II. The Proposed Acquisition

A. The Companies Involved

Cal-Am is a class A water utility serving about 170,000 customers and is a wholly owned subsidiary of American. Cal-Am provides water service to domestic and industrial customers in six separate systems, including Coronado and a portion of San Diego, six cities and certain unincorporated portions of the Monterey Peninsula in Monterey County, and portions of three cities and unincorporated portions of Los Angeles County, and the City of Thousand Oaks in Ventura County. The Commission recently approved Cal-Am's acquisition of Citizens Utilities Company of California's (Citizens) water utility assets in: (1) Larkfield, Sonoma County; (2) Felton, Santa Cruz County; (3) Montara, San Mateo County; and (4) scattered locations in Sacramento and Placer Counties.¹

American is a Delaware Corporation headquartered in New Jersey, whose principal business is operating water and wastewater companies, such as Cal-Am, that provide service to about 2.6 million customers in the United States and in three Canadian provinces. American Water Works Service Company (the Service Company) is a wholly owned subsidiary of American that provides professional and staff services to American's utility subsidiaries at cost pursuant to approved agreements between them and the Service Company.

According to their respective annual reports for 2001, American's total revenues for 2001 were $1,438,887,000, while Cal-Am's were $76,639,907.80. Thus, Cal-Am's total operating revenues are about 5 % of American's. Cal-Am's customer base comprises about 6.4 % of American's.

RWE, Germany's fifth largest industrial group, is an international multi-service provider with core businesses in electricity, water, gas, waste management, and utility-related services. RWE is organized under the laws of the Federal Republic of Germany. RWE currently derives more than 90% of its revenues from non-water utility operations, and is the third largest company in the global water business. Through Thames Water Aqua Holdings GmbH (Thames Holdings), RWE provides water and waste water services to about 43 million people worldwide, including (through Thames Water Plc (Thames Water)) to 12 million people in and around London.² Thames Holdings is a wholly owned subsidiary of RWE and is organized under the laws of the United Kingdom and Wales. (We refer to the Thames companies as Thames, and to Thames Water Plc as Thames Water. Many references in this decision are to Thames Water.)

B. Overview of the Proposed Transaction

Under the proposed transaction, RWE will purchase all of the stock of Cal-Am's parent, American, pursuant to the Agreement and Plan of Merger dated September 16, 2001 between American and Thames. Under the agreement, American will merge into a corporate shell entity, the Apollo Acquisition Company, that is a subsidiary of Thames Holdings created solely to accommodate the acquisition of American. After the transaction, American will become the wholly owned subsidiary of Thames Water Aqua U.S. Holdings, Inc. (Thames USA), which is organized in the United States. Thames USA is a wholly owned subsidiary of Thames Holdings, which is a wholly owned subsidiary of RWE.

Thames Holdings will purchase from American's shareholders all outstanding American common stock at $46/share and will assume American's existing debt. The total purchase price is $7.6 billion, consisting of $4.6 billion in cash and the assumption of $3.0 billion in debt. The purchase price includes a $2.8 billion acquisition premium, which is about 2.6 times American's book value of about $1.8 billion.

Cal-Am will continue to be the operating public utility providing water utility service under the Commission's jurisdiction in the areas where it is authorized to do so.