chloride prices was mainly due to the introduction of significant production cutbacks and the behaviour of the largest producers who maintained high prices of the feedstock. In the second quarter of 2017, K+S launched production at a new potassium chloride mine in Canada. This, however, had limited effect on the market, as quality and logistics problems held down sales from the new project. Global potassium chloride trade took an upturn in the second half of In July, the largest potassium chloride manufacturers signed major supply contracts with China (to be effective until the end of 2017) and India (until July 2018). China and India import 6 9 million and about 3.5 million tonnes of potassium chloride per year, respectively. Demand from Indonesia, Malaysia, Vietnam, and the Philippines also increased. In the US, a drop in the price of potassium chloride prompted distributors to buy and stockpile potassium chloride. Only in Europe, due to a challenging harvesting period and low demand for NPK fertilizers, demand for potassium chloride was weak, keeping the prices flat. Canada s PotashCorp, the world s largest manufacturer of potassium chloride, continued its policy of maintaining low stock levels and supply reduction, and planned maintenance shutdowns, lasting from eight to ten weeks, at several of its mines in the fourth quarter of Sulfur In the first quarter of 2017, global markets saw both downward and upward trends in sulfur prices. Contract prices of liquid sulfur in Europe did not change in the first quarter of At the beginning of the second quarter, prices of sulfur in key markets, such as the Persian Gulf, China, the U.S. and Canada, fell. Only in China shortages of sulfur, caused by production constraints, led to a price increase. A 4-5% correction of sulfur prices was seen in Europe (Benelux). In the second half of 2017, an upward trend set in, led by growing demand. Commissioning of several large desulfurisation units was delayed, which coincided with reduced output in the US (caused by hurricanes), technical issues in Canada, and logistics problems in Russia. The prices of liquid sulfur in Europe remained unchanged until the end of the third quarter. An uptrend in global sulfur prices in the fourth quarter of 2017 led also to an approximately 7% increase in prices across European markets. Ilmenite and titanium slag In 2017, on the representative Chinese market, prices of raw materials for titanium white production (slag and ilmenite) fluctuated between strong increases (from January to March and from June to August) and steep declines (the other months). The variations were attributable to environmental inspections by governmental authorities in China, resulting in production shutdowns and resumptions. On other markets (e.g. in Australia), prices of raw materials for titanium white production were on a slowly rising trend. Low prices of these raw materials in recent years resulted in a lack of major investments in new mines. The supply of raw materials may be insufficient to meet the demand from titanium white production plants operating at full capacity. Natural gas After a major decline in 2016, 2017 saw rising spot prices on the European gas market. The average annual gas prices at Western European hubs increased by more than 20% on After the cold beginning of the year and fast withdrawal of gas from storage facilities, when prices trended up, the spring saw a price decline. Over the next two quarters, prices trended horizontally, determined by high prices of coal, which was replaced by gas in the energy mix, and high prices of oil, to which Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 16 of 82

17 a part of long-term contracts and most LNG supplies are indexed. In August, the prices began to rise, driven by numerous failures and unscheduled shutdowns of gas infrastructure, resulting in limited gas supplies from Norway and Russia. Further price increases were linked to the start of the heating season and increased demand for gas from households, lower supply from the Groningen field, a surge in LNG prices in Asia, and a gas explosion at Austria s Baumgarten hub. Then gas prices returned to the level recorded at the beginning of the year. The Group purchased natural gas from PGNiG S.A., the EU market and on the Polish Power Exchange (POLPX). In total, in 2017 the Group purchased 96.7% of gas from PGNiG S.A., 0.6% on the POLPX, and 2.7% from the EU market Significant agreements Table 16. Agreements material to the Parent s business Agreement Parties Subject matter date Titania AS Ilmenite purchase Jan Office Chérifien des Phosphates Polskie Górnictwo Naftowe i Gazownictwo S.A. Purchase of phosphorites May Supply of gas fuel Jun Date and number Value of current report Jan Current Report No. 140,000 1/2017 May Current Report No. 135,000 21/2017 Jun Current Report No. 1,800,000 28/2017 On February 6th 2018, the Company and Grupa Azoty S.A. signed a framework agreement for the supply of liquid ammonia to Grupa Azoty S.A. The contract was executed for an indefinite period starting on January 1st 2018 and defines a schedule and other commercial terms of the deliveries. The value of the contract is estimated at PLN 113,000 thousand, VAT-exclusive, per year 7. On March 12th 2018, the Company and Polska Grupa Górnicza S.A. signed a bilateral coal supply contract. The contract was executed for an indefinite period starting on January 1st The value of the contract is estimated at PLN 78,500 thousand, VAT-exclusive, per year 8. On April 9th 2018, the Company executed a contract supply of Moroccan phosphate rock with Office Chérifien des Phosphates of Casablanca, Morocco. The contract was concluded for a definite term from January 1st 2018 to December 31st The value of the deliveries to be made under the contract is estimated at approximately PLN 350,000, Significant events Payment of dividends On June 12th 2017, the Management Board passed a resolution to propose to the Annual General Meeting that a dividend of PLN 31,500 thousand be paid to the Company s shareholders from the net profit earned in January 1st December 31st Uniform Procurement Regulations On June 15th 2017, in order to provide systemic solutions for awarding supply contracts, the Grupa Azoty Group put in place Group-wide Uniform Procurement Regulations. The Regulations contributed to the uniformity of procurement and tendering processes at the Company and helped optimise purchases made via the Procurement Platform. The Platform, which is a modern tool supporting procurement processes, was deployed simultaneously across all of the Grupa Azoty Group s subsidiaries. 7 For details, see Current Report No. 3/2018 of February 6th For details, see Current Report No. 5/2018 of March 12th For details, see Current Report No. 11/2018 of April 9th For details, see Current Report No. 24/2017, of June 12th 2017, and Current Report 26/2017 of June 12th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 17 of 82

18 Consolidation of Supra Agrochemia Sp. z o.o. The Company decided to consolidated Supra Agrochemia Sp. z o.o, a subsidiary, and recognise the effect to retained earnings as a correction of a prior period error, as the Parent had already controlled the subsidiary in previous periods. In addition, the sale of net assets of Supra Agrochemia Sp. z o.o. is highly probable, and therefore as at June 30th 2017, the assets were disclosed as Noncurrent assets held for sale and Liabilities directly related to assets held for sale. Other material events with a bearing on the Grupa Azoty Zakłady Azotowe Police Group s performance and growth are described elsewhere in this Report. 4. Growth strategy and policy 4.1. Strategy The Company is a key entity in the Grupa Azoty Group, whose development and growth plans are defined in the Grupa Azoty Group s Strategy for The methods for driving growth in line with the strategy are laid down in the Grupa Azoty Group s Strategy for Operationalisation. Since June 2012, when the Strategy was announced, major changes have occurred in the Grupa Azoty Group s immediate environment, which required updates to the underlying assumptions of the Grupa Azoty Group s development plans. The plans outlined in the Grupa Azoty Group s updated Strategy until 2020 account for the recent market developments as well as business cycle fluctuations that bear on results of the Grupa Azoty Group. In the coming years, the Company will focus on attaining the four key objectives set therefor in the Updated Strategy for , namely further consolidation, strengthening the Company s position as a solutions provider for the agricultural market, developing non-fertilizer segments as the second pillar of its business, and developing innovations Directions of development The Strategy outlines the Grupa Azoty Group s key strategic objectives in the main product areas with respect to raw materials, innovations, operational excellence, and financial policy. It also defines the corporate management objectives and methodology applied across the Group. The key development directions for the Grupa Azoty Group include product-related objectives for value-building business segments and for business support functions. In 2017, the Company was engaged in the following initiatives designed to support organic growth of the Fertilizers Segment: upgrade of the ammonia production unit was completed, which helped to reduce energy consumption and to improve the unit s production capacity, a new logistics depot was constructed to increase the fertilizer packaging capacities and streamline the loading and forwarding of palletised fertilizers, and to markedly increase the Company s product storage capacity, upgrade of the phosphoric acid unit was continued to increase production efficiency through improved P 2 O 5 recovery, reduce process steam consumption in the acid concentration process, reduce generation of waste phosphogypsum, and reduce the cadmium content in the acid to improve its quality, upgrade of heat exchangers in the ammonia synthesis unit was commenced. In 2017, the Pigments Segment continued initiatives aligned with the directions set out in the updated strategy. The main objective was to increase the share of sales to strategic customers and to concentrate activity on the European market. In the area of power generation, projects were continued to ensure the Group s compliance with the Industrial Emissions Directive (IED) Growth prospects and market strategy In 2018, the Company will continue to focus on strengthening the value of the Grupa Azoty Zakłady Chemiczne Police Group by seeking new business opportunities and by further strengthening its competitive advantage. More specifically, the Company will strive to: optimise operating expenses and financing structure, increase utilisation of the units capacities, including through reliability and efficiency improvements, reduce the consumption of strategic feedstocks and process utilities, Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 18 of 82

19 ensure compliance with environmental and technical safety requirements, streamline inventory management, develop technologies, ensure efficient project delivery, streamline logistics, increase the efficiency of support processes, increase the value of intellectual capital, and ensure optimal use of the available assets. Growth prospects at the Company are analysed with reference to individual business units as they operate on different markets, offer different products, and are subject to different regulatory regimes, including environmental requirements. To support implementation of the product and market strategy, R&D activities will be carried out in partnership with both third parties and other Group companies, i.e. the Tarnów and Kędzierzyn Chemical Technology Research and Development Centres and the Puławy Competence Centre. The key objective of these R&D activities will be to build knowledge-based competitive advantage to facilitate development of a more innovative product, process and technology portfolio. Titanium white market The titanium white business unit s strategy includes a range of initiatives designed to secure stable product sales during economic downturn by retaining key customers across target markets in Europe, maintaining the leading position on the Polish market, keeping up a large product portfolio, and maintaining the proper technical condition of the production facilities. Planned work will focus on improving the plant s process flexibility, optimising feedstock management to increase the efficiency of the titanium white unit, and expanding the product range to include products targeted at the most demanding customer groups. Fertilizer market Being of key importance to the Group s operations, the mineral fertilizers sector remains our focal area. A primary objective in this segment is to step up efforts in the key markets, i.e. Poland and the neighbouring countries, in particular Germany, based on the existing portfolio of phosphate and potassium fertilizers. The Company will continue adding new liquid and specialty fertilizers to its mix, as well as other products and services for the agricultural sector. This strategy requires continued efforts to improve cost-efficiency of the fertilizers business. To that end, process lines are being upgraded mainly to reduce their energy-intensity and operating costs, and to ensure their uninterrupted availability. Ammonia and urea market In 2018, the Company will carry out further projects to enhance the operational reliability of its ammonia production facilities. Plans have been made to improve the production of urea solutions in terms of its efficiency and cost-effectiveness. Efforts will continue to upgrade the ammonia unit to increase its efficiency while ensuring compliance with environmental regulations. Power generation Until 2020, the existing coal-fired co-generation plant will continue as the main source of heat and electricity for the production plants. The CHP units will be regularly upgraded to ensure their compliance with the changing legal requirements, particularly the environmental regulations. Measures taken to secure long-term access to heat and electricity will mainly depend on changes in the regulatory regime and market conditions. New business areas The Group is taking steps to diversify its product portfolio, expand into new business areas, and mitigate business cycle risks in the Fertilizers Segment. As part of this strategy, the Group is carrying out the Police Polymers project involving construction of the largest and most advanced PDH propylene unit in Europe and a polypropylene unit. Once brought on stream, these units will lead to a major shift in the structure of the Grupa Azoty Group s revenue streams, with the non-fertilizers business area increasing its share considerably. The Police Polymers project comprises the construction of a propylene unit, a polypropylene unit, auxiliary facilities, a polypropylene logistics depot and a propane and ethylene Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 19 of 82

20 handling and storage terminal. The project has been scheduled to break ground in 2019 and to be completed in late Its settlement is expected to continue until the end of Key investments in Poland and abroad In 2017, the Group s expenditure on property, plant and equipment and intangible assets was to PLN 226,581 thousand. The Parent s expenditure on property, plant and equipment and intangible assets was PLN 197,062 thousand, including: mandatory capex PLN 72,426 thousand; growth capex PLN 45,813 thousand; maintenance capex PLN 22,374 thousand; purchase of finished goods PLN 7,487 thousand; major overhaul work and other expenditure PLN 48,962 thousand. Figure 5. Structure of capital expenditure by type 25% 37% Mandatory capex 4% 11% 23% Growth capex Maintenance capex THE GROUP S KEY INVESTMENT PROJECT In 2017, the Group continued the key investment project of the Grupa Azoty Group, i.e. construction of a PDH propylene unit with auxiliary infrastructure. Steps were also taken extend the scope of the project to include a polypropylene unit. Following the optimization of the investment strategy based on a detailed feasibility study of both the engineering and business aspects of the revised plan, a decision was made to change the scope of the project. In business and commercial terms, adding a polypropylene unit to the PDH project is desirable as demand for polypropylene in Central and Eastern Europe is projected to grow dynamically until 2025 (forecast CAGR of 4.7%). Polypropylene is currently the main and most attractive derivative of propylene, accounting for more than 60% of the consumption of this raw material in Central Europe. Poland is one of the largest consumers of polypropylene in the region with a growing demand-supply gap on the domestic market (250 thousand tonnes in 2016). Construction of a polypropylene unit by PDH Polska S.A. will contribute to the extension of the product chain and thus help seek new business opportunities and generate higher margins. It will also provide the Group with an opportunity to expand into the larger and less saturated polypropylene market, thereby improving its resilience to business cycles. Once brought on stream, the unit will lead to a major shift in the revenue mix of both the Grupa Azoty Zakłady Chemiczne Police Group and the entire Grupa Azoty Group, with the non-fertilizers business area increasing its share considerably. On June 26th 2017, the Management Board of PDH Polska S.A. passed a resolution recommending that construction of a 400,000 tonne polypropylene unit be the preferred option for the project. On the same day, the recommendation was approved by the company s Supervisory Board 11. On August 25th 2017, PDH Polska S.A. obtained a permit (dated August 24th 2017) to conduct activities in the Police Sub-Zone of the Pomeranian Special Economic Zone 12. Under the permit, the company is entitled to a CIT exemption (a form of regional support) of up to the equivalent of EUR 26.25m. On October 5th 2017, the management board of PDH Polska S.A. passed a resolution to modify the scope of the PDH propylene project and acquire items of property, plant and equipment in line with the new scope of the Police Polymers project. The net amount of the project budget was estimated at EUR 1.27bn, including nearly EUR 1bn in capital expenditure; the balance will include borrowing costs the construction phase, the cost of operation of the SPV established to execute 11 For details, see Current Report No. 29/2017 of June 26th For details, see Current Report No. 37/2017 of August 25th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 20 of 82

21 project, and the debt service reserve required in the project finance model. The project will also require a EUR 72m additional working capital facility. 13 The higher project budget results mainly from the expansion of the project scope (addition of the polypropylene unit, the necessary auxiliary facilities necessitated, and a polypropylene logistics depot). The project is scheduled to break ground in late 2019, while its completion is expected in late Fifty per cent of the Police Polymers project costs will be financed with senior debt and the balance with subordinated capital, including equity. On October 12th 2017, the supervisory board of PDH Polska S.A. approved the proposed changes to the project. On November 10th 2017, the general meeting of PDH Polska S.A. passed resolutions approving: (i) changes the Police Polymers project, (ii) purchase of items of property, plant and equipment, and (iii) an increase the share capital of PDH Polska S.A., as proposed and presented by the management board of PDH Polska S.A. and approved by its supervisory board on October 12th In the reporting period, PDH Polska S.A. carried out tasks planned under the Police Polymers project. In August 2017, a tender was called to select the Project Management Consultant (PCM); the selection process is pending. In late September 2017, another tender was called, to select the Front End Engineering and Design (FEED) contractor for auxiliary facilities and inter-unit connections of the Police Polymers project. The winning tender was selected on December 21st In October 2017, a tender was called for the conceptual design for the Polypropylene Logistics Infrastructure, with the request for proposals distributed among potential contractors. The winning tender was selected on December 21st The tender procedure was also continued to select the general contractor for the project. The prequalification stage was completed and a group of entities were shortlisted and invited to place their bids. In early 2018, at the next stage of the procedure to select the EPC contractor for the project, an invitation to bid (ITB) was sent to potential bidders. The EPC contractor will be tasked with delivery of the Police Polymers project, comprising a propane dehydrogenation (PDH) unit, a polypropylene (PP) production unit, a propane and ethylene storage and handling terminal, auxiliary facilities, inter-unit connections, and polypropylene logistics infrastructure. In parallel with the procedure to select the EPC contractor, steps were taken to secure financing for the Police Polymers project. In late 2017, PDH Polska S.A. held meetings with financial institutions, which, as a result, provided letters of intent, whereby they declared capital commitments significantly in excess of the debt financing required for the project. In the reporting period, PDH Polska S.A. held a series of meetings with suppliers of propane and ethylene, i.e. the key feedstocks for the new project, to establish the key terms of future cooperation. Meetings were also held with preselected potential polypropylene customers, including polypropylene distributors and off-takers operating in Poland and on foreign markets. In September 2017, following completion of the environmental impact assessment, the environmental permit for the PDH unit was obtained; the permit does not yet cover the potential expansion of the project scope to include the polypropylene unit. Steps have already been taken to prepare a new environmental impact study and obtain a new environmental permit. PARENT S KEY PROJECTS In 2017, the Company launched 27 new projects with a total budget of PLN 53,640 thousand, and continued 43 projects commenced in previous years. The most important projects are presented and described below. Upgrade of ammonia unit The unit was upgraded to reduce energy consumption of the ammonia production process and improve the operational reliability of its individual systems. With removal of bottlenecks, the unit s daily capacity increased by 200 tonnes. On completion of the project, the upgraded Benfield systems and the upgraded process and instrument air systems as well as new syngas drying systems and new turbines for the syngas compressors were brought on stream. The unit was fine-tuned to 13 For details, see Current Report No. 38/2017 of October 5th For details, see Current Report No. 42/2017 of November 10th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 21 of 82

22 ensure optimum performance, and settlement of the project was completed, including the final settlement with the National Fund for Environmental Protection and Water Management (NFOŚiGW), which co-financed the project. Budget: PLN 156,900 thousand; completed in March Development of logistics at Z.Ch. Police S.A. stage 2 The project led to an increase in the Company s fertilizer packaging capacity and improvements in loading and forwarding of palletised fertilizers. The new logistics depot was commissioned, and the final settlement of the project was completed. Budget: PLN 29,738 thousand; completed in Exhaust gas treatment unit and upgrade of the EC II CHP plant The objective of the project is to bring the operation of the CHP plant s units in line with the requirements of Directive 2010/75/EU. The work on boiler revamping was completed, and the flue gas denox unit was assembled. The flue gas desulfurisation unit was completed. An operation permit was obtained for all project facilities. In 2017, the unit was commissioned for initial operation, and on May 31st 2018 a commissioning report was obtained, approving the unit for permanent operation. Budget: PLN 290,885 thousand; expected completion: Change of the DA-HF phosphoric acid production technology The objective of the project is to improve the efficiency of phosphoric acid production and the acid s quality by reducing impurities and waste generation. The new technology is based on a licence from Prayon Technologies S.A. Design work, procurement, and delivery of key instruments and equipment have been completed. In 2017, stage 1 of the project was carried out, comprising construction works outside the phosphoric acid plant buildings. The contractor was selected and the contract was signed for stage 2, comprising construction, installation, electrical, automationrelated and commissioning works. Budget: PLN 73,700 thousand, expected completion: Computerisation of the I&C and electrical systems of the NPF Department of the PF-4 crude acid unit An advanced production process control system will be deployed to fully automate the technological processes. The upgrades will in particular enable precise dispensing of raw materials and media, continuous tracking and analysis of trends in the production process. The design work was completed. A contractor was selected and the contract was signed. The construction site was handed over to the contractor. Budget: PLN 10,846 thousand; expected completion: Upgrade of TUP-12 (TG1) turbine generator set and auxiliary equipment The objective of the project is to improve the reliability, safety, flexibility and quality of the turbine control systems across the operating range. Assembly works were completed; turbine and pipeline insulating works are in progress. The start-up of electrical installations, oil unit, control and protection systems as well as turbine components commenced. Budget: PLN 16,000 thousand, expected completion: Replacement of 17/18E601A and 17/18E601B heat exchangers The objective of the project is to improve the technical condition of key exchangers in the ammonia synthesis unit, increase the efficiency of the apparatus, and improve the reliability of the unit s operation. Technical documentation for the new exchangers was developed. A contract for the manufacturing and replacement of the exchangers was concluded. Materials were purchased and prefabrication of apparatus started. Budget: PLN 15,500 thousand, expected completion: Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 22 of 82

23 Replacement of the 311 X PN-2 fertilizer drying unit A new drying unit will guarantee a failure-free fertilizer drying process. The manufacturer delivered the drying unit in October The device was assembled and built into the unit. Connection works and assembly of the feeding and discharge chambers are in progress. Budget: PLN 12,000 thousand; expected completion: Key equity investments On February 2nd 2017, the capital increase at PDH Polska S.A from PLN 60,000 to PLN 128,000 thousand was registered 15. On March 13th 2017, the management board of PDH Polska S.A. passed a resolution to request the company s supervisory board s opinion on, and to recommend to the general meeting of PDH Polska S.A., an increase in the company s share capital by way of issue of 5,200,000 Series C shares with a par value of PLN 10 per share through private placement. On March 29th 2017, the Company s Management Board adopted a resolution to purchase up to 5,200,000 new Series C registered shares in PDH Polska S.A.; pursuant to the resolution, subject to the Supervisory Board s consent, it was resolved to acquire, on the first date for the exercise of pre-emptive rights, 2,917,875 new issue Series C registered shares in PDH Polska S.A. with a par value and issue price of PLN 10 per share and with the total par value of PLN 29,178, On March 31st 2017, the Company s Supervisory Board adopted a resolution to approve the purchase of up to 5,200,000 new Series C registered shares in PDH Polska S.A. The resolution having been adopted, the condition precedent was fulfilled for the implementation of the Management Board s resolution, dated March 29th 2017, to acquire, on the first date for the exercise of pre-emptive rights, 2,917,875 new issue Series C registered shares in PDH Polska S.A. 17 On June 20th 2017, the supervisory board of Grupa Azoty S.A. adopted a resolution to approve the acquisition of 2,282,515 new Series C registered shares in PDH Polska S.A. for an issue price of PLN 10.00, with a total value of PLN 22,821,250. On July 11th 2017, the management board of PDH Polska S.A. allotted in a private placement 2,282,125 Series C shares to Grupa Azoty S.A. and 2,917,875 Series C shares to the Company (at the issue price and par value per share of PLN 10). On July 14th 2017, the share capital increase at PDH Polska S.A. was registered with the National Court Register. Following the registration, the company s share capital was increased to PLN 180,000,000 and currently comprises 18,000,000 shares 18. As a result of the private placement, Grupa Azoty S.A. came to hold 2,782,125 shares in PDH Polska S.A., representing 15.46% of its share capital. The Company holds the remaining 84.54% of shares. On July 18th 2017, it was announced in a current report that on July 14th 2017 the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the increase in the share capital of PDH Polska S.A. of Police. On October 5th 2017, the management board of PDH Polska S.A. passed a resolution to request the company s supervisory board s opinion on an increase in the share capital of PDH Polska S.A. by PLN 124,000,000 through an issue of 12,400,000 new shares with a par value of PLN 10 per share 19. On October 12th 2017, the supervisory board of PDH Polska S.A. approved the management board s proposal to increase the share capital of PDH Polska S.A. The new shares would be acquired by: the Company, which was offered to subscribe for shares with a par value of PLN 30,000 thousand; Grupa Azoty S.A., which was offered to subscribe for shares with a par value of PLN 94,000 thousand. In view of the favourable opinion issued by the supervisory board, the management board of PDH Polska S.A. has proposed that the general meeting increase the share capital on the terms set out above For details, see Current Report No. 6/2017 of July 18th For details, see Current Report No 16/2017 of March 29th For details, see Current Report No 18/2017 of March 31st 2017.of March 31st For details, see Current Report No. 33/2017 of July 18th For details, see Current Report No. 38/2017 of October 5th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 23 of 82

24 On October 18th 2017, the management boards of Grupa Azoty S.A. and of the Company resolved to acquire new registered shares in PDH Polska S.A. Pursuant to the adopted resolutions, Grupa Azoty S.A. decided to acquire 9,400,000 shares for PLN 94,000,000, and the Company decided to acquire 3,000,000 shares for PLN 30,000,000, in each case by way of subscription for shares in PDH Polska S.A. s increased share capital 21. On November 6th 2017, the Company s Supervisory Board resolved to approve the purchase of 3,000,000 new Series D registered shares in PDH Polska S.A. with a par value and issue price of PLN 10 per share and total par value of PLN 30,000,000. The purchase will be effected by the Company subscribing for new shares in the increased share capital of PDH Polska S.A. The new Series D shares will be acquired in a private placement (with the pre-emptive rights of the existing shareholders waived in full) after PDH Polska S.A. invites the Company to acquire shares, with the following payment dates: PLN 7,500,000 to be paid by March 1st 2018; PLN 22,500,000 to be paid by September 1st On November 8th 2017, the supervisory board of Grupa Azoty S.A. resolved to approve the acquisition of 9,400,000 new Series D registered shares in PDH Polska S.A. with a par value and issue price of PLN 10 per share and the total par value of PLN 94,000,000. The new Series D shares will be acquired in a private placement (with the pre-emptive rights of the existing shareholders waived in full) after PDH Polska S.A. invites Grupa Azoty S.A. to acquire shares. with the following payment deadlines: PLN 23,500,000 to be paid by March 1st 2018; PLN 70,500,000 to be paid by September 1st On November 10th 2017, the general meeting of PDH Polska S.A. passed a resolution to increase the company s share capital Feasibility of investment plans The Company is continuing investment projects commenced in previous years, but also begins new ones. The Company has full capacity to finance its investment projects. Expenditure on property, plant and equipment under the 2018 Investment Plan will be financed, first of all, with the Company s own resources, working capital and funds available under the Grupa Azoty Group s New Financing Agreements, intended to finance the Group s general corporate needs arising from its Strategy and Investment Programme. The available credit limits cover long-term capital expenditure, minimising the risk of the Company failing to carry out its investment plans. Environmental protection projects will be financed with instruments available from non-bank funding sources on preferential terms, such as EU funds or national support programmes. Out of the 70 investment projects currently under way, two were co-financed from such sources. In 2017, the Company also received a non-refundable grant (from the funds of the Norwegian Financial Mechanism ) for the implementation of one of the projects referred to above Significant R&D achievements In 2017, the Group s research and development activities focused primarily on developing new technologies and new products, and on improving technologies currently used by the Group. The total amount of the Company s R&D expenditure was PLN 2,970 thousand. The work done included adjustment of the manufacturing processes to the requirements of the proposed new fertilizer regulation. Given the proposed reduction of permitted levels of fertilizer contaminants, including cadmium, the Company continued its efforts to improve the quality of its phosphoric acid. Another important direction was the research into the possibility of phosphorus recovery from industrial wastewater, which is in line with the idea of sustainable use of phosphorus and the assumptions of a closed-cycle economy (Circular Economy). The aim is to develop a technology for recovering phosphorus from phosphogypsum landfill leachate, in the form of compounds that can be recycled or be suitable for direct application as a fertilizer For details, see Current Report No. 39/2017 of October 12th For details, see Current Report No 40/2017 of October 18th For details, see Current Report No 41/2017 of November 6th For details, see Current Report No. 42/2017 of November 10th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 24 of 82

25 The Company established cooperation with the West Pomeranian University of Technology in Szczecin on research into non-toxic phosphate pigments. The university received funding for the project from the National Centre for Research and Development. Preliminary laboratory tests were conducted to investigate the impact of surface treatment of titanium white with zinc compounds on increasing the biostatic efficiency of the pigment in exterior wall paints and plasters. The Company manufactures 32.5% high-purity urea solution (NOXy TM ) commonly used in heavy goods vehicles to control emissions of nitrogen oxides (NO x ). The research is designed to develop a new NOXy TM production technology to make the manufacturing process more cost-effective, while increasing the urea unit s overall efficiency. The research and development activities also included a technological audit of the TCW-1 cooling system. The study showed potential opportunities and proposals for investments to improve the efficiency of the cooling system. 5. Financial condition of the Group 5.1. Assessment of factors and one-off events having a material impact on the Group s activities and financial results One-off events related to AFRIG S.A. Revaluation of expenditure on exploration and evaluation of mineral resources at AFRIG S.A. On August 1st 2017, AFRIG S.A., a subsidiary, resolved to recognise an XOF 4,241,955 thousand (equivalent to PLN 28,349 thousand as translated at the average exchange rate for the twelve months ended December 31st 2016) impairment loss on exploration and evaluation expenditures related to services performed under a contract with AVES FZE as a correction of a prior period error. In the course of analyses of the documentation owned by the subsidiary, no substantive bases were identified to support the capitalisation of the expenditure in previous years. Accordingly, it was determined that the expenditure neither had brought nor would bring economic benefits. At the same time, in the light of information available in December 2016, including a report lodged with the prosecution service on alleged abuse, the Management Board of the Parent concluded that the impairment loss should have been recognised already in Execution of conditional arrangement agreement involving termination and reversal of the effects of the agreement to purchase shares in AFRIG S.A. In connection with claims raised by the Company for reimbursement of undue tranches of the purchase price of 55% of shares in African Investment Group S.A. of Dakar, on December 20th 2017, the Company and DGG ECO Sp. z o.o. executed a conditional agreement (confirmed by court settlement). The agreement is to be finalised by way of mutual confirmation of the termination and reversal of the effects of the agreement of August 28th 2013 under which the Company acquired a majority interest in AFRIG S.A., having paid a total of USD 28,850 thousand towards the purchase price. The reversal of the effects of the above-mentioned agreement is to include reimbursement to the Company of all amounts paid by it for the shares in AFRIG S.A. against re-transfer of the shares to DGG ECO Sp. z o.o. The agreement was originally to be finalized by February 28, 2018, assuming that the required corporate approvals would be issued within this period, and the Company would receive the first tranche of the price refund and a bank guarantee securing the refund of the remaining price, to be effected in quarterly instalments, the last of which would be payable by December 31st The guarantee would also partly secure repayment by AFRIG S.A. of a credit facility of up to EUR 22,000,000 contracted by AFRIG S.A. and the Company, the servicing and repayment of which is to be continued by AFRIG S.A. Consummation of the agreement is also to result in cancellation of AFRIG S.A. s liabilities towards the Parent, except for any claims arising in connection with repayment of the credit facility. 25 As DGG ECO Sp. z o.o. failed to pay the first tranche of the refund of the purchase price for shares in African Investment Group S.A. by February 28th 2018 and also failed to provide a bank guarantee securing the refund of the remaining part of the price, the conditional arrangement agreement concluded between the Company and DGG Eco Sp. z o.o. was not finalised by the agreed deadline. 24 For details, see Current Report No. 35/2017 of August 2nd For details, see Current Report No. 43/2017 of December 20th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 25 of 82

26 Nevertheless, the Company continued talks with DGG Eco Sp. z o.o., which carried on with the efforts aimed at fulfilling the conditions for finalising the agreement 26. The conditional arrangement agreement was not finalised in the agreed additional deadline, either. 27 The parties continue discussions. Recognition of impairment loss on exploration and evaluation assets relating to AFRIG S.A. in the Company s consolidated financial statements Having regard to all circumstances of the phosphate rock project in Senegal and the protracting process of negotiating and finalising the terms of the arrangement agreement between Grupa Azoty Zakłady Chemiczne Police S.A. and DGG ECO Sp. o.o. whose purpose was to recover undue payments made towards the purchase price for shares in African Investment Group S.A. and the implementation of which could confirm the value of the exploration and evaluation assets recognised in the consolidated financial statements, on March 7th 2018 the Company s Management Board passed a resolution to recognise, at December 31st 2017, an impairment loss for the entire amount of AFRIG S.A. s exploration and evaluation intangible assets of XOF 5,854,799 thousand (i.e. PLN 37,178 thousand, translated at the exchange rate effective for the reporting date); The impairment loss is disclosed in the Company s consolidated financial statements for Insolvency of African Investment Group S.A. and filing of the bankruptcy petition. On March 29th 2018, African Investment Group S.A., a subsidiary of the Company with a share capital of CFA thousand (PLN 2,169 thousand, translated at the mid exchange rate for March 28th 2018), acting through its legal representative (CEO), declared insolvency, and accordingly filed a petition for bankruptcy with the Commercial Court of Dakar Market overview As in previous years, the financial results of the Group in the reporting period were strongly correlated with the situation in the Company s market environment. Presented below are factors with the greatest impact on the results reported for 2017: grain prices on global markets were relatively high at the beginning of the year, and dropped on promising harvest forecasts, unfavourable weather conditions adversely affected the financial performance of many farms in Poland, reducing the volume of winter crops, and thus adversely affected the volume of NPK purchases in autumn, poor quality of part of the harvest affected farmers cash flows and disrupted their financial liquidity, outside the spring season, the demand for NPK fertilizers in Europe was weak: in France and Spain, NPK production facilities were temporarily shut down for scheduled maintenance, Russian and Ukrainian markets saw an increase in the consumption and sales of NPK fertilizers, prices of NPK fertilizers on world markets in 2017 were stable, but the average annual level of prices was lower than in 2016, limited shipments from the US, China and Morocco, as well as low stocks contributed to higher DAP fertiliser prices at the beginning of the year, DAP prices fell after the spring season, but the trend reversed in the second half of the year on the back of stronger demand on a number of markets in the fourth quarter of 2017, driven by stock building before the coming spring season, annual average prices of key feedstocks for the production of compound fertilizers (phosphate, potassium salt and sulfur) were lower than in 2016, however, after a period of declines, the trend reversed during the year, an increase in average annual prices of natural gas, the key feedstock for ammonia production, significantly affected production costs, market prices of ammonia once again saw a few months of steep rises and declines in July, the price reached its low, but shutdowns of many units for emergency, maintenance and balancing purposes as well as the growing demand on several markets resulted in the price increase from August to the end of the year, shutdowns of Chinese urea production units due to environmental reasons caused urea shortages 26 For details, see Current Report No. 4/2018 of March 1st For details, see Current Report No. 6/2018 of March 17th For details, see Current Report No. 7/2018 of March 17th For details, see Current Report No. 7/2018 of March 17th Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 26 of 82

27 on the Chinese market and led to exports restrictions, due to financial reasons, India limited its urea purchases to the necessary minimum, shutdowns of titanium white capacities in China and a serious failure of a titanium white production unit in Finland limited the material s supply, given the supply constraints, growing demand for and low stocks of titanium white resulted in a systematic increase in prices in the subsequent quarters of Macroeconomic conditions on the agricultural market Poland In agriculture, 2017 was marked by difficult weather conditions, which had an adverse effect on the economic performance of many farms in the closing months of the year. In spring, frosts caused significant damage to fruit trees (up to 50%) and vegetable plantations. The frosts also damaged many of the rape plantations. In several regions, the weather made harvest very difficult, many plantations were destroyed by excessive rainfall and storms, and farming vehicles could not access flooded fields. Crops were of poor quality, and often grains were not even suitable for feed. In autumn, excessive soil moisture hampered sowing of winter oilseed rape. It is estimated that about 20% less of winter rape was sown compared to the previous autumn. Root crops and corn harvests were also poor, and many farmers did not harvest gain corn before the end of December. In the eastern Poland, many herds of pigs were slaughtered due to the ASF disease, and the compensations did not cover all the outlays. As a result of the above factors, farmers incurred additional costs, and did not recover the initial outlays. The financial situation of many farms is difficult, and many households face financial liquidity problems. The declared 70% advance area payments disbursed in November and December were often as little as 10%, and some farms did not receive any support. The payment of subsidies somewhat alleviated and delayed financial difficulties of many farms, but did not solve the problem. Due to the high risk of insolvency, traders tend to be very cautious about selling fertilizers on deferred payment. As the global supply of grains was high, their prices were rather moderate in Poland. For similar reasons, the price of rapeseed fell by about 20% over the year. In 2017, high purchase prices of milk and pigs maintained, which partially made up for the losses incurred by these sectors in the previous years. Europe and the world At the beginning of 2017, prices of wheat, rapeseed and corn on the MATIF exchange in Paris were rather stable and fairly high. In March, prices of those crops reached their two-year highs. Forecasts for high yields triggered a decline in prices on global markets. Strong competition from exporters operating in the Black Sea region (including Russia, Ukraine and Romania) and continued appreciation of the euro against the US dollar remained among the key factors which put pressure on wheat prices on the Paris exchange and curbed wheat exports from the European Union to non- EU countries. In September, EU import duties were lowered for biodiesel from Argentina, from 22% 25.7% to 4.5% 8.1%, which translated into a decline in prices of rapeseed on the EU markets. NPK fertilizers Poland In the first quarter of 2017 (in March), the NPK fertilizer market picked up. Retailers maintained adequate stocks of NPK fertilizers from Polish producers, but also provided NPK fertilizers imported from Norway, Finland, Russia and Belarus. The second quarter of 2017 saw a decline in sales of NPK fertilizers, and producers offered afterseason discounts. Manufacturers restocked retail and distribution warehouses with NPK fertilizers under storage contracts. Poor quantity and quality of the harvest curtailed cash inflows to agricultural farms, causing disruptions in their financial liquidity. Unfavourable weather conditions reduced winter crop sowing: for example, rapeseed acreage shrank by 20%, thus limiting the volume of NPK fertilizer purchases in the autumn. Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 27 of 82

28 Western Europe On European markets, the demand for NPK fertilizers remained generally weak throughout 2017, and only some markets recorded periodically increase turnover. Subdued demand for NPK fertilizers was caused primarily by low income in the agricultural sector. In France, it was only the spring demand that led Timac and Seco to launch NPK fertiliser production units had been idle since December Despite poor sales in the first quarter, manufacturers increased the prices of standard NPK fertilizers. Save for local pockets of demand, in the second quarter demand for NPK fertilizers was depressed in most European markets. In June, European manufacturers introduced discounts on NPK fertilizers, hoping to stimulate sales before the autumn application season. In the second half of the year, Europe did not see increased purchasing in NPK markets. In France, manufacturers delayed announcement of new prices for the autumn season. In Spain, waiting for stronger demand, Fertieria and Fertinagro shut down their NPK units in August. In September, five largest French manufacturers suspended offering of NPK fertilizers. Prices of NPK fertilizers in Europe remained flat over the year, except a 3 4% cut in prices of basic NPK fertilizers for November seen in the UK at the end of October. Russia At the beginning of the quarter, the demand for NPK fertilizers on the Russian market, the neighbouring markets and in western Europe was weak, so the Russian manufacturers focused on sales outside Europe and shipped large cargoes to China, India, Vietnam, Thailand, Malaysia, Kenya and Benin. In May, Russian producers started to shift their attention towards more profitable destinations, i.e. the internal market, the Baltic States, Ukraine and Poland. The fast growing Russian agricultural sector is consuming increasing amounts of fertilizers, including NPK products. Sales of NPK fertilizers in Russia are estimated to have grown in 2017 by 13% 15% year on year. From May to August, approximately 200 thousand tonnes of NPK fertilizers were sold on the domestic market each month, with sales gradually declining from September towards the year s end. Ukraine According to forecasts, consumption of NPK fertilizers in Ukraine will be higher than in the previous year, when it stood at 1.28m tonnes. Ukraine s fertilizer output is small, therefore shortages of NPK fertilizers are covered by imports. Russian and Belarusian manufacturers, which account for 80% of imports, are the main suppliers of NPK fertilizers to Ukraine. The plant operated by Sumychimprom, Ukraine s only NPK manufacturer, remained shut down in the first half of In the second half of the year, own production in Ukraine was approximately 10 thousand tonnes per month. Belarus Average monthly production of NPK fertilizers in Belarus amounts to 80 thousand tonnes. The production is sold mainly to the Ukrainian and Polish markets, as well as to the Baltic countries and the internal market. POLIDAP Manufacturing and shipment constraints in the United States, China and Morocco, which continued since the autumn of 2016, were the main drivers of the situation on the DAP/MAP market at the beginning of On many markets, stocks accumulated ahead of the spring application season were low, hence increased purchases in early The high demand on many markets encouraged manufacturers to raise the prices. In the second quarter, the DAP season ended on global markets and in Europe, resulting in a downward trend in DAP prices, as most global manufacturers started to cut their prices in order to sell their planned output. After a period of decline between March and September, from October the price of DAP showed an upward trend. The markets in the US, Canada, China, Europe, Pakistan, Japan, and Australia saw DAP stocks being accumulated before the spring application season. In September 2017 some DAP capacities in the US were taken off stream for a prolonged period due to damage caused by the hurricanes. Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 28 of 82

29 Figure6. Monthly average prices of NPK and DAP fertilizers in 2017 [USD/t] DAP NPK In late 2017, several significant developments affected the DAP market, with their effects particularly visible in 2018: In mid-december, Mosaic shut down a production unit, with an annual capacity of 2 million tonnes of DAP, for a period of one year. The unit s output accounted for about 50% of DAP production in the US. The shutdown will have a significant impact on both the US and global markets. Further lines of a new production unit (with an annual capacity of 3m tonnes) were being commissioned in Saudi Arabia. In the fourth quarter of 2017, the construction of a new DAP unit (with an annual capacity of 1m tonnes) was completed in Morocco. Its launch is scheduled for the first quarter of 2018, subject to completion of investments that will increase the fertilizer loading capacities of ships. Ammonia and urea In the first quarter of 2017, the ammonia prices remained high and stable. At the end of the quarter, two new ammonia units were launched in the US, and the country previously a large importer became a major exporter of ammonia. US producers began exporting ammonia from the new facilities, with the destinations including North Africa and Europe, and the price decline on the American market led to ammonia prices falling also in other markets. In July, the price of ammonia hit its new low. Maintenance and balancing shutdowns of a number of ammonia units (in Russia, Algeria, Egypt, Ukraine, Indonesia, Belarus, Norway and Belgium), as well as a gradually growing demand in the US, Russia, Morocco, Europe and Ukraine continued to push up ammonia prices from August to the end of 2017 (up 45% by the end of the year). Figure 7. Monthly average prices of ammonia and urea in 2017 [USD/t] Urea Ammonia In 2017, prices of urea were exceptionally volatile and fluctuated from USD 175/t to USD 275/t. The urea market was driven mainly by the situation in the US, China and India. Over the past few years, the urea market in the US has changed significantly as new production capacities were launched, reducing the country s dependence on imports by 50%. However, imports of additional 3-4m tonnes of urea are still necessary. In China, due to environmental shutdowns, the actual output of urea was around 50 55% of the country s capacity throughout This resulted in growing urea shortages on the Chinese market and thus restricted exports, from the 14m tonnes in 2015 and 5m tonnes in 2017 to a point where urea imports were needed to satisfy demand (December 2017). Countries of south-eastern Asia, so far dependent on the urea from China, started to source urea (0.5m tonnes quarterly) elsewhere. India, the world s largest importer of urea, limited its purchases to the necessary minimum due to financial reasons. Urea prices were also driven by the production situation (repairs, shutdowns, and Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 29 of 82

30 failures) of exporters such as Egypt, Venezuela, Indonesia, Ukraine, Saudi Arabia, Iran, China, and Algeria. Titanium white Throughout 2017, the prices of titanium white were on the rise up across all global markets. The increase was mainly due to lower output, seasonal and cyclical growth in demand, and low stocks kept by manufacturers. The decline in output resulted from closure of a number of titanium white units over the recent years and a severe failure, in early 2017, at a production plant in Finland which satisfied about 10% of the demand in Europe. Moreover, around 15% of China s production plants were decommissioned for environmental reasons; Chinese capacities represent 30% of the world s total. The prices of titanium white have been rising since 2016, and the manufacturers expect further price increases in The prices are already at their all-time high and 2018 is likely to see the increase decelerate to the point of price stabilisation. Figure 8. Monthly average prices of titanium white in 2017 [EUR/t] Titanium white Other products Technical-grade urea is used mainly to produce glues for the furniture industry and to prepare the NOXY (AdBlue ) solution. In 2017, the demand for urea used in glue production was stable. In the NOXY segment, sales increased, despite strong competition. It was a result of the Grupa Azoty s group-wide strategy for the RedNOX segment (products designed to reduce nitric oxide emissions in the automotive industry and the manufacturing): NOXY (32.5% urea solution, AdBlue ); Likam (ammonia water); Pulnox (40% technical-grade urea solution). Iron sulfate is a by-product of titanium white and steel production. In 2017, the demand for iron sulfate remained high across European markets. This demand was particularly strengthened following the failure of the titanium white plant in Pori, Finland (February 2017), whose annual output of iron sulfate is approximately 390 thousand tonnes. Iron sulfate is mainly used in the cement industry, in wastewater treatment plants and for fertilizing purposes. The volume of purchases by various customers fluctuated during the year. The high sales of iron sulfate to the cement industry continued in the second and third quarters of Key financial and economic data The Group s key achievements in 2017: the Group s net profit more than doubled on 2016, the profitability ratios improved year on year, the Pigments Segment reported the best financial result and the highest profitability in six years, there was a 21% year-on-year increase in the financial result of the Fertilizers Segment, despite a difficult market environment, Police delivered the highest sales volumes of compound fertilizers in the last several years, in particular in Poland, which is the Group s priority market, the Group reported a high volume of ammonia sales, key investment projects were continued under the new name of Police Polymers, with the scope of the project extended to include a polypropylene plant. In 2017, the Group posted a net profit of PLN 88,508 thousand, with EBIT at PLN 128,371 thousand, and EBITDA of PLN 230,519 thousand. Year on year, net profit and EBIT increased by PLN 48,414 thousand (or 121%) and PLN 58,104 thousand (or 83%), respectively. In the reporting period, the Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 30 of 82

31 financial results performance of the Group were strongly correlated with the Parent s market environment. This correlation has been present since the Company commenced its operations. The impairment losses for assets of AFRIG S.A. had a material adverse effect on the Group s results. In 2017, the Group recognised a PLN 37,791 thousand impairment loss on AFRIG S.A. s intangible assets related to exploration for and appraisal of mineral resources; the loss was disclosed under other expenses. In the reporting period, the Company earned a net profit of PLN 133,206 thousand, an increase of PLN 69,223 thousand on The amount of EBIT was PLN 178,892 thousand, an increase of PLN 65,895 thousand year on year. The Company s results were higher than those of the Group as they were not affected by the oneoff events related to the subsidiary AFIRG S.A.; they were recognised as impairment losses and bore on the results for 2017 and the previous year. The results for the reporting period were also affected by environmental provisions, which reduced EBIT by PLN 14,889 thousand, and accrued expenses of PLN 6,904 thousand related to exceeding the SO 2 emission limit. The increase in other expenses and decrease in EBIT were also attributable to litigation provisions of PLN 3,205 thousand, PLN 2,726 thousand provisions for property damage compensation, and a PLN 3,150 impairment loss for property, plant and equipment under construction (costs incurred on the initial phase of the phosphate rock project in Senegal). In 2017, the Company continued measures to adapt its business to the changing market conditions, commenced in Decisions made ahead of anticipated changes in the market, based on early warning signals, mitigated the effects of adverse trends seen on the product markets and enabled the emerging opportunities to be pursued. The Company s Management Board supported cost optimisation measures initiated based an in-depth analysis of the rationale for each project and available opportunities and possibilities to modify or reschedule ongoing projects. A flexible approach to business strategy allowed the Group to maintain high volumes of product sales, and helped to align the sales strategy with the changing situation on individual markets. Particular emphasis was placed on increasing the Group s share in the domestic market of compound fertilizers, which resulted in high sales volumes. Financial data for 2016 was restated on account of the changes described in Note 2.4 to the consolidated financial statements for the 12 months ended December 31st Table 17. Consolidated financial results Item change % change Revenue 2,599,577 2,417,48 182, Cost of sales 2,127,968 1,998,73 129, Gross profit 471, ,758 52, Selling and distribution expenses 112, ,092-3, Administrative expenses 167, ,687-12, Net profit on sales 190, ,979 68, Other income/(expenses) -62,498-51,712-10, EBIT 128,371 70,267 58, Finance income/(costs) -14,825-15, Share of profit/(loss) of equity-accounted associates 13,103 11,863 1, Profit before tax 126,649 66,977 59, Income tax 38,141 26,883 11, Net profit/(loss) 88,508 40,094 48, In 2017, the Company took extensive measures to secure lower prices of key raw materials and feedstock used in the production processes. Effective efforts in raw materials procurement were reflected in lower prices of key materials, including phosphate rock, potassium chloride and sulfur. The active procurement policy delivered substantial measurable benefits in terms of partial offsetting of gas price increases and, consequently, improved financial results. Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 31 of 82

32 Table 18. Financial results of the Parent Item change % change Revenue 2,585,370 2,385, , Cost of sales 2,129,112 1,999, , Gross profit 456, ,492 70, Selling and distribution expenses 112, ,173-4, Administrative expenses 136, ,913-12, Net profit on sales 207, ,406 87, Other income/(expenses) -28,292-6,409-21, EBIT 178, ,997 65, Finance income/(costs) -4,990-27,453 22, Profit before tax 173,902 85,544 88, Income tax 40,696 21,561 19, Net profit/(loss) 133,206 63,983 69, In 2017, the Company delivered optimum results in the context of the prevailing market environment. Also, as part of its streamlining efforts, the Company reviewed and reassessed its existing contracts and agreements, which allowed it to reduce administrative expenses by PLN 12,802 thousand compared with Segments financial results In 2017, the Group delivered strong results in both the Fertilizers Segment and the Pigments Segment. Another factor which significantly contributed to the Group s performance was the Group s ability to take advantage of the improved situation on the titanium white market, which led to a strong year-on-year increase in the Pigment Segment s EBIT. The Fertilizers Segment s EBIT was 21% higher than in the previous year. Table 19. EBIT by segment in 2017 Item Revenue from external sales Grupa Azoty POLICE Group Fertilizers Pigments Other Activities Fertilizers Parent Pigments Other Activities 2,167, ,699 46,394a 2,168, ,700 30,840 Share 83% 15% 2% a 84% 15% 1% EBIT 62,074 75,892-9,595 a 105,185 75,821-2,114 Table 20 EBIT by segment in 2016 Item Revenue from external sales Grupa Azoty POLICE Group Fertilizers Pigments Other Activities Fertilizers Parent Pigments Other Activities 2,050, ,035 59,405a 2,046, ,035 30,544 Share 85% 13% 2%a 86% 13% 1% EBIT 51,179 13,624 5,464a 84,234 13,541 15,222 The increase in the Fertilizers Segment s EBIT was driven by sales of phosphate fertilizers, which increased year on year, despite the lower prices of NPK fertilizers. The increase in EBIT was also attributable to lower prices of key feedstocks (phosphate rock, potassium chloride and sulfur). In 2017, sales of nitrogen products did not change significantly year on year, with revenues driven by several diverse factors: a significant increase in ammonia and urea sales volumes and higher average Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 32 of 82

33 selling prices, coupled with an increase in the price of natural gas. The segment s revenue increased by 6% year on year. Figure 9. The Group s revenue by segment Fertilizers Pigments Other activities Figure 10. The Group s revenue by segment % 2% % 2% Fertilizers Pigments Other Activities 83% 85% The shares of individual segments in total revenue changed slightly year on year: the Fertilizers Segment s share decreased by 2pp, while that of the Pigments Segment increased by 2pp, with the share of other sales unchanged. Fertilizers In 2017, the Fertilizers Segment s revenue was PLN 2,167,484 thousand, accounting for 83% of the Group s revenue. The segment s EBIT was positive at PLN 62,074 thousand. On average, domestic sales accounted for 69% of the segment s total sales, having increased by 2pp. In 2017, compound fertilizers accounted for the highest share in the Parent s revenue by product group, representing over 56% of total revenue. Relative to 2016, changes in the shares of individual product groups in total revenue followed the changes in the market environment. Revenue from sale of compound fertilizers was PLN 1,458,570 thousand in 2017, a decrease of 1.8% year on year. The main cause of the decrease was a 7% drop in selling prices of NPK fertilizers. The prices of compound fertilizers dropped by 6% on average, while sales volume increased by 4%. Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 33 of 82

34 Figure 11. Consolidated revenue of the Fertilizers Segment Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q % In 2017, revenue from sales of urea was PLN 363,660 thousand, having increased by 19% year on year. The increase was to a large extent attributable to a 18% increase in the sales volume. Revenue from sales of ammonia increased by 38% year on year, mainly due to an increase in the ammonia price (7%) and a simultaneous increase in ammonia sales volume (29%). Pigments There was a marked improvement in the Pigments Segment s market in 2017, which led to a strong increase in revenues and overall results. The Pigments Segment s revenue was PLN 385,699 thousand, which represented 15% of the Company s revenue. Year on year, the segment s revenue increased by 25%. Approximately 56% of the segment s revenue was derived from sales on foreign markets. The segment s EBIT was highly positive and increased by several orders of magnitude over Figure 12. Consolidated revenue of the Pigments Segment % Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Revenue from sale of titanium white was PLN 370,139 thousand in 2017, and increase of 26% year on year. The volume was nearly as much as in 2016 and was close to the Company s maximum production capacity. Titanium white prices increased by over 25%. Other Activities Revenue recognised under Other Activities accounts for approximately 2% of the Group s total sales. In 2017, the consolidated EBIT under Other Activities was negative. EBIT was significantly affected by the subsidiaries financial results, impairment loss recognised for the expenditure incurred in the initial phase of phosphate-rock project in Senegal (PLN 3,150 thousand), and recognition of provisions for employee litigations Operating expenses The Group s operating expenses were PLN 2,411,627 thousand in 2017, having increased by PLN 130,840 thousand (or 6%) year on year. The increase mainly related to raw materials and consumables used (representing almost 70% of total expenses). The year-on-year increase in raw materials and consumables used was driven by Grupa Azoty Zakłady Chemiczne Police S.A. Group Page 34 of 82