Letter from The Board of Directors

This is our first letter to you. With this letter, and this annual report, we hope to give you a deeper understanding of our newly listed company, PT Adaro Energy Tbk. We recognize we are new kids on the block and are still relatively unknown to public equity markets. There is a lot to know and one report will never be enough to get the full story. We hope we can begin an on going dialogue with you so you can come to know who we are, where we are going and how we will get there.

Our vision is to be the largest and most efficient integrated coal mining and energy company in South East Asia. This will not be achieved quickly. Mining is a slow yielding, capital intensive and long term sector. But as evidenced by the past performance of the group of companies that today make up what is Adaro Energy, we believe we have high quality assets with a consistent track record of volume growth and low costs, a highly experienced and skilled management and workforce, a supportive group of controlling shareholders and other competitive advantages to steadily grow and improve to build a bigger and better Adaro Energy.

The theme of this year's annual report is "Clean, Strong and Improving." While this has various meanings, for us it means we have clean coal and clean management practices; it means we operate a resilient business model that has grown production volumes without fail each year since operations began in 1992 and are focused on continuing to implement that business model despite difficult conditions or economic crises; it means that we are constantly improving and will strive to improve our efficiency, our reliability and dependability, our customer service, our skills and now that we have become a publicly listed firm (a big improvement in itself) to improve our transparency and disclosure and corporate governance in general.

The year 2008 was a phenomenal, unprecedented year. It is a year that can be described in many different ways. It was a year of extreme highs and extreme lows. It was a year of tremendous challenges and of testing our strategy and operations to overcome these challenges to deliver unsurpassed performance. It was a year of exceptional transition as we made the move to become a publicly listed company. It was a year in which we experienced unexpected and extraordinary increases in global coal and commodity prices. It was a year in which the global economy entered into the worst downturn in decades, the depth and breadth of which not many had anticipated.

2008: Another Year of Higher Production, Increased Profits
In 2008, the group of companies that would become Adaro Energy had a record breaking year in terms of profitability and production and sales volume. Due to a 9% increase in sales volumes to 41 million tonnes, on the back of a 7% increase in production to 38.5 million tonnes, our net sales increased 56% to a record Rp 18,093 billion. The increase was also a function of higher prices, with our average achieved selling price increasing 34%. Meanwhile, margins widened as we kept our rate of cost increases lower, with the cost of sales increasing 45% to Rp 13,149 billion. Our cash cost of production, excluding the royalty, increased by 22% to US$28.80 per tonne. The increase is mostly due to a higher stripping ratio of 4.25, which is comparatively low, and higher prices for most supplies and services. The rate of cost increase was kept lower than the net sales increase, partly due to a new policy, as part of the strategy of further integration, of purchasing fuel for future delivery. Buying fuel in bulk, which tends to be in backwardation, and for most of the entire coal supply chain, Adaro Energy was able to create cost efficiencies. As a result, our operating margin increased to 23% and our Earnings Before Interest Tax and Depreciation, increased 84% to Rp 4,455 billion. Mostly due to acquisitions, our total assets increased 130% to Rp 33,720 billion, and equity increased 550% to Rp 14,009 billion. As a result, our balance sheet strengthened, with net debt to equity decreasing to 0.5 times from 2.3 times

The Initial Public Offering; After a Classic LBO
In looking back at such a year there are many highlights which we can focus on but perhaps the most important is the transition we made by taking our operation public on July 16, 2008. As part of a long stated strategy of growing production and improving efficiency through increased vertical integration and greater control of our coal supply chain, we raised Rp 12.2 trillion, or US$1.3 billion by listing 35% of our shares on the Indonesian Stock Exchange. Our Initial Public Offering was the largest in the history of the IDX in Rupiah terms (second largest in US Dollars), and was the fourth largest IPO in 2008 in Asia ex-Japan.

We used the bulk of the IPO funds to conduct acquisitions and take full control of our operating subsidiaries, which include PT Adaro Indonesia, which has coal mining, exploration and river port interests in Indonesia, PT Indonesia Bulk Terminal (IBT), a coal port company, PT Saptaindra Sejati (SIS), a coal mining contractor, Coaltrade Service International Pte. Ltd. (Coaltrade), a coal marketing and coal blending company, and PT Makmur Sejahtera Wisesa (MSW), which is to build Adaro's 60MW mine-mouth power plant. We also used US$100 million to further reduce our debt, part of our continuous efforts to strengthen our financial structure, balancing the needs of funding our growth without taking on too much risk. The acquisitions give us greater control over our coal supply chain, they simplify and consolidate the entire operation and create a foundation upon which we can build a bigger and better Adaro Energy.

To understand the need for greater control via consolidation and integration, we feel it is important to look back at the recent history of Adaro Energy. Before April 18, 2008, Adaro Energy was known as PT Padang Karunia, which was established on July 28, 2004. Padang Kurnia was essentially the vehicle through which Adaro Energy's controlling shareholders held their stakes in the various operating companies of the group.

In the middle of 2005, Adaro Energy's five controlling shareholders, who at the end of 2008 owned 65% of the company, together with an international consortium of 5 blue-chip, financial investors, conducted Indonesia’s largest leveraged buyout (LBO), to acquire control of most of the operating subsidiaries of what is today Adaro Energy. The US$973 million LBO was 95% debt financed, with US$923 million of debt and US$50 million of equity. The group of companies was managed by representatives of each of the shareholders by way of a "governing council".

In order to secure the necessary financing from the LBO banks and provide assurances as regards the ability to repay the newly acquired debt, Adaro Indonesia adopted a more defensive marketing strategy, by locking in not only volumes but also prices for the long term. A number of these contracts, what we call our “legacy contracts” still remain. In 2008, 20 million tonnes of our sales volumes were legacy contracts. In each of 2009 and 2010 we have 20 million tonnes of legacy contracts and finally 10 million tonnes in 2011.

Immediately following the LBO the decision was made to improve the efficiency of the operation and boost output by chip sealing, or paving, the 75 kilometer hauling road from the mine to the river terminal. Part of the long stated strategy to create pit-to-port integration, this resulted in an immediate 30% jump in production in 2006 and was followed in subsequent years by further production increases.

Since 2005, in combination with improved performance, the group consistently refinanced and recapitalized its debts, thus improving its capital structure and reducing costs. However, while effective, the structure of the group was quite complicated, and so to improve and streamline decision making, it was decided to conduct an IPO to fund acquisitions and reorganize into a simplified corporate structure, by putting all control into Padang Karunia (later to be renamed Adaro Energy) and liquidating any unnecessary companies.

Many capital market observers have indicated that we have executed a "classic" LBO, in terms of heavily debtfinanced acquisitions, followed by improving performance, lowering debt levels and costs through refinancing, and finally conducting an IPO. Perhaps one difference from the text book LBO, rather than change the existing management the new group of shareholders retained the highly experienced and skilled marketing and operational teams, appointing the heads of each to the Board of Adaro Energy. Another difference, perhaps due to the recognition of the high quality coal assets owned by the group, the international financial investors did not choose to "cash out" by way of the IPO, but instead chose to participate in the IPO and own a portion of Adaro Energy.

The IPO was undoubtedly the biggest transition for the group and arguably our biggest achievement in 2008. It was also arguably our biggest challenge. It was the culmination of three years of hard work to improve performance and lower debt. It was conducted in the midst of a heightened level of scrutiny for the Indonesian coal industry, which demanded heightened levels of disclosure and attention to make sure the IPO could go forward. We felt a certain sense of urgency as we wanted to complete the IPO well before the national elections in 2009. Although we did not foresee how drastically the credit crisis in the US and Europe was to affect the economies of Asia, we are pleased we pushed forward to complete our IPO, for had we pushed back the listing back even a few months, the economic crisis would have hit Asia and the IPO might not have occurred.

We see the immediate benefits of the IPO in terms of how greater control and vertical integration of our coal supply chain will improve efficiency and lower costs, allow us to provide better customer service, and lay the ground work to grow production volume to 80 million tonnes in five years, and perhaps move into the power industry. However there are also many other benefits from being a publicly listed company, such as obtaining a market valuation for the firm, increased access to capital, a lower cost of capital, better corporate governance and improved recognition and credibility amongst numerous stakeholders including the government, customers, suppliers, contractors, and our employees.