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Letter from the Board of Directors

The year 2009 was one of the most unprecedented, mostly unexpected, volatile and profitable years in the history of Adaro and the Adaro group of companies. It tested our business model in unexpected ways and tested our resolve to stay on track to build a bigger and better Adaro Energy.

Although it was a difficult year, we were able to achieve excellent results. Our audited consolidated net profit for the year ended December 31st, 2009 increased 392% to an all time record of Rp4.4 trillion. Our 2009 basic earnings per share (EPS) increased to Rp136.5. The significant increase is attributed to higher average selling prices of coal as well as increased sales volume, which increased revenue 49% to Rp26.9 trillion. Meanwhile, the cost of revenue increased at a lesser rate of 21%, boosting the gross margin from 27% in 2008 to 41% in 2009.

Although it was a difficult year, it made us stronger. One of the best moves we made was not to waver from our long held plans, to stay focussed on long term value creation and not get distracted by short term hype and fears.

There was a lot of confusion at the beginning of the year. Just how bad was the global economic crisis going to be? How bad would it affect Asia? How bad would it affect the demand and outlook for our product, Envirocoal? How should we react to this crisis to safeguard our assets? Would the current conditions create opportunities to further grow our business?

Our Vision, Main Goal and Strategy
The vision we have is to be the largest and most efficient integrated coal mining and energy company in South East Asia.

Our main overriding aspiration is to create maximum value from Indonesian coal. While creating shareholder value is our main goal, we also seek to create value from Indonesian coal for all of our other stakeholders. It is our reason for being, it is what we are good and experienced at and it is why we come to work everyday.

IIn order to achieve our main goal, we implement a long standing business strategy of 1) increasing production organically every year, 2) improving the efficiency and integration of our coal supply chain and 3) maintaining and acquiring world class deposits of Indonesian coal, which may include the use of coal enhancement technology.

Adaro Indonesia, our main source of revenue and key value driver, has a remarkable track record of increasing production every single year since commercial operations began in 1992 and, together with the other Group companies, is known for its reliability and dependability in the coal and credit markets. This is a track record we are extremely proud of and is one we intend to continue.

Therefore, at the beginning of 2009 after much review, discussion and debate we decided to not make big strategy changes and stay on track to deliver increased value.

How Did We Do?
By the end of 2008, we, along with much of the world’s coal industry, saw little evidence that demand for our product was waning. We attributed this to a possible segmentation forming in the coal market and that environmental sub-bituminous coal, like our Envirocoal, was becoming a niche market.

We therefore decided, even though so much had changed since we set those targets prior to the IPO in the middle of 2008, that we were not going to change our 2009 targets. We continued to use our pre-crisis target range of 42-45 million tonnes of coal production and sales, EBITDA range of US$750 million - US$1.0 billion and cash costs ex-royalty range of US$31 per tonne - US$33 per tonne (note: we increased our cash cost range following the mid-2009 increase to the strip ratio).

However, the company started the year with uncertainties in coal market conditions given the weakness in the global economy, which in turn resulted in soft sales volume and reduced tonnage off-take by customers in the first half of 2009.

After the end of the first half of 2009 we had produced and sold 18 million tonnes of coal, which was the same volume as in the first half of 2008. We could have reacted to the softening of demand by lowering our price to attract new customers, but we did not, sticking to our plan of creating long term value and growing with our valued customers, who value the benefits of low pollutant coal and our reputation for reliability and dependability. We could have lowered our volume target, but we did not.

At the end of the first half we began to see demand returning and the challenge was whether we could ramp up fast enough again to allow us to catch up to our target. We indicated in our 2Q09 Quarterly Report that it would be difficult, and actual output would probably be just at or under the bottom part of the production range. This would require second half production to hit 24 million tonnes, or a new production record of 4 million tonnes per month.

We also saw at this time that the Japanese-Newcastle negotiated benchmark price for thermal coal (which normally comes out around the end of the Japanese fiscal year) was settling at around US$70 per tonne, which while lower than the 2008 benchmark price of US$125 per tonne, which we used to price most of our coal deliveries for 2009, was still 27% higher than the US$55 per tonne benchmark price of 2007. We were encouraged to see thermal coal contracts “normalizing” in the midst of an economic downturn at such a historically high price, with market expectations of moderate price increases in the following few years. For us, the economic crisis was now over, and with renewed confidence we began to rapidly implement our growth and development plans, in terms of marketing to new markets, securing funding, signing various agreements and appointing engineering and construction contractors.

Due to higher than expected negotiated benchmark price that became apparent in middle of 2009, we took the prudent step of increasing the budgeted strip ratio of the mine plan. Conducting pre-stripping activities and exposing more coal provides operational efficiencies in the future and create more options and certainty of coal production when wet weather hampers production during the rainy season. The mine plan originally called for an increase from 4.25 in 2008 to 4.75 in 2009. The new budgeted strip ratio for 2009 became 5.0. This had the effect of slightly increasing cash cost guidance (excluding royalties) to a range of US$31-US$33 per tonne.

By the end of the year, we were delighted to achieve another year of volume increases, with 40.6 million tonnes of production and 41.4 million tonnes of sales. We produced a record 12.4 million tonnes in the fourth quarter, at an average of over 4 million tonnes per month, in the midst of the rainy season, which normally begins in November. It showed our decision to increase overburden removal as well as other “waterproofing” activities had worked.

In term of costs, the benefits of our acquisitions and investments in our coal supply chain as well as lower fuel prices combined with a generally stable cost environment in 2009 offset the increase to costs due to a higher stripping ratio. Thus our operating margin widened to 37% and operating profit rose 136% to Rp9.9 trillion, as the increase in revenue outpaced cost increases.

Due to the extraordinary conditions at the beginning of 2009, we came in slightly below our volume range, but we were delighted to achieve or beat our other targets in terms of price, costs and profit. We delivered an average cash cost (excluding royalties) of US$30.3 per tonne, and EBITDA of Rp11 trillion or US$1.1 billion.

Building a Bigger Better Adaro Energy
There were numerous improvements to the efficiency of Adaro Energy’s coal supply chain in 2009 that can be attributed to several investments in new equipment and training as well as the acquisition in 2008 of PT Sarana Daya Mandiri (“SDM”), a dredging and water toll contractor and in 2009 of Orchard Maritime Logistics Pte Ltd (“OML”), a barging and ship loading company.

In 2009 we were able to complete the long planned total integration from pit to port, by acquiring OML, the last critical part of the coal supply chain that was still not under our direct control. It did not seem likely at the beginning of the year, when the economic crisis that began in 2008 was still very much a reality. The Board had decided to shift gears to neutral so as to better assess the situation in our markets and regional economies. In the President Directors’s annual speech of October 2008, the key message was “Back to Basics” and we were still very much operating using that approach.

For the entire first quarter of 2009, we were in cash preservation mode and were re-evaluating feasibility work of various key projects, such as our mine mouth power plant and the associated overland conveyor.

On March 11, 2009, as we began to see the contours of global economic recovery, we announced we were resuming our development projects. Mining is traditionally a long term, capital intensive and slow yielding sector. Despite the uncertainty of the difficult short term market conditions we felt we had to stay on track with our pre-crisis plans and continue to implement our long stated business model of further integration. Due to the 6 month delay, however, our 80 million tonnes target date was moved back to the end of 2014.

Orchard Maritime Logistics Pte Ltd
After a thorough examination of the strategic benefits as well as expected future cash flows, we decided to go ahead with the acquisition of an existing contractor, that was partly held by three, but not all, of our key shareholders. On April 30, 2009 we acquired 74.16% of OML, a Singapore-based barging and ship loading company, for US$78.55 million and completed the integration of our coal supply chain.

Funded entirely out of existing cash, the deal was done at an arm’s length basis and a fair price. Throughout the process of acquiring OML, Adaro commissioned independent share valuations, a legal due diligence, and a review of the operational merits of the transaction.

The acquisition of OML has already delivered in terms of reduced costs, as seen by the 6% reduction in Adaro Energy’s 2009 freight and handling costs and increased control of transportation, partly responsible for the 98% reduction in 2009 demurrage charges. Other benefits include lower counter-party and other risks, increased flexibility of production and improved reliability.

SDM and OML Deliver Efficiency Improvements
At the end of 2008, SDM completed the dredging of a new channel on the Barito River. The heavy sedimentation build up had caused a serious bottleneck at the mouth of the Barito River and SDM’s new channel increased the river’s annual capacity from 60 million tonnes to 200 million tonnes. In 2009, due to the new channel as well as the newly acquired OML, Adaro Energy enjoyed the benefits in terms of approximately US$1.00 per tonne, or US$41 million, in cost savings. This occurred due to a 20% improvement to cycle time (or the time it takes a barge set to deliver its coal and return to the river terminal), eliminated the need to increase the barge fleet to meet production increases through until 2011 by an equivalent of 11 sets, or the equivalent of US$55 million in capital spending.

IBT and Shell sign Fuel Facilities Agreement
Another important move we made was the fuel facilities agreement signed on September 1, 2009 between our wholly-owned subsidiary PT Indonesia Bulk Terminal (“IBT”) and PT Shell Indonesia (“Shell”). The deal was made in order to support traffic growth at IBT’s port and increase the income stream coming from liquid bulk jetty operations.

We will never coddle our subsidiaries, but we will create opportunities to enable them to reach maximum potential. To reduce costs, we had steadily been moving our coal transhipment activities to the open anchorage of Taboneo at the mouth of the Barito River, rather than barge the coal the extra distance to IBT’s terminal at Pulau Laut, South Kalimantan. The deal with Shell is part of our on going commitment to improve the efficiency of our coal supply chain, and to further develop the business performance and potential of one of our operating subsidiaries.

The US$40 million project will include a fuel storage terminal with a minimum capacity of sixty thousand tonnes of high speed diesel to serve the regional coal and transportation companies.

Fuel Supply Agreement with Shell
In December 2009, we signed a Fuel Supply Agreement with Shell. Under this agreement, Shell will supply fuel to Adaro Indonesia with a minimum throughput of 360 Mn liters per year until 2022. The pricing of the fuel will be determined by market prices. The signing of the FSA will strengthen control of the coal supply chain by enhancing fuel supply security and improve efficiency through the reduction of costs.

Fuel Hedging
In order to reduce the risks caused by the fluctuation in the fuel price, in November 30, 2009 we entered into fuel hedging contracts with a relationship lending bank, where Adaro Indonesia will pay for fuel at a fixed rate. With total notional quantity amounts of 2,160,000 barrels, the agreement will cover approximately 80% of Adaro’s fuel requirements for 2010 at a rate similar to the average rate paid in 2009.

Complying with the Cabotage Law
In late October 2009, in order to comply with a 2005 regulation from the Ministry of Transportation regarding the implementation of a cabotage law that stipulates the transportation of goods by a vessel along the coast of domestic seaports must be carried out by domestic shipping carriers bearing an Indonesian flag, the majority of the assets of OML were restructured to PT Maritim Barito Perkasa (“MBP”) and PT Harapan Bahtera Internusa (“HBI”). MBP and HBI are national shipping carriers bearing domestic licenses, which were acquired for a nominal sum in the second half of 2009 by Adaro Energy. OML now handles customers outside of Indonesia, HBI handles non-Adaro barging customers within Indonesia and MBP handles Adaro Indonesia’s domestic barging.

Shareholders Restructure their Holdings
On July 23, 2009 our key shareholders restructured some of their holdings of stock of Adaro Energy into a single entity, called PT Adaro Strategic Investments, which now directly owns 43.91% shares of Adaro Energy. At the time of the restructuring, the key shareholders did not reduce nor increase their interest in Adaro Energy. The move was made to further increase the efficiency and cohesiveness of decision making and to strengthen the continuity and commitment of these key shareholders to create a bigger and better Adaro Energy. The shares crossing consolidated the ownership of the five key shareholders, namely the Rachmat family, the Thohir family, the Subianto family, Mr. Edwin Soeryadjaya and Mr. Sandiaga Salahuddin Uno.

The move is similar to when Adaro Energy was listed on the Indonesian Stock Exchange, as part of long standing efforts to simplify the corporate structure and consolidate control of the Adaro Group of companies.

Indonesian Coal Project with BHP Billiton
As part of our third strategic objective, to acquire world class deposits of Indonesian coal, in the fourth quarter of 2009, we expressed our interest to participate in a world class metallurgical coal project located to the north of our existing operations in Kalimantan.

On March 31, 2010, BHP Billiton announced it had entered into binding agreements to create a new joint venture for its Indonesian Coal Project (ICP) with our wholly owned subsidiary PT Alam Tri Abadi. We agreed to acquire a 25 per cent interest in the ICP joint venture. BHP Billiton holds the remaining 75 per cent. The ICP covers seven Coal Contracts of Work (CCoWs) located in East and Central Kalimantan in Indonesia. Undeveloped metallurgical and thermal Coal Resources are estimated at 774 million tonnes. Adaro is Indonesia’s second largest thermal coal producer and has operations near the ICP.

BHP Billiton President Metallurgical Coal, Hubie van Dalsen, said, “These agreements with Adaro provide a strong local partner to ensure the successful development of our world class metallurgical coal interests in Indonesia. As we progress development, we will continue our strong commitment to the protection of the region’s outstanding biodiversity.”

Completion of the transaction is subject to approvals from the Indonesian Government.

Balance Sheet, Access to Capital and Use of Proceeds
Our balance sheet strengthened considerably in 2009, with net gearing further falling to 26% at the end of December 2009. The stronger capital structure was made possible by strong cash flows and earnings generation during the year. We will continue to implement a strategy of continuously optimizing the capital structure and cost of capital, as well as maintaining good liquidity.

On October 22, 2009, we raised US$800 million with the issuance of 10 year bonds that paid a 7.75% yield. In addition to this, we secured a US$500 million Amortizing Revolving Credit Facility as a stand-by facility to ensure sufficient liquidity, which is currently undrawn. The purpose of this bond issuance is to strengthen our financial structure to support the growth plan and build infrastructure to increase cost efficiency.

Dividend
On June 3, we held our Annual General Meeting of Shareholders and received approval to distribute Rp377 billion, or Rp11.8 per share, or 42.5% of the 2008 net income of Adaro Energy. The dividend was paid on September 11th, 2009. On December 30th, 2009, we also paid an interim dividend of Rp384 billion or Rp12 per share, based on Adaro Energy’s net income for the nine-month period ending September 30, 2009.

We will always endeavor to return cash dividends to our shareholders provided there is no other opportunity to create value for Adaro Energy.

Outlook
We are encouraged by all the positive forecasts on the medium to long term outlook for coal, but we realize that it is extremely tough to predict the future. We understand from our own internal marketing research that the demand for coal will be strongest in emerging market Asia, especially as China, India, and Indonesia. We are encouraged by the results of our technical marketing teams, mostly consisting of experienced combustion engineers, who have been meeting with power companies in Asia.

However there are always risks. One of the biggest risks is should China experience a severe and prolonged economic downturn the decrease in demand would significantly lower global prices. As we cannot control prices, we focus on annual organic production growth, to the satisfaction of our customers and on keeping costs down.

Our view is supply and demand for thermal coal will more or less be in balance over the next three to five years, which should support the current price levels or perhaps create a moderate increase. While we are all encouraged by the signs of future demand, we must remember there are other deposits and suppliers of sub-bituminous coal that we must compete with. Our challenge will be to continue to get the market price for our coal and beat our competition in terms of cost and market share.

In terms of 2010, we are expecting to deliver another year of growth to around 45-46 million tonnes, to keep cash cost inflation to mid-single digits therefore retaining our position in the bottom quartile of producers, and to deliver similar pricing as in 2009.

As the company moves into 2010, the focus will be on growing production and marketing the new coal product Envirocoal-Wara and exploring different initiatives to get to 80 million tonnes by 2014, executing the current development projects to further improve the efficiency of the coal supply chain and seeking acquisition and investment opportunities in world class deposits of Indonesian coal. By staying focused and on track, Adaro Energy will continue to deliver long-run value creation through organic production growth, better operation integration and lower operation costs.

Thank You
Finally, we would like to thank all those involved in making 2009 another extraordinary year for Adaro Energy. Most importantly are our people. We can not thank you enough. You are Adaro Energy and what make it like a unique and great family. It is our combination of professional, loyal, merit-based, experienced, educated, and hardworking people that will allow us to keep satisfying our communities and our customers and grow bigger and better. We look forward to a great 2010 and creating a bigger and better Adaro Energy.

On behalf of the Board of Directors,

Garibaldi Thohir | President Director