IV. The Proposed Transaction

Joint applicants seek Commission approval for a transfer of indirect control of Cal-Am. The proposed transaction is intended to return American Water to a publicly traded company, as it was for nearly 60 years before being acquired by RWE in 2003.

RWE requested Commission authority to acquired control of American Water and, in turn, Cal-Am by Application 02-01-036 so that RWE could expand its water and wastewater services to the United States. At that time, RWE was providing water and wastewater services to approximately 43 million people worldwide.

Although that original application was protested, joint applicants entered into a settlement agreement with their affiliate Apollo Acquisition Company, Division of Ratepayer Advocates (DRA), the Utility Workers Union of America, and the AFL-CIO. That settlement agreement incorporated several conditions which were to benefit Cal-Am's ratepayers. Those benefits included a sharing of RWE's best practices; a lowering of Cal-Am's cost of debt; a deferral of rate increases; implementation of two public assistance programs; and adoption of affiliate transaction rules. All of the agreed-upon conditions are attached to this order as Appendix C. The Commission adopted the proposed settlement agreement and authorized RWE to acquire indirect control of American Water, pursuant to D.02-12-068 on December 19, 2002.

Since the 1960s, until its acquisition by RWE, American Water was the ultimate parent of Cal-Am and throughout that period and thereafter, American Water has provided the necessary capital and operating assistance to Cal-Am to ensure that Cal-Am provides safe and reliable service to its customers.

Due to changed circumstances, RWE has refocused its core business on the rapidly changing European energy markets that are experiencing increased competition, growing customer needs, and rising costs. To do so, RWE made a business decision to withdraw from its non-core businesses.⁵ RWE had already divested itself of its non-core environmental business and now seeks to divest itself of its non-core water services business.

This proposed transaction involves only a change of control at the holding company level and will not change the relationship between Cal-Am and American Water, nor will it change Cal-Am's day-to-day operations. Applicants seek to accomplish this transfer of indirect control through the sale of up to 100% of the shares of common stock of American Water through an IPO to be listed on the New York Stock Exchange by American Water's parent company, Thames GmbH. The first step of the proposed transaction is the merger of TWAUSHI with and into American Water, so that American Water is the servicing corporation. The merger will result in the consolidation of RWE's American Water related U.S. water assets (including U.S. water assets acquired by RWE through its acquisition of Thames Water plc) into American Water. Upon completion of the merger, Thames GmbH will sell up to 100% of the common stock of American Water through one or more public offerings. The proposed transaction is expected to be completed within two years. The IPO prospectus will include a clear statement that no investor is permitted to acquire control of American Water without obtaining any necessary regulatory approval pursuant to applicable state laws.

Although Thames GmbH will sell all of the shares of American Water, it may initially sell less than 100% of the shares in the IPO. That decision will be dependent upon market conditions at the time the IPO is issued. To the extent all shares are not sold as part of the IPO, the remainder of the shares would then be sold in a subsequent offering or offerings as soon as reasonably practicable. The IPO and any subsequent public offerings will be conducted according to the rules for underwritten public offerings mandated by the United States Securities and Exchange Commission (SEC).

⁵ Although DRA has inferred reasons that RWE seeks to divest itself of American Water from a review of the RWE Supervisory Board of the Board of Director's meeting minutes, RWE nevertheless made a business decision to classify its water operations as a non-core businesses and to divest itself of its non-core businesses.