Form S-1

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

(Name and address, including zip code, and telephone number, including area code, of agent for service)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ¨

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.

This is an offering of equity units of American Water Works Company, Inc., referred to as American Water. Each equity unit will have a stated amount of $50 and will consist of a purchase contract issued by us and, initially, a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of senior notes due 2012 issued by our subsidiary American Water Capital Corp., referred to as AWCC, which we refer to as a corporate unit.

The purchase contract will obligate you to purchase from American Water, no later than , 2010, for a price of $50 in cash, the following number of shares of American Water’s common stock, subject to anti-dilution adjustments:

American Water will also pay you quarterly contract adjustment payments at a rate of % per year of the stated amount of $50 per equity unit, or $ per year, subject to American Water’s right to defer contract adjustment payments, as described in this prospectus.

The senior notes will initially bear interest at a rate of % per year, payable, initially, quarterly. The senior notes will be remarketed as described in this prospectus. Following a successful remarketing, the interest rate on the senior notes will be reset and interest will become payable semi-annually.

The corporate units will initially be sold by the underwriters in minimum increments of 20 units.

Concurrently with this offering, RWE Aktiengesellschaft, through a subsidiary, is offering by separate prospectus shares of American Water’s common stock, plus up to an additional shares of common stock if the underwriters exercise their option to purchase additional shares. This offering of equity units is contingent upon the consummation of the concurrent offering of American Water’s common stock, referred to as the concurrent initial public offering.

American Water intends to apply to list the corporate units on the New York Stock Exchange under the symbol “ .” American Water intends to apply to have its common stock listed on the New York Stock Exchange under the symbol “AWK.”

Investing in our equity units involves risks. See “ Risk Factors” on page 24 to read about factors you should consider before buying equity units.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed on the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters may also purchase up to an additional corporate units from us at the public offering price, less the underwriting discount, within 30 days of the date of this prospectus.

The underwriters expect to deliver the equity units against payment in New York, New York on .

As used in this prospectus, and unless otherwise indicated or unless the context otherwise requires:

You should rely only on the information contained in this prospectus or any free writing prospectus prepared by or on behalf of us. We have not authorized anyone to provide you with information that is different. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.

“American Water” and its logos are our trademarks. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners.

Our regulated subsidiaries are subject to economic regulation by state PUCs in Arizona, California, Hawaii, Illinois, Indiana, Iowa, Kentucky, Maryland, Missouri, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Tennessee, Texas, Virginia and West Virginia. Some of these states have enacted laws that require regulatory approval for the acquisition of “control” of any regulated utility. In those states, obtaining “control” of the parent or any other company that controls a regulated utility also requires prior regulatory approval. The threshold for a change of control is a fact-specific inquiry that varies by state. For example, in several states, a presumption of control will arise when an acquiring party acquires more than 9.9% of the voting securities of the regulated utility or the controlling entity. In addition to ownership, other states may analyze the degree of influence or control an acquiror may exert over the company. Any person acquiring American Water’s common stock in this offering of equity units, through the concurrent initial public offering of American Water’s common stock or in any other purchase of American Water’s common stock in a quantity sufficient to trigger a change of control under state law would need the prior approval of the applicable state PUC.

Through and including , 2007 (the 25th day after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It may not contain all the information that is important to you. You should carefully read this entire prospectus, including the section captioned “Risk Factors” and the consolidated financial statements and notes to the consolidated financial statements, before making an investment decision. For the definition of certain terms used in this prospectus, please refer to the definitions set forth above and under “Glossary.”

Our Company

Founded in 1886, American Water is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served. Our nearly 6,900 employees provide approximately 16.2 million people with drinking water, wastewater and other water-related services in 32 states and Ontario, Canada. In 2006, we generated $2,093.1 million in operating revenue, representing approximately four times the operating revenue of the next largest investor-owned company in the United States water and wastewater business, and $252.5 million in operating income, which includes $221.7 million of impairment charges relating to continuing operations.

Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers. Our subsidiaries that provide these services are generally subject to economic regulation by state Public Utility Commissions, referred to as state PUCs, in the states in which they operate. The federal government and the states also regulate environmental, health and safety and water quality matters. We report the results of this business in our Regulated Businesses segment. Our Regulated Businesses currently provide services in 20 states within the United States and in 2006 served approximately 3.3 million customers, or connections to our water and wastewater networks. In 2006, our Regulated Businesses generated $1,854.6 million in operating revenue, prior to inter-segment eliminations, representing 88.6% of our consolidated operating revenue.

We also provide services that are not subject to economic regulation by state PUCs. We report the results of this business in our Non-Regulated Businesses segment. Our Non-Regulated Businesses include our Contract Operations Group, our Applied Water Management Group and our Homeowner Services Group. In 2006, our Non-Regulated Businesses generated $248.5 million in operating revenue, prior to inter-segment eliminations.

Our Industry

The United States water and wastewater industry has two main segments: (i) utility, which involves supplying water and wastewater services to customers, and (ii) general services, which involves providing water and wastewater-related services, including engineering, consulting and sales of water infrastructure and distribution products, such as pipes, to water and wastewater utilities and other consumers on a fee-for-service contract basis.

The utility segment includes municipal systems, which are owned and operated by local governments, and investor-owned systems. Government-owned systems make up the vast majority of the United States water and wastewater utility segment, accounting for approximately 85% of all United States community water systems and approximately 95% of all United States community wastewater systems.

The utility segment is characterized by high barriers to entry, including high capital spending requirements. Investor-owned water and wastewater utilities also face regulatory approval processes in order to do business, which may involve obtaining relevant operating approvals, including certificates of public convenience and necessity (or similar authorizations), pursuant to which state PUCs grant investor-owned utilities the right to provide service within an authorized service area. The utility segment of the United States water and wastewater industry is highly fragmented, with approximately 53,000 community water systems and approximately 16,000

community wastewater facilities, according to the United States Environmental Protection Agency, or EPA, and therefore presents opportunities for consolidation. Larger utilities, such as ours, that have greater access to capital are generally more capable of making mandated and other necessary infrastructure upgrades to water and wastewater systems.

Our Strengths

We believe that we are distinguished by the following key competitive strengths:

Market leader with broad national footprint and strong local presence. We are the largest and most geographically diversified investor-owned water and wastewater utility company in the United States. With operations in 32 states and Ontario, Canada, we serve a population of approximately 16.2 million people, which we estimate is approximately five times the population served by the next largest investor-owned water and wastewater company in the United States. Our scale and geographic scope enable us to capitalize effectively on growth opportunities across our service areas, while helping to insulate us from adverse conditions in any one geographic area.

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Regulatory, weather and economic diversity. Our presence in numerous jurisdictions and localities across the United States promotes more stable and predictable financial performance across our overall business.

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Economies of scale. As the largest investor-owned water and wastewater utility company in the United States, our scale and long-standing history with suppliers provide us with a competitive advantage in procuring goods and services reliably and economically, which enables us to provide high quality, cost-effective service to our customers and allows us to economically employ industry experts to serve all our systems.

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Active community involvement supports customer satisfaction. We establish an active presence in the local communities we serve, supported by strong, ongoing community relations and corporate responsibility. We work closely with these communities to help create detailed water development plans, collaborate on growth initiatives and implement various water infrastructure and conservation projects.

Regulated Businesses provide financial stability. Our core Regulated Businesses, which consist of locally managed utility subsidiaries that generally are economically regulated by the states in which they operate, accounted for approximately 88.6% of our consolidated operating revenue in 2006. Our Regulated Businesses provide a high degree of financial stability because (i) high barriers to entry insulate us from competitive pressures, (ii) economic regulation promotes predictability in financial planning and long-term performance through the rate-setting process and (iii) our largely residential customer base promotes consistent operating results.

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Barriers to entry. The requirement to hold or to obtain government authorizations, along with high capital costs, generally inhibit competitive entry into our markets, including by municipal or government-owned utilities, which must either construct new systems or convert our assets to public ownership in order to compete directly with us in our authorized areas. Both of these factors provide a framework that allows us to operate our Regulated Businesses on a predictable and consistent basis.

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Economic regulation. Economic regulation in the water and wastewater utility industry exists as a substitute for competition. The primary regulatory model used by state PUCs involves a determination of an applicable rate base (consisting of allowed investments made in infrastructure), the recovery of prudently incurred operating expenses and an opportunity to earn an appropriate rate of return of and on invested capital. This model allows us to project our returns of and on investment and recovery of expenses and promotes predictability in financial planning and long-term performance of our Regulated Businesses.

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Residential customer base. Residential customers accounted for approximately 91% of the total customers served by our Regulated Businesses and approximately 61% of total operating revenue for our Regulated Businesses in 2006. Residential customers represent a stable customer platform, generating consistent operating results for our company over time and across our geographic service areas.

Experience in securing appropriate rates of return and promoting constructive regulatory frameworks. We seek appropriate rates of return of and on investments and recovery of prudently incurred operating expenses from state PUCs in the form of rate increases, referred to as rate relief. We have a strong track record of providing reliable service at cost-effective rates, which has typically resulted in high customer satisfaction and has generally allowed us to maintain positive relations with local communities and regulators. We have generally been granted rate relief in a timely manner after application, and prior to our acquisition by RWE, we often were successful in securing appropriate rate relief when we filed rate cases. In the period following RWE’s acquisition of the Company, as a condition to the approval of the acquisition, we agreed with some state PUCs that we would not file rate cases for specified periods of time, also known as rate stay-outs. As of June 30, 2007, all rate stay-out provisions had expired.

A number of states in which our Regulated Businesses operate have adopted efficient rate policies, including some form of single tariff pricing, forward-looking test years and infrastructure surcharges. These constructive regulatory mechanisms encourage us to maintain a steady capital expenditure program to repair and improve water and wastewater systems as needed by reducing the regulatory lag on the recovery of prudent expenditures.

Significant growth opportunities with a low risk business profile. We believe we are well positioned to benefit from favorable industry dynamics in the water and wastewater sectors, which provide significant opportunities for future growth in both our Regulated Businesses and complementary Non-Regulated Businesses.

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Replacement of aging infrastructure. We intend to invest capital prudently to enable us to continue to provide essential services to our regulated water and wastewater utility customers and to assist municipalities in meeting the capital challenges of making substantial required infrastructure upgrades. We have successfully developed expertise in managing large capital investment projects and programs as an owner-operator and have an established track record of investing to upgrade, replace and add new pipes, treatment and pumping facilities and other water system infrastructure. In addition, we have experience designing, building and operating water treatment plants, which treat water from major rivers as well as lakes, reservoirs and groundwater sources within the United States.

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Fragmented industry provides consolidation opportunities. With approximately 53,000 community water systems and roughly 16,000 community wastewater systems in the United States, the water and wastewater industry is significantly more fragmented than the other major utility industries. With the presence of our Regulated Businesses in 20 states, we have a large platform on which to grow both organically and through consolidation of this fragmented market.

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Opportunities for non-regulated growth. Our expertise and geographic diversity increases our ability to make opportunistic investments in non-regulated businesses that are complementary to our Regulated Businesses. Our national footprint and public/private partnership experience, including operation and maintenance contracts, referred to as O&M contracts, position us to participate in existing and emerging non-regulated water businesses. These include contracting for the supply and treatment of water and the collection and treatment of wastewater with the United States military.

Experienced senior management team. Our three senior managers have an average of 27 years of experience in the utilities industry. Donald L. Correll, our President and Chief Executive Officer, Ellen C. Wolf, our Senior Vice President and Chief Financial Officer, and John S. Young, our Chief Operating Officer, have all

held senior management positions at publicly traded companies. Our 12 state presidents have an average of 19 years of experience in the utilities industry.

Industry leader in water quality, testing and research. As the largest investor-owned United States water and wastewater utility company, we are experts in water quality testing, compliance and treatment and have established and own industry-leading water testing facilities. Our technologically advanced quality control and testing laboratory in Belleville, Illinois is certified in 24 states through the EPA Unregulated Contaminant Monitoring program. Our laboratories and other facilities perform more than one million water quality tests per year.

Our Strategy

Our goal is to consistently provide customers with safe, high quality drinking water and reliable water and wastewater services. Our business strategies include:

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continuing to prudently invest in regulated water and wastewater infrastructure projects;

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earning an appropriate rate of return on our investments from state PUCs;

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growing our Regulated Businesses through acquisitions; and

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continuing to pursue public/private partnerships, including O&M and military contracts and services and other non-regulated businesses that are complementary to our Regulated Businesses.

The Transactions

American Water is currently an indirect wholly owned subsidiary of RWE. RWE is one of Europe’s leading electricity and gas companies and supplies 20 million customers with electricity and 10 million customers with gas in Germany, the United Kingdom and Central and Eastern Europe. On November 4, 2005, RWE announced its intention to exit its water activities in the United States and the United Kingdom to focus on its core European electricity and gas business and has since then completed the divestiture of its water business in the United Kingdom. As a part of this strategy, RWE intends to fully divest its ownership of American Water through the consummation of one or more public offerings of common stock of American Water as soon as reasonably practicable, subject to market conditions, referred to as the RWE Divestiture. In anticipation of the RWE Divestiture, effective December 31, 2006, the businesses of Thames Water Holdings Incorporated and its subsidiaries were contributed by Thames US Holdings to American Water, referred to as the Contribution. In addition, prior to the consummation of the concurrent initial public offering, Thames US Holdings will be merged with and into American Water with American Water being the surviving entity, referred to as the Merger. The Contribution and the Merger are referred to collectively in this prospectus as the Restructuring.

Concurrently with this offering, RWE is offering by separate prospectus shares of American Water’s common stock, plus up to an additional shares of common stock if the underwriters exercise their option to purchase additional shares. Prior to this offering we will effect a -for- stock split.

In addition, prior to the consummation of this offering, we intend to use the proceeds from the issuance of approximately $1,500.0 million aggregate principal amount of senior notes, referred to as the new senior notes, and approximately $450.0 million of commercial paper, together with approximately $20.0 million of cash on hand, to fund the early redemption of $1,750.0 million of preferred stock held by RWE and the repayment of $222.0 million aggregate principal amount of debt owed to RWE, which we refer to as the RWE notes. The new senior notes will not be registered under the Securities Act and will be offered in reliance on an exemption from the registration requirements of the Securities Act. We intend to use a portion of the proceeds from this offering of equity units to fund the repayment of approximately $450.0 million of commercial paper, with the balance of the net cash proceeds of approximately $34.5 million used for general corporate purposes. These transactions,

together with the non-cash equity contribution to the Company by RWE of $1,194.5 million of debt of our subsidiaries held by RWE on December 15, 2006, the non-cash equity contribution to the Company by RWE of $100.0 million of debt of our subsidiaries held by RWE on March 29, 2007, and the $550.0 million cash equity contribution to the Company by RWE on March 29, 2007, which was used to pay down $232.5 million of short-term debt and the remainder used for general working capital purposes, are collectively referred to as the Refinancing. The Restructuring, the Refinancing, the Merger and the -for- split of common stock referred to above are collectively referred to in this prospectus as the Transactions.

Organizational Structure

The following chart sets forth our current organizational structure:

LOGO

The following chart sets forth our organizational structure after giving effect to the consummation of the Transactions:

LOGO

*	Assumes that RWE, through its subsidiary Thames Water Aqua Holdings GmbH, will sell its shares of our common stock in more than one offering.

THE OFFERING

Unless the context otherwise requires, for purposes of this section entitled “The Offering,” the terms “American Water,” “our,” “us” or “we” refer to American Water Works Company, Inc. and not to any of its subsidiaries.

What are equity units?

Equity units may be either corporate units or treasury units as described below. The equity units offered hereby will initially consist of corporate units, each with a stated amount of $50. You can create treasury units from the corporate units in the manner described below under “How Can I Create Treasury Units From Corporate Units?”

What are the components of a corporate unit?

Each corporate unit consists of a purchase contract and, initially, a 1/20, or 5%, undivided beneficial ownership interest in $1,000 principal amount of AWCC’s senior notes due 2012, which we call the applicable ownership interest in senior notes. The senior notes will be issued in minimum denominations of $1,000 and integral multiples thereof, except in certain limited circumstances. The applicable ownership interest in senior notes underlying a corporate unit is owned by you, but it initially will be pledged to us to secure your obligation under the related purchase contract. If the senior notes are successfully remarketed on or prior to the ninth business day immediately preceding , 2010, or if a tax event redemption occurs prior to , 2010, in each case as described in this prospectus, the senior notes underlying the corporate units will be replaced by the treasury portfolio described below under “What is the treasury portfolio?” and the applicable ownership interest in the treasury portfolio will then be pledged to American Water through the collateral agent to secure your obligation under the related purchase contract.

What is a purchase contract?

Each purchase contract underlying an equity unit obligates the holder of the purchase contract to purchase, and obligates American Water to sell, on , 2010, which we refer to as the purchase contract settlement date, for $50 in cash, a number of newly issued shares of American Water common stock equal to the “settlement rate.” The settlement rate will be calculated, subject to adjustment under the circumstances set forth in “Description of the Purchase Contracts—Anti-Dilution Adjustments,” as follows:

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if the applicable market value of American Water common stock is equal to or greater than $ , which we refer to as the threshold appreciation price, the settlement rate will be shares of American Water common stock;

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if the applicable market value of American Water’s common stock is less than the threshold appreciation price but greater than $ , which we refer to as the reference price, the settlement rate will be a number of shares of American Water’s common stock equal to $50 divided by the applicable market value; and

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if the applicable market value of American Water common stock is less than or equal to the reference price, the settlement rate will be shares of American Water common stock.

“Applicable market value” means the average of the closing price per share of American Water common stock on each of the 20 consecutive trading days ending on the third trading day immediately preceding the purchase contract settlement date, subject to anti-dilution adjustments. The reference price represents the initial public offering price of American Water’s common stock in the concurrent initial public offering. The threshold appreciation price represents a % appreciation over the reference price.

Can I settle the purchase contract early?

You can settle a purchase contract for cash prior to the purchase contract settlement date, subject to certain exceptions described under “Description of the Purchase Contracts—Early Settlement.” If a purchase contract is settled early, the number of shares of American Water common stock to be issued per purchase contract will be the stated amount of $50 divided by the threshold appreciation price, initially shares. In addition, if American Water is involved in a cash merger, which we define as any acquisition (whether by means of a liquidation, share exchange, tender offer, consolidation, recapitalization, reclassification, merger of us or any subsidiaries or other transfer of the consolidation assets of us and subsidiaries) or a series of related transactions or events in which at least 51% of our common stock is exchanged for, converted into or constitutes solely the right to receive cash, securities or other property, more than 10% of which consists of cash, securities or other property that are not, or upon issuance will not be, common equity interests listed for trading or quotation on the New York Stock Exchange or quoted on the Nasdaq Global Market or Nasdaq Global Select Market, you will have the right to accelerate and settle the purchase contract early at the settlement rate in effect immediately prior to the closing of that merger plus, subject to certain limitations, a make-whole amount. See “Description of Purchase Contracts—Early Settlement Upon Cash Merger.” Your early settlement right is subject to the condition that, if required under the U.S. federal securities laws, we have a registration statement under the Securities Act of 1933 in effect covering the shares of common stock and other securities, if any, deliverable upon settlement of a purchase contract. We have agreed that, if required by U.S. federal securities laws, we will use reasonable efforts to have a registration statement in effect covering those shares of common stock and other securities, if any, to be delivered in respect of the purchase contracts being settled.

What is a treasury unit?

A treasury unit is a unit created from a corporate unit and consists of a purchase contract and a 1/20, or 5%, undivided beneficial interest in a zero-coupon U.S. treasury security with a principal amount of $1,000 that matures on , 2010 (CUSIP No. ), which we refer to as a treasury security. The ownership interest in the treasury security that is a component of a treasury unit will be owned by you, but will be pledged to American Water through the collateral agent to secure your obligation under the related purchase contract.

How can I create treasury units from corporate units?

Subject to the last sentence of this paragraph, unless the treasury portfolio has replaced the senior notes underlying the corporate units, each holder of corporate units will have the right, at any time on or prior to the seventh business day immediately preceding the purchase contract settlement date, to substitute for the underlying senior notes held by the collateral agent treasury securities in a total principal amount equal to the aggregate principal amount of the senior notes underlying the corporate units with respect to which substitution is being made. Because treasury securities and senior notes are issued in integral multiples of $1,000, holders of corporate units may make this substitution only in integral multiples of 20 corporate units. The ability of holders of corporate units to create treasury units will be subject to the limitation that holders may not create treasury units during any period commencing on and including the business day preceding any three-day remarketing period as described below under “—What is remarketing?” and ending on and including, in the case of a successful remarketing during that three-day remarketing period, the reset effective date, or, if none of the remarketings during that three-day remarketing period is successful, the business day following the last remarketing date during that three-day remarketing period.

the corporate units held by the collateral agent, but holders of corporate units can only make this substitution in integral multiples of corporate units (or such other number of corporate units as may be determined by the remarketing agent upon a successful remarketing of senior notes if the reset effective date is not a regular quarterly interest payment date).

Each of these substitutions will create treasury units, and the senior notes underlying the applicable ownership interests in senior notes or applicable ownership interests in the treasury portfolio will be released to the holder and be tradable separately from the treasury units.

How can I recreate corporate units from treasury units?

Subject to the last sentence of this paragraph, unless the treasury portfolio has replaced the senior notes underlying the corporate units, each holder of treasury units will have the right, at any time on or prior to the seventh business day immediately preceding the purchase contract settlement date, to substitute for the related treasury securities held by the collateral agent senior notes having a principal amount equal to the aggregate principal amount at stated maturity of the treasury securities for which substitution is being made. Because treasury securities and senior notes are issued in integral multiples of $1,000, holders of treasury units may make these substitutions only in integral multiples of 20 treasury units. The ability of holders of treasury units to recreate corporate units will be subject to the limitation that holders may not recreate corporate units during any period commencing on and including the business day preceding any three-day remarketing period and ending on and including, in the case of a successful remarketing during that three-day remarketing period, the reset effective date, or, if none of the remarketings during that three-day remarketing period is successful, the business day following the last remarketing date during that three-day remarketing period.

If the treasury portfolio has replaced the senior notes underlying the corporate units as a result of either a successful remarketing of the senior notes or a tax event redemption, holders of treasury units will have the right, at any time on or prior to the second business day immediately preceding the purchase contract settlement date, to substitute the applicable ownership interests in the treasury portfolio for the treasury securities underlying the treasury units, but holders of treasury units can only make this substitution in integral multiples of treasury units (or such other number of treasury units as may be determined by the remarketing agent upon a successful remarketing of senior notes if the reset effective date is not a regular quarterly interest payment date). Each of these substitutions will recreate corporate units and the applicable treasury securities will be released to the holder and be separately tradable from the corporate units.

What payments am I entitled to as a holder of corporate units?

Holders of corporate units will be entitled to receive quarterly cash distributions consisting of their pro rata share of interest payments on the senior notes payable by AWCC, equivalent to the rate of % per year on the applicable ownership interests in senior notes (or distributions on the applicable ownership interests in the treasury portfolio if the senior notes have been replaced by the treasury portfolio), and contract adjustment payments payable by American Water at the rate of % per year on the stated amount of $50 per corporate unit, subject to American Water’s right to defer the contract adjustment payments as described below.

If interest on the senior notes is reset on a reset effective date that is not a scheduled interest payment date, the collateral agent will receive on behalf of holders of corporate units a payment from AWCC on such reset effective date of accrued and unpaid interest on the senior notes from the most recent quarterly interest payment date to, but excluding, such reset effective date. On the quarterly payment date next following the reset effective date, corporate unit holders will receive a regular quarterly cash distribution comprised of their pro rata portion of that interest payment, the portion of their applicable ownership interest in the remarketing treasury portfolio that matures prior to that quarterly payment date and the contract adjustment payment payable on that date.

What payments will I be entitled to if I convert my corporate units to treasury units?

Holders of treasury units will be entitled to receive quarterly contract adjustment payments payable by American Water at the rate of % per year on the stated amount of $50 per treasury unit, subject to our right to defer the contract adjustment payments as described below. There will be no distributions in respect of the treasury securities that are a component of the treasury units but the holders of the treasury units will continue to receive the scheduled quarterly interest payments on the senior notes that were released to them when they created the treasury units as long as they continue to hold the senior notes.

Does American Water have the option to defer current payments?

American Water has the right to defer the payment of contract adjustment payments until no later than the purchase contract settlement date; provided, however, that in an early settlement upon a cash merger or any other early settlement of the purchase contracts, American Water will pay deferred contract adjustment payments through the cash merger settlement date or the most recent quarterly payment date, as applicable. Any deferred contract adjustment payments would accrue additional contract adjustment payments at the rate of % per year until paid, compounded quarterly, to, but excluding, the earlier of the purchase contract settlement date and the date of any earlier settlement of the purchase contract. AWCC is not entitled to defer payments of interest on the senior notes.

In the event that American Water exercises its option to defer the payment of contract adjustment payments, then until the deferred contract adjustment payments have been paid, American Water will not, with certain exceptions, declare or pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment with respect to, any of its capital stock.

What are the payment dates for the corporate units?

The payments described above in respect of the corporate units will be payable quarterly in arrears on February 1, May 1, August 1 and November 1, of each year, commencing on , subject to, in the case of that portion of the current payment attributable to contract adjustment payments, the deferral provisions described in this prospectus.

What is remarketing?

We may, at our option and in our sole discretion, elect to remarket the aggregate principal amount of senior notes underlying the aggregate applicable ownership interests in senior notes held by corporate unit holders as part of a corporate unit on any remarketing date occurring during the period for early remarketing beginning on the third business day preceding , 2010 and ending on the ninth business day preceding , 2010, unless the senior notes have been previously redeemed in connection with a tax event redemption or have been previously successfully remarketed. Any remarketing during the period for early remarketing will occur during one or more three-day remarketing periods that consist of three sequential possible remarketing dates selected by us and will include the senior notes underlying the corporate units and other senior notes of holders that have elected to include those senior notes in the remarketing.

On each remarketing date occurring during the period for early remarketing, the remarketing agent will use its reasonable efforts to obtain a price for the senior notes remarketed equal to approximately 100% of the purchase price for the remarketing treasury portfolio plus a fee to be determined between us and the remarketing agent, which we refer to as the remarketing fee. A portion of the proceeds from the remarketing equal to the remarketing treasury portfolio purchase price will be applied to purchase the remarketing treasury portfolio. The remarketing treasury portfolio will be substituted for the senior notes underlying the corporate units and will be pledged to us through the collateral agent to secure the corporate unit holders’ obligations to purchase American Water’s common stock under the purchase contracts. When paid at maturity, an amount of the remarketing

treasury portfolio equal to the principal amount of the substituted senior notes will automatically be applied to satisfy the corporate unit holders’ obligations to purchase American Water’s common stock under the purchase contracts on , 2010.

In addition, the remarketing agent may deduct the remarketing fee from any amount of the proceeds from the remarketing of the senior notes in excess of the remarketing treasury portfolio purchase price; if such excess is less than the remarketing fee, then we shall be liable for the remainder of that remarketing fee. The remarketing agent will then remit the remaining portion of the proceeds from the remarketing of the senior notes, if any, for the benefit of the holders.

If a remarketing attempt described above is unsuccessful on the first remarketing date of a three-day remarketing period, subsequent remarketings as described above will be attempted on each of the two following remarketing dates in that three-day remarketing period until a successful remarketing occurs. If none of the three remarketings occurring during a three-day remarketing period results in a successful remarketing because the remarketing agent cannot obtain a price for the senior notes on any such date equal to at least 100% of the remarketing treasury portfolio purchase price or a condition precedent to the remarketing has not been satisfied, the interest rate on the senior notes will not be reset, the applicable ownership interests in senior notes will continue to be a component of corporate units and subsequent remarketings may, subject to the next paragraph, be attempted during one or more subsequent three-day remarketing periods as described above.

Unless the senior notes have been successfully remarketed on or prior to the ninth business day immediately preceding , 2010, the senior notes that underlie corporate units whose holders have failed to notify the purchase contract agent on or prior to the seventh business day immediately preceding , 2010 of their intention to pay cash in order to satisfy their obligations under the related purchase contracts, will, unless a tax event redemption has occurred or will occur prior to , 2010, be remarketed during a three-day remarketing period beginning on and including the fifth business day, and ending on and including the third business day, immediately preceding , 2010. This three-day remarketing period is referred to as the “final three-day remarketing period” and we refer to the third business day immediately preceding , 2010 as the “final remarketing date.” In this remarketing, the remarketing agent will use its reasonable efforts to obtain a price for the senior notes equal to approximately 100% of the aggregate principal amount of the senior notes being remarketed plus the remarketing fee. A portion of the proceeds from the remarketing equal to the aggregate principal amount of the senior notes being remarketed will automatically be applied to satisfy in full the corporate unit holders’ obligations to purchase American Water’s common stock under the related purchase contracts on the purchase contract settlement date.

If a remarketing during the final three-day remarketing period is successful, the remarketing agent may deduct the remarketing fee from any amount of the proceeds in excess of the aggregate principal amount of the remarketed senior notes; if such excess is less than the remarketing fee, then we shall be liable for the remainder of the remarketing fee. The remarketing agent will then remit any remaining portion of the proceeds for the benefit of the holders. In connection with a successful remarketing, interest on the senior notes will be payable semiannually at the reset rate and the maturity date of the senior notes may be extended. The reset rate on the senior notes and the date, if any, to which the maturity date of the senior notes is extended will be determined on the date that the remarketing agent is able to successfully remarket the senior notes. The reset rate, modified interest payment dates and extension, if any, of the maturity date will become effective, if the remarketing is successful, on the reset effective date. The reset effective date will be, in the case of a successful remarketing during the period for early remarketing, the third business day immediately following the date of the successful remarketing and, in the case of a successful remarketing during the final three-day remarketing period, the purchase contract settlement date.

If a remarketing attempt described above is unsuccessful on the first remarketing date of the final three-day remarketing period, subsequent remarketings will be attempted as described above on each of the two following remarketing dates in the final three-day remarketing period until a successful remarketing occurs.

What happens if the senior notes are not successfully remarketed?

If the senior notes have not been successfully remarketed on or prior to the final remarketing date, the interest rate on the senior notes will not be reset and holders of all senior notes will have the right to put their senior notes to us on the purchase contract settlement date at a put price equal to $1,000 per senior note ($50 per applicable ownership interest) plus accrued and unpaid interest. A holder of a senior note underlying a corporate unit will be deemed to have automatically exercised this put right unless, prior to 11:00 a.m., New York City time, on the second business day immediately preceding the purchase contract settlement date, such holder provides a written notice of an intention to settle the related purchase contract with separate cash and on or prior to the business day immediately preceding the purchase contract settlement date delivers to the collateral agent the purchase price in cash. Unless a corporate unit holder has settled the related purchase contracts with separate cash on or prior to the purchase contract settlement date, such holder will be deemed to have elected to apply a portion of the proceeds of the put price equal to the principal amount of the senior notes underlying such corporate units against such holder’s obligations to American Water under the related purchase contracts, thereby satisfying such obligations in full, and American Water will deliver to such holder its common stock pursuant to the related purchase contracts.

Do I have to participate in the remarketing?

You may elect not to participate in any remarketing and to retain the senior notes underlying the applicable ownership interests in senior notes comprising part of your corporate units by (1) creating treasury units at any time prior to the business day preceding any three-day remarketing period or (2) if there has not been a successful remarketing prior to the final three-day remarketing period, notifying the purchase contract agent of your intention to pay cash to satisfy your obligation under the related purchase contracts on or prior to the seventh business day before the purchase contract settlement date and delivering the cash payment required under the purchase contracts to the collateral agent on or prior to the sixth business day before the purchase contract settlement date. Following a successful remarketing prior to the final three-day remarketing period, holders of treasury units can recreate corporate units at any time prior to the second business day immediately preceding the purchase contract settlement date, as described under “How can I recreate corporate units from treasury units?”

The interest rate, maturity date and scheduled interest payment dates of senior notes that are held by holders that do not participate in a remarketing will still be reset on the reset effective date in accordance with any reset of the interest rate, extension of the maturity date or modification of the scheduled interest payment dates of the senior notes in connection with a successful remarketing.

What is the treasury portfolio?

If there is a successful remarketing on or prior to the ninth business day preceding the purchase contract settlement date or if a tax event redemption described under “Description of the Senior Notes—Optional Redemption—Tax Event” occurs prior to the purchase contract settlement date, the senior notes will be replaced by the treasury portfolio. The treasury portfolio is a portfolio of U.S. treasury securities consisting of:

(1) for a remarketing treasury portfolio,

•

interest or principal strips of U.S. Treasury securities that mature on or prior to , 2010 in an aggregate amount equal to the principal amount of the senior notes underlying the corporate units; and

•

interest or principal strips of U.S. Treasury securities that mature on or prior to , 2010 in an aggregate amount equal to the aggregate interest payment that would be due on , 2010, on the principal amount of the senior notes that would have been components of the corporate units assuming no remarketing and no reset of the interest rate on the senior notes and assuming that interest on the senior notes accrued from the later of the reset effective date and , 2010 to, but excluding, , 2010.

(2) for a tax event treasury portfolio,

•

interest or principal strips of U.S. Treasury securities that mature on or prior to , 2010 in an aggregate amount at maturity equal to the applicable principal amount; and

•

interest or principal strips of U.S. Treasury securities that mature on or prior to the business day immediately preceding that scheduled interest payment date in an aggregate amount at maturity equal to the aggregate interest payment (assuming no reset of the interest rate) that would be due on the applicable principal amount of the senior notes on that date.

If I am holding a senior note as a separate security from the corporate units, can I still participate in a remarketing of the senior notes and do I also have a put right in the event that there is no successful remarketing on or prior to the final remarketing date?

Holders of senior notes that are not part of the corporate units may elect, in the manner described in this prospectus, to have their senior notes remarketed by the remarketing agent along with the senior notes included in the corporate units. See “Description of the Senior Notes—Optional Remarketing.” Such holders may also participate in any remarketing by recreating corporate units from their treasury units at any time on or prior to the second business day immediately prior to any of the three-day remarketing periods.

Holders of senior notes that are not part of a corporate unit may exercise their put right upon a failed final remarketing by providing written notice at least two business days prior to the purchase contract settlement date. The put price will be paid to such holder on the purchase contract settlement date.

Besides participating in a remarketing, how else can I satisfy my obligation under the purchase contracts?

Holders of corporate units or treasury units may also satisfy their obligations, or their obligations will be terminated, under the purchase contracts as follows:

•

through early settlement as described under “Can I settle the purchase contract early?” above;

•

through cash settlement prior to the final three-day remarketing period in the case of holders of corporate units, unless the treasury portfolio has replaced the senior notes underlying the corporate units, by notifying the purchase contract agent on or prior to the sixth business day prior to , 2008 and delivering the cash payment required under the related purchase contracts on or prior to the business day immediately prior to , 2010;

•

through the automatic application of the proceeds of the treasury securities in the case of the treasury units or proceeds from the treasury portfolio equal to the principal amount of the senior notes in the case of corporate units if the treasury portfolio has replaced the senior notes as a component of the corporate units;

•

through exercise of the put right as described under “What happens if the senior notes are not successfully remarketed prior to the final remarketing date?” if no successful remarketing has occurred and none of the above events has taken place; or

•

without any further action, upon the termination of the purchase contracts as a result of our bankruptcy, insolvency or reorganization.

What interest payments will I receive on the senior notes or on the applicable ownership interests in senior notes?

Interest on the senior notes will be payable initially quarterly in arrears at the annual rate of % per annum of the principal amount of $1,000 to, but excluding, the reset effective date, which will be the third business day following the date on which a remarketing of the senior notes is successfully completed, or in the case of a remarketing during the final three-day remarketing period, the purchase contract settlement date.

Following a successful remarketing, the senior notes will bear interest from the reset effective date at the reset rate to, but excluding, , 2012 or, if the maturity of the senior notes is extended on the reset effective date, such extended maturity date. If interest on the senior notes is reset on a reset effective date that is not a scheduled interest payment date, holders of senior notes will receive on the reset effective date a payment of accrued and unpaid interest from the most recent interest payment date to, but excluding, such reset effective date (provided that holders of corporate units will receive that payment as described under “What payments am I entitled to as a holder of corporate units?”). On the interest payment date next following the reset effective date, holders of senior notes will receive a payment of interest accrued from and including the reset effective date, to but excluding such interest payment date. For United States federal income tax purposes, original issue discount will accrue on the senior notes. If there is not a successful remarketing of the senior notes, the interest rate will not be reset and the senior notes will continue to bear interest at the initial interest rate, payable quarterly in arrears.

What are the interest payment dates on the senior notes?

On or prior to the reset effective date, interest payments will be payable quarterly in arrears on each , , and , commencing , and on the reset effective date as described above in “What interest payments will I receive on the senior notes?” if the reset effective date is not otherwise a quarterly interest payment date. If the interest rate on the senior notes is reset on a reset effective date that is not otherwise a quarterly interest payment date, the collateral agent will receive the interest payment made on senior notes underlying corporate units on that reset effective date, which will be paid to holders of corporate units on the quarterly payment date next following that reset effective date.

From the reset effective date, interest payments on all senior notes will be paid semiannually in arrears on interest payment dates to be selected by us. If no successful remarketing of the senior notes occurs, interest payments on all senior notes will remain payable quarterly in arrears on the original quarterly interest payment dates.

When will the interest rate on the senior notes be reset and what is the reset rate?

Unless a tax event redemption has occurred, the interest rate on the senior notes will be reset on the date of a successful remarketing and the reset rate will become effective three business days thereafter, or in the case of a remarketing during the final three-day remarketing period, the purchase contract settlement date. The reset rate will be the interest rate determined by the remarketing agent as the rate the senior notes should bear in order for the senior notes underlying the corporate units to have an approximate aggregate market value on the remarketing date of 100% of the treasury portfolio purchase price plus the remarketing fee, in the case of a remarketing prior to the final three-day remarketing period, or 100% of the aggregate principal amount of the senior notes being remarketed plus the remarketing fee, in the case of a remarketing during the final three-day remarketing period. The interest rate on the senior notes will not be reset if there is not a successful remarketing. Any reset rate may not exceed the maximum rate, if any, permitted by applicable law.

When is the maturity of the senior notes?

The initial maturity date of the senior notes will be , 2012. Upon a successful remarketing of the senior notes, the maturity of the senior notes may be extended to a date selected by us that is up to ten years from the reset effective date. Such extended maturity date, if any, will be selected on the remarketing date and will become effective on the reset effective date. If the senior notes are not successfully remarketed on or prior to , 2012, the maturity of the senior notes will remain , 2012.

When may the senior notes be redeemed?

The senior notes are redeemable at our option, in whole but not in part, upon the occurrence and continuation of a tax event at any time prior to the earlier of the date of a successful remarketing and the

purchase contract settlement date, as described in this prospectus under “Description of the Senior Notes— Optional Redemption—Tax Event.” Following any such redemption of the senior notes, which we refer to as a tax event redemption, the redemption price for the senior notes that underlie the corporate units will be paid to the collateral agent who will purchase the tax event treasury portfolio and remit any remaining proceeds to the holders. Thereafter, the applicable ownership interests in the tax event treasury portfolio will replace the applicable ownership interests in senior notes as a component of the corporate units and will be pledged to us through the collateral agent. Holders of senior notes that do not underlie corporate units will receive the redemption price paid in such tax event redemption in full.

What is the ranking of the senior notes?

The senior notes will rank equally with all of AWCC’s other unsecured and unsubordinated obligations. The indenture under which the senior notes will be issued will not limit our ability to issue or incur other unsecured debt or issue preferred stock. The senior notes will have the benefit of a support agreement from American Water. American Water’s obligation under the support agreement will rank equally with all of American Water’s other unsecured and unsubordinated obligations.

The senior notes are not guaranteed by any of our subsidiaries and are the obligations only of AWCC and, by virtue of the support agreement, American Water. Accordingly, the senior notes are structurally subordinated to liabilities of our subsidiaries other than AWCC. We have no material assets or operations other than our equity interests, and AWCC has no material assets or operations other than its limited operations as a financial subsidiary for American Water and its operating subsidiaries for our businesses. We expect that payments of interest and principal that AWCC makes on the senior notes will be made only to the extent that our operating subsidiaries distribute cash and other property to us, and through us, to AWCC.

What are the principal U.S. Federal income tax consequences related to corporate units, treasury units and senior notes?

A beneficial owner of corporate units or senior notes, if separated from corporate units, should be treated as owning an interest in a debt instrument that should be subject to the Treasury regulations that govern contingent payment debt instruments. Under these rules, for all accrual periods beginning before the earlier of the reset effective date and , 2010, a holder will be required to include in gross income an amount in excess of the interest actually received, regardless of the holder’s usual method of tax accounting, and a holder will generally recognize ordinary income or loss, rather than capital gain or loss, on the sale, exchange or disposition of senior notes (including upon a successful remarketing) or corporate units, to the extent such income or loss is allocable to the senior notes. A beneficial owner of treasury units will generally be required to include in gross income any original issue discount with respect to the treasury securities as it accrues on a constant yield to maturity basis. If the treasury portfolio has replaced the senior notes underlying the corporate units as a result of a successful remarketing of the senior notes or a tax event redemption, a beneficial owner of corporate units generally will be required to include in gross income its allocable share of original issue discount on the treasury portfolio as it accrues on a constant yield to maturity basis. We intend to report contract adjustment payments as ordinary income to you, but you may wish to consult your tax advisor concerning possible alternative characterizations.

FOR ADDITIONAL INFORMATION, SEE “UNITED STATES FEDERAL INCOME TAX CONSEQUENCES.”

What are the rights and privileges of the common stock?

The shares of American Water’s common stock that you will be obligated to purchase under the purchase contracts have one vote per share. For more information, please see the discussion of American Water’s common stock in this prospectus under the heading “Risk Factors” and under the heading “Description of Capital Stock.”

THE OFFERING—EXPLANATORY DIAGRAMS

The following diagrams demonstrate some of the key features of the purchase contracts, applicable ownership interests in senior notes, corporate units and treasury units, and the transformation of corporate units into treasury units and senior notes. The following diagrams assume that the senior notes are successfully remarketed and the interest rate on the senior notes is reset on the third business day immediately preceding the purchase contract settlement date.

Purchase Contract

Corporate units and treasury units both include a purchase contract under which the holder agrees to purchase shares of American Water’s common stock on the purchase contract settlement date. In addition, these purchase contracts include unsecured contract adjustment payments as shown in the diagrams on the following pages.

LOGO

Notes:

(1)	If the applicable market value of American Water’s common stock is less than or equal to the reference price of $ , the number of shares of American Water’s common stock to be delivered to a holder of an equity unit will be calculated by dividing the stated amount of $50 by the reference price.

(2)

If the applicable market value of American Water’s common stock is less than the threshold appreciation price of $ but greater than the reference price of $ , the number of shares of American Water’s common stock to be delivered to a holder of an equity unit will be calculated by dividing the stated amount of $50 by the applicable market value.

(3)

If the applicable market value of American Water’s common stock is greater than or equal to the threshold appreciation price, the number of shares of American Water’s common stock to be delivered to a holder of an equity unit will be calculated by dividing the stated amount of $50 by the threshold appreciation price of $ .

(4)	The reference price is $ , which is the initial public offering price of American Water’s common stock in the concurrent initial public offering.

(5)	The threshold appreciation price is $ , which is % of the reference price.

(6)	The “applicable market value” means the average of the closing price per share of American Water’s common stock on each of the 20 consecutive trading days ending on the third trading day immediately preceding the purchase contract settlement date, subject to anti-dilution adjustments.

Corporate Units

A corporate unit consists of two components as described below:

LOGO

Notes:

•

The holder of a corporate unit owns the 1/20, or 5%, undivided beneficial ownership interest in, and will be entitled to a corresponding portion of each interest payment payable in respect of, a $1,000 principal amount senior note but will pledge it to us to secure the holder’s obligation under the related purchase contract.

•

The foregoing analysis assumes the senior notes are successfully remarketed during the final three-day remarketing period. If the remarketing were to be successful prior to such period, following the remarketing of the senior notes, the applicable ownership interests in the treasury portfolio will replace the applicable ownership interest in senior notes as a component of the corporate unit and the reset rate would be effective three business days following the successful remarketing.

•

If the treasury portfolio has replaced the senior notes as a result of a tax event redemption prior to , 2010, the applicable ownership interest in the treasury portfolio will also replace the applicable ownership interest in senior notes as a component of the corporate unit.

Treasury Units

A treasury unit consists of two components as described below:

LOGO

•

The holder owns the 1/20 ownership interest in the treasury security that forms a part of the treasury unit but will pledge it to us through the collateral agent to secure the holder’s obligations under the related purchase contract. Unless the purchase contract is terminated as a result of our bankruptcy, insolvency or reorganization or the holder recreates a corporate unit, the treasury security will be used to satisfy the holder’s obligation under the related purchase contract.

•

Treasury units can only be created with integral multiples of 20 corporate units.

Senior Notes

Senior notes have the terms described below:

LOGO

Notes:

•

Because the senior notes and the treasury securities are issued in minimum denominations of $1,000, holders of corporate units may only create treasury units in integral multiples of 20 corporate units.

•

To create 20 treasury units, a holder separates 20 corporate units into their two components—20 purchase contracts and a senior note—and then combines the purchase contracts with a treasury security that has a principal amount at maturity of $1,000 that must be purchased on the open market at the corporate unitholder’s expense and that matures on the day immediately preceding the purchase contract settlement date.

•

The senior note, which is no longer a component of corporate units and has a principal amount of $1,000, is released to the holder and is tradable as a separate security.

•

A holder owns the treasury security that forms a part of the treasury units but will pledge it to us through the collateral agent to secure its obligation under the related purchase contract.

•

The treasury security together with the 20 purchase contracts constitute 20 treasury units.

Transforming Corporate Units into Treasury Units and Senior Notes

The following illustration depicts the transformation of 20 corporate units into 20 treasury units and one $1,000 principal amount.

LOGO

•

Following the successful remarketing of the senior notes prior to the final three-day remarketing period or a tax event redemption, the applicable ownership interests in the treasury portfolio, rather than the senior note, will be released to the holder upon the transformation of a corporate unit into a treasury unit and will be tradable separately.

•

The holder can also transform 20 treasury units and a $1,000 principal senior note (or, following a successful remarketing of the senior notes or a tax event redemption, the applicable ownership interest in the treasury portfolio) into 20 corporate units. Following that transformation, the treasury security, which will no longer be a component of the treasury unit, will be released to the holder and will be tradable as a separate security.

•

If the applicable ownership interest in the treasury portfolio has replaced the senior notes underlying the corporate units, the transformation of corporate units into treasury units and the transformation of treasury units into corporate units can only be made in certain minimum amounts, as more fully described in this prospectus.

SUMMARY HISTORICAL CONSOLIDATED AND UNAUDITED PRO FORMA FINANCIAL DATA

The following table presents our summary historical consolidated financial data and summary unaudited pro forma consolidated financial data, at the dates and for the periods indicated. The historical data as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 have been derived from our audited historical consolidated financial statements and the notes to those statements included elsewhere in this prospectus. See footnote 1 to the table below. The historical data as of June 30, 2007 and for the six months ended June 30, 2006 and 2007 have been derived from our unaudited historical consolidated financial statements and the notes to those statements included elsewhere in this prospectus. Operating results for the six months ended June 30, 2006 and 2007 have been prepared on a basis consistent with our audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of any interim period are not necessarily indicative of the results that may be expected for any other interim period or for the entire fiscal year.

The summary unaudited pro forma financial data have been derived from our historical financial statements and adjusted to give effect to the Transactions. The summary unaudited pro forma financial data have been prepared to give effect to the Transactions as if they had occurred on January 1, 2006, in the case of the summary unaudited pro forma statement of operations data, and on June 30, 2007, in the case of the summary unaudited pro forma balance sheet data. The pro forma adjustments are based upon available information and certain assumptions that we believe are reasonable. The summary unaudited pro forma financial data are for informational purposes only and do not purport to represent what our results of operations or financial position actually would have been if the Transactions had occurred at any date, and such data do not purport to project the results of operations for any future period. See “Unaudited Pro Forma Condensed Consolidated Financial Information.”

Our historical financial data are not necessarily indicative of our future performance or what our financial position and results of operations would have been if we had operated as a separate, stand-alone entity during the periods shown. Because the data in this table is only a summary and does not provide all of the data contained in our financial statements, the information should be read in conjunction with “Use of Proceeds,” “Capitalization,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes thereto appearing elsewhere in this prospectus.


	For the years ended December 31,									For the six months ended June 30,						Pro forma for the year ended December 31,			Pro forma for the six months ended June 30,
	For the years ended December 31,									For the six months ended June 30,						Pro forma for the year ended December 31,			Pro forma for the six months ended June 30,
	2004			2005			2006			2006			2007			2006			2007
										(unaudited)			(unaudited)			(unaudited)			(unaudited)
	(dollars in thousands, except for share and per share data)
Statement of operations data(1):
Operating revenues	$	2,017,871		$	2,136,746		$	2,093,067		$	1,007,691		$	1,027,277		$	2,093,067		$	1,027,277
Operating expenses
Operation and maintenance		1,121,970			1,201,566			1,174,544			562,072			581,999			1,176,244			582,509
Depreciation and amortization		225,260			261,364			259,181			128,728			132,764			259,181			132,764
General taxes		170,165			183,324			185,065			94,756			93,819			185,065			93,819
Loss (gain) on sale of assets(2)		(8,611	)		(6,517	)		79			(1,795	)		(6,113	)		79			(6,113	)
Impairment charges		78,688			385,434			221,685			—			—			221,685			—

Total operating expenses, net		1,587,472			2,025,171			1,840,554			783,761			802,469			1,842,254			802,979

Operating income (loss)		430,399			111,575			252,513			223,930			224,808			250,813			224,298

Other income (deductions)
Interest		(315,944	)		(345,257	)		(365,970	)		(178,968	)		(142,970	)		(296,913	)		(141,682	)
Amortization of debt expense		(3,377	)		(4,367	)		(5,062	)		(1,678	)		(2,397	)		(5,932	)		(2,832	)
Other, net(3)		14,350			13,898			9,581			4,927			7,351			9,581			7,351

Total other income (deductions)		(304,971	)		(335,726	)		(361,451	)		(175,719	)		(138,016	)		(293,264	)		(137,163	)

Income (loss) from continuing operations before income taxes		125,428			(224,151	)		(108,938	)		48,211			86,792			(42,451	)		87,135

Provision for income taxes		66,328			50,979			46,912			20,056			34,378			73,208			34,514

Income (loss) from continuing operations	$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414		$	(115,659	)	$	52,621

Income (loss) from continuing operations per basic common share(4)(5)	$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414

Income (loss) from continuing operations per diluted common share(4)(5)	$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414

Basic weighted average common shares		1,000			1,000			1,000			1,000			1,000

Diluted weighted average common shares		1,000			1,000			1,000			1,000			1,000


Other data(1):
Cash flows provided by (used in):
Operating activities	$	458,408		$	525,435		$	323,748		$	66,723		$	136,181
Investing activities		(545,903	)		(530,165	)		(691,438	)		(241,724	)		(279,441	)
Financing activities		95,254			(9,049	)		332,367			133,391			164,951
Construction expenditures		(546,241	)		(558,446	)		(688,843	)		(235,818	)		(307,726	)


	As of December 31,				As of June 30,		Pro forma as of June 30,
	2005		2006		2007		2007
					(unaudited)		(unaudited)
	(dollars in thousands)
Balance sheet data(1):
Cash and cash equivalents	$	65,077	$	29,754	$	51,445	$	66,012
Utility plant at original cost, net of accumulated depreciation		8,101,769		8,605,341		8,806,066		8,806,066

Goodwill		3,181,570		2,962,493		2,962,564		2,962,564

Total assets		12,542,029		12,783,059		13,071,585		13,097,388

Redeemable preferred stock at redemption value(6)		1,774,691		1,774,475		1,774,299		24,299
Other long-term debt		3,011,827		3,096,404		3,335,579		5,254,579
Other short-term and current portion of long-term debt		2,018,251		1,007,128		253,242		112,242

Total debt		6,804,769		5,878,007		5,363,120		5,391,120

Common stockholder’s equity		2,804,716		3,817,397		4,520,149		4,491,275
Preferred stock without mandatory redemption requirements(6)		4,571		4,568		4,568		4,568

(1)

Prior to the consummation of the concurrent initial public offering, Thames US Holdings will be merged with and into American Water, with American Water as the surviving entity. Both American Water and Thames US Holdings are wholly owned subsidiaries of RWE. The audited historical consolidated financial statements of American Water represent the consolidated results of the Company, formerly issued under the name Thames Water Aqua US Holdings, Inc. and Subsidiary Companies for 2005 and 2006.

(2)	Represents primarily losses (gains) on sales of publicly traded securities and dispositions of assets not needed in utility operations.

(3)	Includes allowance for other funds used during construction, allowance for borrowed funds used during construction and preferred dividends of subsidiaries.

(4)

The number of common shares used to compute net income per basic share and net income per diluted share for the fiscal years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007 is 1,000 (the number of shares outstanding during such period) as no dilutive options or instruments were outstanding during these periods.

(5)

The number of common shares used to compute pro forma net income per basic share is , which gives effect to the -for- stock split to be effected prior to the concurrent initial public offering. Net income per diluted share also gives effect to all restricted stock units and stock options to be granted under our 2007 Omnibus Equity Compensation Plan to our executive officers and certain key employees upon the consummation of the concurrent initial public offering as if they were exercised or converted into common stock using the treasury method. Incremental common shares included in diluted earnings per share are .

(6)	Includes preferred stock held by RWE and other preferred stock issued by subsidiaries of the Company.

Our operations are heavily regulated. Decisions by regulators and changes in laws and regulations over which we have no control can significantly affect our business and results of operations.

Our operations are subject to extensive regulation by state PUCs and environmental, health and safety and water quality regulation by federal, state and local governments.

Our Regulated Businesses provide water and wastewater services to our customers through subsidiaries economically regulated by state PUCs. Economic regulation affects the rates we charge our customers and has a significant effect on our business and results of operations. Generally, the state PUCs authorize us to charge rates that they determine are sufficient to recover our prudently incurred operating expenses, to enable us to finance the addition of new, or the replacement of existing, water and wastewater infrastructure and to allow us the opportunity to earn what they determine to be an appropriate rate of return of and on our invested capital.

Our ability to meet our financial objectives depends upon the rates authorized by the various state PUCs. We periodically file rate increase applications with state PUCs. The ensuing administrative process may be lengthy and costly. We can provide no assurances that our rate increase requests will be granted. Even if approved, there is no guarantee that approval will be given in a timely manner or at a sufficient level to cover our expenses, the recovery of our investment and/or provide us an opportunity to earn an appropriate rate of return of and on our investment. If the authorized rates are insufficient to cover operating expenses, to allow for the recovery of our investment and to provide an appropriate return on invested capital, or if the rate increase decisions are delayed, our financial condition, results of operations, cash flow and liquidity may be adversely affected. Even if rates are sufficient, we face the risk that we will not achieve the rates of return of and on our invested capital that are permitted by the state PUC.

Our water and wastewater operations are subject to extensive United States federal, state and local and, in the case of our Canadian operations, Canadian laws and regulations, that govern the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation rights, and the manner in which we collect, treat and discharge wastewater. These requirements include the United States Clean Water Act of 1972, referred to as the Clean Water Act, and the United States Safe Drinking Water Act of 1974, referred to as the Safe Drinking Water Act, and similar state and Canadian laws and regulations. We are also required to obtain various environmental permits from regulatory agencies for our operations. State PUCs also set conditions and standards for the water and wastewater services we deliver. If we deliver water or wastewater services to our customers that do not comply with regulatory standards, or otherwise violate environmental laws, regulations or permits, or other health and safety and water quality regulations, we could incur substantial fines, penalties or other sanctions or costs or damage to our reputation. In the most serious cases, regulators could force us to discontinue operations and sell our operating assets to another utility or municipality.

We incur substantial operating and capital costs on an ongoing basis to comply with environmental laws and regulations and other health and safety and water quality regulations. These laws and regulations, and their enforcement, have tended to become more stringent over time, and new or stricter requirements could increase our costs. Although we may seek to recover ongoing compliance costs in our rates, there can be no guarantee that the various state PUCs or similar regulatory bodies that govern our Regulated Businesses would approve rate increases to recover such costs or that such costs will not adversely and materially affect our financial condition, results of operations, cash flow and liquidity.

In addition, we operate a number of water and wastewater systems under O&M contracts. Pursuant to these contracts, we operate the system according to the standards set forth in the applicable contract, but it is generally the responsibility of the owner to undertake capital improvements. In some cases, we may not be able to convince the owner to make needed improvements in order to maintain compliance with applicable regulations. Although violations and fines incurred by water and wastewater systems may be the responsibility of the owner of the system under these contracts, such non-compliance events may reflect poorly on us as the operator of the system and damage our reputation, and in some cases, may result in liability to the same extent as if we were the owner.

We may also incur liabilities under environmental laws and regulations requiring us to investigate and clean up environmental contamination at our properties or at off-site locations where we have disposed of waste or caused adverse environmental impacts. The discovery of previously unknown conditions, or the imposition of cleanup obligations in the future, could result in significant costs, and could adversely affect our financial condition, results of operations, cash flow and liquidity. Such remediation losses may not be covered by our insurance policies and may make it difficult for us to secure insurance in the future at acceptable rates.

Any governmental entity that regulates our operations may enact new legislation or adopt new regulations or policies at any time, and new judicial decisions may change the interpretation of existing legislation or regulations at any time. The individuals who serve as regulators are elected or are political appointees. Therefore, elections which result in a change of political administration or new appointments may also result in changes in the individuals who serve as regulators and the policies of the regulatory agencies that they serve. New laws, or regulations, new interpretations of existing laws or regulations, or changes in agency policy, including as a response to shifts in public opinion, or conditions imposed during the regulatory hearing process may affect our business in a number of ways, including the following:

Any of these changes or any other changes in laws, regulations, judicial decisions or agency policies applicable to us may have an adverse effect on our business, financial condition, results of operations, cash flow and liquidity.

Weather conditions, natural hazards, overuse of water supplies and competing uses may interfere with our sources of water, demand for water services and our ability to supply water to customers.

Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. In many states, the availability of our water supply is established through allocation rights and passing-flow requirements set by governmental entities. These requirements can change from time to time and adversely impact our water supply. Drought, overuse of sources of water, the protection of threatened species or habitats or other factors may limit the availability of ground and surface water. Governmental restrictions on water use during drought conditions may also result in decreased use of water services, even if our water supplies are sufficient to serve our customers, which may adversely affect our financial condition and results of operations. Following drought conditions, water demand may not return to pre-drought levels even after restrictions are lifted. Cool and wet weather may also reduce demand for water, thereby adversely affecting our financial condition, results of operations, cash flow and liquidity.

Earthquakes and other natural hazards may affect the condition or operability of our facilities, limiting or preventing us from delivering water or wastewater services to our customers, which may adversely affect our financial condition, results of operations, cash flow and liquidity. Furthermore, damage to our facilities might not be covered by our insurance policies and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

In addition, freezing weather may contribute to water and wastewater transmission interruptions caused by pipe and main breakage, which may be costly to repair. Extreme weather events may also have a material adverse effect on our results of operations. If an extreme weather event, such as a hurricane or flood, were to damage the physical plant of one or more of our operating subsidiaries, the delivery of water to our customers could be interrupted and we could be required to make significant capital expenditures to repair the damage. Extreme weather events may also affect demand for water services. We may not be able to recover such costs through rates. Any interruption in our ability to supply water or to collect, treat and properly dispose of wastewater, or any costs associated with restoring service, could adversely affect our financial condition and results of operations. Furthermore, losses from business interruptions might not be covered by our insurance policies, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Declining residential per customer water usage may reduce our long-term revenues, financial condition and results of operations.

Increased water conservation, including through the use of more efficient household fixtures and appliances among residential consumers, combined with declining household sizes in the United States, has contributed to a trend of declining residential per customer water usage. Our Regulated Businesses are heavily dependent upon revenue generated from rates we charge to our residential customers for the volume of water they use. The rate we charge for our water is regulated by state PUCs and we may not unilaterally adjust our rates to reflect demand. If rate increases authorized by state PUCs or growth in our residential customer base are not sufficient to offset declining revenue caused by this declining usage, our long-term revenues, financial condition and results of operations may be materially adversely affected.

Due to overlaps in regulatory oversight, parallel regulatory regimes may impose inconsistent obligations on us, and we may be subject to fines and penalties under one regulatory regime for actions that are compulsory under another regulatory regime.

We are subject to environmental, economic and other regulation at the state level and environmental and other regulation at the federal level. In many cases, state agencies adopt and enforce federal regulations. Although state regulations frequently overlap with federal regulations, state regulations in some instances may be stricter or broader in scope than applicable federal standards or inconsistent with other federal regulations. For example, in California, our extraction of water from certain surface water sources to meet the requirement by the state PUC to provide water to the population we serve can result in fines under federal environmental laws for

damage caused to steelhead trout stock. The fines and penalties we may incur as a result of inconsistent regulatory regimes may adversely affect our financial condition and results of operations, cash flow and liquidity.

Risks associated with the collection, treatment and disposal of wastewater may impose significant costs.

The wastewater collection, treatment and disposal operations of our subsidiaries are subject to substantial regulation and involve significant environmental risks. If collection or sewage systems fail or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages, which may not be recoverable in rates. Liabilities resulting from such damage could adversely and materially affect our business, results of operations and financial condition. Moreover, in the event that we are deemed liable for any damage caused by overflow, our losses might not be covered by insurance policies, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Our Regulated Businesses require significant capital expenditures to maintain infrastructure and expand our rate base and may suffer if we fail to secure appropriate funding to make investments, or if we suffer delays in completing major capital expenditure projects.

The water and wastewater utility business is capital intensive. In addition to our acquisition strategy, we invest significant amounts of capital to add, replace and maintain property, plant and equipment. In 2006, we invested $688.8 million in capital improvements and we expect to invest approximately $740 to $780 million in capital improvements in 2007. We expect the level of capital expenditures necessary to maintain the integrity of our systems to increase in the future. We fund these projects from cash generated from operations, borrowings under our revolving credit facility and commercial paper programs and the issuance of long-term debt and equity securities. We can provide no assurances that we will be able to access the debt and equity capital markets or do so on favorable terms.

Upon the consummation of the concurrent initial public offering, RWE will have certain registration rights with respect to future issuances of our equity securities and, subject to the lock-up provision described in this prospectus, intends to fully divest its ownership of American Water as soon as reasonably practicable, subject to market conditions. The registration rights agreement to be entered into with RWE will impose certain restrictions on our ability to issue equity securities in amounts beyond specified thresholds without RWE’s consent. Future sales of our common stock by RWE, as well as the restrictions in the registration rights agreement, may make it more difficult or costly for us to raise additional equity in the future. Furthermore, if we are unable to raise sufficient equity, we can provide no assurances that we will be able to access the debt capital markets, or do so on favorable terms.

If we are unable to obtain sufficient capital, we may fail to maintain our existing property, plant and equipment, realize our capital investment strategies, meet our growth targets and successfully expand the rate base upon which we are able to earn future returns of and on our investment. Even if we have adequate resources to make required capital expenditures, we face the additional risk that we will not complete our major capital expenditures on time, as a result of construction delays or other obstacles. Each of these outcomes could adversely affect our financial condition and results of operations. We also face the risk that after we make substantial capital expenditures, the rate increases granted to us by state PUCs may not be sufficient to recover our prudently incurred operating expenses and to allow us the opportunity to earn an appropriate rate of return of and on our invested capital.

Our business may suffer if we receive a downgrade in our corporate or issuer ratings from the credit ratings agencies.

Moody’s Investors Service, Inc., referred to as Moody’s, and Standard & Poor’s Ratings Services, referred to as S&P, issue ratings on our ability to repay our debt obligations. The credit ratings agencies could downgrade our credit rating based on reviews of our financial performance and projections or upon the occurrence of other

events that could impact our business outlook. A downgrade could cause our lenders to seek a higher rate of interest for future borrowings and thus increase our cost of capital. A downgrade could also limit our access to further equity and debt capital. The ratings agencies might not maintain ratings that allow us to obtain further capital for our business on reasonable terms, and we might not be able to recover any increases in our cost of capital through rates. The inability to recover these higher costs or regulatory lag in the recovery of such costs can affect our financial condition, results of operations, cash flow and liquidity. At June 30, 2007, S&P had its ratings of the Company and AWCC on CreditWatch with negative implication. On August 28, 2007, Moody’s announced that it had placed its ratings of AWCC on review for possible downgrade.

The failure of, or the requirement to repair, upgrade or dismantle, any of our dams may adversely affect our financial condition and results of operations.

We own a total of 99 dams. A failure of any of those dams could result in injuries and property damage downstream for which we may be liable. The failure of a dam would also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition and results of operations. Any losses or liabilities incurred due to a failure of one of our dams might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

We also are required from time to time to repair or upgrade the dams that we own. The cost of such repairs can be and has been material. We might not be able to recover such costs through rates. The inability to recover these higher costs or regulatory lag in the recovery of such costs can affect our financial condition, results of operations, cash flow and liquidity.

The federal and state agencies that regulate our operations may adopt rules and regulations requiring us to dismantle our dams. Federal and state agencies are currently considering rules and regulations that could require us to strengthen or dismantle one of our dams on the Carmel River in California due to safety concerns related to seismic activity. Any requirement to strengthen or dismantle this dam could result in substantial costs that may adversely affect our financial condition and results of operations. We are currently engaged in negotiations with federal and state agencies and local stakeholders on a plan to maintain our existing Carmel River dams or to share the costs of dismantling one of them with those federal and state agencies and local stakeholders. These negotiations could be delayed or abandoned.

Any failure of our network of water and wastewater pipes and water reservoirs could result in losses and damages that may affect our financial condition and reputation.

Our operating subsidiaries distribute water and wastewater through an extensive network of pipes and store water in reservoirs located across the United States. A failure of major pipes or reservoirs could result in injuries and property damage for which we may be liable. The failure of major pipes and reservoirs may also result in the need to shut down some facilities or parts of our network in order to conduct repairs. Such failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water and wastewater delivery requirements prescribed by governmental regulators, including state PUCs with jurisdiction over our operations, and adversely affect our financial condition, results of operations, cash flow, liquidity and reputation. Any business interruption or other losses might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Contamination of our sources of water could result in service interruptions and human exposure to hazardous substances and subject our subsidiaries to civil or criminal enforcement actions, private litigation and clean-up obligations.

Our water supplies are subject to contamination, including contamination from naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made sources, such as perchlorate

and methyl tertiary butyl ether (MTBE), and possible terrorist attacks. In the event that our water supply is contaminated, we may have to interrupt the use of that water supply until we are able to substitute the supply of water from another water source, including, in some cases, through the purchase of water from a third-party supplier. In addition, we may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities, or development of new treatment methods. If we are unable to substitute water supply in a cost-effective manner, our financial condition, results of operations, cash flow, liquidity and our reputation may be adversely affected. We might not be able to recover costs associated with treating or decontaminating water supplies through rates, or such recovery may not occur in a timely manner. Moreover, we could be held liable for environmental damage as well as damages arising from toxic tort or other lawsuits or criminal enforcement actions or other consequences arising out of human exposure to hazardous substances in our drinking water supplies.

The necessity for increased security has resulted, and may continue to result, in increased operating costs.

Following the events of September 11, 2001, we have taken steps to increase security measures at our facilities and heighten employee awareness of threats to our water supply and infrastructure. We have also increased our security measures regarding the delivery and handling of some chemicals used in our business. We have and will continue to bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant. We might not be able to recover these increased costs or any other costs that may be incurred as a result of terrorist attacks or other security breaches through rates or applicable insurance policies.

Our liquidity and earnings could be adversely affected by increases in our production costs, including the cost of chemicals, electricity, fuel or other significant materials used in the water and wastewater treatment process.

We incur significant production costs in connection with the delivery of our water and wastewater services. Our production costs are driven by inputs such as chemicals used to treat water and wastewater as well as electricity and fuel, which are used to operate pumps and other equipment used in water treatment and delivery and wastewater collection, treatment and disposal. We also incur production costs for waste disposal. For 2006, production costs accounted for 14.4% of our total operating costs. These costs can and do increase unexpectedly and in substantial amounts, as occurred in California during 2001 when the cost of electricity rose substantially.

Our Regulated Businesses might not be able to recover increases in the costs of chemicals, electricity, fuel, other significant inputs or waste disposal through rates, or such recovery may not occur in a timely manner. Our Non-Regulated Businesses may not be able to recover these costs in contract prices or other terms. The inability to recover these higher costs can affect our financial condition, results of operations, cash flow and liquidity.

Our reliance on third-party suppliers poses significant risks to our business and prospects.

We contract with third parties for goods and services that are essential to our operations, such as maintenance services, pipes, chemicals, electricity, water, gasoline, diesel and other materials. We are subject to substantial risks because of our reliance on these suppliers. For example:

As a result of any of these factors, we may be required to find alternative suppliers for the raw materials and services on which we rely. Accordingly, we may experience delays in obtaining appropriate raw materials and services on a timely basis and in sufficient quantities from such alternative suppliers at a reasonable price, which could interrupt services to our customers and adversely affect our revenues, financial condition, results of operations, cash flow and liquidity.

Risks associated with potential acquisitions or investments may adversely affect us.

We will continue to seek to acquire or invest in additional regulated water or wastewater systems, including by acquiring systems in markets in the United States, where we do not currently operate our Regulated Businesses, and through tuck-ins. We will also continue to seek to enter into public/private partnerships, including O&M, military and design, build and operate, referred to as DBO, contracts and services that complement our businesses. These transactions may result in:

We may also experience difficulty in obtaining required regulatory approvals for acquisitions, and any regulatory approvals we obtain may require us to agree to costly and restrictive conditions imposed by regulators. Future sales of our common stock by RWE, as well as the restrictions in the registration rights agreement to be entered into with RWE, may make it more difficult or costly for us to raise additional equity to fund an acquisition or to issue shares as consideration in connection with an acquisition. We may not identify all significant risks when conducting due diligence for the transaction, and we could be exposed to potential liabilities for which we will not be indemnified. There may be difficulties integrating new businesses, including bringing newly acquired businesses up to the necessary level of regulatory compliance. The demands of identifying and transitioning newly acquired businesses or pursuing investment opportunities may also divert management’s attention from other business concerns and otherwise disrupt our business. Any of these risks may adversely affect our financial condition, results of operations and cash flows.

We have recorded a significant amount of goodwill, and we may never realize the full value of our intangible assets.

Our total assets include substantial goodwill. At June 30, 2007, our goodwill totaled $2,962.6 million. The goodwill is associated primarily with the acquisition by an affiliate of RWE of American Water in 2003 and E’Town Corporation in 2001, representing the excess of the purchase price the purchaser paid over the fair value of the net tangible and intangible assets acquired. Goodwill is recorded at fair value on the date of an acquisition and, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” or SFAS No. 142, is reviewed annually or more frequently if changes in circumstances indicate the carrying value may not be recoverable. Annual impairment reviews are performed in the fourth quarter. We have been required to reflect, as required by SFAS No. 142 and other applicable accounting rules, a non-cash charge to operating results for goodwill impairment in the amounts of $192.9 million in 2004, $396.3 million in 2005 and $227.8 million in 2006. These amounts include impairments relating to discontinued operations.

There are a number of significant assumptions reflected in our valuation analyses. These include market interest rates used for discounting future cash flows, market value assumptions using market valuation multiples of comparable water utilities and revenue and operating income growth assumptions in our business plan. We base these assumptions on our best estimates of the Company’s future performance and available market information at the time. It is reasonably possible that we will be required to recognize additional impairments in the future, depending on, among other factors, a decline over a period of time in the valuation multiples of comparable water utilities, a decline in the market value of our common stock and its value relative to our book equity at the consummation of the concurrent initial public offering or a decline over a period of time of our stock price following the consummation of the concurrent initial public offering. A decline in our forecasted results in our business plan, such as changes in rate case results or capital investment budgets or changes in our interest rates may also result in an incremental impairment charge. Further recognition of impairments of a significant portion of goodwill would negatively affect our results of operations and total capitalization, the effect of which could be material and could make it more difficult for us to secure financing on attractive terms and maintain compliance with our debt covenants.

Our Regulated Businesses compete with other regulated utilities, as well as strategic and financial buyers, for acquisition opportunities, which may hinder our ability to grow our business.

We compete with other regulated utilities, as well as strategic and financial buyers, for acquisition opportunities, including tuck-ins. Our competitors may impede our growth by purchasing water utilities near our existing operations, thereby preventing us from acquiring them. Competing utilities and strategic and financial buyers have challenged, and may in the future challenge, our applications for new service territories. Our growth could be hindered if we are not able to compete effectively for new territories with other companies or strategic and financial buyers that have lower costs of operations or that can submit more attractive bids.

The assets of our Regulated Businesses are subject to condemnation through eminent domain.

Municipalities and other government subdivisions have historically been involved in the provision of water and wastewater services in the United States, and organized movements may arise from time to time in one or more of the service areas in which our Regulated Businesses operate to convert our assets to public ownership and operation through the governmental power of eminent domain. Should a municipality or other government subdivision seek to acquire our assets through eminent domain, we may resist the acquisition. Contesting an exercise of condemnation through eminent domain may result in costly legal proceedings and may divert the attention of the affected Regulated Business’s management from the operation of its business.

The last sale of one of our water and wastewater systems under threat of condemnation occurred in 2003 in California. On March 1, 2007, our subsidiary, California American Water Company, was served by the San Lorenzo Valley Water District with court papers seeking to condemn our water and wastewater system in Felton, California, which serves approximately 1,300 customers. While we are contesting the condemnation, we might not prevail. If a municipality or other government subdivision succeeds in acquiring the assets of one or more of our Regulated Businesses through eminent domain, there is a risk that we will not receive adequate compensation for the business, that we will not be able to keep the compensation, or that we will not be able to divest the business without incurring significant one-time charges.

In order to consummate the proposed RWE Divestiture, we and RWE were required to obtain approvals from thirteen state PUCs. There can be no guarantee that we will obtain the remaining final Pennsylvania approval in a timely manner or that some state PUC approvals already granted to us will not be appealed, withdrawn, modified or stayed. In addition, to obtain the approvals we were required to accept certain conditions and restrictions that could increase our costs and adversely affect our business.

To consummate the proposed RWE Divestiture, we and RWE obtained regulatory approvals from state PUCs in 13 states. While the RWE Divestiture was approved in writing on August 23, 2007 by the Pennsylvania state PUC, a final and non-appealable order, referred to as the PA Final Order, has yet to be issued. Therefore, we

may not be able to obtain all necessary final state PUC approvals in a timely fashion. In addition, the appeal period to challenge our state PUC approvals remains open in California, Illinois, New York, New Jersey and Pennsylvania. Thus, there can be no guarantee that our state PUC approvals in those states will not be appealed. Moreover, some of our existing state PUC approvals may be withdrawn or altered in the future by the state PUCs since they retain authority to withdraw or modify their prior decisions. There also can be no guarantee that, in conjunction with an appeal or otherwise, a stay or other form of injunctive relief will not be granted by a state PUC or reviewing court.

Some of the regulatory approvals contain conditions and restrictions that could increase our costs and adversely affect our business, including reporting obligations; obligations to maintain appropriate credit worthiness; restrictions on changes of control; prohibitions on the pass-through of our initial Sarbanes-Oxley Act compliance costs; prohibitions on the pass-through of costs of the Transactions; service and staffing level requirements; and the maintenance of collective bargaining agreements and retirement and other post employment benefit programs.

In addition, one of the regulatory approvals that we and RWE obtained expires 24 months from the date of effectiveness of the registration statement for the concurrent initial public offering and another such approval expires 36 months from that date. If RWE does not fully divest its ownership of American Water within 24 or 36 months of the effectiveness of the registration statement for the concurrent initial public offering, then we and RWE may be required to seek an extension of such approvals, as applicable, which process may result in delays, costs and the imposition of additional conditions on us or on RWE.

Our Non-Regulated Businesses, through American Water (excluding its regulated subsidiaries), provide performance guarantees and other forms of financial security to our public-sector clients that could be claimed by our clients or potential clients if we do not meet certain obligations.

Under the terms of some of our indebtedness and some of our agreements with the municipalities and other governmental entities, which we serve pursuant to O&M contracts, American Water (excluding its regulated subsidiaries) provides guarantees of the performance of our Non-Regulated Businesses, including financial guarantees or deposits to ensure performance of certain obligations. At June 30, 2007, we had guarantees and deposits totaling approximately $511.0 million, and this amount is likely to increase if our Non-Regulated Businesses grow. The presence of these contingent liabilities on our balance sheet may adversely affect our financial condition and make it more difficult for us to secure financing on attractive terms. In addition, if the obligor on the guaranteed instrument fails to perform certain obligations to the satisfaction of the party that holds the guarantee, that party may seek to enforce the guarantee against us or proceed against the deposit. In that event, our financial condition, results of operations, cash flow and liquidity could be adversely affected.

Our Non-Regulated Businesses are party to long-term contracts to operate and maintain water and wastewater systems under which we may incur costs in excess of payments received.

Some of our Non-Regulated Businesses enter into long-term contracts pursuant to which they agree to operate and maintain a municipality’s or other party’s water or wastewater treatment and delivery facilities in exchange for an annual fee. Our Non-Regulated Businesses are generally subject to the risk that costs associated with operating and maintaining the facilities may exceed the fees received from the municipality or other contracting party. In addition, directly or through our non-regulated subsidiaries, we often guarantee our Non-Regulated Businesses’ obligations under those contracts. Losses under these contracts or guarantees may adversely affect our financial condition, results of operations, cash flow and liquidity.

Our Non-Regulated Businesses expose us to product liability, warranty and other claims.

Our Non-Regulated Businesses design, build, operate and maintain water and wastewater systems at which accidents or system failures can cause personal injury and property damage. Any such failures could result in product liability, warranty and other claims against us.

We rely on our IT systems to assist with the management of our business and customer and supplier relationships, and a disruption of these systems could adversely affect our business.

Our IT systems are an integral part of our business, and a serious disruption of our IT systems could significantly limit our ability to manage and operate our business efficiently, which in turn could cause our business and competitive position to suffer and cause our results of operations to be reduced. We depend on our IT systems to bill customers, process orders, provide customer service, manage construction projects, manage our financial records, track assets, remotely monitor certain of our plants and facilities and manage human resources, inventory and accounts receivable collections. Our IT systems also allow us to purchase products from our suppliers and bill customers on a timely basis, maintain cost-effective operations and provide service to our customers. Our IT systems are vulnerable to damage or interruption from:

Such damages or interruptions may result in physical and electronic loss of customer or financial data, security breaches, misappropriation and similar events.

In addition, we may not be successful in developing or acquiring technology that is competitive and responsive to the needs of our business and we might lack sufficient resources to make the necessary investments in technology to allow us to continue to operate at our current level of efficiency.

Our indebtedness could affect our business adversely and limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flow to satisfy our liquidity needs.

As of June 30, 2007, after giving effect to the Transactions, our pro forma indebtedness was $5,391.1 million, and our working capital, defined as current assets less current liabilities, was in a deficit position. Our indebtedness could have important consequences, including:

The terms of our credit facilities permit additional borrowings, subject to certain conditions. In order to meet our capital expenditure needs, we may be required to make such additional borrowings under our credit facilities

or be required to issue new debt securities in the capital markets. We can provide no assurances that we will be able to access the debt capital markets or do so on favorable terms. If new debt is added to our current debt levels, the related risks we now face could intensify limiting our ability to refinance existing debt on favorable terms.

We will depend primarily on operations to fund our expenses and to pay the principal and interest on our outstanding debt. Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic, competitive, legislative, regulatory and other factors. We are not able to control many of these factors, such as economic conditions in the markets where we operate and pressure from competitors. The money we earn may not be sufficient to allow us to pay principal and interest on our outstanding debt obligations. If we do not have enough money, we may be required to refinance all or part of our existing debt, sell assets, borrow additional funds or sell additional equity. We may not be able to take such actions on terms that are acceptable to us, if at all. In addition, the terms of our existing or future debt agreements, including our credit facilities, may restrict us from adopting any of these alternatives. If our business does not generate sufficient cash flow from operations or if we are unable to incur indebtedness sufficient to enable us to fund our liquidity needs, we may be unable to plan for or respond to changes in our business that would prevent us from maintaining or increasing our business and cause our operating results and prospects to be affected adversely.

Our failure to comply with restrictive covenants under our credit facilities could trigger prepayment obligations.

Our failure to comply with the restrictive covenants under our credit facilities could result in an event of default, which, if not cured or waived, could result in us being required to repay or refinance (on less favorable terms) these borrowings before their due date. If we are forced to repay or refinance (on less favorable terms) these borrowings, our results of operations and financial condition could be adversely affected by increased costs and rates. In 2007, we were not in compliance with reporting covenants contained in some of the debt agreements of our subsidiaries. Such defaults under the reporting covenants were caused by our delay in producing our quarterly and audited annual consolidated financial statements. We have obtained all necessary waivers under the agreements, and we expect that prior to the effectiveness of the registration statement we will deliver the required financial statements and no longer be in default under any debt agreements. We can provide no assurance that we will comply in the future with all our reporting covenants and will not face an event of default under our debt agreements, or that such default will be cured or waived.

Our inability to adequately replace members of our local and corporate management team could adversely affect our results of operations.

Our operations are dependent on the continued efforts of our officers and employees. The loss of key officers who have acquired significant experience in operating an integrated water company on a national level may cause a significant disruption to our business. In addition, the operations of the individual utilities we own are dependent on the performance and productivity of the local managers in charge of those utilities and on other skilled employees. The success of the water utilities we own is significantly affected by local relationships (including relationships with local regulatory bodies) and the quality of services the utilities offer. Our inability to adequately replace key local managers and other skilled employees may jeopardize those relationships and the quality of services offered by those utilities. In addition, management and other skilled employees are in high demand. We cannot assure you that we will be able to identify, attract and retain sufficient managers and other skilled employees to continue to operate our businesses at their current levels of performance in the future.

Work stoppages and other labor relations matters could adversely affect our results of operations.

Currently, approximately 3,400 employees, or approximately 50% of our total workforce, are unionized and represented by 14 different unions. Approximately one-third of our 75 union collective bargaining agreements expire annually, with 23 agreements covering 783 employees scheduled to expire before the end of 2007. We

might not be able to renegotiate labor contracts on terms that are favorable to us and negotiations or dispute resolutions undertaken in connection with our labor contracts could be delayed or become subject to the risk of labor actions or work stoppages. Labor actions, work stoppages or the threat of work stoppages and our failure to obtain favorable labor contract terms during renegotiations may all adversely affect our financial condition, results of operations, cash flow and liquidity.

We currently have material weaknesses in internal control over financial reporting. If we fail to remedy our material weaknesses or otherwise maintain effective internal control over financial reporting, we may not be able to report our financial results accurately or on a timely basis. Any inability to report and file our financial results in an accurate and timely manner could harm our business and adversely impact the trading price of our common stock.

After the consummation of the concurrent initial public offering, we will become a public company. As a public company, we will be required to comply with the Sarbanes-Oxley Act and other rules and regulations that govern public companies. In particular, we will be required to certify our compliance with Section 404 of the Sarbanes-Oxley Act for the year ended December 31, 2008, which will require us to perform system and process evaluation and testing of our internal control over financial reporting to allow management and our registered public accounting firm to report on the effectiveness of our internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. However, since 2003, we have been a wholly owned subsidiary of RWE, a stock corporation incorporated in the Federal Republic of Germany, and were not required to maintain a system of internal control consistent with the requirements of the SEC and the Sarbanes-Oxley Act, nor to prepare our own financial statements. As a public reporting company, we will be required, among other things, to maintain a system of effective internal control over financial reporting suitable to prepare our publicly reported financial statements in a timely and accurate manner, and also to evaluate and report on such system of internal control.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the preparation of our consolidated financial statements as of December 31, 2006, we and our independent registered public accountants have identified the following material weaknesses in our internal control over financial reporting:

We have allocated, and will continue to allocate, significant additional resources, including hiring of additional staff, to remediate the deficiencies in our internal control listed above. However, elements of our remediation plan can only be accomplished over time, and we can provide no assurances that our initiatives will result in an effective internal control environment.

Each of these weaknesses could result in a material misstatement of our annual or interim consolidated financial statements. Moreover, we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses, any of which may subject us to additional regulatory scrutiny, and cause

future delays in filing our financial statements and periodic reports with the SEC. Any such delays in the filing of our financial statements and periodic reports may result in a loss of public confidence in the reliability of our financial statements and sanctions imposed on us by the SEC. We believe that such misstatements or delays could negatively impact our liquidity, access to capital markets, financial condition and the market value of our common stock or cause a downgrade in the credit ratings of American Water or AWCC. These material weaknesses contributed to our inability to comply with reporting covenants in our debt agreements and those of our subsidiaries, and could hinder our ability to comply with such covenants in the future if we are not successful in remediating such weaknesses.

You will bear the entire risk of a decline in the price of American Water’s common stock.

Although as a holder of corporate units or treasury units you will be the beneficial owner of the related applicable ownership interests in senior notes, treasury securities or the applicable ownership interests in the treasury portfolio, as the case may be, you do have an obligation to buy shares of American Water’s common stock pursuant to the purchase contract that is a part of the corporate units and treasury units. On the purchase contract settlement date, unless you pay cash to satisfy your obligation under the purchase contracts or the purchase contracts are terminated due to our bankruptcy, insolvency or reorganization, (i) in the case of corporate units, either (x) the principal of the appropriate applicable ownership interests in the treasury portfolio when paid at maturity or (y) either the proceeds attributable to the applicable ownership interest in senior notes derived from the successful remarketing of the senior notes or, if no successful remarketing has occurred, the put price paid upon the automatic put of the senior notes to us, or (ii) in the case of treasury units, the principal of the related treasury securities when paid at maturity, will automatically be used to purchase a specified number of shares of American Water’s common stock on your behalf.

The number of shares of American Water’s common stock that you will receive upon the settlement of a purchase contract is not fixed but instead will depend on the average of the closing price per share of American Water’s common stock on the 20 consecutive trading days ending on the third trading day immediately preceding the purchase contract settlement date, which we refer to as the applicable market value. There can be no assurance that the market value of common stock received by you on the purchase contract settlement date will be equal to or greater than the price per share paid by you for American Water’s common stock. If the applicable market value of the common stock is less than $ , the market value of the common stock issued to you pursuant to each purchase contract on the purchase contract settlement date (assuming that the market value is the same as the applicable market value of the common stock) will be less than the effective price per share paid by you for the common stock on the date of issuance of the equity units. Accordingly, you assume the entire risk that the market value of the common stock may decline and that the decline could be substantial.

The opportunity for equity appreciation provided by an investment in the equity units is less than that provided by a direct investment in American Water’s common stock.

Your opportunity for equity appreciation afforded by investing in the equity units is less than your opportunity for equity appreciation if you directly invested in American Water’s common stock. This opportunity is less because the market value of the common stock to be received by you pursuant to the purchase contract on the purchase contract settlement date (assuming that the market value is the same as the applicable market value of the common stock) will only exceed the price per share paid by you for American Water’s common stock on the purchase contract settlement date if the applicable market value of the common stock exceeds the threshold appreciation price (which represents an appreciation of % over the reference price). If the applicable market value of American Water’s common stock exceeds the reference price but falls below the threshold appreciation price, you realize no equity appreciation of the common stock for the period during which you own the purchase contract. Furthermore, if the applicable market value of American Water’s common stock equals or exceeds the threshold appreciation price, you would receive on the purchase contract settlement date only approximately % of the value of the shares of common stock you could have purchased with $50 at the initial public offering price of American Water’s common stock in the concurrent initial public offering.

The trading prices for the corporate units and treasury units will be directly affected by the trading prices of American Water’s common stock.

The trading prices of corporate units and treasury units in the secondary market will be directly affected by the trading prices of American Water’s common stock, the general level of interest rates and our credit quality. It is impossible to predict whether the price of the common stock or interest rates will rise or fall. Trading prices of the common stock will be influenced by our operating results and prospects and by economic, financial and other factors. In addition, general market conditions, including the level of, and fluctuations in the trading prices of stocks generally, and sales of substantial amounts of common stock by us in the market after the offering of the equity units, or the perception that such sales could occur, could affect the price of American Water’s common stock. Fluctuations in interest rates may give rise to arbitrage opportunities based upon changes in the relative value of the common stock underlying the purchase contracts and of the other components of the equity units. Any such arbitrage could, in turn, affect the trading prices of the corporate units, treasury units, senior notes and American Water’s common stock.

If you hold corporate units or treasury units, you will not be entitled to any rights with respect to American Water’s common stock, but you will be subject to all changes made with respect to the common stock.

If you hold corporate units or treasury units, you will not be entitled to any rights with respect to American Water’s common stock (including, without limitation, voting rights and rights to receive any dividends or other distributions on the common stock), but you will be subject to all changes affecting the common stock. You will only be entitled to rights on the common stock if and when we deliver shares of common stock in exchange for corporate units or treasury units on the purchase contract settlement date, or as a result of early settlement, as the case may be, and the applicable record date, if any, for the exercise of rights occurs after that date. For example, if an amendment is proposed to American Water’s articles of incorporation or by-laws requiring stockholder approval and the record date for determining the stockholders of record entitled to vote on the amendment occurs prior to delivery of the common stock, you will not be entitled to vote on the amendment, although you will nevertheless be subject to any changes in the powers, preferences or special rights of American Water’s common stock.

You may suffer dilution of the shares of common stock issuable upon settlement of the purchase contracts.

The number of shares of common stock that you are entitled to receive on the purchase contract settlement date or as a result of early settlement of a purchase contract is subject to adjustment for certain events arising from stock splits and combinations, cash or stock dividends and certain other actions by us that modify our capital structure. We will not adjust the number of shares of common stock that you are to receive on the purchase contract settlement date or as a result of early settlement of a purchase contract for other events, including offerings of common stock for cash by us or in connection with acquisitions. The purchase contract agreement does not restrict us from issuing additional common stock during the term of the purchase contracts, and we have no obligation to consider your interests for any reason. If American Water issues additional shares of common stock, it may materially and adversely affect the price of its common stock and, because of the relationship of the number of shares to be received on the purchase contract settlement date to the price of the common stock, such other events may adversely affect the trading price of the corporate units or treasury units. See “—Future sales of American Water’s shares, or the perception by the market that future sales of American Water’s shares may occur, could depress the market price of American Water’s common stock.”

You may have to pay taxes with respect to distributions on the common stock that you do not receive.

cash dividend, you would be required to include an amount in income for federal income tax purposes, notwithstanding the fact that you do not actually receive such distribution. Non-U.S. holders of the equity units may, in certain circumstances, be deemed to have received a distribution subject to U.S. federal withholding tax requirements. See “United States Federal Income Tax Consequences—U.S. Holders—Purchase Contracts—Adjustment to Settlement Rate” and “—Non-U.S. Holders—Dividends.”

The secondary market for the corporate units, treasury units or senior notes may be illiquid.

It is not possible to predict how corporate units, treasury units or senior notes will trade in the secondary market or whether the market will be liquid or illiquid. There is currently no secondary market for either the corporate units, treasury units or senior notes. We intend to apply to have the corporate units listed on the New York Stock Exchange under the symbol “ ”. If the treasury units or the senior notes are separately traded to a sufficient extent that applicable exchange listing requirements are met, we will try to list the treasury units or the senior notes on the same exchange as the corporate units. There can be no assurance as to the liquidity of any market that may develop for the corporate units, the treasury units or the senior notes, your ability to sell these securities or whether a trading market, if it develops, will continue. In addition, in the event a sufficient number of holders of corporate units were to convert their treasury units to corporate units or their corporate units to treasury units, as the case may be, the liquidity of corporate units or treasury units could be adversely affected. There can be no assurance that the corporate units will not be delisted from the New York Stock Exchange or that trading in the corporate units will not be suspended as a result of your election to create treasury units by substituting collateral, which could cause the number of corporate units to fall below the requirement for listing securities on the New York Stock Exchange.

The delivery of make-whole shares upon a cash merger early settlement may not adequately compensate you.

If a cash merger occurs and you exercise your merger early settlement right, you will have the right to accelerate and settle the purchase contract early at the settlement rate in effect immediately prior to the closing of the cash merger, plus an additional make-whole amount of shares (which amount we refer to as the make-whole shares) unless the price paid per share of our common stock in the cash merger is less than or equal to $ or more than $ (in each case, subject to adjustment). A description of how the make-whole shares will be determined is set forth under “Description of the Purchase Contracts—Early Settlement Upon Cash Merger—Calculation of Make-Whole Shares.” Although the make-whole shares are designed to compensate you for the lost value of your equity units as a result of certain types of mergers, this feature may not adequately compensate you for such loss.

We may, at our option and upon prior written notice to the holders of the equity units and the purchase contract agent, defer the payment of contract adjustment payments on the related purchase contracts forming a part of the equity units until no later than the purchase contract settlement date. However, deferred contract adjustment payments will accrue additional contract adjustment payments at the rate of % per year (compounded quarterly) until paid. If the purchase contracts are terminated due to our bankruptcy, insolvency or reorganization or are settled early, the right to receive contract adjustment payments and deferred contract adjustment payments, if any, will also terminate and, except in the case of a merger early settlement, you will not receive any accrued and unpaid contract adjustment payments.

The senior notes are structurally subordinated to all the obligations of our subsidiaries other than AWCC. AWCC’s ability to service its debt is dependent on the performance of our other subsidiaries.

The senior notes are issued by AWCC, our finance subsidiary. American Water has signed a support agreement with AWCC. The senior notes are not guaranteed by any of our subsidiaries and are the obligations only of AWCC and American Water, by virtue of the support agreement. Accordingly, the senior notes are

structurally subordinated to the liabilities, including trade payables, lease commitments and moneys borrowed, of American Water’s subsidiaries other than AWCC. American Water has no material assets or operations other than its equity interests in its subsidiaries, and AWCC has no material assets or operations except for its limited operations as a finance vehicle for our businesses. We expect that payments of interest and principal that AWCC makes on the senior notes (or that American Water makes pursuant to the support agreement) will be made only to the extent that our operating subsidiaries can distribute cash or other property to American Water and, through American Water, to AWCC.

Although the terms of the senior notes restrict our ability and the ability of our subsidiaries to incur certain liens and to enter into certain sale and leaseback transactions, the incurrence of other indebtedness or other liabilities by any of our subsidiaries is not prohibited in connection with the senior notes and could adversely affect our ability to pay our obligations on the senior notes. As of June 30, 2007, the indebtedness of our subsidiaries other than AWCC, excluding intercompany liabilities and obligations of a type not required to be reflected on a balance sheet in accordance with generally accepted accounting principles, that would effectively have been senior to the senior notes, was approximately $1,982.8 million. We anticipate that from time to time our subsidiaries will incur additional debt and other liabilities. Any debt incurred by our subsidiaries other than AWCC will be structurally senior to the senior notes.

We have not agreed to any financial covenants in connection with the senior notes. Consequently, we are not required in connection with the senior notes to meet any financial tests, such as those that measure our working capital, interest coverage, fixed charge or net worth, in order to maintain compliance with the terms of the senior notes.

Our ability to service our obligations under the senior notes depends on our ability to receive cash distributions from our operating subsidiaries. There can be no assurance that we will continue to receive such distributions or, if they are received, that they will be in amounts similar to past distributions.

AWCC, the issuer of the senior notes, is our finance subsidiary and has no substantial assets. American Water has entered into a support agreement with AWCC pursuant to which it has unconditionally guaranteed all payment obligations on all debt incurred by AWCC. Because substantially all of our operations are conducted through our subsidiaries other than AWCC, AWCC will not be able to make interest and principal payments on the senior notes (and American Water will not be able to fulfill its obligations under the support agreement) unless American Water receives sufficient cash distributions from its operating subsidiaries and contributes such distributions to AWCC. The distributions received from our operating subsidiaries might not permit AWCC or American Water to make required payments of interest and principal under the senior notes or pursuant to the support agreement, as applicable, on a timely basis, or at all.

Your rights to the pledged securities will be subject to our security interest.

Although you will be the beneficial owner of the applicable ownership interests in senior notes, treasury securities or applicable ownership interests in the treasury portfolio, as applicable, those securities will be pledged to us through the collateral agent to secure your obligations under the related purchase contracts. Thus, your rights to the pledged securities will be subject to our security interest. Additionally, notwithstanding the automatic termination of the purchase contracts, in the event that we become the subject of a case under the U.S. Bankruptcy Code, the delivery of the pledged securities to you may be delayed by the imposition of the automatic stay under Section 362 of the Bankruptcy Code and claims arising out of the senior notes, like all other claims in bankruptcy proceedings, will be subject to the equitable jurisdiction and powers of the bankruptcy court.

AWCC has the option to redeem the senior notes, on not less than 30 days nor more than 60 days prior written notice, in whole but not in part at any time before the earlier of the date of a successful remarketing of the

senior notes underlying the corporate units or the purchase contract settlement date, if a tax event occurs and continues under the circumstances described in this prospectus, which we call a tax event redemption. If AWCC exercises this option to redeem the senior notes, AWCC will pay the redemption price, as described herein, in cash to the holders of the senior notes. The redemption price payable to you as a holder of corporate units will be distributed to the collateral agent, who in turn will apply a portion of the redemption price to purchase the treasury portfolio on your behalf, and will remit the remainder of the redemption price, if any, to you, and the treasury portfolio will be substituted for the senior notes as collateral to secure your obligations under the purchase contracts related to the corporate units. If your senior notes do not underlie corporate units, you will receive the redemption payment directly. There can be no assurance as to the effect on the market price for the corporate units if we substitute the treasury portfolio as collateral in place of any senior notes so redeemed. A tax event redemption will be a taxable event to the holders of the senior notes. See “United States Federal Income Tax Consequences—Senior Notes—Sale, Exchange or Other Disposition of Senior Notes.”

The United States federal income tax consequences of the purchase, ownership and disposition of the equity units are unclear.

Although the Internal Revenue Service (the “IRS”) has issued a Revenue Ruling addressing the treatment of units similar to the equity units, no statutory, judicial or administrative authority directly addresses all aspects of the treatment of the equity units or instruments similar to the equity units for United States federal income tax purposes, and no assurance can be given that the conclusions in the Revenue Ruling would apply to the equity units. As a result, the United States federal income tax consequences of the purchase, ownership and disposition of equity units are not entirely clear. In addition, any gain on a disposition of a senior note or a corporate unit to the extent such gain is allocable to the applicable ownership interest in senior notes prior to the date six months after the interest rate on the senior notes is reset will generally be treated as ordinary interest income; thus, the ability to offset such interest income with a loss, if any, on a purchase contract may be limited. For additional tax-related risks, see “United States Federal Income Tax Consequences” in this prospectus.

The purchase contract and pledge agreement will not be qualified under the Trust Indenture Act and the obligations of the purchase contract agent are limited.

The purchase contract and pledge agreement between American Water and the purchase contract agent will not be qualified as an indenture under the Trust Indenture Act of 1939, and the purchase contract agent will not be required to qualify as a trustee under the Trust Indenture Act. Thus, you will not have the benefit of the protection of the Trust Indenture Act with respect to the purchase contract and pledge agreement or the purchase contract agent. The senior notes constituting a part of the corporate units will be issued pursuant to an indenture, which will be qualified under the Trust Indenture Act. Accordingly, if you hold corporate units, you will have the benefit of the protections of the Trust Indenture Act only to the extent applicable to the applicable ownership interests in senior notes included in the corporate units. The protections generally afforded the holder of a security issued under an indenture that has been qualified under the Trust Indenture Act include:

You will be required to accrue original issue discount on the senior notes for United States federal income tax purposes.

Because of the manner in which the interest rate on the senior notes is reset, the senior notes should be classified as contingent payment debt instruments subject to the “noncontingent bond method” for accruing

original issue discount for United States federal income tax purposes. Assuming that the senior notes are so treated, you will be required to accrue original issue discount on the senior notes or the applicable ownership interests in senior notes that are a component of the corporate units in your gross income on a constant yield-to-maturity basis, regardless of your usual method of tax accounting. For all accrual periods beginning before the earlier of the reset effective date and , 2010, the original issue discount that accrues on the senior notes will exceed the stated interest payments on the senior notes. For additional tax-related risks relating to the senior notes, see “United States Federal Income Tax Consequences—U.S. Holders—Senior Notes” in this prospectus.

There has been no prior public trading market for shares of American Water’s common stock since our acquisition by RWE, and an active trading market may not develop following the completion of the concurrent initial public offering.

Since our acquisition of RWE in 2003, there has been no public market for American Water’s shares. It is likely that the initial public offering price for American Water’s shares will differ from the market price for the shares after the concurrent initial public offering. We cannot assure you that an active trading market for American Water’s shares will develop. A significant portion of American Water’s shares may not trade following the concurrent initial public offering because RWE will own approximately % of the shares after the offering (or approximately % of the shares if the underwriters’ option to purchase additional shares in such offering is exercised in full). If no trading market develops, securities analysts may not initiate or maintain research coverage of American Water, which could further depress the market for the shares. The price of American Water’s shares could decline if one or more equity analysts downgrade its common stock or if those analysts issue other unfavorable commentary or cease publishing reports about American Water or its business. Furthermore, our operating results and prospects from time to time may be below the expectations of market analysts and investors. As a result, investors may not be able to sell their shares at or above the initial public offering price or at the time that they would like to sell.

The market price for American Water’s common stock may be volatile, which could cause the value of your investment to decline.

There has historically been significant volatility in the market price and trading volume of equity securities. This volatility is often unrelated to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market value of American Water’s common stock. The initial public offering price for the shares of American Water common stock being sold in the concurrent initial public offering will be determined by negotiations between the representatives of the underwriters and RWE and may not be indicative of prices that will prevail in the open market following such offering. You may not be able to resell your shares at or above the initial public offering price due to fluctuations in the market price of the common stock caused by changes in our operating performance or prospects and other factors. Some specific factors that may have a significant effect on the market price of American Water’s common stock include:

There has not been a public market for American Water’s common stock since its acquisition by RWE in 2003. We cannot predict the extent to which investor interest will lead to the development of an active trading market on the New York Stock Exchange or otherwise or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling any of our common stock that you buy. Consequently, you may not be able to sell your shares at prices equal to or greater to the initial public offering price in the concurrent initial public offering.

Future sales of American Water’s shares, or the perception by the market that future sales of American Water’s shares may occur, could depress the market price of American Water’s common stock.

Future sales, or the perception of the availability for sale in the public market, of substantial amounts of American Water’s common stock could adversely affect the prevailing market price of its common stock and could impair our ability to raise capital through future sales of equity securities at a time and price that we deem appropriate. Following the Transactions, there will be shares of American Water’s common stock outstanding.

The shares of common stock sold by RWE in the concurrent initial public offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares of common stock owned by RWE will be restricted securities within the meaning of Rule 144 under the Securities Act but will be eligible for resale subject to applicable volume, manner of sale, holding period and other limitations of Rule 144 and the lock-up provisions described below. RWE has certain registration rights with respect to the common stock that they will retain following the concurrent initial public offering and, subject to the lock-up provisions described in the prospectus, intends to fully divest its ownership of American Water as soon as reasonably practicable, subject to market conditions.

In addition, the equity units are effectively exchangeable into up to freely tradable shares of American Water’s common stock on the third anniversary of this offering. Following the consummation of the concurrent initial public offering, we intend to grant restricted stock units and stock options under our 2007 Omnibus Equity Compensation Plan, and are considering establishing an employee stock purchase plan, for which we would reserve shares of our common stock to be issued and sold thereunder.

American Water, our executive officers and directors and RWE have agreed to a “lock-up,” meaning that, subject to specified exceptions, neither we nor they will sell any shares or engage in any hedging transactions without the prior consent of the representatives of the underwriters for 180 days after the date of this prospectus. Following the expiration of this 180-day lock-up period, all of the shares of American Water’s common stock held by our executive officers and directors and by RWE will be eligible for future sale, subject to the applicable volume, manner of sale, holding period and other limitations of Rule 144.

We may issue shares of American Water’s common stock, or other securities, from time to time as consideration for future acquisitions and investments. In the event any such acquisition or investment is significant, the number of shares of our common stock or the number or aggregate principal amount, as the case may be, of other securities that we may issue may in turn be significant. We may also grant registration rights covering those shares or other securities in connection with any such acquisitions and investments. Any additional capital raised through the sale of our equity securities may dilute your percentage ownership in us. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.

You may never receive dividends on your investment in American Water’s common stock, which may limit your returns.

American Water currently intends to declare and pay regular quarterly cash dividends on its common stock. See “Dividend Policy.” However, American Water is not legally or contractually required to pay dividends, and its board of directors may revise or discontinue its dividend policy at any time. In particular, American Water’s dividend policy may change upon a change of control. In addition, any payment of cash dividends will depend upon our financial condition and results of operations, liquidity requirements, capital requirements of our subsidiaries, legal requirements, regulatory constraints, restrictions in our debt agreements and other factors deemed relevant by our board of directors. Some of our debt agreements restrict our ability, subject to specified exceptions, to pay dividends. Furthermore, any additional indebtedness that we incur may severely restrict or prohibit the payment of dividends. We cannot assure you that the agreements governing our future indebtedness will permit us to pay dividends on American Water’s common stock. See “Description of Certain Indebtedness.”

To pay dividends at intended levels, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, including the ability to receive cash distributions from our subsidiaries. We may not receive sufficient distributions from our subsidiaries to pay dividends with respect to shares of American Water’s common stock.

Our ability to pay dividends will depend on our ability to generate cash flow from operations in the future. This ability, to a certain extent, is subject to general economic, financial, competitive, regulatory and other factors that are beyond our control. We cannot assure you, however, that our subsidiaries will generate sufficient cash flow from operations, or have sufficient surplus or net profits, as the case may be, to make cash contributions to us in an amount sufficient to enable us to pay our indebtedness, pay dividends or to fund our other liquidity needs.

In addition, American Water is a holding company with no substantial assets. Because substantially all of American Water’s operations are conducted through our subsidiaries, American Water will not be able to pay dividends unless it receives sufficient cash distributions from its operating subsidiaries. American Water’s operating subsidiaries are subject to regulation by applicable state PUCs which may limit the ability of these subsidiaries to make distributions to American Water. If American Water does not have sufficient cash to fund dividend payments, we would either reduce or eliminate dividends or rely on cash provided by financing activities to fund dividend payments, and such financing may or may not be available.

Our principal stockholder is in a position to affect our ongoing operations, corporate transactions and other matters, and its interests may conflict with or differ from your interests as a stockholder.

Upon the consummation of the concurrent initial public offering, RWE will own approximately % of American Water’s common stock (or approximately % if the underwriters’ option to purchase additional shares is exercised in full). As a result, RWE effectively will be able to significantly influence the outcome on virtually all matters submitted to a vote of our stockholders, including the election of directors. So long as RWE continues to own a significant portion of the outstanding shares of American Water’s common stock, it will continue to be able to significantly influence the election of our directors, subject to compliance with applicable NYSE requirements, our decisions, policies, management and affairs and corporate actions requiring stockholder approval, including the approval of transactions involving a change of control. The interests of RWE and its affiliates may not coincide with the interests of our other stockholders.

Provisions in our amended and restated certificate of incorporation, our bylaws, Delaware law and the laws of the states in which we operate may inhibit or discourage a takeover attempt and negatively affect the value of your shares.

Provisions of our charter documents, the General Corporation Law of the State of Delaware, the state in which we are organized, and the laws of the states in which we operate could discourage potential acquisition

proposals or make it more difficult for a third party to acquire control of our company, even if doing so might be beneficial to our stockholders. See “Description of Capital Stock.” Upon the consummation of the concurrent initial public offering, our amended and restated certificate of incorporation and bylaws will provide for various procedural and other requirements that could make it more difficult for stockholders to effect certain corporate actions, or may deter, delay or prevent a third party from acquiring us. These provisions will include:

In addition, certain of the states in which we operate have enacted laws that require regulatory approval for the acquisition of “control” of regulated utilities. The threshold for a change of control is a fact-specific inquiry that varies by state. For instance, in some states any person acquiring more than 9.9% of American Water’s common stock would need the prior approval of the applicable state PUC or a determination from such state PUC that “control” has not been acquired. In addition to ownership, other states may analyze the degree of influence or control an acquiror may exert over the company. Any person acquiring American Water’s common stock in the concurrent initial public offering, through this offering of our equity units or in any other purchase of American Water’s common stock in a quantity sufficient to trigger a change of control under state law would need the prior approval of the applicable state PUC.

These provisions may discourage acquisition proposals and may make it more difficult or expensive for a third party to acquire a majority of our outstanding voting stock or may delay, prevent or deter a merger, acquisition, tender offer or proxy contest, which may negatively affect our stock price.

We have made statements under the captions “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and in other sections of this prospectus that are forward-looking statements. In some cases, these forward-looking statements can be identified by words with prospective meanings such as “intend,” “plan,” “estimate,” “believe,” “anticipate,” “expect,” “predict,” “project,” “forecast,” “outlook,” “future,” “potential,” “continue,” “may,” “can,” “should” and “could” and similar expressions. Forward-looking statements may relate to, among other things, our future financial performance, our growth strategies, our ability to repay debt, our ability to finance current operations and growth initiatives, trends in our industry, regulatory or legal developments or rate adjustments.

Forward-looking statements are predictions based on our current expectations and assumptions regarding future events. They are not guarantees of any outcomes, financial results or levels of performance, and you are cautioned not to place undue reliance upon them. These forward-looking statements are subject to a number of risks and uncertainties, and new risks and uncertainties of which we are not currently aware or which we do not currently perceive may arise in the future from time to time. Should any of these risks or uncertainties materialize, or should any of our expectations or assumptions prove incorrect, then our results may vary materially from those discussed in the forward-looking statements herein. Factors that could cause actual results to differ from those discussed in forward-looking statements include, but are not limited to, the factors discussed under the caption “Risk Factors” and the following factors:

Any forward-looking statements we make speak only as of the date of this prospectus. Except as required by law, we do not have any obligation, and we specifically disclaim any undertaking or intention, to update any forward-looking statements, whether as a result of new information, future events or otherwise.

Unless otherwise indicated, information contained in this prospectus concerning the water and wastewater industry, its segments and related markets and our general expectations concerning such industry and its segments and related markets are based on management estimates. Such estimates are derived from publicly available information released by third-party sources, as well as data from our internal research and on assumptions made by us based on such data and our knowledge of such industry and markets, which we believe to be reasonable. We have estimated the number of people served by our water and wastewater systems (i) by multiplying the number of residential water and wastewater connections by average people per household based on 2000 United States Census data by state (average people per household varies by state but is generally between 2.4 to 3.0 individuals per household); (ii) by adjusting for some other customer classes, including commercial customers, and for bulk water sales and (iii) by reconciling drinking water and wastewater connections to avoid double counting population served where the same user has both drinking water and wastewater service. In some instances, population estimates for our Non-Regulated Businesses are based on either (i) specific population estimates from the client or (ii) population estimates based on the average volume of water processed by the applicable facilities. Our internal research has not been verified by any independent source, and we have not independently verified any third party information and cannot assure you of its accuracy or completeness. In addition, while we believe the market share and market position information included herein is generally reliable, such information is inherently imprecise. While we are not aware of any misstatements regarding the industry or similar data presented herein, such data involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this prospectus.

We estimate that we will receive net proceeds from the sale of equity units in this offering of $ million, after deducting expenses and underwriting discounts and commissions. We will use a portion of the proceeds from this offering to repay outstanding commercial paper issued by AWCC and the balance of the proceeds for general corporate purposes. The commercial paper bears interest at a rate of % per annum and matures on .

This offering of equity units is contingent upon the concurrent initial public offering described below.

Concurrently with this offering of equity units, RWE, through its direct wholly owned subsidiary Thames Water Aqua Holdings GmbH, will sell, by means of a separate prospectus, shares of American Water’s common stock, subject to customary closing conditions.

RWE estimates that it will receive net proceeds from that sale of American Water’s common stock of $ , after deducting expenses and underwriting discounts and commissions.

We intend to pay quarterly cash dividends on our common stock at an initial rate of $ per share per annum. The first such dividend will be declared and paid in the first quarter following the completion of the concurrent initial public offering. The declaration, payment and amount of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition and results of operations, liquidity requirements, capital requirements of our subsidiaries, legal requirements, regulatory constraints and other factors deemed relevant by our board of directors.

American Water is a holding company with no significant business operations of its own. All of our business operations are conducted through our subsidiaries. Dividends and loans from, and cash generated by, our subsidiaries will be our principal sources of cash to repay indebtedness, fund operations and pay dividends. Accordingly, our ability to pay dividends to our stockholders will depend on the earnings and distributions of funds from our subsidiaries. See “Risk Factors—Risks Related to American Water’s Common Stock—To pay dividends at intended levels, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control, including the ability to receive cash distributions from our subsidiaries. We may not receive sufficient distributions from our subsidiaries to pay dividends with respect to shares of American Water’s common stock.”

The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2007 on an actual basis and on a pro forma basis to give effect to the Transactions as if they had occurred on June 30, 2007.

You should read this table in conjunction with, and this table is qualified in its entirety by reference to, the sections in this prospectus entitled “Summary Historical Consolidated and Unaudited Pro Forma Financial Data,” “Use of Proceeds,” “Unaudited Pro Forma Condensed Consolidated Financial Information,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

American Water and AWCC’s ratio of earnings to combined fixed charges and preferred dividends for each of the periods indicated is as follows:

For purposes of calculating the ratio of earnings to combined fixed charges and preferred dividends, earnings consists of income (loss) from continuing operations before income taxes including the effect of allowance for funds used during construction, referred to as AFUDC, plus fixed charges. Fixed charges consist of interest expense, amortization of debt issuance costs, interest on mandatory redeemable preferred stock, and a portion of rent expense that management believes is representative of the interest component of rental expense. Fixed charges have not been reduced for the effect of AFUDC.

The ratio of earnings to combined fixed charges and preferred dividends was less than 1.00x for the periods indicated in the table below.

The following unaudited pro forma condensed consolidated financial information have been developed by applying pro forma adjustments to the historical audited and unaudited consolidated financial statements of American Water appearing elsewhere in this prospectus. See the explanatory note to the unaudited pro forma condensed consolidated financial statements. The unaudited pro forma condensed consolidated statements of operations give effect to the Transactions as if they had occurred on January 1, 2006. The unaudited pro forma condensed consolidated balance sheet gives effect to the Transactions as if they had occurred on June 30, 2007. The Transactions consist of the following:

Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with these unaudited pro forma condensed consolidated financial statements.

The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the information contained in “Use of Proceeds,” “Capitalization,” “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto appearing elsewhere in this prospectus. All pro forma adjustments and their underlying assumptions are described more fully in the notes to our unaudited pro forma condensed consolidated financial statements.

See accompanying notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements.

Notes to the Unaudited Pro Forma Condensed Consolidated Financial Statements

Explanatory Note: Prior to the consummation of the concurrent initial public offering, Thames US Holdings will be merged with and into American Water, with American Water as the surviving entity. Both American Water and Thames US Holdings are wholly owned subsidiaries of RWE. The historical consolidated financial statements of American Water represent the consolidated results of the Company, formerly issued under the name Thames Water Aqua US Holdings, Inc. and Subsidiary Companies.

The following table presents our selected historical consolidated financial data at the dates and for the periods indicated. The statements of operations data for the years ended December 31, 2004, 2005, and 2006 and the balance sheet data as of December 31, 2005 and 2006 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The historical financial data as of December 31, 2004 have been derived from our audited consolidated financial statements not included in this prospectus. The financial data as of June 30, 2006 and 2007 and for the six months ended June 30, 2006 and 2007 have been derived from our unaudited interim consolidated financial statements included elsewhere in this prospectus. See footnote 1 to the table below. Operating results for the six months ended June 30, 2006 and 2007 have been prepared on a basis consistent with our audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position and results for the periods presented. The results of any interim period are not necessarily indicative of the results that may be expected for any other interim period or for the entire fiscal year. The financial data as of and for the year ended December 31, 2002 have been derived from the consolidated financial statements of Thames Water Holdings, Incorporated, referred to as Predecessor, the statement of operation for the year ended December 31, 2003, and the financial data as of December 31, 2003 and 2004 have been derived from our historical financial statements, in each case, which are not included in this prospectus.

Our historical consolidated financial data are not necessarily indicative of our future performance or what our financial position and results of operations would have been if we had operated as a separate, stand-alone entity during the periods shown. This financial data should be read in conjunction with, and is qualified in its entirety by reference to, the information in the section in this prospectus entitled “Summary Historical Consolidated and Unaudited Pro Forma Financial Data”, “Use of Proceeds”, “Capitalization”, “Unaudited Pro Forma Condensed Consolidated Financial Information”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.

The following discussion and analysis of our financial condition and results of operations covers periods prior to the consummation of the Transactions. Accordingly, the discussion and analysis of historical periods does not reflect the significant impact that the Transactions will have on us. You should read the following discussion together with the financial statements and the notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business and operations. The cautionary statements made in this prospectus should be read as applying to all related forward-looking statements whenever they appear in this prospectus. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Risk Factors” and elsewhere in this prospectus. You should read “Risk Factors” and “Forward-Looking Statements.”

Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers. Our Regulated Businesses that provide these services are generally subject to economic regulation by state PUCs in the states in which they operate. The federal government and the states also regulate environmental, health and safety and water quality matters. We report the results of this business in our Regulated Businesses segment. Our Regulated Businesses currently provide services in 20 states and in 2006 served approximately 3.3 million customers, or connections to our water and wastewater networks. In 2006, our Regulated Businesses generated $1,854.6 million in operating revenue, prior to inter-segment eliminations, representing 88.6% of our consolidated operating revenue.

In 2006, our Non-Regulated Businesses generated $248.5 million in operating revenue, prior to inter-segment eliminations.

Prior to being acquired by RWE in 2003, we were the largest publicly traded water utility company in the United States. In 2003, we were acquired by RWE and became a private company. Thames US Holdings, currently an indirect wholly owned subsidiary of RWE, is the holding company for us and our regulated and

unregulated subsidiaries throughout the United States and Ontario, Canada. Our consolidated statements of operations, statements of cash flow and changes in common stockholder’s equity and comprehensive income (loss) for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007 and consolidated balance sheets as of December 31, 2005 and 2006 and as of June 30, 2007 have been derived from the consolidated financial statements and accounting records of Thames US Holdings and its subsidiaries.

Our consolidated statements of operations for the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007 reflect expense allocations for some central corporate functions historically provided to us by RWE, including information systems, human resources, accounting and treasury activities and legal services. These allocations reflect expenses specifically identifiable as relating to our business as well as our share of expenses allocated to us based on capital employed, capital expenditures, headcount, revenues, production volumes, fixed costs, environmental accruals or other methods management considers to be reasonable. We and RWE consider these allocations to be a reasonable reflection of our utilization of the services provided by RWE. However, our expenses as a separate, stand-alone company may be higher or lower than the amounts reflected in our consolidated statements of operations.

The RWE acquisition resulted in certain changes in our business. For example, our operations and management were managed through Thames Water Plc, referred to as Thames Water, a former subsidiary of RWE. Also, we agreed not to file rate cases with some state PUCs for specified periods of time as a condition of the acquisition. As of June 30, 2007, all rate stay-out provisions had expired.

As a result of significantly increased costs, our inability to file rate cases and impairment charges, we recorded net losses in the amount of $64.9 million, $325.0 million and $162.2 million for the years ended December 31, 2004, 2005 and 2006, respectively.

In 2005, RWE decided to divest American Water through the sale of shares in one or more public offerings. In order to become a public company once again, we have had to incur substantial initial costs, including costs associated with ensuring adequate internal control over financial reporting in order to achieve compliance with the Sarbanes-Oxley Act. These substantial initial costs are not recoverable in rates charged to our customers. See “—Our Internal Control and Remediation Initiatives.”

We performed valuations of our long-lived assets, investments and goodwill, as of December 31, 2004, 2005 and 2006. As a result of the valuation analyses, we recorded pretax charges of $216.0 million, $420.4 million and $227.8 million, including impairment charges from discontinued operations, for the years ended December 2004, 2005 and 2006, respectively. As a result, this reduced net income by $200.5 million, $388.6 million and $223.6 million in 2004, 2005 and 2006, respectively.

The Company estimates the fair value of our long-lived assets, investments and goodwill using available market values, discounted cash flow models from our business plan or a combination of market and discounted cash flow values. Annual impairment reviews are performed in the fourth quarter. There are a number of significant assumptions reflected in our valuation analyses. These include market interest rates used for discounting future cash flows, market value assumptions using market valuation multiples of comparable water utilities and revenue and operating income growth assumptions in our business plan. We base these assumptions on our best estimates of the Company’s future performance and available market information at the time. Any decline over a period of time in the valuation multiples of comparable water utilities, a decline in the market value of our common stock and its value relative to our book equity at the consummation of the concurrent initial public offering or a decline over a period of time of our stock price following the consummation of the concurrent initial public offering could result in additional impairments. A decline in our forecasted results in our business plan, such as changes in rate case results or capital investment budgets or an increase in interest rates, may also result in an incremental impairment charge. In accordance with GAAP, the Company reviews goodwill annually, or more frequently, if changes in circumstances indicate the carrying value may not be recoverable. See “—Critical Accounting Policies and Estimates.”

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles. However, since 2003, we have been a wholly owned subsidiary of RWE, a stock corporation organized under the laws of the Federal Republic of Germany, and were not required to maintain a system of internal control consistent with the requirements of the SEC and the Sarbanes-Oxley Act, nor to prepare our own financial statements. As a public reporting company, we will be required, among other things, to maintain a system of effective internal control over financial reporting suitable to prepare our publicly reported financial statements in a timely and accurate manner, and also to evaluate and report on such system of internal control. In particular, we will be required to certify our compliance with Section 404 of the Sarbanes-Oxley Act for the year ended December 31, 2008, which will require us to perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting.

In connection with the preparation of our consolidated financial statements as of December 31, 2006, we and our independent registered public accountants have identified the following material weaknesses in our internal control over financial reporting:

Since joining the Company in 2006, Donald L. Correll, our Chief Executive Officer, and Ellen C. Wolf, our Chief Financial Officer, have assigned a high priority to the evaluation and remediation of our internal controls, and have taken numerous steps to remediate these material weaknesses and to evaluate and strengthen our other internal controls over financial reporting. Some of the actions taken include:

We have allocated, and will continue to allocate, significant additional resources, including the hiring of additional staff, to remediate the material weaknesses identified above. As of June 30, 2007, the Company has incurred $33.8 million to remediate these material weaknesses and to document and test key financial reporting controls. As a condition to state PUC approval of the RWE Divestiture, we agreed that costs incurred in connection with our initial internal control and remediation initiatives would not be recoverable in rates charged to our customers.

Elements of our remediation activities can only be accomplished over time, and our initiatives provide no assurances that they will result in an effective internal control environment. Our board of directors, in coordination with our audit committee, will continually assess the progress and sufficiency of these initiatives and make adjustments, as necessary.

Our financial condition and results of operations are influenced by a variety of factors, including the following:

Our subsidiaries in the states in which we operate our Regulated Businesses are generally subject to extensive economic regulation by their respective state PUCs. Although specific authority might differ from state to state, in most states, these state PUCs must approve rates, accounting treatments, long-term financing programs, significant capital expenditures and plant additions, transactions between the regulated subsidiary and affiliated entities, reorganizations and mergers and acquisitions, in many instances prior to their completion. Regulatory policies not only vary from state to state, they may change over time. These policies will affect the timing as well as the extent of recovery of expenses and the realized return on invested capital.

Our operating revenue is typically determined by reference to the volume of water supplied to a customer multiplied by a price-per-gallon set by a tariff approved by the relevant state PUC. The process to obtain approval for a change in rates, or rate case, involves filing a petition with the state PUC on a periodic basis as determined by our capital expenditures needs and our operating costs. Rate cases and other rate-related proceedings can take several months to a year or more to complete. Therefore, there is frequently a delay, or regulatory lag, between the time one of our regulated subsidiaries makes a capital investment or incurs an operating expense increase and when those costs are reflected in rates. The management team at each of our regulated subsidiaries works to minimize regulatory lag.

Our results of operations are significantly affected by rates authorized by the state PUCs in the states in which we operate. In addition to the formal rate case filings, we generate revenues through other cost recovery procedures. For example, some states in which we operate allow utility subsidiaries to recover system infrastructure replacement costs without the necessity of filing a full rate proceeding. Since infrastructure replacement is a significant element of capital expenditures made by our subsidiaries, such programs can reduce regulatory lag.

Currently, Pennsylvania, Illinois, Missouri, Indiana, New York, California and Ohio have allowed the use of these infrastructure surcharges. These surcharges adjust periodically based on qualified capital expenditures being completed or anticipated in a future period. These surcharges are typically reset to zero when new base rates are effective and incorporate the costs of these infrastructure expenditures. We anticipate an increase in revenues of approximately $16.0 million in 2007, assuming constant sales volumes, as a result of these infrastructure surcharges.

Some states have permitted use of some form of forecast or forward looking test year instead of historical data to set rates. Examples of these states include Illinois, Kentucky, Ohio, New York and California. In addition, a number of states in which we operate have allowed the utility to update historical data for some changes that occur for some limited period of time subsequent to the historical test year. This allows the utility to take account of some more current costs or capital investments in the rate-setting process. Examples of these states include New Mexico, Texas, Missouri, Iowa, Virginia, Pennsylvania, Maryland, West Virginia, New Jersey and Arizona.

Another regulatory mechanism to address issues of regulatory lag includes the ability, in some circumstances, to recover in rates a return on utility plant before it is actually in service, instead of capitalizing an allowance for funds used during construction. Examples of states that have allowed such recovery include Iowa, Texas, Pennsylvania, Ohio, Kentucky and California.

As a condition to our acquisition by RWE in 2003, we agreed not to file rate cases in some of the states where our Regulated Businesses operate. As of June 30, 2007, all material rate stay-out provisions had expired. We have four general rate cases pending that were filed in 2006 that would provide $79.1 million in additional annualized revenues, assuming constant sales volumes, if approved as filed. During the first six months of 2007, our subsidiaries have filed general rate cases in seven states that would provide $125.5 million in additional annualized revenues, assuming constant sales volumes, if approved as filed. In the first six months of 2007 we received authorizations for additional annualized revenues from rates of $81.0 million, assuming constant sales volumes. We have filed (or soon will file) general rate cases in six additional states before the end of 2007 that would provide $52.6 million in additional annualized revenues, assuming constant sales volumes, if approved as filed. In addition, we expect to continue to receive additional revenues through infrastructure replacement surcharges. There is no assurance that the complete amount, or any portion thereof, of any requested increases will be granted.

Over the next five years, we estimate that Company-funded capital investment will total between $4,000 and $4,500 million. We anticipate spending between $700 and $900 million yearly on Company-funded capital investment for the foreseeable future, depending upon the timing of major capital projects. Our capital investment includes both infrastructure renewal programs, where we replace existing infrastructure, as needed, and construction of facilities to meet new customer growth. Over the next five years, we estimate we will invest approximately $1,800 million to replace aging infrastructure including mains, meters, and supply and treatment facilities. We estimate that we will invest approximately $1,300 million in facilities to serve new customer growth over this same period. In addition, we estimate that complying with water quality standards and other regulatory requirements will require approximately $750 million of investment. Projects to enhance system reliability, security and efficiency, or to meet other needs are projected to account for approximately an additional $400 million of investment over this same period.

These capital investments are needed on an ongoing basis to comply with existing and new regulations, renew aging treatment and network assets, provide capacity for new growth and enhance system reliability, security and quality of service. The need for continuous investment presents a challenge due to the potential for regulatory lag, or the delay in recovering our operating expenses and earning an appropriate rate of return of and on our invested capital. Because the decisions of state PUCs and the timing of those decisions can have a

significant impact on the operations and earnings of our Regulated Businesses, we maintain a rate case management program guided by the goals of obtaining efficient recovery of costs of capital and utility operation and maintenance costs, including costs incurred for compliance with environmental, health and safety and water quality regulation. We pursue methods to minimize the adverse impact of regulatory lag and have worked with state PUCs and legislatures to implement a number of approaches to achieve this result, including promoting the implementation of forms of forward-looking test years and infrastructure surcharges.

Our water and wastewater operations are subject to extensive United States federal, state and local and, in the case of our Canadian operations, Canadian laws and regulations, governing the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation rights, and the manner in which we collect, treat and discharge wastewater. These requirements include the Safe Drinking Water Act, the Clean Water Act and similar state and Canadian laws and regulations. We are also required to obtain various environmental permits from regulatory agencies for our operations. State PUCs also set conditions and standards for the water and wastewater services we deliver. We incur substantial costs associated with compliance with environmental, health and safety and water quality regulation to which our Regulated Businesses are subject.

Environmental, health and safety and water quality regulations are complex and change frequently, and they have tended to become more stringent over time. As newer or stricter standards are introduced, they could increase our operating expenses. In the past, we have generally been able to recover expenses associated with compliance for environmental, health and safety standards, but this recovery is affected by regulatory lag.

Our water and wastewater services require significant production inputs and result in significant production costs. These costs include fuel and power, which is used to operate pumps and other equipment, purchased water and chemicals used to treat water and wastewater. We also incur production costs for waste disposal. For 2006, production costs accounted for approximately 14.4% of our total operating costs.

Customer growth in our Regulated Businesses is driven by (i) organic population growth within our authorized service areas and (ii) by adding new customers to our regulated customer base by acquiring water and wastewater utility systems through acquisitions. Generally, we add customers through tuck-ins of small water and/or wastewater systems, typically serving fewer than 10,000 customers, in close geographic proximity to where we currently operate our Regulated Businesses. We also seek large acquisitions that allow us to acquire multiple water and wastewater utility systems in our existing markets and markets where we currently do not operate our Regulated Businesses. During 2004, 2005, and 2006, we had cash outflows of $1.6 million, $5.0 million and $12.5 million, respectively, for acquisitions of water and wastewater systems which allowed us to expand our regulated customer base. Our most recent significant acquisition was the 2002 purchase of the water and wastewater assets of Citizens Communications Company, adding approximately 342,000 customers in six states in which we had existing operations. We intend to continue to expand our regulated footprint geographically by acquiring water and wastewater systems in our existing markets and some markets in the United States where we do not currently operate our Regulated Businesses. Our experienced development team evaluates potential acquisition targets across the country, particularly in higher-growth areas. Before entering new markets, we will evaluate the regulatory environment to ensure that we will have the opportunity to achieve an appropriate return on our investment while maintaining our high standards for quality, reliability and compliance with environmental, health and safety and water quality standards. These acquisitions may include large acquisitions of companies that have operations in multiple markets. For further information, see “Our Business—Our Regulated Businesses—Acquisitions”.

Increased water conservation, including through the use of more efficient household fixtures and appliances among residential consumers, combined with declining household sizes in the United States, has contributed to a trend of declining residential per customer water usage. Because the characteristics of residential water use are driven by many factors, these declining trends will vary by state and service area and change over time. For example, areas with higher per customer residential water use (primarily due to lawn irrigation) will generally have a greater projected decline in the long term since the conservation potential is greater. Our Regulated Businesses are heavily dependent upon operating revenue generated from rates we charge to our residential customers for the volume of water they use. If rate increases authorized by state PUCs or growth in our residential customer base are not sufficient to offset declining revenue caused by this declining usage, this will have a negative impact on our long-term operating revenues.

Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. Drought, overuse of sources of water, the protection of threatened species or habitats or other factors may limit the availability of ground and surface water. Also, customer usage of water is affected by weather conditions, in particular during the summer. Our water systems experience higher demand in the summer due to the warmer temperatures and increased usage by customers for lawn irrigation and other outdoor uses. Summer weather that is cooler and wetter than average generally serves to suppress customer water demand, and can have a downward effect on our operating revenue and operating income. Conversely, when weather conditions are extremely dry, our systems may be affected by drought-related warnings and/or water usage restrictions imposed by governmental agencies, also serving to reduce water allocation due to passing-flow requirements, customer demand and operating revenue. These restrictions may be imposed at a regional or state level and may affect our service areas regardless of our readiness to meet unrestricted customer demands.

The geographic diversity of our service areas tends to mitigate some of the effect of weather extremes. In any given summer, some areas are likely to experience drier than average weather while other areas will experience wetter than average weather.

The following table sets forth our consolidated statement of operations data for the years ended December 31, 2004, 2005, and 2006 and the six months ended June 30, 2006 and 2007:

The following table summarizes certain financial information for our Regulated and Non-Regulated Businesses for the periods indicated (without giving effect to inter-segment eliminations):

Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers. As such, our results of operations are significantly impacted by rates authorized by the state PUCs in the states in which we operate. The table below details the annualized revenues (assuming constant sales volumes) resulting from rate authorizations, including distribution infrastructure and other surcharges, granted in 2004, 2005, 2006 and through June 30, 2007.

Comparison of Results of Operations for the Six Months Ended June 30, 2007 to the Six Months Ended June 30, 2006

Operating revenues. Our consolidated operating revenues increased $19.6 million, or 1.9%, from $1,007.7 million for the six months ended June 30, 2006, to $1,027.3 million for the six months ended June 30, 2007. An increase in operating revenues for our Regulated Businesses was somewhat offset by a decrease in operating revenues for our Non-Regulated Businesses. The increase in the Regulated Businesses operating revenues was primarily due to rate increases obtained through general rate cases in New Jersey, California, Arizona and other states, totaling approximately $26.5 million. In addition, rate increases obtained through infrastructure surcharges, primarily in Pennsylvania, Missouri, Illinois and Indiana, totaled approximately $8.0 million. Water service operating revenues increased due to growth of 0.9% in our Regulated Businesses customer base. Water sales volume associated with existing customers increased by 0.4% for our Regulated Businesses.

The following table sets forth the percentage of our Regulated Businesses operating revenues and water sales volume by customer class:

Water Services—Water service operating revenues from residential customers for the six months ended June 30, 2007 amounted to $535.3 million, a 5.9% increase over the same period in 2006 primarily due to rate increases and changes in sales volume. The volume of water sold to residential customers increased by 2.2% for the six months ended June 30, 2007 to 99.1 billion gallons, from 96.9 billion gallons for the same period in 2006.

Water service operating revenues from commercial customers for the six months ended June 30, 2007 amounted to $176.0 million, a 2.3% increase over the same period in 2006, primarily due to rate increases and changes in sales volume. The volume of water sold to commercial customers increased by 0.5% for the six months ended June 30, 2007 to 41.3 billion gallons, from 41.1 billion gallons for the same period in 2006.

Water service operating revenues from industrial customers for the six months ended June 30, 2007 amounted to $46.1 million, a 3.0% increase over the same period in 2006, primarily due to rate increases and changes in sales volume. The volume of water sold to industrial customers decreased by 2.0% for the six months ended June 30, 2007 to 20.5 billion gallons, from 20.9 billion gallons for the same period in 2006.

Water service operating revenues from public and other customers for the six months ended June 30, 2007 amounted to $116.7 million, a 0.6% increase over the same period in 2006. Water service operating revenues from municipal governments for fire protection services and customers requiring special private fire service facilities for the six months ended June 30, 2007 amounted to $49.2 million, a 2.0% decrease over the same period in 2006. Water service operating revenues from governmental entities and resale customers for the six months ended June 30, 2007 amounted to $67.5 million, a 2.6% increase over the same period in 2006.

Wastewater Services—Our subsidiaries provide wastewater services in 11 states. Operating revenues from these services increased by 7.9% to $35.4 million for the six months ended June 30, 2007, from $32.8 million for the same period in 2006. The increases were attributable to rate increases and customer growth in our service areas.

Our Non-Regulated Businesses operating revenues decreased by $22.4 million, or 17.3%, from $129.4 million for the six months ended June 30, 2006 to $107.0 million for the six months ended June 30, 2007. The decline was primarily attributable to the inclusion in 2006 of approximately $28.5 million in operating revenues for work performed under a contract to design and build the Lake Pleasant Water Treatment Plant in Phoenix, Arizona. The decrease in our Non-Regulated Businesses operating revenues also reflects operating

contracts that ended during 2006. These decreases were partially offset by expansion into new geographic markets by the Homeowners Services Group (Virginia and Trenton, New Jersey) and a new contract awarded to American Water Enterprises in Fillmore, California for a design and build project.

Operation and maintenance. Our consolidated operation and maintenance expense increased $19.9 million, or 3.5%, from $562.1 million for the six months ended June 30, 2006, to $582.0 million for the six months ended June 30, 2007.

Production costs, including fuel and power, purchased water, chemicals and waste disposal increased by 8.2% for the six months ended June 30, 2007 compared to the same period in 2006. The increase was primarily attributable to higher energy costs, which are mainly due to increased production, as well as higher electricity prices as rate freezes resulting from electricity deregulation expired in some states in which we operate.

Employee-related costs including wage and salary, group insurance, and pension expense increased by 8.5% for the six months ended June 30, 2007 compared to the same period in 2006. These costs represented 36.6%, and 38.4% of operation and maintenance expense for the six months ended June 30, 2006 and 2007, respectively. The increase in 2007 was due to higher wage, salary and group insurance expenses in our Regulated Businesses, primarily resulting from an increase in the number of employees and wage rate increases. This increase was offset by a reduction in pension expense. Pension expense in excess of the amount contributed to the pension plans is deferred by some of our regulated subsidiaries pending future recovery in rates as contributions are made to the plans. The decrease is primarily attributable to lower pension expense for those regulated subsidiaries as a result of reduced pension contributions. In addition, pension expense for the six months ended June 30, 2006 included additional pension expense due to curtailment charges.

Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information systems and other office equipment and facility rental charges. For the six months ended June 30, 2007, these costs decreased by 5.8% compared to the same period in 2006. A significant factor contributing to the decrease was approximately $27.6 million of expenses associated with the design and build of the Lake Pleasant Water Treatment Plant in Phoenix, Arizona which were included in operating supplies and services for the six months ended June 30, 2006. The decrease also reflects Non-Regulated Businesses operating contracts that ended during 2006, and a decline in design and build activity by the Applied Water Management Group due to a downturn in new home construction. In addition, offsetting the decrease was additional expense associated with several new operating contracts and expansion into new markets by the Homeowner Services Group.

Offsetting the decline in Non-Regulated Businesses operating supplies and services was an increase in accounting, legal and consulting costs. Our remediation efforts in connection with the Sarbanes-Oxley Act resulted in an increase of $14.6 million for the six months ended June 30, 2007, as compared to the same period in 2006. Transportation costs for the six months ended June 30, 2007 increased by $2.4 million due to increased

vehicle leasing costs and higher gasoline prices. Also included in the six months ended June 30, 2006 was a recovery of $2.4 million previously disallowed in the regulatory process by our Indiana subsidiary. Expenses related to the RWE Divestiture were $2.3 million lower for the six months ended June 30, 2007 than in the same period in 2006 as regulatory approval activity related to the divestiture declined.

Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased by 24.1% for the six months ended June 30, 2007 compared to the same period in 2006. This increase was primarily the result of a larger number of main breaks in the first quarter of 2007 compared to the first quarter of 2006 experienced by several of our operating subsidiaries due to winter weather conditions.

Customer billing and accounting expenses decreased by 31.3% for the six months ended June 30, 2007 compared to the same period in 2006. Lower uncollectible accounts expense by our regulated subsidiaries as a result of an increased focus on collection of past due accounts contributed to the decrease.

Other operation and maintenance expenses include casualty and liability insurance premiums and regulatory costs. These costs decreased by 8.3% in 2007 primarily due to a reduction in insurance cost resulting from favorable claims experience.

Depreciation and amortization. Our consolidated depreciation and amortization expense increased $4.1 million, or 3.2%, from $128.7 million for the six months ended June 30, 2006, to $132.8 million for the six months ended June 30, 2007. The increase was primarily due to property placed in service, net of retirements, of approximately $319.9 million as a result of an increased focus on infrastructure spending mainly in our Regulated Businesses.

General taxes. Our consolidated general taxes expense, which includes taxes for property, payroll, gross receipts and other miscellaneous items, decreased $1.0 million, or 1.1%, from $94.8 million for the six months ended June 30, 2006, to $93.8 million for the six months ended June 30, 2007. The decrease was primarily due to lower taxes for expatriates because employees seconded by Thames Water to American Water were no longer employed by American Water in 2007.

Loss (gain) on sale of assets. Our consolidated gain on sale of assets increased $4.3 million, or 238.9%, from $(1.8) million for the six months ended June 30, 2006, to $(6.1) million for the six months ended June 30, 2007. This line of our Statement of Operations represents loss (gain) on non-recurring sales of assets not needed in our utility operations.

Other income (deductions). Interest expense, the primary component of our consolidated other income (deductions), decreased $36.0 million, or 20.1%, from $179.0 million for the six months ended June 30, 2006, to $143.0 million for the six months ended June 30, 2007. The decline was primarily due to the repayment of outstanding debt with new equity contributions from RWE in order to establish a capital structure that is consistent with other regulated utilities and also to meet the capital structure expectations of various state regulatory commissions. This decrease was offset slightly by an increase in interest expense of our Regulated Businesses of $7.4 million mainly due to increased borrowings to fund capital programs.

Provision for income taxes. Our consolidated provision for income taxes increased $14.3 million, or 71.1%, from $20.1 million for the six months ended June 30, 2006, to $34.4 million for the six months ended June 30, 2007. The increase reflects a 80.0% increase in pre-tax income for the six months ended June 30, 2007, as compared with the same period in 2006. The effective tax rates for the six months ended June 30, 2006 and 2007 were 41.6% and 39.6% respectively.

Net income (loss). Our consolidated net income including results from discontinued operations increased $22.0 million, or 73.6%, from $29.9 million for the six months ended June 30, 2006, to $51.9 million for the six months ended June 30, 2007. The increase is the result of the changes discussed above.

Comparison of Results of Operations for the Years Ended December 31, 2006 and 2005

Operating revenues. Our consolidated operating revenues decreased $43.6 million, or 2.0%, from $2,136.7 million for 2005 to $2,093.1 million for 2006. A decline in operating revenues associated with our Non-Regulated Businesses was partially offset by an overall increase in operating revenues from our Regulated Businesses.

Operating revenues from our Regulated Businesses increased by $18.6 million in 2006 compared to 2005, even with a 2.0% decline in water sales volume primarily due to weather fluctuations in 2006, as compared to 2005. The increase was primarily due to rate increases obtained through general rate cases in Arizona, California and New York as well as other states totaling $12.4 million. In addition, infrastructure surcharges in Pennsylvania, Missouri, Indiana, Illinois, and Ohio provided $13.7 million in additional operating revenues. Operating revenue also increased due to the addition of approximately 1.5%, or 51,000 customers, in our Regulated Businesses customer base through small acquisitions to our service areas and through growth in existing service areas.

The following table sets forth the percentage of our Regulated Businesses operating revenues and water sales volume by customer class:

Water Services—Water service operating revenues from residential customers in 2006 amounted to $1,068.2 million, relatively unchanged from 2005, as rate increases offset changes in sales volume. The volume of water sold to residential customers decreased by 2.5% in 2006 to 217.2 billion gallons, from 222.8 billion gallons for 2005.

Water service operating revenues from commercial customers in 2006 amounted to $362.7 million, a 2.5% increase over 2005, primarily due to rate increases and changes in sales volume. The volume of water sold to commercial customers decreased by 1.7% in 2006 to 91.6 billion gallons, from 93.2 billion gallons for 2005.

Water service operating revenues from industrial customers in 2006 amounted to $92.0 million, a 5.4% decrease over 2005, primarily due to rate increases and changes in sales volume. The volume of water sold to industrial customers decreased by 1.8% in 2006 to 44.4 billion gallons, from 45.2 billion gallons for 2005.

Water service operating revenues from public and other customers for 2006 amounted to $231.5 million, a 3.6% increase over 2005 primarily due to rate increases and changes in sales volume. Water service operating revenues from municipal governments for fire protection services and customers requiring special private fire service facilities for 2006 amounted to $98.5 million, a 9.6% increase from 2005. Water service operating revenues from governmental entities and resale customers 2006 amounted to $133.0 million, a 0.4% decrease from 2005.

Wastewater Services—Our subsidiaries provide wastewater services in 11 states. Operating revenues from these services increased by 8.1% to $68.1 million for 2006, from $63.0 million for 2005. The increases were attributable to rate increases and customer growth in our service areas.

Non-Regulated Businesses operating revenues decreased by $62.3 million, or 20.0% from $310.8 million for 2005 to $248.5 million for 2006. The decrease was primarily due to a decline of approximately $63.4 million in operating revenue for work performed under a contract to design and build the Lake Pleasant Water Treatment Plant in Phoenix, Arizona. The decrease in operating revenues also reflects the cessation of some operating contracts that ended during fiscal 2006. Partially offsetting the decrease was expansion into new markets by the Applied Water Management Group and the Homeowner Services Group, as well as increased revenues from some O&M contracts and a new contract in Fillmore, California for a design and build project.

Operation and maintenance. Our consolidated operation and maintenance expense decreased $27.1 million, or 2.3%, from $1,201.6 million for 2005, to $1,174.5 million for 2006.

Production costs, including fuel and power, purchased water, chemicals and waste disposal, increased by 0.7% in 2006 compared to 2005. Increases in chemical prices and energy costs in our Regulated Businesses were the principal drivers of the increase, mitigated by the overall decline in water sales and decreases in costs resulting from reduced Non-Regulated Businesses activities. Energy costs increased due to higher electricity prices as rate freezes resulting from electricity deregulation expired in some states in which we operate. The unit cost of water produced was up 7.3% in 2006 compared to 2005.

Employee-related costs include wage and salary, group insurance, pension expense and expenses related to our long-term incentive plan, referred to as the LTIP, for certain key employees. These costs represented 38.0% of operation and maintenance expense in 2006 and increased 9.1% in 2006 as compared to 2005. Wage and salary expenses were up $22.2 million, or 6.9%, in 2006 due to salary increases and workforce additions. The LTIP accounted for $3.1 million of the increase. Group insurance expense, which includes the cost of providing current health care and life insurance benefits as well as the expected cost of providing postretirement benefits, increased 15.1% in 2006 as a result of workforce additions and higher group insurance premiums associated with our active employees. In addition, the cost accrued for postretirement benefits in 2006 also increased due to lower than expected returns on plan assets and a decrease in the discount rate actuarial assumption. Pension expense increased by 32.5% in 2006 compared to 2005, due to lower than expected returns on plan assets and a decrease in the discount rate actuarial assumption. Additionally, our contributions to a defined contribution plan for employees increased over 2005 as the number of program participants increased.

the Lake Pleasant Water Treatment Plant in Phoenix, Arizona. The majority of the project activity occurred during 2005. These Non-Regulated Businesses operating expenses also decreased as a result of the aforementioned operating and maintenance contracts that ended during 2006. These cost reductions were offset by additional expenses related to expansion into new markets by the Applied Water Management Group and Homeowner Services Group, as well as costs associated with several new O&M contracts. These changes resulted in a decrease of $54.0 million in operating supplies and services by our Non-Regulated Businesses in 2006 as compared to 2005.

In addition to the decline in our Non-Regulated Businesses operating supplies and services, there was a decrease in accounting, legal and consulting costs in 2006. A significant portion of the decrease was due to lower management charges allocated from Thames Water of $9.1 million in 2006 as compared to 2005 and a recovery of $2.4 million previously disallowed in the regulatory process for our Indiana subsidiary. During 2005, the Company also recorded $3.5 million in expense relating to a special program established to protect the environment along the central coastal area of California. In addition, there was a decrease of $3.9 million relating to costs incurred in 2005 that were subsequently not allowed to be recovered in rates at our Kentucky subsidiary. These decreases were offset by higher expenses related to the RWE Divestiture of $7.4 million and increased costs related to the Company’s compliance with the Sarbanes-Oxley Act of $3.8 million from 2005 to 2006.

Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, decreased by 1.4% in 2006 compared to 2005. The cessation of some O&M contracts managed by our Non-Regulated Businesses was the primary reason for this decrease.

Customer billing and accounting expenses increased by 25.2% in 2006 compared to 2005, due to higher uncollectible expense due to a decline in the quality of our customer accounts receivable, increases in postage costs to mail customer bills and an increased number of bills being sent as a result of customer growth.

Other operation and maintenance expenses include casualty and liability insurance premiums and regulatory costs. Total other costs decreased in 2006 by 12.3% from 2005, due to improved claims experience following an increase in 2005. Regulatory costs increased during 2006 due to increased regulatory filings by our subsidiaries.

Depreciation and amortization. Our consolidated depreciation and amortization expense decreased $2.2 million, or 0.8%, from $261.4 million for 2005, to $259.2 million for 2006. The decrease was primarily due to a write-off in 2005 of $21.6 million associated with an abandoned information technology project. This decrease was offset by an increase in depreciation expense due to property placed in service, net of retirements, of $697.1 million as a result of infrastructure replacement in our Regulated Businesses.

General taxes. Our consolidated general taxes expense, which includes taxes for property, payroll, gross receipts and other miscellaneous items, was relatively unchanged from $183.3 million for 2005 to $185.1 million for 2006. The increase was primarily due to higher gross receipts taxes as a result of increased Regulated Businesses operating revenues. Gross receipts and franchise taxes that vary based on operating revenues were higher by 7.5% in 2006 compared to 2005. Property and capital stock taxes that are assessed on the basis of tax values assigned to assets and capitalization were down 3% in 2006 compared to 2005 due to property tax appeals and dispositions.

Loss (gain) on sale of assets. Our consolidated gain on sale of assets was $(6.5) million for 2005, compared to a loss on sale of assets of $0.1 million for 2006. The decrease in 2006 was primarily due to the fact that 2005 included sales of various properties and investments not needed in our utility operations.

Impairment charges. Our consolidated impairment charges were $385.4 million for 2005 and $221.7 million for 2006. The 2005 impairment charge was primarily the result of a change in our strategic business plan for our Non-Regulated Businesses and lower margins than previously forecasted in our Regulated Businesses. The 2006 impairment charge was primarily attributable to higher interest rates in our Regulated Businesses and a change in the potential net realizable value of our Non-Regulated Businesses.

Other income (deductions). Interest expense, the primary component of our consolidated other income (deductions), increased $20.7 million, or 6.0%, from $345.3 million for 2005 to $366.0 million for 2006. This increase was primarily due to higher interest rates for new debt issuances, mitigated by overall reduced borrowings as a result of repaying outstanding debt with new equity contributions.

Provision for income taxes. Our consolidated provision for income taxes decreased $4.1 million, or 8.0%, from $51.0 million for 2005, to $46.9 million for 2006. The decrease was primarily due to the mix of taxable income by jurisdiction.

Net income (loss). Our consolidated net (loss), including results from discontinued operations, decreased $162.8 million, or 50.1%, from $(325.0) million for 2005, to $(162.2) million for 2006. The decrease was primarily due to the changes discussed above.

Operating revenues. Our consolidated operating revenues increased $118.8 million, or 5.9%, from $2,017.9 million for 2004 to $2,136.7 million for 2005. The increase was primarily due to increased water sales volume of 3.1% from existing customers, increased customer growth, and the effects of rate increases granted to our regulated subsidiaries. In addition, revenues from our Non-Regulated Businesses increased primarily due to the timing of work performed on a design and build contract and expansion into new markets by Applied Water Management Group and Homeowner Services Group, offset in part by the cessation of some operations contracts.

Operating revenues from our Regulated Businesses increased $88.1 million, or 5.0%, from $1,748.0 million for 2004 to $1,836.1 million for 2005. The increase was primarily due to rate increases from general rate cases in California, Kentucky, New Jersey, New York, Pennsylvania and West Virginia as well as other states totaling $34.6 million. In addition, infrastructure related provisions in Indiana, Ohio and Pennsylvania provided $6.5 million in additional operating revenues. Operating revenues also increased due to the addition of nearly 38,000 new customers and a 2.6% increase in water sales volume from existing customers over 2004 due to favorable weather conditions in the summer of 2005.

The following table sets forth the percentage of our Regulated Businesses operating revenues and water volume by customer class:

Water Services—Water service operating revenues from residential customers in 2005 amounted to $1,068.1 million, a 6.1% increase over those for 2004 primarily due to rate increases and changes in sales volume. The volume of water sold to residential customers increased by 7.2% in 2005 to 222.8 billion gallons, from 207.8 billion gallons for 2004.

Water service operating revenues from commercial customers in 2005 amounted to $353.7 million, a 3.9% increase over 2004 primarily due to rate increases and changes in sales volume. The volume of water sold to commercial customers decreased by 2.0% in 2005 to 93.2 billion gallons, from 95.1 billion gallons for 2004.

Water service operating revenues from industrial customers in 2005 amounted to $97.2 million, a 2.6% decrease over 2004 primarily due to rate increases and changes in sales volume. The volume of water sold to industrial customers increased by 0.9% in 2005 to 45.2 billion gallons from 44.8 billion gallons for 2004.

Water service operating revenues from public and other customers for 2005 amounted to $223.4 million, a 2.4% increase over 2004 primarily due to rate increases and changes in sales volume. Water service operating revenues from municipal governments for fire protection services and customers requiring special private fire service facilities for 2005 amounted to $89.9 million, a 4.1% decrease over 2004. Water service operating revenues from governmental entities and resale customers in 2005 amounted to $133.5 million, an 7.4% increase over 2004.

Wastewater Services—Our subsidiaries provide wastewater services in 11 states. Operating revenues from these services increased by 9.8% to $63.0 million for 2005, from $57.4 million for 2004. The increases were attributable to rate increases and customer growth in our service areas.

Operating Revenues for our Non-Regulated Businesses increased $20.8 million, or 7.2%, from $290.0 million for 2004, to $310.8 million for 2005. The increase was primarily for work performed on the design and build of the Lake Pleasant Water Treatment Plant in Phoenix, Arizona. This resulted in approximately $50.3 million in additional operating revenues. The increase was somewhat offset by work performed on the design and build of a wastewater plant adjoining existing facilities at Camp Creek in Fulton County, Georgia of approximately $28.6 million. The increase in operating revenues also includes expansion into new markets by the Applied Water Management Group and Homeowner Services Group and general price increases in operating contracts for 2005, partly offset by operation and maintenance contracts that ended in 2005. Offsetting these increases were lower production costs from the Non-Regulated Businesses primarily due to operating contracts that ended in 2005.

Operation and maintenance. Our consolidated operation and maintenance expense increased $79.6 million or 7.1%, from $1,122.0 million for 2004 to $1,201.6 million for 2005.

Production costs, including fuel and power, purchased water, chemicals and waste disposal, increased by 5.7% in 2005 compared to 2004. Higher chemical prices and energy costs were the principal drivers of the increase, along with the incremental costs associated with increased sales volume. Offsetting these increases were lower production costs from the Non-Regulated Businesses primarily due to operating contracts that ended in 2005.

Employee-related costs include wage and salary, group insurance, and pension expense. These costs increased 0.3% in 2005 compared to 2004. Wage and salary expense decreased by 1.2% in 2005 compared to 2004. Group insurance expense increased by 6.5% in 2005 compared to 2004. The total expense in 2004 was higher than normal as a result of severance and other compensation related costs associated with organizational restructuring during that year. Pension expense increased by 1.9% in 2005 compared to 2004. The increase was due primarily to a decrease in the discount rate actuarial assumption. Pension expense in excess of the amount contributed to the pension plans is deferred by some regulated subsidiaries pending future recovery in rates charged for water services as contributions are made to the plans.

Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information systems and other office equipment and facility rental charges. These costs increased by 16.8% in 2005 compared to 2004. The increase in operating expense in 2005 compared to 2004 for our Non-Regulated Businesses was mainly attributable to approximately $49.8 million of costs associated with the Lake Pleasant Water Treatment Plant in Phoenix, Arizona. The additional increase can be attributed to a number of items, including increased costs due to the expansion into new markets by the Applied Water Management Group and Homeowner Services Group, increased business development costs due to enhanced emphasis on exploring potential business growth opportunities and higher administrative costs associated with a management restructuring of our contract operations. Offsetting these expenses were lower costs related to the Camp Creek project in Fulton County, Georgia of approximately $27.6 million. Operating supplies and services expenses also decreased as a result of the contracts that ended during 2005, partially offset by the new contracts awarded and Consumer Price Index increases in existing contracts.

In addition to the increase in Non-Regulated Businesses operating supplies and services, a portion of the increase was due to higher management charges allocated from Thames Water of $2.4 million in 2005 as compared to 2004. During 2005, we also recorded $3.5 million in expense relating to a special program established to protect the environment along the central coastal area of California.

Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased by 8.0% in 2005 compared to 2004. The increase was primarily due to costs associated with main breaks, as well as tank painting.

Customer billing and accounting expenses increased by 4.6% in 2005 compared to 2004, due to higher uncollectible expense resulting from a decline in the quality of our customer accounts receivable, increases in postage costs to mail customer bills and an increase in the number of bills mailed as a result of customer growth.

Other operation and maintenance expenses increased by 14.6% in 2005 compared to 2004. These expenses include casualty and liability insurance premiums and regulatory costs. Casualty and liability insurance increased based on claims experience. Regulatory costs increased during 2005 compared to 2004 due to increased regulatory filings by our subsidiaries.

Depreciation and amortization. Our consolidated depreciation and amortization expense increased $36.1 million, or 16.0%, from $225.3 million for 2004, to $261.4 million for 2005. The increase was primarily due to a write-off in 2005 of $21.6 million associated with an abandoned information technology project. In addition, the increase was due to increased property placed in service, net of retirements, of $515.1 million as a result of infrastructure replacement in our Regulated Businesses.

General taxes. Our consolidated general taxes expense, which includes taxes for property, payroll, gross receipts and other miscellaneous items, increased $13.1 million, or 7.7%, from $170.2 million for 2004, to $183.3 million for 2005. The increase was primarily due to a 9.7% increase in our Regulated Businesses gross receipts and franchise taxes driven by increased operating revenues, as well as a 3% increase in regulated property and capital stock taxes.

Loss (gain) on sale of assets. Our consolidated gain on sale of assets was ($8.6) million for 2004, compared to ($6.5) million for 2005. This line of our Statement of Operations represents loss (gain) on non-recurring sales of assets not needed in our utility operations.

Impairment charges. Our consolidated impairment charges were $78.7 million for 2004 and $385.4 million for 2005. The 2004 impairment charge was for our Non-Regulated Businesses and was primarily attributable to lower than expected growth and slower development compared with original expectations. The 2005 impairment charge was primarily the result of a change in our strategic business plan for our Non-Regulated Businesses and lower margins than previously forecasted in our Regulated Businesses.

Other income (deductions). Interest expense, the primary component of our consolidated other income (deductions), increased $29.4 million, or 9.3%, from $315.9 million for 2004, to $345.3 million for 2005. A portion of this increase is due to the fact that 2004 interest expense included an offsetting gain of $11.4 million resulting from an early extinguishment of debt. The remaining increase in interest expense was the result of additional borrowings from the regulated subsidiaries and additional interest expense of $7.1 million associated with the Company’s long-term borrowings from RWE.

Provision for income taxes. Our consolidated provision for income taxes expense decreased $15.3 million, or 23.1%, from $66.3 million for 2004, to $51.0 million for 2005.

Net income (loss). Our consolidated net (loss), including results from discontinued operations, increased $260.1 million, or 400.8%, from $(64.9) million for 2004, to $(325.0) million for 2005. The increase was due to the changes discussed above, as well as a $74.1 million reduction in our loss from discontinued operations.

Our business is capital intensive and requires considerable capital resources. A portion of these capital resources are provided by internally generated cash flows from operations. When necessary, we obtain funds from external sources in the capital markets and through bank borrowings. Our access to external financing on reasonable terms depends on our credit ratings and current business conditions, including that of the water utility industry in general. If these conditions deteriorate to the extent that we no longer have access to the capital markets at reasonable terms, we have access to revolving credit facilities with aggregate bank commitments of $810.0 million that we currently utilize to support our commercial paper programs and to issue letters of credit. See “—Credit Facilities and Short-Term Debt.”

In addition, our regulated utility subsidiaries receive advances and contributions from customers, home builders and real estate developers to fund construction necessary to extend service to new areas. Advances for construction are refundable for limited periods, which vary according to state regulations, as new customers begin to receive service or other contractual obligations are fulfilled. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from rate base. Generally, we depreciate contributed property and amortize contributions in aid of construction at the composite rate of the related property. Some of our subsidiaries do not depreciate contributed property, based on regulatory guidelines.

We use our capital resources, including cash, to (i) fund capital requirements, including construction expenditures, (ii) pay off maturing debt, (iii) pay dividends, (iv) fund pension obligations and (v) invest in new and existing ventures. We spend a significant amount of cash on construction projects that have a long-term return on investment. Additionally, we operate in rate-regulated environments in which the amount of new investment recovery may be limited, and where such recovery takes place over an extended period of time, as our recovery is subject to regulatory lag. See “Business—Regulation—Economic Regulation.” As a result of these factors, our working capital, defined as current assets less current liabilities, as of June 30, 2007, is in a net deficit position.

To maintain our capital structure, we intend to refinance maturing long-term debt during 2007 with proceeds of future external debt offerings. Prior to the consummation of the concurrent initial public offering, we intend to use the proceeds from the issuance of approximately $1,500.0 million aggregate principle amount of senior notes together with commercial paper and excess cash to fund the early redemption of $1,750.0 million of preferred stock and the repayment of $222.0 million aggregate principal amount of the RWE notes. In addition, we intend to use the approximately $500.0 million of proceeds from the issuance of the equity units to fund the repayment of commercial paper borrowed to repay the preferred stock owed to RWE and the RWE notes, with the balance of excess cash used to fund general working capital requirements. Future acquisitions that we may undertake may involve external debt financing or the issuance of additional common stock.

We expect to fund future maturities of long-term debt through a combination of external debt and cash flow from operations. We have no plans to reduce debt significantly.

Our future cash flows from operating activities will be affected by economic utility regulation; infrastructure investment; inflation; compliance with environmental, health and safety standards; production costs; customer growth; and declining per customer usage of water; and weather and seasonality. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of Operations.”

Cash flows from operating activities have been a reliable, steady source of cash flow, sufficient to meet operating requirements and a portion of our capital expenditures requirements. We expect to have to access debt and equity capital markets to meet the balance of our capital expenditure requirements. There can be no assurance that we will be able to successfully access such markets on favorable terms or at all. Operating cash flows can be negatively affected by changes in our rate regulatory environments. Taking into account the factors noted above, we also obtain cash from non-operating sources such as the proceeds from debt issuances, customer advances and contributions in aid of construction and equity offerings.

The following table provides a summary of the major items affecting our cash flows from operating activities for the periods indicated:

The decrease in cash flows from operations during 2006 versus 2005 was primarily the result of higher contributions to pension and postretirement healthcare trusts and higher taxes paid. Excluding these items, changes in our cash flows from operating activities were generally consistent with changes in the results of operations as adjusted by changes in working capital in the normal course of business.

The increase in cash flow from operations during 2005 versus 2004 was primarily due to improvements in working capital driven mainly by the changes in accounts receivable and unbilled utility revenues. This improvement was offset in part by higher contributions to pension and postretirement healthcare trusts and higher taxes paid.

The increase in cash flow from operations during the six months ended June 30, 2007 versus the same period for 2006 was primarily due to greater net income and improvements in working capital. Also adding to the improved cash flow for this period were the lower contributions to pension and postretirement healthcare trusts than made in the same period for the prior year.

Cash flows used in investing activities were as follows for the periods indicated:

Cash flows used in investing activities increased significantly in 2006 versus 2005 as we increased investment in regulated infrastructure projects. Cash flows used in investing activities will continue to rise during 2007 as construction expenditures are expected to be approximately $740 to $780 million during 2007. We intend to invest capital prudently to provide essential services to our regulated customer base, while working with regulators in the various states in which we operate to have the opportunity to earn appropriate rates of return of and on these investments.

Our infrastructure investment plan consists of both infrastructure renewal programs, where we replace infrastructure as needed, and major capital investment projects, where we will construct new water and wastewater treatment and delivery facilities. Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

The following table provides a summary of our historical construction expenditures:



Title of Each Class of Securities to be Registered	Proposed Maximum Aggregate Offering Price(1)(2)	Amount of Registration Fee
Equity units	$500,000,000	$15,350.00
American Water Capital Corp. Senior Notes (3)
Common stock, par value $1.00 per share (4)	$500,000,000	$15,350.00
Purchase Contracts (5)
Support Agreement (6)


	Per unit	Total
Public offering price	$	$
Underwriting discounts	$	$
Proceeds, before expenses, to American Water	$	$


	As of June 30, 2007
	(dollars in thousands)
	Historical		Pro forma
Cash and cash equivalents	$	51,445	$	66,012

Short-term debt
RWE notes(1)		141,000		—
Short-term debt		167		167


Total short-term debt		141,167		167


Long-term debt of American Water
Redeemable preferred stock(2)		1,750,000		—

Long-term debt of AWCC
Private activity bonds and government funded debt		86,860		86,860
Senior notes		1,212,000		1,212,000
New senior notes(3)		—		1,500,000
RWE notes(4)		81,000		—
Equity units (5)		—		500,000

Long-term debt of other subsidiaries
Private activity bonds and government funded debt		1,126,493		1,126,493
Mortgage bonds		802,840		802,840
Senior notes		53,500		53,500
Redeemable preferred stock at redemption value (6)		24,856		24,856
Notes payable and other		3,859		3,859
Unamortized debt discount, net		80,545		80,545

Total long-term debt		5,221,953		5,390,953

Total debt		5,363,120		5,391,120

Equity
Common stockholders’ equity(7)		4,520,149		4,491,275
Preferred stock without mandatory redemption requirements		4,568		4,568

Total equity		4,524,717		4,495,843

Total capitalization including short-term debt and current portion of long-term debt	$	9,887,837	$	9,886,963


	For the Year Ended December 31,					For the Six Months Ended June 30, 2007
	2002(1)	2003	2004	2005	2006	For the Six Months Ended June 30, 2007
American Water	(Predecessor)
Ratio of Earnings to Combined Fixed Charges and Preferred Dividends(2)	—	1.35	1.38	—	—	1.57
Pro Forma—Ratio of Earnings to Combined Fixed Charges and Preferred Dividends(2)					—	1.58

AWCC
Ratio of Earnings to Combined Fixed Charges and Preferred Dividends	1.00	1.00	1.00	1.00	1.00	1.00
Pro Forma—Ratio of Earnings to Combined Fixed Charges and Preferred Dividends					1.00	1.00


	Historical		Pro forma adjustments			Pro forma
	(dollars in thousands)
ASSETS
Property, plant and equipment
Utility plant—at original cost, net of accumulated depreciation	$	8,806,066	$	—		$	8,806,066
Nonutility property, net of accumulated depreciation		109,525		—			109,525

Total property, plant and equipment		8,915,591		—			8,915,591

Current assets
Cash and cash equivalents		51,445		14,567	(B)		66,012
Other current assets		440,550		—			440,550

Total current assets		491,995		14,567			506,562

Regulatory and other long-term assets
Goodwill		2,962,564		—			2,962,564
Other regulatory and other long-term assets		701,435		11,236	(D)		712,671

Total regulatory and other long-term assets		3,663,999		11,236			3,675,235

TOTAL ASSETS	$	13,071,585	$	25,803		$	13,097,388

CAPITALIZATION & LIABILITIES
Capitalization
Common stockholders’ equity	$	4,520,149	$	790 6,500 (23,000) (13,504) 340	(I) (I) (H) (D) (J)	$	4,491,275
Preferred stock without mandatory redemption requirements		4,568		—			4,568
Long-term debt
Long-term debt		3,335,579		(81,000	)(I)		3,254,579
Redeemable preferred stock at redemption value		1,774,299		(1,750,000	)(I)		24,299
New senior notes		—		1,500,000	(B)		1,500,000
Equity units		—		500,000	(B)		500,000

Total capitalization		9,634,595		140,126			9,774,721

Current liabilities
Short-term debt and current portion of long-term debt		253,242		(141,000	)(I)		112,242
Other current liabilities		373,216		4,017 4,425	(E) (E)		381,658

Total current liabilities		626,458		(132,558	)(I)		493,900

Total regulatory and other long-term liabilities		2,031,085		18,235	(H)		2,049,320

Contributions in aid of construction		779,447		—			779,447

TOTAL CAPITALIZATION AND LIABILITIES	$	13,071,585	$	25,803		$	13,097,388


		Page
Prospectus Summary		1
Risk Factors		24
Forward-Looking Statements		45
Industry and Market Data		46
Use of Proceeds		47
Common Stock Offering		48
Dividend Policy		48
Capitalization		49
Ratio of Earnings to Combined Fixed Charges and Preferred Dividends		50
Unaudited Pro Forma Condensed Consolidated Financial Information		51
Selected Historical Consolidated Financial Data		57
Management’s Discussion and Analysis of Financial Conditions and Results of Operations		59
Business		92
Management		119
Certain Relationships and Related Transactions		153
American Water Capital Corp.		155
Principal Stockholders		156
Description of Capital Stock		158
Description of Certain Indebtedness		161
Description of Equity Units		165
Description of Purchase Contracts		171
Certain Provisions of The Purchase Contract and Pledge Agreement		187
Description of The Senior Notes		191
Accounting Treatment		204
Shares Eligible for Future Sale		205
United States Federal Income Tax Consequences		207
Underwriting		217
Validity of the Equity Units		220
Experts		221
Where You Can Find More Information		222
Glossary		G-1
Index to Consolidated Financial Statements		F-1


	Principal		Rate(1)		Interest expense 12 months			Interest expense 6 months			Debt expense amortization 12 months			Debt expense amortization 6 months
	(dollars in thousands)
SOURCES:
New senior notes	$	1,500,000
Equity units		500,000

Total sources	$	2,000,000	6.00	%	$	120,000		$	60,000
USES:
Redeemable preferred stock	$	1,740,000			$	(103,250	)	$	(51,625	)
RWE notes		220,693				(12,511	)		(6,237	)
Financing costs		24,740									($	870	)	($	435	)

Total		1,985,433				(115,761	)		(57,862	)		(870	)		(435	)

Net source (use)	$	14,567			$	4,239		$	2,138		($	870	)	($	435	)


	For the years ended December 31,															For the six months ended June 30,
	For the years ended December 31,															For the six months ended June 30,
	2002(1)			2003			2004			2005			2006			2006			2007
	(Predecessor) (unaudited)			(unaudited)												(unaudited)			(unaudited)
				(dollars in thousands, except for share and per share data)
Statement of operations data(2):
Operating revenues	$	198,835		$	1,890,291		$	2,017,871		$	2,136,746		$	2,093,067		$	1,007,691		$	1,027,277

Operating expenses
Operation and maintenance		99,571			1,089,071			1,121,970			1,201,566			1,174,544			562,072			581,999
Depreciation and amortization		20,659			210,588			225,260			261,364			259,181			128,728			132,764
General taxes		24,480			164,677			170,165			183,324			185,065			94,756			93,819
Loss (gain) on sale of assets(3)		—			(16,771	)		(8,611	)		(6,517	)		79			(1,795	)		(6,113	)
Impairment charges		182,256			3,555			78,688			385,434			221,685			—			—

Total operating expenses, net		326,966			1,451,120			1,587,472			2,025,171			1,840,554			783,761			802,469

Operating income (loss)		(128,131	)		439,171			430,399			111,575			252,513			223,930			224,808

Other income (deductions)
Interest		(26,734	)		(280,501	)		(315,944	)		(345,257	)		(365,970	)		(178,968	)		(142,970	)
Amortization of debt expense		—			(3,872	)		(3,377	)		(4,367	)		(5,062	)		(1,678	)		(2,397	)
Other, net(4)		5,343			(52,387	)		14,350			13,898			9,581			4,927			7,351

Total other income (deductions)		(21,391	)		(336,760	)		(304,971	)		(335,726	)		(361,451	)		(175,719	)		(138,016	)


Income (loss) from continuing operations before income taxes		(149,522	)		102,411			125,428			(224,151	)		(108,938	)		48,211			86,792

Provision for income taxes		8,895			60,271			66,328			50,979			46,912			20,056			34,378

Income (loss) from continuing operations	$	(158,417	)	$	42,140		$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414

Income (loss) from continuing operations per basic common share(5)	$	(158,417	)	$	42,140		$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414

Income (loss) from continuing operations per common diluted share(5)	$	(158,417	)	$	42,140		$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414

Basic weighted average common shares(5)		1,000			1,000			1,000			1,000			1,000			1,000			1,000

Diluted weighted average common shares(5)		1,000			1,000			1,000			1,000			1,000			1,000			1,000


	For the years ended December 31,									For the six months ended June 30,
	2004			2005			2006			2006			2007
										(unaudited)			(unaudited)
	(dollars in thousands, except for share and per share data)
Other data:
Cash flows provided by (used in):
Operating activities	$	458,408		$	525,435		$	323,748		$	66,723		$	136,181
Investing activities		(545,903	)		(530,165	)		(691,438	)		(241,724	)		(279,441	)
Financing activities		95,254			(9,049	)		332,367			133,391			164,951
Construction expenditures		(546,241	)		(558,446	)		(688,843	)		(235,818	)		(307,726	)
Ratio of earnings to combined fixed charges and preferred dividends(6)		1.38			—			—						—



	As of December 31,										As of June 30,
	2002(1)		2003		2004		2005		2006		2007
	(Predecessor) (unaudited)		(unaudited)								(unaudited)
Balance sheet data:
Cash and cash equivalents	$	24,232	$	71,097	$	78,856	$	65,077	$	29,754	$	51,445
Utility plant and property, net of depreciation		772,052		7,377,195		7,754,434		8,101,769		8,605,341		8,806,066
Total assets		1,297,587		12,629,354		12,728,410		12,542,029		12,783,059		13,071,585

Other short term and long term debt		806,770		5,063,344		5,101,891		5,030,078		4,103,532		3,588,821
Redeemable preferred stock		12,000		1,787,777		1,775,224		1,774,691		1,774,475		1,774,299
Total debt		818,770		6,851,121		6,877,115		6,804,769		5,878,007		5,363,120
Common stockholder equity		106,229		3,198,144		3,129,555		2,804,716		3,817,397		4,520,149
Preferred stock without mandatory redemption requirements	—			5,687		4,651		4,571		4,568		4,568


	For the years ended December 31,									For the six months ended June 30,
	2004			2005			2006			2006			2007
										unaudited			unaudited
	(dollars in thousands except for share and per share data)

Operating revenues	$	2,017,871		$	2,136,746		$	2,093,067		$	1,007,691		$	1,027,277

Operating expenses
Operation and maintenance		1,121,970			1,201,566			1,174,544			562,072			581,999
Depreciation and amortization		225,260			261,364			259,181			128,728			132,764
General taxes		170,165			183,324			185,065			94,756			93,819
Loss (gain) on sale of assets		(8,611	)		(6,517	)		79			(1,795	)		(6,113	)
Impairment charges		78,688			385,434			221,685			—			—

Total operating expenses, net		1,587,472			2,025,171			1,840,554			783,761			802,469

Operating income (loss)		430,399			111,575			252,513			223,930			224,808

Other income (deductions)
Interest		(315,944	)		(345,257	)		(365,970	)		(178,968	)		(142,970	)
Allowance for other funds used during construction		5,476			5,810			5,980			3,145			3,169
Allowance for borrowed funds used during construction		2,923			2,420			2,652			1,366			1,512
Amortization of debt expense		(3,377	)		(4,367	)		(5,062	)		(1,678	)		(2,397	)
Preferred dividends of subsidiaries		(410	)		(227	)		(215	)		(112	)		(113	)
Other, net		6,361			5,895			1,164			528			2,783

Total other income (deductions)		(304,971	)		(335,726	)		(361,451	)		(175,719	)		(138,016	)

Income (loss) from continuing operations before income taxes		125,428			(224,151	)		(108,938	)		48,211			86,792

Provision for income taxes		66,328			50,979			46,912			20,056			34,378

Income (loss) from continuing operations		59,100			(275,130	)		(155,850	)		28,155			52,414
Income (loss) from discontinued operations, net of tax		(124,018	)		(49,910	)		(6,393	)		1,703			(551	)

Net income (loss)	$	(64,918	)	$	(325,040	)	$	(162,243	)	$	29,858		$	51,863

Net income (loss) per common share:
Basic
Income (loss) from continuing operations	$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414

Income (loss) from discontinued operations, net of tax	$	(124,018	)	$	(49,910	)	$	(6,393	)	$	1,703		$	(551	)

Net income (loss)	$	(64,918	)	$	(325,040	)	$	(162,243	)	$	29,858		$	51,863

Diluted
Income (loss) from continuing operations	$	59,100		$	(275,130	)	$	(155,850	)	$	28,155		$	52,414

Income (loss) discontinued operations, net of tax	$	(124,018	)	$	(49,910	)	$	(6,393	)	$	1,703		$	(551	)

Net income (loss)	$	(64,918	)	$	(325,040	)	$	(162,243	)	$	29,858		$	51,863

Average common shares outstanding during the period:
Basic		1,000			1,000			1,000			1,000			1,000

Diluted		1,000			1,000			1,000			1,000			1,000


	Annualized Rate Increases Granted
	During the years
	2004			2005		2006		2007
	(dollars in millions)
State
New Jersey	$	29.7		$	—	$	—	$	56.2
Pennsylvania		28.6			5.8		8.0		6.6
Missouri		(0.4	)		—		6.8		2.6
Illinois		—			—		0.9		1.7
Indiana		2.7			0.9		1.8		—
California		7.2			8.4		15.1		0.5
West Virginia		1.8			10.0		—		—
Other		9.5			9.9		8.7		13.4

Total	$	79.1		$	35.0	$	41.3	$	81.0


	For the six months ended June 30,
	Operating Revenues				Water Sales Volume
	2006		2007		2006		2007
Water service:
Residential	57.3	%	57.7	%	51.6	%	52.3	%
Commercial	19.5	%	19.0	%	21.9	%	21.8	%
Industrial	5.1	%	5.0	%	11.1	%	10.8	%
Public and other	13.1	%	12.6	%	15.4	%	15.1	%
Other water revenues	1.1	%	1.7	%	—		—

Total water revenues	96.1	%	96.0	%	100.0	%	100.0	%

Wastewater service	3.7	%	3.8	%
Management fees	0.2	%	0.2	%

	100.0	%	100.0	%


	Year ended December 31,
	2004		2005
	(dollars in thousands)
Production costs	$	248,487	$	262,629
Employee-related costs		407,661		408,834
Operating supplies and services		289,329		338,052
Maintenance materials and services		90,620		97,866
Customer billing and accounting		42,460		44,413
Other		43,413		49,772

Total	$	1,121,970	$	1,201,566


	Year ended December 31,									Six months ended June 30,
	2004			2005			2006			2006			2007
	(dollars in thousands)
Net income (loss)	$	(64,918	)	$	(325,040	)	$	(162,243	)	$	29,858		$	51,863
Add (subtract):
Non-cash operating activities(1)		560,135			799,127			582,569			141,285			143,622
Income taxes, paid net of refunds		(18,109	)		(43,694	)		(11,633	)		(6,389	)		8,967
Changes in working capital and other noncurrent assets and liabilities(2)		28,365			148,288			(3,454	)		(57,472	)		(36,564	)
Pension and postretirement healthcare contributions		(47,065	)		(53,246	)		(81,491	)		(40,559	)		(31,707	)

Net cash flows provided by operations	$	458,408		$	525,435		$	323,748		$	66,723		$	136,181


Goldman, Sachs & Co.		Citi		Merrill Lynch & Co.