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’.

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 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):

Compliance (Shared Services Center—SSC):

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.

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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

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

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

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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

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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:

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:

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

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Attachment C

Operational Parameters for 2007 AIP – Payout Scale and Relative Weighting

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

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Attachment C

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

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