LETTER FROM

The Board of

Directors

However, around about the middle of the second quarter, the rains did not go away as expected. The rainy season, which starts in November and lasts four months, for the first time, did not come to an end. Normally in May we see start to see drier weather, but not in 2010. The months of June through September experienced double the five year average of rain fall and rain days. Above average rains continued in the fourth quarter. Every year we need a third quarter dry season to stay on track in term of production. During the third quarter we normally produce around 30% of our annual target and also conduct "waterproofing" activities. These activities, such as pre-stripping and exposing more coal at higher elevations, allow us to continue producing coal to meet customer demand during the upcoming rainy season.

No one could have anticipated that we would have a La Nina year and that there would be no dry season. It is an incredible achievement that despite 3,761 millimeters of rain and 206 rain days at our minesite we were still able to increase overburden removal by 8% to 226 million bank cubic meters and increase coal production by 4% to 42.2 million tonnes. It is testament to our operations and the skills and experience of our managers. I have full confidence in their ability to meet the inevitable challenges we will face in the future as we increase production up to our medium term target of 80 million tonnes a year.

Due to the weather, our cash cost, excluding royalties, of US$35.29 per tonne was slightly higher than expected and our average sales price of US$57.18 per tonne slightly lower than anticipated, but were still within range of our guidance. We did not produce as much as we hoped, however, most importantly it was another year of annual growth, in terms of both overburden and coal, and our customers remained satisfied as we were only 5% below our guidance. We still delivered our second best year of profit ever, with EBITDA of US$884 million and net income of US$243 million. We had our best year ever in terms of revenues, which increase to US$2.7 billion.

E 4000 (Wara): Better than Expected Acceptance by the Market
We stated at the beginning of 2010, we would focus on marketing the new coal product E 4000 (Wara). This is certainly one of the highlights of 2010, as demand for the 4,000 CV Wara coal was strong. At least five years ago, it was thought the E 4000 (Wara) coal had too little heat and too much moisture to export and different ideas including the implementation of coal drying technology were considered.

Following a thorough study, and partly due to the robust conditions in the coal markets, our marketing department reported to the Board of Directors in June 2010 that we would not need to blend E 4000 (Wara) in order to generate exports. We sold 2.05 million tonnes, which is above our 1-2 million tonnes target. This year we hope to sell 4-5 million tonnes of E 4000 (Wara).

Getting to 80 Million Tonnes a Year by 2014
At the beginning of 2010, we also stated we would be exploring different initiatives to get to 80 million tonnes a year by 2014. We have held this target since 2008 and are doing everything we can to make it a reality. While both 2009 and 2010 were record years and extraordinarily profitable, in both years production was slightly below (around 5%) what we expected, due to the global recession in 2009 and the unprecedented wet weather in 2010.

Improving Integration and Efficiency of the Coal Supply Chain: Conveyor Systems
As ensuring the reliable and safe production growth of Tutupan is a higher priority than increasing coal hauling efficiency, we advanced plans to increase and improve overburden removal at the Tutupan mine. Plans to construct what is known as an overburden crusher and conveyor system made good progress and we will announce the EPC contractor in early 2011. We expect the system will be operational by 2013.

Meanwhile, the 38 kilometer overland conveyor (OLC), which will run along our coal haul road, was put on hold given our E 4000 (Wara) coal was making as good a margin as E 5000 (Tutupan) without having to lower coal transportation costs with the OLC.

2 X 30 MW Mine-mouth Power Plant
Our mine-mouth power plant will power the new conveyors and the entire mining operation, bringing costs savings, less dependency on oil and more reliability. The plant will be owned and operated by our subsidiary, MSW, and is expected to commence in 2012. As at the end of 2010, MSW had spent US$59 million on the project. The plant will be fueled by approximately 300,000 tonnes of E 4000 (Wara) per year.

Shell Inaugurates the Pulau Laut Fuel Terminal in South Kalimantan
Shell, in co-operation with Indonesia Bulk Terminal officially opened the Pulau Laut Fuel Terminal in South Kalimantan on August 27th, 2010. IBT's new fuel terminal is an example of our continual efforts to further integrate and improve our coal supply chain. For Adaro Indonesia, the fuel terminal will provide a guaranteed and lower cost fuel supply. For IBT, the fuel terminal will help increase third party traffic and users of IBT's facilities.

New Barging Contracts to Lower Freight Rates an Estimated 15%.
We also made some progress in terms of our barging activities. In November, we announced our wholly-owned subsidiary PT Adaro Indonesia had signed three new innovative long term coal barging

Regulatory and Land Issues
Like the weather, land issues will always be there, this includes permits as well as outright purchase of land. We are not a backfill operation and need to purchase hundreds of acres each year. We try and keep a land bank of what we estimate we need for around 5 years ahead. Although land has become more of an issue, we do not foresee any out of the ordinary problems, nor do we anticipate our growth plans will be hampered.

Dividend
Last year, on the 2009 net income we paid a cash dividend of 21.24%, or Rp928 billion. The payout ratio was less than the 42.5% we paid on the 2008 net income, as we needed cash to pay BHP Billiton for our 25% interest in the IndoMet Coal project. On the 2010 net income, and pending shareholder approval, we are planning to pay a cash dividend of Rp655.71 billion, or 43.98% of the 2010 net income.

It was a year when we made good on plans to broaden our focus from one concession and one type of business activity. After 19 years, we no longer are solely concerned with our coal operations in South Kalimantan. Our business strategy is no longer solely about organic annual production from this site. However, while we are broadening our focus, we still are very much focused on creating sustainable value from Indonesian coal.

Finally, I would like to thank all of our stakeholders for helping to turn a difficult year into one of our best ever. In particular I would like to thank our dedicated and loyal workforce and contractors. Without your professionalism and skills, 2010 might have become the first year we did not increase our output. I would like to thank our valued long term customers who remained loyal despite the difficulties posed by the unusual weather. I would also like to thank you, our shareholders, for your continued support as we build a bigger and better Adaro Energy in order to create sustainable value from Indonesian coal.