Grupa Azoty S.A.

M&A Activity • May 13, 2019

Current report no. 28/2019 dated 11 May 2019

Execution of the Contract for Engineering, Procurement and Constructionof the Polimery Police Project

Contents of the report:

The Management Board of Grupa Azoty S.A. (hereinafter the "Issuer")hereby notifies that on 11 May 2019 the Issuer's subsidiary - PDH PolskaS.A. ("PDH") and Hyundai Engineering Co., Ltd. ("Contractor") enteredinto a contract for engineering, procurement and construction of thePolimery Police Project ("Polimery Police Project"), on a turn keybasis, for the lump sum remuneration ("EPC Contract"). The Issuernotified, in current report no. 19/2019 dated 18 April 2019, of the factthat the bid submitted by the Contractor, as a general contractor, wasfinally selected within the tender for the award of the contract forengineering, procurement and construction of the Polimery Police Project.

The subject matter of the EPC Contract is the engineering, procurementand construction of the Polimery Police Project, i.e. a newpetrochemical complex in Police, which comprises five sub-projects: (i)propane dehydrogenation process unit (PDH Unit), (ii) polypropyleneproduction unit (PP Unit), (iii) system for polypropylene packaging,storage, logistics and dispatch, (iv) auxiliary units andinterconnections, and (v) handling and storage terminal comprising portfacilities for the unloading and storage of propane and ethylene fromseagoing vessels. The planned target of the PDH Unit is to be 400thousand tonnes of propylene with the purity of 99.6% of its volume(polymer grade propylene) per 8000 hours, and the performance of the PPUnit is to be as well 400 thousand tonnes of polypropylene of varioustype per 8000 hours.

The EPC Contract was entered into on the basis of the EPC LSTK(Engineering, Procurement and Construction Lump Sum Turn Key) formula.Under the EPC Contract the Contractor will comprehensively develop,including it will design and construct, a new Polimery Policepetrochemical complex, and will procure achieving and maintaining theguaranteed parameters specified in the licence agreements concerning thePDH Unit and the PP Unit.

Within the EPC Contract PDH is entitled to instruct the Contractor toperform the optional scope on the terms and upon remuneration strictlyspecified in the EPC Contract. The optional scope includes sixadditional options: (i) execution of dredging works in the fairway fromthe Mijanka Terminal to the Handling and Storage Terminal - deepeningfrom 10.5 m to 12.5 m in the Kanał Policki Channel, (ii) execution ofWater Treatment Plant related to the Issuer's investments, (iii)execution of the Nitrogen Plant for the PDH Unit and PP Unit, (iv)laboratory equipment for the purposes of the Polimery Police Project,(v) equipment for production and maintenance services, and (vi) warrantyextension from 24 months up to 36 months for anti-corrosion coatings andfire protection coatings. The total remuneration for the optional scopeis EUR 35,938,000.

The period of warranty granted by the Contractor in respect ofparticular sub-projects is 24 months from the date of the provisionalacceptance certificate concerning a given sub-project, and in respect ofthe anti-corrosion and fire protection coatings the EPC Contractstipulates a possibility of extending such period up to 36 months.

The remuneration due to the Contractor is lump sum remuneration andamounts to EUR 992,811,000 net for the basic scope. The lump sumremuneration is subject to changes only in exceptional situationsspecified in the EPC Contract, within the change procedure. Theremuneration will be payable in instalments after the completion andacceptance of subsequent stages of the Polimery Police Projectdevelopment.

The EPC Contract stipulates liquidated damages to be paid to PDH in suchevents as: (i) the Contractor's delay in the performance of the keyproject milestones - up to the total amount of 10% of the remuneration,(ii) a failure to achieve the guaranteed parameters - up to the totalamount of 10% of the remuneration; and (iii) PDH's rescission of the EPCContract - in the amount of 10% of the remuneration. The total sum ofthe liquidated damages (on all accounts) payable by the Contractor islimited to 20% of the remuneration.

The Contractor's liability on account of all claims arising from the EPCContract is limited to 30% of the remuneration. The above limitationdoes not apply to the liability for non-performance or improperperformance of the Contractor's obligations under the warranty, theintellectual property rights and the confidentiality obligation, as wellas for actions or omissions due to its willful misconduct or grossnegligence.

The commencement of the performance of the Contractor's obligations isscheduled for 1 August 2019 (Commencement Date), with the reservationthat until the issue of the Full Notice to Proceed the parties willproceed with the performance of its obligations only in a limited scopeexpressly indicated in the EPC Contract. PDH has the right to issue theFull Notice to Proceed within four months from the Commencement Date.

The delivery of the Polimery Police Project for operation on the basisof an integrity test protocol signed by the parties should take placewithin a maximum period of forty months from the Commencement Date.

The parties to the EPC Contract are entitled to rescind it and suspendits performance on the terms specified therein. In particular, PDH willbe entitled to rescind the EPC Contract with immediate effect if: (i)meeting all minimum guaranteed parameters in the period specified in theEPC Contract is not confirmed within the acceptance tests or theintegrity test, except where the Contractor proves it is not liable forthe failure to meet them; (ii) the maximum limit of the liquidateddamages for delay payable by the Contractor is reached; (iii) theContractor is in delay with the completion of any of the key milestonesof the Polimery Police Project by more than 120 days; (iv) theContractor otherwise infringes any material obligation or persistentlyviolates any obligations arising from the EPC Contract, if theContractor fails to remedy such violation within a period specified byPDH in written summons, not shorter than one month. In the above eventsPDH will pay the Contractor a portion of the remuneration due for thedocumentation, deliveries and works properly performed and accepted. PDHmay exercise its right to rescind the EPC Contract within 30 days fromthe end of the basic warranty period.

Notwithstanding the above, if PDH fails to issue the Full Notice toProceed within four months from the Commencement Date, each party willhave the right to rescind the EPC Contract with immediate effect. In theabove case PDH will (i) pay the Contractor a portion of remuneration duefor the documentation, deliveries and works performed and accepted; (ii)reimburse the Contractor for any evidenced and reasonable costs ofpurchasing equipment and material ordered but not yet delivered to thesite insofar as the Contractor cannot cancel the order on a no-costbasis; and (iii) reimburse the Contractor for any other evidenced andreasonable costs, accepted by PDH, incurred by the Contractor or whichthe Contractor is obliged to incur in relation to the rescission, withthe reservation that the value of the remuneration payable to theContractor and the value of all reasonable and evidenced costs returnedto the Contractor will not exceed EUR 30 million.

The total estimated budget of the performance of the Polimery PoliceProject is approximately EUR 1.5 billion, of which approximately EUR 1.2billion will be capital expenditures (the Contractor's remuneration,purchase of licences, preparatory works, capitalised costs ofremuneration etc.). The remaining amount will comprise non-capitalisedcosts of PDH operation, financial expenses during the constructionperiod and provisions made for the debt service and project developmentcost overruns, resulting from the specifics of financing the PolimeryPolice Project based on the project finance formula.

Legal grounds: Art. 17 sec. 1 of the Regulation (EU) No. 596/2014 of theEuropean Parliament and of the Council of 16 April 2014 on market abuse(market abuse regulation) and repealing Directive 2003/6/EC of theEuropean Parliament and of the Council and Commission Directives2003/124/EC, 2003/125/EC and 2004/72/EC (Official Journal of theEuropean Union dated 12 June 2014, no. L 173/1, as amended).