Directors’ Report on the operations of Grupa Azoty Spółka Akcyjna

and the Grupa Azoty Group

in the 12 months ended December 31st 2020

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This Directors’ Report presents the key events which occurred in the 12 months ended December 31st 2020 at the Grupa Azoty Group and Grupa Azoty S.A., the Group’s Parent.

This Report includes all information which is essential for the assessment of the Group’s and the Parent’s financial condition and assets, including the results of their operations, as well as a description of risks and threats. It also presents financial and non-financial indicators, if material for the assessment of the Group’s and the Parent’s condition, as well as additional explanations on the amounts presented in the consolidated and separate financial statements.

‎ Contents

1. General information on the Grupa Azoty Group and its Parent

1.1. Organisation and structure

1.2. Subsidiaries’ organisational or equity ties

1.3. Changes in the organisational structure

2. Management policy

2.1. Parent’s organisational chart

2.2. Changes in key management policies

2.3. Workforce

3. Business overview

3.1. Business segments

3.2. Overview of key products

3.3. Sales markets and procurement sources

3.4. Seasonality of operations

3.5. Agreements, including credit facility and loan agreements, guarantees and sureties

3.5.1. Significant agreements

3.5.2. Loan agreements and annexes

3.5.3. Commercial contracts

3.5.4. Insurance agreements

3.5.5. Project co-financing agreements

3.5.6. Agreements between the Grupa Azoty Group companies

3.5.7. Sureties and guarantees

3.6. Significant events

3.6.1. Implementation of the Polimery Police project

3.6.2. Information on the effects of the COVID-19 pandemic

3.6.3. Other significant events

4. Growth strategy and policy

4.1. Strategy and growth directions

4.2. Growth prospects and market strategy

4.3. Key investments in Poland and abroad

4.4. Equity investments

4.5. Feasibility of investment plans

4.6. Significant R&D achievements

5. Current financial position and assets

5.1. Assessment of factors and one-off events having a material impact on the Group’s operations and financial performance

5.2. Market overview

5.3. Key financial and economic data

5.3.1. Consolidated financial information

5.3.2. Segments’ consolidated financial information

5.3.3. Structure of consolidated operating expenses

5.3.4. Structure of consolidated assets, equity and liabilities

5.3.5. Consolidated financial ratios

5.3.6. Separate financial data

5.3.7. Separate financial data by segment

5.3.8. Structure of separate operating expenses

5.3.9. Structure of separate assets, equity and liabilities

5.3.10. Separate financial ratios

5.4. Financial liquidity

5.5. Management of capital and assets

5.6. Bank deposits

5.7. Material off-balance-sheet items

5.8. Financial instruments – risk management policy and risk management instruments, objectives and methods

5.9. Expected financial condition

6. Risk, threats and growth prospects

6.1. Significant risk factors and threats

6.2. Significant external and internal growth factors

7. Shares and shareholding structure

7.1. Total number and par value of Grupa Azoty shares, holdings of the shares by supervisory and management personnel, and interests of such persons in the Parent’s related entities

7.2. Treasury shares held by the Parent, the Group companies and persons acting on their behalf

7.3. Grupa Azoty shares

8. Statement of compliance with corporate governance standards

8.1. Corporate governance code applicable to the Parent and the place where the text of the code is available to the public

8.2. Information on the Parent’s non-compliance, if any, with the corporate governance standards and reasons for such non-compliance

8.3. Internal control and risk management systems

8.4. Management standards and systems

8.5. Shareholding structure

8.6. Special control powers of securities holders

8.7. Rules governing amendments to the Parent’s Articles of Association

8.8. Restrictions on voting rights

8.9. Restrictions on the transferability of securities

8.10. Rules governing appointment and removal of the management staff; powers of the management staff, including in particular the authority to resolve to issue or buy back shares

8.11. Operation of the General Meeting

8.12. Composition and operation of the Company’s management and supervisory bodies

8.13. Diversity policy

8.14. Remuneration policy

8.15. Sponsorship, charitable or similar activities

8.16. Report on entertainment expenses, legal costs, marketing costs, public relations and social communication expenses and management consultancy fees, and report on compliance with best practices issued pursuant to the Act on State Property Management

8.16.1. Introduction

8.16.2. Expenses

9. Other material information and events

9.1. Qualified auditor

9.2. Environmental performance

10. Non-financial statement

11. Supplementary information

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1. General information on the Grupa Azoty Group and its Parent

1.1. Organisation and structure

Parent of the Grupa Azoty Group

Grupa Azoty S.A. is the Parent of the Grupa Azoty Group (“Grupa Azoty”, the “Group”, the “Grupa Azoty Group”). Its principal business activities include manufacturing, trading in and service activities related to nitrogen fertilizers, engineering plastics and intermediates.

The Company operates its own research facilities. It concentrates both on research into new products and technologies, and on advancing existing products.

The Parent, Grupa Azoty S.A., has been listed on the Warsaw Stock Exchange (“WSE”) since June 30th 2008. The company is included in the WIG, WIG-CHEMIA, WIG30, mWIG 40, WIG, WIG-Poland, InvestorsMS, WIG.MS-PET and WIG-ESG indices, as well as in CEEplus, the index of stock exchanges from the Three Seas Initiative countries. It is also represented in foreign indices: MSCI Emerging Markets. The Company is an ESG (environmental, social and governance) reporting company.

The Company’s registered office is located at ul. Eugeniusza Kwiatkowskiego 8, Tarnów, Poland. Since April 22nd 2013, the Company has been trading under the name Grupa Azoty Spółka Akcyjna. Its history goes back to 1927, when Państwowa Fabryka Związków Azotowych was established in Mościce, a township later incorporated into Tarnów. The plant’s construction was one of the largest investment projects undertaken in the Republic of Poland after it regained independence in 1918.

Grupa Azoty S.A. is an integrated manufacturer of polyamide 6, marketed as Tarnamid®; it also specialises in the manufacturing of nitrogen fertilizers (nitrogen-sulfur and nitrate).

The Grupa Azoty Group is one of Central Europe’s major chemical groups with a strong presence on the market of mineral fertilizers, engineering plastics, OXO products, and other chemicals.

Grupa Azoty has brought together companies with different traditions and complementary business profiles, seeking to leverage their potential to deliver a common strategy. This has led to the creation of Poland’s largest chemical group and a major industry player in Europe. Thanks to its carefully designed structure, the Group offers a diverse product mix, ranging from nitrogen and compound fertilizers, engineering plastics, to OXO products and melamine.

As at December 31st 2020, the Grupa Azoty Group comprised: Grupa Azoty S.A. (the “Parent”), direct subsidiaries:

 COMPO EXPERT Holding GmbH (“COMPO EXPERT”, formerly Goat TopCo GmbH) – wholly-owned,

 Grupa Azoty ATT Polymers GmbH – wholly-owned,

 Grupa Azoty Compounding Sp. z o.o. – wholly-owned,

 Grupa Azoty Kopalnie i Zakłady Chemiczne Siarki Siarkopol S.A. (Grupa Azoty SIARKOPOL) – a 99.56% interest,

 Grupa Azoty Zakłady Azotowe Puławy S.A. (Grupa Azoty PUŁAWY) – a 95.98% interest,

 Grupa Azoty Zakłady Azotowe Kędzierzyn S.A. (Grupa Azoty KĘDZIERZYN) – a 93.48% interest,

 Grupa Azoty Zakłady Chemiczne Police S.A. (Grupa Azoty POLICE) – a 62.86% interest,

 Grupa Azoty Polskie Konsorcjum Chemiczne Sp. z o.o. (Grupa Azoty PKCh Sp. z o.o.) – a 63.27% interest, with Grupa Azoty KĘDZIERZYN holding a 36.73% interest,

 Grupa Azoty Koltar Sp. z o.o. (Grupa Azoty KOLTAR) – a 60% interest, with Grupa Azoty PUŁAWY and Grupa Azoty KĘDZIERZYN each holding a 20% interest,

as well as the indirect subsidiaries and associates presented in the charts on the next pages.

The Parent and the Group companies were incorporated for an indefinite period.

Parent’s direct subsidiaries

Grupa Azoty PUŁAWY

The company’s registered office is located in Puławy.

Grupa Azoty PUŁAWY (full name: Grupa Azoty Zakłady Azotowe Puławy Spółka Akcyjna) specialises in the production of nitrogen fertilizers and is also one of the largest melamine manufacturers in the world.

Grupa Azoty POLICE

The company’s registered office is located in Police.

Grupa Azoty POLICE (full name: Grupa Azoty Zakłady Chemiczne Police Spółka Akcyjna) is a major producer of compound fertilizers, nitrogen fertilizers and titanium white.

Grupa Azoty KĘDZIERZYN

The company’s registered office is located in Kędzierzyn-Koźle.

The business of Grupa Azoty KĘDZIERZYN (full name: Grupa Azoty Zakłady Azotowe Kędzierzyn Spółka Akcyjna) is based on two pillars: nitrogen fertilizers and OXO products (OXO alcohols and plasticizers).

COMPO EXPERT

The company’s registered office is located in Münster, Germany. The company (full name: COMPO EXPERT Holding GmbH) is a holding company for a group of subsidiaries, including the main operating company COMPO EXPERT GmbH, one of the world’s largest manufacturers of speciality fertilizers for professional customers. The group’s products are sold in many countries in Europe, Asia, Africa, as well as North and South Americas.

Grupa Azoty ATT Polymers GmbH

The company’s registered office is located in Guben, Germany. It manufactures polyamide 6 (PA6).

Grupa Azoty PKCh Sp. z o.o.

The company’s registered office is located in Tarnów. The services of Grupa Azoty PKCh Sp. z o.o. (full name: Grupa Azoty Polskie Konsorcjum Chemiczne Spółka z ograniczoną odpowiedzialnością) encompass comprehensive design support for investment projects in the chemical industry − from study and concept work to engineering design, building permit design and working plans, to services provided during the construction, commissioning and operation of process units.

Grupa Azoty KOLTAR Sp. z o.o.

The company’s registered office is located in Tarnów.

Grupa Azoty KOLTAR provides countrywide railway transport services. It is one of the few organisations in Poland to hold licences required to perform comprehensive repairs of rail car chassis and tank cars used in the transport of dangerous materials (according to RID).

Grupa Azoty SIARKOPOL

The company’s registered office is located in Grzybów.

Grupa Azoty SIARKOPOL (full name: Grupa Azoty Kopalnie i Zakłady Chemiczne Siarki Siarkopol Spółka Akcyjna) is Poland’s largest producer of liquid sulfur.

Grupa Azoty Compounding Sp. z o.o.

The company’s registered office is located in Tarnów. Its business model is based on a portfolio of specialised engineering plastics manufactured through the compounding of plastics, with the use of innovative technological solutions.

The company manufactures and sells modified plastics.

Parent’s equity interests in subsidiaries as at December 31st 2020

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The Parent and its subsidiaries as at December 31st 2020

Source: Company data

 

1.2. Subsidiaries’ organisational or equity ties

Equity interests held by the subsidiaries in other entities of the Group as at December 31st 2020

Grupa Azoty PUŁAWY

¹⁾Grupa Azoty POLICE holds 7.35% of shares in Prozap Sp. z o.o.

Grupa Azoty POLICE

¹⁾The Parent holds 30.52% of shares in Grupa Azoty Polyolefins S.A.

²⁾Grupa Azoty PUŁAWY holds 78.86% of shares in Prozap Sp. z o.o.

Grupa Azoty KĘDZIERZYN

¹⁾Grupa Azoty KOLTAR Sp. z o.o holds 0.783% of shares in ZAKSA S.A.

Grupa Azoty PKCh Sp. z o.o.

¹⁾Grupa Azoty Jednostka Ratownictwa Chemicznego Sp. z o.o. holds 60% of shares in Konsorcjum EKO TECHNOLOGIES and 12% of shares in EKOTAR Sp. z o.o.

²⁾Grupa Azoty Prorem Sp. z o.o. holds 12% of shares in EKOTAR Sp. z o.o.

Compo Expert Holding GmbH Group

COMPO EXPERT International GmbH

¹⁾ 0.000003% of the share capital is held by COMPO EXPERT GmbH.

²⁾ 0.01% of the share capital is held by COMPO EXPERT GmbH.

³⁾ 0.0103% of the share capital is held by COMPO EXPERT GmbH.

⁴⁾ 0.000311% of the share capital is held by COMPO EXPERT GmbH.

⁵⁾ 0.1% of the share capital is held by COMPO EXPERT GmbH.

⁶⁾ 3.83% of the share capital is held by COMPO EXPERT GmbH.

⁷⁾ 10.000024% of the share capital is held by COMPO EXPERT GmbH.

COMPO EXPERT GmbH holds shares in:

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COMPO EXPERT Holding GmbH Group and its subsidiaries as at December 31st 2020 – Europe

Source: Company data

COMPO EXPERT Holding GmbH Group and its subsidiaries as at December 31st 2020 – rest of the world

Source: Company data

 

Parent’s significant minority interests in related companies as at December 31st 2020

1.3. Changes in the organisational structure

Changes in the Group’s structure, including changes resulting from business combinations, acquisitions or disposals of Group entities, as well as long-term investments, demergers, restructuring or discontinuation of operations in the reporting period.

Deregistration of Infrapark Police S.A. w likwidacji (in liquidation)

On January 9th 2020, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, deleted Infrapark Police S.A. w likwidacji (in liquidation) from the Business Register of the National Court Register. As the company was not consolidated and the value of its shares was zero, the event had no financial effect on the Group’s consolidated financial statements.

Registration of an increase in Grupa Azoty POLICE’s share capital

On January 10th 2020, the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital and amendments to the Articles of Association of Grupa Azoty POLICE. The share capital was increased from PLN 750,000,000 to PLN 1,241,757,680 through an issue of 49,175,768 Series C ordinary bearer shares with a par value of PLN 10.00 per share.

After the registration of the increase, the share capital of Grupa Azoty POLICE amounts to PLN 1,241,757,680 and is divided into 124,175,768 shares with a par value of PLN 10.00 per share, including:

 60,000,000 Series A shares,

 15,000,000 Series B shares,

 49,175,768 Series C shares.

The total number of voting rights attached to all the shares in issue is 124,175,768.

Grupa Azoty POLICE raised capital amounting to PLN 501,592,833.60. The purpose of the share issue was to raise proceeds to support the implementation of the Group’s strategy for the coming years, in particular to diversify revenue streams and increase profitability, and to step up the efforts to expand the non-fertilizer business lines. The key task undertaken in the pursuit of these strategic goals is the Polimery Police project.

As a result of its participation in the public offering of new shares in Grupa Azoty POLICE, the Parent acquired 28,551,500 shares and now holds in aggregate 78,051,500 shares in Grupa Azoty POLICE, representing 62.86% of its share capital. Prior to the issue, the Parent’s holding in Grupa Azoty POLICE represented 66% of its share capital.

Increase in Grupa Azoty Polyolefins S.A’s share capital

On January 24th 2020, an Extraordinary General Meeting of Grupa Azoty POLICE, and on February 17th 2020 – an Extraordinary General Meeting of the Parent approved the purchase by the companies of shares, for the issue price specified by the General Meeting of Grupa Azoty POLYOLEFINS, by way of a private placement, within the meaning of Art. 431.2.1 of the Commercial Companies Code, in a number ensuring that the companies’ current percentage shareholdings in Grupa Azoty POLYOLEFINS are maintained.

On February 18th 2020, an Extraordinary General Meeting of Grupa Azoty POLYOLEFINS passed a resolution to increase the share capital by PLN 131,944,310.00 through the issue of 13,194,431 new Series F registered shares with a par value of PLN 10.00 per share. The issue price of each Series F share is PLN 47.90.

The new shares were to be acquired in a private placement by Grupa Azoty POLICE, which was to acquire 6,993,048 shares for a total issue price of PLN 334,968 thousand, and the Parent, which was to acquire 6,201,383 shares for a total issue price of PLN 297,047 thousand.

The share subscription agreements were to be executed and payments for the shares were to be made by April 30th 2020.

On March 18th 2020, the Parent’s Management Board passed a resolution to acquire 6,201,383 shares in Grupa Azoty POLYOLEFINS as part of the issue of Series F shares, for the issue price of PLN 47.90 per share (total consideration of PLN 297,046,245.70). In order to implement the resolution, the Management Board requested the Supervisory Board to grant consent for the above actions.

On April 7th 2020, the Supervisory Board of the Parent approved the execution of an agreement to acquire Grupa Azoty POLYOLEFINS shares.

As Grupa Azoty POLYOLEFINS’ requirement for funds was deferred in time, the above equity contributions were not made and on April 30th 2020 the Extraordinary General Meeting of Grupa Azoty POLYOLEFINS resolved to amend the resolutions and postpone the deadline for payment in respect of Grupa Azoty POLYOLEFINS’ share issue until July 31st 2020. On August 3rd 2020, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital of Grupa Azoty POLYOLEFINS from PLN 467,339,000.00 to PLN 599,283,310.00. The percentage interests in Grupa Azoty POLYOLEFINS’ share capital held by its existing shareholders (the Parent and Grupa Azoty POLICE) remained unchanged at 47% and 53%, respectively.

On November 16th 2020, the Extraordinary General Meeting of Grupa Azoty POLYOLEFINS passed a resolution to issue new shares and increase the company’s share capital by PLN 323,684,990 to PLN 922,968,300. In accordance with relevant agreements, the new shares were subscribed for by Hyundai Engineering Co., Ltd (“Hyundai”) – 15,348,963 shares, Korea Overseas Infrastructure & Urban Development Corporation (“KIND”) – 1,052,184 shares, and Grupa LOTOS S.A. (“Grupa LOTOS”) – 15,967,352 shares.

The cash contributions made to pay for all the shares totalled PLN 594,699,600. Hyundai made a payment of USD 73m (equivalent to PLN 275,808,600), KIND made a payment of USD 5m (equivalent to PLN 18,891,000), and Grupa LOTOS made a payment of PLN 300,000,000. The share premium of PLN 271,014,610 was allocated to the statutory reserve funds of Grupa Azoty POLYOLEFINS.

As a result, Grupa Azoty POLICE holds 34.41% of the shares, the Parent – 30.52%, Grupa LOTOS – 17.3%, Hyundai – 16.63%, and KIND – 1.14%. The percentages represent both the respective ownership interests and shares in total voting rights at the General Meeting of Grupa Azoty POLYOLEFINS.

On November 27th 2020, the District Court for Szczecin-Centrum in Szczecin, 13th Commercial Division of the National Court Register, registered the increase in the share capital of Grupa Azoty POLYOLEFINS.

Koncept Sp. z o.o. and Prozap Sp. z o.o. merger registration

The merger was entered with the National Court Register on January 29th 2020. Following the merger of Prozap Sp. z o.o. (acquirer) and Koncept Sp. z o.o. (acquiree), Grupa Azoty POLICE received, in exchange for 1,023 shares in Koncept Sp. z o.o., 131 shares in Prozap Sp. z o.o.

As of January 29th 2020, the registered office of Koncept Sp. z o.o. in Police was transformed into a branch of Prozap Sp. z o.o. in Police, with the status of a separate employer.

In addition, on June 23rd 2020 3 shares in Prozap Sp. z o.o., previously held by a former employee, were cancelled, and on December 3rd 2020 Grupa Azoty PUŁAWY acquired 7 shares from the other shareholders.

As a result, Grupa Azoty PUŁAWY and Grupa Azoty POLICE hold, respectively, 78.86% and 7.35% of shares in Prozap Sp. z o.o.

Repurchase of minority interests in Grupa Azoty SIARKOPOL

On March 26th 2020, an entry was made in the share register concerning acquisition by the Parent of 2,159 shares, by way of repurchase in accordance with Art. 418¹ of the Commercial Companies Code.

On March 30th 2020, the Parent received a declaration of the State Treasury’s acceptance of a repurchase offer for 7,604 employee-stock shares in Grupa Azoty SIARKOPOL which had not been acquired by that company’s eligible employees or their heirs. On May 8th 2020, a global certificate for the shares was delivered against a transfer report; accordingly, the Parent’s interest in the share capital of Grupa Azoty SIARKOPOL increased to 99.56%.

On July 31st 2020, the Annual General Meeting of Grupa Azoty SIARKOPOL passed a resolution to repurchase the shares under Art. 418¹ of the Commercial Companies Code. Based on the resolution, the Parent was to repurchase 463 shares for PLN 46.83 per share. On August 21st 2020, the Parent paid for the 463 registered shares.

The shareholder entitled under the resolution to sell the shares did not submit the share certificate to Grupa Azoty SIARKOPOL within the statutory deadline in order to sell them, and notified the company of its decision not to sell the shares.

Therefore, Grupa Azoty SIARKOPOL returned the amount transferred to repurchase the registered shares to the Parent.

Change of name of Zakłady Azotowe Chorzów S.A.

On May 26th 2020, a change of the name of Zakłady Azotowe Chorzów S.A. to Grupa Azoty Zakłady Azotowe Chorzów S.A. (Grupa Azoty CHORZÓW) was registered in the National Court Register.

Cancellation of Remzap Sp. z o.o. shares

In 2020, 56 shares in Remzap Sp. z o.o., previously held by its former employees, were cancelled. As a result, the percentage of total voting rights at the General Meeting of Remzap Sp. z o.o. held by Grupa Azoty PUŁAWY increased from 96.83% to 97.05%.

Registration of COMPO EXPERT Egypt LLC

On August 10th 2020, a new company under the name of COMPO EXPERT Egypt LLC was registered (with a share capital of EGP 100,000.00 owned in 99.9% by COMPO EXPERT International GmbH, and in 0.1% – by COMPO EXPERT GmbH). The company’s objects are to strengthen the presence on the Egyptian market and protect intellectual property.

Liquidation of Grupa Azoty Folie Sp. z o.o. w likwidacji (in liquidation)

On November 20th 2020 the General Meeting of Grupa Azoty Folie Sp. z o.o. w likwidacji (in liquidation) passed resolutions concerning, among other things, consideration of the Liquidator’s report on the company’s operations between January 1st 2020 and October 19th 2020 (the day preceding distribution to shareholders of assets remaining after satisfying or securing creditors’ claims), consideration of the financial statements (liquidation report) as at October 19th 2020 (the day preceding distribution to shareholders of assets remaining after satisfying or securing creditors’ claims), approval of the Liquidator’s statement on completion of actions necessary to wind up the company, distribution of the company’s assets and closure of the liquidation, consideration of the financial statements as at October 21st 2020 (the date of liquidation closure), and selection of a place for archiving documents.

On December 10th 2020 Grupa Azoty Folie Sp. z o.o. was deleted from the National Court Register.

Registration of Grupa Azoty FOSFORY Sp. z o.o. name change

On December 15th 2020, a change of the name of Gdańskie Zakłady Nawozów Fosforowych Fosfory Sp. z o.o. to Grupa Azoty Zakłady Fosforowe Gdańsk Sp. z o.o. (abbreviated to Grupa Azoty FOSFORY Sp. z o.o.) was registered.

Events after the reporting date

On February 9th 2021 two shares in Prozap Sp. z o.o., previously held by a deceased shareholder (employee of the company) were cancelled.

As a result, the percentage of voting rights held by Grupa Azoty PUŁAWY at the General Meeting of Prozap Sp. z o.o. rose from 80.30% to 80.39%. The share in the capital did not change.

2. Management policy

2.1. Parent’s organisational chart

Source: Company data.

 

2.2. Changes in key management policies

In August 2020, a Remuneration Policy for the Management Board and Supervisory Board Members was adopted by resolutions of the General Meetings of Grupa Azoty companies listed on the WSE. The Remuneration Policy defines the rules and terms of remunerating members of the management and supervisory bodies of Grupa Azoty Group’s public companies, which are draw up in accordance with the Act on Public Offering, Conditions Governing the Introduction of Financial Instruments to Organised Trading, and Public Companies, dated July 29th 2005, on the basis of Remuneration Policies for the Management Board and Supervisory Board Members adopted by resolutions of the General Meetings of these companies.

The total remuneration of a Manager consists of a fixed component (Fixed Remuneration), representing a monthly base pay, and a variable component (Variable Remuneration), representing additional remuneration payable for the Company’s financial year.

As Variable Remuneration is of an incentive nature and its amount is set based on achievement of management objectives, it is an instrument ensuring the implementation of the Company’s business strategy, pursuit of the Company’s long-term interests, stability and growth of the Company and increase in its value.

A Manager is remunerated based on a managerial contract concluded between the Company and the Manager for the period of appointment as a Management Board member. A Supervisor may be remunerated based on a supervisory services contract or directly under the Remuneration Policy.

The Remuneration Policy determines the Fixed Remuneration range for a Manager, the upper limit of Variable Remuneration, and the remuneration of the Supervisory Board members. As Variable Remuneration is of an incentive nature and its amount is set based on achievement of management objectives, it is an instrument ensuring the implementation of the Company’s business strategy, pursuit of the Company’s long-term interests, stability and growth of the Company and increase in its value. The Policy also sets out the conditions subject to which a Manager receives Variable Remuneration for the year and based on which the amount of Variable Remuneration is defined.

The Remuneration Policy also provides that assessment of achievement of management objectives by a Manager, determination of the Variable Remuneration amount, and payment of Variable Remuneration may be deferred, and also specifies cases where the right to demand Variable Remuneration may be lost or the Manager may be obliged to return Variable Remuneration received prior to disclosure of such cases.

The Remuneration Policy for Management Board and Supervisory Board Members takes into account the rules of remunerating Managers and members of Supervisory Bodies in place at a given company and complements the regulations governing remuneration by:

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extending the criteria for granting and determining the amount of variable remuneration components to include criteria related to social interests, the company’s contribution to environmental protection, and taking measures to prevent and eliminate adverse social impacts of the company’s operations;

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indicating how the Remuneration Policy for Management Board and Supervisory Board Members, and in particular the criteria (management objectives) for granting and determining the amount of Variable Remuneration, should contribute to ensuring implementation of the company’s business strategy, long-term interests, stability, development and value growth;

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ensuring that the method of calculating the achievement of the criteria (management objectives) for granting and determining the amount of variable remuneration components is defined in a resolution of the General Meeting;

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expressly empowering the Supervisory Body to adopt the Variable Remuneration Rules;

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indicating:

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how the terms of service and remuneration of Company employees other than managers and members of Supervisory Bodies are taken into account in determining the remuneration of Managers,

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the decision-making process for establishing, implementing and reviewing the Remuneration Policy for the Management Board and Supervisory Board Members,

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measures to ensure that conflicts of interest relating to the Remuneration Policy for the Management Board and Supervisory Board Members are avoided or managed,

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the company’s right to discontinue granting or paying and to demand the return of Variable Remuneration;

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benefits for members of the Supervisory Body other than Remuneration, such as reimbursement of travel expenses;

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the nature and stability of the legal relationship between the company and members of its governing bodies.

Neither Managers nor Supervisors receive remuneration in the form of financial instruments. Nor are they covered by any supplementary pension schemes or early retirement schemes, subject to mandatory provisions of law.

The Remuneration Policy also specifies additional benefits and rights (including severance pay, non-compete compensation, provision of equipment and technical devices owned by the company, reimbursement of expenses, etc.)

Definition of Remuneration Policies for Management Board and Supervisory Board Members and any amendments thereto are initiated by the Supervisory Bodies of Grupa Azoty Group’s public companies, using the support of their relevant functions, including legal assistance. This is without prejudice to the General Meeting’s powers to adopt or amend the policy, also without prior initiative of the Supervisory Body.

The Remuneration Policy for Management Board and Supervisory Board Members should be updated at least every four years. Any material amendments to the policy are approved by resolution of the General Meeting.

The Supervisory Bodies of Grupa Azoty Group’s public companies monitor whether the Remuneration Policy for Management Board and Supervisory Board Members needs to be updated, and if any need for amendments is identified they adopt a relevant proposal and submit it so that the amendment can be adopted by resolution of the company’s General Meeting.

The Supervisory Body draws up an annual remuneration report providing a comprehensive overview of the remuneration, including all benefits, in whatever form, received or due to individual Managers and members of the Supervisory Body in the previous financial year in accordance with the Remuneration Policy for Management Board and Supervisory Board Members.

Where necessary for furthering the long-term interests and ensuring financial stability or profitability of a Grupa Azoty Group public company, the Supervisory Body may decide to temporarily waive the Remuneration Policy for Management Board and Supervisory Board Members. Such a decision may be made in the event of:

 a change in the legal framework governing remuneration of Managers and members of the Supervisory Bodies of state-owned companies,

 permanent discontinuation or material limitation of the Company’s operations caused by circumstances that could not be prevented,

 opening of restructuring, liquidation or similar proceedings of a restructuring nature.

The Remuneration Policy for Management Board and Supervisory Board Members is waived by resolution of the Supervisory Body of a Grupa Azoty Group public company, which defines the substantive and temporal scope of the waiver.

2.3. Workforce

Number of employees at the Group

Number of employees at the Parent

Number of employees at consolidated subsidiaries

Average for the year and as at the end of 2020

Number of employees at the Parent: average for the year and as at the end of 2020

Number of employees at consolidated subsidiaries: average for the year and as at the end of 2020

Employee turnover at the Grupa Azoty Group

Employee turnover at the Parent

3. Business overview

3.1. Business segments

The Group is the largest chemical group in Poland and a significant player in Central Europe. It offers mineral fertilizers and B2B products, including engineering plastics, OXO products and melamine.

Grupa Azoty – core business areas

Source: Company data.

The Group’s business is divided into the following segments:

 Agro Fertilizers,

 Plastics,

 Chemicals,

 Energy,

 Other Activities.

Agro Fertilizers

Mineral fertilizers are the key area of the Group’s business. The Agro Fertilizers segment manufactures nitrogen and compound fertilizers, as well as speciality fertilizers, ammonia and other nitrogen-based intermediate products.

The segment’s manufacturing activities are conducted by the companies based in Tarnów (the Parent), Puławy, Kędzierzyn, Police, Gdańsk, Chorzów, as well as Germany and Spain. The Grupa Azoty Group is Poland’s largest and European Union’s second largest manufacturer of mineral fertilizers.

Grupa Azoty Group’s production capacities vs competition (mineral fertilizers)

Source: Fertilizers Europe 2021

Plastics

The segment’s key products are engineering plastics (polyamide 6 (PA6) and modified plastics) as well as auxiliary and intermediate products, such as caprolactam and other chemicals. They are manufactured by the companies in Tarnów, Puławy, and Guben (Germany). The Group is the leading manufacturer of PA6 in Poland and the third largest producer of this polyamide in the European Union.

Grupa Azoty Group’s production capacities vs competition (Polyamide 6)

^*)Integrated manufacturers

Source: PCI Nylon 2018.

Chemicals

The Chemicals segment is an important part of the Group’s business, comprising OXO alcohols, plasticizers, melamine, technical grade urea, titanium white, sulfur, AdBlue^® , and other products.

They are manufactured in Kędzierzyn, Puławy, Police, and Grzybów. The Group is a major manufacturer of melamine globally and the third largest in the European Union. As regards OXO products, the Group is the only manufacturer of OXO alcohols in Poland and the fifth largest in the European Union. The Group is Poland’s only producer of titanium white.

Grupa Azoty Group’s production capacities vs competition (Plasticizers)

Source: CEH 2018.

Grupa Azoty Group’s production capacities vs competition (OXO)

Source: CEH 2018.

Grupa Azoty Group’s production capacities vs competition (Melamine)

Source: CEH 2018.

Energy

Electricity and heat generated by the Energy segment are used primarily for the Group’s own production needs, with small volumes sold locally, in the immediate vicinity of the Group companies.

The segment’s key customers are companies of the Group. Outside the Group, the segment’s products are sold on the electricity and hot water markets to customers connected to local heat and electricity distribution networks. The Group companies operate their own energy distribution networks.

Other Activities

The Other Activities segment comprises auxiliary and support services. As in the case of the Energy segment, its services are mainly rendered for the Group companies. Outside the Group, the segment mainly provides maintenance (automation, design, repair, etc.) and logistics services (road transport, rail transport, ports), and conducts manufacturing at the Catalyst Production Plant. The segment is also involved in various operations in such areas as environmental protection, administration, research, and infrastructure management.

3.2. Overview of key products

AGRO FERTILIZERS

The Group classifies mineral fertilizers as nitrogen (single-nutrient) fertilizers and compound fertilizers, the latter including at least two of the following key nutrients: nitrogen (N), phosphorus (P) or potassium (K), as well as speciality fertilizers.

Nitrogen fertilizers

Nitrogen fertilizers are substances or mixtures of substances where nitrogen is the primary plant nutrient. The Group’s product range includes a number of nitrogen fertilizers: urea, nitrate fertilizers (including ammonium nitrate, calcium ammonium nitrate, UAN), nitrogen-sulfur fertilizers (made as a result of mixing fertilizers in the manufacturing process: ammonium sulfate nitrate, solid and liquid mixtures of urea and ammonium sulfate, and ammonium sulfate). Natural gas is the key feedstock for nitrogen fertilizers production.

Urea

Urea is a nitrogen fertilizer containing 46% nitrogen; it is produced in Puławy (as PULREA^®), Police (as mocznik.pl^®), and Kędzierzyn. Urea is a universal fertilizer – it can be used for all crops at various growth stages, both in the granular form and as a solution.

Outside agriculture, urea is used for technical purposes, mainly for manufacturing of adhesive resins, which find application in the chipboard industry. Urea may also be further processed into urea-ammonium nitrate solution (UAN − RSM®), a liquid fertilizer, or into melamine.

Nitrate fertilizers

 Ammonium nitrate is a nitrogen fertilizer which is easily dissolved in water, Containing between 30% and 34% nitrogen. The Group offers this product in a wide variety of granule forms and sizes, such as mechanically granulated ZAKsan^®, with excellent sowing properties; the PULAN^® beaded ammonium nitrate,

 Calcium ammonium nitrate (CAN) is a nitrogen fertilizer with a nitrogen content of up to 28%. It is a universal fertilizer, suitable for all types of soil, well soluble and easily absorbed by crops. The Group markets CAN in a number of granule varieties; the offering includes the granulated Salmag^® fertilizers (including varieties with a sulfur or boron content), and bead fertilizers such as Saletrzak 27 (CAN 27) standard and Saletrzak 27 with boron.

 Urea-ammonium nitrate solution (UAN – RSM^®) is a liquid nitrogen fertilizer coming in three varieties: with 32%, 30% and 28% nitrogen content. Thanks to its form, UAN–RSM^® is easily absorbed by plants. It is also produced with an admixture of sulfur, as UAN–RSM®S.

Nitrogen-sulfur fertilizers

These fertilizers improve sulfur content in the soil, enhance arable crops' ability to absorb nitrogen, and thus increase the quality and volume of crops.

 PULGRAN®S – urea-ammonium sulfate, is a nitrogen fertilizer with sulfur in the form of white hemispherical pastilles, obtained by blending urea and ammonium sulfate. It is manufactured in two varieties with various contents: 37% nitrogen/21% sulfur and 33% nitrogen/31% sulfur.

 Saletrosan^®, or ammonium sulfate nitrate, is a nitrogen fertilizer with sulfur, obtained by blending ammonium nitrate and ammonium sulfate. Saletrosan^® 26 contains 26% nitrogen and 13% sulfur. The fertilizer is also marketed under the trade name Saletrosan^® 30, with different proportions of nitrogen and sulfur (30% and 6%).

 Polifoska^® 21 is a nitrogen fertilizer with sulfur; it is an ammonium sulfate-urea mix, containing 21% nitrogen and 33% sulfur.

 Ammonium sulfate, marketed under the trade names AS 21 and Pulsar^®, is a simple nitrogen fertilizer with sulfur, containing 21% nitrogen and 24% sulfur. It is a by-product in the manufacture of caprolactam and in flue gas desulfurisation. The Group manufactures a wide range of ammonium sulfate in various granule forms and sizes: selection, macro, standard, and crystalline.

 PULASKA® is a liquid nitrogen fertilizer with sulfur, obtained by blending urea and ammonium sulfate, and has a 20% nitrogen and a 6% sulfur content.

Compound fertilizers (NPK, NP)

NPK and NP compound fertilizers are universal fertilizers which, depending on composition, can be applied to various types of crops and soil. Aside from the primary components − nitrogen (N), phosphorous (P) and potassium (K), these fertilizers contain secondary nutrients such as magnesium, sulfur or calcium, and may contain microelements such as boron or zinc.

Compound fertilizers may be used to provide nutrients to all types of arable crops. The Group’s current offering includes more than 40 grades of compound fertilizers, which are marketed under the following trade names: Polifoska^®, Polidap^®, Polimag^® Superfosfat, Amofoska^®, etc. The Group also offers dedicated fertilizers, custom-made to satisfy customers’ specific requirements.

Speciality fertilizers

Speciality fertilizers are designed to meet the requirements of various sectors, including fruit and vegetable growing, horticulture or maintenance of green areas. In addition to the primary components − nitrogen (N), phosphorous (P) and potassium (K), such fertilizers also contain secondary nutrients and microelements. They may also contain inhibitors that reduce nutrient leaching.

Available in solid (coated or uncoated) or in liquid form, this product range also includes fertigation and foliar fertilizers.

Currently, they are marketed under a number of trade names, including Blaukorn^®, NovaTec^®, Hakaphos^®, Basfoliar^®, Easygreen^®, DuraTec^®, Basacote^® and Floranid^®Twin.

Ammonia

Ammonia is a feedstock for the manufacture of fertilizers, produced in a process of direct synthesis of nitrogen and hydrogen. Ammonia is the basic intermediate product used to manufacture nitrogen fertilizers and compound fertilizers. It is also used in the chemical industry, e.g. for the manufacturing of caprolactam or polymers, or as a cooling agent. Natural gas is the key feedstock for the production of ammonia.

PLASTICS

Engineering plastics

Engineering plastics exhibit high thermal resistance and good mechanical properties. The wide range of the plastics' beneficial properties makes them a product of choice for many industries, including automotive, construction, electrical engineering, household appliances, and the food and textile industries.

The Group manufactures polyamide 6 (PA6) and modified plastics (with admixtures affecting the physical and chemical properties of the final plastics) based on polyamide 6 and other engineering plastics (POM, PP, PBT, PA66). It also offers modified plastics, custom-made to meet the requirements of individual customers.

Polyamide 6 (PA 6)

Polyamide 6 (PA6) is a high quality thermoplastic in granular form used for injection processing. It is the leading product among engineering plastics. The Group's very popular brands in this segment are Tarnamid® and Alphalon®.

Caprolactam

Caprolactam is an organic chemical compound and an intermediate product used for the manufacture of polyamide 6 (PA6). It is produced mainly from benzene and phenol. Synthesis of caprolactam yields ammonium sulfate as a by-product.

CHEMICALS

OXO products

OXO alcohols manufactured by the Grupa Azoty Group: 2-ethylhexanol (2-EH) and butanols (n-butanol, isobutanol). The key product in this group is 2-EH.

2-ethylhexanol (2-EH) is used in the manufacture of plasticizers, paints and varnishes as well as in the textile industry and oil refining processes. It is also applied as a solvent for vegetable oils, animal fats, resins, waxes and petrochemicals.

Plasticizers manufactured by the Grupa Azoty Group:

 DEHT/DOTP. It is used in the chemical industry to increase the plasticity of materials, mainly PVC, and as an additive to paints and varnishes. The Group’s DEHT/DOTP is marketed under the Oxoviflex^® brand. It is used in plastics processing as a non-phthalic plasticizer as well as in the manufacture of paints and varnishes. It is also widely applied for the production of floor tiles and wall cladding as well as toys for children.

 DBTP/DBT. It is a plasticizer characterised by quick plastification of polymers and low migration, giving higher flexibility to finished products. Due to these properties, DBTP/DBT is used in the production of PVC flooring as a functional plasticizer in combination with Oxoviflex^®, as well as in the production of adhesives, seals, and inks. The Group’s DBTP/DBT is marketed under the Oxovilen^® brand.

 DEHA/DOA. It is a high quality bis(2-ethylhexyl) adipate which is recommended for the manufacture of food contact materials (particularly PVC food wrapping film) due to its very good plastifying properties and the fact that it maintains its properties in low-temperature applications and has a safe toxicological profile. The Group markets its DEHA/DOA under the Adoflex^® brand. The product is also used in the manufacture of garden hoses, cables and coated fabrics. Depending on the application, it may be used as the main plasticizer or a functional plasticizer in combination with Oxoviflex^®. Besides its application in PCV processing, Adoflex^® is also recommended as a solvent for the cosmetics industry, for use in nitrocellulose and synthetic rubber plasticisation, and in the manufacturing of lacquers.

Sulfur

The product offered by Grupa Azoty is mined sulfur. Sulfur is mainly used to produce sulfuric acid, which is widely used in the chemical industry, for instance to produce DAP, a two-component fertilizer. The product is offered in various forms. For the Group’s own needs, sulfur is also purchased from other suppliers who obtain it as a by-product from flue gas desulfurisation or crude oil refining.

Melamine

It is a non-toxic, non-flammable product in the form of a white powder, used for the production of synthetic resins, thermosetting plastics, adhesives, paints, varnishes (including furnace varnishes), auxiliary materials for the textile industry, fire retardants, and other.

Titanium white

Titanium white (titanium dioxide) is the most widespread category of inorganic pigments characterised by the highest refractive index. Its other properties include the capacity to strongly absorb harmful ultraviolet radiation. The pure form is a colourless, crystalline, non-volatile, non-flammable, insoluble and thermally stable solid. Industrial applications of titanium white include the manufacture of paints and varnishes, plastics, paper, synthetic fibres, ceramics, rubber, cosmetics, pharmaceuticals and food products.

The Group sells titanium white under the Tytanpol® brand. Several titanium white grades are regularly manufactured, including universal pigments: R-001, R-003, R-210, and speciality pigments: R-002, R-211, R-213, RD-5, RS, R-310).

3.3. Sales markets and procurement sources

The Group’s products are sold all over the world, mainly in the European Union, and on the domestic market.

Group’s sales by geographies (by revenue in 2020)

* Excluding Poland.

Source: Company data.

Parent’s sales by geographies (by revenue in 2020)

Source: Company data.

In 2020, the Parent had one customer which accounted for more than 10% of the total revenue. It was Grupa Azoty ATT Polymers GmbH, a subsidiary of the Parent. The company plays an important role in the manufacturing and trading chain of the Plastics segment.

Sources of strategic raw materials

For the most part, the Group procures its raw materials, merchandise and services on the domestic and EU markets. Certain raw materials (phosphate rock, slag, potassium chloride) are purchased from non-EU suppliers. Raw materials supplied by the Group companies, i.e. ammonia and to some extent sulfur, account for a significant share of the total raw materials procured by the Group.

Ammonia

The procurement strategy is based primarily on the optimisation of intragroup supplies. Intragroup supplies are transacted on arm’s length terms. The Grupa Azoty Group is the largest ammonia manufacturer in Poland and a major one in CEE, operating several ammonia units. It is also one of the largest consumers of ammonia in the region, with a significant potential in logistics.

Having satisfied its own needs, the Group sells a surplus on the market. The Group’s ability to effectively secure ammonia supplies largely depends on conditions prevailing on the fertilizer market and in the natural gas sector.

Benzene

Benzene is mainly delivered under one-year contracts, with supplementary purchases made on the spot market. Benzene is sourced chiefly from domestic and CEE suppliers. The benzene market is largely driven by the situation on the crude oil market and the demand–supply balance on global markets, particularly the level of demand for benzene outside Europe.

Electricity

The Group purchases electricity from major Polish suppliers trading with large accounts. Following a number of tenders for 2020, the Group companies signed electricity supply contracts under their existing framework agreements. Thanks to the joint procurement strategy for electricity supplies, they secured competitive prices and favourable terms of the contracts. Given the volatility of the electricity market and its changing legal framework, the Group’s policy is to purchase electricity under forward contracts concluded for various periods and on the SPOT market, including on the Polish Power Exchange.

Phenol

The procurement strategy is based primarily on supplies from the domestic and the EU markets, with deliveries from outside Europe covering deficit. The Group secures phenol supplies for its own needs under long-term contracts concluded directly with Europe’s largest producers. In 2019, the Grupa Azoty Group increased its internal storage capacities, thus optimising the phenol supply chain.

Phosphate rock

Phosphate rock is purchased under term contracts, chiefly from North African and West African producers, given the mineral’s abundance in the region and the well-developed local sea logistics infrastructure. The situation on the phosphorite market is to a large extent driven by the situation in the fertilizers sector. The Group has in place a joint phosphate rock purchase programme for Grupa Azoty POLICE and GZNF Fosfory Sp. z o.o.

Natural gas

High-methane gas and gas from local sources was supplied by PGNiG S.A. under long-term contracts. Any additionally required volumes were bought by the Group at the Polish Power Exchange.

Propylene

The bulk of the Group’s purchases of propylene are made under annual contracts, with supplementary purchases made on the spot market. To a large extent, propylene prices are driven by oil prices. The Group pursues a diversified procurement strategy, based chiefly on supplies from the EU and countries east of Poland. Supplies from the latter largely reduce the overall cost of propylene procurement.

Sulfur

The Group is the largest producer and consumer of liquid sulfur on the domestic market and in the region. Its sulfur procurement strategy is based on optimising intragroup supplies (from Grupa Azoty SIARKOPOL) and on supplies from the petrochemical sector. This approach gives the Group considerable procurement flexibility, and significantly reduces the risk of supply shortages. The Group also has the largest logistics facilities in Poland, which is a source of additional competitive advantage. With a centralised sulfur procurement strategy in place (a joint purchase programme for the entire Group), the Group is able to aggregate the supply volumes and reduce the cost of this raw material.

Potassium chloride

With substantial natural resources and competitive commercial terms, producers from the Commonwealth of Independent States (Russia, Belarus), as well as Canada and Germany, are the primary suppliers of potassium chloride. The Group’s procurement strategy is chiefly based on quarterly framework agreements, with supplementary deliveries sourced from Western Europe. The Group pursues a centralised procurement strategy by making joint purchases for Grupa Azoty POLICE and GZNF Fosfory Sp. z o.o.

Coal

The Group purchases coal mainly on the domestic market. Purchasing large volumes of coal of the required quality from geographically remote markets is not economically viable given the transport costs and price formulae (ARA).

On the domestic market, the prices of pulverised coal used in power generation are not directly linked to ARA rates, which only serve as pricing benchmarks for Polish coal producers.

Since 2018, the Group companies follow a strategy of purchasing coal under multi-year contracts with a guaranteed price change range. Such long-term contracts cover all of the Group’s needs for coal supplies.

3.4. Seasonality of operations

Seasonality of operations is seen mainly in the markets for mineral fertilizers.

Mineral fertilizers

The seasonality in the fertilizer segment in 2020 followed its usual pattern. Demand for fertilizers from the agricultural market was the highest in spring, which is natural given the nature of agricultural operations. In autumn, the demand was slightly lower. Weather conditions, the key driver of demand, were not typical in 2020. Weather conditions have a significant impact on market demand for fertilizer products. The Group follows a policy of mitigating seasonality through optimum volume allocation:

 As part of all-year supplies to the distribution network, and

 by partial sales of products on geographical markets with different seasonality patterns.

Titanium white market

The main target application of TiO₂ is the manufacture of paints and varnishes. Titanium white is a seasonal product, linked closely to structural construction. Demand for titanium white depends on the situation on its application markets, especially the construction market. It usually starts to rise at the end of the first quarter and falls as the construction season ends in autumn. The first quarter of a year is typically classified as a low season, a run-up to the slow beginning of a high season. The fourth quarter is also usually a low season for the main sector of paints and coatings. However, in 2020 the buying patterns were disturbed by the coronavirus pandemic.

In the case of other Grupa Azoty Group’s products, seasonality does not have a material effect on the Group’s performance as they represent a small proportion of total output.

3.5. Agreements, including credit facility and loan agreements, guarantees and sureties

The agreements are presented in chronological order.

In 2020 and as at the date of this Report for 2020, none of the Group companies defaulted on credit facilities or loans or breached any material covenants under credit facility or loan agreements.

In 2020, the Parent drew down a PLN 500m loan under the term facility advanced by a bank syndicate under the Credit Facility Agreement of April 23rd 2015 (as amended), to secure liquidity necessary to finance its equity contribution to the Polimery Police project.

3.5.1. Significant agreements

Transaction Agreements between Grupa Azoty PUŁAWY and ENEA S.A.

In 2020, Grupa Azoty PUŁAWY and ENEA S.A. entered into Transaction Agreements under the Framework Agreement, with an aggregate value of more than PLN 100m. The Agreements provide for the supply of electricity to Grupa Azoty PUŁAWY.

Continued cooperation with Lubelski Węgiel Bogdanka S.A.

On November 18th 2020, Grupa Azoty PUŁAWY signed an annex to the long-term agreement for the supply of thermal coal executed on January 8th 2009. The estimated value of the agreement from its execution date to December 31st 2026 totals (without taking into account any possible increases, deviations and tolerances) PLN 1,996m (VAT exclusive), i.e. 7.56% more than specified in Current Report No. 33/2019 of November 20th 2019. Of that amount, PLN 847m (VAT exclusive) is planned for 2021–2026.

Termination of coal purchase contracts

On December 29th 2020, the Parent submitted to Polska Grupa Górnicza S.A. (the Seller) a notice of termination of the bilateral coal sale contracts executed on March 12th 2018 by the Parent and its subsidiaries: Grupa Azoty PUŁAWY, Grupa Azoty POLICE and Grupa Azoty KĘDZIERZYN (the “Customers”).

The subject matter of the Contracts is the sale of thermal coal produced at the Seller’s mines and intended for consumption at the Customers in quantities specified in the respective contracts, based on uniform business terms for the Customers.

The reason for terminating the contracts is a reduction in the quantities of coal to be consumed by the Customers as from 2022, related to:

 conversion of the heat and power generation system from fine coal to a different fuel,

 planned investments in the CHP plants aimed at converting them to a different fuel and improving their efficiency,

 improved energy efficiency of industrial processes resulting in lower heat consumption.

The termination notices were submitted subject to the 24 months’ notice period and take effect as of the end of the calendar year in which the notice period expires, i.e. December 31st 2022.

The termination of the contracts will not disrupt the operations of the Customers. Failure to terminate the contracts would result in excessive difficulties related to reception of fine coal and in negative financial consequences of their continued performance.

Despite the contracts having been terminated, an intention was expressed to continue the long-term business cooperation on new mutually agreed terms, adapted to reflect the quantities of coal actually needed by the Customers and prevailing market conditions. A negotiation team is already working to reach an agreement with respect to future business relations between the parties.

The Seller is the main supplier of fine coal to the Grupa Azoty Group companies, and the value of supplies in 2020 was approximately PLN 187.2m.

3.5.2. Loan agreements and annexes

Annexes to credit facility agreements

On January 30th 2020, the Parent and the European Investment Bank executed Annex 4 to the financing agreement of May 28th 2015, as amended, and Annex 3 to the financing agreement of January 25th 2018.

Given the expiry of the availability period of the European Investment Bank’s facility on January 25th 2020, an annex to the facility agreement was executed extending the said period until January 25th 2021 and extending the deadlines for delivery of selected projects under the investment and R&D programmes by one year.

Annexes to the physical cash pooling agreement with PKO BP

On February 19th 2020, the Parent, together with other Grupa Azoty Group companies, and PKO Bank Polski S.A. signed Annex 7 to the PLN physical cash pooling agreement of September 20th 2016, as amended, in connection with the merger of Prozap Sp. z o.o. and Koncept Sp. z o.o.

On March 25th 2020, the Parent and the Grupa Azoty Group companies entered into Annex 8 to the agreement with PKO Bank Polski S.A. to amend the terms of interest accrual, and on June 29th 2020 they entered into Annex 9 changing the rates of interest on credit balances.

On August 10th 2020, the Parent and the Group companies entered into Annex 10 to the above-mentioned agreement with PKO Bank Polski S.A., concerning exclusion of Grupa Azoty Folie Sp. z o.o. w likwidacji (in liquidation) and Grupa Azoty POLYOLEFINS from the physical cash pooling arrangement.

On November 30th 2020, the Parent together with other Grupa Azoty Group companies and PKO Bank Polski S.A. signed Annex 3 to the EUR Physical Cash Pooling Agreement of November 2nd 2018, as amended. The Annex amended the Agreement to reflect changes in the financing structure of the COMPO EXPERT Group companies.

Grupa Azoty POLICE’s overdraft facility from Bank Gospodarstwa Krajowego

On January 24th 2020, the PLN 80m overdraft facility agreement with Bank Gospodarstwa Krajowego expired. Accordingly, Grupa Azoty POLICE carried out a RFP procedure for a PLN 100m overdraft facility. The best proposal was submitted by Bank Gospodarstwa Krajowego, and consequently a PLN 100m overdraft facility agreement was concluded on March 5th 2020 for the period until January 23rd 2023.

Credit line agreements concluded by COMPO EXPERT GmbH

In March 2020, COMPO EXPERT GmbH increased the credit line at Banco Santander granted under an agreement concluded in September 2019 from EUR 5m to EUR 6m. The agreement is valid for an indefinite period.

In April 2020, COMPO EXPERT GmbH’s credit line at Commerzbank granted in the amount of EUR 5m under an agreement of May 2019 was increased by PLN 3m. It was arranged to replace COMPO EXPERT Spain S.L.’s EUR 3m credit facility with Banco Sabadell, maturing in June 2020, which was not extended.

Annex to the multi-purpose credit facility agreement with PKO BP

On April 27th 2020, the Parent, together with Grupa Azoty Group companies, and PKO Bank Polski S.A. executed Annex 6 to the multi-purpose credit facility agreement of April 23rd 2015 (as amended), changing the pricing terms for services related to guarantees and letters of credit.

Credit facility agreements for the Polimery Police project

On May 31st 2020, Grupa Azoty POLYOLEFINS signed a Credit Facilities Agreement to raise senior debt financing necessary to implement the Polimery Police project.

The Credit Facilities Agreement was concluded between Grupa Azoty POLYOLEFINS and a syndicate of financial institutions comprising: Alior Bank S.A., Bank Gospodarstwa Krajowego, Bank Ochrony Środowiska S.A., Bank Polska Kasa Opieki S.A. (the bank coordinating the Polimery Police Project financing transaction), BNP Paribas Bank Polska S.A., the European Bank for Reconstruction and Development, Industrial and Commercial Bank of China (Europe) S.A. Poland Branch, mBank S.A., Powszechna Kasa Oszczędności Bank Polski S.A., Powszechny Zakład Ubezpieczeń S.A., Powszechny Zakład Ubezpieczeń na Życie S.A., PZU Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych BIS 2 and Santander Bank Polska S.A. (the “Syndicate”), as well as ICBC Standard Bank PLC.

The Credit Facilities Agreement provides for the following loans to be granted by the Syndicate:

 a term loan facility of up to EUR 487.8m, mainly for financing or refinancing the Polimery Police Project costs during the construction phase. The final repayment date is November 29th 2030, with the proviso that once the conditions defined in the Credit Facilities Agreement are met, it may be extended until December 15th 2035. The facility bears interest at a variable rate based on the EURIBOR reference rate;

 a term loan facility of up to USD 537.7m, mainly for financing or refinancing the Polimery Police Project costs during the construction phase. The final repayment date is November 29th 2030, with the proviso that once the conditions defined in the Credit Facilities Agreement are met, it may be extended until December 15th 2035. The facility bears interest at a variable rate based on the LIBOR reference rate;

 a VAT credit facility of up to PLN 150m, for financing or refinancing VAT paid on the Polimery Police Project costs during the construction phase. The final repayment date falls six months after the actual Polimery Police Project completion date, but not later than November 30th 2024. The facility bears interest at a variable rate based on the WIBOR reference rate;

 a working capital facility of up to USD 180m to finance or refinance Polyolefins’ operating costs and working capital. The final repayment date falls five years after the financial close date, but not later than November 29th 2025. The facility bears interest at a variable rate based on the LIBOR reference rate.

The key security instruments for the credit facilities include: mortgage over Grupa Azoty POLYOLEFINS’ (ownership or perpetual usufruct) rights to real property, registered pledges over Grupa Azoty POLYOLEFINS’ all assets and rights, registered and financial pledges over receivables under Grupa Azoty POLYOLEFINS’ bank accounts, registered and financial pledges over all Grupa Azoty POLYOLEFINS shares held by the shareholders of Grupa Azoty POLYOLEFINS, declarations of voluntary submission to enforcement, as well as security assignments.

In addition, in connection with the Credit Facilities Agreement, the Parent and Grupa Azoty POLICE entered into a support loan provision guarantee agreement with Grupa Azoty POLYOLEFINS and Bank Polska Kasa Opieki S.A. (acting as the facility agent and security agent) for up to EUR 105m in the form of a subordinated loan, the main objective of which is to cover a potential liquidity deficit, construction cost overruns, operating costs and debt service costs in the operation phase.

Execution of transaction documents for equity investment in and financing of the Polimery Police project

On May 31st 2020, the Parent, Grupa Azoty POLICE and Grupa Azoty POLYOLEFINS concluded with Grupa LOTOS, Hyundai and KIND agreements concerning the conditions of an equity investment and subordinated debt financing in connection with Grupa Azoty POLYOLEFINS’ Polimery Police project.

More information on this subject, including information about the financial instruments under the Grupa Azoty POLYOLEFINS’ shareholder agreement of May 31st 2020, is presented in the separate financial statements of Grupa Azoty Spółka Akcyjna for the 12 months ended December 31st 2020 (Note 30.6) and in the consolidated financial statements of the Grupa Azoty Group for the 12 months ended December 31st 2020 (Section 2.7.6, Note 21.6 and Note 21.7).

Transfer of credit commitment from Santander Bank Polska S.A. to CaixaBank S.A.

On July 16th 2020, Santander Bank Polska S.A. transferred a part of its commitment under Tranche A of the Credit Facility Agreement of April 23rd 2015 (as amended) concluded between the Parent and a bank syndicate (PKO BP S.A., Santander Bank Polska S.A., BGK and ING Bank Śląski S.A.), in the amount of PLN 100m, to CaixaBank S.A., Polish Branch. Following the transfer, Santander Bank Polska S.A.’s credit commitment is PLN 200m.

Loan agreement concluded by COMPO EXPERT Spain S.L.

On August 3rd 2020, COMPO EXPERT Spain S.L. and Fondo Europaeo concluded a EUR 943 thousand loan agreement, maturing on September 27th 2024. On September 14th 2020, COMPO EXPERT Spain S.L. received a tranche of EUR 471 thousand. The balance will be disbursed by June 27th 2021, depending on the progress in implementing individual stages of the project to provide equipment for a granulated fertilizers line.

Agreement between the creditors of Grupa Azoty POLYOLEFINS

In order to implement Polimery Police, a project of strategic importance to the Grupa Azoty Group, on October 7th 2020 an intercreditor agreement (the “Intercreditor Agreement”) was concluded between the Parent, Grupa Azoty POLICE, Grupa Azoty POLYOLEFINS, the Syndicate, as well as ICBC Standard Bank PLC (as an original security participant), Hyundai, KIND, and Grupa LOTOS.

The conclusion of the Intercreditor Agreement was among the conditions of the availability of senior debt financing for the implementation of the Polimery Police project on a project finance basis. Debt financing for the implementation of the Project in the form of: (i) a EUR-denominated term loan facility of up to EUR 487,800 thousand; (ii) a USD-denominated term loan facility of up to USD 537,700 thousand; (iii) a VAT credit facility of up to PLN 150,000 thousand, and (iv) a working capital facility of up to USD 180,000 thousand to be made available to Grupa Azoty POLYOLEFINS was granted by the Syndicate under the credit facilities agreement of May 31st 2020.

Security under the Credit Facilities Agreement for the Polimery Police project

Other pre-conditions to disbursement of funds by the Syndicate included the execution of apprioriate security documents as provided for in the Credit Facilities Agreement. Accordingly, to perform the relevant provisions of the Credit Facilities Agreement, on October 7th 2020 Grupa Azoty POLYOLEFINS and certain other obligors (including the Parent and Grupa Azoty POLICE) executed agreements and other documents providing, among other things, for the creation of the following security interests for the benefit of the Syndicate:

i.registered and financial pledges over all shares in Grupa Azoty POLYOLEFINS held by the Parent and Grupa Azoty POLICE;

ii.registered floating charges over a pool of movables and property rights forming part of the business of the subsidiary Grupa Azoty POLYOLEFINS;

iii.registered and financial pledges over receivables from bank accounts held by Grupa Azoty POLYOLEFINS;

iv.power of attorney over bank accounts held by Grupa Azoty POLYOLEFINS;

v.contractual mortgage over real property;

vi.execution by Grupa Azoty POLYOLEFINS, the Parent and Grupa Azoty POLICE of notarial deeds on submission to enforcement;

vii.security assignments of rights and claims under insurance and other relevant contracts of Grupa Azoty POLYOLEFINS; and

viii.security assignments of rights and claims under subordinated loans advanced to Grupa Azoty POLYOLEFINS (including subordinated loans from the Parent and Grupa Azoty POLICE) and the support loan provision guarantee agreement between the Parent, Grupa Azoty POLICE, the subsidiary Grupa Azoty POLYOLEFINS and Bank Pekao).

All of the above security interests have been created in favour of Bank Pekao, which acts as the security agent.

After the reporting date, i.e. by February 22nd 2022, all shareholders of Grupa Azoty POLYOLEFINS (including the Parent and Grupa Azoty POLICE) and Bank Pekao concluded amending agreements to the agreements for registered and financial pledges over all shares in Grupa Azoty POLYOLEFINS in order to convert the shares into book-entry form. The conversion was successfully carried out by Grupa Azoty POLYOLEFINS, and the new shares were duly entered in the register of shareholders of Grupa Azoty POLYOLEFINS by March 1st 2021.

Annex to Overdraft Facility Agreement with PKO BP

On October 21st 2020, the Parent, together with other Grupa Azoty Group companies, and PKO Bank Polski S.A. executed Annex 17 to the overdraft facility agreement of October 1st 2010 (as amended), concerning exclusion of Grupa Azoty Folie Sp. z o.o. w likwidacji (in liquidation) from the Overdraft Facility Agreement.

Annex 1 to Payments Servicing Agreement with Banco Santander S.A.

On November 3rd 2020, the Parent, its Key Subsidiaries and COMPO EXPERT GmbH executed Annex 1 to the Payments Servicing Agreement with Banco Santander S.A. of December 14th 2018, as specified in the agreement amending and superseding the Payments Servicing Agreement of September 23rd 2019, with a maximum limit of EUR 122m, to transfer the servicing of four Key Companies of the Grupa Azoty Group, i.e. the Parent, Grupa Azoty PUŁAWY, Grupa Azoty POLICE and Grupa Azoty KĘDZIERZYN, to a Polish member of the Santander Group, i.e. Santander Factoring Sp. z o.o. The Parent submitted to Santander Factoring Sp. z o.o. a notarised declaration of voluntary submission to enforcement, under the Annex, for up to 120% of the financing limit, i.e. up to EUR 146.4m, while retaining the existing declaration of submission to enforcement, submitted to the previous factor, i.e. Banco Santander, with the proviso that both factors may not jointly pursue claims under the two declarations of submission to enforcement for an amount higher than 120% of the permitted financing limit.

On November 17th 2020, Grupa Azoty S.A., its Key Subsidiaries and COMPO EXPERT GmbH executed Annex 2 to the aforementioned Agreement with Banco Santander S.A. and Santander Factoring Sp. z o.o. The purpose of the Annex was to provide a more precise definition of interest rates.

Annex to the intraday overdraft facility agreement

On November 30th 2020, Grupa Azoty PUŁAWY executed Annex 12 to the intraday overdraft facility agreement with Bank Pekao S.A. The annex extends the term of the facility until November 30th 2021 and increases the facility amount from PLN 2m to PLN 4m.

Changes to the definition of EBITDA in Grupa Azoty’s credit facility agreements

In order to introduce a harmonised amendment consisting in the exclusion from the definition of EBITDA (applicable to the net debt to EBITDA ratio) of one-off items resulting from potential recognition or reversal of impairment losses on non-current assets, the following Agreements and Annexes were signed:

 Agreement amending and restating the credit facility agreement

On December 23rd 2020, Grupa Azoty S.A. and PKO BP S.A., Bank Gospodarstwa Krajowego, Santander Bank Polska S.A., ING Bank Śląski S.A. and CAIXA Bank S.A., acting jointly as the “Lenders”, signed an agreement amending and restating the credit facility agreement of April 23rd 2015, amended by the amending and restating agreement of June 29th 2018 and December 16th 2019.

 Annex to the multi-purpose credit facility (MPCF) agreement with PKO BP

On December 23rd 2020, the Parent, together with Grupa Azoty Group companies, and PKO Bank Polski S.A. executed Annex 7 to the multi-purpose credit facility agreement of April 23rd 2015, as amended.

 Annex to Overdraft Facility Agreement (PLN OFA) with PKO BP

On December 23rd 2020, Grupa Azoty S.A., together with Grupa Azoty Group companies, and PKO Bank Polski S.A. executed Annex 18 to the PLN overdraft facility agreement of October 1st 2010, as amended.

 Annex to Overdraft Facility Agreement (EUR OFA) with PKO BP

On December 23rd 2020, the Parent, together with Grupa Azoty Group companies, and PKO Bank Polski S.A. executed Annex 2 to the EUR overdraft facility agreement of November 2nd 2018, as amended.

 Annexes to credit facility agreements with EBRD

On December 23rd 2020, the Parent and the European Bank for Reconstruction and Development executed Annex 4 to the credit facility agreement of May 28th 2015 and Annex 2 to the credit facility agreement of July 26th 2018.

 Annexes to credit facility agreements with EIB

After the reporting date, on January 12th 2021, the Parent and the European Investment Bank executed Annex 5 to the Financing Agreement of May 28th 2015, as amended (EIB Agreement I) and Annex 4 to the Financing Agreement of January 25th 2018 (EIB Agreement II).

Given the expiry on January 25th 2021 of the availability period of the credit facility granted under EIB Agreement II, Annex 4 to the above credit facility agreement also extended the availability period until January 25th 2022, concurrently extending the deadlines for delivery of selected projects under the investment and R&D programmes by one year.

Premium multi-purpose credit facility agreement with BNP Paribas Bank Polski S.A.

On December 29th 2020, the Parent and the Grupa Azoty Group companies entered into a PLN 240m premium multi-purpose credit facility agreement with BNP Paribas BP S.A. The funds made available under the credit facility, valid for three years from the date of the agreement, are to be used for opening and handling letters of credit and guarantees.

After the reporting date, on February 4th 2021 Amendment 1 to the aforementioned Agreement was signed in order to introduce an amendment consisting in the exclusion from the definition of EBITDA (applicable to the net debt to EBITDA ratio) of one-off items resulting from recognition or reversal of impairment losses on non-current assets.

3.5.3. Commercial contracts

Ilmenite purchase contract

On January 9th 2020, Grupa Azoty POLICE, a subsidiary of the Parent, signed an ilmenite purchase contract with Titania AS of Hauge and Dalane of Norway. The contract was concluded for a definite term from January 1st 2020 to December 31st 2022.

The value of the deliveries to be made under the Contract is estimated at approximately PLN 168m.

3.5.4. Insurance agreements

Trade credit insurance

In January 2020, Grupa Azoty PUŁAWY and Towarzystwo Ubezpieczeń Euler Hermes S.A. (“TUEH”) renewed two trade credit risk insurance contracts for the period from February 1st 2020 to January 31st 2021.

The contracts covered global sale receivables, with the exception of receivables from domestic sales of fertilizers. In December 2020, the Management Board of Grupa Azoty PUŁAWY approved the renewal of the contracts with TUEH, for the period from February 1st 2021 to January 31st 2022. Additionally, in 2020 Grupa Azoty PUŁAWY and TUEH renewed a Trade Credit Risk Insurance Contract for the period from July 1st 2020 to June 30th 2021. The insurance covers receivables from domestic sales of fertilizers.

Consolidated Group Insurance Programme with TUW PZUW

Under a Master Agreement for the Consolidated Property Insurance Programme (executed with TUW PZUW by Grupa Azoty Group companies, members of the Grupa Azoty Mutual Insurance Union operating within TUW PZUW, for a period of three years, i.e. from March 1st 2019 to February 28th 2022), policies were issued for the second year, i.e. from March 1st 2020 to February 28th 2021, covering the following lines of insurance:

 all-risk property insurance (ALLR),

 all-risk electronic equipment insurance (EEI),

 loss of profit insurance (ALLR (BI)),

 all-risk machinery insurance (MB).

On June 28th and June 30th 2020, TUW PZUW issued policies for another annual period from July 1st 2020 to June 30th 2021, for the following types of insurance:

 property in national and international transit insurance (CARGO),

 business and property owner’s liability insurance (OC).

The policies were issued for the above-mentioned companies included in the Grupa Azoty Mutual Insurance Union under the Master Agreements with TUW PZUW, as follows:

 in the case of the CARGO insurance, for a period of three years, i.e. from July 1st 2019 to June 30th 2022,

 in the case of the OC insurance, for a period of two years, i.e. from July 1st 2019 to June 30th 2021.

D&O insurance

On March 16th 2020, the Parent signed a directors and officers (D&O) liability insurance policy with PZU S.A. (providing insurance cover to the other Group companies), whereby the existing insurance cover was renewed for the period March 17th 2020 – September 16th 2021 (with the total sum insured of PLN 200m).

On September 30th 2020, Powszechny Zakład Ubezpieczeń S.A. issued an annex to the insurance agreement concerning the liability of the Company’s directors and officers, providing insurance cover also to the other Group companies.

Insurance of environmental risks

On August 4th 2020, the leading companies of the Grupa Azoty Group: the Parent, Grupa Azoty PUŁAWY, Grupa Azoty POLICE and Grupa Azoty KĘDZIERZYN extended the environmental liability insurance until September 15th 2021. This risk was insured with the Polish Branch of Colonnade Insurance Societe Anonyme.

Automobile Insurance

Pursuant to the motor insurance master agreement of December 18th 2019 (effective from January 1st 2020 to December 31st 2020, with a one-year extension option), the Grupa Azoty Group companies forming part of the Mutual Insurance Union with Towarzystwo Ubezpieczeń Wzajemnych PZUW confirmed the extension of their validity. On December 29th 2020, motor insurance policies were issued for the period from January 1st 2020 to December 31st 2021.

3.5.5. Project co-financing agreements

On February 26th 2020, the Parent received the final payment of PLN 286 thousand as funding under an agreement signed on September 2nd 2016 with the Minister of Development, acting as the Managing Authority, to finance the ‘Construction of Grupa Azoty’s R&D Centre in Tarnów’ project, co-financed from the European Regional Development Fund. The project is being implemented under the Smart Growth Operational Programme 2014–2020.

On June 19th 2020, the Parent and the National Centre for Research and Development signed an agreement to co-finance the ‘Specialist ammonium nitrate fertilizer products with functional additives’ project under Sub-Measure 1.1.1 of the Smart Growth Operational Programme 2014-2020 co-financed by the European Regional Development Fund. The value of the project is PLN 4,882.3 thousand, of which PLN 1,952.9 thousand will be covered by the grant.

On June 19th 2020, Grupa Azoty KĘDZIERZYN signed an agreement for co-financing of the project to develop an innovative process to obtain a range of ester for ionic liquid catalyst. Agreement value: PLN 5,873 thousand, co-financing amount: PLN 2,517 thousand.

On June 29th 2020, Grupa Azoty POLICE repaid the full outstanding amount of the loan granted under the loan agreement of November 5th 2013 with the National Fund for Environmental Protection and Water Management (NFOŚiGW) of Warsaw to finance the ‘Upgrade of ammonia synthesis process at Zakłady Chemiczne Police S.A.’ project.

On July 23rd 2020, the Parent and the county job centre in Tarnów signed an agreement for co-financing of employee training from the National Training Fund. The value of the project is PLN 230.5 thousand, of which PLN 181 thousand will be covered by the grant.

On July 29th 2020, Grupa Azoty KĘDZIERZYN signed an agreement for co-financing of the project to develop a technology for production of high-purity neopentyl glycoland hydroxipival aldehyde oxime with the use of low-value intermediate product and waste hydrogen stream. Agreement value: PLN 27,400 thousand, co-financing amount: PLN 11,675 thousand.

Grupa Azoty PUŁAWY relies on financing in the form of loans and grants under agreements executed in 2011–2020 with: The National Fund for Environmental Protection and Water Management, the National Centre for Research and Development, the Ministry of Investments and Development, and the Lublin Agency for the Support of Entrepreneurship.

In 2020, Grupa Azoty PUŁAWY’s bank account was credited with grants totalling PLN 2,599 thousand, including:

 PLN 2,342 thousand under agreements with the National Centre for Research and Development, and

 PLN 10 thousand under the agreement with the Agency for Restructuring and Modernisation of Agriculture, under the single area payment scheme for 2019 and 2020,

 PLN 247 thousand under the agreement with the Lublin Agency for the Support of Entrepreneurship.

In 2020, Grupa Azoty PUŁAWY entered into new co-financing agreements under the Smart Growth Operational Programme 2014–2020:

 agreement of August 4th 2020 for co-financing of the ‘Environmentally friendly slow-release fertilizers’ project; total co-financing granted to Grupa Azoty Zakłady Azotowe Puławy S.A. was PLN 1.4m; as at December 30th 2020, no amounts had been disbursed under that agreement,

 agreement of September 29th 2020 for co-financing of the ‘Environmentally friendly technology for the production of adipic acid through the oxidation of cyclohexanone’ project; total co-financing granted to Grupa Azoty Zakłady Azotowe Puławy S.A. was PLN 1.4m; as at December 30th 2020, no amounts had been disbursed under that agreement.

On October 5th 2020, Grupa Azoty KĘDZIERZYN and the National Centre for Research and Development signed an agreement on co-financing the project “New formulations of nitrogen-rich CRF/SRF fertilizers based on ammonium nitrate and biodegradable coatings” under the Smart Growth Operational Programme 2014–2020 co-financed by the European Regional Development Fund. Agreement value: PLN 5,475 thousand, co-financing amount: PLN 2,611 thousand.

On December 18th 2020, Grupa Azoty POLICE signed Annex 1 to the loan agreement with the National Fund for Environmental Protection and Water Management in Warsaw on co-financing (through a loan) of the project to upgrade steam generator OP-215 No. 2 to reduce NOx emissions. The Annex changes the schedule of works and expenditures, drawdowns and repayments.

3.5.6. Agreements between the Grupa Azoty Group companies

Loan agreement between Grupa Azoty PUŁAWY and Grupa Azoty CHORZÓW

On January 8th 2020, a loan agreement was signed whereby Grupa Azoty PUŁAWY (Lender) advanced a PLN 5m loan to Grupa Azoty CHORZÓW. The agreement provided for the disbursement of the loan in five tranches available until May 5th 2020. The loan bears interest at a variable rate based on 1M WIBOR plus margin. The disbursement of each tranche will be subject to a separate decision of the Lender. The loan is to be repaid in five instalments, from January 2023 to May 2023. The full loan amount was disbursed, in several tranches, in the first half of 2020.

On April 22nd 2020, the parties signed an agreement for the assignment of rights under an insurance policy as a security instrument under the loan agreement.

Annexes to loan agreement between Grupa Azoty PUŁAWY and SCF Natural Sp. z o.o.

Grupa Azoty PUŁAWY and SCF Natural Sp. z o.o. signed Annex 2 (on June 23rd 2020) and Annex 3 (on December 22nd 2020) to the loan agreement of May 7th 2014 to postpone the repayment dates for the loan instalments. Under the Annexes, the repayment date of the PLN 0.6m loan granted to SCF Natural Sp. z o.o. was postponed until December 31st 2023.

Loan tranche disbursement

Acting under the Intragroup Financing Agreement of April 23rd 2015, as amended:

 on January 27th 2020, the Parent disbursed to Grupa Azoty KĘDZIERZYN a tranche of PLN 19,400 thousand of the loan to finance projects implemented at the Fertilizers Production Unit,

 on July 27th 2020, the Parent disbursed to Grupa Azoty KĘDZIERZYN a tranche of PLN 14m of the loan to finance projects implemented at the Fertilizers Production Unit,

 on July 31st 2020 the Parent disbursed to Grupa Azoty POLICE a PLN 51,420 thousand tranche under the loan for refinancing the PLN 90m loan agreement concluded on November 5th 2013 with the National Fund for Environmental Protection and Water Management (NFOŚiGW) to finance the ‘Upgrade of ammonia synthesis process at Zakłady Chemiczne Police S.A.’ project;

 on August 26th 2020, the Parent disbursed to Grupa Azoty POLICE a PLN 249,047 thousand tranche, and on October 9th 2020 – a PLN 48,953 thousand tranche under the loan to finance the Polimery Police project (PLN 298,000 thousand in total);

 on October 16th 2020, the Parent disbursed to Grupa Azoty KĘDZIERZYN further tranches of the loan to finance the following investment projects: upgrade of the ammonia liquefaction unit at the Ammonia Department Cooling Centre (PLN 16m) and upgrade of the partial combustion unit at the Ammonia Department (PLN 7m).

Disbursement of loan tranches to Grupa Azoty POLYOLEFINS

Under the PLNBłąd! Nieprawidłowy odsyłacz typu hiperłącze. 344,464 thousand loan agreement concluded on May 31st 2020 between the Parent and Grupa Azoty POLYOLEFINS, the Parent disbursed to Grupa Azoty POLYOLEFINS:

 on August 4th 2020 – a tranche of PLN 18,430 thousand,

 on August 26th 2020 – a tranche of PLN 220,853 thousand,

 on October 9th 2020 – a tranche of PLN 105,181 thousand.

As of December 31st 2020, as a result of commission and interest compounding, the loan principal is PLN 355,120 thousand.

Under the PLN 388,438 thousand loan agreement concluded on May 31st 2020 between Grupa Azoty POLICE and Grupa Azoty POLYOLEFINS, Grupa Azoty POLICE disbursed to Grupa Azoty POLYOLEFINS:

 on August 4th 2020 – a tranche of PLN 20,783 thousand,

 on August 26th 2020 – a tranche of PLN 249,047 thousand, and

 on October 9th 2020 – a tranche of PLN 118,608 thousand.

As of December 31st 2020, as a result of commission and interest compounding, the loan principal is PLN 400,454 thousand.

The above tranches were disbursed to cover expenditure on the Polimery Police project.

Loan agreement between the Parent and COMPO EXPERT

On December 7th 2020, the Parent and COMPO EXPERT (the Borrower) signed a EUR 60m long-term loan agreement to partially refinance COMPO EXPERT International GmbH’s debt outstanding as a daily limit under the EUR-denominated Cash Pooling Agreement (EUR 100m, available until March 31st 2021) and/or the Borrower’s debt under the EUR-denominated Cash Pooling Agreement, resulting from early repayment of COMPO EXPERT International GmbH’s debt under a daily limit in the EUR-denominated Cash Pooling Agreement in order to adapt the financing model to the structure of the Borrower’s Group and to the market costs of long-term borrowing.

The interest rate on the loan is equal to the interest rate applicable to tranche A in the euro under the Parent’s syndicated credit facility agreement, increased by an intragroup margin and surety commissions, and using a repayment schedule based on and adjusted to the availability period of the credit facility, i.e. 65% of the loan amount in 18 quarterly instalments payable from February 2022 to May 2025, with the last instalment equal to 35% of the loan amount payable on June 29th 2025 (balloon payment).

The EUR 60m loan was disbursed on December 14th 2020 and used as intended.

3.5.7. Sureties and guarantees

Material sureties issued

No material sureties were issued in the reporting period.

Sureties received

Material sureties received

Source: Company data.

The total amount of all sureties received by the Grupa Azoty Group companies in 2020 was PLN 8,322 thousand, including:

 with a unit value of up to PLN 500 thousand – PLN 180 thousand,

 with a unit value above PLN 500 thousand – PLN 8,142 thousand.

Guarantees

Guarantees provided

The total amount of all guarantees issued at the request of the Grupa Azoty Group companies in the reporting period was PLN 12,367 thousand.

Corporate guarantees provided in 2020 and effective as at December 31st 2020

Source: Company data.

Material guarantees provided

Source: Company data.

Guarantees received

The total amount of all guarantees received by the Grupa Azoty Group companies in the reporting year was PLN 355,391 thousand, including

 with a value of up to PLN 500 thousand – PLN 38,095 thousand,

 with a value above PLN 500 thousand – PLN 317,296 thousand.

Material guarantees received

Source: Company data.

Letters of credit

In the period from January 1st to December 31st 2020, nine documentary letters of credit were opened on instruction from Grupa Azoty CHORZÓW, for a total amount of USD 538.4 thousand.

The beneficiary of the letters of credit is a supplier of magnesium sulfate heptahydrate. As at December 31st 2020, the outstanding credit balance under the letter of credit was PLN 0.

On March 11th 2020, an annex was executed to a letter of credit issued on the instruction of Grupa Azoty KĘDZIERZYN on April 29th 2019 for a total amount of EUR 2,251 thousand. The letter of credit was issued under the multi-purpose credit facility agreement concluded with PKO BP S.A., and the instrument serves as security for the equipment supplied. The beneficiary of the letter of credit is a supplier of catalysts.

3.6. Significant events

3.6.1. Implementation of the Polimery Police project

In 2020, Grupa Azoty POLYOLEFINS (a special purpose vehicle) continued to implement Polimery Police, the Grupa Azoty Group’s key investment project, comprising the construction of propylene and polypropylene units with auxiliary systems and associated infrastructure, as well as a port terminal with feedstock storage facilities. The general contractor for the project is Hyundai, selected in a tender procedure. The start of commercial operation is scheduled for the first quarter of 2023.

Progress of construction work

As at March 31st 2021, the overall material progress under the EPC contract was 47%. Material progress is understood as design, procurement and supply; delivery of equipment with long lead times; applications for necessary administrative permits and decisions; structural work.

On September 29th 2020, the process of securing building permits for the Polimery Police project was completed. All 22 building permits required for the implementation of the Polimery Police project had been obtained.

Handling and storage terminal (marine gas terminal, “HST”)

On January 29th 2020, the Management Board of Grupa Azoty POLYOLEFINS and Przedsiębiorstwo Robót Czerpalnych i Podwodnych sp. z o.o. signed a contract for the ‘Planning and performance of dredging work to increase depth from 10.5 to 12.5 metres (within the port terminal on the Police channel) as part of the project’.

On February 22nd 2021, Annex 1 to the contract was signed, changing the value and scope of the project.

In the reporting period, the foundations for propane and ethylene tanks were laid. The installation of bottom slabs of three tanks was also completed. In addition, assembly work is under way on the outer shell of the propane tanks and the ethylene tank. Integration of the roof structure of the propane tank and the roof of the ethylene tank has been completed. Once the construction of the outer shell is completed, Hyundai will proceed to the operation of lifting the roof and begin the installation of internal tanks. Construction of buildings forming part of the HST, including the electrical substation, control room and pumping station, is continuing. Installation of above-ground pipelines on the pipe bridges in the area of the HST facilities is under way. Concurrently, hydraulic engineering work is underway in the offshore part of the HST subproject: construction of the wharf is ongoing and the dredging of the part of the harbour channel included in the Polimery Police project has started (in the reporting period, the dredging of the Police channel to 10.5 metres was completed – project implemented by the Maritime Office in Szczecin).

Foundation work is continued and the assembly of steel structures, including pipe bridges, is in progress.

Main construction site (PDH unit, PP unit with a logistics base, auxiliary systems)

In the reporting period, hydrogen, process steam, demineralised water, and natural gas connections as well as DSM (Deep Soil Mixing) columns were installed.

Foundation work is underway throughout the main construction site and the assembly of steel structures for pipelines (pipe bridges) is in progress. Prefabrication of steel structures for the main pipe bridge has been completed.

The construction of a furnace, which is part of the project’s critical path, for the PDH unit has commenced.

In the coming months, the deliveries of equipment and apparatus to the construction site will continue. By the date of issue of this Report, all propylene storage tanks, 110kV transformers necessary for the operation of the future power system, propylene production reactors and a propane-propylene splitter, one of the key equipment items at the PDH, had already been delivered.

Currently, blending silos, prefabricated at the construction site, are being placed on foundations at the site. Preparations to place 30 storage silos in a vertical position at the Propylene Production Unit are under way.

Financing of the project

On May 31st 2020, the Parent, Grupa Azoty POLICE, Grupa Azoty POLYOLEFINS, Grupa LOTOS, Hyundai, and KIND signed agreements for the financing of the Polimery Police project. Grupa LOTOS agreed to invest in the Project a total of PLN 500m by: (i) making a cash contribution of PLN 300m to cover the increased share capital of and subscribe for new shares in Grupa Azoty POLYOLEFINS and (ii) providing Grupa Azoty POLYOLEFINS with a subordinated loan of PLN 200m.

Hyundai agreed to invest a total of USD 73m in the Polimery Police project by making a cash contribution to cover the increased share capital of and subscribe for new shares in Grupa Azoty POLYOLEFINS, while KIND agreed to invest a total of USD 57m in the Project by (i) making a cash contribution of USD 5m to cover the increased share capital of and subscribe for new shares in Grupa Azoty POLYOLEFINS and (ii) providing Grupa Azoty POLYOLEFINS with a subordinated loan of USD 52m.

The two Korean companies will invest a total of USD 130m in the Polimery Police project.

In addition, on May 31st 2020 a credit facilities agreement was concluded with a Syndicate comprising Alior Bank S.A., Bank Gospodarstwa Krajowego, Bank Ochrony Środowiska S.A., Bank Polska Kasa Opieki S.A. (the bank coordinating the Polimery Police project financing transaction), BNP Paribas Bank Polska S.A., the European Bank for Reconstruction and Development, Industrial and Commercial Bank of China (Europe) S.A. Poland Branch, mBank S.A., Powszechna Kasa Oszczędności Bank Polski S.A., Powszechny Zakład Ubezpieczeń S.A., Powszechny Zakład Ubezpieczeń na Życie S.A., PZU Fundusz Inwestycyjny Zamknięty Aktywów Niepublicznych BIS 2 and Santander Bank Polska S.A., as well as ICBC Standard Bank PLC. As a result, the Syndicate will advance to Grupa Azoty POLYOLEFINS:

 a term loan facility of up to EUR 487.8m,

 a term loan facility of up to USD 537.7m,

 a VAT facility of up to PLN 150.0m,

 a working capital facility of up to USD 180.0m.

On August 3rd 2020, the District Court for Szczecin-Centrum of Szczecin, 13th Commercial Division of the National Court Register, registered an increase in the share capital of Grupa Azoty POLYOLEFINS. The share capital of Grupa Azoty POLYOLEFINS was increased from PLN 467,339,000 to PLN 599,283,310.

On October 7th 2020, an intercreditor agreement (the “Intercreditor Agreement”) was concluded between the Parent, Grupa Azoty POLICE, Grupa Azoty POLYOLEFINS, the Syndicate, as well as ICBC Standard Bank PLC (as an original security participant), Hyundai, KIND, and Grupa LOTOS. The conclusion of the Intercreditor Agreement was another step in the process designed to secure the availability of senior debt financing for the implementation of the Polimery Police project.

In addition, in accordance with the provisions of the Credit Facility Agreement, on October 7th 2020 Grupa Azoty POLYOLEFINS and other obligors executed agreements and other documents providing, among other things, for the creation of the following security interests for the benefit of the Syndicate: registered and financial pledges over all shares in Grupa Azoty POLYOLEFINS held by the Parent and Grupa Azoty POLICE, registered floating charges over a pool of movables and property rights forming part of the business of the subsidiary Grupa Azoty POLYOLEFINS, registered and financial pledges over receivables from bank accounts held by Grupa Azoty POLYOLEFINS, power of attorney over bank accounts held by Grupa Azoty POLYOLEFINS, contractual mortgage over property, execution by Grupa Azoty POLYOLEFINS, the Parent and Grupa Azoty POLICE of notarial deeds on submission to enforcement, security assignments of rights and claims under insurance and other relevant contracts of Grupa Azoty POLYOLEFINS, as well as security assignments of rights and claims under subordinated loans advanced to Grupa Azoty POLYOLEFINS (including subordinated loans from the Parent and Grupa Azoty POLICE) and the support loan provision guarantee agreement between the Parent, Grupa Azoty POLICE, the subsidiary Grupa Azoty POLYOLEFINS and Bank Pekao).

For details on the financing agreements, see Section 3.5.2. Loan agreements and annexes

On November 16th 2020, the Extraordinary General Meeting of Grupa Azoty POLYOLEFINS passed a resolution to issue new shares and increase the company’s share capital to PLN 922,968,300 (the share capital increase was registered on November 27th 2020). Under the agreements executed on May 31st 2020, the new shares were subscribed for by Hyundai, KIND and Grupa LOTOS. As a result, Grupa Azoty POLICE holds 34.41% of the shares, the Parent – 30.52%, Grupa LOTOS – 17.3%, Hyundai – 16.63%, and KIND – 1.14%.

For details on the financing agreements, see Section 1.3. Changes in the organisational structure.

In December 2020, the subordinated loans provided by LOTOS (PLN 200m) and KIND (USD 52m) were received.

On February 25th 2021, Grupa Azoty POLYOLEFINS received a confirmation from Bank Pekao S.A. that the conditions precedent under the Credit Facilities Agreement had been fulfilled. As a result, Grupa Azoty POLYOLEFINS may now, subject to specific conditions for the first drawdown on each Facility and additional conditions for each disbursement, which do not differ from standard terms and conditions applicable to similar financing arrangements, apply for disbursement of funds under the Credit Facilities to finance the Polimery Police project. Thus, the last stage of the process to raise debt financing for the project has been successfully completed.

Other material information

On January 17th 2020, the Office of Competition and Consumer Protection (UOKiK) issued a decision approving a concentration consisting in Grupa Azoty, Hyundai, KIND and Grupa LOTOS establishing an undertaking which will operate under the name Grupa Azoty POLYOLEFINS. A request for the decision was submitted on December 23rd 2019.

On May 7th 2020, Grupa Azoty POLYOLEFINS and Hyundai signed annex 1 (“Annex 1”) to the EPC contract for the Polimery Police project, dated May 11th 2019 (the “EPC Contract”). Annex 1 provided for amendments to the scope of work to be performed by Hyundai, amendments to reflect the current status of optional work under the EPC Contract, amendments to align the EPC Contract with the amended terms of the licence agreement concerning the UNIPOL® process for the polypropylene unit, amendments with respect to the insurance cover and implementation schedule required by the providers of financing for the Polimery Police project, as well as other formal changes. Annex 1 did not change the amount of payment due to Hyundai or the Project’s key completion deadlines.

On October 9th 2020, Grupa Azoty POLYOLEFINS and Hyundai signed annex 2 (“Annex 2”) to the EPC contract for the Polimery Police project, dated May 11th 2019 (the “EPC Contract”), in response to the EPC Contract amendment proposals submitted by the General Contractor in connection with, inter alia, the effect of the COVID-19 pandemic on the implementation of the Polimery Police project. The annex provides, among other things, for a EUR 33.2m increase in the Contractor’s remuneration and a three-month extension of the timescale for the Polimery Police project.

3.6.2. Information on the effects of the COVID-19 pandemic

In connection with the Act on Special Masures to Prevent, Counteract and Combat COVID-19, Other Infectious Diseases and Related Crisis Situations (Dz.U. of 2020, item 374, as amended) and the pandemic announced by the World Health Organisation due to the spread of coronavirus SARS-CoV-2 which causes the COVID-19 disease, the Group has taken immediate measures to protect its business against the consequences of the pandemic. In order to enable the Parent and other Group companies to operate in a possibly smooth manner, procedures have been put in place to ensure prompt response by relevant units. In addition, the Grupa issued instructions to mitigate the risk of infection among its employees, including in particular:

 detailed instructions and guidelines on monitoring the health of the Group’s employees and the health of trading partners’ employees who come in physical contact with the Group’s employees,

 reducing the number of meetings as well as domestic and foreign business travel, and using teleconferencing, videoconferencing and instant messengers as much as possible,

 instructions to enable remote work to the extent it does not disrupt the work of individual organisational units,

 instructions to provide the Group employees with additional personal protection and hygiene supplies.

Although the pandemic necessitated changes to the existing work systems, Grupa Azoty’s headcount remained relatively unchanged in 2020.

The Group companies also monitor the market situation with respect to sales of products and supplies of key raw materials and feedstock, as well as the situation on financial markets in the context of their currency and interest rate risk exposures. Measures of this type have been taken at the Parent and all its subsidiaries, including the COMPO EXPERT Group, with respect to operations at all locations where the companies are present.

The descriptions and amounts given below reflect the general impact of these factors on the Company’s and the Group’s operations.

Plastics

The Grupa Azoty Group's operations in the Plastics segment are directly related to the electrical engineering and automotive industries, where the effects of the pandemic have been the strongest. Administrative restrictions introduced at the end of March 2020 to limit the spread of COVID-19 affected demand and caused a drop in caprolactam and polyamide prices, both on the European and Asian markets. Before the demand for Grupa Azoty products declined, in March 2020 production activities were discontinued by certain manufacturers in all segments of the plastics value chain. As a result of developments in the market environment, in the second quarter of 2020 the Plastics Segment reported the sharpest decline in revenue (down 43% year on year), due mainly to the impact of the COVID-19 pandemic and disruption to the demand and supply balance on the market. After a traditional slowdown in summer months, a gradual recovery was observed. Since the third quarter of 2020, the pandemic-related situation in the plastics business has improved. The easing of the restrictions imposed in late March 2020 helped to further improve the situation. There was a slight recovery in both the feedstock and product markets. The last months of 2020 saw demand pick up further, justifying a bit more optimistic outlook for 2021. Nevertheless, the situation in the Plastics segment is still being affected by the generally tough economic climate prevailing in countries which are the main markets for its products and depends on further implementation of measures to contain the spread of COVID-19 infections.

Despite the improvement seen on the market over the fourth quarter of 2020, revenue was down 9% year on year. In 2020, full-year revenue went down 20% on the previous year.

Agro Fertilizers

The COVID-19 pandemic had no material effect on the delivery of the production and contract sale schedules in 2020.

In the fourth quarter of 2020, revenue fell by approximately 4% year on year despite higher sales volumes, due to lower prices. The economic situation improved on account of the prices of basic grains, which increased by about 16%–20% year on year.

In 2020, the segment revenue fell 4.5% on the previous year.

Chemicals

In April 2020, the prices of oxo products fell reflecting a downtrend in propylene prices and lower market demand caused by the COVID-19 situation. After a period of price declines, early June 2020 saw a recovery in the market of alcohols and plasticizers, accompanied by a price increase driven by higher prices of propylene. Demand in the third qurater of 2020 rebounded on the back of supply factors in Europe and America and customers’ restocking activity. Following maintenance shutdowns in the summer, demand for OXO alcohols began to rise gradually.

Revenue generated in the fourth quarter of 2020 from sales of oxo alcohols was 37% up year on year. The full-year revenue was 2% higher compared with 2019.

At the beginning of the pandemic, there was also a drop in melamine demand and prices, with the first signs of recovery in May 2020. In the fourth quarter of 2020, revenue from melamine sales was 2% lower year on year. The full-year revenue was 20% lower compared with 2019.

It is expected that melamine prices will grow in 2021, driven by strong demand and the need to restore margins.

In the titanium white area, no significant impact of COVID-19 was identified in relation to the scale of the Grupa Azoty Group’s business, despite a marked decline in demand on certain markets during the initial stage of the pandemic. In the second half of 2020, demand for titanium white gradually increased, reaching very high levels at the end of 2020, unusual for this time of year.

The crisis related to the spread of the COVID-19 pandemic also affected the RedNOx product market. Lower fuel consumption supressed demand for NOXy urea solution (the main product in this business area).

In other industries, such as power plants or glass, paper and cement manufacturers, where the segment’s products are also used, revenue was also lower. Sales decline in the RedNOx market of up to 20%, recorded mainly in the second quarter of 2020 (quarter on quarter), was consequent upon the global situation and COVID-19 crisis. For the remainder of 2020, the pandemic seemed to have no significant impact on RedNOx product sales.

The Grupa Azoty Group is taking steps to minimise the impact of the COVID-19 pandemic on the Group’s operations, for instance by using solutions available on the market to support working capital management, optimise the costs of feedstock procurement and adjust the production volumes to sales opportunities. Hedging against risks associated with a deteriorating business environment was a priority also in the internal control area. Measures taken focused on the management of receivables, inventories and liquidity.

Having recorded revenue declines, the Parent and some of its subsidiaries took steps to benefit from the wage subsidy scheme under the Guaranteed Employee Benefits Fund. The amount of support obtained in 2020 by the Grupa Azoty Group was close to PLN 65m. The funds were transferred to individual Group companies mainly in the third quarter of 2020. The pandemic did not significantly affect the deadlines for implementation of major investment projects carried out by the Grupa Azoty Group in 2020. In the case of the Polimery Police project, due to the COVID-19 pandemic and other factors, it was agreed that the General Contractor’s remuneration would be increased by EUR 33.2m and the project timescale extended by three months.

It should be noted that the Group’s financial condition is stable. The Group also has additional sources of liquidity, namely cash held, whose amount as at December 31st 2020 was PLN 924m (including cash held as bank deposits), undrawn credit facilities, whose amount as at December 31st 2020 was PLN 2,743m, and available reverse factoring limit of PLN 7m, adding up to a total of PLN 3,674m.

In the opinion of the Parent’s Management Board, the preventive measures taken have minimised the economic impact of the COVID-19 pandemic and mitigated the risk to business continuity, but the observed impacts of the pandemic are bound to have a materially adverse short- and medium-term effect on the operations of the Grupa Azoty Group, especially in the Plastics and Chemicals segments. However, these effects will not jeopardise the Group’s market position, its liquidity or ability to pursue strategic investment projects.

3.6.3. Other significant events

Launch of a granulated fertilizer unit

In July 2020, Grupa Azoty PUŁAWY commenced the precommissioning and commissioning of the facility for production of ammonium nitrate-based granulated fertilizers. The project’s budget was PLN 430m.

The combined production capacity of the two new lines is 2,600 tonnes of fertilizers per day (up to 820,000 tonnes per year): the granulated ammonium nitrate (AN – 32% N) line and the calcium ammonium nitrate (CAN – 27% N) line have the daily production capacities of 1,200 tonnes and 1,400 tonnes, respectively.

The mechanical granulation process used in the new unit will support the production of fertilizers with a much more diversified composition compared with the high-tower granulation technology used previously. Both the production process and transport of such fertilizers are also more environmentally friendly and safer.

Granulated ammonium nitrate and calcium nitrate will meet the growing demand from large-scale agriculture.

Apart from the production lines, the ‘Facility for production of granulated fertilizers based on ammonium nitrate’ project included the construction of logistics and auxiliary facilities for unloading and processing of raw materials, as well as packaging and storage of finished products.

 

Contractor selection for the construction of a peak-load and reserve boiler house

On August 18th 2020, Grupa Azoty KĘDZIERZYN selected the consortium of Polimex Energetyka Sp. z o.o. and Polimex Mostostal S.A. as the contractor to execute the ‘Construction of a gas-fired peak-load and reserve boiler house at Grupa Azoty Zakłady Azotowe Kędzierzyn S.A.’ project. The construction of a new boiler house is an important element of the New Energy Concept, whose key envisaged outcome is the use of heat generated in production processes to make electricity and other energy carriers.

The turnkey contract was executed on November 5th 2020. The investment project is planned to be completed by the end of 2023. The value of the contract is PLN 91,568.6 thousand.

 

Launch of two pilot units at Grupa Azoty S.A.

In a move to prepare the diversification of Grupa Azoty’s product portfolio, two pilot plants were launched: a 3D printing material production plant which will make it possible to launch commercial sales of FDM technology products manufactured at the 3D Printing Materials Centre and offered under the Tarfuse^® brand, providing a basis for launch of production on an industrial scale in 2023, and a humic acid production plant for the development of environmentally-friendly agriculture, with launch of sales planned for 2021.

 

The basic raw material for the production of filaments is the high-quality polyamide 6 and its modified varieties produced at Grupa Azoty S.A. The Tarnów-based Centre will also launch a 3D printing campaign targeted at businesses, scientists, and enthusiasts of incremental technologies.

With the launch of sales of FDM (fused deposition modelling) 3D printing filaments, the R&D programme pursued by Grupa Azoty since 2017 entered the commercialisation phase. Under the Tarfuse^® brand, Grupa Azoty offers basic, industrial-grade and speciality filaments. Work is also under way to develop speciality polymer powders for SLS printing as well as light-curing polymers (photopolymers) for the SLA and DLP technologies. The 3D Printing Materials Centre, engaged in the research into and production of filaments, is located at the Research and Development Centre in Tarnów.

An online store with filaments for 3D printers was launched in early July 2020.

Going concern status of Zakłady Azotowe Chorzów S.A.

Following a notification made by the Management Board of Grupa Azoty Zakłady Azotowe Chorzów S.A. in accordance with Art. 397 of the Commercial Companies Code to the effect that that company’s most recent balance sheet showed a loss exceeding the aggregate of the company’s capital reserve, statutory reserve funds and one-third of the share capital, the Extraordinary General Meeting of Zakłady Azotowe Chorzów S.A. passed resolutions on the company’s continued existence as a going concern.

The resolutions were based on the Development Plan for 2020–2022 prepared by the Management Board of Grupa Azoty Zakłady Azotowe Chorzów S.A.

Implementation of a new communication system in the fertilizers area

In September 2020, the Parent officially implemented a new communication system for the Agro segment. The rebranding effort seeks to create a modern and recognisable brand of products projecting a consistent image that will also address challenges faced by agriculture in relation to the European Green Deal. The effort marks another step towards business integration of the Grupa Azoty Group companies.

Events after the reporting date

Execution of a cooperation agreement regarding integrated project LIFE EKOMAŁOPOLSKA

On February 23rd 2021, the Parent and the Małopolska Region signed an agreement on cooperation in implementing the integrated project LIFE EKOMAŁOPOLSKA.

In the Agreement, the parties defined the main principles of cooperation in implementing a climate protection policy and the integrated project LIFE EKOMAŁOPOLSKA – “Implementation of the Regional Action Plan for Climate and Energy”, financed with a LIFE financial instrument and European Union funds.

The Company declared itself to:

 strive to achieve climate neutrality in its production processes and activities carried out in the Małopolska Region by 2050,

 implement projects supporting the energy transformation process, especially those involving the use of renewable energy sources, and reduction of greenhouse gas emission by 2030,

 seek to decarbonise industrial activity and minimise the carbon footprint,

 develop green ammonia and green hydrogen technologies,

 implement R&D projects that will contribute to the achievement of environmental and climate objectives set out in the European Green Deal,

 provide expertise and support for the purposes of implementing the integrated project LIFE EKOMAŁOPOLSKA – “Implementation of the Regional Climate and Energy Action Plan for the Małopolska Region”.

The Małopolska Region declared that it will use its own funds and resources in order to meet the Project requirements and achieve its main objectives.

The Parties to the Agreement represented that they will collaborate in developing/preparing assessments, expert opinions and plans regarding transformation of the energy-intensive industry in the Małopolska Region, which are being drawn up as part of the LIFE EKOMAŁOPOLSKA Project.

The Agreement does not provide for any financial flows between its parties and no transfer of funds will take place as part of the cooperation.

The Agreement was made for an indefinite period and until the completion of the LIFE EKOMAŁOPOLSKA Project – “Implementation of the Regional Action Plan for Climate and Energy”, assuming that the Project will be completed in December 2030.

Either party may withdraw from the Agreement by giving written notice to the other party.

The Parent, being aware of air pollution and climate change as well as the inevitable energy transition in industry and the economy as a whole, wishes to engage in all initiatives conducive to achieving climate and environmental goals. One of the initiatives taken is the above project of the Małopolska Region.

Fulfilment of conditions to Financial Close

On February 25th 2021, Grupa Azoty POLYOLEFINS was informed by Bank Polska Kasa Opieki S.A., as the Facility Agent, of the receipt (in form and content satisfactory to the Lenders) of all necessary documents and/or information constituting conditions precedent to Financial Close under the Credit Facilities Agreement, as amended.

Financial Close was thus achieved, enabling Grupa Azoty POLYOLEFINS to apply for disbursement of funds under the credit facilities, subject to the fulfilment of specific conditions for the first disbursement of each credit facility and additional conditions for each subsequent disbursement, similar to conditions commonly applied with respect to financing of this type.

4. Growth strategy and policy

4.1. Strategy and growth directions

On May 10th 2017, the Management Board of the Parent passed a resolution to update the Grupa Azoty Group Strategy for 2013−2020. On the same day, the Supervisory Board of the Parent passed a resolution to approve and adopt the updated Strategy.

The documents present to the stakeholders the Group’s key strategic objectives in the main product areas with respect to innovations, operations, sales and financial policy. The strategy also defines the corporate management objectives and methodology applied across the Group.

The Group stated that it will deploy state-of-the-art, comprehensive chemical industry solutions that meet stakeholder expectations. The Group’s activities will serve as a catalyst for growth of Poland’s chemical sector and related industries and a springboard for expansion of the product chain in the domestic chemical sector (in particular by building a feedstock base for propylene, polypropylene and their processing products), and will position the Grupa Azoty Group as the leader of R&D and innovation in Poland’s chemical sector and associated industries. By harnessing innovative mechanisms, the Group will revamp its revenue structure by moving towards high-margin and low-tonnage chemicals.

Mission and Vision of the Grupa Azoty Group

Source: Company data.

Strategic growth directions

Changes in economic conditions and in the Grupa Azoty Group’s immediate environment have necessitated a revision to its previous strategic objectives to better align them with the current market landscape.

The Grupa Azoty Group will pursue growth in four areas representing the main challenges for Poland’s top chemical producer:

 Complete the Group consolidation process

 Reinforce leadership in agricultural solutions in Europe

 Strengthen the second operating pillar by expanding non-fertilizer business

 Develop and implement innovations to drive growth of the chemical industry

Strategic growth directions

Source: Company data.

Complete the Group consolidation process

Launched in 2013, the Grupa Azoty Group consolidation process can still offer potential further gains. In order to improve the management efficiency within the Group, further integration of processes and consolidation of such functions as sales, procurement, logistics, finance and IT are being pursued.

Reinforce leadership in agricultural solutions in Europe

To preserve its strong position on the fertilizer markets at home and regionally, the Group is increasing control over retail channels, looking for opportunities to grow and improve the efficiency of its production processes. In response to changing expectations of its key customers, the Group is modifying its product range to better meet the needs of modern farming, also by offering auxiliary services to farmers.

Strengthen the second operating pillar by expanding the non-fertilizer business

In order to diversify its revenue sources and become less dependent on business cycles in agriculture, the Grupa Azoty Group will step up its efforts to expand the non-fertilizer business lines, with propylene and polypropylene production in the plastics segment as the key area for growth.

Develop and implement innovations to drive the industry’s growth

With its own unique expertise in agro-products, the Grupa Azoty Group is an active participant in research, development and innovation projects in Poland, particularly those focused on developing and marketing advanced, profitable, speciality fine chemicals.

Key development directions in the areas supporting Grupa Azoty Group’s business

The Strategy provides for reviewing further centralisation of the Energy segment. The extent of centralisation depends on the potential costs and benefits, and the ability to ensure energy security of the Group’s individual plants.

As regards Logistics, the Strategy provides for process consolidation across Grupa Azoty Group’s plants based on standardised IT systems, enabling supervision of processes and centralisation of logistics information, and thus effective management and improvement of efficiency. In the long term, full process and IT integration will be the basis for transferring logistics to the Shared Services Centre.

In the area of logistics assets management, Grupa Azoty Group’s strategy provides for developing and implementing a railway asset management model and increasing the use of marine assets in Police and Gdańsk. In addition, analytical and design work was planned to be carried out to explore the potential of the Oder River Waterway.

The objective of the measures taken by the Grupa Azoty Group in the Asset Management area is to achieve optimum efficiency, including by harmonising operational planning and production processes for businesses at the Group level, and by standardising operational and cost efficiency reporting.

With a view to improving safety (of people, environment and processes), reducing the failure rate and improving the availability rate, the Grupa Azoty Group is taking steps to optimise the management of non-current assets.

To achieve cost and process synergies and better align IT support with key business processes, the Grupa Azoty Group is focusing on further streamlining of the IT environment.

The Parent’s Management Board launched the project “Preparation of the Grupa Azoty Group’s 2021–2030 Strategy”. In 2020, work on strategy documentation under the project was underway.

4.2. Growth prospects and market strategy

Investment efforts will focus on continued improvement of the efficiency of current production activities in the Agro Fertilizers segment and strengthening of the second operating pillar by expanding the non-fertilizer business. Measures are being implemented to further improve the efficiency of production activities, including to boost energy efficiency and further extend the product chain. Projects are also underway to mitigate the environmental impact of production activities and improve the safety of production units’ operation. Other important investment activities include implementation of projects related to adaptation of the Energy segment to the requirements of BAT conclusions and projects related to modernisation of logistics and inventory management.

Agro Fertilizers

Grupa Azoty Group’s growth strategy for Agro Fertilizes focuses on extending the value chain to include more speciality products for specific crops and customers, and on enhancing the efficiency of its production processes. The efforts are mainly focused on tailoring the product portfolio to the needs of large-scale farms, while maintaining a strong position among small farmers. The Grupa Azoty Group is also expanding its offering with specialised precision farming services.

In order to secure a market outlet for its fertilizer products, the Grupa Azoty Group is taking steps to increase control over both domestic and foreign sales channels for its products for agriculture. The Group seeks to increasingly use channels allowing it to deal directly with end consumers and grow sales of products complementary to fertilizers.

By consolidating its production assets, the Grupa Azoty Group acts on market opportunities to reinforce its position in the European fertilizer market.

Plastics

In Plastics, the Group’s strategy focuses on extending the value chain to include more specialty products, expanding into new business fields, and improving operational efficiency.

The new polyamide unit brought on stream in Tarnów has enabled the Group to fully balance caprolactam supply with demand for Grupa Azoty’s polyamide production and to focus on polyamides and their derivatives that are further down the value chain and offer stronger market potential. The new plant produces polyamides in a full viscosity range, suitable for a broader spectrum of applications.

In line with its strategy, the Grupa Azoty Group will avoid direct competition with its customers down the polyamide product chain. In addition, the Group is seeking out opportunities to expand into advanced polyamide-based polymers, polymer additives, and engineering plastics.

OXOplast

The Grupa Azoty Group’s strategy for the OXO business focuses on securing access to its own sources of raw materials, extending the value chain to include more specialty products, and improving operational efficiency.

In order to satisfy its own propylene demand and create opportunities for growth in a new value chain, the Group is carrying out a project to build propylene (PDH) and polypropylene production units in Police.

To better align its offering with current market expectations and regulatory requirements, non-phthalate, organic and specialty plasticizers are being added to the product portfolio. In addition, the Grupa Azoty Group sees growth opportunities in extending its product chain and processing of aldehydes into specialty products.

Titanium white and melamine

The Group’s strategy for Titanium White and Melamine is to improve the efficiency of existing production units by implementing upgrades and removing bottlenecks, while extending the value chain to include polymer additives.

Raw materials strategy

The Grupa Azoty Group is dependent on external suppliers. Raw materials and energy commodities account for more than 60% of total operating expenses.

Strategic tasks in the area of raw materials are:

 ensuring stable supplies,

 further consolidation of procurement processes,

 addition of new product categories.

The Grupa Azoty Group effectively leverages its competencies in managing natural gas supplies and continues signing gas supply contracts providing for price formulae based on market prices of gas.

Continuity of supplies is maintained through long-term contracts with reliable suppliers, while monitoring market and regulatory developments and taking proactive measures to optimise the supply portfolio through partnerships with diverse suppliers.

Strategic raw materials for fertilizer production

The measures that are being undertaken are designed to enhance the efficiency of the use of the Group’s own raw material assets while optimising the cost of key raw materials purchased from third parties. The Grupa Azoty Group seeks to leverage the benefits of geographical location of its plants in the proximity of existing manufacturers and secure the supplies of raw materials that enable it to meet the growing requirements of environmental regulations.

Other strategic raw materials – the Grupa Azoty Group is continuing the construction of a propylene unit. The supply of other raw materials is based on long-term master agreements optimised using spot transactions. The objective is to reduce costs and better secure supplies through initiatives within logistics infrastructure.

Innovation strategy

The Grupa Azoty Group keeps track of and follows current trends, including in the area of research, development and innovation (R&D&I). It does not want to be a mere beneficiary but an active participant of the initiatives being implemented Poland. Its ultimate goal is to lead the way and break new ground in innovation.

In order to maximise potential benefits, Grupa Azoty Group’s R&D&I activities are being operationalised to establish proper structures, procedures, principles and good practices, which will be coordinated at the Group level. This initiative is supported through further development of the existing Research and Development Centres and establishment of new units and product specialities.

The Group’s strategy focuses on driving innovation to extend the value chain with high-margin, specialty fine products, and adapting new technologies while refining existing processes.

The Grupa Azoty Group actively participates in open innovation initiatives, also by working with promising start-ups (commercial contracts and/or equity participation), implementing CSR projects, and engaging with local communities.

Operational excellence strategy

Operational excellence, which complements the organic growth strategy, is about implementing mechanisms for continuous efficiency improvement, which is achieved by streamlining business processes, cutting costs, and minimising the impacts or reducing the risk of a crisis.

Financial strategy

The indicators provide a benchmark against which progress in the implementation and delivery of our Strategy will be measured.

Strategic financial targets

Source: Company data.

Functional integration

One of Grupa Azoty’s strategic objectives is to integrate its finance function. To this end, procedures and structures of finance departments are being harmonised across the Group.

Process support

By integrating IT systems and implementing a tool to operationalise the Strategy and monitor its progress.

Security

The overriding goal is to ensure long-term financial security and internal coherence among all funding sources.

Risk

Given the extensive capital investment programme in place and the risk of an economic downturn, no floor has been set for the dividend payout ratio.

Accordingly, if justified, the Management Board will not recommend a dividend payment.

Corporate management strategy

A new organisational model for the Group is being developed to maximise synergies through integration of selected support functions and implementation of a management system based on key business segments.

Segment management is being introduced, non-core companies are undergoing consolidation or are offered for sale. There are also ongoing consolidation measures in sales and procurement areas.

The Group’s CSR initiatives encompass sustainable development efforts taking into account the need to:

 improve operational safety of its chemical units and reduce environmental footprint,

 maintain dialogue with key stakeholders and support local communities,

 create favourable working conditions by raising employee satisfaction, health and safety standards, and staff qualifications.

4.3. Key investments in Poland and abroad

The Group’s capital expenditure is presented below, including amounts spent on components, major overhaul work and improvements.

Structure of the Group’s capital expenditure in 2020:

Structure of capital expenditure

Source: Company data.

Grupa Azoty Group’s capital expenditure in 2020:

The Parent’s capital expenditure is presented below,

including amounts spent on components, major overhaul work and improvements.

Structure of the Parent’s capital expenditure in 2020:

Structure of the Parent’s capital expenditure

Source: Company data.

Key investment projects implemented by the Group as at December 31st 2020 (PLN ‘000)

*)The Extraordinary General Meeting granted its consent for Grupa Azoty PUŁAWY to purchase non-current assets for the purpose of implementing two investment projects with a total value increased to PLN 430m and PLN 145m, respectively.

Source: Company data.

4.4. Equity investments

Save for the equity investments at the Grupa Azoty Group described in section 1.3 Changes in the organisational structure, no other significant equity investments were made, in particular no investments outside the group of related entities.

4.5. Feasibility of investment plans

The Grupa Azoty Group is continuing investment projects commenced in previous years, but also plans to embark on new ones. The Group has full capacity to finance such investment projects. Expenditure on property, plant and equipment under the 2021 Investment Plan will be financed, first of all, with Grupa Azoty Group’s own resources, working capital and funds available under Grupa Azoty Group’s New Financing Agreements, intended to finance Grupa Azoty Group’s general corporate needs arising from its Strategy and Investment Programme. As the credit facilities in place provide the required cover for capital expenditure, the risk that the planned investments will not be carried out is very low. Environmental protection projects will be analysed for the potential for raising financing from non-bank sources on preferential terms, such as EU funds or national support programmes.

In 2020, the Parent incurred capital expenditure of PLN 111m, financed with its internally generated funds, funds available under long-term credit facilities and, to a lesser extent, with leases and grants.

The Group’s total capital expenditure in 2020 reached PLN 2,757m and was financed with its internally generated funds, funds available under corporate credit facilities (redistributable among the Group companies) and, additionally, with borrowings, leases and grants.

Under its centralised financing model, in 2020 the Grupa Azoty Group continued to use the long-term credit facilities for a total amount of PLN 4,719m to finance the Group’s capital expenditure and other objectives outlined in the long-term strategy. The facilities included:

 a PLN 3,000m syndicated revolving and term loan facility; as at December 31st 2020, funds available under the facility were PLN 1,27m,

 term credit facilities from EIB and EBRD totalling PLN 1,719m; as at December 31st 2020, funds available under the facilities were PLN 607m.

The Group is able to finance its investment plans using either current or expected free operating cash flows (EBITDA), as well as the corporate credit facilities specified above.

Given the acceptable levels of financial ratios agreed with the strategic lenders, the Parent and the Group can further increase their external funding without the risk of breaching covenants under the set of credit facilities, or secure separate financing for projects implemented by SPVs on a project finance basis.

4.6. Significant R&D achievements

In accordance with the adopted and subsequently updated Grupa Azoty Group Strategy for 2013-2020, development and implementation of innovations were named among the four key areas for the Group’s growth. The principal source of innovation is research and development work.

The Grupa Azoty Group conducts its research activities at a state-of-the-art Research and Development Centre, which enables the Group to, among other things, increase the scale of operations previously conducted as separate projects. Moreover, the Group actively cooperates with external research centres, employing the expert knowledge of their specialists as well as their, often unique, research facilities.

The research activities conducted in 2020 at the Grupa Azoty Group were mainly aimed at:

 product diversification,

 refining of the existing processes,

 lessening of the environmental impact,

 adjustment to changing legal requirements.

The objectives of R&D projects carried out in 2020 included:

 Development of new, fine specialty granulated fertilizers;

 Improvement of the quality of currently manufactured fertilizer products;

 Consistent work on expanding the range of modified engineering plastics, based on polymers manufactured both by the Company and third parties, tailored to the current quality requirements of customers and suitable for specialist applications;

 Development of a technology to manufacture polymer materials for 3D printing using the FDM and SLS technology;

 Development of proprietary technologies to manufacture new types of plastics for specialist applications, including plastics with high mechanical and thermal resistance; lightweight, flexible and resistant to chemicals; biodegradable plastics;

 Increasing the efficiency of the plastics production complex by constantly reducing production costs while maintaining high product quality;

 Minimising adverse environmental impacts, including optimisation of wastewater management.

5. Current financial position and assets

5.1. Assessment of factors and one-off events having a material impact on the Group’s operations and financial performance

One-off items affecting the assets, equity and liabilities, capital, net profit/loss or cash flows are presented below.

Compensation

The Parent, Grupa Azoty PUŁAWY, Grupa Azoty KĘDZIERZYN and Grupa Azoty POLICE received, by electronic mail, the President of the Energy Regulatory Office’s decision granting them compensation for 2019, payable under the Act on the Compensation Scheme for Energy-Intensive Sectors and Subsectors.

As at December 31st 2020, the compensation was recognised under other income at PLN 85,123 thousand.

Compensation due in respect of 2020 is recognised as a deduction of current electricity costs. The amount of compensation for 2020, recognised as a deduction of costs, was PLN 133,657 thousand.

As a result, the total amount of income from compensation for energy-intensive businesses recognised in 2020 was PLN 218,780 thousand.

Impact of COVID-19 pandemic on Grupa Azoty Group’s business

Having recorded declines in revenue, the Parent and some of its subsidiaries will take steps to avail themselves of the financial support mechanisms under the Act on Special Measures to Prevent, Counteract and Combat COVID-19, Other Infectious Diseases and Related Crisis Situations of March 2nd 2020, version 4.0. The amount of support for the Grupa Azoty Group was PLN 64.9m, including PLN 15.7m for the Parent.

For information on the impact of the COVID-19 pandemic on the Grupa Azoty Group’s business, see Section 3.6.2.

Exchange rates

Factors and events with a bearing on the financial performance of the Grupa Azoty Group, which in early 2020 had a positive influence on market behaviour, included the news of a trade agreement signed between the US and China and, domestically, about the sustained strong momentum in GDP growth and sound public finances. In contrast, market sentiment deteriorated significantly and became highly volatile as of February 2020 as a consequence of the spread of the coronavirus pandemic, the scale of which had a material adverse impact on the global economy in 2020. Following depreciation of the złoty (PLN) in the first quarter of 2020, PLN currency pairs remained at above-average levels until the end of 2020. The second wave of the pandemic in the autumn and the economic restrictions that followed triggered another sell-off of the złoty, which intensified at the end of October. PLN depreciation against EUR was more severe than during the panic sell-off in spring. At the beginning of November, the Polish currency strengthened as global investor optimism waxed. However, the end of the year saw another short-term depreciation of PLN, resulting from the NBP’s intervention aimed at supporting exporters.

In 2020, the Polish złoty weakened against the euro by approximately 8.4% and appreciated against the US dollar by approximately 1.0% versus the respective levels recorded on December 31st 2019. The average PLN/EUR and PLN/USD exchange rates weakened by approximately 3.4% and 1.5%, respectively, relative to the average exchange rates for 2019.

The average annual depreciation of the Polish currency against the euro in 2020 was very limited compared to the weakening recorded at the end of the year. On the other hand, the złoty strengthened slightly against the US dollar relative to the rates recorded at the end of the year, with a simultaneous slight weakening of the average annual exchange rate. The above developments had a positive impact on the Grupa Azoty Group’s operating results.

The considerable weakening of PLN relative to EUR as at December 31st 2020 compared with December 31st 2019 had a negative impact on the value of the Group’s foreign currency bank loans denominated in EUR. However, since the loan maturity dates are usually far in the future (until 2028), the Group does not expect to repay the debt at the current high EUR/PLN exchange rates.

The Group expects a gradual strengthening of PLN in 2021 along with the expected lifting of restrictions adversely affecting the economy, progress in vaccination and growing optimism of markets and consumers.

It is assumed that the forecast currency trends should not have a material bearing on the Group’s performance in 2021.

The Group reduces the risk resulting from its currency exposure by using selected instruments and taking measures to hedge against the currency risk based on the current and planned currency exposure. In the reporting period, the main hedging tools used by the Group included natural hedging, factoring and discounting of foreign currency receivables, and currency forwards entered into on a rolling basis to cover up to 80% of the remaining currency exposure with time horizons of less than 6 months, up to 50% of the remaining currency exposure with time horizons between 6 and 12 months, and up to 25% of the remaining currency exposure with time horizons between 12 and 24 months.

In 2020, the Grupa Azoty Group additionally expended the range of hedging instruments to include zero-cost collars with a symmetric risk profile maturing in 2021. A zero-cost collar is a combination of two options: a put option and a call option with the same notional value and maturity date, with such clearing prices of the purchased and written option that the transaction is cost-free at the time of its execution.

The structure of the Grupa Azoty Group’s physical cash pooling in EUR allows the companies to use the Group’s global liquidity limit in that currency, which further reduces their exposure to the currency risk in EUR by correcting potential mismatches in revenue and expenditure over time.

In 2020, the Grupa Azoty Group entered into FX forward transactions for the sale of EUR and USD, executed in the periods of depreciation of PLN to supplement hedges, as well as into EUR/USD currency pair contracts (Grupa Azoty POLICE, to hedge the purchase of USD), reflecting its planned exposure in both currencies.

The Group’s (excluding Grupa Azoty POLYOLEFINS) net result on hedging transactions settled in 2020 was PLN -7,654 thousand, with the net result on remeasurement of hedging instruments also negative at PLN -11,867 thousand.

In 2020, the Group’s (excluding Grupa Azoty POLYOLEFINS) total net result on the settlement of hedging transactions and remeasurement of hedging instruments was a loss of PLN -19,521 thousand.

In 2020, Grupa Azoty POLYOLEFINS purchased call options and entered into FX forward transactions for the purchase of EUR to hedge the expected expenditure of Grupa Azoty POLYOLEFINS in EUR under contractual payments for the Polimery Police project, to be covered by equity contributions from the Group in PLN. The Company also entered into FX Forward transactions for the purchase of EUR for USD and of PLN for USD to hedge the expected expenditure in EUR and PLN under contractual payments for the Polimery Police project, to be covered from disbursements under the term loan facility. All currency call options held expired or were settled in 2020. Some of the FX forward transactions served as interim security towards the ultimate security required under the Credit Facilities Agreement.

As at December 31st 2020, Grupa Azoty POLYOLEFINS was party to the following transactions:

 FX forward to exchange approximately PLN 186m for EUR (hedging the expenditures to be covered from equity contributions and subordinated loans from the Parent, Grupa Azoty POLICE and Grupa LOTOS in PLN),

 FX forward to exchange approximately USD 37m for EUR (hedging the expenditures to be covered from the equity contributions and subordinated loan from Korea Overseas Infrastructure & Urban Development Corporation and Hyundai Engineering Co., Ltd in USD),

 FX Forward to exchange approximately USD 267m for EUR (hedging the expenditures to be covered from funds drawn under the USD-denominated term loan facility, including interim transactions towards the ultimate security interest required under the Credit Facilities Agreement),

 FX Forward to exchange approximately USD 63m for PLN (hedging the expenditures to be covered from funds drawn under the existing USD-denominated term loan facility, including interim transactions towards the ultimate security interest required under the Credit Facilities Agreement).

FX forward transactions for the purchase of USD for PLN, amounting to approximately USD 20m, were designated as hedges for accounting purposes.

As at December 31st 2020, the total result on the measurement of open FX forwards executed by Grupa Azoty POLYOLEFINS was PLN 43,462 thousand, including PLN 1,619 thousand in transactions designated as hedges for accounting purposes.

Foreign currency derivatives and hedge accounting

As at December 31st 2020, the notional amount of the Grupa Azoty Group’s open currency derivatives (FX forwards) totalled EUR 68m (instruments maturing in 2021: January – EUR 0.2m, February – EUR 1.7m, March – EUR 2.7m, April – EUR 8.7m, May – EUR 9m, June – EUR 8.1m, July – EUR 8.5m, August – EUR 8m, September – EUR 6.6m, October – 4.4m, November – EUR 5.7m, December – EUR 3.2m, March 2022 – EUR 1m) and EUR 10m under options, maturing between February and December 2021, executed by Grupa Azoty POLICE.

The total value of the Grupa Azoty Group’s open currency derivatives amounted to EUR 78m.

Such contracts are only entered into with reliable banks under master agreements. All the contracts reflect actual cash flows in foreign currencies. Currency forwards and derivative contracts are executed to match the Parent’s currency exposure and their purpose is to limit the effect of exchange rate fluctuations on profit or loss.

The Grupa Azoty Group applies cash flow hedge accounting. The hedged item are highly probable future proceeds from sale transactions in the euro, which will be recognised in profit or loss in the period from January 2021 to September 2028. The hedging covers currency risk. The hedge are two euro-denominated credit facilities of:

 EUR 81,729 thousand as at December 31st 2020 (December 31st 2019: EUR 99,891 thousand), repayable from December 2018 to June 2025 in 14 equal half-yearly instalments of EUR 9,081 thousand each.

 EUR 100,000 thousand as at December 31st 2020 (December 31st 2019: EUR 100,000 thousand), repayable from December 2021 to September 2028 in 15 equal half-yearly instalments of EUR 3,333 thousand each.

As at December 31st 2020, the carrying amount of both these credit facilities was PLN 838,187 thousand (December 31st 2019: PLN 850,648 thousand). In 2020, the hedging reserve included PLN 58,626 thousand (2019: PLN 7,250 thousand) on account of the effective hedge.

In 2019 and 2020, the Group did not reclassify any hedge accounting amounts from other comprehensive income to the statement of profit or loss.

Prices of CO₂ emission allowances

In 2020, the prices of CO₂ emission allowances traded on the exchange market were highly volatile while maintaining an upward trend. The amplitude of fluctuations was around EUR 19. Prices declines began after the tenth of March, when the market panic caused by the spread of COVID-19 and the subsequent global lockdown was at its peak. The lowest price of EUR 14.31 was recorded on March 23rd 2020. As of that date, allowance prices moved into a strong upward trend to reach a high of EUR 33.50 at the end of the year. The price growth was driven by such factors as recovering economy and the ensuing improvement in investor sentiment across global financial markets, the news of vaccine development, and a hiatus in allowance trading.

The Grupa Azoty Group companies purchase emission allowances in line with the joint management model for CO₂ emission allowances adopted by the Group and under approved purchasing plans of the companies. The Grupa Azoty Group pursues a policy of a rolling reduction of its deficit in CO₂ emission allowances through spot and futures transactions with a three-year time horizon.

In 2020, the Group was taking adaptive and preventive measures with a view to mitigating the negative financial impact of higher prices of CO₂ emission allowances by buying the allowances during temporary price declines. Consequently, the weighted average allowance purchase price is much below the market prices quoted on December 31st 2020.

As at December 31st 2020, the Grupa Azoty Group companies delivered their EUA purchase plans and secured enough allowances to fully meet the needs for balancing the planned carbon emissions for 2020.

5.2. Market overview

AGRO FERTILIZERS

In 2020, the prices of key agricultural produce in Poland were slightly higher year on year. The highest price increase was recorded for maize, with the average price of PLN 745/tonne, up by 7.8% year on year. Also rapeseed prices were on a rise. Year on year, they grew 4.9% (to PLN 1,698/t). The smallest increase compared with 2019 was recorded for milling wheat, whose price grew 3.7%, to PLN 784/t.

The key factor that sparked the rise in prices in the domestic market (particularly in the second half of 2020) was the situation on global grain markets and a poor harvest in the EU countries. Strategie Grains estimates that the 2020/2021 harvest will be 276.5 million tonnes (excluding UK), compared to 287 million tonnes a season earlier (-3.8%). A completely different situation could be observed in the domestic market. Based on Statistics Poland (GUS) data, Poland’s total grain output in 2020 is estimated at 33.5 million tonnes, up by as much as 16% compared to 2019. It is the higher prices of agricultural produce and better harvest that contributed most significantly to the economic recovery of the agricultural sector in Poland, strained by several years of drought.

An event of principal importance for the economic situation of the Polish agricultural sector was the disbursement, in the fourth quarter of 2020, of advance direct payments by the Agency for Restructuring and Modernisation of Agriculture (ARiMR). As a result of a high EUR/PLN exchange rate, the total funds available for direct payments reached a record amount of PLN 15.53bn, of which 67% (PLN 10.4bn) was disbursed to farmers already in the last months of 2020. The balance will be disbursed by the ARiMR by the end of the first half of 2021.

Prices of wheat, maize and rapeseed

Source: In-house analysis based on external data.

Average prices of wheat, maize and rapeseed

Source: In-house analysis based on external data.

Market of nitrogen fertilizers

In 2020, prices of nitrate fertilizers on the markets under review were slightly lower year on year. The average price of calcium ammonium nitrate (CAN) on the German market fluctuated around EUR 163/t CIF Inland, down by as much as 14.1% on 2019. A year-on-year price decline was also seen for ammonium nitrate (AN) on the French market. In 2020, the price was approximately EUR 237/t, while in 2019 it averaged at EUR 274/t (down by 13.4%). In the period under analysis, demand for nitrate fertilizers changed sharply at times, mainly due to the weather conditions necessitating the postponement of fertilizer application and affecting the dosages. While at the beginning of the spring fertilization season the main problem was rainfall shortage, in the autumn (during the establishment of winter crops) the problem was excessive rainfall. What additionally affected demand distribution throughout the analysed period was farmers’ decision to postpone purchases until the last moment in anticipation of sharper declines in prices. Owing, among other factors, to the continuously weak financial condition of the agricultural sector, most fertilizer purchases were made only to the extent required to meet current needs. The situation improved only at the end of 2020 as a result of direct payments received by the agricultural sector and growing prices of agricultural produce, which strengthened the purchasing power of the agricultural sector.

Prices of ammonia followed a downward trend over most of the period under review and began to recover only in the fourth quarter of 2020. The average ammonia price in 2020 was USD 203/t FOB Yuzhny, down by 12% on 2019. The COVID-19 pandemic put an abrupt brake on the international ammonia market. Traders were not eager to purchase volumes for which they could not be able to find buyers, while producers tried to focus more on contracted sales than on spot sales at reduced prices. Low demand from industrial users (such as caprolactam and acrylonitrile producers), especially in the Asia and Pacific region, contributed to greater availability of ammonia, pushing down its prices. The beginning of the third quarter saw no major changes in the international ammonia markets. While prices stabilised in the east, a downward trend was observed in the west. Despite shutdowns and lower output from ammonia-producing plants worldwide, limited demand and moderate oversupply in the key regions caused only slight changes in the ammonia prices and reduced sales. Unplanned capacity cuts in late 2020 in Saudi Arabia and Trinidad and Tobago reduced the availability of ammonia in international markets in December 2020.

Urea prices continued to grow for most of 2020. The price averaged at USD 226/t FOB Baltic, down by 5.7% on 2019. In the first quarter of 2020, the United States was the key player dictating prices in the global market. With the outbreak of the coronavirus pandemic, the urea market lost about 10% of its traded volume due to demand and logistics disruptions. In late second/early third quarter, the urea market began to recover due to growing demand in Brazil and India. However, markets grew more cautious as China returned to the export market. In the second half of 2020, an important factor driving prices up were further buying campaigns in India (including a record purchase of 2.18m tonnes in October) and the prospect of a decrease in the availability of Chinese urea. The biggest increase in urea prices was recorded in Egypt, where the demand for the product increased as traders sought to meet current and future demand. After a flurry of buying activity in the second half of November and early December, the activity in the north-western Europe slowed down significantly, with market attention focusing on the end of the year.

Indian import volumes and domestic demand in China, which affects the country’s exports, will continue to be the key determinants for global markets in the coming months, as regards both agricultural and industrial applications.

Prices of nitrogen fertilizers (urea, CAN, AN, AS,) and ammonia

Source: In-house analysis based on external data.

Average prices of nitrogen fertilizers

Source: In-house analysis based on external data.

Market of compound fertilizers

The beginning of 2020 was marked by weak demand for DAP, but towards the end of the first quarter the situation in Europe changed. Supply dropped due to disruptions in transport to Europe caused by the coronavirus pandemic. At the end of the first and beginning of the second quarter as well as throughout the second quarter of 2020, the European DAP market was affected most significantly by the coronavirus pandemic, and the resultant problems with transport and availability of seasonal workers. Other important factors were weather conditions and droughts experienced in many European countries. From the third quarter onwards, a marked increase in demand for DAP on global markets was observed, followed by an upward price trend. Russian producers actively exported their products to Europe as well as to North and South America and to India. In the fourth quarter of 2020, the Brazilian market remained active, supplied with fertilizers from Russia, USA and Morocco.

In the first months of 2021, DAP and MAP prices are likely to remain at their current, relatively high, levels due to sales to such countries as Pakistan and Bangladesh, leading to undersupply. Another factor supporting prices may be low inventory levels in India. Global markets are also likely to be affected by the US plans to impose, as of April 1st 2021, anti-dumping duties on phosphate fertilizer imports from Russia and Morocco.

The annual average NPK 16:16:16 FOB Baltic price in 2020 was USD 231, down by 10.7% on 2019. Initially in the first quarter of 2020, the demand for NPK fertilizers in many European countries was negligible. At the end of the first quarter, the demand picked up, but there were noticeable delays in deliveries by road due to restrictions imposed by governments to contain the spread of the coronavirus. The main factor affecting the European NPK fertilizer market in the second quarter of 2020 was the weather. In the first weeks of the quarter, several European countries experienced droughts, followed by excessive rainfall, which made fertilizer application impossible. Buyers showed little interest in purchases in the third quarter due to the harvest season. Weak demand continued into the fourth quarter.

Prices of compound fertilizers (NPK, DAP), potassium chloride and phosphate rock

Source: In-house analysis based on external data.

Average prices of compound fertilizers and raw materials for their production

* change of base

** change of the source of quotations

Source: In-house analysis based on external data.

From the second half of 2019 until the end of the first quarter of 2020, prices in the potassium salt market followed a downward trend. New contracts for the supply of potassium chloride executed with China and India for the financial year 2020/2021 had to account for the weak market environment and, consequently, contract prices were lower by approximately USD 70/t compared to the 2018-2019 contracts. In subsequent quarters of 2020, global markets remained stable. No material increases or decreases in price levels were recorded. The Chinese market remained quiet virtually throughout 2020, with no clear sign of recovery. A similar climate prevailed on the Brazilian market, with slight price rebounds, and potassium salt import volumes close to those recorded in previous years. In contrast, from mid-2020 increases in prices were seen in the US market, especially in the Port of New Orleans. This was mainly due to a major surge in demand, driving an upward price trend for the remainder of 2020.

According to short-term forecasts, a recovery on global markets is expected in 2021. The years 2019 and 2020 were not good for potassium chloride producers due to weaker cropping seasons in various regions of the world, declining demand, and a global recession triggered by the coronavirus pandemic. Significant demand for potassium chloride is expected. Combined with a reasonably good fertilizer environment, this should drive the prices up. However, potassium chloride mining projects currently being commissioned and optimised may result in a higher supply and, thus, halt the upward trend in MOP prices. According to forecasts, this may occur at the end of 2021.

In the first half of 2020, the DAP market remained stable with only minor deviations. The increase in phosphate fertilizer prices recorded in the second half of the year drove up the prices of phosphoric acid. In 2020, the price of phosphoric acid for India, its main buyer, increased throughout the year by more than USD 100/t P₂ O₅ , making the production of fertilizers in India hardly profitable, even despite direct production subsidies from the state. For most of 2020, the growth in phosphate fertilizer prices was not reflected in phosphate rock prices, which remained stable over three quarters. It was only in the fourth quarter that phosphate rock prices went up by a few dollars.

Late January and early February 2021 suggested a further strengthening of DAP fertilizer prices across all fertilizer markets in the first quarter of 2021. Market participants raised prices in anticipation of the US imposing countervailing duties on phosphate fertilizer imports from Morocco and Russia, expected from April 1st 2021. The current limited supply on the US market is strongly driving up prices for DAP and MAP phosphate fertilizers. Forecasts indicate that DAP prices should go down slightly in the second and third quarter, after sales are redirected, mainly to the Indian market. According to the forecast, prices of phosphate rock and phosphoric acid should be stable, with a possible slight decrease in late third and early fourth quarter of 2021.

PLASTICS

Polyamide 6 chain

2020 was a very challenging period for the entire polyamide 6 segment. The market situation was under the strong impact of supply and demand forces and fluctuations in crude oil prices, driving changes in prices of petroleum products. The coronavirus pandemic led to a sharp economic deceleration in 2020 as a result of lockdowns and social distancing requirements imposed around the world. Increasingly affected by the spread of the pandemic which caused both demand-side shocks (due to measures limiting global population movements) and supply-side shocks (with serious disruption in supply chains), global markets, including Europe, faced an economic crisis. Quarantine restrictions, local and country-wide lockdowns and temporary production stoppage in some industries pushed consumption to unprecedented lows, especially in the second quarter of 2020.

After a fall to historic lows at the beginning of the second quarter, prices of petroleum products (benzene and phenol) in Europe embarked on an upward trend, with slight drops in late third/early fourth quarter of the year. In November and December 2020, benzene contract prices began to rise again as a result of high consumption in Asia from the styrene sector, growing demand from local processing markets and supply constraints. However, they did not return to the pre-pandemic levels in 2020. The average annual European contract prices of benzene (CIF NWE) and phenol (FD NWE) were down respectively by 31.1% and 12.8% relative to 2019.

The beginning of the second quarter of 2020 saw steep declines in the prices of caprolactam and polyamide 6 in Europe. The largest drop was recorded in the settlement of April contracts, with the prices of European caprolactam down on average by 17% and of polyamide 6 – by 14% month on month. The prices began to recover in June, but continued poor demand from end-use markets and uncertain prospects in the short term prevailed over higher prices of the products, and producers of both CPL and PA6 struggled to halt declining margins. In the fourth quarter, especially in the last two months of the year, prices of caprolactam and polyamide went up, driven by growing demand from processing markets and supply volatility. In December, average polyamide 6 prices were only slightly below the level observed in the same period a year earlier. However, the price drops that occurred in the second quarter were offset only in part. The average annual contract price of polyamide 6 on the European market (Engineering Resin Virgin DDP, WE) fell by 15% and the average annual price of liquid caprolactam (New Contract Molten, DDP, WE) – by 19.3% year on year. On the Asian markets (CFR, NE Asia), the average annual price of caprolactam went down by 27.4% compared with 2019.

The European polyamide 6 market experienced weak demand in 2020. The challenging situation triggered by the coronavirus pandemic led to a decrease in consumption by polyamide 6 end-use industries, especially in the first half of 2020. With the exception of the food packaging and medical industries, sales to all segments fell to varying degrees. The coronavirus pandemic sparked an unprecedented crisis in the automotive sector, a key polyamide 6 end-use sector, effectively halting the production and distribution of cars in Europe for several spring weeks.

A slow recovery in demand was observed in the second half of 2020. Government programmes stimulating the economies did much to improve market sentiment. Yet the slow recovery started from a low base and the pace of consumption revival in Europe varied by region and producer. In the fourth quarter of 2020, demand across all downstream sectors increased despite more extensive restrictions imposed in the wake of the second wave of the pandemic in European countries. Growing interest in purchases of engineering plastics was observable in automotive, domestic appliances and packaging industries. Demand from the textile, spinning, electrical and electronic applications sectors was also good. Despite relatively weak demand for new passenger cars among end users, consumption in the automotive chain increased significantly in November and December 2020 compared with the same months of 2019, mainly due to restocking. However, automotive production in 2020 did not return to the pre-pandemic levels.

The availability of caprolactam and polyamide 6 remained balanced for most of 2020. The situation changed in November due to lower supply. This was mainly consequent upon scheduled maintenance shutdowns and technical problems at one of the key European manufacturers, resulting in invocation of force majeure. Shortages in supply at the time of strong demand from processing markets led to polyamide 6 market tightness, triggering an upward movement in the main benchmarks.

Prices of PA6, caprolactam, benzene and phenol

Source: In-house analysis based on external data.

Average prices of polyamide 6, caprolactam and raw materials used in their production

Source: In-house analysis based on external data.

In 2021, product prices in the polyamide 6 chain will be driven mainly by supply and demand developments in end-use markets, still strongly preoccupied with the progressing coronavirus pandemic. Another factor with a bearing on the segment’s market are prices of petrochemical feedstocks, the volatility of which puts pressure on price movements along the entire product chain.

Short-term market sentiment remains generally positive, and the outlook for 2021 as a whole is prudently optimistic.

CHEMICALS

OXO product chain

Prices of 2-EH alcohol in 2020 decreased by 14.1% relative to 2019, mainly due to lower prices of raw materials used in its production, its high market availability and very weak demand, especially in the second and third quarter of 2020. The availability of OXO alcohols in 2020 was considered very high. In late February and then in December, after the invocation of force majeure by two producers, the market availability of 2-EH and n-butanol declined. Towards the end of March, first logistic problems were reported in the wake of the coronavirus pandemic in Europe and associated restrictions leading to longer delivery times. Imports of OXO alcohols into the European market decreased relative to 2019, due to lower prices of the products in Europe. Demand for OXO alcohols had remained relatively good until mid-April, but began to fall dramatically after individual countries started imposing restrictions. The only area where demand remained robust was the broad sector of health protection products. Following maintenance shutdowns in the summer, demand for OXO alcohols began to rise gradually.

In 2020, the prices of DOTP were down 15.3% year on year. The supply of plasticizers in Europe remained very strong in the first quarter, as local output was supported by imports from other parts of the world (Korea, Turkey, US, Russia). At the end of March, the availability of DOTP (mainly on the spot market) decreased following the invocation of force majeure by a producer, which entailed a decline in 2-EH supply. At the end of 2020, the supply of plasticizers slightly deteriorated due to a very high demand combined with production constraints arising from feedstock shortages on the one hand (force majeure invoked by another producer) and insufficient workforce to operate the units because of high sickness rates. The decline in plasticizer supply over the last months of 2020 was further aggravated by considerably lower imports of these products into the European market. Demand for plasticizers remained low early in the year. However, at the end of January, it started gradually growing, reaching a level above the forecast in March. Unfortunately, at the beginning of the second quarter of 2020 demand for plasticizers began to fall sharply due to the coronavirus pandemic and restrictions imposed by European countries, which also affected the manufacturing industry. The only segment where demand remained relatively robust was that of health protection products. After the summer holiday season, demand for plasticizers gradually picked up, especially in the area of engineering plastics and health protection products.

Prices of 2-EH, DOTP and propylene

Source: In-house analysis based on external data.

Average prices of 2-EH, DOTP and propylene

Source: In-house analysis based on external data.

In 2020, propylene prices were 20.6% lower compared to 2019 and contract prices fell by around 21%. In the case of propylene, supply and demand remained fairly stable. In the first quarter of 2020, the supply of feedstock (particularly polymer) deteriorated slightly quarter on quarter, which was attributable to strikes that broke out across France in early January, as well as to maintenance and emergency shutdowns at several propylene producers. The second quarter saw a gradual improvement in the market supply of propylene. Another market shortage of propylene occurred during the summer holiday season as a result of maintenance shutdowns and equipment failures experienced by some producers as well as high air temperatures in Europe, which necessitated load reductions on process units. Demand for the product kept growing early in the year, but the spreading coronavirus pandemic forced propylene processors to gradually reduce production, which suppressed demand in the second quarter of 2020. The only sector where demand remained solid was propylene processing for the purposes of food packaging and health protection products. Demand for propylene picked up in the third quarter of 2020 and climbed much higher than projected.

In the coming months, the prices of propylene are expected to keep rising, driven by a strong growth in demand for the product and higher prices of crude oil and kerosene. Future market developments will also depend on whether there is another wave of COVID-19 infections. If so, countries may reintroduce production lockdowns, which will again cause the demand for propylene to fall, driving down its prices.

Sulfur

The sulfur market improved significantly in 2020. Rising prilled sulfur prices were recorded across all markets under observation. For instance, the price of prilled sulfur in Chinese contracts in early 2020 hovered around USD 60 per tonne, but it reached about USD 120 per tonne by year-end, mainly on the back of favourable developments in the phosphate fertilizer market, most remarkably in the second half of 2020. Higher demand for phosphate fertilizers drives the demand for sulfur and its prices. Over the course of 2020, prilled sulfur prices (Vancouver SPOT FOB) rose by about 100% (December 2020 to January 2021), but still the average annual price in 2020 was 23.8% lower than back in 2019.

The European market in liquid sulfur did not follow suit. Over the first three quarters of 2020, sulfur prices for Benelux Delivered and NW Europe remained stable. It was only in response to a marked increase in prilled sulfur prices, a significant recovery in the phosphate fertilizer market, and adverse supply and demand developments that liquid sulfur producers raised their prices in the fourth quarter of 2020.

Forecasts for 2021 for the prilled sulfur market indicate that stable prices in early months will most likely be followed by price weakening as a result of new production capacities coming online in the Middle East. However, it is not entirely clear how fast the refining sector, as the main producer of sulfur, will recover from the stagnation caused by the pandemic. Following an increase in liquid sulfur prices in Western Europe in the first quarter, the market situation in the following months will depend on the conditions prevailing in the prilled sulfur and fertilizer markets as well as on developments in fuel production by European refineries (maintenance shutdowns, breakdowns, production cuts). Forecasts point to a potential price decline in the third and fourth quarter of 2021.

Sulfur prices

Source: In-house analysis based on external data.

Average prices of sulfur

Source: In-house analysis based on external data.

Pigment chain

In 2020, the average price of all types of titanium white in Europe, including highly specialised varieties, was EUR 2,504/tonne, down by almost 6% year on year.

In the first quarter of 2020, the global economy went into an unprecedented downward trend due to the global coronavirus outbreak. In the first half of 2020, Europe’s major economies were completely paralysed, which considerably affected the consumption of titanium white. In a move to safeguard themselves from anticipated difficulties, buyers increased their stocks, to some extent curbing the decline in sales for titanium white producers in Europe. Recovery in the pandemic-affected sectors became visible in the second half of 2020. The demand for titanium white gradually increased. People stayed at home because of the pandemic, which generated an increased interest in DIY home renovations. In late 2020, the demand was unusually high for this time of year. A boom in local Asian markets fuelling a series of price increases for Chinese titanium white, global shipping restrictions, growing shipping costs, shortage of shipping containers and logistical bottlenecks rendered Chinese imports to Europe unattractive, and some European players significantly reduced purchases from China or switched to buying exclusively from European sources. Price developments were also affected by stabilisation programmes run by the world’s major titanium white producers since the first half of 2019, which helped avoid steeper declines in titanium white prices. If the programmes are maintained in 2021, they will continue to affect the prices.

Global market pricing forecasts for 2021 are still exposed to a high risk of being affected by the pandemic. Initial forecasts for the first half of 2021 are promising, although there are some indications that the pickup in demand seen at the end of 2020 may be slowly fading. The construction and automotive industries are projected to continue their slow rebound. The titanium white market is also expected to experience a seasonal recovery at the beginning of the second quarter of 2021, which should fuel further price increases. According to market forecasts, the level of demand for titanium white will be higher than in 2020, but it is likely not to exceed the pre-pandemic levels.

Prices of titanium white, ilmenite and titanium slag

Source: ICIS, CCM.

Average prices of titanium white and raw materials for its production

Source: In-house analysis based on external data.

Ilmenite prices remained strong from the beginning of 2020. However, as a result of the escalating global impacts of the coronavirus pandemic, the first half of 2020 brought a significant pressure on producers to reduce the prices of titanium-bearing minerals. Due to a rising demand for ilmenite in China, the room for correction was limited. The average annual price of ilmenite on the Chinese market in 2020 was 33% higher than the year before. Globally, the prices of this mineral also went up, by 15 to 20%.

The prices of titanium-bearing minerals produced in China grew fast in the second half of the year. In October, the price of ilmenite in the Sichuan province reached an all-time high at USD 300 per tonne. The increase was mainly driven by a limited local supply of the mineral. Moreover, such price increase fuels the demand for imported minerals, which tend to be cheaper than the mineral obtained locally even when high transport costs are involved.

Titanium slag is produced by smelting ilmenite with coke. As no investments are made in new furnaces, the titanium slag market is undersupplied, especially with respect to 74%–76% titanium slag used in the sulfate-based production of titanium white. Some of the manufacturers discontinued the production of titanium slag with a lower titanium content and switched to producing slags with a 90% or higher TiO₂ content, due to higher sales margins achieved in chlorine-based production of titanium white. Thus, despite the falling prices of titanium white, the global price of titanium slag remains high. In 2020, the average price of titanium slag used in the sulfate process on the representative Chinese market was 8% higher than in the same period of 2019.

The balance in the ilmenite market is very fragile, with periods of undersupply. In view of the above, a consistent increase in the price of Norwegian ilmenite is projected throughout 2021, with the growth scale depending on global market developments. A considerable increase in ilmenite prices may also drive up the prices of titanium slag.

Melamine

One key driver in the global melamine market in 2020 was declining supply and demand caused by the outbreak of the coronavirus pandemic, most notably in China and Southern Europe. As a result, producers shut down their plants or significantly reduced their outputs, while customers made use of their stocks. The demand did not pick up until May 2020. Asian producers took the opportunity offered by the period of limited demand to perform plant repairs and upgrades. The Asian market was also considerably affected by logistical problems (such as a shortage of containers), which delayed deliveries and inflated the cost of freight.

The average annual contract price for melamine in 2020 in European markets was 8.9% (EUR 135/t) lower than in the previous year. Lower demand in relation to previous years is one of the main reasons behind this decline. As a result of the coronavirus pandemic, in particular in the first half of 2020, the demand dropped by 40 to 50%.

According to analysts, 2021 will see a rapid growth of melamine prices across global markets. At the beginning of the year, it will be driven by high demand and the need to restore margins. The increase may also be seen in the European market, where melamine prices are expected to rise by approximatley EUR 100–150 per tonne.

Prices of melamine

Source: In-house analysis based on external data.

Average prices of melamine

Source: In-house analysis based on external data.

ENERGY

Natural gas

In the first weeks of 2020, natural gas prices exceeded EUR 13/MWh. The first half of 2020 saw a downward trend and the price hit a record low of approximately EUR 3.57/MWh at the end of May. Initially, the prices were under strong downward pressure from the exceptionally warm weather, high stock levels, as well as growing LNG deliveries and regular pipeline supplies (transit of gas from Russia via Ukraine was maintained). In March, the impact of fundamental factors was compounded by the coronavirus pandemic and a decline in energy demand as one of its indirect effects. The demand for fuels also fell, leading to a sharp drop in the prices of crude oil, coal and CO₂ emission allowances. On the other hand, an oversupply of LNG on the global market pushed down the gas prices in Asia. As a result, spot LNG deliveries from the Atlantic region were directed to Europe, which offered higher rates of return. Gas prices on the market fell below the break-even point. US producers were the first to respond, by reducing production and cutting LNG exports by two-thirds. Faced with unprofitability of exports, also Russia severely limited supplies, and Norway started overhauls of its mining and transmission infrastructure. This led to a change in the market environment in the third quarter of 2020. The decline in supply coincided with an increase in demand for electricity from gas-fired power plants due to a heat wave and problems with cooling and repairs at nuclear reactors in France, combined with low wind levels and rising prices of other energy carriers. Moreover, in an attempt to remain competitive and attract larger deliveries of spot LNG, European market players raised their prices in response to an increase in the prices of liquefied gas in Asia. As a result, gas prices rose twofold in August and then grew again in September. At the end of the third quarter, they reached EUR 13/MWh.

The fourth quarter saw significant volatility in gas prices. After an initial drop due to higher pipeline supplies, mild temperatures and high volumes of wind power generation, prices soared to EUR 15.5/MWh. Strikes on oil rigs and reductions of gas supplies from Norway coincided with falling temperatures and rising demand. The price growth was also driven by a strong increase in both demand for and prices of liquefied natural gas in Asia and the consequential reduction in LNG supplies to Europe. Towards the end of the year, prices rose supported by the prevailing cold weather in Europe, low wind levels, price growth on the competitive Asian market and rising prices of other energy carriers. The growing demand for gas in Asia, driven, among other factors, by the La Nina phenomenon in the Pacific, coupled with limited LNG supplies from the US (congestion at the Panama Canal), took the supply of LNG from the Atlantic basin and began to exert strong pressure on the European market. In December, gas prices in Asia rose 100%, reaching USD 14.3/MMBtu (seven times higher than in mid-year and more than two times higher than at European hubs) at the end of the month. The price at the Gaspool spot delivery market was EUR 18.8/MWh at the end of the year.

In the first months of 2021, limited LNG supplies to Europe and low stocks of gas at storage facilities will push gas prices up, increasing the risk that for the rest of the year they will remain higher than in 2020. LNG imports to Europe are not expected to grow significantly before the second quarter of 2021. Under the influence of fundamental factors, the market will remain highly volatile and strongly affected by weather conditions, LNG supplies, varying volumes of RES power generation and reduced supplies during shutdowns and overhauls of the Norwegian and Russian infrastructure. In addition, the suppliers’ experience of oversupply last year, the expected increase in gas prices at the US Henry Hub, and the year-on-year drop in the volume of gas transmitted through Ukraine will prevent any major decrease in gas prices in the summer. As a result, the average gas price in Europe is forecast to be about 50% higher in 2021 than in 2020.

Prices of natural gas

* Excluding transmission.

Source: In-house analysis based on external data.

Average prices of natural gas

* Excluding transmission.

Source: In-house analysis based on external data.

Coal

The fourth quarter of 2020 saw a reversal of the downward trend in coal prices. Quarter on quarter, average prices rose by almost 9%, reaching their highest at the end of the period. As a result, the average price remained largely flat on the corresponding period of 2019 and slightly exceeded USD 58/t. Year on year, average prices were almost 19% lower, with a global decrease in consumption of about 5%.

In the European market, demand fell by approximately 100 million tonnes. Germany and Poland, where consumption went down by 22% and 8% respectively, accounted for the largest shares in the decrease.

In 2021, coal prices will be shaped mainly by the European policy aimed at reducing the share of coal in the EU’s energy mix and the resultant slump in demand for coal in Europe. In addition, coal prices will still be driven by fluctuations in other commodity markets. According to analysts, the ARA average coal price will reach USD 60–65 per tonne in 2021.

Prices of hard coal

Source: In-house analysis based on external data.

Average prices of hard coal

Source: In-house analysis based on external data.

Electricity

The average electricity prices rose by 7% quarter on quarter and by 20% year on year. However, due to low prices in the first quarter of 2020, the average annual price fell by 4% year on year. The situation was mainly an effect of higher prices of CO₂ emission allowances (which reached their historical highs in the fourth quarter). Volatility in demand and a shift in the structure of production sources (greater share of RES) also had a noticeable impact.

In the coming months, electricity prices will be driven mainly by changes in the support system for renewable energy sources, an effect of efforts towards carbon neutrality. These measures will most likely result in further growth of prices of CO₂ emission allowances. The possible further consequences of the coronavirus pandemic, which affects both the demand for electricity and prices of energy commodities, should not be overlooked either.

Prices of electricity

IRDN − average price weighted by the volume of all transactions on a trading day, calculated after the delivery date for the entire day.

Source: In-house analysis based on external data.

Average prices of electricity

Source: In-house analysis based on external data.

5.3. Key financial and economic data

5.3.1. Consolidated financial information

In 2020, the Group earned a positive EBITDA of PLN 1,321,547 thousand and net profit of PLN 355,410 thousand.

Year on year, EBITDA and net profit decreased by PLN 102,563 thousand and PLN 52,263 thousand, respectively.

Consolidated data

[PLN ‘000]

Source: Company data.

With revenue down 6.9% year on year and cost of sales down 5.5%, the Group reported a gross profit. The 2020 gross profit was PLN 300,469 thousand lower compared with 2019.

Gross profit net of selling and distribution expenses and administrative expenses was PLN 453,333 thousand, down by PLN 231,714 thousand year on year.

In 2020, the balance of other income and other expenses was positive, at PLN 102,426 thousand, increasing EBIT to PLN 555,759 thousand.

5.3.2. Segments’ consolidated financial information

EBIT by segment

[PLN ‘000]

Source: Company data.

Revenue by segment

[PLN ‘000]

Source: Company data.

Revenue by segment

Source: Company data.

Agro Fertilizers

In 2020, revenue in the Agro Fertilizers segment came in at PLN 6,363,624 thousand and accounted for 60.5% of the Group’s total revenue. Year on year, the segment’s revenue went down by 5.2% and its share in the total revenue rose by 1.1pp.

EBIT reported by the Agro Fertilizers segment was positive.

Sales on the domestic market accounted for approximately 55.4% of the segment’s revenue.

Plastics

In 2020, revenue in the Plastics segment was PLN 1,135,442 thousand and accounted for 10.8% of the Group’s total. The segment’s revenue was down 22.1% year on year and its share in total revenue fell by 2.1pp.

EBIT reported by the Plastics segment was negative.

More than 86.3% of the segment’s revenue was derived from sales on foreign markets.

Chemicals

In 2020, the Chemicals segment’s revenue amounted to PLN 2,522,073 thousand, down by 4.4% year on year. The segment’s revenue accounted for 24.0% of the Group’s total revenue, having increased by 0.7pp.

EBIT reported by the Chemicals segment was positive.

Sales on foreign markets accounted for approximately 58.7% of the Chemicals segment’s revenue.

Energy

In 2020, revenue in the Energy segment was PLN 255,726 thousand and accounted for approximately 2.4% of the Parent’s total revenue. Year on year, the segment’s revenue decreased by 6.6%.

EBIT reported by the Energy segment was negative.

Other Activities

In 2020, revenue of the Other Activities segment was PLN 247,662 thousand and accounted for 2.3% of total revenue, having increased by 11.8% relative to 2019.

The segment’s EBIT was positive in 2020.

5.3.3. Structure of consolidated operating expenses

In 2020, operating expenses reached PLN 9,820,404 thousand, having decreased by PLN 725,912 thousand year on year. Most items of operating expenses went down by a total of 6.9% compared with 2019. Services and taxes and charges increased by 3.3% and 12.4%, respectively.

Operating expenses by nature of expense

[PLN ‘000]

Source: Company data.

Other operating expenses

In 2020, other operating expenses, excluding raw materials and consumables used, accounted for 44.7% of total operating expenses, Compared with 41.6% in 2019. The structure of these expenses changed only slightly relative to the comparative period.

Structure of other operating expenses [%]

Source: Company data.

5.3.4. Structure of consolidated assets, equity and liabilities

In 2020, the Group’s assets rose to PLN 18,207,150 thousand, by PLN 2,728,459 thousand relative to the end of 2019. As at December 31^st 2020, non-current assets were PLN 13,511,725 thousand, and current assets were PLN 4,695,425 thousand.

Year on year, the most significant changes in assets in the reporting period included:

 PLN 2,430,353 thousand increase in property, plant and equipment,

 PLN 332,960 thousand increase in other receivables,

 PLN 153,241 thousand increase in cash,

 PLN 55,066 thousand increase in property rights,

 PLN 135,798 thousand decrease in inventories.

Structure of assets

[PLN ‘000]

Source: Company data.

Year on year, the most significant changes in equity and liabilities in the reporting period included:

 PLN 594,955 thousand increase in equity,

 PLN 776,317 thousand increase in long-term borrowings,

 PLN 576,126 thousand increase in trade and other payables,

 PLN 561,081 thousand increase in other financial liabilities.

Structure of equity and liabilities

[PLN ‘000]

Source: Company data.

5.3.5. Consolidated financial ratios

Profitability ratios [%]

Source: Company data.

Ratio formulas:

Gross profit margin = gross profit (loss) / revenue (statement of comprehensive income by function)

EBIT margin = EBIT / revenue

EBITDA margin - EBITDA / revenue

Net profit margin = net profit (loss) / revenue

Return on assets (ROA) = net profit (loss) / total assets

Return on capital employed (ROCE) = EBIT / TALCL, that is EBIT / 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 ratios

Source: Company data.

Ratio formulas:

Current ratio = current assets / current liabilities

Quick ratio = (current assets - inventories) / current liabilities

Cash ratio = (cash + other financial assets) / current liabilities

Changes in working capital

[PLN ‘000]

The decrease in working capital relative to prior periods resulted from a decrease in current assets, due mainly to the equity contribution and disbursement of loans to Grupa Azoty POLYOLEFINS (a decrease in cash), with a concurrent decline in revenue attributable to lower prices and sales volumes in the Chemicals and Plastics segments (a decrease in receivables). In addition, the value of property rights fell following the redemption of CO₂ emission allowances for the previous year, while emission allowances for 2020 and subsequent years are purchased mostly in forward transactions with settlement and delivery dates falling before the redemption date.

Source: Company data.

Operational efficiency ratios

Source: Company data.

Ratio formulas:

Inventory turnover = inventories * 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 ratios [%]

Source: Company data.

Ratio formulas:

Total debt ratio = total 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 = (profit before tax + interest expense) / interest expense

5.3.6. Separate financial data

In 2020, the Parent earned a positive EBITDA of PLN 165,733 thousand and a net profit of PLN 125,628 thousand.

Year on year, EBITDA was down PLN 58,022 thousand and net profit was PLN 67,379 thousand higher.

Separate financial data

[PLN ‘000]

Source: Company data.

With revenue down 18.8% and cost of sales up 17.2% year on year, the Parent reported a gross profit of PLN 298,266 thousand, down by PLN 100,402 thousand on 2019.

The reduction of administrative expenses and selling and distribution expenses as well as the earning of net other income resulted in an operating profit of PLN 26,673 thousand. Eventually, the net profit was an effect of finance income of PLN 110,428 thousand and income tax of PLN 11,473 thousand.

5.3.7. Separate financial data by segment

EBIT by segment

[PLN ‘000]

Source: Company data.

Revenue by segment

[PLN ‘000]

Source: Company data.

Revenue by segment

Source: Company data.

Agro Fertilizers

In 2020, revenue in the Agro Fertilizers segment was PLN 729,804 thousand and accounted for 45.2% of the Parent’s total revenue. Year on year, the segment’s revenue went down by 10.7% and its share in the Parent’s revenue rose by 4.1pp.

EBIT reported by the Agro Fertilizers segment was positive.

Sales on the domestic market accounted for approximately 67.7% of the segment’s revenue.

Plastics

In 2020, revenue in the Plastics segment was PLN 808,187 thousand and accounted for 50.1% of the Parent’s total revenue. Year on year, revenue fell by 26.9%.

EBIT reported by the Plastics segment was negative.

More than 85.2% of the segment’s revenue was derived from sales on foreign markets.

Energy

In 2020, revenue in the Energy segment was PLN 27,483 thousand and accounted for approximately 1.7% of the Parent’s total revenue. Year on year, the segment’s revenue rose by 2.5%.

EBIT reported by the Energy segment was negative.

Other Activities

In 2020, revenue of the Other Activities segment was PLN 47,635 thousand and accounted for 3.0% of total revenue, having increased by 24.9% relative to 2019. The segment’s EBIT was positive in 2020.

5.3.8. Structure of separate operating expenses

In 2020, operating expenses amounted to PLN 1,509,704 thousand, having decreased by PLN 281,535 thousand year on year. The largest decrease was recorded in raw materials and consumables used.

Operating expenses by nature of expense

[PLN ‘000]

Source: Company data.

Other operating expenses

In 2020, other operating expenses, excluding raw materials and consumables used, accounted for 45.4% of total operating expenses, compared with 40.4% in 2019. The share of services, depreciation and amortisation, as well as surcharges and other benefits increased year on year. The structure of other operating expenses changed only slightly.

Structure of other operating expenses [%]

Source: Company data.

5.3.9. Structure of separate assets, equity and liabilities

In 2020, the Parent’s assets increased to PLN 9,845,542 thousand, i.e. by PLN 605,149 thousand relative to the end of 2019. As at December 31st 2020, non-current assets were PLN 8,732,723 thousand, and current assets were PLN 1,112,819 thousand.

The most significant changes in assets compared with the previous year included:

 a 5.5% increase in shares,

 a 322.6% increase in other financial assets resulting from concluded loan agreements,

 a 59.9% decrease in cash and cash equivalents,

 a 19.6% decrease in inventories.

Structure of assets

[PLN ‘000]

Source: Company data.

Year on year, the most significant changes in equity and liabilities in the reporting period included:

 an increase in current and non-current liabilities under borrowings,

 a 13.2% decrease in trade and other payables,

 increase in other financial liabilities.

Structure of equity and liabilities

[PLN ‘000]

Source: Company data.

5.3.10. Separate financial ratios

Profitability ratios [%]

Source: Company data.

Ratio formulas:

Gross profit margin = gross profit (loss) / revenue (statement of comprehensive income by function)

EBIT margin = EBIT / revenue

EBITDA margin - EBITDA / revenue

Net profit margin = net profit (loss) / revenue

Return on assets (ROA) = net profit (loss) / total assets

Return on capital employed (ROCE) = EBIT / TALCL, that is EBIT / 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 ratios

Source: Company data.

Ratio formulas:

Current ratio = current assets / current liabilities

Quick ratio = (current assets - inventories) / current liabilities

Cash ratio = (cash + other financial assets) / current liabilities

Changes in working capital

[PLN ‘000]

Source: Company data.

The negative working capital as at December 31st 2020 was attributable to intra-group loans advanced to Compo Expert Holding, Grupa Azoty POLYOLEFINS, Grupa Azoty POLICE, and Grupa Azoty KĘDZIERZYN.

Operational efficiency ratios

Source: Company data.

Ratio formulas:

Inventory turnover = inventories * 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 ratios [%]

Source: Company data.

Ratio formulas:

Total debt ratio = total 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 = (profit before tax + interest expense) / interest expense

5.4. Financial liquidity

Although their situation is clearly linked to developments in the market environment, the Parent as well as the key Group companies are fully solvent, with good credit standing. The Group is able to pay its liabilities as they fall due and to hold and generate free operating cash flows to further support payment of such liabilities in a timely manner. In 2020, the Group paid all of its borrowing-related and other financial liabilities when due, and there is no threat to its ability to continue servicing its debt.

The liquidity management policy operated by the Group consists in maintaining surplus cash and available credit facilities as well as limits under the intragroup financing agreement (one purpose of which is to effectively distribute funds within the Group), and in ensuring that their level is safe and adequate to the scale of the Group’s business.

The Group is monitoring the spread of the COVID-19 pandemic and its impact on the Group’s economic environment. The Group has identified the following risk areas related to the pandemic outbreak that may affect its liquidity:

 potential risk of deterioration in the financial liquidity of some of our trading partners as a result of payment backlogs,

 volatility of exchange rates.

As at the date of this report, the Group did not record any material adverse impact of the COVID-19 pandemic on its financial position.

5.5. Management of capital and assets

In 2020, the Group paid all of its borrowing-related liabilities when due, and there is no threat to its ability to continue servicing its debt.

The Grupa Azoty Group has access to umbrella overdraft limits related to the PLN and EUR physical cash pooling arrangements and under a multi-purpose credit facility, which may be used as directed by the Parent at times of increased demand for funding from any of the Group companies. The Grupa Azoty Group also has access to bilateral overdraft limits and multi-purpose facilities available to the Group companies.

The aggregate amount of the Group’s undrawn overdraft and multi-purpose credit facilities as at December 31st 2020 was PLN 1,055m.

In addition, as at the reporting date, the Group had access to corporate credit facilities of approximately PLN 1,634m.

The Group also had access to special purpose loans totalling PLN 52m.

As at December 31st 2020, under the agreements specified above the Group had access to total credit limits of approximately PLN 2,743m.

The Group’s financial standing is sound, and there are no material threats or risks of its deterioration in the future. The Group complies with the uniform covenants of its facility agreements which enable it to significantly increase financial debt when and as needed.

5.6. Bank deposits

The arrangement enabled the Group to optimise its interest income and expenses, while effectively managing the global liquidity limit and its optimal allocation within the Group. In 2020, the Group’s short-term funds were primarily held in current accounts in PLN and EUR with PKO BP S.A., linked under physical cash pooling with the individual companies’ sublimits in those currencies.

The Group companies also held free cash in short-term deposits placed with reputable banking institutions offering the highest interest rates (amounts not included the cash pooling arrangement).

As at December 31st 2020, the Group held a total of PLN 923,328 thousand in bank accounts and short-term deposits. Cash totalling PLN 1,052,972 thousand was held by the Group companies in the Parent’s consolidated current accounts (in PLN and EUR) with PKO BP S.A., linked to the physical cash pooling instruments in those two currencies. Of that amount, PLN 31,514 thousand was a net surplus balance of the Group companies, placed with PKO BP.

 

As at December 31st 2020, all of the above-mentioned cash and short-term deposits maturing within three months as at the reporting date were presented in the financial statements of the Grupa Azoty Group under cash and cash equivalents in the amount ofPLN 923,328 thousand.

Interest income earned by the Group on fixed-term deposits and under the cash pooling arrangement totalled PLN 4,354 thousand.

5.7. Material off-balance-sheet items

The Group companies reported blank promissory notes and guarantees issued upon their instruction. Blank promissory notes issued by the Group companies and guarantees issued by banks or insurance companies upon the Group companies’ instruction as security for liabilities recognised in the statement of financial position, or liabilities with respect to which the likelihood of cash outflows to settle the liability is negligible, are not presented as contingent liabilities.

In connection with the Credit Facility Agreement, the Parent and Grupa Azoty POLICE entered into a support loan provision guarantee agreement with Grupa Azoty POLYOLEFINS and Bank Polska Kasa Opieki S.A. (acting as the facility agent and security agent) for up to EUR 105m in the form of a subordinated loan, the main objective of which is to cover a potential liquidity deficit, construction cost overruns, operating costs and debt service costs in the operation phase.

5.8. Financial instruments – risk management policy and risk management instruments, objectives and methods

As part of its financial risk management policy, the Group identifies the following risks and has adopted the following risk management objectives and methods:

Currency risk management

The policy is also applied by those Group companies which are exposed to material levels of currency and interest rate risk. In 2020, the Grupa Azoty Group applied the ‘Financial (Currency and Interest Rate) Risk Management Policy’, as an element of the Group’s centralised Financing Model.

 Identification of currency risk

The Group is exposed to currency risk resulting from its net exposure to the euro and the US dollar related to the foreign currency balance of its sale and procurement transactions, trade receivables and payables, as well as receivables and liabilities from financing and investing activities.

The Group is also exposed to the risk related to periodic episodes of strong exchange rate volatility, including the effect of EUR/USD exchange rate development on EUR/PLN and USD/PLN exchange rates.

 Purpose of currency risk management

The purpose of currency risk management is mitigation of volatility of the Group’s cash flows in the euro and US dollar and hedging against adverse exchange rate movements by using instruments designed to reduce currency risk exposure and its effect on the Group’s financial performance.

In accordance with the policy, the objective of currency risk management at the Group is to reduce the impact of adverse exchange rate movements on the Group’s cash flows to a level acceptable by the Group, determined according to the VaR methodology.

 Level of currency hedging

The hedging level is considered optimum if up to 80% of the planned currency exposure is hedged for a period of up to 6 months from the transaction date, up to 50% of the planned currency exposure is hedged for a period from 6 to 12 months from the transaction date, and up to 30% of the planned currency exposure is hedged for a period from 12 to 24 months from the transaction date.

Using a higher currency hedging level requires approval from the Management Board following a recommendation received from the Risk Committee.

 Rules of executing currency hedges

Currency hedges are executed to reduce the Group’s planned currency exposure and they are classified as cash flow hedges under hedge accounting. The amount of currency in a given transaction may not be higher than the hedged item in that currency.

To hedge exposure in the euro and US dollar the Group primarily uses natural hedging, which involves increasing future liabilities in the euro and US dollar through the execution of procurement, investing and financing contracts and agreements in those currencies.

The remaining currency exposure is mitigated by executing transactions of the following types:

­ Currency forwards,

­ Currency swaps, involving temporary swaps of currencies with a bank to optimise short-term currency mismatch,

­ It is also possible to execute symmetric currency collars or other symmetric combinations of longing put options and shorting call options.

Currency hedges are generally settled by physical delivery of the currency on the expiry date.

Pursuant to the ‘Policy of Financial Risk Management (Currency Risk and Interest Rate Risk)’, the Grupa Azoty Group may enter into hedging transactions with horizons of up to 24 months, provided such transactions reduce the adverse effect of fluctuations in exchange rates on the cash flows (and the Group complies with the adopted hedging limits and hedge ratios and acts consistently with the applied VaR methodology).

The Group enters into currency hedges only with the banks with which it has executed framework agreements that provide for comprehensive rules of execution and settlement of such transactions.

Execution of currency hedging transactions where the hedge horizon is more than 24 months or the transaction does not conform to the Financial Risk Management Policy requires approval by the Management Board based on the recommendation of the Finance Committee.

Interest rate risk management

The Group is exposed to interest rate risk related to its financial liabilities (chiefly borrowings) denominated in the złoty and the euro, which are based on variable market interest rates, and financial assets (mainly cash at banks and bank deposits) denominated in the złoty, which earn interest at variable and fixed market interest rates.

The objective of interest rate risk management is to optimise interest rates with a view to:

 Reducing the adverse effect of fluctuations in interest rates on cash flows,

 Minimising the cost of interest on debt,

 Ensuring the highest available profitability of financial assets and their safe allocation.

To achieve that objective it is necessary to ensure an optimum structure and cost of project financing using proceeds from issues of securities and debt, and to provide for an optimum level of working capital.

The Group primarily uses natural hedging involving the use of the same reference rate for borrowings and financial assets denominated in the złoty, and maintaining its available long-term credit facilities based on a fixed interest rate in the euro.

The remaining exposure to interest rate risk may be hedged using only the following transactions:

 Forward rate agreements (FRA),

 Interest rate swaps (IRS),

 Cross-currency interest rate swaps (CIRS).

The Group may enter into a transaction to hedge interest rate risk if it is ensured that the expected cost of the underlying instrument is limited. Execution of such a transaction is subject to the Risk Committee’s approval.

Execution of an interest rate hedging transaction must be approved by the Management Board if its hedge horizon is more than 12 months or if the transaction does not conform to the Financial Risk Management Policy.

Credit risk management

The Group has a uniform credit risk management policy and procedure in place, which has been adopted by all key companies of the Group which are exposed to such risk.

 Identified credit risks

The Group’s credit risk is related to:

­ Placements of cash and cash equivalents with banks;

­ Granting trade credit to trading partners in connection with the sale of products and services.

 Purpose of credit risk management:

To mitigate the risk of loss of financial assets, including loans, receivables, cash and cash equivalents.

 Identification of cash investment instruments

The Group is allowed to use the following instruments to invest cash:

­ Bank deposits with banks of good financial standing,

­ Polish treasury bills and bonds,

­ Other instruments of a similar nature.

 Trade credit limits:

The total amount of trade credit granted to trading partners by a Group company should not exceed:

­ The amount of insured trade credit,

­ The market value of security provided by the customer,

­ The trade credit limit determined by the Group company based on the assessment of the trading partner’s financial condition.

 Rules of credit risk management

a) Execution of transactions involving placement of cash and cash equivalents

­ Group companies make cash placements following selection of the highest interest rate quotations received from at least three banks, taking into account allocation limits, except for overnight deposits, which may be placed with the bank at which the account balance shows a financial surplus.

­ Exceeding the allocation limit and/or placement of a deposit with a term of more than one year requires approval by the Management Board member in charge of finance or the President of the Grupa Azoty Management Board.

b) Provision of trade credit

­ The Group determines trade credit limits based on requests received from sales force.

­ A trade credit limit does not require a separate approval if it is insured or relevant security is provided by a bank or another institution with high creditworthiness.

­ In other cases, a trade credit limit decision requires approval by the Corporate Finance Department (for limits of up to PLN 2m), by the Credit Risk Committee (up to PLN 5m), or by the Management Board member in charge of finance or President of the Grupa Azoty Management Board (over PLN 5m).

In the case of actual or threatened insolvency, as a result of which an impairment loss is recognised, a Group company should immediately initiate an amicable recovery procedure, or collection or enforcement proceedings to recover the threatened financial asset or relevant security.

Receivables insurance agreements at the Group

As part of trade credit risk management, the Group cooperates with leading insurance companies, taking advantage of diversification and competition between insurers by accessing specialist knowledge on the financial standing of the insured trading partners and having the ability to adjust the amounts of trade credits to the limits granted by individual insurers to their clients which are also customers of the Group.

Given the above, the Parent (with certain subsidiaries as co-insured) and Grupa Azoty KĘDZIERZYN hold uniform global receivables insurance policies with KUKE, expiring in July 2021. Grupa Azoty PUŁAWY holds a foreign trade receivables insurance policy, executed on equivalent terms with TUEH, valid until January 2021, and a domestic trade receivables insurance policy with AGRO, valid until June 2021. Also Grupa Azoty POLICE has executed a global insurance agreement based on unified terms of insurance, with ATRADIUS, valid until December 2021.

COMPO EXPERT and Grupa Azoty ATT Polymers have separate global trade receivables insurance programmes, under TUEH insurance scheme.

In 2020, there were a few cases of reducing trade credit limits under global trade receivables insurance policies, for trading partners whose standing and creditworthiness deteriorated significantly due to the COVID-19 pandemic, but their overall impact on the Group’s credit risk was negligible and the existing high level of insurance coverage of trade receivables was maintained.

5.9. Expected financial condition

Although their situation is clearly linked to developments in the market environment, the Parent as well as the Group’s subsidiaries and associates are fully solvent, with good credit standing. This means that they are able to pay their liabilities in a timely manner and to hold and generate free operating cash flows sufficient to continue servicing their liabilities as they become due. In 2020, all of their borrowing-related liabilities were paid when due, and there is no threat to their ability to continue servicing their debt. To secure liquidity, the Parent uses external sources of financing. It is party to umbrella credit facility agreements which secure funding for day-to-day operations and to a package of corporate financing agreements which include long-term agreements to finance the Strategy and Development Plan. The Parent and the subsidiaries are party to a physical cash pooling agreement in PLN and EUR, whereby some companies’ deficits are financed with surpluses from other companies. Thus, even if the macroeconomic conditions deteriorate in a short term, the risk of losing liquidity remains low. Under the Payment Service Agreement with Banco Santander S.A. and Santander Faktoring Polska S.A., executed together with the Key Subsidiaries, the Parent has the ability to defer the payment of liabilities. The agreement supports liquidity management.

In 2020, no material adverse impact of the COVID-19 pandemic on the Group’s operations was identified. Nevertheless, if the vaccination programmes implemented worldwide fail to produce the expected effects and if the restrictions and limitations necessitated by the pandemic continue, the risk of a negative impact of the COVID-19 pandemic on the operations of Grupa Azoty in the next financial year may increase.

The major drivers determining the Parent’s development in 2021, including growth of its financial resources and assets, will include prices of the key feedstocks (including gas) and the ability to generate positive margins on the main products sold both in Poland and abroad. Moreover, future financial performance will also be influenced by exchange rates (USD, EUR) and the economic situation in agriculture and in the industries which are final customers.

The Parent intends to consistently implement the financial and investment objectives assumed in the strategy, designed to ensure that the return on investment expected by investors is achieved.

6. Risk, threats and growth prospects

6.1. Significant risk factors and threats

Risk related to health risks for employees and disruptions in the Group’s operations due to SARS-CoV-2 coronavirus epidemic

Group - medium risk/ Grupa Azoty S.A. - medium risk

Risk related to health and safety of employees, potential disruptions in production and supply chain, and adverse financial consequences resulting from the public health emergency caused by the SARS-CoV-2 epidemic.

The Group is constantly monitoring the epidemic situation in Poland and analysing various scenarios relating to the current and projected consequences of the public health emergency affecting the Company’s and the Grupa Azoty Group’s operations. The analyses and forecasts consider the introduced legislative changes and changes in behaviour in the market environment.

In order to enable the Company and other Grupa Azoty Group companies to operate in a possibly smooth manner, procedures have been put in place to ensure prompt reaction of appropriate services. In addition, recommendations were issued to disinfect premises, work from home (where possible) and maintain social distancing in order to reduce the risk of employees contracting the coronavirus. A team has also been set up in the Grupa Azoty Group to coordinate activities undertaken in connection with the public health emergency.

In view of the decline in revenue recorded in 2020, the Parent and some of its subsidiaries took advantage of the governmental support programme (the anti-crisis shields), mainly in the form of subsidies to salaries and wages and social security contributions.

There are no reports of increased staff absence that would disrupt the continuity of production.

Risks associated with the execution of investment projects

Grupa Azoty Group – medium risk / Parent – medium risk

Risk that key investment projects will not be completed according to plan and/or will not deliver the expected results. Risk that a given investment project may not be executed at all, may be delayed and/or may be over budget.

Implementation of strategic investment projects is among the Group’s major areas of activity, critical to its value growth. The Group’s strategy envisages both investment projects in the core business areas of the Group and expansion of its new business segments.

Investment decisions are made on a case-by-case basis in the context of compliance with the Group’s strategy, the project’s expected economic viability, and the level of risk associated with achieving the expected results. In consequence, considering the nature of the Group’s investment projects, including the time required for their preparation and implementation and the effect of new regulations on their profitability, there is a risk that some of the investment projects included in the Group’s investment programme will be modified, their completion will be delayed or that they will not be carried out at all.

Each investment project is implemented in line with internal procedures and is fully supervised by the Investment Corporate Supervision Department. Monthly reporting by Project Managers and quarterly corporate reporting have been put in place at Grupa Azoty S.A. The reports contain analysis identifying potential increases in the risk of exceeding the deadline and/or overrunning the budget of a specific project.

Risk associated with price and availability of key raw materials

Grupa Azoty Group – medium risk / Parent – medium risk

Risk that production may be stopped or significantly constrained due to disruptions in supplying a key raw material or a significant increase in its price.

Continuity of the Group’s production depends on availability and quality of key raw materials. No assurance can be given that terms of business with some suppliers will not deteriorate or that the supply of raw materials used in production will not be interrupted. In particular, a limited number of potential suppliers and monopolisation on some of the markets for the commodities used by the Group may be a source of risk. The continuity of supply of raw materials to the Group may be disrupted by factors such as technical failures, natural disasters, adverse market conditions resulting from the lack or short supply of certain raw materials, significant adverse weather conditions or events of force majeure. Furthermore, no assurance can be given that contracts for the supply of raw materials will not contain clauses unfavourable to the Group companies, which would unduly or ineffectively protect the Group companies’ interests in the event that a given supplier fails to perform or improperly performs its obligations under such contracts.

The key raw materials and feedstocks for fertilizer production at the Parent include ammonia, phenol, sulfur, natural gas and coal. The raw materials and feedstocks used by the Group’s subsidiaries also include benzene, propylene, phosphate rock and potassium chloride.

Risk related to price and availability of natural gas

Grupa Azoty Group – medium risk / Parent – medium risk

Risk related to prices and operational disruptions caused by a lower-than-expected or restricted supply of adequate volumes of natural gas of the right grade and quality required for production.

In the search for competitive sources of gas in order to diversify both the geographical regions and suppliers of gas, the Grupa Azoty Group companies provide details of executed contracts and their terms and conditions in press releases and reports. Negotiations with gas suppliers are conducted at the Group level, which allows the Group to leverage its stronger bargaining position. The Grupa Azoty Group takes steps to satisfy its overall gas demand through a combination of a long-term contract with its strategic supplier, annual or shorter contracts with a number of other suppliers, and transactions on energy exchanges and the OTC market to meet short-term demand of the companies, secure gas supplies and lower cost of gas.

To this end, Grupa Azoty S.A. has concluded a long-term contract with a reliable strategic partner. The contract secures 80–100% of the needs, making it possible to partially diversify supplies. The contract provides for a price formula based on market quotations and allows the Parent to hedge future prices based on forward products. The conclusion of a long-term contract with pricing formulas based on the German market (the largest gas market in Europe) has limited the risk of having to pay significantly higher prices than the direct EU competitors.

Furthermore, the risk of supply constraints due to disruption in gas supplies to Poland has been mitigated by the extension of cross-border interconnectors, launch of the LNG terminal, and by Regulation (EU) 2017/1938 of the European Parliament and of the Council concerning measures to safeguard the security of gas supply. Moreover, the gas availability and price risk is mitigated by the supplies of substitute and cheaper gas from local sources. They ensure that in the event of limited grid gas supply production may be continued at satisfactory levels, and if supplies from local sources are lower than needed, grid gas is purchased on the Polish Power Exchange and supplied as part of within-day capacity.

Factors that shape the gas market and their impact are changing rapidly. Gas prices are increasingly influenced by the volatile demand caused by the growing share of renewable energy sources in power generation, supplemented by flexible gas-fired generation units. The global LNG market, with Europe’s own production declining, is also putting an increasing pressure on prices through price arbitrage between the European and Asian markets, perceived by many suppliers as competing markets.

Therefore, in order to alleviate the impact of significant gas price movements on the spot market on the gas costs paid by the Group companies, measures mitigating the risk were taken in 2020, consisting in locking in gas prices through forward contracts covering a portion of purchased volumes.

Risk of major industrial accidents or technical failures disrupting the continuity of processes and operation of key production units

Grupa Azoty Group – medium risk / Parent – medium risk

The risk of major industrial accidents defined in accordance with the Environmental Protection Law or technical failures disrupting the continuity of processes and operation of production units of key importance for the implementation of the enterprise’s objects.

The Parent is classified as an establishment with a high risk of a major industrial accident (upper-tier establishment – UTE). Therefore, the Company has developed and implemented incident prevention programmes and regularly monitors and implements legal safety requirements, including requirements of the SEVESO III Directive. Grupa Azoty S.A. has reliable safety systems and preventive and prediction measures in place at all organisational and technological levels, including occupational health and safety as well as protection against industrial accidents. The relevance of adopted safety measures is assessed by internal and external inspection authorities as well as by accreditation/certification bodies.

The strategy for managing the risk of major industrial accidents or technical failures focuses in the first place on measures to prevent critical situations, and if any such event occurs, the risk is shared with the insurer.

Measures to prevent emergency situations at the Grupa Azoty Group companies include ongoing monitoring of hazards related to technological processes and operation of machinery and equipment, ongoing assessment of their technical condition, and monitoring of threats in storage and transport. Grupa Azoty S.A.’s plants and units are equipped with safety and protection systems to minimise the risk of major accidents and environmental contamination, as well as risks to human life and health. The Group’s units are Best Available Techniques (BAT) compliant. The units are kept in a proper working order also by carrying out scheduled technical stoppages and maintenance shutdowns, periodic inspections and routine rounds as required in the technological and job instruction manuals. The relevant execution resources are provided.

If a failure or accident occur, they are thoroughly analysed in order to identify their causes. Based on such analysis, preventive measures are taken to minimise the risk of such incidents taking place again.

Risk of higher fertilizer imports

Grupa Azoty Group – high risk / Parent – high risk

Risk of failure to achieve target revenue from sales of fertilizers due to higher fertilizer imports. Risk related to periodic increases in volumes of fertilizers imported into Poland from other EU countries and from third countries as well as to a decline in economic performance as a result of squeezed product margins caused by the emergence of new market players and significant volumes of imported fertilizers. Consequently, there is a risk of failure to achieve targeted revenue from sales of fertilizers.

Recent years saw a significant increase in imports of NP and NPK fertilizers as well as UREA, AN, UAN and CAN fertilizers both to the EU and Poland. Competitors from eastern markets have access to cheap raw materials, such as natural gas, potassium chloride and phosphate rock, which are the key cost components in fertilizer production. Fertilizer production costs in the European Union are driven by a number of regulations, including limits on CO₂ emissions, which are not applied in Eastern European or Asian markets.

The Group’s efforts focus on mitigating the risks and on strengthening and consolidating its position in the segment of fertilizer production and sale. The Group monitors the volume of fertilizer imports by adapting its sale/pricing policies to market developments, for instance by adjusting price paths to current trends on the European and key global markets and taking steps to optimise the production costs and expand the portfolio of products and services offered to customers.

Risk of tightening regulations restricting the use or application of products

Grupa Azoty Group – medium risk / Parent – medium risk

The Group monitors and implements new requirements on an ongoing basis. The Group takes an active part in the work of registration consortia and European associations, and cooperates with Polish institutions to respond to upcoming changes in legislation.

The impact of new regulations on operations and marketed products is reviewed by Grupa Azoty S.A. on a case by case basis. Amendments to EU directives and regulations applicable to the Group’s key manufacturing and trading activities give rise to a potential risk that the use of the Group’s products by customers in the EU countries may be restricted.

The Grupa Azoty Group is currently analysing the risks associated with regulatory trends and proposed changes or planned new regulations, including delegated acts under the New Fertilizers Regulation (Regulation (EU) 2019/1009 of the European Parliament and of the Council of June 5th 2019), as well as Commission Implementing Regulation (EU) 2020/2151 of December 17th 2020 laying down rules on harmonised marking specifications on single-use plastic products, and regulatory packages under the European Green Deal.

The risks of more stringent EU regulations on the content of heavy metals in fertilizer products, restrictions on sales of certain plastic materials due to stricter requirements on plastic recycling, and possible restrictions on sales of iron-chromium catalyst, resulting from a planned future ban on using chromium compounds are also being monitored by the Grupa Azoty Group. Also analysed are the potential indirect risks for the Group’s products arising from regulatory trends concerning the end-user applications market for the Group’s products, such as the “Green” Common Agricultural Policy, Carbon Border Adjustment Mechanism (CBAM), Circular Economy (CE), or the EU climate policy, including the EU ETS reform.

Risk of rising prices of carbon emission allowances

Grupa Azoty Group – medium risk / Parent – medium risk

Potential threats related to this risk include higher market prices of CO₂ emission allowances or failure to purchase sufficient volumes of CO₂ emission allowances due to unavailability of cash or trading limits at banks.

To monitor this risk, the Grupa Azoty Group has established an EU ETS Management Committee and an EU ETS Executive Team. In order to mitigate the risk of a negative impact of CO₂ emissions trading prices on the results delivered by the Company and other key Group companies, the emission allowances market is continuously monitored and emission allowances are purchased on the futures market on a rolling basis. Additional futures transactions are executed when the market conditions are favourable. Such approach ensures mitigating the risk that allowances would be purchased at unfavourable prices.

In addition, a part of future emission allowances is secured by means of purchases of emission allowances in transactions that give rise to an obligation to deliver allowances on future dates, to be settled in future periods. The potential risk related to the drawdown of existing trading limits at banks has been mitigated by signing a relevant agreement with another bank, enabling the purchase of greenhouse gas emission allowances under forward contracts and the execution of a procurement plan within the trading limit granted by that bank. Similar agreements have been executed with three banks.

The policies and procedures in place are designed to ensure smooth trading in CO₂ emission allowances, ensure its efficiency, minimise the cost of operation of the EU Emissions Trading Scheme at the Group, and reduce the risks associated with participation in the scheme. They also aim to reduce spending on the purchase of emission allowances by entry into forward transactions, which maximally delay the related cash outflows, thus minimising an increase in the net debt to EBITDA ratio at the end of a reporting period.

Interest rate risk

Grupa Azoty Group – low risk/ Parent – low risk

From Grupa Azoty S.A.’s perspective, net exposure to interest rate risk is partly limited as Grupa Azoty S.A.’s credit facilities bear variable interest at 1M WIBOR plus the banks’ margin and, at the same time, Grupa Azoty S.A. has granted the Group companies loans bearing interest at the same variable rate and a slightly higher margin. From the Grupa Azoty Group’s perspective, this risk is not hedged, and it is mitigated by the fact that some credit facility agreements are denominated in the euro and have fixed interest rates.

The Group also uses surplus cash in PLN and EUR to balance the debt owed by the Group companies in PLN and EUR under Overdraft Agreements connected with physical cash pooling agreements (from 2016 in PLN and from 2018 in EUR). This limits the Group’s net exposure to interest rate risk. Moreover, the Company had utilised the first long-term loan with the EIB by 2017 and plans to end the utilisation of the second loan from the EIB by 2021, based on the available fixed interest rate, which are repayable over a period of 10 years. The Group also has access to transaction limits with banks, which enable it to enter into fixed-rate hedging transactions if the risk of a significant increase in financing costs due to higher variable market interest rates grows.

The Group has implemented the Financial (Currency and Interest Rate) Risk Management Policy. The Group has a Risk Committee which periodically assesses the consolidated exposure to interest rate risk of the Parent and its key subsidiaries, and examines the validity of measures designed to mitigate that risk.

When market interest rates are low, a scenario analysis is performed to calculate risk indicators and asses the risk, with regard to the Group’s actual exposure to that risk. If the risk exposure and/or market interest rates significantly increase, the Risk Committee considers calculating the value exposed to interest rate risk in accordance with the VaR methodology. Interest rate risk hedges should be executed by the Parent as the entity which centrally manages the Group’s finances. Under the loan agreement with the EIB, the Group is obliged to keep its consolidated EBITDA to net interest expense ratio at no less than 6x.

In 2020, due to the COVID-19 pandemic, interest rates in PLN were significantly reduced, with the NBP base rate down from 1.5% to 0.1%. At the same time, base interest rates in EUR were negative. Despite growing inflation, current market forecasts and efforts taken by the governments of developed countries worldwide to support the economy and ensure liquidity do not imply any significant interest rate increases over the next few years.

Liquidity risk

Grupa Azoty Group – low risk/ Parent – low risk

Liquidity risk is the risk of unexpected cash shortage or unavailability of credit facilities, resulting in temporary loss of ability to meet financial liabilities or the need to raise financing on unfavourable terms.

The Group is exposed to financial liquidity risk consisting in the Group’s inability to repay its financial liabilities when they fall due. Risk of failure to raise new financing or refinance existing debt can increase liquidity risk.

The Parent has established the Grupa Azoty Financing and Liquidity Risk Management Policy. Under the central financing model, the Group has implemented a package of financing agreements and amended its umbrella overdraft and multi-purpose credit facility agreements which secure current liquidity of the Group companies. The Parent is the agent under the umbrella agreements, authorised to allocate sub-limits of those credit facilities to individual Group companies. In 2015, the Parent and its key subsidiaries entered into an Intra-Group Financing Agreement (amended in 2018) under which it set financing limits for the subsidiaries. On October 1st 2016, the Group launched a physical cash pooling service in PLN and, and on November 2nd 2018 – in EUR, enabling the Group companies to take advantage of the Group’s overall liquidity position, including for short-term financing of deficits at some of the companies with surpluses at others. As a result, the Group has access to credit facilities (surplus cash) as well as mechanisms for their free redistribution, which significantly reduces the probability of short-term liquidity loss by the Group or its individual companies. The mechanism also significantly reduces the Group’s finance costs.

Moreover, the Group has implemented and plans to further increase the use of factoring and reverse factoring solutions, which offer a lower cost of financing and high flexibility and make it possible to reduce the cost of traditional debt financing.

The above instruments effectively satisfy the Group’s current liquidity needs and provide financing for its investment programme. However, if there is an accumulation of both external and internal negative factors, the liquidity risk mitigation methods applied by the Group may prove insufficient, which may have a material adverse effect on the Group’s operations, financial condition and results. Therefore, the key issue is to ensure compliance with the covenants provided for in the credit facility agreements, in particular the ratio of the Group’s net debt to consolidated EBITDA. This ratio is calculated on a rolling 12 month basis and monitored semi-annually, i.e. at the end of the first half of a calendar year and at the end of the year. The Group monitors projections concerning changes in this ratio on the basis of its annual budget and by preparing long-term budgets, taking into account both base-case and conservative scenarios. However, in the event of accumulation of adverse macro- and microeconomic factors, such risk may materialise. At present, none of the covenants under the credit facility agreements are expected to be breached in this respect. Therefore, operating and financial performance must be monitored on an ongoing basis, and operating expenses and capital expenditure at individual Group companies must be monitored and managed effectively.

Risk related to the security of IT systems

Grupa Azoty Group – medium risk / Parent – medium risk

In their operations, the Group companies use IT systems whose operation can be disrupted by errors in software or ICT infrastructure failures. In addition, some of the systems may be subject of cyber attacks, in particular those taking advantage of defects or security gaps in ICT systems, not yet identified by their manufacturers or providers of ICT security solutions.

Despite the implementation of ICT security systems and procedures as well as constant efforts to minimise the risk of failure and breaking the security barriers in place, the technical and organisational solutions applied may prove ineffective, and failures or ICT security breach incidents may pose a threat to the systems’ uninterrupted operation and to the confidentiality and integrity of the data processed in these systems, which in turn may have a material adverse effect on the Group’s business, financial position or growth prospects.

The Parent has in place a number of solutions governing information security management: Information Security Policy, ICT system security policy, Instructions for secure use of email, and internal orders concerning the protection of business secrets and handling of information security incidents. The Group has established a Data Protection Committee, as well as a security testing team and an ICT security procedure team. The Group’s Security Operations Center monitors the security of ICT systems and handles ICT security incidents.

6.2. Significant external and internal growth factors

The estimates of the World Bank show that the COVID-19 pandemic caused the global economy to shrink by about 4.3% in 2020. The International Monetary Fund (IMF) estimates that the global economic recovery from the crisis sparked by the pandemic may begin already in 2021. The IMF’s initial forecast suggests that the global economy will grow by 5.5% in 2021. However, the forecast uncertainty is high and depends on the success of vaccination against coronavirus on a global scale.

According to the IMF’s estimates, Poland’s economy contracted by 3.4% in 2020, which was one of the mildest recessions in the EU. At the same time, the IMF expects that the Polish economy will begin to rebound in the second quarter of 2021 as the availability of the vaccine against COVID-19 improves.

Interest rates in Poland

In April and May 2020, the Polish Monetary Policy Council significantly reduced the interest rates, by a total of 1.4pp. Thus, the main reference rate applicable to the credit facilities of the Grupa Azoty Group (1M/3M WIBOR) fell from approximately 1.7% to about 0.25%, and is expected to stay there in a longer term. This stabilises the Group’s borrowing costs at a relatively low level and reinforces its debt service capacity, also if the Group plans to increase debt to finance its investing activities.

The Polish Monetary Policy Council is not expected to change its interest rate policy over 2021. This will help maintain the Group’s borrowing costs as a low level and secure debt service.

The main reference interest rate for the Group’s borrowings (1M WIBOR) should remain at approximately 0.2% in 2021.

It is also expected that in 2021 the European Central Bank, the Fed, as well as the Polish Monetary Policy Council and the National Bank of Poland will continue to use the instruments to ease the monetary policy, thus sustaining the high liquidity of the interbank sector, or they might be reducing, to a very limited degree, the scale of the use of these instruments as the economy recovers.

A limited rise of the WIBOR and/or EURIBOR rates is unlikely before the first half of 2022 if inflation escalates or the economic conditions in Poland and globally improve significantly after the COVID-19 pandemic is over (vaccination programmes prove successful).

In conclusion, as regards the currencies used to finance the Group’s activities (PLN and EUR) the Grupa Azoty Group expects the current low interest rates to remain unchanged throughout 2021. Thus, the borrowing costs will remain at their historical lows, and the risk of the Group’s financial condition or results of its operations deteriorating on higher borrowing costs should be assessed as low.

Relative to market rates, the relatively narrow spread between credit and deposit rates available to the Group is expected to continue.

Interest income earned on free cash under cash pooling and fixed-term deposits will partially offset the borrowing costs.

Regulatory area

 The European Commission continues its work on delegated acts under the New Fertilizers Regulation (Regulation (EU) 2019/1009 of the European Parliament and of the Council of June 5th 2019), aimed at clarifying the provisions of the Regulation. An official document addressing FAQs concerning the Regulation was issued on December 21st 2020, while the guidelines on fertilizer product marking are yet to be published. Moreover, the Joint Research Centre of the European Commission is analysing which by-products within the meaning of Directive 2008/98/EC will fall under component material category CMC 11. The Regulation will take full effect in July 2022 after a three-year vacatio legis period.

 The work continues on implementing the provisions presented by the European Commission in its Communication on the European Green Deal with a view to achieving climate neutrality by 2050 in the European Union:

o In October 2020, a revised plan to raise the 2030 greenhouse gas emissions reduction targets to at least 55% was announced.

o A public consultation on the revision and extension of the ETS to cover the maritime sector and on the reduction of free allowances for the aviation sector was held between October 1st 2020 and January 14th 2021.

o A public consultation on the revision of the Energy Taxation Directive to ensure its coherence with Europe’s climate ambitions ended on October 14th 2020.

o On October 14th 2020, the European Commission published:

­ The methane strategy, which sets out measures to reduce methane emissions in Europe and globally;

­ The “Healthy and Energy Efficient Buildings” initiative: renovation wave strategy aimed at improving energy performance of buildings;

­ The Chemicals Strategy for Sustainability, part of the EU’s zero pollution ambition.

 On October 26th 2020, a public consultation was launched on review of the needs for additional legal requirements with respect to sustainable corporate governance – proposed directive on sustainable corporate governance; the consultation is scheduled to close on February 8th 2021.

 On October 26th 2020, a roadmap consultation concerning revision of the EU rules on addressing pollution from large industrial installations closed.

 A public consultation on a new mechanism for putting a carbon price on imports (Carbon Border Adjustment Mechanism) closed on October 28th 2020.

 From October 30th to December 4th 2020, a roadmap consultation was carried out to prepare the European Union’s strategy for protection and restoration of forests.

 A roadmap consultation on the sustainable products initiative (revision of the Ecodesign Directive) closed on November 2nd 2020.

 Between November 3rd 2020 and February 2nd 2021, a public consultation was held on the revision of the Intelligent Transport Systems Directive.

 A roadmap consultation on the EU soil strategy took place between November 5th 2020 and December 10th 2020.

 On November 11th 2020, a public consultation on the adaptation of the Action Plans: “Towards a Zero Pollution Ambition for air, water and soil” was launched, with a close date scheduled for February 10th 2021.

 Between November 13th 2020 and February 5th 2021, a public consultation on the revision of CO₂ emission performance standards for passenger cars and vans (light commercial vehicles) was held.

 November 13th 2020 saw the launch of a public consultation on the revision of the ETS Directive, scheduled to close on February 5th 2021.

 On November 17th 2020, a public consultation was launched on revising energy legislation to reflect the new climate goals, the Energy Efficiency Directive (EED) and the Directive on the promotion of the use of energy from renewable sources (RED II). The consultation is due to end on February 9th 2021.

 A roadmap consultation on the revision of the TEN-T regulation was held between November 20th 2020 and December 18th 2020.

 On November 27th 2020, a public consultation on the organic farming action plan was closed.

 On December 3rd 2020, a public consultation on substantiating claims about the environmental footprint of businesses and products was closed.

 December 9th 2020 saw the publication of the following documents:

o The Sustainable and Smart Mobility Strategy, which the European Commission perceives as a basis for green and digital transformation and for making the EU transport system more resilient to future crises.

o The European Climate Pact, an EU-wide initiative inviting people, communities and organisations to participate in climate action and build a greener Europe.

 December 18th 2020 saw the closing of a public consultation on a draft delegated act under the Taxonomy Regulation. The Taxonomy Regulation (2020/852), adopted in June 2020, is a general document in respect of which the European Commission will adopt delegated acts containing specific criteria to supplement the principles set out in the Regulation. The acts will establish detailed technical criteria for meeting the environmental objectives defined in the Taxonomy Regulation and define the conditions for individual activities associated with a given investment ensuring that ‘no significant harm’ is done regarding any of the environmental objectives.

 A roadmap consultation on future EU rules for reducing methane emissions in the energy sector was held between December 22nd 2020 and January 26th 2021.

 In the EU’s pursuit of climate neutrality and in order to meet the European Green Deal’s targets, in 2020 Member States implemented their national hydrogen strategies. For instance, the Kingdom of the Netherlands published its Hydrogen Strategy on April 6th 2020, the German government adopted its hydrogen strategy awaited since 2019 on June 10th 2020, Portugal published its National Hydrogen Strategy in August 2020, France published its ambitious national strategy for the development of decarbonized hydrogen on September 8th 2020. Moreover, already on July 8th 2020 the European Commission published a Hydrogen Strategy for a Climate Neutral Europe, while Poland is currently working on the development of a Polish Hydrogen Strategy until 2030 with an outlook until 2040.

 On November 16th 2020, the European Commission published its Decision adjusting the Union-wide quantity of allowances (the cap) for the EU ETS fourth trading period (2021-2030), beginning on January 1st 2021. This was consequent upon the need to adjust the allowance cap to the new rules and changes adopted in the revision of the EU ETS Directive, as well as due the UK’s exit from the European Union and the EU ETS as of 2021. The total number of allowances provided for in the Commission Decision on the Union-wide quantity of allowances to be issued under the EU Emissions Trading System for 2021 is 1,571,583,007, for the years 2021-2030.

 During the European Council Summit held on December 10th and December 11th 2020, conclusions were adopted, concerning new, more ambitious targets for greenhouse gas emissions reduction and providing for a reduction of net greenhouse gas emissions in the European Union by 2030 by at least 55% compared to the 1990 levels, as prerequisite for achieving the EU’s climate neutrality targets by 2050. This objective needs to be approved by the European Parliament. Following the approval by the EU Environment Council on December 17th 2020 of a new emission reduction target for 2030 and an agreement on a general approach to a draft new EU Climate Law, the EU submitted a new Nationally Determined Contribution (NDC) to the Paris Agreement under the United Nations Framework Convention on Climate Change (UNFCCC), whereunder the European Union has committed to reduce its greenhouse gas emissions by at least 55% by 2030 compared to the 1990 levels.

 A Council Decision on the system of own resources of the European Union was adopted on December 14th 2020, introducing the application of a uniform call rate to the weight of plastic packaging waste generated in each Member State that is not recycled. The uniform call rate is EUR 0.80 per kilogram. Additionally, Poland is entitled to an annual lump sum reduction, expressed in current prices, to be applied to its contribution, in the amount of EUR 117m.

 Commission Implementing Regulation (EU) 2020/2151 of December 17th 2020 laying down rules on harmonised marking specifications on single-use plastic products listed in Part D of the Annex to Directive (EU) 2019/904 on the reduction of the impact of certain plastic products on the environment was published in the Official Journal of the European Union on December 18th 2020.

Trade policy

 Efforts are continued to challenge the European Commission’s 2019 decision to impose an anti-dumping duty on UAN imports from Russia, the US and Trinidad and Tobago by Methanol Holdings (of Trinidad and Tobago) and Eurochem (of Russia).

 In October 2020, the European Union imposed sanctions (in three rounds) against Belarus for disregarding standards and human rights in the presidential election held in Belarus on August 9th 2020.

 The European Union also exercised its right to impose retaliatory tariffs on selected US goods, with effect from November 10th 2020. Simultaneously, in connection with the US presidential election, many EU countries see the change of the US president as a chance for a change in the US trade policy.

 On December 15th 2020, the decision to extend the anti-dumping measures applicable to imports of ammonium nitrate originating in Russia for another five years was published in the Official Journal of the EU. The decision followed a 15-month review initiated at the request of EU fertilizer manufacturers in September 2019. The European Commission decided to keep the duties at the current level.

 As the United Kingdom left the European Union (on January 31st 2020), a transitional period was in place until the end of 2020, allowing trade between the EU and the United Kingdom to be conducted under the former rules. On December 24th 2020, after several months of negotiations, an agreement was reached on the terms of future trade and cooperation, providing for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin. The agreement was signed on December 30th 2020 and is provisionally applicable, but awaits ratification by the European Parliament. On January 1st 2021, the UK left the single market and customs union.

 On December 30th 2020, a political agreement was reached to conclude a Comprehensive Agreement on Investment (CAI) between the EU and China. The procedure for signing and ratifying the agreement is expected to start soon.

 Negotiations of the European Union’s trade agreements with the following third countries are in progress: Australia and New Zealand as well as Indonesia (the texts of the agreements are being negotiated bilaterally, subsequent rounds of negotiations have not been scheduled yet) and Chile (the text of the agreement is being negotiated bilaterally, with the ninth round of negotiations scheduled for January 2021.

7. Shares and shareholding structure

7.1. Total number and par value of Grupa Azoty shares, holdings of the shares by supervisory and management personnel, and interests of such persons in the Parent’s related entities

Number and par value of shares as at the date of issue of this Report:

 24,000,000 Series AA shares with a par value of PLN 5 per share,

 15,116,421 Series B shares with a par value of PLN 5 per share,

 24,999,023 Series C shares with a par value of PLN 5 per share,

 35,080,040 Series D shares with a par value of PLN 5 per share.

The total number of Parent shares is 99,195,484 bearer shares (ISIN code PLZATRM00012).

As at December 31st 2020 and as at the date of this Report, none of the members of the Parent’s Management or Supervisory Boards held any shares in the Parent’s share capital.

As at the date of this Report, none of the Parent’s supervisory or management personnel held any shares in the Parent’s related parties.

7.2. Treasury shares held by the Parent, the Group companies and persons acting on their behalf

The Parent holds no treasury shares. The Group companies hold no shares in the Parent.

7.3. Grupa Azoty shares

The Parent stock has been listed on the WSE since June 30th 2008.

The Parent’s share capital amounts to PLN 495,977,420 and is divided into 99,195,484 shares with a par value of PLN 5 per share. The Parent’s shares (ticker: ATT) are listed on the WSE main market in the continuous trading system and are included in the following domestic indices:

 WIG − comprising all stocks traded on the WSE Main Market which satisfy the basic eligibility criteria;

 WIG30 – based on the value of the 30 largest and most liquid stocks traded on the WSE Main Market;

 mWIG40 – comprising 40 medium-sized companies listed on the WSE Main Market;

 WIG-Chemia – a sector index comprising those companies included in the WIG index which are also classified in the Chemicals sector;

 WIG.MS-PET – a macro-sector index comprising companies in the fuel, gas and chemical industries.

 WIG-Poland – an index comprising exclusively shares of Polish companies listed on the Main Market of the WSE and meeting the basic eligibility criteria.

The Parent is also included in the following foreign indices:

 MSCI indices – in the semi-annual revision of the MSCI indices of November 13th 2018, Grupa Azoty was transferred from the MSCI GLOBAL STANDARD INDEXES – MSCI POLAND INDEX to MSCI GLOBAL SMALL CAP INDEXES – MSCI POLAND INDEX;

 Since June 15th 2018, Parent shares have been traded on the Berlin Open Market (Boerse Berlin).

The Parent is included in CSR indices:

 the Company was a constituent of the RESPECT Index for an uninterrupted period from the index’s launch on November 19th 2009 to its expiry on December 30th 2019; apart from the Respect index, the Parent is presently a constituent of WIG-ESG, launched by the Warsaw Stock Exchange (WSE) in September 2019;

 MSCI ESG – the Company is among the companies reporting their environmental, social responsibility and corporate governance performance.

All other key information on Parent shares, including information on voting restrictions, is presented in the sections concerning the Statement of compliance with corporate governance rules.

Shareholding structure

Below are listed shareholders holding directly, or indirectly through subsidiaries, at least 5% of total voting rights at the General Meeting, along with information on the number of shares held by such entities, their respective ownership interests, the number of voting rights held, and their share in total voting rights at the General Meeting.

The actual shareholding structure may differ from that presented if there were no events giving rise to a shareholder’s obligation to disclose a new shareholding or if, despite the occurrence of such events, a shareholder failed to provide relevant information.

Shareholding structure as at December 31st 2020

^*)current name: Nationale-Nederlanden Otwarty Fundusz Emerytalny

^**)Direct subsidiary of Norica Holding S.à r.l.

In the period from December 31st 2020 to the issue date of this Report, the Parent was not notified of any changes in major holdings of its shares.

Dividend policy

In accordance with the dividend policy resulting from the updated strategy for 2013−2020, the Company decided not to set the lower limit for the dividend payout ratio and to maintain the upper limit at 60%.

The main goal underpinning Grupa Azoty’s financing structure is to ensure long-term financial security and internal coherence between all funding sources. Given the extensive capital investment programme in place and the risk of an economic downturn, no floor has been set for the dividend payout ratio. Accordingly, if justified, the Parent’s Management Board did not recommend a dividend payment.

The final decision on profit distribution for a given financial year is made each time by shareholders at the Annual General Meeting.

No dividend was paid in 2020. On June 29th 2020, the Company’s Annual General Meeting passed a resolution to allocate the entire amount of the Parent’s net profit for the financial year 2019, of PLN 58,249 thousand, to the statutory reserve funds.

Dividend paid out in 2008−2020

Source: Company data.

Performance of Parent shares

In the first half of 2020, the share price remained low, rarely exceeding PLN 30 per share. However, 2020 was an exceptional year, the main reason being the outbreak of the COVID-19 pandemic. Before the pandemic, as in 2019, the Grupa Azoty stock was significantly undervalued, with the price staying low and rarely breaking above PLN 30 per share. Such a short price rebound was observed in January, followed by another decline and stabilisation at PLN 26-27 per share. The outbreak of the pandemic and a panic sell-off across all global stock exchanges, including the Warsaw Stock Exchange, also caused a steep decline in the Parent’s share price. The lowest level was recorded in mid-March – PLN 17.71 per share. The price did not exceed PLN 21 before the end of the month. Once more positive information was reported and the first wave of the pandemic subsided, an outburst of euphoria followed, with the sentiment on the Warsaw Stock Exchange positive enough to compel investors to buy shares at considerably reduced prices. After the March sell-off many companies were soon back in favour with investors and their share prices soared. The Parent’s share price also benefited from the upward trend and started to grow rapidly – in the first half of April 2020 it rose from approximately PLN 20 to PLN 28. The price stayed at PLN 26-28 until the third week of May, when it broke above PLN 30, staying for a short time at PLN 34.75 in mid-June. Thereafter, the price steadily declined with short rebounds: to PLN 30.55 in the last ten days of July, PLN 27.05 in the middle of August, and PLN 26.45 in the last ten days of September. In mid-October, the price dropped again to around PLN 20. A moderate gradual growth was recorded since, up to PLN 25, with the average price reaching around PLN 25-27 at the end of the year, with a one-off rebound to PLN 28.85 on December 9th 2020. Eventually, the year-end price was PLN 27.45.

Performance of Parent shares

Source: In-house analysis based on the WSE Statistics Bulletin.