2007 American Water Senior Management Annual Incentive Plan



 Exhibit 10.20 
 

 







 The 2007 American Water Annual Incentive Plan 
 The 2007 American Water Annual Incentive Plan (AIP) recognizes the opportunity and the accountability we share for achieving our goals. Your accomplishments have helped to build American Water’s success to this
point, and the AIP will reward you for the contribution you make to the achievement of our 2007 goals. 
 Who Is Eligible for the 2007 AIP 

 All full-time employees in Management Levels ML1 – ML4 in American Water are eligible to participate in the 2007 AIP. 
 Eligible employees who join American Water on or before September 30 of a plan year (January 1 – December 31) are also eligible to participate in the plan on a
prorated basis. 
 Eligible employees seconded from RWE will participate in the plan for the duration of their secondment. Target levels for assignees
seconded from Germany are aligned with incentive opportunities for German based employees to maintain the “home country terms and conditions” approach adopted for assignees. 
 Individuals who do not meet their individual performance expectations will not be eligible to receive an incentive award. The American Water Board, or its designee for these purposes, reserves the right to determine
whether incentives are payable to any individual or group of individuals. The Board may withhold all incentive payments in certain circumstances. 
 Your Award Opportunity 
 Your award opportunity is based on your role. Your manager will confirm your award opportunity to you in
writing. Any award you earn is based on your salary as of December 31,2007. 
 If you are promoted during the plan year to a position with a higher
target level, your bonus plan will be prorated to reflect participation at each award level. Similarly, if you are reclassified to a position with a lower AIP award level, your bonus plan will be prorated to reflect your participation at each award
level. 
  

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 What the Plan Measures 
 The AIP is designed to reward participants for the performance results they and the Company attain during the plan year. There are three performance components: ‘Financial’ (Corporate, Regional), ‘Operational’ and
‘Individual’. 
  

	•	 	 The Financial component is based on Operating Income. The performance level will be determined at the Corporate and Regional levels. For 2007, more than 80%
of the Operating Income target for the entire Company must be achieved before any payment will be made on the corporate financial component of the Plan (although a payment could be made on the regional financial component if the regional
operating income exceeds 80% of target). In addition, more than 70% of the Operating Income target must be achieved before any payment will be made on any component of the Plan for the entire Company (including regional financial, operational
and individual components). 


 Operating Income – is defined as earnings before interest, taxes and other
non-operating expenses. 
 See Attachment A for the 2007 Target Level Achievement Schedule. 
 Your AIP letter will provide you with your Company component targets. 
  

	•	 	 The Operational component includes performance measures tied to the American Water business objectives through which customer satisfaction, customer service
quality, service level, environmental, health & safety, and quality measures and compliance goals are the key performance indicators. If you are an employee of the Business Center or the Belleville Lab, you will not have an operational
component. See Attachments B and C for the 2007 operational components. 


 The Customer Satisfaction Study measures
overall satisfaction with the services offered by American Water that directly benefits the customer. This study is conducted annually in the fourth calendar quarter and surveys approximately 1,100 American Water regulated water or sewer customers.

 The Customer Service Quality Study measures customer satisfaction levels as a result of field and Customer Service contacts. This
study is conducted throughout the year and surveys approximately 900 American Water regulated water or sewer customers each quarter. 
 Service Level (Customer Service Centers): Measures the percentage of customer calls answered within a specified period of time. 
 Notices of Violation (NOV): The number of times that an official notice is issued by a primacy agency for failure to comply with a federal, state, or local environmental statute or regulation that is covered by the Environmental
Management Plan (EMP). 
 Lost Work Day Case Rate (LWCR): The number of total OSHA recordable injuries and/or illness cases with lost
workday(s) per 200,000 hours worked. 
  

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 Quality Measures (Shared Services Center—SSC): 
  

	 	•	 	 SSC Error Rate—Number of Financial Statements errors (Annual). 


  

	 	•	 	 Reconciliations—Calendar Year Average of accounts beyond policy. 


  

	 	•	 	 Timeliness of Processes—Annual percentage of process conducted according to schedule -Tax Filings, Financial Statements available for consolidation, External
Audit information submissions, days to image and process invoices, and Orcom rate changes. 


 Compliance (Shared
Services Center—SSC): 
  

	 	•	 	 External Audit Findings—Number of unrecorded differences and topside entries. 


  

	 	•	 	 Internal Audit Findings—Number of instances of deviations from policy/procedures during SOX testing. 


  

	 	•	 	 External Filing Requirements—Annual Reports and Commission Reports completed by established deadlines for SSC. 


  

	•	 	 The Individual component includes Performance Targets as agreed by you and your manager within the companywide standard performance management process.



 How Your Award Is Weighted 
 Your award opportunity is based on two or four performance components (see pages 3 and 4), depending on your role. However, you could earn part of your award based on individual, operational and regional financial components if Company
Operating Income is more than 70%. If Company Operating Income is 70% or less, no award will be paid on any component. 
 The portion of your award
opportunity you can earn for each component is reflected in weightings assigned to each, based on your role in the organization, as the following charts show. The award has a target and a maximum opportunity. 
  

														
	 BUSINESS CENTER -
2007

	 Management Level
	  	Company
Financial	 	 	Individual (1)	 	 	Target
Opportunity	 	 	Management Positions
	ML1	  	 	 	 	 	 	 	 	 	 	 
	Financial	    	 Individual
	  	56	%	 	24	%	 	80	%	 	CEO
	     70%
	    	     30%
	  			 			 			 	
	ML2	  	 	 	 	 	 	 	 	 	 	 
	 Financial
	    	 Individual
	  	25	%	 	25	%	 	50	%	 	COO, CFO
	     50%
	    	     50%
	  			 			 			 	
	ML3	  	 	 	 	 	 	 	 	 	 	 
	 Financial
	    	 Individual
	  	16	%	 	24	%	 	40	%	 	Senior Management
	     40%
	    	     60%
	  			 			 			 	
	ML4	  	 	 	 	 	 	 	 	 	 	 
	 Financial
	    	 Individual
	  	10	%	 	15	%	 	25	%	 	Directors
	     40%
	    	     60%
	  			 			 			 	



	(1)	This component is defined as Target Agreement or Performance Targets. 

  

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	 SHARED SERVICES CENTER / CUSTOMER
SERVICE CENTER - 2007

	 Management
Level
	 	 Company
Financial
 (40%)
	 	 	 Individual (1)
 (30%)
	 	 	Operational (2)
(30%)	 	 	Target
Opportunity	 	 	Management
Position
	ML4	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Financial
	  	Individual/
Operational	 			 			 			 			 	
		  		 	10	%	 	7.5	%	 	7.5	%	 	25	%	 	Vice President
	     40%
	  	      60%	 			 			 			 			 	Director



	(1)	This component is defined as Target Agreement or Performance Targets. 


	(2)	This component is defined by Customer Service Center as: 34% Customer Satisfaction; 33% Customer Service Quality; 33% Service Level. 

  

																				
	 REGION -
2007

	 Management
Level
	 	 Company
Financial
 (40%)
	 	 	 Regional
Financial
 (20%)
	 	 	Individual (1)
(20%)	 	 	Operational (2)
(20%)	 	 	Target
Opportunity	 	 	Management
Positions
	ML3	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Financial
	  	Individual/
 Operational/

 Regional

 Financial
	 	16	%	 	8	%	 	8	%	 	8	%	 	40	%	 	Regional
 Presidents

	     40%
	  	    60%	 	 	 	 	 	 
	ML4	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 Financial
	  	Individual/
 Operational/

 Regional

 Financial
	 	10	%	 	5	%	 	5	%	 	5	%	 	25	%	 	State
 Presidents,

 Directors

	     40%
	  	    60%	 	 	 	 	 	 



	(3)	This component is defined as Target Agreement or Performance Targets. 


	(4)	50% of the Operational component is allocated to Customer Satisfaction/Customer Service Quality. 

  

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 How the Weightings Come Together 
 Here is an example of how the three/four performance components and their weightings come together. As you can see, the measures within each component are also weighted. 
 EXAMPLE 
 

 
  

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 Operational 
 Regional Operational components are performance measures tied to the American Water objectives. Customer Service Quality is 25% of this component and is measured on a state-by-state basis. Customer Satisfaction (25%), Environmental Notice
of Violations (NOVs) (25%) and Lost Workday Health and Safety Case Rate (LWCR) (25%) (Attachments B & C). Shared Services and Customer Service operational components are described in Attachments B & C. 
 Operational components are evaluated on a range from 0 to 120%. 
 Performance You Can Impact 
 We believe it is essential that you are accountable for, measured on and rewarded for performance that
you can directly impact or influence. 
 You and your manager have agreed on your individual performance targets. These targets should relate back to the
performance scorecard for your business unit or region and should directly reflect your role. 
 Individual Performance 
 Individual performance will be assessed using American Water’s Performance Management and Development Review (PDR) process. The first section of the PDR form
contains a scorecard in which your individual Performance Targets will be documented. You and your supervisor will jointly identify and agree to your individual Performance Targets and relative weightings to be achieved during the year. 

In overview, the PDR requires each individual to have 5 Performance Targets. The Performance Targets should be specific and measurable and aligned with the Company
performance targets. Each target needs to be evaluated on a range of 0 to 120% according to its importance relative to other targets. In this way excelling at your highest priority target, which has the heaviest weighting, will drive a bigger award.
At least one of the targets should be linked to a personal development objective. At the beginning of 2008, a structured performance review will be conducted to determine how well you performed against your targets in 2007. It will be the
Performance Scorecard Summary Rating for these 5 Performance Targets and NOT the “overall” performance rating that will be used for AIP award purposes (see below). 
  

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 Performance Category 
 Each participant in the AIP plan should have 5 performance targets. An assessment should be made of performance against each target. Once evaluated, each individual performance target rating will be added and averaged to determine an
overall rating. 
 Example #1 
  

														
	 Performance Target Rating (PT)
	  	 AIP Performance Rating
	  	Percentage
Amount	  	Weighting	  	Subtotal
	 PT#1 (Meets Expectation)
	  	Target fully achieved	  	100	  	x	  	20	%	 	=	  	20
	 PT#2 (Meets Expectations)
	  	Target largely achieved	  	85	  	x	  	20	%	 	=	  	17
	 PT#3 (Does Not Meet Expectation)
	  	Target not achieved	  	0	  	x	  	20	%	 	=	  	0
	 PT #4 (Progressing)
	  	Target partially achieved	  	60	  	x	  	20	%	 	=	  	12
	 PT #5 (Exceeds Expectation)
	  	Target exceeds expectations	  	120	  	x	  	20	%	 	=	  	24

 Take each performance target percentage amount and multiply it by its assigned weight. Add the subtotal numbers =
73 (Individual Weighting Factor) 73% would be used as the INDIVIDUAL weighting factor in the AIP plan. 
 Example #2 
  

														
	 Performance Target Rating (PT)
	  	 AIP Performance Rating
	  	Percentage
Amount	  	Weighting	  	Subtotal
	 PT#1 (Exceeds Expectation)
	  	Target exceeds expectations	  	120	  	x	  	10	%	 	=	  	12
	 PT#2 (Meets Expectations)
	  	Target largely achieved	  	90	  	x	  	20	%	 	=	  	18
	 PT#3 (Does Not Meet Expectation)
	  	Target not achieved	  	0	  	x	  	10	%	 	=	  	0
	 PT #4 (Progressing)
	  	Target partially achieved	  	55	  	x	  	20	%	 	=	  	11
	 PT #5 (Meets Expectation)
	  	Target fully achieved	  	100	  	x	  	40	%	 	=	  	40

 81 would be the subtotal and 81% would be used as the INDIVIDUAL weighting factor in the AIP plan. 
  

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	 2007 Target Rating
Scale
	 
	 Rating
	  	Scale	 
	 Exceeds Expectations
	  	101 – 120	%
		
	 Meets Expectations
	  		
	 -   Target Fully Achieved
	  	100	%
	 -   Target Largely Achieved
	  	75 – 99	%
		
	 Progressing
	  		
	 -   Target Partially Achieved
	  	25 – 74	%
		
	 Does Not Meet Expectations
	  	0	%
	 -   Not Achieved
	  		
		
	 Too Soon to Rate
	  	0	%

 Performance ratings can range from 0% - 120%. The degree of percentage given will be based on the
supervisor’s assessment of performance on the performance target. The maximum payment you can receive under the Individual component is 120%. This would only be awarded if an individual exceeded all 5 performance targets. This should be used
only in cases of exceptional and outstanding performance against a target. If an individual received a “too soon to rate” or “does not meet expectations” on their performance scorecard they would not be eligible for an AIP award.

 How Your Payout Is Determined 
 At the end of
the year, the amount for each component is based on performance against each goal within the component and its relative weighting. Here is a simplified way to think of it. 
 

 
 (See example on page 10.) 
  

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 2007 AIP Payout Example  
 ML4 EXAMPLE: 
 Target Opportunity is 25% with 40% Company Operating Income 20% Regional Operating Income, 20%
Operational and 20% Individual Components 
 Financial Performance 
 Company Operating Income 
 Achievement against financial target = 103.000% x 10.000% (Target) = 10.300% 
 Regional Operating Income 
 Achievement against financial target = 100.000% x
5.000% (Target) =5.000% 
 Operational Performance 
 Achievement
against operational targets = 96.50% x 5.000% (Target) =4.825% 
 Individual Performance 
 Achievement against 5 Performance targets = 97.50% x 5.000% (Target) = 4.875% 
 Total AIP payable is 10.300% (Company
Operating Income) + 5.000% (Regional Operating Income) + 4.825% (Operational) + 4.875% (Individual) is 25.00% of annual base salary of $150,000 or $37,500 
  

											
	 Salary
	  	 x
	  	 AIP
 Target
	  	 equals
	  	 Target
 Payout
	  	 Maximum
 Payout

	$150,000	  		  	25%	  		  	$37,500	  	$51,750
						
	 Operating
 Income
 (40%)
	  		  		  		  		  	
						
	 Corporate
 Operating
 Income
 =10%

	  		  	 Regional
 Operating
 Income
 =5%

	  		  	 Operational
 Results
 =5%
	  	 Individual
 Performance
 Targets
 =5%


						
	Target	  		  	Target	  		  	Target	  	Target
	$15,000	  		  	$7,500	  		  	$7,500	  	$7,500
						
	Actual	  		  	Actual	  		  	Actual	  	Actual
	$15,450	  		  	$7,500	  		  	$7,238	  	$7,313
						
	 Maximum =
 150%
	  		  	 Maximum =
 150%
	  		  	 Maximum =
 120%
	  	 Maximum =
 120%

	$22,500	  		  	$11,250	  		  	$9,000	  	$9,000

  

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 Target Bonuses 
 You will have received a letter which states your target bonus opportunity. Target bonus is defined as the bonus paid at 100% for both financial and individual awards. This means business plan is achieved for the financial and
operational element, and the employee has met his/her objectives for the individual element. 
 The maximum bonus you can receive is 150% of your Financial
element (both corporate and regional), 120% of operational and 120% of your Individual element. 
 Adjustments for Uncontrollable Events

 The financial data included in the appendices has been prepared on the basis of the business plans agreed in 2007, using the assumptions set at
that time. As in previous years, the actual results used for assessment may be amended to reflect the impact of events that are not considered to be within the control of local management. Any such amendments will require the explicit approval of
the Chief Executive Officer and the Chief Financial Officer, and if material, the Board, whose decision will be final. The following items are those most likely to be considered for amendment: 
  

	 	•	 	 Weather conditions having a material impact on the financial results 


  

	 	•	 	 The impact of movements in foreign exchange rates 


  

	 	•	 	 Disposal/acquisition of businesses not anticipated in the business plan, but subsequently mandated by the Board of Directors 


  

	 	•	 	 Goodwill impairments 


  

	 	•	 	 Costs related to the public offering 


 A ward
Payments 
 To be eligible to receive an AIP award, you must be actively employed on the date the payment is made. However, in case of disability,
retirement, layoff or death during the plan year, a prorated award based on participation in the plan may be payable. Employees who resign or are terminated for cause at any time prior to payment are not eligible. 
 Awards are usually determined and paid in cash as soon as possible after the release of financial results. Awards are normally paid by April of the following year.
Awards are subject to all federal, state and local income tax withholdings. 
 If you become eligible to join the AIP during a plan year, any payout for that
year will be prorated to reflect your participation in the plan. 
 The American Water Board, or its designee for these purposes, reserves the right to
determine whether incentives are payable to any individual or group of individuals. The Board may withhold all incentive payments in certain circumstances, such as failing to reach minimum financial goals. Individuals who do not meet their
individual performance expectations will not be eligible to receive an incentive award. 
  

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 Rewarding Achievement 
 Our AIP goals are challenging, but with your focus and contribution and effective teamwork, they can be achieved. Remember, your individual results do matter; our overall performance is the collective results of all AIP participants.

 It is important that you clearly understand your goals, how we are performing against the goals, and how the AIP works so you know how you personally
affect our performance. Be sure to talk to your manager or your local HR representative if you have questions. 
 This brochure describes the
2007 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. 
  

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 Attachment A 
 Company bonus 2007 for American Water will be based on Operating Income. If the Operating Income results are met, the award payout will be based on the following: 
  

			
	 Bonus payout curve: Range between 0%
and 150%

	 % of Operating
	  	%
	 Income Achieved
	  	Payout
	 125%
	  	150%
	 120%
	  	140%
	 115%
	  	130%
	 110%
	  	120%
	 105%
	  	110%
	    100% *
	  	100%
	 95%
	  	75%
	 90%
	  	50%
	 85%
	  	25%
	 80%
	  	0%
	 70%
	  	0%



	*	Business Plan Operating Income 

 Operating Income is defined as earnings
before interest, taxes and other non-operating expenses. 
  

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 Attachment B 
 2007 AIP OPERATIONAL MEASURES & TARGETS 
  

																			
	 	  	Weighting	 	 	NE	 	 	SE	 	 	Central	 	 	West	 	 	AWE	 
	 Notices of Violation
 (NOV)**
	  	25	%	 	4	*	 	4	*	 	4	*	 	4	*	 	4	*
	 Lost Work Day Case Rate
 (LWCR) ***
	  	25	%	 	2.2	 	 	1.7	 	 	1.7	 	 	1.4	 	 	1.7	 
	 Customer Satisfaction Rating
 (Q23 of CSS)
	  	25	%	 	95	%	 	95	%	 	95	%	 	95	%	 	N/A	 
	 Customer Service
 Quality Rating
 (Q29 of SQS)
	  	25	%	 	80	%	 	80	%	 	80	%	 	80	%	 	N/A	 



	*	If total AW NOVs are less than or equal to the target of 21, everyone gets rewarded for the NOV component, regardless of their individual region result vs. target. If total AW NOVs
exceed 21 rewards will determined by region. The AW target for NOVs will be adjusted upward for any significant growth (add 1 NOV per 5% growth in customers served, rounded down). 


	**	Definition—Notices of Violation (NOV): Number of times that an official notice is issued by a primacy agency for failure to comply with a federal, state, or local environmental
statute or regulation that is covered by the Environmental Management Plan (EMP). For an acquisition in which the Company has entered into a consent agreement to correct known deficiencies, violations will not count towards the NOV target unless
they are due to issues not contemplated by the consent agreement or are related to a failure to comply with the consent agreement. 


	**	Lost Work Day Case Rate (LWCR) is the number of total OSHA recordable injuries and/or illness cases with lost workday(s) per 200,000 hours worked. LWCR x 5 = Injury Frequency Rate
(IFR) which is a similar measure only per 1,000,000 hours worked. LWCR is a more recognized and tracked US metric. 

  

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 Attachment C 
 Operational Parameters for 2007 AIP – Payout Scale and Relative Weighting 
  

																							
	I. Relative Weighting	 
	25%	 	 	25%	 	 	25%	 	 	25%	 
	II. Payout Scales	 
	 CUSTOMER
 SATISFACTION
	 	 	SERVICE QUALITY	 	 	 Lost Workday Case
 Rate (LWCR)
	 	 	 ENVIRONMENTAL
 NOVs
	 
	% Achieved	 	 	Payout (%)	 	 	% Achieved	 	 	Payout (%)	 	 	% of Target	 	 	Payout (%)	 	 	% of Target	 	 	Payout (%)	 
	£    90	%	 	0	%	 	£    75	%	 	0	%	 	£      50	%	 	120	%	 	£      50	%	 	120	%
	91	%	 	10	%	 	76	%	 	10	%	 	75	%	 	110	%	 	75	%	 	110	%
	92	%	 	20	%	 	77	%	 	20	%	 	100	%	 	100	%	 	100	%	 	100	%
	93	%	 	40	%	 	78	%	 	40	%	 	110	%	 	70	%	 	110	%	 	70	%
	94	%	 	70	%	 	79	%	 	70	%	 	120	%	 	30	%	 	120	%	 	30	%
	95	%	 	100	%	 	80	%	 	100	%	 	3    130	%	 	0	%	 	3    130	%	 	0	%
	96	%	 	110	%	 	85	%	 	110	%	 			 			 			 		
	3     97	%	 	120	%	 	3    90	%	 	120	%	 			 			 			 		

 Operational Parameters for 2007 AIP – Payout Scale and Relative Weighting – Customer
Service Centers 
  

																
	I. Relative Weighting	 
	34%	 	 	33%	 	 	33%	 
	II. Payout Scales	 
	 CUSTOMER
 SATISFACTION
	 	 	SERVICE QUALITY	 	 	SERVICE LEVEL	 
	% Achieved	 	 	Payout (%)	 	 	% Achieved	 	 	Payout (%)	 	 	% Achieved	  	Payout (%)	 
	£    90	%	 	0	%	 	£    75	%	 	0	%	 	< 72%	  	0	%
	91	%	 	10	%	 	76	%	 	10	%	 	72% - < 80%	  	75	%
	92	%	 	20	%	 	77	%	 	20	%	 	80%	  	100	%
	93	%	 	40	%	 	78	%	 	40	%	 	> 80% - < 84%	  	105	%
	94	%	 	70	%	 	79	%	 	70	%	 	84% - < 86%	  	110	%
	95	%	 	100	%	 	80	%	 	100	%	 	86%	  	120	%
	96	%	 	110	%	 	85	%	 	110	%	 		  		
	3    97	%	 	120	%	 	3    90	%	 	120	%	 		  		

  

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 Attachment C 
 Operational Parameters for 2007 AIP – Payout Scale and Relative Weighting – Shared Services Center 
  

											
	I. Relative Weighting	 
	55%	 	 	45%	 
	II. Payout Scales	 
	QUALITY	 	 	COMPLIANCE	 
	% Achieved *	 	 	Payout (%)	 	 	% Achieved *	 	 	Payout (%)	 
	<75	%	 	0	%	 	<75	%	 	0	%
	75	%	 	25	%	 	75	%	 	25	%
	80	%	 	50	%	 	80	%	 	50	%
	85	%	 	75	%	 	85	%	 	75	%
	90	%	 	100	%	 	90	%	 	100	%
	95	%	 	110	%	 	95	%	 	110	%
	100	%	 	120	%	 	100	%	 	120	%



	*	If the percentage achieved is between the range parameters of the scale, the payout percentage will be derived from the actual percentage achieved. For example, if the percentage
achieved is 88%, the payout percentage will be 90%. 

  

 16