The ratings on American Water Capital reflect the strong support arrangement with its parent, American Water Works. The consolidated credit strength of American Water Works reflects its very strong business position, stemming from geographic diversity, a stable customer base, supportive regulatory environments, high-quality operations, and experienced management. These strengths are tempered by the company's aggressive growth strategy and a financial profile that is relatively weak for the ratings.

American Water Capital acts as the funding vehicle for American Water Works' water utility companies. American Water Works is the largest water utility holding company in the U.S., with 25 water utility subsidiaries, and serving customers in 22 states.

About 77% of revenues and 75% of sales come from residential and commercial customers, providing a stable customer base with consistent water-usage patterns. The geographic diversity tempers the effect of adverse weather patterns on the company's cash flow and cushions the company from unfavorable rate decisions in any particular jurisdiction.

On average, the regulatory environment is viewed as supportive, because many states provide recovery of construction expenses with minimal delay, the implementation of single tariff pricing, reducing the complexity of multitariff rate proceedings, and regular rate increases.

All of American Water Works' production meets Safe Drinking Water Act standards. In 2000, investment in treatment plants and distribution facilities accounted for 68% of the company's capital expenditures. During 2000, the company's subsidiaries produced 341 billion gallons of water, slightly less than in 1999, which was sourced from rivers and reservoirs (68%), ground water supplies (23%), and purchases from neighboring utilities (9%).

The large degree of fragmentation present in the water utility industry, combined with the substantial capital needs of many smaller water companies to meet increasingly stringent water quality standards affords numerous opportunities for consolidation.

American Water Works has been aggressively acquiring both private and municipal water systems. At year-end 2000, American Water Works had 22 pending acquisitions.

The acquisition of the water and wastewater assets of Citizens Communications will increase the customer base to about 2.8 million customers from 2.5 million, consolidate the company's operations in existing areas, and provide significant expansion in Northern California and Arizona, areas with higher-than-average growth.

Historically, American Water Works has had a relatively weak, but stable financial profile for the rating category that has been in line with that of other water utilities with similar ratings. For the nine months ended Sept. 30, 2001, total debt-to-total capital reached 61%, while funds from operations interest coverage was about 2.8 times.

For the same period, internal funding covered about 70% of capital spending needs, but over the intermediate term, Standard & Poor's expects that internally generated funds will cover about 75% of capital spending needs, partly curtailing reliance on external funding.

Ratings assigned to assumed debt issues