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Letter from the Commissioners

February 2, 2017, 9:42 am | Admin

Adaro Energy creates maximum sustainable value along our pit-to-power value chains to provide reliable energy and help build Indonesia. This is what drives us and is why we are so passionate about building a great company.

Esteemed shareholders,
It will come as no surprise to you that 2015 was a challenging year. Global economic growth slowed just as geopolitical risks increased. Deflationary conditions in Europe, tepid growth in the US and other OECD countries, and weaker than expected growth in China were coupled with increased volatility in capital markets as capital  owed in and out of markets to avoid risk. Lower-than- expected oil and gas prices and currency depreciation in several countries added to the turmoil.
Indonesia was not immune, as economic growth was not as robust as hoped. In addition, the world grappled with the growing problem of climate change, and the coal industry in particular dealt with unique pressures brought on by environmental groupsand lobbyists. The year 2015 was an especially difficult year for the Indonesian coal industry.

The poor conditions put further downward pressure on commodity prices, especially coal, as slower demand growth was coupled with chronic oversupply.
Surprisingly, Indonesia was the only coal-producing country to reduce output. Indonesian coal miners tried to adjust to the conditions by improving effiencies and reducing costs, but many did not survive. What became apparent in 2015 was that the global conditions were more volatile and less predictable and that this was to be the new normal. It also further proved to us that the strategic decision we made several years ago to reduce our reliance on coal and move downstream into the more stable and predictable power business, was absolutely the right decision.


However, despite the difficulties, I am proud to report the Board of Directorsof Adaro Energy have navigated the plethora of unexpected risks and challenges, to continue on its critical and strategic transformation. Adaro Energy started many years ago as a group witha large coal-mining company and some service providers in South Kalimantan, and has now become an efficient and reliable vertically integrated pit-to-port coal supply chain, delivering tremendous sustainable value for all its stakeholders. Starting several years ago we envisioned a vertically integrated pit-to-power business model with three pillars of growth: coal mining, logistics/services, and power. In 2015, we moved that much closer to completing our transformation into a vertically integrated energy producer in Indonesia.

Adaro Energy creates maximum sustainable value along our pit-to-power value chains to provide reliable energy and help build Indonesia. This is what drives us and is why we are so passionate about building a great company.


Riding Out the Downturn With Solid PerFormance
We are proud of the way Adaro’s management coped with the challenging conditions in 2015. We have seen management act nimbly while being consistent in implementing its strategy and building a strong foundation for Adaro’s future growth. We agreed with the management’s decision to marginally miss the coal production target in 2015, so as to preserve the premium Adaro charges for its environmentally-friendly Envirocoal, to maintain healthy margins and strong liquidity.


Adaro’s strategies to preserve cash, strengthen the capital structure and maintain solid free cash  flow have supported the company and helped it smoothly ride out the difficult year. Our vertically integrated business model remained resilient. We were able to lower costs, manage our capital spending and continue to deliver operational excellence.
Despite the challenging conditions, last year Adaro distributed US$75 million to shareholders in cash dividends for the 2014  financial year, which translates to approximately a 42% payout ratio. Further, in January 2016 we distributed an interim dividend for our 2015  financial year of US$35 million. This shows commitment from management to provide significant returns to shareholders while continuing to create value.


While we were disappointed that  financial closure was not achievedfor our power projects, we applaud management’s consistency in moving Adaro downstream into the power business. Also, we achieved significant progress in 2015 as President Joko Widodo inaugurated the construction of our subsidiary PT Bhimasena Power Indonesia’s 2x1,000MW Coal-Fired Power Plant project in Batang, Central Java. We have the government’s full support to develop the project andwe expect no further delay in the development of this power plant.


The government has demonstrated strong commitment to infrastructure development and investment in Indonesia, a positive signal to encourage investment. It is our objective to fully support the Indonesian government in promoting economic growth by providing sufficient energy and electricity for the people of Indonesia. We believe that access to a ordable electricity across the archipelago will help Indonesia unlock its potential to become one of the world’s leading economy.


Changes to The Board of Commissioners
In 2015 there were no changes to the composition of the Board of Commissioners.
 

Ensuring compliance and good corporate governance
Adaro upheld high standards of corporate governance in 2015. Good corporate governance is important in protecting the interests of shareholders and stakeholders as well as the sustainability of the company. Adaro’s majority owners are not a single family but a group of five families. Their involvement in decision-making, with no single controlling shareholder, naturally results in a strong mechanism to ensure decisions are made in the best interests of Adaro and its diverse stakeholders.


As a public company, we understand that good corporate governance is one of the most important factors in influencing investors’ investment decisions. We paid especial attention in 2015 to improving our public disclosures and our communications with shareholders and investors, refining the duties and responsibilities of our Board of Commissioners and Directors, and improving the utility of the General Meeting of Shareholders.


It is with pride that we as an energy group continue to honor and implement Adaro’s core values of integrity, meritocracy, openness, respect and excellence in day-to-day activities. Despite the difficult industry condition, we continue to work hard and re ect these values in all our activities. 

Bright Future ahead
It will take time for the coal market to rebalance. In the short term, condition may remain challenging as chronic oversupply persists, but we view the current period as a healthy cyclical downturn. Growing demand and production discipline will gradually rebalance the market. We are optimistic, too, that this will be helped by effective government policies to stimulate and support economic growth.We are exploring opportunities arising from government plans to dramatically boost Indonesia’s electricity-generating capacity over the coming decade. We share management’s excitement over our expansion into the power business. This will complete our vertically integrated business model and allow us to support the government’s future vision for energy sufficiency.

We have reviewed the Board of Directors’ strategic plans for 2016 and support its operational and  financial guidance. We believe that Adaro’s management has good initiatives in place on cost e ciency, improving the non-coal business along the coal supply chain and creating value.

We are confident that we will be able to ride out the current cyclical downturn while prudently responding to the ongoing weak conditions in the global economy and coal market.
In closing, we wholeheartedly thank our shareholders and stakeholders for their continuous support to Adaro.

 

On Behalf of the Board of Commissioners

 

Edwin Soeryadjaya

President Commissioner

Last modified on March 1, 2017, 5:37 pm | 614