directors' report on the operations of grupa azoty zakłady ... · company's growth...

Directors' Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A.

for the 12 months ended December 31st 2014

Directors' Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2014

(all figures in PLN thousands unless otherwise stated)

Grupa Azoty Zakłady Chemiczne Police S.A. of 50

Contents 1. General information on the Company .................................................................. 4

1.1. Organisation .................................................................................................. 4 1.2. Company organisational and equity ties ................................................................. 6 1.3. Company’s branches (divisions) ........................................................................... 7 1.4. Employment................................................................................................... 8 2. Management of the Company ............................................................................ 9

2.1. Organisational chart ......................................................................................... 9 2.2. Changes in key management policies .................................................................. 10 2.3. Organisational changes ................................................................................... 10 3. Company shares and other securities and its major shareholders ............................ 10

3.1. Total number and par value of Company shares, holdings of Company shares by supervisory and management personnel and interests of such persons in related entities .. 10

3.2. Agreements known to the Company which may cause future changes in share percentages of existing shareholders and bondholders ............................................................. 11

3.3. Treasury shares held by the Company and persons acting on its behalf ......................... 11 3.4. Company shares ............................................................................................ 11 4. Business overview ........................................................................................ 12

4.1. Overview of key products, goods and services ....................................................... 12 4.2. Sales markets and sources of strategic raw materials, merchandise and services ............. 14 4.3. Key investments in Poland and abroad ................................................................. 15 4.4. Key equity investments ................................................................................... 16 4.5. Company's deposits and capital placements .......................................................... 16 4.6. Significant agreements.................................................................................... 17 4.7. Material related-party transactions on non-arm's length terms ................................... 18 4.8. Significant R&D achievements ........................................................................... 18 4.9. Environmental performance ............................................................................. 19 4.10. Significant events .......................................................................................... 19 5. Company's current financial position ................................................................ 20

5.1. Assessment of factors and non-typical events having a material impact on operations and financial performance .................................................................................... 20

5.2. Key financial and economic data ....................................................................... 22 5.3. Explanation of differences between actual performance and financial forecasts for 2014 .. 29 5.4. Management of capital and assets ...................................................................... 29 6. Risks, threats and growth prospects .................................................................. 33

6.1. Significant risk factors and threats ..................................................................... 33 6.2. Company's significant external and internal growth factors and its development direction

policy ......................................................................................................... 36 6.3. Company's growth prospects and market strategy ................................................... 38 7. Qualified auditor .......................................................................................... 39 8. Litigation .................................................................................................... 39 9. Company's governing bodies ........................................................................... 39

9.1. Remuneration and additional benefits ................................................................. 39 9.2. Agreements between the Company and Management Board members .......................... 40 10. Statement of compliance with corporate governance rules .................................... 41




10.1. Corporate governance code applicable at the Company ........................................... 41 10.2. Degree of the Company's non-compliance with the corporate governance rules,

specification of the rules not complied with, and reasons for the non-compliance ........... 41 10.3. Internal control and risk management systems ...................................................... 41 10.4. Shareholding structure .................................................................................... 42 10.5. Special control powers of security holders ............................................................ 43 10.6. Restrictions on voting rights ............................................................................. 43 10.7. Restrictions on the transferability of securities ...................................................... 43 10.8. Rules governing appointment and removal from office of management personnel; powers

of such personnel, including their authority to decide on the issue or buy-back of shares .. 43 10.9. Rules governing amendments to the Company’s Articles of Association ......................... 44 10.10. Operation of the General Meeting ...................................................................... 44 10.11. Composition and operation of the Company's management and supervisory bodies .......... 46 Index of tables ....................................................................................................... 49 Index of figures...................................................................................................... 49




1. General information on the Company 1.1. Organisation Name (company name): Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna Abbreviated name: Grupa Azoty Zakłady Chemiczne Police S.A. Registered office: Police Company address: 72-010 Police, ul. Kuźnicka 1 Grupa Azoty Zakłady Chemiczne Police S.A. (the “Company”) is entered in the National Court Register maintained by the District Court for Szczecin-Centrum, 13th Commercial Division of the National Court Register, under entry No. KRS 0000015501.

For 40 years, Grupa Azoty Zakłady Chemiczne Police has been one of the leading European manufacturers of fertilizers, and is also one of the largest Polish exporters. The Company plays a key role in the economic and social well-being of the Szczecin province. Its principal business is the manufacture of chemical products in three business units: Fertilizers, Nitro, and Pigments. The Company shares have been listed on the Warsaw Stock Exchange since July 14th 2005.

In 2014, Grupa Azoty Zakłady Chemiczne Police S.A. doubled its net profit relative to 2013. Optimal performance in the challenging market environment resulted largely from successful implementation of a series of measures to better react to changing market conditions and so offset the effects of negative market trends. The results were driven by higher sales of fertilizers as well as lower prices of key raw materials. In 2014, the Company took active steps under its raw materials policy to secure the more cost effective feedstock sources and negotiate down feedstock prices. As a consequence, costs were reduced, resulting in the optimal financial performance.

In 2014, the Company was gradually increasing the production and consumption of phosphates from Senegal. The Company holds 55% of the shares in African Investment Group S.A. of Senegal, which has access to phosphate rock and ilmenite sand deposits in that country. Thus, a substantial part of phosphates used for production were sourced at a lower cost from the Company's own reserves in Senegal, which contributed directly to reducing the production costs. Production of phosphate rock from the Company's own mine is a significant factor in minimising the risk of dependency on a narrow group of suppliers, and in improving the Company's cost efficiency. As a result, the supplies are uninterrupted, and the Company's susceptibility to changes in market prices has been reduced. This investment in overseas feedstock reserves is the first of its kind in the Polish chemical sector. In 2015, the Company expects to further increase its production of phosphate rock.

In 2014, the Company's capital expenditure amounted to a record level of PLN 136m. Projects undertaken by the Company included modernisation of key production units and auxiliary infrastructure. The main objectives were to improve the efficiency of production processes, and to reduce the consumption of energy and raw materials used in production. For this reason, the Company launched projects to adapt its Power Centre to the IED requirements, carried out comprehensive modernisation of its ammonia unit, and started implementing a new technology of phosphoric acid production. Simultaneously, the Company carried out an investment project in Senegal, aimed at ensuring direct access to phosphate, which is a key raw material used by Grupa Azoty Zakłady Chemiczne Police S.A. to manufacture compound fertilizers. In the same period, the Company was preparing for the launch of two other projects with a view to ensuring access to its own sources of key raw materials. 2015 will be a year of intensified implementation of the capex programme. In 2015, the Company's expenditure on new and continued projects is expected to be significantly higher than in 2014. Apart from running investment projects, there are plans to modernise port infrastructure and build a new organic chemistry complex, which will entail significant costs. Besides the most capital-intensive projects, the Company pays great attention to projects improving the safety and comfort of work.

In 2014, the Company started implementing the Operational Excellence Programme under the name of Azoty PRO, with a view to improving the efficiency of its business and achieving the Group's ROCE target of 14% in 2020, in compliance with Grupa Azoty's plans. The Company also developed a plan of strategic initiatives for the key business segments, to implement the competition strategy, maximise the utilisation of human and financial resources, reduce costs in technological processes, and streamline the organisation. The Azoty PRO Programme will result in lasting improvement of competitiveness of the Group's products, driving up the Company's profit by more than PLN 90m in 2017 (target level).




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 Company 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). 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 synonym for compound fertilizers in Poland, evoking superior quality and highest performance. The POLIFOSKA brand has a high concentration of pure constituents, chemical uniformity of fertilizer grains, high assimilability of constituents, optimal granulation and application characteristics, as well as favourable price of pure 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 NOXy® (AdBlue®), a urea solution used in the automotive industry to reduce nitric oxides in diesel engines. With tightening standards for nitric oxide emissions under EU directives, the European market of NOXy® (AdBlue®) is expected to grow steadily in the coming years. The Nitro Business Unit's product range is complemented by Likam® (ammonia water). These products are manufactured at production plants which are constantly modernised and upgraded, with a special emphasis on safety at work 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-of-the-art technology which meets stringent environmental requirements. The pigments are highly sought after due to their versatility, efficiency, durability, safety in use and non-toxic nature, and their associated products have excellent aesthetic and protective properties. Applications of titanium white include the production of paints and varnishes, printing inks, plastics, papers and laminated materials. 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).

Power Centre The Power Centre produces heat (in the form of hot steam), electricity and feedwater, and also 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 to this, the Centre generates electricity using high-efficiency co-generation technology, and therefore obtains certificates of origin from co-generation, which are transferable property rights.

Logistics Centre The Logistics Centre is responsible for shipping and transport, packaging and distribution, 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 transshipment wharves and transshipment stations for ammonia and sulfuric acid. The packaging process involves efficient fertilizer packaging, storage and distribution. The logistics system of Grupa Azoty Zakłady Chemiczne Police S.A. 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 manages technical infrastructure, auxiliary utility production and distribution, wastewater treatment and waste landfilling. It supports comprehensive management of land, buildings and structures. In production asset management, the Centre carries out inspections required under applicable laws and standards, and manages repairs and maintenance. It is also




responsible for procurement and storage of technical materials. The Centre's operations are environmentally friendly, as evidenced by rare flora and fauna species found in areas adjacent to the Company's wastewater treatment plant and phosphogypsum landfill unit.

Laboratory Analysis Centre The Laboratory Analysis Centre satisfies all needs of internal customers regarding chemical analyses of feedstock/raw material supplies, implementation of technological processes, quality assessment of semi-finished and finished goods, environmental protection issues, OHS, and implementation of new technical and technological solutions. The Centre also provides similar laboratory services to the Company's external customers. The Laboratory Analysis Centre operates in accordance with the Integrated Management System in place at the Company based on PN-EN ISO 9001 and PN-EN ISO 14001, PN-EN ISO 18001 and PN-EN ISO/IEC 17025:2005.

1.2. Company organisational and equity ties Grupa Azoty Zakłady Chemiczne Police S.A. is the Parent of the Grupa Azoty Zakłady Chemiczne Police Group, which comprises the following entities: • nine subsidiaries (in which the Parent held ownership interests above 50%), including one

company in liquidation, • one indirect subsidiary, • two associates (in which the Parent held ownership interests below 50%, including one company

in bankruptcy by liquidation.

In 2014, the Group was expanded relative to 2013, to include Grupa Azoty Africa S.A., in which the Parent acquired 100% of the shares, and AFRIG Trade SARL, in which 100% of the shares were acquired by the Company's direct subsidiary, African Investment Group S.A.




Structure of the Group as at December 31st 2014:

1.3. Company’s branches (divisions) The Company does not operate any branches or divisions outside of its principal place of business.

budchem Spółka z o.o.

w upadłości likwidacyjnej (in bankruptcy by

liquidation)

KEMIPOL Spółka z o.o.

REMECH Grupa Remontowo

Inwestycyjna Spółka z o.o.

TRANSTECH Usługi Sprzętowe i Transportowe Spółka z o.o.

Grupa Azoty Africa S.A.

Senegal

Koncept Spółka z o.o.

AUTOMATIKA Usługi Kontrolno Pomiarowe

Spółka z o.o.

Zarząd Morskiego Portu Police Spółka z o.o.

AFRIG Trade SARL

Supra Agrochemia Spółka z o.o.

Grupa Azoty Zakłady Chemiczne Police S.A.

INFRAOARK Police S.A. w likwidacji

(in liquidation)

African Investment Group S.A.

Consolidated subsidiaries

Non-consolidated subsidiaries

0.10%

48.96%

33.99%

100%

100%

Equity- accounted associates

100%

100%

100%

100%

100%

99.98%

54.43%

54.90%




1.4. Employment Table 1. Number of employees

Employee group As at

Dec 31 2014 As at

Dec 31 2013 Blue collar employees 1,681 1,707 White collar employees 699 688 Total 2,380 2,395

Table 2. Number of employees: average annual and as at the end of 2014

Employee group Average annual At year end

Blue collar employees 1,690 1,681 White collar employees 697 699 Total 2,387 2,380

Table 3. Employee turnover from January 1st to December 31st 2014

2014 New hires 91

Redundancies -106

Total -15 Table 4. Employment by summary education

Item Year

Total employment

University or

equivalent

Secondary Vocational Primary

Number of employees 2014 2,380 605 947 598 230

Number of employees 2013 2,395 599 940 614 242 Table 5. Employment by length of service

Item Year up to 5 years 6-10 years 11-20 years above 20 years

Number of employees 2014 143 302 415 1,520

Number of employees 2013 123 292 418 1,562




2. Management of the Company 2.1. Organisational chart

DG President of the Management Board, CEO

GK Internal Audit Division

GM Marketing Division

GO Public Relations Office

GD Central Dispatch Division

GH Fertilizer Sales Department

GT Technical Safety Department

GR Strategy and Development Department

GZ Human Resources and Management Department

GF Finance Department

GC Strategic Procurement Department

GP Pigments Business Unit

GN Fertilizers Business Unit

GA Nitro Business Unit

GI Infrastructure Centre

GJ Laboratory Analysis Centre

GE Power Centre

GL Logistics Centre

Management Board




2.2. Changes in key management policies In 2014, there were no material changes in the Company's key management policies.

2.3. Organisational changes In the reporting period, the following changes took place in the organisational structure of the Company: • the Company's Management Board was enlarged to include four persons, as Ms Anna Podolak

joined as Vice-President,1 • the Strategic Procurement Office of the Logistics and Procurement Centre was liquidated and a

new organisational unit under the name Strategic Procurement Department was set up within the Company; the name of the Logistics and Procurement Centre was changed to Logistics Centre,

• the Director of Core Business Department and the Director of Support Functions Department units, reporting directly to the President of the Management Board, were liquidated,

• the Information and Investor Relations Division operating within the Human Resources and Management Department was liquidated, and a new organisational unit under the name Public Relations Office, reporting directly to President of the Management Board, was set up.

3. Company shares and other securities and its major shareholders 3.1. Total number and par value of Company shares, holdings of Company

shares by supervisory and management personnel and interests of such persons in related entities

Number and par value of Grupa Azoty Zakłady Chemiczne Police S.A. shares: • 60,000,000 Series A shares with a par value of PLN 10 per share, • 15,000,000 Series B shares with a par value of PLN 10 per share, The total number of Company shares is 75,000,000 ordinary bearer shares (code PLZCPLC00036). Table 6. Company shares held by management personnel

Number of shares / voting rights

As at

Jan 1 2014 As at

Dec 31 2014 As at

this Report date

Jałosiński Krzysztof 2,000 1,000 1,000

Kuźmiczonek Rafał - - -

Naruć Wojciech - - -

Podolak Anna* - - - * as of appointment date, i.e. October 29th 2014

On October 29th 2014, the Supervisory Board appointed Ms Anna Podolak to the Management Board of the sixth joint term of office.

1 The Company announced the appointment in Current Report No. 39/2014 ‘Appointment of a Management

Board member’ of October 29th 2014.




Table 7. Company shares held by supervisory personnel

Number of shares / voting rights

As at

Jan 1 2014 As at

Dec 31 2014 As at

this Report date

Jarczewski Paweł - - -

Likierski Marcin - - -

Lipiec Maciej* - - -

Markwas Wiesław 500 500 500

Skolmowski Andrzej - - -

Tarocińska Anna 1 1 1 * as of appointment date, i.e. October 8th 2014

Subsequent events No transactions in Company shares were executed by the management or supervisory staff after the end of the reporting period.

3.2. Agreements known to the Company which may cause future changes in share percentages of existing shareholders and bondholders

As at the date of approval of this Report, the Company was not aware of any agreements between shareholders or any agreements that may lead to future changes in the percentages of shares held by existing shareholders and bondholders.

3.3. Treasury shares held by the Company and persons acting on its behalf The Company holds no treasury shares, whether directly or through persons acting on its behalf.

3.4. Company shares Grupa Azoty Zakłady Chemiczne Police S.A. shares were listed on the Warsaw Stock Exchange for the first time on July 14th 2005. Company shares (ticker: PCE) are listed on the WSE main market in the continuous trading system and are included in the WIG and sWIG80 indices and the chemical sector index, WIG-Chemia. Figure 1. Grupa Azoty Zakłady Chemiczne Police S.A. stock price in 2014

Source: Company data.

In 2014, Grupa Azoty Zakłady Chemiczne Police S.A. shares opened at PLN 24 and continued in a moderate downward trend throughout the first quarter to bottom out at PLN 21. In the second quarter, the stock price rose slightly, reaching PLN 25 per share on May 30th, which also turned out to be the highest quotation in 2014. In the third quarter, the stock price was relatively stable at

14

16

18

20

22

24

26




PLN 22-23. The fourth quarter opened with a price of PLN 24 per share, but then a downward trend was observed and the year closed at PLN 19.

The share price increase seen in the first half of 2014 was attributable, among other things, to a favourable relationship between fertilizer and grain prices. The second half of 2014 saw bountiful agricultural harvests, both in Poland and globally. Oversupply of grains sent their prices down, which − given the strong correlation between grain and fertilizer prices − was reflected in low prices of fertilizers. Table 8. Stock performance

Since IPO 2014 2013

Historical high 30.00 25.00 30.00 Historical low 4.20 16.50 11.95

Average price 12.56 21.37 22.29 Average trading volume 93,719 6,656 42,473

Dividend policy In line with the Strategy of the Grupa Azoty Group for 2013–2020, the guiding principle behind the dividend policy is to make payments proportionate to the Company’s earnings and financial standing. The General Meeting is recommended to resolve on dividend payments representing 40% to 60% of the Company's separate net profit for a given financial year. Decisions on dividend payments are made with consideration given to a range of factors concerning the Company, and this includes prospects for its further operations and earnings, cash requirement, financial position, expansion plans and related legal requirements.

Investor relations Acting in accordance with the highest standards of capital market communications and corporate governance, Grupa Azoty Zakłady Chemiczne Police S.A. provides all market participants, and particularly current and prospective shareholders, with exhaustive and reliable information on events taking place at the Company. The corporate website is a key tool for communication with the capital market, and features the Company’s current and periodic reports, important information about AGMs and EGMs, analyst recommendations and financial results.

4. Business overview 4.1. Overview of key products, goods and services Grupa Azoty Zakłady Chemiczne Police S.A.'s core business is the manufacture of fertilizers and nitrogen compounds (PKD 20.15.Z) and the manufacture of dyes and pigments (PKD 20.12.Z). Its non-core operations comprise the manufacture of other inorganic basic chemicals (PKD 20.13.Z) and the manufacture of other chemical products not elsewhere classified (PKD 20.59.Z). In addition, the Company's Articles of Association provide for the conduct of any activities necessary to ensure proper operation of the Company, including procurement of raw materials, product distribution and sales.

The Company's main commercial products include: • compound fertilizers - NP2 (MAP, DAP) and NPK3 mineral fertilizers manufactured using mono-

and 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 • titanium white - a group of titanium dioxide-based white dyes.

NP fertilizers - compound fertilizers with two primary nutrients: nitrogen (N) and phosphorus (P)2

NPK fertilizers - compound fertilizers with three primary nutrients: nitrogen (N) , phosphorus (P) and potassium

(K)3




The Company 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, the Company also manufactures: • 32.5% aqueous urea solution for automotive applications - NOXy™ (AdBlue®) and crystalline urea

for its production • defluorinated phosphoric acid • hexafluorosilicic acid • dried iron (II) sulfate.

2014 production

Table 9. Company's production volume by product [tonnes]

Product 2014 production volume

2013 production

volume % change

NPK 686,384 727,691 -5.7 NP 200,512 131,220 52.8 NS 41,358 57,981 -28.7 Urea 362,485 311,488 16.4 Ammonia 508,333 493,959 2.9 Titanium white 36,001 36,186 -0.5 AdBlue 82,863 85,999 -3.6 Sulfuric acid 591,850 536,150 10.4 Phosphoric acid 300,153 257,512 16.6

2014 sales The 2014 revenue was PLN 2,376,763 thousand, slightly down (by PLN 90,680 thousand, or 3.7%) on 2013. The highest sales were recorded in the case of compound fertilizers and urea, which jointly generated PLN 1,705,861 thousand in revenue, accounting for 72% of total sales. Figure 2. Revenue by product group


NPK 40%

Urea 17%

NP 13%

Titanium white; 12%

Ammonia 12%

Other 4%

NOXy® (AdBlue®) 1%

NS 1%




Table 10. Revenue by segment

Segment 2014 2013 % change Fertilizers 2,042,567 2,102,383 -2.8%

Pigments 299,746 327,580 -8.5% Other Activities 34,449 37,480 -8.1%

Total revenue 2,376,763 2,467,443 -3.7%

4.2. Sales markets and sources of strategic raw materials, merchandise and services

Domestic sales of the Company's products in the reporting period totalled PLN 1,401,259 thousand, down by 11% compared with 2013. The share of exports in the 2014 revenue (40%) rose 4pp compared with the previous year. Domestic and export sales accounted respectively for 63% and 37% of total fertilizer sales. Key export markets included Venezuela, Germany, United Kingdom, Paraguay, the Netherlands and Argentina. Combined sales to those countries accounted for approximately 81% of total export sales. The domestic share of titanium white sales was 52%, while product exports made up the remaining 48%. Key export markets included France, Italy, Germany, Finland and Denmark. Combined sales to those countries accounted for 77% of total export sales. 52% of chemicals sales were to the domestic market and 48% to export markets. Key export markets included Sweden and Germany. Combined sales to those countries accounted for 76% of total export sales. Figure 3. 2014 sales by geographical regions


No customer/business partner of Grupa Azoty Zakłady Chemiczne Police S.A. accounted for more than 10% of the Company's revenue in 2014. In the case of suppliers, only PGNIG S.A., a gas fuel supplier, and Uralkali Trading S.A., a supplier of potassium chloride, exceeded the 10% threshold (accounting respectively for 17.6% and 10.2% of the Company's revenue).

Sources of strategic raw materials In 2014, the price declines decelerated, and in some cases the prices of basic feedstocks for fertilizer production (phosphorites, potassium chloride, sulfur and sulfuric acid) rebounded. Declines in the prices of titanium-bearing materials, which are the basis for production of titanium white, continued, albeit at a slower pace.

Poland 60%

Other EU countries; 17%

Germany 10%

South America 10%

Africa 1%

Other countries ; 2%




Phosphorites In 2014, phosphorites were mainly procured from Algieria and Senegal, with supplementary supplies coming from Morocco, Egypt, Tunisia, Syria and Togo. In 2014, supplies were also made from the Company's own source, i.e. from Senegal, commenced in 2013. Access to its own phosphorite deposits has considerably improved the Company's security in terms of feedstock supplies, reducing its dependence on external suppliers and reinforcing its negotiating position. In 2014, the political situation in countries of North and East Africa no longer had such a considerable impact on phosphorite supplies as in previous years. Occasional manifestations of social unrest had no major effect on the availability of the mineral. Diversification of suppliers ensured the required continuity of supplies. Compared with 2013, when a price decline from over ten to several dozen percent per year was seen due to the weakening fertilizer market, in 2014 the decline in phosphorite prices decelerated, to evolve into a slight trend reversal in the second half of the year.

Potassium chloride In 2014, the Company relied on its traditional sources of potassium chloride supply. It was procured mainly from Russia (about 80%, main supplier: Uralkali Trading S.A.). Additional volumes were purchased from Germany and Belarus.

Ilmenite and titanium slag In the context of the weakening global market of titanium white, both ilmenite and titanium slag prices continued on a downward trend. However, following strong price drops in the previous years, in 2014 the trend was less dramatic. Titanium white manufacturers were, in most cases, unable to increase prices and decelerate the downward trend. Given this, there were no reasons for a reversal of the downward trend in the prices of titanium white production inputs. The Company continued to look for alternative suppliers of titanium-bearing raw materials.

Natural gas In 2014, Grupa Azoty Zakłady Chemiczne Police S.A. continued to diversify its natural gas supply sources. In addition to PGNiG S.A. and the EU market, the Polish Power Exchange became another procurement source. Overall, in 2014, the proportions of the respective gas supply sources were as follows: PGNiG S.A. − 60%, EU market − 31%, and PPE − 9%.

4.3. Key investments in Poland and abroad In 2014, the Company's expenditure on property, plant and equipment and intangible assets was PLN 177,127 thousand. The capital expenditure reached PLN 136,233 thousand, including: • mandatory investments: PLN 74,194 thousand, • business development: PLN 34,869 thousand, • business continuity: PLN 14,160 thousand, • purchase of finished goods: PLN 13,010 thousand. and the balance was spent on significant overhaul work.

Figure 4. Structure of expenditure by project type


Mandatory 54%

Business development ;

23%

Business continuity

10%

Purchase of finished goods

10%

Preparation of projects

3%




In 2014, 21 new investment projects were launched, with a total budget of PLN 85,545 thousand. The most important of them was ‘Change of the DA-HF phosphoric acid production technology’. The main purpose of the investment is to raise the efficiency of phosphoric acid production and improve the acid's quality by reducing impurities.

In the discussed period, the Company continued to work on 23 investment projects commenced in previous years − the expenditure made on these projects in 2014 amounted to PLN 129,956 thousand. Key projects included: • Exhaust gas treatment unit and upgrade of the steam generators at the EC II CHP plant The

project's objective is to bring the operation of the CHP plant's units in line with the requirements of Directive 2010/75/EU;

• Upgrade of the ammonia unit The objective of the upgrade is to reduce energy consumption of the ammonia production process and to improve the operational reliability of individual process nodes. The upgrade will eliminate bottlenecks in the ammonia unit and increase its efficiency by 200 tonnes of ammonia per day;

• Upgrade of ammonia synthesis reactors The project is intended to ensure a higher synthetic gas reaction rate, which will lower the process pressure and, as a result, reduce energy consumption by the synthetic gas compressor.

In 2014, the Company completed 24 projects. The completed projects included: • Upgrade of ammonia synthesis reactors. Project completed in December 2014; • Production of Polifoska 21 and ammonium sulfate at DAP facility. Project completed in

December 2014.

4.4. Key equity investments Grupa Azoty AFRICA S.A., wholly-owned by Grupa Azoty Zakłady Chemiczne Police S.A., was established in Senegal on May 7th 2014. The company was registered on September 10th 2014, and has been consolidated since September 2014.

On May 14th 2014, AFRIG Trade SARL of Senegal was established, with 100% of its shares acquired by AFRIG S.A., a subsidiary of Grupa Azoty Zakłady Chemiczne Police S.A.

4.5. Company's deposits and capital placements Grupa Azoty Zakłady Chemiczne Police S.A. uses overdraft facilities (PLN). Surplus cash is placed on PLN, USD and EUR overnight deposits under separate agreements. Table 11. Summary of Company bank deposits as at December 31st 2014

Bank Amount Opening date Maturity date

Overnight deposits 15,651 Dec 31 2014 Jan 2 2015

Total bank deposits 15,651




4.6. Significant agreements Table 12. Agreements significant for the Company's business

Party Subject matter Agreement date

Date and number of current report Value

Yara Switzerland Ltd. Sale of ammonia Jan 16 2014 Jan 16 2014

Current Report No. 3/2014

11,050 (104,440*)

Uralkali Trading S.A. Purchase of potassium salt Jan 23 2014

Jan 24 2014 Current Report

No. 4/2014 206,000

Metrac HmbH Sale of compound fertilizers and ammonia Mar 31 2014

Mar 31 2014 Current Report No. 11/2014

132,000

(150,641*)

Witt Handel GmbH Sale of compound fertilizers and ammonia Apr 1 2014

Apr 1 2014 Current Report No. 12/2014

160,000

(169,327*)

Beiselen GmbH Sale of compound fertilizers and ammonia Apr 7 2014

Apr 8 2014 Current Report

No. 13/2014

120,000

(125,575*)

PGNiG S.A.

(annex to an agreement)

Comprehensive supply of gaseous fuel Apr 25 2014

Apr 25 2014 Current Report No. 16/2014

546,000

DGG ECO Sp. z o.o. Sale of phosphate rock to Grupa Azoty Zakłady Chemiczne Police S.A.

Jun 30 2014 Jun 30 2014


181,248

Przedsiębiorstwo Handlowo-Promocyjne AGRO-EFEKT Sp. z o.o.

Annex to the Agreement of August 1st 2008 for sale of compound fertilizers and urea for further resale

Jul 14 2014 Jul 14 2014


135,099

(162,175*)

AGRO-HANDLOWIEC Szymańscy Sp. z o.o. nr 1 Spółka komandytowo-akcyjna

Annex to the Agreement of January 1st 1999 for sale of compound fertilizers and urea for further resale

Jul 14 2014 Jul 14 2014


155,650

(196,320*)

Przedsiębiorstwo Handlowe AGROSKŁAD spółka jawna Włodzimierz Jabłoński, Jacek Kaczuba


Jul 14 2014 Jul 14 2014


290,372

(358,339*)

Ampol-Merol Sp. z o.o.

Annex to the Agreement of February 6th 2002 for sale of compound fertilizers and urea for further resale

Jul 14 2014 Jul 14 2014


384,296

(450,093*)




Party Subject matter Agreement date

Date and number of current report Value

ROLPOL Ołdakowscy Spółka Jawna

Annex to the Agreement of April 23rd 2012 for sale of compound fertilizers and urea for further resale

Jul 14 2014 Jul 14 2014


131,921

(155,562*)

Skłodowski spółka jawna


Jul 14 2014 Jul 14 2014


198,342

(243,990*)

Marian Sobianek, operating as a sole trader under the name of Skład Opału i Materiałów Budowlanych T. i M. Sobianek of Parczew


Jul 14 2014 Jul 14 2014


181,810

(212,239*)

Przedsiębiorstwo Handlowo-Usługowe WAMEX Sp. z o.o.


Jul 14 2014 Jul 14 2014


126,200

(139,564*)

OSADKOWSKI S.A.

Annex to the Agreement of February 25th 2009 for sale of compound fertilizers and urea for further resale

Aug 18 2014 Aug 19 2014


103,063

(107,497*)

Kronospan Chemical Szczecinek Sp. z o.o. Sale of urea Oct 8 2014

Oct 8 2014 Current Report

No. 35/2014 347,000

PGNiG S.A.

(annex to an agreement)

Comprehensive supply of gaseous fuel Dec 16 2014

Dec 16 2014 Current Report No. 40/2014

197,400

* Total value of contracts signed over the last 12 months or from the submission date of the last current report concerning agreements with this entity.

4.7. Material related-party transactions on non-arm's length terms In 2014, Grupa Azoty Zakłady Chemiczne Police S.A. did not enter into any related-party transactions on non-arm's length terms.

4.8. Significant R&D achievements In 2014, the Company's expenditure on research and development work amounted to PLN 6,230 thousand. The Company's efforts in this area concentrated on: • laboratory research and quarter-technical analyses, • tests on the industrial scale, • feasibility studies, expert investigation and analyses.




The above work was conducted mostly in cooperation with other Polish and foreign organisations and institutions. Apart from new R&D work, projects launched in 2013 continued throughout 2014. The list below summarises the most important R&D projects: • feasibility study into modernisation of the evaporation system at the Phosphoric Acid Division, • investigation into the possibility of recovering phosphorous from a phosphogypsum landfill site

leachate, • research into removal of impurities from phosphoric acid, • comprehensive research into fertilizer quality enhancement methods – choice of coating agents

and evaluation of the impact of cooling air parameters on the quality of fertilizers, • research into the usability of magnesium sulfate obtained through magnesite neutralisation of

hydrolytic acid in the fertilizer segment.

4.9. Environmental performance Grupa Azoty Zakłady Chemiczne Police S.A. constantly monitors its readiness to meet the environmental requirements applicable under relevant laws. The Company participates in social consultations of draft legal acts. Since January 9th 2014, the Company has held a new integrated permit that meets the requirements imposed by the IED Directive. The new permit has been granted for an unspecified time and covers all installations on the Company's premises. The Company was the first in Poland to prepare and file a Baseline Report. The condition of soil and ground water on the Company's premises was examined at the beginning of 2013. Late in 2014, the Marshal Office of the Province of Szczecin issued a decision amending the integrated permit, thereby accepting the submitted Baseline Report and the manner of monitoring the ground, soil and ground water (risk assessment). The Industrial Emissions Directive introduced new requirements applicable to titanium white installations. As stipulated in the Environmental Protection Act, these requirements were defined in relevant regulations. In January 2015, continuous monitoring was put in place to meet the conditions specified in a new regulation. New investment projects and overhauls of dedusting and desulfurising units to adapt the installation to the new emission standards are nearing completion. Another project that was launched relates to exhaust gas treatment at the power generating installation (EC II CHP Plant). The risk related to BAT conclusions, which have not yet been defined for the Company's installations, remains unchanged. The period for adapting production installations to the emission levels specified in BAT conclusions is four years.

REACH The Company has fulfilled the obligation to register all substances it manufactures. It has prepared and published safety data sheets (or equivalent documents) in accordance with REACH requirements for all marketed products, and keeps updating these documents as required. Grupa Azoty Zakłady Chemiczne Police S.A. fulfils its obligations as a downstream user of chemical substances on an ongoing basis. The Company does not produce any chemicals whose production or use would be banned or restricted. No chemical substances in quantities from 10 to 100 tonnes per year covered by the registration requirement in 2012, or in quantities from 1 to 10 tonnes per year covered by the registration requirement in 2018, are manufactured.

4.10. Significant events Profit distribution On April 24th 2014, the Annual General Meeting of the Company distributed the net profit for the financial year 2013, of PLN 42,155 thousand, in the following manner: PLN 23,250 thousand was allocated to dividend payment and PLN 18,905 thousand to statutory reserve funds.4 Appointment of a new member of the Company's Management Board On October 29th 2014, under a resolution of the Company's Supervisory Board, Ms Anna Podolak joined the Management Board of the sixth joint term as its Vice-President, and thus the number of Management Board members was brought up to four. The Management Board needed to be strengthened in connection with the Group's rapid development and implementation of its strategy. 4 The Company disclosed this information in Current Report No. 14/2014 'Payment of dividend for 2013', dated

April 24th 2014.




The Company wins the WSE Golden Share The Company received the Golden Share distinction in the 3rd Edition of the TSR Ranking – Biznes.pl.'s Golden Share. The Company's value in 2011-2013 rose by 230%, ranking it first among the best companies in which the State Treasury holds interests. The ranking is compiled on the basis of total shareholder return (TSR), which allows to evaluate a company's capacity to create shareholder value over a specific period of time.

5. Company's current financial position 5.1. Assessment of factors and non-typical events having a material impact on

operations and financial performance Domestic, European and global factors with the largest impact on sales in 2014: • the 30% decline in the prices of agricultural products seen in the middle of the year had a

negative effect on sales of fertilizers and caused considerable volatility of their prices, • low demand and considerable temporary output reductions had a material effect on the

dynamics of ammonia price changes, • the increase in supply of urea (China, Algieria, Qatar) had an effect on its price, • prices of feedstock for production of compound fertilizers, e.g. phosphorites, potassium chloride

and sulfur, rose slightly, • the economic slowdown in the eurozone and a limited number of new investment projects led to

lower demand for titanium white.

NPK and DAP fertilizers In 2014, except for short periods in spring and autumn, the Polish market saw a decline in sales of NPK fertilizers. Low prices of agricultural products and lower incomes forced farmers to cut costs and purchase less expensive NPK fertilizers, containing lower nutrient concentrations or imported. Due to limited incomes, some farmers altogether abandoned the autumn application of NPK fertilizers. Throughout 2014, there was a steady inflow of imported NPK fertilizers to Poland, mostly from Belarus, Russia, Finland, Norway and Lithuania. In western European markets demand for NPK fertilizers was limited, too. Given low prices of agricultural crops, farmers were reluctant to invest in NPK fertilizers. Figure 5. Monthly average prices of NPK and DAP fertilizers in 2014 [USD/t]


The first quarter of 2014 brought an increase in demand for DAP in a number of global markets. Also the price of DAP was rising steadily during the first quarter. In the second and third quarters, the demand for DAP, its supply and price varied considerably between markets. Weak sales results in autumn made the largest global manufacturers of phosphate fertilizers downsize production in the fourth quarter of 2014. The limited supply and a slight increase in the prices of agricultural products late in the year helped stabilise DAP prices on the global markets, leading to their moderate increase late in December.

0

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Ammonia and urea In 2014, demand for and supply of urea were low, and changes in the market price of ammonia were strong and dynamic. Good conditions in the ammonia market in spring and in October and November were supported mostly by buyers from the US. Installation stoppages and output reductions in Egypt, Trinidad, Russia, Algeria, Indonesia, Australia, Libya, Turkey, Saudi Arabia and Ukraine had a considerable impact on the ammonia market in 2014. Interruptions and limitations in ammonia production were due to installation failures and gas supply restrictions that many producers struggled with. The political crisis and installation stoppages in Ukraine also had an effect on the ammonia market, because a considerable part of the overall global ammonia trading volume passes through the Yuzhny terminal (Black Sea, Ukraine). Figure 6. Monthly average prices of ammonia and urea in 2014 [USD/t]


In 2014, there were spells of both considerable decreases and increases in the price of urea. High at the beginning of the year, the price began to fall in February, strongly affected by the financial turmoil in India, Turkey and some Asian countries, and a 6% reduction in the area of corn plantations in the US. In the third quarter, the price rebounded. Low prices of agricultural products and growing urea supply from China led to reduced purchases by large importers, and − starting from September − another decline in the urea price. The downward trend in the urea price was halted in December, thanks to increasing imports to the US and Europe. In 2014, new large producers-exporters from Algeria and Qatar emerged on the market, and supply of urea from China also rose considerably. It is estimated that in 2014 exports of urea from China were in excess of 12m tonnes, compared with 8m tonnes in 2013. The global urea trading volume is about 40m tonnes per year. Urea overproduction in China is estimated at approximately 10m tonnes per year.

Titanium white The economic slowdown and crisis observed in many countries had a negative effect on demand for titanium white. The Chinese market, accounting for over 30% of the global titanium white production and consumption, reported high inventory levels along with falling demand for the product.

Figure 7. Monthly average prices of titanium white in 2014 [EUR/t]


0 100 200 300 400 500 600 700

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2 200

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2 500




The market price of titanium white did not experience major fluctuations and was in a slight downward trend in 2014. Limited demand for titanium white triggered a decline in demand for the materials used in its production and forced suppliers of such production input to reduce prices. Throughout 2014, average prices of titanium-bearing minerals, ilmenite and titanium slag, decreased respectively by 30% and 60%.

Chemicals Ammonia is among the Company's key chemical products. In 2013, an upward trend in this product's price was observed on global markets. Shutdowns of ammonia production units for longer periods of time and output reductions by numerous major exporters were the main drivers of the upward trend. Technical grade urea is used mainly to produce glues in the furniture industry and to prepare the AdBlue® solution. In 2014, demand for technical grade urea was stable. The demand for NOXYTM (AdBlue®) grows in response to the growing number of new vehicles meeting the emission standards, fitted with catalytic converters. Growth in the product's consumption in 2014 was limited due to the economic slowdown and a lower number of road transfers. Aggressive competition was seen in export markets, particularly in the German market. There was an increase in production of AdBlue® by non-integrated installations, using inexpensive urea from China or Russia. In 2014, the European markets saw an oversupply of iron sulfate, despite its lower production volume. Iron sulfate is a by-product generated in the production of titanium white. Lower supply of iron sulfate was due to lower production of titanium white. Consumption of iron sulfate in the cement industry fell due to the slowdown in the construction sector and reduced dosage of this product in the manufacture of concrete. Nevertheless, imports of iron sulfate to Poland, mainly from Slovakia, were growing.

5.2. Key financial and economic data 5.2.1. Financial performance

The Company's key achievements in 2014 included: • Doubling the Company's net profit relative to 2013, despite difficult market conditions, • Substantial growth of profitability ratios, • Increased sales of fertilizers, • Substantial decline in production costs due to constantly growing phosphate supplies from the

Company's own source (a subsidiary in Senegal) and lower prices negotiated on key raw materials,

• Dividend payment of PLN 23,250 thousand.

In 2014, the Company generated a net profit of PLN 82,677 thousand, with EBIT at PLN 101,121 thousand and EBITDA at PLN 184,064 thousand. Compared with 2013, net profit rose by PLN 40,522 thousand (96%), while EBIT improved by PLN 43,937 thousand (77%). In the reporting period, the Company's financial performance was strongly correlated with the situation in the market environment.

The Company worked actively to increase cheaper phosphate supplies from its own source (interest in African Investment Group S.A.), which significantly reduced the cost of raw materials and improved financial performance.

The Company's year-on-year improvement in performance is also attributable to the increased fertilizer sales volume and lower prices of key raw materials.

In 2014, revenue was lower by 4% year on year, whereas the EBITDA margin of 8% was up by 2pp relative to 2013. The decrease in revenue resulted mainly from lower prices of products, particularly titanium white, which reflected wider market trends. Revenue was driven up by increased sales volumes of fertilizers (urea and compound fertilizers). Selling and distribution costs were up on 2014 mainly due to changes in the policy governing transport costs. Also there was an increased number of transactions in which the Company was tasked to handle transport logistics. Administrative expenses were higher year on year, which resulted from: labour costs, a higher fee for the use of the Grupa Azoty logo, costs of advisory services related to the adaptation and launch of the Azoty PRO project, as well as advertising and marketing costs.




Table 13. Company's financial performance

Item 2014 2013 change % change

Revenue 2,376,763 2,467,443 -90,680 -4 Cost of sales 2,062,619 2,251,256 -188,637 -8 Gross profit 314,144 216,187 97,957 45 Selling and distribution expenses 84,885 67,466 17,419 26 Administrative expenses 142,353 135,035 7,318 5 Net profit on sales 86,906 13,686 73,220 535 Other income/(expenses) 14,215 43,498 -29,283 -67 EBIT 101,121 57,184 43,937 77 Finance income/(costs) 703 -3,498 4,201 -120 Profit before tax 101,824 53,686 48,138 90 Tax expense 19,147 11,531 7,616 66 Net profit/loss 82,677 42,155 40,522 96

In 2014, a profit of PLN 14,215 thousand was posted on other operating activities, down by PLN 29,283 thousand on 2013. The Company's weaker performance compared with the previous year resulted from a lower value (by PLN 7,113 thousand) of property, plant and equipment contributed to Zarząd Morskiego Portu Police Sp. z o.o., and lower amounts of reversal of provisions for environmental protection (down by PLN 12,666 thousand) and reversal of impairment losses on property, plant and equipment following impairment testing of such property, plant and equipment (down by PLN 3,634 thousand).

Net finance income/costs was positive at PLN 703 thousand. In 2013, the figure was negative at PLN -3,498 thousand. The year-on-year growth posted by the Company in 2014 was driven by higher income from dividends (by PLN 5,047 thousand), higher interest income (by PLN 2,788 thousand), and lower (by PLN 1,637 thousand) interest expense on employee benefit liabilities measured with the actuarial method. Additionally, interest expense under borrowings recognised in 2014 fell by PLN 1,004 thousand compared with 2013. Compared with 2013, net foreign exchange gains/losses fell by PLN 10,672 thousand (in 2014, the result was a net loss of PLN -8,092 thousand, compared with a net gain of PLN 2,580 thousand posted in 2013).

5.2.2. Segment results

At 86%, the Fertilizers Segment had the highest value and accounted for the largest share of the Company's revenue. The Pigments Segment generated 13% of total revenue, with revenue from other activities representing 1% of revenue from sales to external customers. In 2014, the Fertilizers Segment's share in the Company's EBIT increased strongly to 73% (from 47% in 2013), with the Pigment Segment's share up to 12% from 9% in 2013. The share of Other Activities in the Company's EBIT decreased from 44% in 2013 to 15%, largely as a result of the non-cash contribution of property, plant and equipment to Zarząd Morskiego Portu Police Sp. z o.o., which in 2014 was lower by PLN 7,113 thousand relative to 2013. Table 14. EBIT by segment in 2014

Item Fertilizers Pigments Other Activities

Revenue from external sales 2,042,568 299,746 34,449 Share [%] 86% 13% 1% EBIT 73,589 12,581 14,951

Share [%] 73% 12% 15%




Table 15. EBIT by segment in 2013

Item Fertilizers Pigments Other Activities

Revenue from external sales 2,102,383 327,580 37,480 Share [%] 85% 13% 2% EBIT 27,048 4,964 25,172

Share [%] 47% 9% 44%

In 2014, profit posted in the Fertilizers Segment was markedly higher than in the previous year. The profit increase was primarily attributable to a higher volume of fertilizer sales and lower purchase prices of feedstock, including phosphate rock, a key feedstock, from the Company's own source (Senegal). At the same time, the market was affected by lower prices of compound fertilizers and urea. Conditions on the ammonia market also deteriorated.

Despite the significantly more adverse situation on the titanium white market compared with 2013, the Pigments Segment's EBIT increased year on year. The prices of titanium white were lower in 2014 relative to the previous year. The improved performance was mainly attributable to lower prices of titanium-bearing materials, relative to 2013.

Fertilizers In 2014, revenue of the Fertilizers Segment was PLN 2,042,568 thousand, down 3% year on year. The decrease was predominantly due to lower fertilizer prices. Relative to the previous year, sales of NP fertilizers and urea increased significantly, which to a large extent offset the decline in revenue caused by lower prices of products sold in the Fertilizers Segment. Revenue of the Fertilizers Segment


Pigments In 2014, revenue from external sales posted by the Pigments Segment was PLN 299,746 thousand, down 8% on 2013. The key product sold by the Pigments Segment is titanium white. In 2014, the Segment's revenue from sales of titanium white reached PLN 289,834 thousand.

Revenue of the Pigments Segment


0 100 000 200 000 300 000 400 000 500 000 600 000 700 000

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Key factors behind the year-on-year drop in revenue of the Pigments Segment included a decrease in export volumes of titanium white and a 5% drop in average selling prices.

Other Activities Revenue of the Other Activities segment accounts for 1% of the Company's total external sales and is derived mainly from occasional sales of merchandise and services.

Sales by product group Sales of compound fertilizers (NPK, NP, NS) are the most important source of revenue, accounting for 55% of the Company's total sales. In 2014, revenue from sales of compound fertilizers came in at PLN 1,305,101 thousand, having fallen 4% year on year. In the compound fertilizer category, sales of NPK fertilizers are the main contributor to revenue, with a 40% share in total sales. In 2014, revenue from sales of compound fertilizers was down 12% year on year, reflecting a decrease in the market prices of NPK fertilizers in the reporting period. In 2014, revenue from sales of urea was PLN 400,760 thousand and accounted for 17% of the Company's total sales. Relative to 2013, the Company posted a 16% increase in revenue. In 2014, revenue from sales of titanium white was PLN 289,834 thousand and accounted for 12% of the Company's total sales. The average selling prices were approximately 5% lower than in 2013.

Revenue by product group


A decrease in revenue from product sales was recorded in the chemicals product category (down by 14% on 2013), which was chiefly attributable to lower ammonia sales, representing the key item in the chemicals sales structure (85%). Lower sales of ammonia resulted from transfer of a part of production volume to internal consumption, with a view to increasing sales of urea and NP fertilizers. In the Other Activities group, accounting for 2% of total revenue, a year-on-year decrease was recorded in terms of sales value, on the back of lower occasional sales of merchandise and materials.

Compared with 2013, the share of urea in total revenue grew from 14% to 17%, the share of compound fertilizers (55%) remained fairly unchanged, and the share of titanium white fell from 13% to 12% year on year. A decrease was reported in revenue from sales of chemicals, primarily ammonia, which brought the share of chemicals in total revenue down from 16% to 14%.

Com

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Figure 8. Revenue by product group


5.2.3. Operating expenses by nature Operating expenses were down 8% in 2014 relative to 2013. The key factor driving the Company's expenses was the value and cost structure of raw materials/feedstock. The most important item here was raw materials and consumables used, accounting for approximately 72% of the Company's operating expenses. Key factors driving down those expenses in 2014 relative to 2013 included lower prices of main raw materials. The increase in other expenses is attributable to several factors, including the change in the manner of posting advertising costs (which have been moved from services to other expenses), higher fees for using the Grupa Azoty logo, costs of advisory services related to the launch of the Azoty PRO project, as well as marketing and advertising expenses. Table 16. Operating expenses by nature

Item Expenses Structure %

2014 2013 2014 2013 Depreciation and amortisation 82,943 78,871 4 3 Raw materials and consumables used 1,620,589 1,852,063 72 76 Services 215,424 217,630 10 9 Salaries and wages, including overheads, and other benefits 219,876 205,801 10 8

Taxes and charges 77,629 66,516 3 3 Other expenses 44,291 25,141 1 1

In 2014, raw materials and consumables used were down 12% relative to 2013, largely due to lower prices of key raw materials following successful negotiations that markedly reduced purchase prices of such raw materials as phosphates, potassium salt, titanium slag, ilmenite and natural gas. The share of raw materials and consumables used in operating expenses fell to 72%, from 76% in 2013. In the reporting period, the Company posted a decrease in the cost of natural gas consumption (due to lower prices of gas).

Compound fertilizers

55%

Urea 17%

Chemicals; 14%

Titanium white; 12%

Other 2

2014

Compound fertilizers

55%

Chemicals; 16%

Urea; 14%

Titanium white; 13%

Other; 2%

2013




In 2014, other expenses were higher year on year. The share of other expenses in total operating expenses grew from 24% in 2013 to 28% in 2014 due to a significant decrease (12%) in raw materials and consumables used.

5.2.4. Structure of assets, equity and liabilities

Changes in assets disclosed in the statement of financial position in 2014: • a PLN 89,891 thousand (8%) increase in non-current assets, due to investment expenditure in

excess of depreciation/amortisation charges; • a PLN 16,805 thousand (3%) increase in current assets; • a PLN 70,149 thousand (21%) increase in inventories, due to increase in raw materials; • a PLN 30,752 thousand (11%) decrease in trade and other receivables; • cash and cash equivalents stood at PLN 32,085 thousand as at December 31st 2014, having

decreased by PLN 25,787 thousand year on year. Table 17. Structure of assets

Item 2014 2013 change % change Non-current assets, including: 1,193,678 1,103,787 89,891 8 Property, plant and equipment 908,277 823,370 84,907 10 Intangible assets 20,488 12,121 8,367 69 Investment property 24,428 23,999 429 2 Investments in subordinated entities 160,693 147,018 13,675 9 Current assets, including: 681,865 665,060 16,805 3 Inventory 403,479 333,330 70,149 21 Trade and other receivables 237,618 268,370 -30,752 -11 Cash and cash equivalents 32,085 57,872 -25,787 -45

Total assets 1,875,543 1,768,847 106,696 6

Table 18. Structure of equity and liabilities Item 2014 2013 change % change

Equity 1,040,784 983,861 56,923 6 Non-current liabilities, including: 194,117 200,798 -6,681 -3 Borrowings 84,669 42,231 42,438 100 Other non-current liabilities 247 57,277 -57,030 -100

Employee benefit obligations 51,260 44,394 6,866 15

Provisions 46,156 45,097 1,059 2 Current liabilities, including: 640,642 584,188 56,454 10 Trade and other payables 461,585 340,208 121,377 36 Borrowings 131,126 196,752 -65,626 -33 Provisions 39,894 33,710 6,184 18 Total liabilities 834,759 784,986 49,773 6

Total equity and liabilities 1,875,543 1,768,847 106,696 6

Significant changes in equity and liabilities disclosed in the statement of financial position in the period under review: • increase in the Company's equity attributable to net profit generated in 2014, reduced by

dividends distributed to the shareholders; • a PLN 6,681 thousand (3%) decrease in non-current liabilities; • a PLN 23,188 thousand (10%) decrease in the use of borrowings; • a PLN 56,454 thousand (10%) increase in the carrying amount of current liabilities, mainly on the

back of higher trade payables.




5.2.5. Financial ratios

Profitability In 2014, operating in a challenging market environment, the Company achieved optimum results. In 2014, the profitability ratios calculated by reference to revenue were higher than in 2013, mainly due to an improvement in the revenue-cost relationship resulting from higher margins generated on sale of products. Following the year-on-year improvement of financial performance, the Company also posted higher profitability ratios calculated by reference to assets and equity.

Table 19. Profitability ratios Ratio 2014 2013 Gross margin 13% 9% EBIT margin 4% 2% EBITDA margin 8% 6% Net margin 3% 2% ROE 4% 2% ROCE 8% 5% ROE 8% 4% Return on non-current assets 7% 4%

Ratio formulas: Gross margin = gross profit (loss) / revenue (statement of profit and loss and other comprehensive income)

EBIT margin = EBIT / revenue EBITDA margin = EBITDA / revenue Net margin = net profit (loss) / revenue Return on assets (ROA) = net profit (loss) / total assets Return on capital employed (ROCE) = EBIT / TALCL (total assets less current liabilities) Return on equity (ROE) = net profit (loss) / equity Return on non-current assets = net profit (loss) / non-current assets

Liquidity The Company's financial standing continued to be strongly correlated with developments in its market environment. In 2014, the current ratio remained at its 2013 level, as current liabilities increased more than current assets. The quick ratio in 2014 was lower than in 2013, owing to increased liabilities. At the same time, there were positive changes in current assets, i.e. a reduction of receivables (by 11% year on year). Table 20. Liquidity ratios

Ratio 2014 2013 Current ratio 1.1 1.1 Quick ratio 0.4 0.6 Cash ratio 0.1 0.1

Ratio formulas: Current ratio = current assets / current liabilities Quick ratio = (current assets – inventory – current accruals) / current liabilities Cash ratio = (cash and cash equivalents + other financial assets) / current liabilities

Operating efficiency In 2014, the Company's cash conversion cycle shortened relative to the previous year, from 38 days to 26 days. Relative to 2013, the inventory turnover period lengthened by 17 days, while the average collection period shortened by 3 days. Concurrently, in 2014, trade and other receivables were down 11%, whereas inventories increased 21% year on year. The average payment period lengthened by 27 days, due primarily to a 36% increase in trade and other payables. Table 21. Operating efficiency ratios

Ratio 2014 2013 Inventory turnover period (days) 70 53 Average collection period (days) 36 39




Average payment period (days) 81 54 Cash conversion cycle 26 38

Ratio formulas: Inventory turnover = (inventory * 360) / cost of sales Average collection period = (trade and other receivables * 360) / revenue Average payment period = (trade and other payables * 360) / cost of sales Cash conversion cycle = inventory turnover + average collection period - average payment period

Debt In 2014, the level of debt did not change significantly year on year. A slight increase in total debt ratio is attributable to various factors, including environment protection-related projects partially financed with borrowed funds. The debt ratios for 2014 were at levels guaranteeing financial security for the Company. Table 22. Debt ratios

Ratio 2014 2013 Total debt ratio 45% 44% Long-term debt ratio 10% 11% Short-term debt ratio 34% 33% Equity-to-debt ratio 125% 125% Interest cover ratio 1,337% 600%

Ratio formulas: Total debt ratio = current and non-current liabilities / total assets Long-term debt ratio = non-current liabilities / total assets Short-term debt ratio = current liabilities / total assets Equity-to-debt ratio = equity / current and non-current liabilities Interest cover ratio = [EBIT + interest expense] / interest expense

5.3. Explanation of differences between actual performance and financial forecasts for 2014

The Company did not publish any financial forecasts for 2014, on account of continued unpredictability in the product and feedstock markets on which the Company heavily depends. Developments on these markets have a material effect on the Company's financial performance. Forecasting key economic indicators would, therefore, carry considerable risk, and their publication could lead to wrong investment decisions by potential investors.

5.4. Management of capital and assets Grupa Azoty Zakłady Chemiczne Police S.A. is not subject to any external limitations relating to management of its financial resources and assets, other than standard requirements of the Commercial Companies Code. Generation of positive margins on the main products sold both on the domestic market and abroad remains the key factor determining the Company's development, including growth of its financial resources and assets. The Company identifies and manages its liquidity risk, and also follows an active cash flow (payables and receivables) management policy by using tools such as trade credit and advance payment in the settlement of sale transactions, as well as control of payment deadlines in purchase transactions. Currency risk is reduced through natural hedging. The Company matches single currency inflows and outflows arising in connection with purchases of key raw materials and sales of products to foreign markets. To secure financial liquidity, the Company uses external sources of financing. Loans are repaid using current business revenues, but the Company always maintains a safe level of credit reserve for use when necessary. In 2014, the Company took a number of steps to optimise the cost of debt, including execution of an annex to its credit facility agreement with Raiffeisen Bank Polska S.A., which reduced the borrowing costs. Additionally, in July 2014 the Company executed a factoring agreement with Raiffeisen Bank Polska S.A. to obtain additional financing for its operations, as well as to secure the Company's liquidity and improve its relations with customers.




The Company financed its investment projects planned for 2014 with internally generated funds and with funds from preferential sources of project financing. In June 2014, the Company executed a PLN 50m investment facility agreement with Bank PKO BP S.A. to secure financing for the Company's investment expenditure. In the opinion of its strategic lenders, the Company has a sound liquidity position and enjoys a high credit standing. Given this, even with a potential economic slowdown, there is no risk that it might lose liquidity. Financial instruments and related risks, as well as financial risk management methods and objectives adopted by the Company, were comprehensively described in the financial statements for 2014 (note 26). For information on guarantees granted and received, see note 27 to the financial statements for 2014. Information on loans advanced to related entities was disclosed in the financial statements for 2014, in notes 13.3 and 28.




Table 23. Company's loans and borrowings in 2014

Bank

Amount outstanding at the beginning of the

year*

Amount outstanding at the end of the

year*

Agreement date Agreement term

Overdraft and revolving credit facilities PKO BP S.A. − MPCF (multi-purpose credit facility) 62,000 62,000 Jan 30 2007 Jun 30 2016 Bank Gospodarstwa Krajowego 51,787 50,691 Nov 13 2013 Nov 12 2016 PKO BP S.A. Overdraft facility 83,798 5,704 Dec 7 2011 Sep 30 2016 Raiffeisen PolBank S.A. 0 110 Oct 4 2013 Jun 15 2015 Total bank borrowings 197,585 118,505 - - * Amounts outstanding without interest accrued

all loans denominated in PLN, interest rate: 1M WIBOR plus margin.

Table 24. Company's liabilities under non-bank borrowings as at December 31st 2014 Name of institution co-financing the

project Liability amount Utilisation % Project

Regional Fund for Environmental Protection and Water Management in Szczecin*

90,000 100.00% Flue gas treatment unit and upgrade of the EC II CHP plant at Zakłady Chemiczne Police S.A.

National Fund for Environmental Protection and Water Management**

90,000 6.58% Upgrade of the ammonia synthesis process at Zakłady Chemiczne Police S.A.

Regional Fund for Environmental Protection and Water Management in Szczecin***

6,228 0% Expansion of the post-calcination gas desulfurisation system at facility 414 at the Titanium White Plant of Zakłady Chemiczne POLICE S.A.

National Fund for Environmental Protection and Water Management****

2,945 56.03% Elimination of negative environmental impact of the iron sulfate (II) landfill site - Stawostadion No. 1

Total 189,173 51.58%

* PLN 90,000 thousand loan repayable after 9 years and 8 months, granted by the Regional Fund for Environmental Protection and Water Management in Szczecin, intended for financing of the 'Flue gas treatment unit and upgrade of the EC II CHP plant at Zakłady Chemiczne Police S.A.' project. The loan was disbursed in full. The loan bears variable interest based on the rediscount rate. The loan is scheduled for repayment in full by December 31st 2022. ** PLN 90,000 thousand loan repayable after 10 years, granted by the National Fund for Environmental Protection and Water Management in Warsaw, intended for financing of the 'Upgrade of ammonia synthesis process at Zakłady Chemiczne Police S.A.' project. The loan is disbursed in tranches and bears




interest at a variable rate based on 3M WIBOR. As at December 31st 2014, the amount outstanding under the agreement was PLN 5,919 thousand. The loan is scheduled for repayment in full by December 20th 2023. ***PLN 6,228 thousand loan repayable after 9 years and 8 months, granted by the Regional Fund for Environmental Protection and Water Management in Szczecin, intended for financing of the 'Expansion of the post-calcination gas desulfurisation system at facility 414 at the Titanium White Plant of Zakłady Chemiczne Police S.A.' project. The loan is disbursed in tranches and bears interest at a fixed rate. As at December 31st 2014, there was no amount outstanding under the agreement and no disbursement was made. The loan is scheduled for repayment in full by March 30th 2023.




**** PLN 2,945 thousand loan, repayable after 3 years and 9 months, granted by the National Fund for Environmental Protection and Water Management in Warsaw, intended for financing of the 'Elimination of negative environmental impact of iron sulfate (II) landfill site - Stawostadion No. 1' project. The loan is disbursed in tranches and bears interest at a fixed rate. It is scheduled for repayment in full by December 20th 2016. As at December 31st 2014, the amount outstanding under the agreement was PLN 1,650 thousand.

6. Risks, threats and growth prospects 6.1. Significant risk factors and threats 6.1.1. Risks related to the Company's operations

Liquidity risk The Company recognises and manages its liquidity risk understood as the risk of failure to meet its liabilities as they fall due. The Company's exposure to the liquidity risk is tied to its sources of external financing (credit facilities, loans, trade credit advanced). This risk is chiefly connected with potentially limited access to the financial markets, which may result in the Company’s inability to raise new financing or refinance its existing debt. Liquidity risk largely depends on assessment of the Company's creditworthiness by financial institutions, conditions prevailing on the debt markets and lending institutions' appetite for risk. Generation of positive margins on the main products sold both on the domestic and international markets remains a key factor in the Company's current and ongoing liquidity in the long-term. The Company conducts an active cash flow (payables and receivables) management policy by using trade credit and advance payment in the settlement of sale transactions and by extending payment deadlines in purchase transactions. Given the availability of credit facilities and the Company's sound financial standing, the risk of liquidity loss is considered low.

Industrial accident risk In the course of its operations, Grupa Azoty Zakłady Chemiczne Police S.A. handles large quantities of hazardous chemicals that pose a risk of fire, explosion or release of toxic substances. Consequently, the Company's priority is to observe the most stringent safety standards to minimise the risk of industrial accidents. The relevant solutions in place at the Company ensure appropriate conditions for the manufacture, storage, transport and distribution of substances to meet the environment protection requirements. The Company has developed and implemented the required accident prevention programmes and monitors safety on an ongoing basis. The Company has appropriate organisational and technical measures, such as CCTV systems, safeguards and procedures, to prevent industrial accidents and mitigate their consequences. The well-trained Company Fire Brigade, with additional support from chemical rescue teams and other services, is capable of undertaking effective rescue operations in any situation. Such organisational and technical measures allow the Company to maintain high safety standards and consistently reduce its environmental footprint. The Company's efforts to improve working conditions, company-wide work safety campaigns and the free disease prevention programme offered to employees have been recognised by third-party institutions − for instance, the Company once again received the Gold Card Leader on Safety at Work Award (2015-2016). The adequacy of work safety solutions in place at the Company is assessed by external inspection authorities and accreditation/certification bodies. All post-inspection instructions are complied with within the prescribed deadlines, and the Company’s care for safety is evidenced by the number of certificates it holds.

Supplier and customer risk A single customer's or supplier's large share in sales or purchases may result in adverse consequences for the Company. In the case of raw materials, unavailability of alternative supply sources and insufficient stocks may compromise the continuity of production if contracts are terminated or may substantially limit the scale of cooperation with a given trading partner. By including appropriate provisions in its contracts and executing framework agreements with suppliers, the Company was able to maintain production continuity and did not record losses on product sales caused by unavailability of raw materials. The Company pursues a policy of diversification of its supply sources. In addition to its key phosphorite supply sources, in critical situations the Company also sourced feedstocks from other countries. The acquisition of shares in a




Senegalese company with access to phosphorite deposits substantially improved the security of the Company's raw material supply. The Company is working to include countries such as Ukraine, China, India and Mozambique in its group of suppliers of titanium-bearing raw materials. Moreover, following acquisition of a 55% interest in African Investment Group S.A., the Company gained access to the Sud Saint Louis ilmenite sand deposits in Senegal. The Company's sales plans may also be disrupted if its contracts with a large supplier, accounting for a significant share of the Company's revenue, are terminated or restricted. Additionally, an unduly strong supplier/customer position may limit the Company's ability to negotiate prices and terms and conditions of contracts. To mitigate this risk, the Company seeks to execute long-term contracts which guarantee precise and unambiguous terms for both parties. Such long-term contracts define circumstances justifying future contract renegotiation (specifying also how often a contract may be renegotiated in a given financial year). Furthermore, such contracts have long notice periods, giving the Company time to find alternative solutions. In the Pigments Segment, the Company's sales plans may be disrupted as a result of decreased sales to key trading partners and their strong negotiating position due to adverse economic conditions in Europe. To mitigate this risk, the Company seeks to retain key customers, while planning to acquire new customers in its existing segments and preparing to take its products to new segments.

Risk related to non-performing receivables The risk related to non-performing receivables is associated chiefly with product sales under trade credit agreements. By permitting deferred payment sales, the Company incurs the risk that its trade receivables will not be paid or will be paid only partially due to circumstances such as a trade partner's insolvency or dishonesty or other external factors. The Company takes measures to mitigate this risk to the fullest extent possible, and timely payments are evidence that they have proved effective. Financial and sales staff work closely together as arrears arise and may decide to reduce or cancel a trade credit limit if a payment problem persists (depending on a trading partner's financial standing and security provided). The risk related to non-performing receivables may be mitigated by evaluating the creditworthiness of trading partners prior to granting them trade credit, reducing credit limits, monitoring the creditworthiness of trading partners, consulting an independent credit reference agency to determine the creditworthiness of trading partners, consulting the Sales Office and ensuring that appropriate security is provided. Proposed security for trade credit is evaluated based on its market value, liquidity and probability of enforcement. To mitigate the risk associated with deferred payment, the Company takes out insurance policies for its trade receivables. The policies limit credit risk to the deductible amount. The insurance covers sales in three currencies: PLN, EUR and USD. Importantly, all sales involving deferred payment are insured (excluding advance payments). The insurance policies provide for current monitoring of a customer’s financial standing and debt recovery when required. Additionally, upon a customer's actual or legal insolvency, the Company receives a compensation payment amounting to 95% of receivables insured. Credit risk exposure is defined as the total of unpaid receivables, monitored on an ongoing basis by the Company’s internal financial staff (individually for each trading partner) and, if a receivable is insured, also by insurance company analysts.

Risk related to changes in legal and environmental regulations Risk related to changes in environmental regulations is significant in the Company's operations. The Company manages this risk through ongoing monitoring of current legislation and acts according to changes in legal regulations. The Company participates in social consultations of draft legal acts. The Company constantly monitors its readiness to meet the environmental requirements imposed by relevant laws. Since January 9th 2014, the Company has held a new integrated permit that meets the requirements imposed by the IED Directive. The new permit has been granted for an unspecified time and covers all installations on the premises of Grupa Azoty Zakłady Chemiczne Police S.A. The Company was the first in Poland to prepare and file a Baseline Report. The condition of soil and ground water on the Company's premises was examined at the beginning of 2013. Late in 2014, the Marshal Office of the Province of Szczecin issued a decision amending the integrated permit, thereby accepting the submitted Baseline Report and the manner of monitoring the ground, soil and ground water (risk assessment). The Industrial Emissions Directive introduced new requirements applicable to titanium white installations. As stipulated in the Environmental Protection Act, these requirements were defined in relevant regulations. In January 2015, continuous monitoring was put in place to meet the




conditions specified in a new regulation. New investment projects and overhauls of dedusting and desulfurising units that adapt the installation to the new emission standards are nearing completion. Another project that was launched relates to exhaust gas treatment at the power generating installation (EC II CHP Plant). The risk related to BAT conclusions, which have not yet been defined for the Company's installations, remains unchanged. The period for adapting production installations to the emission levels specified in BAT conclusions is four years. The Company's operations may also be affected by changes in the regulation on charges for economic use of the environment, including waste landfilling – such charges may be raised.

Risk related to changes in prices of CO2 emission allowances In connection with the Company's participation in the EU Emissions Trading Scheme (EU ETS) and the resulting obligation to reduce greenhouse gas emissions, the Company is exposed to the risk of higher prices of CO2 emission allowances. In the current Phase III trading period (2013−2020), the free allocation does not cover the Company’s requirement for CO2 emission allowances needed to meet its production targets. Consequently, it is forced to buy missing allowances in the secondary market (exchange, auctions). To purchase the missing allowances, the Company is analysing their market prices, in line with its plan for the third trading period. By doing so, it aims to minimise the adverse effect of higher prices of CO2 emission allowances on the Company's financial performance.

Armed conflicts and political situation in strategic supply and sales markets Significant political events and armed conflicts may compromise the Company's operations in affected areas. Political destabilisation and armed conflicts result in a temporary trade blockade in the region where they occur due to direct threat to trading (danger to people in the conflict zone) as well as political and economic sanctions (including embargoes) imposed by countries not directly involved in the conflict. Such developments disrupt the continuity of trade and, in the case of sales markets, may force the Company to transfer its sales to other markets to avoid sales and revenue erosion. In the case of supply markets, the situation may compromise the Company's feedstock/raw material security (limited number of available strategic feedstock/raw materials sources meeting the Company's quality and technological requirements. In 2014, political situation had no major impact on the maintenance of phosphorite supplies, despite the fact that the Company's main phosphorite sources are located in politically unstable countries of the Mediterranean Basin (North Africa). The Company sourced its feedstock from alternative sources and continued, on a larger scale, the supplies of its own raw materials from Senegal, ensuring continuity and optimum structure of the supplies.

6.1.2. Risk related to the Company's business environment

Risk related to competition and to the situation on the Company's strategic markets Products manufactured by the Company are sold in bulk quantities and their prices are primarily determined by European and global economic cycles as well as global supply and demand dynamics. The products in question are in particular fertilizers, including those manufactured based on natural gas, phosphate rock and potassium chloride (NPK and NP fertilizers). Prices of and demand for these products fluctuate. The Company's revenue is significantly affected by prevailing market conditions. Stabilisation that has been seen on the compound fertilizer market is reflected in the Company's 2014 performance. Based on its past experience, to avoid adverse effects of changes in market trends the Company strives to diversify, to the maximum extent possible, its markets and customer base in order to be more independent and able to offset sales declines in one area with increases in others by periodically changing the sales structure.

Currency risk The Company's transactions where cash flows expressed in the Polish złoty depend on fluctuations in the exchange rate between the Polish złoty and the transaction currency expose the Company to currency risk, which is defined as the risk of incurring financial losses as a result of adverse movements in currency exchange rates. Although the Company tries to predict the directions and extent of exchange rate movements, which requires specialist knowledge, appropriate tools and experience, the actual market developments often differ significantly from projections. Therefore, having such capabilities does not eliminate the risk, but allows the Company to control it better. The effect of exchange rates on the Company's performance depends on whether the Company has a short or long currency position. A strong domestic currency pushes down profit on sales in foreign currencies, while purchases of strategic raw materials priced in foreign currencies become more




economical. To counter the effects of exchange rate fluctuations, the Company effectively balances its net foreign currency position. In 2014, the Company did not have any option contracts that could give rise to losses caused by movements in the value of the Polish złoty against key foreign currencies. The Company hedges its currency exposure mainly through natural hedging − by balancing revenue and expenses in the same currency arising from the purchases of key raw materials with sales of products for export. Additionally, a surplus (long position) generated in one foreign currency is used to cover a deficit (short position) in another foreign currency. To this end, the Company enters into EUR/USD spot transactions.

6.2. Company's significant external and internal growth factors and its development direction policy

6.2.1. External Factors

Market factors The strongest drivers of the situation of Grupa Azoty Zakłady Chemiczne Police S.A. are those relating to the purchase of raw materials/feedstock as they have the greatest effect on production costs. The relationship of product market prices to key feedstock prices has a marked effect on the competitiveness of the Company's product offering. On the expenses side, the price of natural gas and phosphate rock is a material factor. Another important element is the macroeconomic situation in the agricultural sector. Higher grain inventories in the US and globally as well as high yields forecast for the next harvest will most probably keep grain prices on global markets at low levels. In the Polish agricultural sector, the financial situation of farmers deteriorated as a growing number of farmers experienced liquidity problems. China, one of the largest global producers and exporters of fertilizers, with large production surpluses (urea and DAP), significantly reduced fertilizer export duties as of January 1st 2015, for the second consecutive year. This may result in increased activity of Chinese producers on global markets and higher fertilizer supply, which was already seen on the urea market in 2014. Troubled by financial difficulties and currency devaluation, such countries as India, Turkey and a number of countries in Asia and South America, continue the policy of limited fertilizer purchases. In 2015, India plans to phase out fertilizer subsidies. Given the uncertain outlook for the eurozone and slowdown of the EU economy, as well as the lack of stability in Russia and Ukraine, demand for titanium white is expected to fall in 2015. Additionally, the falling prices of titanium white imported from Asia, despite the weakening of the euro against the US dollar, put pressure on the European market and force titanium white producers to lower prices.




Legislative changes As European countries are a strategic market for Grupa Azoty Zakłady Chemiczne Police S.A., the Company's development directions depend on environmental protection directives and regulations, primarily those implemented by the European Union. Legislative changes will affect the Company's business in two ways. On the one hand, the need for compliance will determine the changes and solutions implemented by the Company. On the other hand, legal regulations binding on the Company's customers and users of its products will affect demand. Given the major share of the Fertilizers Segment in the Company's revenue, all developments in the agricultural market translating into demand changes have a significant effect on the Company's market situation, development (changes in product mix) and sales (sales policy and structure). In the coming years, the Company's business will be in particular affected by legal changes in the NOXy™ (AdBlue®) market: implementation of further environmental standards concerning exhaust gas emissions from diesel engines (the EURO 6 standard has already taken effect requiring emission reductions in all lorries regardless of tonnage).

6.2.2. External factors

Liquidity and debt Generation of positive margins on the main products sold both on the domestic and international markets remains the key factor in the Company's current and ongoing liquidity in the long-term. The Company conducts an active cash flow (payables and receivables) management policy by using trade credit and advance payment in the settlement of sale transactions, extending payment deadlines in purchase transactions, and using factoring of accounts receivable under sale transactions. The Company manages its liquidity by maintaining credit facilities appropriate for the scale of its business, which constitute a liquidity reserve minimising the risk of delayed payment of liabilities.

Sales intensification Apart from the achievement of market-related objectives, another important function of sales policy is to maximise the Company's sale volumes through full optimisation of production capacity. Given its production scale and flexibility, the Company can keep expenses down to a minimum and thus offer competitive pricing when compared to other manufacturers having direct access to most raw materials. Sales intensification measures focus primarily on maximising sales volumes in the most profitable markets worldwide. By adapting trade contract terms to current demand and competition, the Company strives to offset the effects of seasonal fluctuations in sales volumes typical of the Company's main product markets of titanium white and mineral fertilizers. In its strategic markets, the Company stimulates sales volume growth using incentive schemes and other marketing tools.

Quality The Company's products are manufactured using globally recognised technologies and the final quality of its products meets the requirements of the Company's customers on target markets. The Company constantly improves production efficiency through the introduction of state-of-the-art systems supporting proper process monitoring and control. The Company holds Quality, Environment and Security Management System Certificates, which guarantees stable quality of its products. The following brands owned by the Company are well-known and recognised on the market as symbols of high quality: • POLIFOSKA® − the leading brand on the Polish market of compound NPK fertilizers. It

encompasses over ten different types of fertilizers with different chemical compositions and application properties. POLIFOSKA® brand has become a synonym of compound fertilizers in Poland. The POLIFOSKA brand has a high concentration of pure constituents, chemical uniformity of fertilizer grains, high assimilability of constituents, optimal granulation and application characteristics, as well as favourable price of pure constituents;

• Apart from POLIFOSKA® products, the Company also offers a diammonium phosphate (NP 18-46) fertilizer sold under the brand name of POLIDAP® and a low-chloride compound fertilizer under the brand name of POLIMAG® S;

• TYTANPOL® − the Company is the only manufacturer and largest supplier of titanium pigments on the Polish market. TYTANPOL® titanium white produced by the Company is well known for its high pigmentation properties. All varieties of titanium white offered by the Company have high quality, opacifying and brightening qualities, are stable, easily dispersible, intercompatible and non-toxic.




6.3. Company's growth prospects and market strategy In the coming years, the Company will endeavour to strengthen its value by seeking out new business opportunities and further reinforcing its competitive advantage. More specifically, the Company will strive to accomplish the following: • optimise its operating expenses and financing structure • increase utilisation of its installation units, including through reliability improvement • reduce consumption of strategic feedstocks and energy used in production processes • ensure compliance with environmental and technical safety requirements • streamline inventory management processes • develop technologies and ensure efficient project delivery • streamline logistics processes • increase the efficiency of support processes, and • grow the value of its intellectual property.

Growth prospects at Grupa Azoty Zakłady Chemiczne Police S.A. are analysed with reference to individual business units as they compete with different business rivals, operate in different marketplaces, have different customer bases, offer different product ranges, and face different challenges resulting from trends and legal environments relevant to their respective business segments.

In 2015, the Company will continue its investment programme under which substantial capex will be incurred on: • upgrading port infrastructure, • building a new organic chemistry complex, • continuing implementation of the new phosphoric acid production technology, • preparatory work for the launch of two other projects with a view to ensuring access to deposits

of key raw materials.

Fertilizer market The growth directions for the fertilizer business are driven by the strategy of market penetration and intensification of efforts in primary markets in Poland and Germany based on the existing product portfolio. To this end, a number of initiatives are pursued on an ongoing basis to support the Mission Statement of the Fertilizers Business Unit: ‘We prepare the ground for agricultural producers' success’. In the long term, the strategy also focuses on developing foliar and slow-release fertilizers. The objective of product portfolio development is to provide a comprehensive range of fertilizers based on phosphorous and potassium. Implementation of this strategy requires continued efforts to ensure cost-efficiency of the business. The Company will maintain its presence on faraway markets, particularly in Senegal, where it recently acquired, through a subsidiary, its own deposits of phosphate rock.

Ammonia and urea market A number of investment projects will be carried out in the Nitro Business Unit to improve its cost-efficiency. The upgraded, more power-efficient, ammonia unit, will maintain its competitiveness and minimise the costs associated with CO2 emissions. The scope of upgrade work will bring about more production capacity and efficiency. The modernised urea unit will be more efficient and will maintain compliance with BAT environmental requirements.

Titanium white market In the titanium white market, a further growth is expected of its globalisation potential. The current strategy assumes market growth while maintaining the existing product portfolio. However, there are changes planned to introduce a new type of titanium white for the needs of the plastics industry, and to enter the white master batch sector of the marketplace. The strategy intends to deliver ROCE at a level set by the Grupa Azoty Group's objectives, and includes efforts to maintain stable sales of this product group by focusing primarily on strategic customers in the target markets of Poland and Germany.

Other markets The Company is considering a project which would involve the construction of new facilities for organic compounds production.




7. Qualified auditor Entity authorised to review and audit the financial statements for the financial year 2014: • KPMG Audyt Sp. z o.o., registered office at ul. Chłodna 51, Warsaw, Poland • Date of the agreement on the review and mandatory audit: July 5th 2012 • Term of the agreement: review and audit of financial statements for 2012, 2013 and 2014

Remuneration of auditors

Item 2014 2013 Audit of the full-year separate and consolidated financial statements of the Company and audit of the consolidation package

117 158

Review of the half-year separate and consolidated financial statements of the Company and review of the consolidation package

59 59

Other services 30 226

Total 206 443

8. Litigation On October 31st 2011, Grupa Azoty Zakłady Chemiczne Police S.A. filed a petition with the Court of Arbitration at the Polish Bank Association in Warsaw through the J. Chałas i Wspólnicy law firm of Warsaw. Parties to the proceedings were: • Grupa Azoty Zakłady Chemiczne Police S.A. − the petitioner • Bank Polska Kasa Opieki Spółka Akcyjna (PEKAO S.A.) - the respondent The value of the dispute covered by the petition was PLN 71,299 thousand, and exceeded 10% of the Company's equity. The petition concerns a compensation claim by the Company for damage suffered in connection with derivative transactions. The Company argues that due to PEKAO S.A.'s negligence and breach of applicable laws the Company executed unfavourable transactions involving derivative instruments5. The Court of Arbitration at the Polish Bank Association dismissed the petition in its decision of September 20th 2012. On December 21st 2012, a petition was filed for revocation of the ruling of the Court of Arbitration at the Polish Bank Association. The court did not grant the petition for revocation of ruling of the Court of Arbitration at the Polish Bank Association in the case against PEKAO S.A. On December 9th 2013, the Company, acting through the law firm, appealed against the decision of the Regional Court in Warsaw dismissing the complaint against the ruling of the Court of Arbitration. As at the date of this Report, the date of the appeals hearing had not yet been set. Grupa Azoty Zakłady Chemiczne Police S.A. is not a party to any other proceedings before any court, arbitration tribunal, or public administration body, conducted in connection with receivables or liabilities of the Company whose value would be equal to at least 10% of the Company's equity, nor is it a party to two or more proceedings concerning liabilities or receivables whose total value would be equal, respectively, to at least 10% of the equity of Grupa Azoty Zakłady Chemiczne Police S.A.

9. Company's governing bodies 9.1. Remuneration and additional benefits Pursuant to Resolution No. 4 of the Extraordinary General Meeting of the Company of October 20th 2010 on amendment to the Company's Articles of Association, remuneration rules and the amount of remuneration for the Management Board members are determined by the Supervisory Board. On November 8th 2011, by Resolution No. 557/V/11, the Supervisory Board established new remuneration rules and the amount of remuneration for members of the Company's Management Board. Subsequently, on March 13th 2012, by Resolution No. 594/V/12 amending Resolution No. 557/V/11, the Supervisory Board determined the amount of remuneration for Management Board member elected by employees. In the reporting period, on January 9th 2014, by Resolution No. 45/VI/14 again amending Resolution No. 557/V/11, the Supervisory Board determined the amount of

5 The Company reported the above event in Current Report No. 58/2011 'Initiation of proceedings before the

Court of Arbitration' of October 31st 2011.




remuneration for all Management Board members. At the same time, by Resolution No. 47/VI/14 of January 9th 2014, the Supervisory Board adopted the 'Rules of the annual bonus scheme for members of the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A.' On October 20th 2011, the Extraordinary General Meeting of the Issuer adopted Resolution No. 3 on the determination of remuneration rules and the amount of remuneration for members of the Company's Supervisory Board. On April 25th 2012, the resolution was revised by Resolution No. 18 of the Extraordinary General Meeting. The revision covered the provisions on remuneration for the Supervisory Board members of the Company who are also members of the Management Board of Grupa Azoty S.A. - the majority shareholder. The remuneration rules for members of the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. did not change in 2014.

Table 25. Remuneration of Supervisory Board members for holding office at the Company for the 12 months of 2014

Remuneration paid

Remuneration due Total

Tarocińska Anna 66.0 0 66.0 Góra Jerzy 38.7 0 38.7 Likierski Marcin 60.0 0 60.0 Lipiec Maciej 8.9 0 8.9 Markwas Wiesław 60.0 0 60.0

Total 233.6 0 233.6

Table 26. Remuneration of Management Board members for holding office at the Company for the 12 months of 2014

Remuneration paid


Jałosiński Krzysztof 799.9 82.8 882.7 Kuźmiczonek Rafał* 376.0 62.1 438.1 Naruć Wojciech 678.1 62.1 740.2 Podolak Anna 18.3 15.5 33.9

Total 1,872.3 222.5 2,094.8 * agreement on holding the office of the employee-elected Management Board member

Table 27. Remuneration of the Company’s Management and Supervisory Board members for holding office at the Company's subsidiaries, for the 12 months of 2014

Remuneration paid


Likierski Marcin 37.9 0 37.9

37.9 0 37.9

Remuneration paid


Jałosiński Krzysztof 47.3 0 47.3 Podolak Anna 71.7 0 71.7

119 0 119

9.2. Agreements between the Company and Management Board members Agreements executed with President of the Management Board, Mr Krzysztof Jałosiński, Vice-President of the Management Board, Mr Wojciech Naruć, and Vice-President of the Management Board, Ms Anna Podolak, provide that in the event of their removal from office or termination of the agreement for other reasons than a breach of material obligations under the employment contract, they will be eligible to a severance pay equal to six times their respective fixed gross monthly salaries. The agreement with the employee-elected Vice-President of the Management Board, Mr Rafał Kuźmiczonek, provides that if the employment contract is terminated following Mr Kuźmiczonek's removal from the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. before the




expiry of the term of office, he will be eligible to a severance pay equal to three times his fixed gross monthly salary. If the cause of removal from the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. is circumstances justifying termination of employment contract without notice due to fault of the employee in accordance with art. 52 of the Labour Code, the employee is not entitled to the compensation specified above. Vice-President of the Management Board, Mr Wojciech Naruć, has signed a non-compete agreement expiring 12 months after the employment contract terminates. Mr Naruć is eligible to receive compensation for refraining from competition, equal to 100% of his fixed gross monthly salary specified in the employment contract for the office of Vice-President of the Management Board.

10. Statement of compliance with corporate governance rules 10.1. Corporate governance code applicable at the Company Acting pursuant to Par. 29.2 of the WSE Rules, except as indicated in Section 10.2 of this Report, the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. adopted the corporate governance rules provided in the Code of Best Practice for WSE Listed Companies, approved by Resolution No. 20/1287/2011 of the Supervisory Board of the Warsaw Stock Exchange of October 19th 2011, as amended. The corporate governance rules adopted by the Company, as amended and restated, are available on the website of the Warsaw Stock Exchange, at http://corp-gov.gpw.pl/assets/library/polish/regulacje/dobre_praktyki_19_10_2011_final.pdf.

10.2. Degree of the Company's non-compliance with the corporate governance rules, specification of the rules not complied with, and reasons for the non-compliance

Rule 2 in Section II of the Code of Best Practice for WSE Listed Companies is not applied by Grupa Azoty Zakłady Chemiczne Police S.A. Under that rule, as of January 1st 2009, the Company should have ensured that its website is available in the English language, at least to the extent described in Section II.1 of the Code. The Company's website is available in English, but not to the extent prescribed in above mentioned rule due to organisational constraints. The Company's objective is to create an organisational environment that would enable full implementation of the rule6,

10.3. Internal control and risk management systems In November 2009, the Supervisory Board established an Audit Committee in order to improve the productivity of the Board's work and to strengthen control over the Company. The Audit Committee is an advisory body acting collectively within the Supervisory Board. Key areas monitored by the Audit Committee are the financial reporting processes and effectiveness of the internal financial control, internal audit and risk management systems in place at the Company. Detailed responsibilities of the Audit Committee are discussed further on in this report. The Company identified market risks requiring that relevant management and monitoring measures be implemented, covering the following areas and activities: • currency risk management, • interest rate risk management, • price risk management, and • credit risk management. Implementation of the process of managing market risks is controlled and supervised by the competent Risk Committees, while oversight of the market risk management process is exercised by the Member of the Management Board in charge of finance. The Company updates its Market Risk Management Procedure if any circumstances arise amounting to a material change in the market environment in which the Company operates. The purpose of the Procedure is to limit the volatility of cash flows measured in PLN. The Procedure provides guidance on conducting the market risk management process, covering, for example, identification and assessment of foreign exchange risk sources, review of cash flow and currency risk exposure projections, selection of a hedging strategy and hedging instruments, as well as monitoring and evaluation of the outcomes of implemented measures.

6 as announced by the Company in Current Report No. 55/2008 of December 30th 2008.

http://corp-gov.gpw.pl/assets/library/polish/regulacje/dobre_praktyki_19_10_2011_final.pdf




The Company's Internal Audit Department reports directly to the CEO - President of the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. This ensures hierarchical independence for audits and inspections. Internal audit at the Company takes the form of an independent, objective assessment of processes, systems and procedures in place at the Company's units and subsidiaries, which enables more effective pursuit of Company objectives, identification of areas for operational improvement, and risk mitigation. The internal audit function also involves advisory services. Within the system, the instruments used to manage risks related to the process of preparation of financial statements include internal regulations governing the identification and recording of business events, as well as their presentation and publication. Direct supervision and coordination of work related to the preparation of financial statements falls within the remit of the Chief Accountant. The Company's financial statements cover all aspects of its business operations. The heads of individual organisational units (departments, business units, support centres, divisions) are responsible for the factual content of the financial statements in the areas assigned to them under the Company's organisational structure. Management Board members are actively involved in the preparation of financial statements at each stage of the process, by contributing to the production of individual components and final review of the contents. Also members of the Audit Committee monitor the process of preparation and audit of financial statements. After they are approved by the Management Board, the Company's financial statements are audited by an independent qualified auditor appointed by the Company's Supervisory Board.

10.4. Shareholding structure Table 28. Shareholding structure as at December 31st 2014

Shareholder Shares Ownership interest (%) Voting rights % of votes

Grupa Azoty S.A. 49,500,000 66.0 49,500,000 66.0 OFE PZU Złota Jesień 10,400,000 13.9 10,400,000 13.9 Agencja Rozwoju Przemysłu S.A. 6,607,966 8.8 6,607,966 8.8 State Treasury 3,759,356 5.0 3,759,356 5.0 Other shareholders 4,732,678 6.3 4,732,678 6.3 75,000,000 100.0 75,000,000 100.0

Table 29. Shareholding structure as at December 31st 2013


Grupa Azoty S.A. 49,500,000 66.0 49,500,000 66.0 OFE PZU Złota Jesień 9,650,000 12.9 9,650,000 12.9 Agencja Rozwoju Przemysłu S.A. 6,574,966 8.8 6,574,966 8.8 State Treasury 3,760,414 5.0 3,760,414 5.0 Other shareholders 5,514,620 7.3 5,514,620 7.3 Total 75,000,000 100.0 75,000,000 100.0




Table 30.30 Shareholding structure as at the date of this Report


Grupa Azoty S.A. 49,500,000 66.0 49,500,000 66.0 OFE PZU Złota Jesień 11,257,189 15.0 11,257,189 15.0 Agencja Rozwoju Przemysłu S.A. 6,607,966 8.8 6,607,966 8.8 State Treasury 3,759,356 5.0 3,759,356 5.0 Other shareholders 3,875,489 5.2 3,875,489 5.2 75,000,000 100.0 75,000,000 100.0

On January 30th 2015, Grupa Azoty Zakłady Chemiczne Police S.A. was notified that OFE PZU Złota Jesień had acquired 857,189 shares in the Company, which increased its holding to 15.01% of the Company's share capital7.

10.5. Special control powers of security holders All the Company shares carry the same rights. The State Treasury's right to call General Meetings and to appoint and remove a Supervisory Board member are discussed in Sections 10.8 and 10.10 of this Report.

10.6. Restrictions on voting rights There are no restrictions on the exercise of voting rights, such as restrictions on the exercise of voting rights by holders of a specific proportion or number of voting rights or time restrictions on the exercise of voting rights, etc.

10.7. Restrictions on the transferability of securities The Company's Articles of Association impose no restrictions on the transferability of shares other than those provided for in the generally applicable laws.

10.8. Rules governing appointment and removal from office of management personnel; powers of such personnel, including their authority to decide on the issue or buy-back of shares

Management Board of the Company The Company's Management Board comprises from one to five persons, including the President, Vice-Presidents and Members of the Management Board. The number of Members of the Management Board is specified by the body appointing the Management Board. The Management Board's term of office is 3 (three) years. As long as the State Treasury remains the Company’s shareholder and the Company’s annual average headcount exceeds 500, the Supervisory Board appoints to the Management Board one person elected by the Company’s employees, to serve on the Management Board during its term of office. The person who receives the highest number of validly cast votes is considered to be a Management Board candidate elected by employees. The election results are binding on the Supervisory Board if at least 50% of all eligible employees participate in the election. The election is a direct election held by secret ballot and open to all employees, and is conducted by the Election Committees appointed by the Supervisory Board from among the Company’s employees. Failure by the Company’s employees to elect a Management Board Member does not prevent the Management Board from adopting valid resolutions. Each Management Board Member may be removed from office or suspended from their duties by the Supervisory Board or the General Meeting. The Management Board manages the affairs of the Company and represents it in all actions before and out of court. The Management Board's operating rules and the division of responsibilities for the conduct of the Company's affairs among its Members are provided in the Rules of Procedure for the Management Board of Grupa Azoty Zakłady Chemiczne Police S.A. In accordance with the Rules of Procedure and the division of roles between the Management Board Members, the powers and

7 The Company announced that in Current Report No. 3/2015 ‘Notification of increase in percentage of total

voting rights at the general meeting’ of February 2nd 2015.




responsibilities for the supervision of individual organisational areas within the Company are determined by the Management Board by way of a resolution. The Management Board is not authorised to make a decision to issue or buy back shares.

Supervisory Board The Supervisory Board consists of between five and nine Members appointed by the General Meeting. However: • as long as the State Treasury remains a shareholder in the Company, the State Treasury,

represented by the competent minister, has the right to appoint and remove from office one Member of the Supervisory Board,

• as of the date when the State Treasury ceased to be the Company’s sole shareholder, the Company employees retain the right to elect candidates to the Supervisory Board in the following proportions: o two persons − if the Supervisory Board consists of up to six members, o three persons − if the Supervisory Board consists of seven to nine members.

The election is a direct election held by secret ballot and open to all employees, and is conducted by the Election Committees appointed by the Supervisory Board from among the Company’s employees. A Management Board candidate cannot serve on the Election Committee. The procedure for appointment of the Supervisory Board Members elected from among candidates nominated by the employees is defined in detail in the Election Rules, adopted by the Supervisory Board by way of a resolution and approved by the General Meeting. Members of the Supervisory Board are appointed for a joint three-year term of office. Supervisory Board Members may tender their resignations in writing to the Management Board. The Supervisory Board performs its duties in compliance with the Rules of Procedure for the Supervisory Board, which detail its operating procedures.

10.9. Rules governing amendments to the Company’s Articles of Association Resolutions to amend the Articles of Association are passed following a three-fourths majority vote at the General Meeting.

10.10. Operation of the General Meeting The General Meeting operates in accordance with the Articles of Association and the Rules of Procedure of the General Meeting, which indicate in particular the rules governing operation of the General Meeting, the holding of meetings, adoption of resolutions and the holding of elections, including block vote elections to the Supervisory Board. The General Meeting adopts these Rules by way of a resolution. The General Meeting strives to ensure the stability of these Rules.

Convention of and agenda of the Meeting The General Meeting is convened by the Company’s Management Board: • on its own initiative, • by written request of the Supervisory Board expressed in the Supervisory Board’s resolution, • in written or electronic form by request of a shareholder or shareholders representing at least

one-twentieth of the share capital, • by written request of the State Treasury (shareholder) irrespective of its interest in the share

capital, and submitted no later than one month before the proposed date of the General Meeting.

The Annual General Meetings is convened by the Management Board, and it should be held within six months of the end of the previous financial year. The business of Annual General Meetings covers: • review and approval of the financial statements for the previous financial year and of the

Directors’ Report on the Company’s operations, • granting discharge to members of the Company’s governing bodies in respect of their duties, • distribution of profit or coverage of loss, • deciding on the dividend record date, on the dividend payment date and on payment of dividend

in instalments, and • review and approval of the Group's consolidated financial statements for the previous financial

year and of the Directors’ Report on the Group’s operations, if their preparation is required under the Polish Accountancy Act.

The General Meeting may only pass resolutions concerning matters on its detailed agenda. The agenda is proposed by the Company’s Management Board or another entity which convenes the




General Meeting. A shareholder or shareholders representing at least one-twentieth of the Company’s share capital may request that certain items be placed on the agenda of the next General Meeting. The State Treasury as a shareholder has the same right, irrespective of its interest in the share capital. Such requests with the statement of reasons, or draft resolutions on proposed items on the agenda, should be submitted at least 21 days prior to the scheduled date of the General Meeting. A shareholder or shareholders representing at least one-twentieth of the share capital may, before the date of the next General Meeting, submit draft resolutions concerning items placed or to be placed on the agenda of the General Meeting. The State Treasury as a shareholder has the same right, irrespective of its stake in the Company's share capital. A resolution not to consider an item placed on the agenda may be passed only for valid reason. A proposal to pass such resolution requires a detailed statement of reasons. A decision to remove an item from the agenda or not to consider an item placed on the agenda upon shareholder request is sanctioned by a resolution passed by the General Meeting, which must be approved by all requesting shareholders present at the General Meeting and carried by at least 75% of the votes cast. Draft resolutions to be recommended for adoption by the General Meeting, and other important materials, must be presented to the shareholders together with the statement of reasons and the Supervisory Board’s opinion thereon prior to the General Meeting, sufficiently in advance to enable the shareholders to read and assess them. From the date of convention of the General Meeting, the Company publishes draft resolutions and all materials relating to the agenda on its website, at the following address: http://zchpolice.grupaazoty.com/pl/. A General Meeting may be attended by members of the media.

Adoption of resolutions The wording of a resolution put to vote should be such as to enable any eligible person who disagrees with how a given matter is resolved to challenge the resolution. The person raising an objection has the right to provide concise grounds for the objection. The General Meeting has the capacity to adopt resolutions irrespective of the number of shares represented at the Meeting. Resolutions are passed by an absolute majority of votes cast unless the Commercial Companies Code, the Articles of Association or the Rules of Procedure stipulate otherwise. Voting may be carried out with the use of electronic devices, including those based on IT systems.

Powers and responsibilities of the General Meeting Powers of the General Meeting include in particular: • appointment and removal of the Supervisory Board Members appointed by the General Meeting,

including Chairperson of the Supervisory Board, subject to the provisions of Art. 32.1 and Art. 34 of the Articles of Association,

• determination of the rules and amounts of remuneration for Supervisory Board Members, • approval of disposal or lease of the Company’s business or an organised part thereof, and

creation of limited property rights therein, • approval of the purchase of real estate, right of perpetual usufruct, interest in real estate or

right of perpetual usufruct with a market value exceeding PLN 10,000,000 (ten million złoty), • approval of disposal of real estate, right of perpetual usufruct, interest in real estate or right

of perpetual usufruct with a market value exceeding PLN 2,000,000 (two million złoty), • approval of the execution by the Company of a loan, surety, or any other similar agreement

with a Management Board member, Supervisory Board member, proxy, liquidator, or for the benefit of any such person,

• increase in or reduction of the Company’s share capital, • issue of convertible bonds, bonds with pre-emptive rights and subscription warrants, • squeeze-out carried out in compliance with applicable laws, • recognition, use, and release of capital reserves, • use of statutory reserve funds, • decisions with respect to claims for redress of damage inflicted in the course of establishing

the Company, its management or supervision, • merger, transformation, or demerger of the Company, • amendments to the Articles of Association and change of the Company’s business, • dissolution and liquidation of the Company, • review of the Supervisory Board’s reports referred to in Art. 30.1.8 and Art. 30.1.19,




• approval of the Election Rules referred to in Art. 34 of the Articles of Association, as adopted by the Supervisory Board, defining the procedure for appointment of the Supervisory Board Members elected from among candidates nominated by the employees, and

• adoption of the rules of procedure for the General Meeting, defining in detail how the Meeting is to be held and pass its resolutions.

10.11. Composition and operation of the Company's management and supervisory bodies

Management Board of the Company In the reporting period, there were changes in the composition of the Company's Management Board. On October 29th 2014, the Company's Supervisory Board, by virtue of Resolution No. 91/VI/14, appointed Ms Anna Podolak as Vice-President of the Management Board of the sixth joint term of office.8 As at the date of this Report, the Parent's Management Board consisted of: • Krzysztof Jałosiński − President of the Management Board, • Rafał Kuźmiczonek − Vice-President of the Management Board elected by the Company

employees. • Wojciech Naruć − Vice-President of the Management Board, • Anna Podolak − Vice-President of the Management Board.

Powers and responsibilities of the Parent's Management Board members Under the Commercial Companies Code and the Articles of Association, the Management Board is the Company's executive body responsible for managing its affairs and representing it in and out of court. The Management Board, headed by the President, manages the Company and represents it before third parties. All matters connected with the management of the Company’s affairs which are not reserved under the law or the Articles of Association for the General Meeting or the Supervisory Board, fall within the scope of powers and duties of the Management Board. The Management Board operates in compliance with effective laws and is accountable for the management of the Company's affairs before the Supervisory Board and the General Meeting. A detailed division of powers and responsibilities of the Management Board members is governed by: • Management Board Resolution No. 398/VI/14 of October 30th 2014 concerning the division of

tasks among the Management Board members with regard to the supervision of organisational areas and business processes;

• Organisational Rules adopted by Management Board Resolution No. 9/VI/12 of July 6th 2012 (as amended, most recently amended by Management Board Resolution No. 399/VI/14 of October 30th 2014), approved by Supervisory Board Resolution No. 628/V/12 of July 13th 2012, Supervisory Board Resolution No. 644/V/12 of December 14th 2012, and Supervisory Board Resolution No. 74/VI/14 of June 25th 2014 (the most recent amendment adopted by virtue of Supervisory Board Resolution No. 94/VI/14 of November 20th 2014).

Pursuant to Management Board Resolution No. 398/VI/14 of October 30th 2014, powers and responsibilities with regard to the supervision of the Company's organisational areas are divided among the Management Board members as follows: • Krzysztof Jałosiński, President of the Management Board and Chief Executive Officer:

o Central Dispatch Division, o Fertilizers Business Unit, o Nitro Business Unit, o Internal Audit Division, o Marketing Division, o Strategy and Development Department, o Fertilizer Sales Department, o Human Resources and Management Department, o Public Relations Office.

• Rafał Kuźmiczonek, Vice-President of the Management Board: o Technical Safety Department, o Laboratory Analysis Centre.

• Wojciech Naruć, Vice-President of the Management Board:

8 The Company announced the appointment in Current Report No. 39/2014 of October 29th 2014.




o Finance Department, o Strategic Procurement Department.

• Anna Podolak, Vice-President of the Management Board: o Pigments Business Unit, o Logistics Centre, o Power Centre, o Infrastructure Centre.

As regards the division of duties among the Management Board members, the above-mentioned resolution also determines their powers and responsibilities in the coordination of business processes. The individual Management Board members supervise and coordinate the following business processes: • Krzysztof Jałosiński, President of the Management Board and Chief Executive Officer:

o Strategic management, o Comprehensive customer support, o Human resources management, o Marketing.

• Rafał Kuźmiczonek, Vice-President of the Management Board: o Technical and environmental safety.

• Wojciech Naruć, Vice-President of the Management Board: o Financial management, o Financial controlling, o Availability of feedstocks and raw materials.

• Anna Podolak, Vice-President of the Management Board: o Logistics support, o Production asset management, o Investment project management.

The President of the Management Board − Chief Executive Officer assisted by the unit responsible for providing support to the Company's governing bodies, performs ongoing supervision of the implementation of Management Board, Supervisory Board, and General Meeting resolutions. The President of the Management Board, or in his absence the Vice-President designated by the President, convenes, determines the agenda of and presides over Management Board meetings. In line with the Organisational Rules of Grupa Azoty Zakłady Chemiczne Police S.A., President of the Management Board exercises general supervision of Company operations and performs his duties with assistance from directors of departments, business units and centres, and heads of other organisational units. Powers and responsibilities of the President of the Management Board - Chief Executive Officer include: • general supervision and coordination of Company operations, • promoting a good corporate image, • directing the work of the Company's Management Board and presiding over its meetings, • meeting the Company's responsibilities as an employer within the bounds of the Polish Labour

Code, • supervising restructuring and privatisation processes of the Company and its subsidiaries, • supervising and coordination of business processes specified in the Management Board Rules of

Procedure, and supervising of organisational units that report directly to the President of the Management Board - Chief Executive Officer,

• approving internal audit, business control and stocktaking plans, as well as taking decisions on their implementation, and

• representing the Company in all procedures in and out of court, together with another Management Board member or proxy.

Supervisory Board As at January 1st 2014, the composition of the Company's Supervisory Board of the sixth term was as follows: • Paweł Jarczewski − Chairperson of the Supervisory Board, • Jerzy Góra − Deputy Chairperson of the Supervisory Board, • Anna Tarocińska − Secretary of the Supervisory Board (representing the Company employees), • Marcin Likierski − Member of the Supervisory Board,




• Wiesław Markwas − Member of the Supervisory Board (representing the Company employees), and

• Andrzej Skolmowski − Member of the Supervisory Board.

During the reporting period, on July 2nd 2014 Mr Jerzy Góra, Deputy Chairperson of the Supervisory Board, tendered his resignation from the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A. Consequently, on October 8th 2014, the Extraordinary General Meeting of Grupa Azoty Zakłady Chemiczne Police S.A. appointed Mr Maciej Lipiec to the Supervisory Board of the sixth joint term of office.9 By virtue of Resolution No. 89/VI/14 of August 27th 2014, Mr Andrzej Skolmowski was appointed Deputy Chairperson of the Supervisory Board. As at the date of publication of this Report, the composition of the Supervisory Board, consisting of six members, was as follows: • Paweł Jarczewski − Chairperson of the Supervisory Board, • Andrzej Skolmowski − Deputy Chairperson of the Supervisory Board, • Anna Tarocińska − Secretary of the Supervisory Board (representing the Company employees), • Marcin Likierski − Member of the Supervisory Board, • Maciej Lipiec − Member of the Supervisory Board, • Wiesław Markwas − Member of the Supervisory Board (representing the Company employees).

The Supervisory Board operates on the basis of: • Commercial Companies Code of September 15th 2000 (Dz.U. No. 94, item 1037, as amended), • Act on Commercialisation and Privatisation, • Accountancy Act, • Company Articles of Association, and • Rules of Procedure for the Supervisory Board of Grupa Azoty Zakłady Chemiczne Police S.A.

Audit Committee On November 23rd 2009, the Supervisory Board established an Audit Committee (Resolution No. 342/IV/09 dated November 23rd 2009) in order to improve the productivity of the Board's work and to strengthen control over the Company. The Audit Committee is an advisory body acting collectively within the Supervisory Board. During the reporting period, the composition of the Company's Audit Committee changed following Mr Jerzy Góra's resignation from the Supervisory Board on July 2nd 2014. To supplement the composition of the Audit Committee, the Supervisory Board appointed Mr Paweł Jarczewski to the Audit Committee by virtue of Resolution No. 90/VI/14 of August 27th 2014. Following the above changes, as at the date of this Report, the Audit Committee consisted of: • Andrzej Skolmowski − Chairman of the Audit Committee, • Anna Tarocińska − Secretary of the Audit Committee, and • Paweł Jarczewski − Member of the Audit Committee.

The Audit Committee's tasks include in particular: • monitoring of the financial reporting process, • monitoring of the effectiveness of internal financial control, internal audit and risk management

systems in place at the Company, • monitoring of financial audit activities, • monitoring of the independence of the qualified auditor and the entity qualified to audit

financial statements, also in the case of its provision of services referred to in Art. 48.2 of the Act on Qualified Auditors, Their Self-Government, Entities Qualified to Audit Financial Statements and on Public Supervision, dated May 7th 2009,

• recommending to the Supervisory Board an entity qualified to audit financial statements in order to perform the financial audit of the Company.

Detailed rules of operation of the Audit Committee are provided for in the Rules of Procedure for the Audit Committee approved by Resolution No. 341/IV/09 of the Parent's Supervisory Board of November 23rd 2009, and amended by Resolution No. 10/VI/2013 of the Supervisory Board of July 31st 2013.

9 Relevant information was published by the Company in Current Report No. 20/2014 of July 2nd 2014 and

Current Report No. 36/2014 of October 8th 2014, respectively.




Index of tables Table 1. Number of employees ................................................................................... 8 Table 2. Number of employees: average annual and as at the end of 2014 ............................. 8 Table 3. Employee turnover from January 1st to December 31st 2014 ................................... 8 Table 4. Employment by summary education .................................................................. 8 Table 5. Employment by length of service ..................................................................... 8 Table 6. Company shares held by management personnel ................................................ 10 Table 7. Company shares held by supervisory personnel .................................................. 11 Table 8. Stock performance .................................................................................... 12 Table 9. Company's production volume by product [tonnes] ............................................. 13 Table 10. Revenue by segment................................................................................ 14 Table 11. Summary of Company bank deposits as at December 31st 2014 ............................ 16 Table 12. Agreements significant for the Company's business .......................................... 17 Table 13. Company's financial performance ................................................................ 23 Table 14. EBIT by segment in 2014 ........................................................................... 23 Table 15. EBIT by segment in 2013 .......................................................................... 24 Table 16. Operating expenses by nature .................................................................... 26 Table 17. Structure of assets .................................................................................. 27 Table 18. Structure of equity and liabilities ................................................................ 27 Table 19. Profitability ratios .................................................................................. 28 Table 20. Liquidity ratios ...................................................................................... 28 Table 21. Operating efficiency ratios ........................................................................ 28 Table 22. Debt ratios ........................................................................................... 29 Table 23. Company's loans and borrowings in 2014 ....................................................... 31 Table 24. Company's liabilities under non-bank borrowings as at December 31st 2014 ............ 31 Table 25. Remuneration of Supervisory Board members for holding office at the Company for the

12 months of 2014 ..................................................................................... 40 Table 26. Remuneration of Management Board members for holding office at the Company for the

12 months of 2014 ..................................................................................... 40 Table 27. Remuneration of the Company’s Management and Supervisory Board members for holding

office at the Company's subsidiaries, for the 12 months of 2014 ............................. 40 Table 28. Shareholding structure as at December 31st 2014 ............................................ 42 Table 29. Shareholding structure as at December 31st 2013 ............................................ 42 Table 30. Shareholding structure as at the date of this Report ......................................... 43

Index of figures Figure 1. Grupa Azoty Zakłady Chemiczne Police S.A. stock price in 2014 ........................... 11 Figure 2. Revenue by product group ........................................................................ 13 Figure 3. 2014 sales by geographical regions .............................................................. 14 Figure 4. Structure of expenditure by project type ...................................................... 15 Figure 5. Monthly average prices of NPK and DAP fertilizers in 2014 [USD/t] ....................... 20 Figure 6. Monthly average prices of ammonia and urea in 2014 [USD/t] ............................. 21 Figure 7. Monthly average prices of titanium white in 2014 [EUR/t] .................................. 21 Figure 8. Revenue by product group ........................................................................ 26




This Directors' Report on the operations of Grupa Azoty Zakłady Chemiczne Police S.A. for the 12 months ended December 31st 2014 contains 51 pages. Signatures of the Members of the Management Board

……………………………… Krzysztof Jałosiński President of the Management Board ……………………………… ………………………………

………………………………

Rafał Kuźmiczonek Wojciech Naruć Anna Podolak Vice-President of the Management Board

Vice-President of the Management Board

Vice-President of the Management Board

Police, March 9th 2015

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