Exhibit 10.1

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2009 Annual Incentive Plan

Highlights Brochure

February 2009

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Table of Contents

 

THE 2009 AMERICAN WATER ANNUAL INCENTIVE PLAN

   1

Your Performance — Your Award

   1

Eligibility

   2

Why Change?

   3

DETERMINING AIP AWARDS

   4

Step 1: Establish initial award pool based on overall corporate performance

   4

Step 2: Allocate overall corporate funding to organizational groups/ functional
areas, and adjust specific organizational group/functional area funding to
reflect results

   6

Step 3: Determine individual AIP award based on (a) individual performance, and
(b) available organizational group/functional area funding; awards are paid from
applicable organizational group/functional area award pool

   7

WHAT THE 2009 AIP MEANS FOR YOU

   8

Performance Ratings

   8

Award Payout Examples

   9

Receiving Your AIP Award

   11

FREQUENTLY ASKED QUESTIONS

   12

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American Water   1

 

 

THE 2009 AMERICAN WATER ANNUAL INCENTIVE PLAN

Your Performance — Your Award

At American Water, your performance counts. We rely on our employees’ knowledge
and skills to help the Company achieve its business objectives.

The American Water 2009 Annual Incentive Plan (AIP) is designed to give eligible
exempt employees an annual opportunity to earn a cash award that recognizes and
rewards their contributions to the Company’s success. We have made significant
changes to the AIP design to reinforce the link between Company and individual
performance and award payouts. This means that Company and individual
performance are both taken into account to determine cash awards under the plan.
Starting with the 2009 AIP:

 

  •  

We are adopting a new approach to AIP funding that directly ties the amount of
available cash for AIP payouts to Company performance against specific metrics.
Additionally, AIP funding for all eligible, exempt employees — regardless of
role — will depend on the Company achieving its financial and non-financial
goals.

 

  •  

Your individual performance will play a greater role in determining the amount
of your payout. Employees who exceed their performance targets could receive
significantly higher payouts. Conversely, employees who under-perform and do not
meet their performance targets could receive lower payouts or no payout at all.
In short, your performance directly impacts the amount of your award.

The 2009 AIP is designed to challenge and motivate you to perform at your
highest level, and promote the creation of shareholder value. Read this brochure
to learn about how the 2009 plan works and what it means for you and your AIP
award going forward.

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American Water   2

 

 

The 2009 AIP

 

What’s Changing    What’s Staying the Same

•     Awards are more closely aligned with the Company’s ability to fund the
award and with individual performance.

 

•     AIP award pool funding is based on overall corporate performance against
specific financial and non-financial goals (represented by the Corporate
Multiplier), then allocated across organizational groups/functional areas—at
senior management’s discretion—depending on organizational group/functional area
results.

 

•     AIP funding for all employees—regardless of your role or position in the
Company—depends on the Company achieving its financial as well as non-financial
goals.

 

•     Financial metrics updated to reflect IPO (e.g. “Diluted Earnings per
Share”).

 

•     Individual award payouts will be based on individual performance against
specific goals (represented by the Individual Performance Factor) and paid from
available organizational group/functional area funding.

 

•     For 2009, the Individual Performance Factor range has been changed from
0%-120% to 0%-200%. Individual payouts will be capped at 200% of AIP target
award.

  

•     Award opportunity (Target Award) is still expressed as a percentage of
base salary.

 

•     Actual payout may be lower or higher than target depending on Company and
individual performance against specific goals.

 

•     Individual performance is assessed by your manager and measured against
your pre-determined performance goals.

 

•     Your AIP will be distributed as a cash award in March.

 

•     You must be actively employed with American Water on the date awards are
made to receive your 2009 AIP payout.

 

•     If you are disabled, retire, experience a layoff or die, you or your
beneficiary may be eligible to receive an award prorated to reflect your service
during the plan year.

  

Eligibility

You are eligible for an AIP award opportunity if you are a full-time exempt
employee of American Water. Eligible exempt employees who join American Water on
or before September 30, 2009 are also eligible to participate in the AIP on a
prorated basis.

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American Water   3

 

 

Why Change?

Since the value (as reflected in our share price and our return to shareholders)
and success of our business depend on the achievement of annual Company and
individual performance goals, American Water recognizes the need to
differentiate and reward the performance of employees who enable us to reach
these goals. The 2009 AIP is designed to ensure that award payouts are directly
tied to measurable contributions — both Company and individual — to American
Water’s success.

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American Water   4

 

 

DETERMINING AIP AWARDS

AIP award payouts depend on individual performance; they also depend on overall
corporate performance and organizational group/functional area results (which
determine award pool funding).

AIP awards will be determined according to the following three-step process:

 

Step 1:    Establish initial award pool based on overall corporate performance
Step 2:    Allocate overall corporate funding to organizational
groups/functional areas, and adjust specific organizational group/functional
area funding to reflect results Step 3:    Determine AIP award based on
individual performance; awards are paid from available organizational
group/functional area funding

Step 1: Establish initial award pool based on overall corporate performance

Each year, American Water establishes funding for the AIP award pool. Starting
in 2009, the funding will be directly tied to Company performance and
represented by the Corporate Multiplier. The Corporate Multiplier can range from
0% to 150% depending on how well the Company performed against the financial and
non-financial goals described below. Note that a predetermined threshold for
Company performance (i.e., a Diluted Earnings Per Share (EPS) must be at least
90.9% of target) must be met in order for funding and any award to be provided
under the AIP.

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American Water   5

 

 

  •  

Financial Metrics (Weighted 70%) (See Attachment A)

 

  •  

Diluted Earnings Per Share (35%) is a widely tracked measure of financial
performance/profitability, and is calculated as follows:

Net Income to Common Stockholders

÷

Average Outstanding Shares (including dilutive securities such as stock options)

=

Diluted Earnings per Share

 

  •  

Operating Cash Flow (GAAP) (24.5%) reflects the amount of cash generated from
our operations and is used as an additional measure of profitability. Operating
cash flow is calculated as follows:

Net Income

+

Depreciation and Amortization

-

Deferred Expenses

+/-

Changes in Payables and Receivables

=

Operating Cash Flow

 

  •  

Revenue Growth (10.5%) is a measure of how quickly our business is growing and
reflects the percentage of planned increase in revenues achieved.

 

  •  

Non-Financial Metrics (Weighted 30%)*

 

  •  

Safety(7.5%)

 

  •  

Environmental (7.5%)

 

  •  

Customer Satisfaction (7.5%)

 

  •  

Business Transformation (4.5%)

 

  •  

Diversity(3.0%)

 

  * These outcomes are based on a combination of surveys, end-of-year results,
data and other annual reports (see Attachment A at the back of this brochure).

Please note that AIP funding for all employees (regardless of role or position)
will depend on how well the Company achieves its financial goals as well as
non-financial goals.

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American Water   6

 

 

The financial and non-financial metrics are added together to determine the
Corporate Multiplier. So, even if certain metrics are not achieved, the funding
may be reduced, but not eliminated altogether. However, if the Company’s
financial performance does not meet the threshold, the Corporate Multiplier will
be reduced to zero, which would eliminate your award payout (as indicated in the
examples on page 10). The Corporate Multiplier (and thus funding for payouts)
may be adjusted to take into account “uncontrollable events” including — but not
limited to — severe weather conditions that significantly impact financial
results (i.e., hurricanes), impairment charges, dissolution or acquisition of
businesses or costs related to public offerings.

Step 2: Allocate overall corporate funding to organizational groups/ functional
areas, and adjust specific organizational groups/functional area funding to
reflect results

Once the overall corporate funding is determined as described under Step 1,
senior management will allocate the Corporate funding to American Water’s
organizational groups and functional areas. The funding for each organizational
group/functional area may be increased or decreased, at senior management’s
discretion, to reflect specific organizational group/functional area results.

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American Water   7

 

 

Step 3: Determine individual AIP award based on (a) individual performance, and
(b) available organizational group/functional area funding; awards are paid from
applicable organizational group/functional area award pool

Your AIP target award (i.e., your award opportunity) is based on your role or
position with the Company and is expressed as a percentage of your base salary.
Your actual award payout may be higher or lower than target depending on whether
individual and Company performance goals have been met, and your organizational
group’s/functional area’s results. Contact your manager for information on your
individual AIP Target Award.

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The Individual Performance Factor represents how well you achieve your annual
individual performance goals. Your Individual Performance Factor can range from
0% to 200%, depending on your performance for the plan year and the amount of
organizational group/functional area funding available. This performance factor
will then be multiplied by your Target Award to determine your 2009 AlP award
payout. Individual payouts will be capped at 200% of AIP target award.

Individual AIP awards are then paid from the applicable organizational
group/functional area award funding. The sum of all individual awards within a
given organizational group/functional area may not exceed its allocated pool of
dollars.

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American Water   8

 

 

WHAT THE 2009 AIP MEANS FOR YOU

Performance Ratings

The better you perform, the greater your potential award will be under the Plan.
It is your responsibility to maximize your award opportunity by achieving or
exceeding your goals.

Each year, you and your manager identify four to six high priority and
challenging performance targets, which represent where you can directly impact
the Company’s success. These performance targets and their weightings should be
specific, measurable and aligned with the Company’s performance targets. During
your year-end performance review, you and your manager will discuss how well you
performed against the established targets, and rate your performance using one
of the following performance ratings:

2009 Performance Rating Scale

 

Rating

  

Description

Exceptional    Contributions are widely recognized as extraordinary. Results far
exceed all defined expectations, producing important and substantial impact on
the Company, Division, Operating Company, Line of Business or Function.
Significant    Contributions are recognized as distinguished. Results exceed all
or most expectations, producing a tangible and material impact on the Company,
Division, Operating Company, Line of Business or Function. Commendable   
Contributions are recognized as meaningful. Results meet, and in some cases
exceed expectations, producing a positive and desirable impact on the Company,
Division, Operating Company, Line of Business or Function. Adequate   
Contributions are recognized as limited. Results fall slightly short of
expectations, producing inconsistent and marginal impact on the Company,
Division, Operating Company, Line of Business or Function. Unacceptable   
Contributions are recognized as unsatisfactory. Results fall considerably short
of expectations, producing negligible or no impact on the Company, Division,
Operating Company, Line of Business or Function. Too Soon to Rate   
Contributions cannot be measured at this time because more time is needed to see
a result.

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American Water   9

 

 

Later, during the AIP process, your manager will use your rating to determine
your Individual Performance Factor. Depending on how you performed during the
year, you could potentially earn a higher payout than in previous years — or you
could earn a lower payout or no payout at all (as the examples on the following
page demonstrate). In other words, the new AIP design gives you more power than
ever before to impact the size of your award. It also means that you are more
accountable than ever before for meeting your goals.

Award Payout Examples

Let’s calculate possible award payouts for a sample AIP participant, under four
possible scenarios:

AIP Participants Assumptions

 

Salary level   L07   Annual Base Salary   $90,000   Individual AIP Target  
$13,500 (15% of Base Salary)   Total of all AIP target   $20,000,000   Total AIP
for Organizational Group   $2,000,000      

 

     Performance      Scenario 1    Scenario 2    Scenario 3    Scenario 4

•     Company

   Above Target    Target    Threshold    Below
Threshold

•     Financial Performance Factor

   1.39    0.94    0.50    0.00

•     Non-Financial Performance Factor

   0.77    1.12    0.50    0.00

•     Individual

   Adequate    Significant    Adequate    Commendable

•     Individual Performance Factor

   0.80    1.50    0.40    1.00

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American Water   10

 

 

     Scenario 1   Scenario 2   Scenario 3   Scenario 4 STEP 1: Establish
corporate funding based on overall corporate performance Total of AIP Targets
(A)    $20,000,000   $20,000,000   $20,000,000   $20,000,000 Financial
Performance Factor (i) (70% weight)    1.39 x 0.70
= 0.97   0.94 x 0.70

= 0.66

  0.50 x 0.70
= 0.35   0.00 x 0.70

= 0.00

Non–Financial Performance Factor (ii) (30% weight)    0.77 x 0.30
= 0.23   1.12 x 0.30

= 0.34

  0.50 x 0.30
= 0.15   0.00 x 0.30

= 0.00

i + ii = Corporate Multiplier (B)    1.20   1.00   0.50   0.00 A x B = Corporate
Funding    $20,000,000
x 1.20

=$24,000,000

  $20,000,000

x 1.00

=$20,000,000

  $20,000,000
x 0.50

=$10,000,000

  $20,000,000

x 0.00

= $0

STEP 2: Allocate overall corporate funding to organizational groups/functional
areas; adjust specific organizational area
funding to reflect results Organizational group pool (C) (Allocated from
corporate funding)    $2,400,000   $2,000,000   $1,000,000   $0 Organizational
Group Adjustment (D)    1.00

(Target)

  .80

(Below
Target)

  1.20

(Above
Target)

  1.00

(Target)

C x D = Organizational Group Pool (adjusted based on results)    $2,400,000
x 1.00

=$2,400,000

  $2,000,000
x 0.80

=$1,600,000

  $1,000,000
x 1.20

=$1,200,000

  $0 x 1.00 = $0 STEP 3: Determine individual award based on individual
performance and available organizational group/functional area
funding; awards are paid from applicable organizational group/functional area
award pool Individual AIP Target (E)    $13,500   $13,500   $13,500   $13,500

Individual Performance Factor (F)

(Range of 0 - 2.00)

   0.80

(Adequate)

  1.50

(Significant)

  0.40

(Adequate)

  1.00

(Commendable)

ExF = Individual Award    13,500 x
0.80

= $10,800
(80% of
AIP
target)

  13,500 x
1.50

= $20,250

(150% of
AIP target)

  13,500 x
0.40

= $5,400

(40% of

AIP
target)

  13,500 x 1.00

= $13,500

however, payout will be
$0 since award pool = $0

As you can see, both company and individual performance can significantly impact
your final payout. Also, remember that the sum of individual awards for a
specific organizational group/functional area must equal the funding allocated
to that organizational group/functional area.

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American Water   11

 

 

Please discuss the new AIP process with your manager to ensure you clearly
understand how the new formula works and how your performance impacts your
potential award payout.

Receiving Your AIP Award

Awards will be paid in cash by March 15 of the year following the year in which
they are earned. If you’re eligible for an award payout, please keep in mind
that:

 

  •  

The payout will be based on your salary as of December 14, 2009 and subject to
all federal, state and local income tax withholdings.

 

  •  

You must be an active employee with American Water on the date the payout is
made in order to receive the award. In certain circumstances, such as
disability, retirement, layoff or death, an award may be made — prorated to
reflect your service during the plan year.

 

  •  

If you are promoted during the plan year to a position with a higher AIP target
level, or if you are reclassified to a position with a lower AIP target level,
your award payout will be based on your new target level as of December 14,
2009.

 

  •  

The American Water Board, or its Designee, reserves the right to determine
whether awards are payable to any individual or group of individuals; the Board
may withhold all award payouts in certain circumstances.

Remember, it’s your performance — and your award: The contributions you make to
American Water’s success throughout the year ultimately impact the size of your
payout. Be sure to carefully review this brochure; then speak with your manager
about the new AIP and about what you can do to improve your performance and
share the financial rewards of American Water’s success.

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American Water   12

 

 

FREQUENTLY ASKED QUESTIONS

 

Question

  

Answer

Why is American Water making changes to the AIP?    American Water changed the
AIP to allow us to differentiate and reward the performance of employees who
contribute to the achievement of the Company’s goals. The 2009 AIP directly ties
award payouts to measurable contributions (Company and individual) to American
Water’s success. Who is eligible for the AIP?    All full-time exempt employees
are eligible to participate. If you join American Water on or before September
30, 2009, you are also eligible to participate in the plan on a prorated basis.
What do I have to do to receive an AIP award   

If you are eligible for an AIP award opportunity, any payout you receive will
depend largely on your performance, as well as on Company performance (including
financial and non-financial), which determines funding.

 

If your performance is rated “Adequate” or higher, you may receive an award
payout — but only if threshold Company performance metrics have been met. If
your performance or Company performance falls below “Adequate,” you may receive
a limited payout or no payout at all. To maximize your award opportunity, it’s
important to meet with your manager to establish meaningful performance goals,
then work hard throughout the year to achieve those goals.

How is my AIP target award opportunity determined? How can I find out what it
is?    Your AIP target award opportunity is based on your role and expressed as
a percentage of your base salary. Please see your manager to learn more about
your target award opportunity for 2009. How will my AIP award payout be
calculated? How does this differ from the 2008 award calculation?   

Your 2009 AIP award payout will be calculated using a formula that multiplies
together your AIP target, and an Individual Performance Factor (which represents
your performance), as follows: AIP Target Award x Corporate Multiplier x
Organizational Group/Functional Area x Individual Performance Factor = AIP
payout.

 

The size of the pool which funds your award is determined based on overall
corporate performance, adjusted to reflect specific organizational
group/functional area results. AIP funding for all employees, regardless of role
or position, will depend on the Company achieving its non-financial as well as
financial goals. Once individual awards are calculated, they are paid from the
applicable organizational group/functional area funding.

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American Water   13

 

 

Question

  

Answer

  

 

Under the 2008 AIP, financial, non-financial and individual results were
weighted and the results were added together to determine the final payout.
Also, non-financial goals did not apply to all employees in all roles and
positions.

 

All AIP payout are subject to approval by the American Water Board.

What is the minimum and maximum that could be paid under the plan (as a percent
of target)?    AIP award payouts could range from zero, to a maximum of two
times the participant’s target award (i.e., Individual Performance Factor of
200%). Payouts are capped at 200% of AIP target award. Will I receive an award
payout if I meet my individual performance goals but the Company does not
achieve minimum (threshold) performance?    No. Award payout will be made only
if both the Company and the individual have met the minimum (or threshold)
performance goals for the year. What happens if I leave American Water before I
receive my award payout?    To receive the award payout to which you are
entitled, you must be actively employed with American Water on the date the
payment is to be made. If you are disabled, retire, experience a layoff or die
during the plan year, you or your beneficiary may be eligible to receive an
award, prorated to reflect your service during the year. Do the AIP changes for
2009 affect my 2008 award?    No. The changes to the AIP for 2009 will be
reflected in your March 2010 award payout. What happens if I change job
positions within American Water during the plan year?    If you are promoted
during the plan year to a position with a higher AIP target level, or if you are
reclassified to a position with a lower AIP target level, your award payout will
be based on your salary and target level percentage as of December 14, 2009.

This brochure provides an overview of the 2009 American Water Annual Incentive
Plan. The American Water Board or its Designee, whose decisions will be final
and binding, will determine interpretations of the Plan. The Company reserves
the right to amend, modify, or discontinue the Plan during the plan year or at
any time in the future. Participation in the Plan does not convey any commitment
to ongoing employment. If there are any differences between the information
contained here and the Plan Document, the Plan Documents will govern.