Potato and Cheddar Soup

2 cups Water
2 cups peeled potato cubes
3 tbs. butter
1 sm. onion chopped
3 cups Milk
3 tbs Flour
Black Pepper
1/2 tsp. Sugar
1 cup shredded Cheddar Cheese
1 cup cooked Ham

Bring water to boil in large saucepan. Add potatoes and cook till tender. Drain reserving liquid measuring 1 cup. Add if necessary. Melt butter in saucepan. Add onion; cook and stir until tender. Add flour, season with black pepper. Cook 3-4 minutes. Gradually add potatoes, reserved liquid, milk and sugar to onion mixture; stir well. Add cheese and ham. Simmer over low heat for 30 minutes. Stirring frequently.