Frontier Communications
FYBR
#2067
Rank
S$12.32 B
Marketcap
S$49.22
Share price
0.00%
Change (1 day)
6.73%
Change (1 year)
Text size:
CITIZENS UTILITIES COMPANY
--------------------------


FORM 10-K
---------



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
---------------------------------------------

OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------

FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 1997 Commission file number 001-11001
----------------- ---------
OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

CITIZENS UTILITIES COMPANY
--------------------------
(Exact name of registrant as specified in its charter)

Delaware 06-0619596
- - -------------------------- -------------------
(State or other jurisdiction of (I.R.S.# Employer Identification No.)
incorporation or organization)

3 High Ridge Park
P.O. Box 3801
Stamford, Connecticut 06905
----------------------------
(Address, zip code of principal executive offices)

Registrant's telephone number, including area code: (203) 614-5600
-------------
<TABLE>
<CAPTION>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act:
Common Stock Series B, par value $.25 per share New York Stock Exchange
Guarantee of Convertible Preferred Securities of Citizens Utilities Trust New York Stock Exchange
Citizens Convertible Debentures N/A
Guarantee of Partnership Preferred Securities of Citizens Utilities Capital L.P. N/A
- - -------------------------------------------------------------------------------- -----------------------
(Title of each class) (Name of exchange on which registered)
</TABLE>

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.

Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of February 27, 1998 was $2,299,329,402

The number of shares outstanding of the registrant's class of common stock as
of February 27, 1998 were:
Common Stock Series B 251,265,860

DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement for the registrant's 1998 Annual Meeting of Stockholders to
be held on May 21, 1998, is incorporated by reference into Part III of this Form
10-K.
TABLE OF CONTENTS
-----------------
Page
PART I

ITEM 1. Description of Business 2
General Development of Business 2
Financial Information about Industry Segments 2
Narrative Description of Business
Communications 2
CLEC 6
Public Services 8
Natural Gas 8
Electric 9
Water and Wastewater 10
General 11
Impact of Year 2000 11
Financial Information about Foreign and Domestic
Operations and Export Sales 12

ITEM 2. Description of Property . 13

ITEM 3. Legal Proceedings 14

ITEM 4. Submission of Matters to Vote of Security Holders 14

Executive Officers 15

PART II
- - -------

ITEM 5. Market for the Registrant's Common Stock
and Related Stockholder Matters 16

ITEM 6. Selected Financial Data 17

ITEM 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17

ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk 30

ITEM 8. Financial Statements and Supplementary Data 30

ITEM 9. Disagreements with Auditors on Accounting and Financial 30
Disclosure

PART III
- - -------- 31

PART IV
- - -------

ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 31


Signatures 33

Index to Consolidated Financial Statements F-1


1
Item 1.   Description of Business
-----------------------

(a) General Development of Business
-------------------------------

The "Company" includes Citizens Utilities Company and its subsidiaries except
where the context or statement indicates otherwise. The Company provides, either
directly or through subsidiaries, communications services, competitive local
exchange carrier ("CLEC") services and public services including electric
transmission and distribution, natural gas transmission and distribution, water
distribution and wastewater treatment services to primarily rural and suburban
customers throughout the United States.

The Company was incorporated in Delaware in 1935 to acquire the assets and
business of a predecessor corporation. Since then, the Company has grown as a
result of investment in owned communications and public services operations and
from numerous acquisitions of additional communications, CLEC and public
services operations. It continues to expand through internal investment,
acquisitions and joint ventures in the rapidly evolving telecommunications
industry and in traditional public services and related fields. The Company's
financial resources and operating performance enable it to make the investments
and conduct the operations necessary to serve growing areas and to expand
through acquisitions. The Company is currently reviewing strategic alternatives
intended to facilitate an improved market valuation of the Company's business
mix.

(b) Financial Information about Industry Segments
---------------------------------------------

Note 14 of the Notes to Consolidated Financial Statements included herein sets
forth financial information about industry segments of the Company for the last
three fiscal years.

(c) Narrative Description of Business
---------------------------------

COMMUNICATIONS
- - --------------

Through subsidiaries, the Company provides both regulated and competitive
communications services to residential, business and wholesale customers.
Communications services consist of local network service, network access
service, long distance service, directory advertising, centrex, custom calling
and caller ID services, paging, cellular, Internet access, voicemail and
conference calling. The Company provides local network services to the following
approximate number of access lines in the following states:

Local Network
State Access Lines
------ ------------
New York 293,400
West Virginia 139,600
Arizona 133,700
California 121,800
Tennessee 92,300
Nevada 25,100
Utah 20,400
Idaho 19,500
Oregon 13,900
Montana 8,000
New Mexico 4,800
Pennsylvania 1,300
-----------
Total 873,800
===========

The Company provides network access services and billing and collections
services primarily to AT&T Corp., MCI Communications Corp., and Sprint Corp. The
Company is also enhancing its network support systems to offer local resale
capabilities in its local exchange franchise serving areas to emerging CLECs.

2
Communications Strategy
- - -----------------------
In 1996 and early 1997, the Company pursued an aggressive growth strategy to
take advantage of opportunities in the emerging communications marketplace and
to become a full-service communications provider to an expanded base of
customers both within and outside its franchise serving areas. This strategy
included the initiation and expansion of long distance service which, in
combination with other enhanced service offerings, including the resale of local
network services outside the local exchange franchised serving areas, would
enable the Company to offer customers an integrated package of products and
services. This aggressive growth strategy was pursued together with a similar
strategy for the Company's CLEC subsidiary, Electric Lightwave, Inc. ("ELI")
(see Page 6 for more discussion of ELI).

Late in 1996, the Company began the transition to a facilities-based long
distance network, utilizing owned switches and fixed cost leases with the
ultimate objective of achieving lower costs in providing long distance service
in anticipation of the expansion of its long distance service customer base. The
Company's customer base expansion plan was focused on its local exchange
franchise serving areas, markets adjacent to these local exchange franchise
serving areas and customers of affiliated companies. In addition, the Company
initiated a brand recognition program to support the sales and marketing
initiatives designed to increase the Company's communications market share. The
increase in revenues resulting from this communications expansion strategy,
though significant, did not offset the resulting increases in network, branding,
sales, marketing and related operations support expenses. As a result, the
Company's communications growth strategy generated higher than expected losses
during the first half of 1997, which had an adverse impact on Company earnings
and cash flow.

The Company re-evaluated its communications growth strategy during the second
quarter of 1997 in light of this continuing impact on earnings and cash flow.
The Company decided it would continue to concentrate its communications
expansion efforts on further development and growth of its local exchange
franchise serving areas and its CLEC subsidiary (see Page 6). As a result, the
Company initiated a reduction in workforce and benefits, consolidated its call
centers, closed certain sales offices, reduced its sales and marketing
activities, reconfigured its network cost structure through new carrier
contracts and network redesign and reduced its planned 1997 capital expenditure
program.

During the third and fourth quarters of 1997, the Company focused primarily on
its traditional core communications business in its local exchange franchise
serving areas. The Company continued its efforts to become a full-service
communications provider offering its customers an integrated package of products
and services including such value added services as caller ID, voice mail,
conference calling, Centrex, cellular, paging and Internet access. Within its
local exchange franchise serving areas, the Company will capitalize upon its
brand name and community relationships while striving to contain costs.

The Company's communications strategy in 1998 is to secure long-term competitive
advantages and continued profitable growth. This is intended to be achieved
through improving the quantity and quality of services provided and increases in
productivity. The Company intends to leverage the strength of its brand within
its franchise serving areas and select adjacent markets focusing on second line
growth, enhanced calling features and long distance services.

Telecommunications Act
- - ----------------------
In February, 1996, the Telecommunications Act of 1996 (the "1996 Act") became
law. The national public policy framework for telecommunications was changed
dramatically by the 1996 Act. A central focus of this sweeping policy reform was
to open local telecommunications markets to workable competition. The 1996 Act
preempts state and local laws to the extent that they prevent competitive entry
into the provision of any telecommunications service. Under the 1996 Act,
however, states retain authority to impose on carriers requirements necessary to
preserve universal telecommunications service, protect public safety and
welfare, ensure quality of service and protect consumers. States are also
responsible for mediating and arbitrating interconnection agreements between
CLECs and ILECs if voluntary negotiations fail.

Pursuant to the requirements of the 1996 Act, the Federal Communications
Commission ("FCC"), throughout 1996, 1997, and continuing into 1998 and beyond,
has been and will be conducting rule-making proceedings resulting in a number of
new rules that could impact the operations of the Company. These rules,
described in more detail below, address interconnection, universal service
reform and access charge/price cap reform.

3
Interconnection
- - ---------------
The FCC's Interconnection Order, issued in August 1996, addresses the
relationship between Incumbent Local Exchange Carriers ("ILECs"), such as
the Company, and Competitive Local Exchange Carriers ("CLECs"), such as
the Company's subsidiary, ELI.

The 1996 Act and the Interconnection Order outline three routes, which
are not mutually exclusive, to competitive market entry. The first is
through a CLEC's construction and operation of its own local exchange
facilities, in which case the sole requirement of the ILEC is
interconnection for purposes of traffic interchange. The second allows a
CLEC to acquire, at cost, unbundled network elements from the ILEC for
CLEC assembly into end-to-end local exchange services and/or as a
supplement to the facilities it has constructed on its own. The third is
through resale of ILEC retail services acquired from the ILEC at
wholesale rates.

Subject to the rural telephone company exemption discussed below, the
Interconnection Order affects the Company's local network services
business as follows:

(a) ILECs must provide interconnection to any new local network
services competitor upon request. This interconnection must be at
least equal in quality to that provided by the ILEC to itself or
its affiliates. Also, the order mandates that the ILEC provide
this interconnection at just, reasonable and nondiscriminatory
rates, terms and conditions.

(b) ILECs must provide unbundled network elements, including support
systems, to telecommunications carriers that intend to provide
local network services or network access services in their
markets. These network elements include network interface
devices; local loops; local and tandem switches (including all
related software-based features); interoffice transmission
facilities; signaling and call-related database facilities; and
operations support systems and information.

(c) ILECs must make retail services available to competitors at
wholesale rates. The Interconnection Order contains pricing
guidelines for wholesale services and interconnection and
unbundled elements. Should pricing negotiations between ILECs and
new entrants become deadlocked, the Order also provides a
standard for arbitration to be applied by the respective state
commissions.

(d) ILECs and CLECs have the obligation to compensate each other for
the termination of interchanged local exchange traffic.

Various parties, including ILECs and state PUCs, filed appeals of the
FCC's August 8, 1996 Interconnection Order, many of which were
consolidated and transferred to the U.S. Court of Appeals for the Eighth
Circuit. On July 18, 1997, the Eighth Circuit rendered its decision,
which held that, in general, the FCC does not have jurisdiction over
prices for interconnection, resale, leased unbundled network elements and
traffic termination. The Eighth Circuit also overturned the FCC's "pick
and choose" rules as well as certain other FCC rules implementing the
1996 Act's local competition provisions. In addition, the Eighth Circuit
decision substantially limits the FCC's authority to enforce the local
competition provisions of the 1996 Act. The FCC and other parties
petitioned for Supreme Court review of the decision, and the Supreme
Court has granted certiorari.

In the long term the Eighth Circuit's decision makes it more likely that
the rules governing local competition will vary from state to state. Most
states have already begun to establish rules for local competition that
are consistent with the FCC rules overturned by the Eighth Circuit. If a
patchwork of state regulations were to develop, it would increase the
Company's costs of regulatory compliance.

4
The primary  provisions  of the  Interconnection  Order  which could  materially
impact the Company's financial position and results of operations are the
provision of unbundled network elements and making retail services available at
wholesale rates. The Company has received approximately 100 interconnection
requests from wireless communications providers and CLECs, none of which have or
are expected to have a material impact on the Company's financial position or
results of operations. In addition, because of its smaller size and smaller
market service areas, the Company's local network services business has a
qualified exemption from the FCC's Interconnection Order. The qualified
exemption pertains to certain technical requirements imposed upon ILECs and is
neither an exemption from interconnection, in general, nor against competitive
entry by other carriers. This exemption is known as the rural telephone company
exemption and it continues until a bona fide request for interconnection is
received and a state commission with jurisdiction determines that
discontinuation of the exemption is warranted, consistent with universal service
principles, and that such discontinuation will not impose an undue economic
hardship on the Company and the interconnection requested is technically
feasible.

Universal Service Reform
- - ------------------------
On May 8, 1997, the FCC released its order creating a new federal
universal service system (the "Universal Service Order"). The Universal
Service Order was the FCC's response to one of the 1996 Act's mandates
for a new system for funding of ubiquitous basic exchange telephone
services to all areas of the United States and its possessions through
explicit contributions of all telecommunications carriers. This new
system for funding of basic services in rural, high cost and insular
locations is designed to end the long standing system of funding through
implicit subsidies levied by ILECs in the form of artificially high,
mandated prices for access, intraLATA toll and other non-basic services.
A second significant mandate of the 1996 Act addressed in the Universal
Service Order is the creation of a federal funding mechanism for the
provision of discounted basic and advanced telecommunications services to
qualifying public primary and secondary schools and local libraries. A
third mandate creates a mechanism for providing federal funding of
advanced services to rural health care providers sufficient in scope to
allow qualified entities to receive such services at rates comparable to
those paid by health care providers in urban areas.

The Universal Service Order has implications for the Company in
addressing universal service funding to rural telephone companies. First,
the Company expects to continue receiving funding under the new federal
universal service system. Second, the FCC determined that it is not
appropriate at this time to bring rural telephone companies under a
proxy-model-driven universal service cost determination system in the
same time frame applicable to non-rural carriers. The Company expects
that its ILECs will continue receiving federal universal service funding,
with certain adjustments, based upon its actual costs incurred to provide
universal services.

The new federal universal service system, unless changed, will fund only
25% of the costs of providing universal service in rural, high cost and
insular areas. The states are required to provide the balance of the
necessary funding. Most of the states served by the Company's ILECs are
in the formative stages of addressing intrastate universal service
issues.

The Company cannot predict what the levels or methods of contributions
will be or whether the amount of receipts from the new system will be
equal to or greater than its contributions, because the new system is in
its early stages at both the federal and state levels.

Access Charge / Price Cap Reform
- - --------------------------------
In May 1997, the FCC released separate orders in its Access Reform and
Price Cap Reform proceedings (the "Access Reform Order" and the "Price
Cap Reform Order," respectively). Both orders affect the Company's ILECs
as the Company elected price cap regulation commencing July 1, 1996.

Price cap regulation is a form of rate regulation in which the interstate
rates of affected ILECs are subject to maximums that are periodically
adjusted according to formulae contained in the FCC's Rules. Price cap
regulation allows affected carriers to retain all earnings generated by
operating at the capped rates. In this manner, affected ILECs are
rewarded for achieving operating efficiencies.

In the Access Reform Order, the FCC ordered price cap carriers to
restructure certain components of the mandated interstate access
structure in order to bring pricing more in line with underlying costs.
This restructure results in lower interstate access charges and revenues
for the Company's ILECs.


5
In the Price Cap Reform  Order,  the FCC arrived at a  permanent  factor,
known as the "X-factor," by which ILEC price caps are lowered each year.
The purpose of the X-factor adjustment is to reflect the FCC's findings
that ILECs enjoy productivity gains that are proportionately greater than
those experienced in other industries. The X-factor adjustment is
designed to give price cap ILECs' interexchange carrier customers some of
the benefits of technology-driven declining costs in local exchange
telephony. The permanent X-factor prescribed by the Price Cap Reform
Order, 6.5%, is based upon data unique to the Bell Operating Companies,
with no consideration given to any other price cap regulated carriers. In
particular, the Company believes that the 6.5% X-factor is inappropriate
as applied to small price cap regulated ILECs. The Company is pursuing an
appeal of the 6.5% X-factor as applied to rural price cap ILECs,
contending that such carriers lack the economics of scope and scale
required to achieve that level of productivity growth each year.

Joint Ventures and Acquisitions
- - -------------------------------
The Company owns a one-third interest and is general managing partner of Mohave
Cellular, a cellular limited partnership operating eight cell sites in Arizona.

A subsidiary of the Company, in a joint venture with a subsidiary of Century
Communications Corp. ("Century"), acquired and operates three cable television
systems in southern California serving 69,500 basic subscribers and has entered
an agreement to acquire another 18,000 subscribers in southern California.
Century is a cable television company of which Leonard Tow, the Chairman and
Chief Executive Officer of the Company, is Chairman and Chief Executive Officer.
In addition, Claire Tow, a director of the Company, is a Senior Vice President
and a director of Century. A management board on which the Company and Century
are equally represented governs the joint venture. A subsidiary of Century (the
"Manager") manages the day-to-day operations of the systems. The Manager does
not receive a management fee but is reimbursed only for the actual costs it
incurs on behalf of the joint venture. The Manager is obligated to pass through
to the joint venture any discount, up to 5%, off the published prices of
services or assets purchased for the joint venture for use in the systems. The
Manager is entitled to retain any discount in excess of 5%. The Company accounts
for the joint venture following the equity method of accounting. Certain of the
joint venture properties are under consideration to be included in a strategic
partnership with TCIC, a cable operator in California. The partnership would
include combined TCIC, Century and Citizens/Century joint venture properties in
southern California serving approximately 745,000 customers. The Company would
retain a percentage share ownership in the partnership if the combination
occurs.

In December 1997, the Company acquired Ogden Telephone Company by merger in a
stock for stock transaction. The Company issued 2,308,262 shares of Common Stock
in conjunction with the merger. Ogden was an independent telephone operating
company providing services to residential and commercial customers in Monroe
County, New York.

In January 1998, the Company purchased 1.3 million shares of D&E Communications
("D&E") for approximately $27 million. The investment represents 17.4% of D&E's
outstanding Common Stock. D&E is a full-service telecommunications company in
Lancaster County, Pennsylvania that offers both local and long distance service,
wireless service, Internet service, paging, voice, data and video communications
equipment, and computer networking services.

CLEC
- - ----

Through its subsidiary, Electric Lightwave, Inc. ("ELI"), the Company provides
full-service, facilities-based communications services in five major market
clusters in the western United States. ELI provides state-of-the-art voice and
data communications services to retail customers, primarily large- and
medium-sized communications-intensive businesses, and wholesale customers.

ELI currently provides services in five markets: Portland, Oregon; Seattle,
Washington; Salt Lake City, Utah; Sacramento, California; and Phoenix, Arizona
("hub cities") and their respective surrounding areas (together with the hub
cities, "market clusters" or "clusters"). ELI's clusters include an extensive
fiber optic network. ELI currently provides switched services, including local
dial tone, utilizing five Nortel DMS 500 switches, in all of its market clusters
except Phoenix, where ELI expects to initiate local dial tone service upon
installing an additional switch in the first half of 1998. ELI serves its
cluster cities with an extensive frame relay network which is comprised of 20
state-of-the-art switches. This network covers 29 western local access transport
areas with 52 network-to-network interfaces, and provides ELI's customers
with national and international coverage through strategic relationships with
other providers. ELI has also developed an Internet backbone network providing
Internet connectivity in each of its markets which includes access on a
redundant basis to the three largest Internet service providers in the United
States.


6
ELI offers a portfolio of products and  services in four  categories:  dedicated
services, local dial tone services, long distance services and enhanced
services. These products and services include: dedicated services which include
point-to-point communications and dedicated DS-1 and DS-3 lines, local dial tone
services which include voice mail and enhanced features such as Integrated
Services Digital Network; long distance services which include toll-free and
prepaid services; and enhanced services which include frame relay, high-speed
Internet access, video conferencing, and local area network LAN-to-LAN services
with very high transport speeds.

The following table represents certain operating information related to ELI:

1997
-----------
Route miles 2,494
Fiber miles 140,812
Buildings connected 610
Access line equivalents 34,328
Switches installed:
Voice 5
Frame relay 20
Internet 17
ATM 8
Customers 1,165

Deregulation in the communications industry, as a result of the 1996 Act and
state regulatory initiatives, has substantially changed the regulatory
environment in the United States. As a result of these changes, the Company is
permitted to provide local dial tone in addition to existing communications
services in certain states.

Competition
- - -----------
In each of its markets, ELI faces significant competition from the ILECs, which
currently dominate the local exchange markets and is a de facto monopoly
provider of local switched voice services. ELI's primary ILEC competitors are
US West, PacBell and GTE. Under certain circumstances, FCC and state regulatory
authorities may provide ILECs with increased flexibility to reprice their
services as competition develops and as ILECs allow competitors to interconnect
to their networks. If the ILECs and other competitors lower their rates and can
sustain significantly lower prices over time, this may adversely affect ELI if
it is required by market pressure to price at or below the ILEC's prices. If
regulatory decisions permit the ILECs to charge CLECs substantial fees for
interconnection to the ILEC's networks or afford ILECs other regulatory relief,
such decisions could also have a material adverse effect on ELI. ELI's
facility-based operational CLEC competitors in the markets in which ELI operates
include: MCI Metro, Inc.; MFS Telecommunications, Inc.; Teleport Communications
Group, Inc.; Brooks Fiber; NEXTLINK Communications, Inc.; and GST
Telecommunications, Inc. Based on management's experience, the initial market
entrant with an operational fiber optic CLEC network generally enjoys a
competitive advantage over other CLECs that later enter the market. In each of
the clusters in which ELI operates, at least one other CLEC, and in some
cases several other CLECs, offer many of the same local communications services
provided by ELI, generally at similar prices. Potential and actual new market
entrants in the local communications services business include RBOCs entering
new geographic markets, inter-exchange carriers, cable television companies,
electric utilities, international carriers, satellite carriers, teleports,
microwave carriers, wireless telephone system operators and private networks
built by large end users. In addition, the current trend of business
combinations and alliances in the communications industry, including mergers
between RBOCs, may increase competition for ELI.

On November 24, 1997, ELI completed an initial public offering ("IPO") of
8,000,000 shares of its Class A Common Stock at a price of $16 per share. The
Company retained 97.97% of the voting interest and 82.83% of the economic
ownership in ELI.


7
PUBLIC SERVICES
- - ---------------

Natural Gas
-----------
Operating divisions of the Company provide natural gas transmission and
distribution services to the following approximate number of primarily
residential customers in the following states:

State Customers
------ -----------
Louisiana 267,700
Arizona 98,700
Colorado 13,000
Hawaii 66,700
------------
Total 446,100
============

The provision of services and/or rates charged are subject to the
jurisdiction of federal and state regulatory agencies. The Company purchases
all needed natural gas (except for the production by the Company of synthetic
natural gas in Hawaii) the supply of which is believed to be adequate to meet
current demands and to provide for additional sales to new customers. The
natural gas industry is subject to seasonal demand, with the peak demand
occurring during the heating season of November 1 through March 31. The
Company's natural gas sector experiences third party competition from fuel
oil, propane, and other natural gas suppliers for most of its large
consumption customers (of which there are few) and from electric suppliers
for all of its customer base. The competitive position of natural gas at any
given time depends primarily on the relative prices of natural gas and these
other energy sources.

The Company continues to expand into high growth areas in Louisiana where the
Company won contracts to serve two large new subdivisions in 1997. In October
1997, the Company purchased the St. John the Baptist Parish Gas System in
Louisiana for $2.1 million. This system serves 2,200 customers located in a
new growth area of the New Orleans-Baton Rouge corridor (including new
industrial development) adjacent to the Company's existing service area.

The Company continues to expand its Arizona natural gas transmission and
distribution service areas. During 1997, the Company completed infrastructure
projects which extended distribution mains in Navajo and Yavapai counties.
These distribution facilities feed some of the fastest growing sections of
the State of Arizona. The Company has positioned itself for continued
accelerated growth for the next several years in its Arizona service areas.

In Colorado, the Colorado Public Utilities Commission has expanded the
Company's franchise area in the Western Slope area where the Company has
added two new industrial customers.

In October, 1997, the Company purchased all of the outstanding stock of
Gasco, Inc., now known as The Gas Company ("TGC"), for approximately $100
million from BHP Hawaii ("BHP"). TGC is a gas distribution company serving
approximately 66,700 customers throughout Hawaii. TGC provides engineering
and technical support services to developers and government representatives
and produces clean, efficient synthetic natural gas ("SNG") at its 16.7
million-cubic-foot capacity manufacturing plant. The SNG plant uses a process
that is environmentally compatible and requires fewer barrels of fossil fuels
than older methods. TGC is not subject to seasonal demand due to the
consistent weather temperatures in Hawaii. The majority of TGC customers on
Oahu use SNG distributed directly from the plant through an underground
utility system of pressurized transmission lines stretching from Kapolei to
Hawaii Kai. TGC customers not served by the SNG utility system receive
propane gas piped underground from a central storage site or are serviced
through delivery of propane in cylinders or tanks. Nearly 90% of TGC's output
is consumed by industrial and commercial customers.

In 1995, the Hawaii Department of Health ("HDOH") issued notices requesting
information from current property owners and facility operators around
Honolulu Harbor relating to the HDOH's intent to conduct a regional
assessment of environmental conditions under authority of the Hawaii
Environmental Response Law. The Company has provided information in response
to the HDOH request relating to two sites within the Iwilei area currently
under HDOH review. These include TGC's former gas plant site at Iwilei Road
and its Pier 38 facilities. The gas plant site at Iwilei Road was purchased
by BHP from Gasco, Inc. prior to the Company's acquisition of Gasco, Inc. The
site specific clean-up was completed at Pier 38 prior to being acquired by
the Company and a "no further action" letter was obtained from the HDOH.
Furthermore, BHP has provided a complete indemnity from claims related to
Pier 38's inclusion in the State Superfund Site. This indemnity is further
supported by a guarantee from BHP's parent, Broken Hill Proprietary, Ltd.
8
Electric
--------
Operating divisions of the Company provide electric transmission and
distribution services to the following approximate number of primarily
residential customers in the following states:

State Customers
------- ------------
Arizona 62,200
Hawaii 29,300
Vermont 20,300
------------
Total 111,800
============

The provision of services and/or rates charged are subject to the
jurisdiction of federal and state regulatory agencies. The Company purchases
approximately 81% of needed electric energy, the supply of which is believed
to be adequate to meet current demands and to provide for additional sales to
new customers. The majority of the Company's generating facilities are on
Kauai. The Company has smaller generating facilities in Arizona and Vermont,
used mainly for peak demand periods. Generally, the Company's electric sector
does not experience material seasonal fluctuations.

The electric utility industry in the United States is undergoing fundamental
changes. Electric utilities have for many years been vertically-integrated
entities with the responsibility for the generation, transmission and
distribution of electric power in a franchise territory. In return for
monopoly status, electric utilities have been subject to comprehensive
regulation at the state and federal level. The industry is now shifting
toward electric customers being able to choose their energy provider much
like telephone customers are able to choose their long distance provider.
Generally, this involves splitting apart the generation and transmission of
power from the rest of the business, and having generators compete with one
another in the sale of power directly to retail customers. The interconnected
regional transmission grids will be operated independently, continuing as a
federally-regulated monopoly. Local transmission and distribution facilities
would continue as state-regulated monopolies. Deregulation could potentially
result in stranded plant investments, stranded costs for supply contracts and
stranded costs associated with programs which promote the most efficient use
of electricity and reduce the environmental impact of generation facilities.
The change in the industry is in various stages of development around the
United States. The Company believes there are many uncertainties associated
with a restructuring of the electric utility industry.

In December 1996, the Arizona Corporation Commission issued Decision No.
59943 approving rules for a phased-in transition to a competitive retail
electric power market beginning January 1, 1999. Under the plan, retail
access will be phased in over four years with 20% of the load open to
competition by 1999, 50% by 2001, and 100% by 2003. Stranded costs are
expected to be recovered from ratepayers through a surcharge with both an
energy and/or demand component.

In 1995, the Company's Arizona Electric Division was notified by the United
States Environmental Protection Agency ("USEPA") of it being a Potentially
Responsible Party related to polychlorinated biphenyl shipments that the
Company made to PCB Inc., sites located in Kansas City, Kansas and Kansas
City, Missouri in the mid 1980s. These sites have been designated by the
USEPA as Superfund Sites and are in the process of being evaluated for
remediation. The Company is one of over 1,500 parties that sent material to
the sites and is considered a deminimus participant. The Company responded to
a number of data requests from USEPA related to its shipments. There has not
yet been a determination of the total cost of the remediation of the sites
and to particular parties, including the Company's share of the cost.

The Company's Kauai, Hawaii operation is a participant in a collaborative
proceeding with approximately 15 other parties initiated by the Hawaii Public
Utilities Commission ("HPUC") on Electric Utility Competition and
Investigation of the Electric Utility Infrastructure in the State of Hawaii.
The parties filed a stipulated agreement with the HPUC to complete all
evidentiary hearings by December 1999. The HPUC is expected to deliberate on
the findings and issue a final decision and order in 2000 or later.

The Vermont Public Service Board (the "Board") has opened a docket (No. 5854)
into competition, customer choice, and restructuring of the Vermont electric
industry. The purpose of the investigation is to develop an information base,
principles, and policy bases to support legislative proposals and rule making
by the Board. The proposal recommends that, by no later than the end of 1998,
direct access should be available to all Vermont customers. There currently
are competing proposals by legislators and the Board. These conflicts
will need to be resolved before any final rule making becomes effective.

In January 1998, a power outage to approximately 5,000 customers in Vermont
was caused by an ice storm. The costs related to power restoration is
approximately $4,000,000. The Company expects to receive insurance recovery
for certain costs and

9
has requested recovery from the Vermont Public Service Board for the
remaining costs. To the extent the charges are not recovered,
the Company will be required to write-off such charges.

In November 1995, the Company's Vermont electric division was permitted an
8.5% rate increase. Subsequently, the Vermont Public Service Board called
into question the level of rates awarded the Company in connection with its
formal review of allegations made by the Department of Public Service (the
"DPS"), the consumer advocate in Vermont and a former Citizens employee. The
major issues in this proceeding involved classification of certain costs to
property, plant and equipment accounts and the Company's Demand Side
Management program. In addition, the DPS believed that the Company should
have sought and received regulatory approvals prior to construction of
certain facilities in prior years. On June 16, 1997, the Board ordered the
Company to reduce its rates for Vermont electric service by 14.65%
retroactive to November 1, 1995 and to refund to customers, with interest,
all amounts collected since that time in excess of the rates authorized by
the Board. The Company estimates that the future annual effect of the rate
reduction ordered by the Board is approximately $3.9 million. The Company
made a $6.6 million refund to its customers by issuing a credit to the
utility bills of each customer. In addition, the Board assessed statutory
penalties totaling $60,000 and placed the Company on regulatory probation for
a period of at least five years. The final terms of the probation have
not been finalized. During this probationary period, the Company could lose
its franchise to operate in Vermont if it violates the terms of probation
prescribed by the Board.

Water and Wastewater
--------------------
Through subsidiaries, the Company provides water distribution, wholesale
water transmission, wastewater treatment, public works consulting, marketing
and billing services to the following approximate number of primarily
residential customers in the following states:

State Customers
------ ------------
Arizona 111,100
Illinois 70,900
California 59,500
Pennsylvania 30,100
Ohio 14,800
Indiana 1,300
------------
Total 287,700
============

The provision of services and/or rates charged are subject to the
jurisdiction of federal, state and local regulatory agencies. A significant
portion of the Company's water/wastewater treatment sector construction
expenditures serving new customers are made under agreements with land
developers who generally advance plant and/or funds for construction to the
Company that are later refunded in part by the Company as new customers and
revenues are added in the respective land developments.

In addition to increasing customers through agreements with land developers,
the Company seeks to acquire water and/or wastewater operations from
municipalities and private companies. Through its subsidiary, Citizens Water
Resources Management Services Company, the Company plans to provide water and
wastewater operations and maintenance services to municipalities in and
around existing service territories. During 1997, the Company responded to
several such requests for proposals.

Privatization opportunities are increasing as the water and wastewater
industries in the United States continue to face significant changes due to
increasing demands for advanced technical expertise and capital to meet the
requirements of more stringent environmental regulations. Opportunities for
public-private partnerships are demonstrated by the following factors: Water
and wastewater industries continue to face significant challenges as
environmental regulations rise and federal funding opportunities decline;
there is a growing need for enhancement of existing infrastructure and
construction of new facilities for water and wastewater systems; and there is
an increased demand for government to restructure and decrease internal
spending. Internationally, developing countries are looking to the expertise
of existing water and wastewater companies to provide a sound infrastructure
of water and wastewater systems. Over the past few years, there have been
several efforts to remove federal barriers to privatization. Citizens'
geographic and service diversity and decades of experience in the water and
wastewater industry provide a strong platform to successfully meet these
needs and respond to the increasing trend for privatization. The Company
plans to initially focus its privatization efforts in existing and
surrounding service areas.

In September 1997, the Company entered into agreements with the Del Webb
Corporation and its subsidiary, The Villages at Desert Hills, Inc. ("Webb")
to provide water and wastewater treatment utility services to a master
planned community

10
currently known as The Villages at Desert Hills. Citizens
was selected as the water and wastewater utility service provider following
intense competition among other investor-owned companies. This project will
be developed on 5,661 acres and will be located about 20 miles north of
downtown Phoenix, Arizona. As currently planned, the project will consist of
a mix of residential and commercial units which total approximately 14,500
equivalent residential units ("ERUs"). Development is expected to commence
in mid 1998 with absorption projected at approximately 700 ERUs per year
over a 15-20 year period. Citizens has entered into an agreement with Webb to
fund approximately 50% (not to exceed $24 million) of the construction cost
incurred in the first five years of construction to build certain treatment
and transmission facilities. The Company has submitted an application to the
Arizona Corporation Commission for approval of certain agreements and the
granting of a Certificate of Convenience and Necessity ("CC&N") to serve the
area encompassed by the project. Approval of the agreements and CC&N
application is expected to occur during the first half of 1998. The Company's
commitment to the project is conditioned upon receiving the CC&N. The
Company's water and wastewater treatment operations in Arizona are now the
largest investor-owned water/wastewater utility in the state of Arizona.

In March 1997, the Company placed into service a reverse osmosis water
treatment plant in Ohio, the first such plant installed in the mid-west for a
municipal water system. The facility was installed as a result of working
with customers to satisfy their desire for improvements to non-health related
water quality issues. Prior to construction, an agreement was reached with
the public services commission to recover the capital and operating costs
immediately upon project completion without the need for a full rate
proceeding.

GENERAL
- - -------

The Company's operations are conducted primarily in small and medium size towns
and communities. No material part of the Company's business is dependent upon a
single customer or small group of customers for its revenues. As a result of its
diversification, the Company is not dependent upon any single geographic area
for its revenues. Due to this diversity, no single regulatory body regulates a
service of the Company accounting for more than 19% of its 1997 revenues.

The Company is subject to regulation by the respective state regulatory agencies
and federal regulatory agencies. The Company is not subject to the Public
Utility Holding Company Act. Order backlog is not a significant consideration in
the Company's business, and the Company has no contracts or subcontracts which
may be subject to renegotiation of profits or termination at the election of the
federal government. The Company holds franchises from local governmental bodies
which vary in duration. The Company also holds certificates of convenience and
necessity granted by various state commissions which are generally of indefinite
duration. The Company has no special working capital practices. The Company's
research and development activities are not material. There are no patents,
trademarks, licenses or concessions held by the Company that are material.

The Company had approximately 6,100 employees at December 31, 1997.

Impact of Year 2000
- - -------------------
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

Based upon a company-wide assessment, conducted in conjunction with an
information systems consulting firm, it has been determined that many of the
Company's software programs need to be modified so that dates beyond December
31, 1999, are properly recognized. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue can be mitigated. However, if such modifications and conversions are
not made in a timely fashion, the Year 2000 Issue could have a material impact
on the operations of the Company.

The Company has developed a plan to mitigate the Year 2000 Issue. The plan
includes formal communications with all of its significant suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 Issue. However, there can be no
guarantee that the systems of suppliers or other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have material adverse effect on the Company. The Company has
determined that it has limited exposure to contingencies related to the Year
2000 Issue for the products it has sold.

11
The Company is and will continue to use both internal and external resources to
reprogram or replace and test software for Year 2000 compliance. The Company
plans to complete its Year 2000 modifications and conversions, related to its
business operations, no later than June 30, 1999. While the total cost of the
Year 2000 modifications and conversions has not been determined, the Company
expects to incur at least $50 million of hardware and software costs associated
with these efforts. The Company expects to fund this cost through operating cash
flows, cash and investments, proceeds from the issuance of securities and/or
other short term borrowings. The Company will be required to expense certain
amounts of the cost of these projects pursuant to generally accepted accounting
principles.

Other Information Systems Initiatives
- - -------------------------------------
The Company has other information systems initiatives in process which are not
due to the Year 2000 Issue. These include implementation of an enterprise wide
financial accounting and reporting system as well as the development of
technology to bring the Company into full compliance with services to be
provided pursuant to the Telecommunications Act of 1996 Interconnection Order.
For these two projects, the Company expects to incur at least $32 million in
costs over the next two years. The Company will be required to expense certain
amounts of the cost of these projects pursuant to generally accepted accounting
principles.

(d) Financial Information about Foreign and Domestic Operations and Export
----------------------------------------------------------------------
Sales
-----

In 1995, the Company made an initial $4,200,000 investment in and entered into
definitive agreements with Hungarian Telephone and Cable Corp. ("HTCC"), a
Delaware corporation, which owns and operates local telephone concessions in
Hungary. In 1995 and 1996, the Company amended certain of such agreements and
entered in additional agreements with HTCC regarding financial support provided
by the Company. Such financial support agreements have since expired. In 1997,
the Company acquired additional HTCC shares in the open market. Pursuant to
these agreements, as amended, and such open market purchases, the Company (i)
owns approximately 17% of the HTTC shares presently outstanding, (ii) has rights
to purchase HTCC shares that, if fully exercised, would result in the Company
owning at least a majority of HTTC common stock on a fully diluted basis, (iii)
provides requested management services to HTCC on a cost-plus basis, and (iv)
has the right to and has designated one member out of nine of the HTCC Board of
Directors. The management services fee payable by HTCC to the Company is the
greater of 5% of adjusted gross revenues of HTCC or a monthly fixed amount. In
addition, expenses incurred by the Company in providing such services, including
certain allocable overhead items, are required to be reimbursed by HTCC. The
Company's investment in HTCC is accounted for using the cost method of
accounting.


12
Item 2.   Description of Property
-----------------------

The Administrative Offices of the Company are located at 3 High Ridge Park,
Stamford, Connecticut, 06905 and are leased. The Company owns property
including: telecommunications outside plant, central office, microwave radio and
fiber-optic facilities; electric generation, transmission and distribution
facilities; gas transmission and distribution facilities; water production,
treatment, storage, transmission and distribution facilities; and wastewater
treatment, transmission, collection and discharge facilities; all of which are
necessary to provide services at the locations listed below.

State Service(s) Provided
----- -------------------

Arizona Electric, Natural Gas, Communications,*
Water, Wastewater

California Communications, Water

Colorado Natural Gas

Florida Communications

Hawaii Electric, Natural Gas

Idaho Communications

Illinois Communications, Water, Wastewater

Indiana Water

Louisiana Natural Gas

Montana Communications

Nevada Communications

New Mexico Communications

New York Communications *

Ohio Water, Wastewater

Oregon Communications

Pennsylvania Water

Tennessee Communications

Utah Communications

Vermont Electric

Washington Communications

West Virginia Communications*

* Certain properties are subject to mortgage deeds pursuant to Rural Utilities
Service borrowings.


13

Item 3. Legal Proceedings
-----------------

In 1995, the Company's Arizona Electric Division was notified by the United
States Environmental Protection Agency ("USEPA") of it being a Potentially
Responsible Party related to poly chlorinated biphenol shipments that the
Company made to PCB Inc., sites located in Kansas City, Kansas and Kansas City,
Missouri in the mid 1980s. These sites have been designated by the USEPA as
Superfund Sites and are in the process of being evaluated for remediation. The
Company is one of over 1,500 parties that sent material to the sites and is
considered a deminimus participant. The Company responded to a number of data
requests from USEPA related to its shipments. There has not yet been a
determination of the total cost of the remediation of the sites and of
particular parties, including the Company's share of the cost.

In November 1995, the Company's Vermont electric division was permitted an 8.5%
rate increase. Subsequently, the Vermont Public Service Board (the "Board")
called into question the level of rates awarded the Company in connection with
its formal review of allegations made by the Department of Public Service (the
"DPS"), the consumer advocate in Vermont and a former Citizens employee. The
major issues in this proceeding involved classification of certain costs to
property, plant and equipment accounts and the Company's Demand Side Management
program. In addition, the DPS believed that the Company should have sought and
received regulatory approvals prior to construction of certain facilities in
prior years. On June 16, 1997, the Board ordered the Company to reduce its rates
for Vermont electric service by 14.65% retroactive to November 1, 1995 and to
refund to customers, with interest, all amounts collected since that time in
excess of the rates authorized by the Board. The Company estimates that the
future annual effect of the rate reduction ordered by the Board is approximately
$3.9 million. The Company made a $6.6 million refund to its customers by issuing
a credit to the utility bills of each customer. In addition, the Board assessed
statutory penalties totaling $60,000 and placed the Company on regulatory
probation for a period of at least five (5) years. The final terms of the
probation have not been finalized. During this probationary period, the Company
could lose its franchise to operate in Vermont if it violates the terms of
probation prescribed by the Board.

In January 1997, the Company's Illinois subsidiary was served with a complaint
in an action commenced by the Illinois Attorney General (the "State"). The
complaint alleges violations of National Pollution Discharge Elimination System
permits issued to three wastewater treatment plants, acquired in mid-1994
through a merger with Metro Utility Company ("Metro"), as well as related
allegations. The majority of the alleged violations predate the Company's
acquisition of the plants, one of which has been taken out of service to foster
regionalization. The Company filed its answer denying the allegations of the
complaint and raised the affirmative defense of failure of the State to comply
with certain provisions of the Illinois Environmental Protection Act. The
Company has completed settlement negotiations with the State and believes that a
settlement will be executed in the near future. The cost of the settlement is
expected to be no more than $65,000. The Company has contractual rights of
indemnification from the former shareholders of Metro and expects to recover a
portion of the settlement cost.

In August 1997, a lawsuit was filed in the United States District Court for the
District of Connecticut (Leventhal vs. Tow) against the Company and five of its
officers, one of whom is also a director, on behalf of all persons who purchased
or otherwise acquired Series A and Series B shares of Common Stock of the
Company between September 5, 1996 and July 11, 1997, inclusive. On February 9,
1998, the plaintiffs filed an amended complaint. The complaint alleges that
Citizens and the individual defendants, during such period, violated Sections 10
(b) and 20 (a) of the Securities Exchange Act of 1934 based upon certain public
statements made by the Company, which are alleged to be materially false or
misleading, or are alleged to have failed to disclose information necessary to
make the statements made not false or misleading. The plaintiffs seek to recover
unspecified compensatory damages. The Company and the individual defendants
intend to file a motion to dismiss.

In addition, the Company is party to various other legal proceedings arising in
the normal course of business. The outcome of individual matters is not
predictable. However, management believes that the ultimate resolution of all
such matters, including those discussed above, after considering insurance
coverages, will not have a material adverse effect on the Company's financial
position, results of operations, or its cash flows.

Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------

None in fourth quarter 1997.



14
Executive Officers
- - ------------------

Information as to Executive Officers of the Company as of February 28, 1998
follows:
<TABLE>
<CAPTION>

Name Age Current Position and Office
---- --- ---------------------------

<S> <C> <C>
Leonard Tow 69 Chairman of the Board and Chief Executive Officer
Daryl A. Ferguson 59 President and Chief Operating Officer
Robert J. DeSantis 42 Chief Financial Officer, Vice President and Treasurer
O. Lee Jobe 40 Vice President, Communications
J. Michael Love 46 Vice President, Public Services
L. Russell Mitten 46 Vice President, General Counsel and Assistant Secretary
Livingston E. Ross 49 Vice President and Controller
David B. Sharkey 48 President, Electric Lightwave, Inc.
Donald P. Weinstein 33 Vice President, Planning and Development
</TABLE>

There is no family relationship between any of the officers of the Registrant.
The term of office of each of the foregoing officers of the Registrant will
continue until the next annual meeting of the Board of Directors and until a
successor has been elected and qualified.

LEONARD TOW has been associated with the Registrant since April 1989 as a
Director. In June 1990, he was elected Chairman of the Board and Chief Executive
Officer. He was Chief Financial Officer from October 1991 through November 1997.
He has also been a Director and Chief Executive Officer of Century
Communications Corp. since its incorporation in 1973, and Chairman of its Board
of Directors since October 1989. He is Director of Hungarian Telephone and Cable
Corporation and is Chairman of the Board of Electric Lightwave, Inc.

DARYL A. FERGUSON has been associated with the Registrant since July 1989. He
has been President and Chief Operating Officer since June 1990. He is currently
a Director of Centennial Cellular Corporation and Chief Executive Officer and
Vice Chairman of the Board of Electric Lightwave, Inc.

ROBERT J. DeSANTIS has been associated with the Registrant since January 1986.
He has been Vice President and Treasurer since October 1991 and became Chief
Financial Officer in November 1997. He is currently Chief Financial Officer,
Vice President and Treasurer of Electric Lightwave, Inc.

O. LEE JOBE has been associated with the Registrant since July 1997. He was Vice
President, Network Operations from July 1997 through October 1997. He has been
Operating Vice President, Communications since October 1997. Prior to joining
the Registrant, he was Vice President, Business Operations at Pacific Bell from
June 1994 through June 1997 and Director, Business Operations at Sprint
Corporation from February 1990 to June 1994.

J. MICHAEL LOVE has been associated with the Registrant since May 1990 and from
November 1984 through January 1988. He was Vice President, Corporate Planning
from March 1991 through January 1997. He was appointed Vice President, Public
Services in January 1997.

L. RUSSELL MITTEN has been associated with the Registrant since June 1990. He
was General Counsel until June 1991. He has been Vice President, General Counsel
and Assistant Secretary since June 1991.

LIVINGSTON E. ROSS has been associated with the Registrant since August 1977. He
has been Vice President and Controller since December 1991.

DAVID B. SHARKEY has been associated with the Registrant since August 1994 and
has been President of Electric Lightwave, Inc. since that date. He has been
Chief Operating Officer of Electric Lightwave, Inc. since October 1997 and is
Director of Electric Lightwave, Inc. Prior to joining the Registrant, he was
Vice President and General Manager of Mobil Media, a wireless company
headquartered in New Jersey, from August 1989 through July 1994.

DONALD P. WEINSTEIN has been associated with the Registrant since August 1989.
He was Manager, Financial Planning from October 1992 through September 1996; and
Director, Financial Planning from September 1996 through October 1997. He has
been Vice President, Planning and Development since October 1997.

15
PART II
-------

Item 5. Market for the Registrant's Common Stock and Related Stockholder
----------------------------------------------------------------
Matters
-------

PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol CZN. Prior to the conversion of Citizens Common Stock Series A into
Common Stock Series B on August 25, 1997, the two series traded separately on
the New York Stock Exchange under the symbols CZNA and CZNB, respectively. The
following table indicates the high and low prices per share as taken from the
daily quotations published in the "Wall Street Journal" during the periods
indicated. Prices have been adjusted retroactively for subsequent stock
dividends, rounded to the nearest 1/16th. (See Note 8 of Notes to Consolidated
Financial Statements.)
<TABLE>
<CAPTION>

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------------ ------------------------- ------------------------ -----------------------
High Low High Low High Low High Low
---- --- ---- --- ---- --- ---- ---
1997:
- - ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Series A $12 1/16 $10 1/16 $11 13/16 $8 9/16 N/A N/A N/A N/A
Series B $12 1/16 $10 3/16 $11 13/16 $7 13/16 $9 5/16 $7 3/4 $10 3/8 $9 1/8

1996:
- - ----
Series A $11 1/2 $9 5/8 $11 3/16 $9 3/4 $11 9/16 $9 3/4 $11 7/16 $10
Series B $11 1/2 $9 3/4 $11 5/16 $9 3/4 $11 9/16 $10 1/8 $11 9/16 $10
</TABLE>


As of February 27, 1998, the approximate number of record security holders of
the Company's Common Stock was 50,450. This information was obtained from the
Company's transfer agent.

DIVIDENDS
The amount and timing of dividends payable on Common Stock are within the sole
discretion of the Company's Board of Directors. The Board of Directors reviews
alternative stock dividend cash equivalents and associated stock dividend rates
each quarter in order to determine and declare a prudent stock dividend rate in
light of the Company's actual and forecasted financial position and results of
operations, as well as dividend yields of comparable communications and public
services companies. Quarterly stock dividends declared and issued on Common
Stock were 1.6% for each quarter of 1996, 1.6% for the first and second quarters
of 1997, 1.0% for the third and fourth quarters of 1997 and .75% for the first
quarter of 1998 wiht consideration of a 7 1/16 cent stock dividend cash
equivalent. The stock dividend cash equivalents considered to determine the
stock dividend rates, adjusted for all stock dividends paid subsequent to all
dividends declared through December 31, 1997, and rounded to the nearest 1/16
are as follows:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------- ------------- -------------- --------------
1997 17 13/16 cent 16 1/2 cent 8 5/16 cent 10 1/8 cent
1996 17 1/2 cent 16 3/16 cent 17 1/8 cent 17 5/16 cent

The lower third and fourth quarter 1997 and first quarter 1998 stock dividend
cash equivalents and stock dividend rates reflect the Board of Directors'
decision to declare dividends more reflective of the Company's financial
performance and with consideration of the impact on retained earnings of the
Company's second quarter 1997 charges to earnings and the divided yields of
comparable communications and public service companies.


RECENT SALES OF UNREGISTERED SECURITIES
None

16
Item 6.  Selected Financial Data ($ in thousands, except for per-share amounts)
----------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----

<S> <C> <C> <C> <C> <C>
Revenues $ 1,393,619 $ 1,306,517 $ 1,069,032 $ 906,150 $ 613,099
Net income (1) $ 10,100 $ 178,660 $ 159,536 $ 143,997 $ 125,630
Basic net income per-share of Common Stock (1)(2) $ .04 $ .70 $ .66 $ .63 $ .55
Stock dividends declared on Common Stock (3) 5.30% 6.56% 6.35% 5.04% 4.37%

As of December 31,
---------------------------------------------------------------------------
Total assets $ 4,872,852 $ 4,523,148 $ 3,918,187 3,576,566 $ 2,627,118
Long-term debt $ 1,706,532 $ 1,509,697 $ 1,187,000 994,189 $ 547,673
Equity (4) $ 1,880,461 $ 1,879,433 $ 1,559,913 1,156,896 $ 974,486
</TABLE>

(1) Reflects the impact of special items in 1997 and CLEC losses (See
"Results of Operations in Management's Discussion and Analysis of
Financial Condition and Results of Operations).
(2) Adjusted for subsequent stock dividends. No adjustment has been made for
the Company's .75% first quarter 1998 stock dividend because the effect is
immaterial.
(3) Compounded annual rate of quarterly stock dividends.
(4) Includes Company obligated mandatorily redeemable convertible preferred
securities.

Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------

This annual report on Form 10-K contains forward-looking statements that are
subject to risks and uncertainties which could cause actual results to differ
materially from those expressed or implied in the statements. These and all
forward-looking statements (including oral representations) are only predictions
or statements of current plans, which are constantly under review by the
Company. All forward-looking statements may differ from actual future results
due to, but not limited to, changes in the local and overall economy, the nature
and pace of technological changes, the number and effectiveness of competitors
in the Company's markets, success in overall strategy, weather conditions,
changes in legal and regulatory policy, the Company's ability to identify future
markets and successfully expand existing ones and the mix of products and
services offered in the Company's target markets. Readers should consider these
important factors in evaluating any statement contained herein and/or made by
the Company or on its behalf. The following information should be read in
conjunction with the consolidated financial statements and related notes to
consolidated financial statements included in this report. The Company has no
obligation to update or revise these forward-looking statements to reflect the
occurrence of future events or circumstances.

(a) Liquidity and Capital Resources
-------------------------------

The Company considers its operating cash flows and its ability to raise debt and
equity capital as the principal indicators of its liquidity. The Company has
committed lines of credit with commercial banks under which it may borrow up to
$600,000,000. There were no amounts outstanding under these lines at December
31, 1997. In November 1997, Electric Lightwave, Inc., ("ELI"), the Company's
competitive local exchange carrier ("CLEC") subsidiary arranged a five-year
$400,000,000 revolving bank credit facility. The Company has guaranteed all of
ELI's obligations under this credit facility. As of December 31, 1997,
$60,000,000 was outstanding under this commitment.

17
Net capital expenditures, by sector, have been and are budgeted as follows:
<TABLE>
<CAPTION>

Budget Actual
1998 1997 1996 1995
----------- ---------- ----------- -----------
($ in thousands)
<S> <C> <C> <C> <C>
Communications $ 219,000 $ 263,000 $ 184,000 113,700
CLEC 275,000 124,500 41,600 27,400
Public Services:
Natural Gas 36,500 47,900 27,700 28,700
Electric 17,500 23,600 24,600 32,800
Water and Wastewater 16,000 32,200 21,000 28,000
General 30,000 33,300 18,900 10,100
----------- ----------- ----------- ------------
$ 594,000 $ 524,500 $ 317,800 240,700
=========== =========== =========== ============
</TABLE>

The Company anticipates that the funds necessary for its 1998 capital
expenditures will be provided from operations; requisitions from Industrial
Development Revenue Bond construction fund trust accounts; advances from Rural
Utilities Service loan contracts; from commercial paper notes payable; from
parties desiring utility service; from debt, equity and other financing at
appropriate times; and from short-term borrowings under bank credit facilities.

Financing
- - ---------
Proceeds from the following variable rate borrowings during 1997 were used to
fund and/or prefund expenditures for the construction, extension and improvement
of the Company's facilities:
<TABLE>
<CAPTION>


Initial
Interest
Date Security/Borrowing Amount Rate Maturity Date
---- ------------------ ------------ -------- -------------
<S> <C> <C> <C> <C>
May 7 Weekly Rate Industrial Development Revenue $ 30,535,000 4.15% May 1, 2032
Bonds

May 1, May 2, and State of California Department of Water 1,557,800 2.42% July 1, 2027
June 16 Resources Loan

July 31 Rural Utilities Service Loan Contract 4,002,000 6.13% December 31, 2027

September 25 Weekly Rate Industrial Development Revenue 17,880,000 4.20% September 1, 2032
Bonds

December 4 Weekly Rate Industrial Development Revenue 4,500,000 3.65% December 1, 2032
Bonds

December 23 Money Market Municipal Industrial 4,500,000 3.85% December 1, 2032
Development Revenue Bonds

--------------
Total / Weighted Average $ 62,974,800 4.19%
==============

</TABLE>
18
The following fixed rate Industrial Development Revenue Bonds were converted and
remarketed as either Adjustable Rate Bonds, Weekly Rate Bonds or Money Market
Bonds during 1997:

<TABLE>
<CAPTION>
Initial
Interest
Date Bonds Amount Rate Maturity Date
--------- ----------------------------------------- ---------- --------- --------------------
<S> <C> <C> <C> <C>
August 1 7.05% 1985 Series Industrial Development $30,350,000 4.75% August 1, 2015, 2020
Revenue Bonds and 2025

September 2 7.20% 1985 Refunded Series Industrial 2,000,000 3.51% August 1, 2020
Development Revenue Bonds

September 2 6.88% 1988 Series Industrial Development 38,315,000 3.85% September 1, 2022,
Revenue Bonds 2026 and 2028

----------------
Total / Weighted Average $70,665,000 4.23%
================
</TABLE>

Electric Lightwave, Inc. Initial Public Offering
- - ------------------------------------------------
On November 24, 1997, ELI completed the initial public offering ("IPO") of
8,000,000 shares of Class A Common Stock at a price of $16 per share. Gross
proceeds from this offering to ELI totaled approximately $128,000,000, and
proceeds net of underwriting discounts and commissions totaled approximately
$120,320,000. The Company recorded a pre-tax non operating gain of approximately
$78,700,000 resulting from this transaction. The Company retained 97.97% of the
voting interest and 82.83% of the economic ownership in ELI.

Acquisitions
- - ------------
In October 1997, the Company purchased all of the outstanding stock of Gasco,
Inc. for approximately $100,000,000 in cash and purchased the St. John the
Baptist Parish Gas System in Louisiana for approximately $2,100,000. In December
1997, the Company acquired Ogden Telephone Company in a stock for stock
transaction. The Company issued 2,308,262 shares of Common Stock to effect this
merger. In January 1998, a subsidiary of the Company acquired 1,300,000 shares
of Common Stock of D & E Communications, Inc. ("D & E") for approximately
$27,000,000 in cash. This investment represents 17.4% of the shares of D & E
Common Stock outstanding.

Regulatory Environment
- - ----------------------

Communications
- - --------------

Telecommunications Act
- - ----------------------
In February, 1996, the Telecommunications Act of 1996 (the "1996 Act") became
law. The national public policy framework for telecommunications was changed
dramatically by the 1996 Act. A central focus of this sweeping policy reform was
to open local telecommunications markets to workable competition. The 1996 Act
preempts state and local laws to the extent that they prevent competitive entry
into the provision of any telecommunications service. Under the 1996 Act,
however, states retain authority to impose on carriers requirements necessary to
preserve universal telecommunications service, protect public safety and
welfare, ensure quality of service and protect consumers. States are also
responsible for mediating and arbitrating interconnection agreements between
CLECs and ILECs if voluntary negotiations fail.

Pursuant to the requirements of the 1996 Act, the Federal Communications
Commission ("FCC"), throughout 1996, 1997, and continuing into 1998 and beyond,
has been and will be conducting rule-making proceedings resulting in a number of
new rules that could impact the operations of the Company. These rules,
described in more detail below, address interconnection, universal service
reform and access charge/price cap reform.




19
Interconnection
---------------
The FCC's Interconnection Order, issued in August 1996, addresses the
relationship between Incumbent Local Exchange Carriers ("ILECs"), such as
the Company, and Competitive Local Exchange Carriers ("CLECs"), such as
the Company's subsidiary, ELI.

The 1996 Act and the Interconnection Order outline three routes, which
are not mutually exclusive, to competitive market entry. The first is
through a CLEC's construction and operation of its own local exchange
facilities, in which case the sole requirement of the ILEC is
interconnection for purposes of traffic interchange. The second allows a
CLEC to acquire, at cost, unbundled network elements from the ILEC for
CLEC assembly into end-to-end local exchange services and/or as a
supplement to the facilities it has constructed on its own. The third is
through resale of ILEC retail services acquired from the ILEC at
wholesale rates.

Subject to the rural telephone company exemption discussed below, the
Interconnection Order affects the Company's local network services
business as follows:

(a) ILECs must provide interconnection to any new local network
services competitor upon request. This interconnection must be
at least equal in quality to that provided by the ILEC to itself
or its affiliates. Also, the order mandates that the ILEC
provide this interconnection at just, reasonable and
nondiscriminatory rates, terms and conditions.

(b) ILECs must provide unbundled network elements, including support
systems, to telecommunications carriers that intend to provide
local network services or network access services in their
markets. These network elements include network interface
devices; local loops; local and tandem switches (including all
related software-based features); interoffice transmission
facilities; signaling and call-related database facilities; and
operations support systems and information.

(c) ILECs must make retail services available to competitors at
wholesale rates. The Interconnection Order contains pricing
guidelines for wholesale services and interconnection and
unbundled elements. Should pricing negotiations between ILECs
and new entrants become deadlocked, the Order also provides a
standard for arbitration to be applied by the respective state
commissions.

(d) ILECs and CLECs have the obligation to compensate each other for
the termination of interchanged local exchange traffic.

Various parties, including ILECs and state PUCs, filed appeals of the
FCC's August 8, 1996 Interconnection Order, many of which were
consolidated and transferred to the U.S. Court of Appeals for the Eighth
Circuit. On July 18, 1997, the Eighth Circuit rendered its decision,
which held that, in general, the FCC does not have jurisdiction over
prices for interconnection, resale, leased unbundled network elements and
traffic termination. The Eighth Circuit also overturned the FCC's "pick
and choose" rules as well as certain other FCC rules implementing the
1996 Act's local competition provisions. In addition, the Eighth Circuit
decision substantially limits the FCC's authority to enforce the local
competition provisions of the 1996 Act. The FCC and other parties
petitioned for Supreme Court review of the decision, and the Supreme
Court has granted certiorari.

In the long term the Eighth Circuit's decision makes it more likely that
the rules governing local competition will vary from state to state. Most
states have already begun to establish rules for local competition that
are consistent with the FCC rules overturned by the Eighth Circuit. If a
patchwork of state regulations were to develop, it would increase the
Company's costs of regulatory compliance.


20
The primary provisions of the Interconnection Order which could materially
impact the Company's financial position and results of operations are the
provision of unbundled network elements and making retail services
available at wholesale rates. The Company has received approximately 100
interconnection requests from wireless communications providers and CLECs,
none of which have or are expected to have a material impact on the
Company's financial position or results of operations. In addition,
because of its smaller size and smaller market service areas, the
Company's local network services business has a qualified exemption from
the FCC's Interconnection Order. The qualified exemption pertains to
certain technical requirements imposed upon ILECs and is neither an
exemption from interconnection, in general, nor against competitive entry
by other carriers. This exemption is known as the rural telephone company
exemption and it continues until a bona fide request for interconnection
is received and a state commission with jurisdiction determines that
discontinuation of the exemption is warranted, consistent with universal
service principles, and that such discontinuation will not impose an
undue economic hardship on the Company and the interconnection requested
is technically feasible.


Universal Service Reform
------------------------
On May 8, 1997, the FCC released its order creating a new federal
universal service system (the "Universal Service Order"). The Universal
Service Order was the FCC's response to one of the 1996 Act's mandates
for a new system for funding of ubiquitous basic exchange telephone
services to all areas of the United States and its possessions through
explicit contributions of all telecommunications carriers. This new
system for funding of basic services in rural, high cost and insular
locations is designed to end the long standing system of funding through
implicit subsidies levied by ILECs in the form of artificially high,
mandated prices for access, intraLATA toll and other non-basic services.
A second significant mandate of the 1996 Act addressed in the Universal
Service Order is the creation of a federal funding mechanism for the
provision of discounted basic and advanced telecommunications services to
qualifying public primary and secondary schools and local libraries. A
third mandate creates a mechanism for providing federal funding of
advanced services to rural health care providers sufficient in scope to
allow qualified entities to receive such services at rates comparable to
those paid by health care providers in urban areas.

The Universal Service Order has implications for the Company in
addressing universal service funding to rural telephone companies. First,
the Company expects to continue receiving funding under the new federal
universal service system. Second, the FCC determined that it is not
appropriate at this time to bring rural telephone companies under a
proxy-model driven universal service cost determination system in the
same time frame applicable to non-rural carriers. The Company expects
that its ILECs will continue receiving federal universal service funding
with certain adjustments, based upon its actual costs incurred to provide
universal services.

The new federal universal service system, unless changed, will fund only
25% of the costs of providing universal service in rural, high cost and
insular areas. The states are required to provide the balance of the
necessary funding. Most of the states served by the Company's ILECs are
in the formative stages of addressing intrastate universal service
issues.

The Company cannot predict what the levels or methods of contributions
will be or whether the amount of receipts from the new system will be
equal to or greater than its contributions, because the new system is in
its early stages at both the federal and state levels.

Access Charge / Price Cap Reform
--------------------------------
In May 1997, the FCC released separate orders in its Access Reform and
Price Cap Reform proceedings (the "Access Reform Order" and the "Price
Cap Reform Order," respectively). Both orders affect the Company's ILECs
as the Company elected price cap regulation commencing July 1, 1996.

Price cap regulation is a form of rate regulation in which the interstate
rates of affected ILECs are subject to maximums that are periodically
adjusted according to formulae contained in the FCC's Rules. Price cap
regulation allows affected carriers to retain all earnings generated by
operating at the capped rates. In this manner, affected ILECs are
rewarded for achieving operating efficiencies.

In the Access Reform Order, the FCC ordered price cap carriers to
restructure certain components of the mandated interstate access
structure in order to bring pricing more in line with underlying costs.
This restructure results in lower interstate access charges and revenues
for the Company's ILECs.


21
In the Price Cap Reform  Order,  the FCC arrived at a  permanent  factor,
known as the "X-factor," by which ILEC price caps are lowered each year.
The purpose of the X-factor adjustment is to reflect the FCC's findings
that ILECs enjoy productivity gains that are proportionately greater than
those experienced in other industries. The X-factor adjustment is
designed to give price cap ILECs' interexchange carrier customers some of
the benefits of technology-driven declining costs in local exchange
telephony. The permanent X-factor selected in the Price Cap Reform Order,
6.5%, is based upon data unique to the Bell Operating Companies, with no
consideration given to any other price cap regulated carriers. In
particular, the Company believes that the 6.5% X-factor is inappropriate
as applied to small price cap regulated ILECs. The Company is pursuing an
appeal of the 6.5% X-factor as applied to rural price cap ILECs,
contending that such carriers lack the economics of scope and scale
required to achieve that level of productivity growth each year.

Electric
- - --------
The electric utility industry in the United States is undergoing fundamental
changes. Electric utilities have for many years been vertically-integrated
entities with the responsibility for the generation, transmission and
distribution of electric power in a franchise territory. In return for monopoly
status, electric utilities have been subject to comprehensive regulation at the
state and federal level. The industry is now shifting toward electric customers
being able to choose their energy provider much like telephone customers are
able to choose their long distance provider. Generally, this involves splitting
apart the generation and transmission of power from the rest of the business,
and having generators compete with one another in the sale of power directly to
retail customers. The interconnected regional transmission grids will be
operated independently, continuing as a federally-regulated monopoly. Local
transmission and distribution facilities would continue as state-regulated
monopolies. Deregulation could potentially result in stranded plant investments,
stranded costs for supply contracts and stranded costs associated with programs
which promote the most efficient use of electricity and reduce the environmental
impact of generation facilities. The change in the industry is in various stages
of development around the United States. The Company believes there are many
uncertainties associated with a restructuring of the electric utility industry.

In December 1996, the Arizona Corporation Commission issued Decision No. 59943
approving rules for a phased-in transition to a competitive retail electric
power market beginning January 1, 1999. Under the plan, retail access will be
phased in over four years with 20% of the load open to competition by 1999, 50%
by 2001, and 100% by 2003. Stranded costs are expected to be recovered from
ratepayers through a surcharge with both an energy and/or demand component.

In 1995, the Company's Arizona Electric Division was notified by the United
States Environmental Protection Agency ("USEPA") of it being a Potentially
Responsible Party related to polychlorinated biphenyl shipments that the
Company made to PCB Inc., sites located in Kansas City, Kansas and Kansas City,
Missouri in the mid 1980s. These sites have been designated by the USEPA as
Superfund Sites and are in the process of being evaluated for remediation. The
Company is one of over 1,500 parties that sent material to the sites and is
considered a deminimus participant. The Company responded to a number of data
requests from USEPA related to its shipments. There has not yet been a
determination of the total cost of the remediation of the sites and to
particular parties, including the Company's share of the cost.

The Company's Kauai, Hawaii operation is a participant in a collaborative
proceeding with approximately 15 other parties initiated by the Hawaii Public
Utilities Commission ("HPUC") on Electric Utility Competition and Investigation
of the Electric Utility Infrastructure in the State of Hawaii. The parties filed
a stipulated agreement with the HPUC to complete all evidentiary hearings by
December 1999. The HPUC is expected to deliberate on the findings and issue a
final decision and order in 2000 or later.

The Vermont Public Service Board (the "Board") has opened a docket (No. 5854)
into competition, customer choice, and restructuring of the Vermont electric
industry. The purpose of the investigation is to develop an information base,
principles, and policy bases to support legislative proposals and rule making by
the Board. The proposal recommends that, by no later than the end of 1998,
direct access should be available to all Vermont customers. There currently are
competing proposals by legislators and the Board. These conflicts will need
to be resolved before any final rule making becomes effective.


22
Water and Wastewater
- - --------------------
Privatization opportunities are increasing as the water and wastewater
industries in the United States continue to face significant changes due to
increasing demands for advanced technical expertise and capital to meet the
requirements of more stringent environmental regulations. Opportunities for
public-private partnerships are demonstrated by the following factors: Water and
wastewater industries continue to face significant challenges as environmental
regulations rise and federal funding opportunities decline; there is a growing
need for enhancement of existing infrastructure and construction of new
facilities for water and wastewater systems; and there is an increased demand
for government to restructure and decrease internal spending. Internationally,
developing countries are looking to the expertise of existing water and
wastewater companies to provide a sound infrastructure of water and wastewater
systems. Over the past few years, there have been several efforts to remove
federal barriers to privatization. Citizens' geographic and service diversity
and decades of experience in the water and wastewater industry provide a strong
platform to successfully meet these needs and respond to the increasing trend
for privatization. The Company plans to initially focus its privatization
efforts in existing and surrounding service areas.

Regulatory Revenue Status
- - -------------------------
During 1997, the Company was authorized increases in annual revenues from
regulatory commissions in Arizona and California totaling $1.2 million. In
addition, the Vermont Public Service Board ordered the Company to reduce its
rates in Vermont by 14.65% retroactive to November 1, 1995. As a result, the
Company refunded $6.6 million to its customers in Vermont in 1997. The Company
estimates that the future annual effect of the rate reduction in Vermont is
approximately $3.9 million. Currently, the Company has additional requests for
increases in annual revenues pending before regulatory commissions in Ohio
totaling $1.1 million.

Impact of the Year 2000
- - -----------------------
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.

Based upon a company-wide assessment, conducted in conjunction with an
information systems consulting firm, it has been determined that many of the
Company's software programs need to be modified so that dates beyond December
31, 1999, are properly recognized. The Company presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue can be mitigated. However, if such modifications and conversions are
not made in a timely fashion, the Year 2000 Issue could have a material impact
on the operations of the Company.

The Company has developed a plan to mitigate the Year 2000 Issue. The plan
includes formal communications with all of its significant suppliers to
determine the extent to which the Company is vulnerable to those third parties'
failure to remediate their own Year 2000 Issue. However, there can be no
guarantee that the systems of suppliers or other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have material adverse effect on the Company. The Company has
determined that it has limited exposure to contingencies related to the Year
2000 Issue for the products it has sold.

The Company is and will continue to use both internal and external resources to
reprogram or replace and test software for Year 2000 compliance. The Company
plans to complete its Year 2000 modifications and conversions, related to its
business operations, no later than June 30, 1999. While the total cost of the
Year 2000 modifications and conversions has not been determined, the Company
expects to incur at least $50 million of hardware and software costs associated
with these efforts. The Company expects to fund this cost through operating cash
flows, cash and investments, proceeds from the issuance of securities and/or
other short term borrowings. The Company will be required to expense certain
amounts of the cost of these projects pursuant to generally accepted accounting
principles.

Other Information Systems Initiatives
- - -------------------------------------
The Company has other information systems initiatives in process which are not
due to the Year 2000 Issue. These include implementation of an enterprise wide
financial accounting and reporting system as well as the development of
technology to bring the Company into full compliance with services to be
provided pursuant to the Telecommunications Act of 1996 Interconnection Order.
For these two projects, the Company expects to incur at least $32 million in
costs over the next two years. The Company will be required to expense certain
amounts of the cost of these projects pursuant to generally accepted accounting
principles.


23
New Accounting Pronouncements
- - -----------------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings Per Share" ("SFAS 128") effective for financial statements issued
for periods ending after December 15, 1997. SFAS 128 establishes standards for
computing and presenting earnings per share and supersedes APB Opinion No. 15,
"Earnings Per Share." The Company adopted SFAS 128 and all prior periods have
been restated to conform with the requirements of this statement.

Charges to Earnings
- - -------------------
In 1996 and early 1997 the Company pursued an aggressive growth strategy to take
advantage of opportunities in the emerging communications marketplace and to
become a full-service communications provider to an expanded base of customers
both within and outside its franchise serving areas. This strategy included the
initiation and expansion of long distance service which, in combination with
other enhanced service offerings, including the resale of local network services
outside the local exchange franchised serving areas, would enable the Company to
offer customers an integrated package of products and services. This aggressive
growth strategy was pursued together with a similar strategy for the Company's
CLEC subsidiary, Electric Lightwave, Inc. ("ELI").

Late in 1996, the Company began the transition to a facilities based long
distance network, utilizing owned switches and fixed cost leases with the
ultimate objective of achieving lower costs for providing long distance service
in anticipation of its long distance service customer base expanding. The
Company's customer base expansion plan was focused on its local exchange
franchise serving areas, markets adjacent to these local exchange franchise
serving areas and customers of affiliated companies. In addition, the Company
initiated a brand recognition program to support the sales and marketing
initiatives designed to increase the Company's communications market share. The
increase in revenues resulting from this communications expansion strategy,
though significant, did not offset the resulting increases in network, branding,
sales, marketing and related operations support expenses. As a result, the
Company's communications growth strategy generated unexpected losses during 1997
which had an adverse impact on Company earnings and cash flow.

The Company re-evaluated its communications growth strategy, during the second
quarter 1997, in light of this continuing impact on earnings and cash flow. As a
result, the Company initiated a reduction in workforce and benefits,
consolidated its call centers, closed certain sales offices, reduced its sales
and marketing workforce and activities, reconfigured its network cost structure
through new carrier contracts and network redesign and reduced its planned 1997
capital expenditure program. In addition, the Company decided it would continue
to concentrate its communications expansion efforts on further development and
growth of its local exchange franchise serving areas and its CLEC subsidiary.

In connection with the re-evaluation of the Company's communications growth
strategy, the Company recorded $34.6 million of charges to earnings in the
second quarter relating to the curtailment of certain long distance service
operations. These charges included expenses and costs associated with the
Communications sector workforce reductions, the curtailment of sales and
marketing initiatives and the termination of fixed cost network leases
associated with the reconfiguration of the Company's network cost structure from
fixed to variable, as well as an additional reserve for uncollectible accounts
receivable.

After reviewing its employee benefit plans to determine if such plans were
competitive with those provided in the industry, the Company decided to curtail
certain of its employee benefit plans. This decision required a reassessment of
the recoverability of certain related regulatory assets that were expected to be
recovered in rates in the Company's current regulatory environment. The
curtailment decision and assessment of recoverability required the Company to
record a second quarter charge to earnings of approximately $34.7 million.

Additionally, between 1993 and 1996, the Company completed acquisitions of over
620,000 telephone access lines from GTE Corp. ("GTE") and ALLTEL Corporation
("ALLTEL"). In connection with these acquisitions, the Company entered into
transition services agreements with both GTE and ALLTEL to provide for customer
care and billing services. These agreements resulted in the Company using
numerous additional customer care and billing systems to serve its
communications operation. In order to realize economies of scale and improve
customer service, the Company, in 1994, decided to consolidate these customer
care and billing systems. Through a strategic partnership, the Company, in 1995,
began developing software and building new customer care and billing systems
that would be used for all of the Company's local exchange telephone properties.
As of June 30, 1997, the Company's Tennessee and New York local exchange
telephone properties were using these customer care and billing systems. After
reviewing the costs to develop this software and build these systems and the
incremental billing and customer care requirements placed on local exchange
companies by the Telecommunications Act of 1996 and subsequent FCC orders, the
Company determined that it was not probable that all of the costs would be
recoverable in the Company's rates. As a result, the Company recorded a $67.4
million second quarter charge to earnings.

24
During the second quarter of 1997, the public utility  commissions in the states
of Vermont, New York and Arizona issued orders which required the Company to
record $47.2 million of charges to earnings. These orders affected the Company's
electric, communications and water properties. More specifically, the Vermont
order required refunds to customers and deemed certain regulatory assets no
longer recoverable. The New York order required the Company to record an expense
and liability for amounts paid by ratepayers to GTE to fund postretirement
benefits prior to Citizens' acquisition of its New York local exchange
properties from GTE. The Arizona order disallowed recovery of certain property,
plant and equipment.

(b) Results of Operations
---------------------

REVENUES
--------
Revenues increased from $1,306.5 million to $1,393.6 million in 1997 and from
$1,069.0 million to $1,306.5 million in 1996. The increase in 1997 was primarily
due to increased communications and CLEC revenues. The increase in revenues in
1996 was primarily due to increased communications and natural gas revenues.
<TABLE>
<CAPTION>

1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
Communications revenues ($ in thousands)
- - -----------------------
<S> <C> <C> <C> <C> <C>
Network access services $ 405,202 4% $ 391,151 17% $ 334,952
Local network services 250,521 8% 232,904 18% 197,092
Long distance services 89,535 52% 59,072 316% 14,217
Directory services 31,982 6% 30,248 22% 24,866
Other 48,922 (2%) 50,084 70% 29,486
Eliminations (23,573) 110% (11,250) 683% (1,436)
----------- ---------- -----------
Total $ 802,589 7% $ 752,209 26% $ 599,177
=========== ========== ===========
</TABLE>

Network access services revenues increased $14.1 million, or 4%, in 1997
primarily due to increased access minutes of use which was partially offset by
an interstate switched access rate reduction which became effective July 1,
1997. The network access services revenues increase in 1996 was primarily due to
a property acquired from ALLTEL in 1996, as well as increased switched and
special access revenues, and increased billing and collections revenue.

Local network services revenues increased $17.6 million, or 8%, in 1997
primarily due to communications acquisitions as well as internal access line
growth. The local network services revenues increase in 1996 was primarily due
to a property acquired from ALLTEL in 1996, customer growth, increased usage and
the sale of other enhanced services.

Long distance services revenues increased $30.5 million, or 52%, in 1997 and
$44.9 million, or 316%, in 1996 primarily due to growth in customers and
increased minutes of use. This increase was partially offset in 1997 by a second
quarter charge of approximately $14.2 million to provide an additional reserve
for uncollectible accounts receivable due to the curtailment of long distance
service operations in adjacent markets.

Directory services revenues increased $1.7 million, or 6%, in 1997 due to
communications properties acquisitions and increased volume. The directory
service revenues increase in 1996 was primarily due to an increase in the number
of directories from a property acquired from ALLTEL in 1996 and an increase in
advertising revenues.

Other revenues decreased $1.2 million, or 2%, in 1997 primarily due to decreased
billing and collection revenues. Other revenues increased in 1996 primarily due
to communications properties acquired.

Eliminations represent network access revenues received by the Company's local
exchange operations from its long distance operations.

25
<TABLE>
<CAPTION>

1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
CLEC revenues ($ in thousands)
- - -------------
<S> <C> <C> <C> <C> <C>
Dedicated services $ 33,522 68% $ 19,947 39% $ 14,357
Local dial tone services 10,565 317% 2,533 275% 676
Long distance services 8,140 13% 7,232 356% 1,586
Enhanced services 8,857 55% 5,705 242% 1,666
Eliminations (3,341) 153% (1,319) 84% (715)
----------- ---------- -----------
Total $ 57,743 69% $ 34,098 94% $ 17,570
=========== ========== ===========
</TABLE>
Dedicated services revenues increased $13.6 million, or 68%, in 1997 primarily
due to sales of additional products to existing customers and an increase in
route miles of 75% over 1996. Approximately $6.8 million of the increase is
associated with a short-term contract with a significant customer which expires
in early 1998. The dedicated services revenues increase in 1996 was primarily
due to the increase of long-haul transport of DS-3 and DS-1 sales.

Local dial tone services revenues increased $8.0 million, or 317%, in 1997 and
$1.9 million, or 275%, in 1996, primarily due to local switch implementations
for new and existing customers in the last half of 1996. The successful
implementation of the ISDN PRI product generated $2.3 million of increased
revenue in 1997.

Long distance services revenues increased $0.9 million, or 13%, in 1997 and $5.6
million, or 356%, in 1996, primarily due to increased prepaid debit card
services introduced in late 1996 and growth associated with the local dial tone
services market.

Enhanced services revenues increased $3.2 million, or 55%, in 1997, primarily
due to $2.1 million in Internet access services and $1.6 million in frame relay
revenue increases, partially offset by a decrease in other products. The
Internet access service and frame relay revenue increases were primarily due to
a 75% increase in Internet switches installed. The increase in 1996 was
primarily due to increases in Internet access services and frame relay services
due to the initial installation of Internet and additional installation of ten
frame relay switches.

Eliminations reflect intercompany activity between the Company's CLEC and
communications operations.

Public services revenues
- - ------------------------
Public services revenues increased 3% from $520.2 million to $533.3 million,
primarily due to increased natural gas and water and wastewater revenues.
<TABLE>
<CAPTION>


1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
($ in thousands)
Natural gas revenues
- - --------------------
<S> <C> <C> <C> <C> <C>
Residential $ 145,016 8% $ 134,888 22% $ 110,146
Commercial 64,004 29% 49,633 22% 40,614
Industrial 30,366 (25%) 40,230 14% 35,244
----------- ---------- -----------
Total distribution 239,386 7% 224,751 21% 186,004
Transportation 2,622 (52%) 5,519 30% 4,255
Other 10,090 8% 9,349 22% 7,643
----------- ---------- -----------
Total $ 252,098 5% $ 239,619 21% $ 197,902
=========== ========== ===========
</TABLE>
The  increase  in natural  gas  revenues  in 1997 of $12.5  million,  or 5%, was
primarily due to higher gas prices, an increase in the number of customers, the
acquisition in October, 1997, of Gasco, Inc., now known as The Gas Company
("TGC"), and rate increases granted in Louisiana in May, 1996 and Arizona in
November, 1996. This increase was partially offset by decreased industrial
revenue as a result of a decrease in customers and lower consumption from high
usage, low margin customers.


26
The  increase in natural gas revenues in 1996 was  primarily  the result of rate
increases in Louisiana and Arizona. In addition to the rate increases, there was
increased consumption by residential customers in Louisiana due to colder than
normal weather conditions which was partially offset by decreased usage in
Arizona due to milder than expected weather conditions and decreased consumption
by industrial customers in Louisiana due to rising gas prices.

<TABLE>
<CAPTION>



1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
Electric revenues ($ in thousands)
- - -----------------
<S> <C> <C> <C> <C> <C>
Residential $ 79,808 - $ 79,893 10% $ 72,460
Commercial 55,805 - 55,826 7% 52,152
Industrial 42,209 (4%) 44,165 12% 39,362
---------- ----------- -----------
Total distribution 177,822 (1%) 179,884 10% 163,974
Other 13,648 10% 12,413 9% 11,377
---------- ----------- -----------
Total $ 191,470 - $ 192,297 10% $ 175,351
========== =========== ===========
</TABLE>

Increases in residential and commercial revenues were generated from rate
increases granted in Hawaii in August, 1996 and Arizona in January, 1997 and
increased consumption as a result of customer growth. These increases were
offset by a second quarter charge to reflect a Vermont public utility commission
order requiring refunds to customers of approximately $6.6 million. Other
revenues increased primarily due to higher fuel costs passed on to customers in
Arizona.

The increase in revenues in 1996 was primarily due to rate increases in Hawaii
and Vermont and increased consumption at the Company's Arizona electric
operations resulting from customer growth.


<TABLE>
<CAPTION>

1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
Water and wastewater revenues ($ in thousands)
- - -----------------------------
<S> <C> <C> <C> <C> <C>
Residential distribution $ 70,742 - $ 70,845 12% $ 63,377
Commercial distribution 14,212 3% 13,801 12% 12,279
Industrial distribution 961 14% 843 46% 576
Other 3,804 36% 2,805 - 2,800
-------- -------- ---------
Total $ 89,719 2% $ 88,294 12% 79,032
======== ======== =========
</TABLE>

The increase in water and wastewater revenues in 1997 of $1.4 million, or 2%, is
primarily due to an operating and maintenance service contract, and a rate
increase granted in Pennsylvania in June, 1996.

The increase in water and wastewater revenues in 1996 was primarily the result
of rate increases as well as increased residential and commercial consumption at
the Company's California and Arizona water properties.
<TABLE>
<CAPTION>

COST OF SERVICES
----------------



1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Natural gas purchased $ 139,900 9% $ 127,913 18% $ 108,385
Network expenses 136,971 77% 77,214 334% 17,777
Electric energy and fuel oil purchased 94,726 2% 93,191 9% 85,168
Eliminations (26,914) 114% (12,569) 484% (2,151)
------------ ------------ ----------
Total $ 344,683 21% $ 285,749 37% $ 209,179
============ ============ ==========

</TABLE>
27
Natural gas purchased expense increased $12.0 million,  or 9%, in 1997 primarily
due to fluctuations in the price of natural gas, increased demand as a result of
an increase in the number of customers and the acquisition of TGC. Under tariff
provisions, increases in the Company's costs of natural gas purchased are
largely passed on to customers. The increase in natural gas purchased in 1996
was primarily due to fluctuations in the price of natural gas and increased
consumption by residential customers in Louisiana due to colder than normal
weather conditions, partially offset by decreased usage in Arizona due to milder
than expected weather conditions and decreased consumption by industrial
customers in Louisiana due to rising gas prices.

Network expenses increased $59.8 million, or 77%, in 1997 primarily due to an
increase in long distance minutes sold requiring additional network access
capacity and a second quarter charge of approximately $11.1 million related to
lease terminations as a result of the curtailment of certain long distance
service operations. The increase in network expenses in 1996 was primarily due
to increased network revenues in communications as well as increased costs
related to the expansion of ELI.

Electric energy and fuel oil purchased increased $1.5 million, or 2%, in 1997
primarily due to higher supplier prices. The increase in electric energy and
fuel oil purchased in 1996 was primarily due to an increase in consumption
driven by an increase in demand and customer growth.

Eliminations represent network expenses incurred by the Company's long distance
operation for services provided by its local exchange operations and
intercompany activity between the Company's CLEC and communications operations.

DEPRECIATION EXPENSE
--------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Depreciation expense $ 235,812 22% $ 193,733 22% $ 158,935

</TABLE>


Depreciation expense increased $42.1 million, or 22% in 1997 and $34.8 million,
or 22%, in 1996 primarily due to increased property, plant and equipment as a
result of acquisitions and new construction.

OTHER OPERATING EXPENSES
--------------------------
<TABLE>
<CAPTION>

1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Other operating expenses $ 534,261 74% $ 306,373 13% $ 272,052
Maintenance expense 116,102 15% 101,206 16% 87,255
Taxes other than income 92,026 14% 80,947 18% 68,382
Sales and marketing 54,893 28% 42,823 125% 19,056
------------ ---------- ---------
Total $ 797,282 50% $ 531,349 19% $ 446,745
============ ========== =========
</TABLE>

Other operating expenses increased $227.9 million, or 74%, in 1997 primarily due
to increases in personnel and related overhead to support expanded service
offerings, increases in expense levels as a result of telecommunications
acquisitions and second quarter charges of approximately $150.6 million. These
charges include approximately $.7 million related to the curtailment of certain
long distance service operations, approximately $34.7 million related to benefit
plan curtailments and related regulatory assets, approximately $67.4 million
related to the write-off of communications information systems and software,
approximately $34.3 million related to regulatory commission orders in New York,
Vermont and Arizona, approximately $10.8 million related to accounting policy
changes associated with ELI in preparation for its initial public offering and
approximately $2.7 million of other adjustments. The increases in operating
expenses in 1996 were primarily due to expenses related to acquired
communications properties.

Maintenance expenses increased $14.9 million or 15%, in 1997, and $14.0 million
or 16% in 1996 primarily due to the communications properties acquired.

28
Taxes other than income increased $28 million, or 14% in 1997 primarily due to
increased payroll, property and franchise taxes resulting from communications
acquisitions, taxes associated with long distance operations, and increased
property taxes in Arizona, California, Louisiana, and Pennsylvania. The increase
in 1996 was primarily due to increased payroll and gross receipts taxes
associated with the acquired communications property.

Sales and marketing expenses increased $12.1 million, or 28%, in 1997 primarily
due to increased costs necessary to support an increased level of service
offerings and a second quarter charge of $8.6 million resulting from the
curtailment of certain long distance service operations. The increase in sales
and marketing expenses in 1996 was primarily due to costs associated with long
distance and other new service offerings.

OTHER INCOME/INTEREST EXPENSE/INCOME TAXES
------------------------------------------
<TABLE>
<CAPTION>

1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
($ in thousands)
Non operating gain on sale of
<S> <C> <C> <C> <C> <C>
subsidiary stock $ 78,734 N/A $ - N/A $ -
Investment income 33,739 (31%) 48,972 18% 41,667
Other 4,481 (74%) 17,483 (4%) 18,288
--------- --------- ---------
$ 116,954 76% $ 66,455 11% $ 59,955
========= ========= =========
</TABLE>

The non operating gain on sale of subsidiary stock of $78.7 million represents
the pre-tax gain on the ELI initial public offering of 8,000,000 shares of Class
A Common Stock at a price of $16 per share on November 24, 1997.

Investment income decreased $15.2 million, or 31%, in 1997 and increased $7.3
million, or 18%, in 1996 primarily due to $22 million earned from Hungarian
Telephone and Cable Corporation in 1996 for guarantees and financial support
provided by the Company. The decrease in 1997 was partially offset by an
increase in the Centennial preferred dividend.

Other income decreased $13.0 million, or 74%, in 1997 primarily due to a second
quarter charge of approximately $4.5 million related to an Arizona public
utility commission order disallowing recovery of certain amounts of the equity
component of the AFUDC, as well as 1996 gains totaling $4.5 million on the sale
of land in Illinois and the sale of assets in Arizona. Other income decreased in
1996 primarily due to disallowed rate case expenses in Hawaii.
<TABLE>
<CAPTION>


1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Interest expense $ 109,329 18% $ 92,695 6% $ 87,775
</TABLE>

Interest expense increased $16.6 million, or 18%, in 1997 primarily due to the
issuance of debentures in June and December, 1996 to fund acquisitions and
capital expenditures, as well as a second quarter charge of approximately $1.7
million related to an Arizona public utility commission order disallowing
recovery of certain amounts of the debt component of the AFUDC.
<TABLE>
<CAPTION>


1997 1996 1995
------------------------ --------------------- -------
Change from Change from
Amount Prior year Amount Prior year Amount
--------- ----------- --------- ----------- -------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Income taxes $ 7,157 (92%) $ 84,937 27% $ 66,817
</TABLE>

Income taxes decreased $77.8 million, or 92%, as compared with the prior year
primarily due to lower taxable income. The increase in income tax expense in
1996 was primarily due to an increase in taxable income and a 2% higher
effective tax rate.

29
<TABLE>
<CAPTION>


NET INCOME AND NET INCOME PER COMMON SHARE

1997
---------------------------------------------------------
Citizens
Communications As
and Public Services CLEC Special items* reported 1996 1995
------------------- ----- ---------------- -------- ----- ------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Net income $ 116,586 $ (22,499) $ (83,987) $ 10,100 $178,660 $159,536
Net income per common share $ .46 $ (.09) $ (.33) $ .04 $ .70 $ .66

</TABLE>
*represents after tax charges of $135.2 million recorded in the second
quarter of 1997 and an after tax non operating gain on the sale of
subsidiary stock of $51.2 million recorded in the fourth quarter of 1997.

Net income and earnings per share decreased in 1997 primarily due to
approximately $197.3 million of pre-tax charges ($135.2 million net of tax)
recorded in the second quarter of 1997. This was partially offset by a fourth
quarter pre-tax non operating gain on the sale of common stock for Electric
Lightwave, Inc. of approximately $78.7 million ($51.2 million net of tax).
Absent these two special items, the net income decrease totals $84.6 million, or
47%, in 1997 primarily due to operating losses from the Company's CLEC
subsidiary and increased network, sales and marketing and other operating
expenses related to the Company's communications operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
-------------------------------------------------------------

The Company is exposed to market risks and has established policies, procedures
and internal processes governing its management of market risks and the use of
financial instruments to manage its exposure to such risks. Sensitivity of
earnings to these risks are managed by maintaining a conservative investment
portfolio, primarily including state and municipal and other fixed income
securities, and entering into long term debt obligations with appropriate price
and term characteristics. The Company does not hold or issue derivative or other
financial instruments for trading purposes. The Company purchases monthly gas
future contracts to manage well defined commodity price fluctuations, caused by
weather and other unpredictable factors, associated with the Company's
commitments to deliver natural gas to certain industrial customers at fixed
prices. This derivative financial instrument activity is not material to the
Company's consolidated financial position, results of operations or cash flows.

Item 8. Financial Statements and Supplementary Data
-------------------------------------------

The following documents are filed as part of this Report:

1. Financial Statements:
See Index on page F-1.

2. Supplementary Data:
Quarterly Financial Data is included in the Financial
Statements (see 1. above).

Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------

None

30
PART III
--------

The Company intends to file with the Commission a definitive proxy statement for
the 1998 Annual Meeting of Stockholders pursuant to Regulation 14A not later
than 120 days after December 31, 1997. The information called for by this Part
III is incorporated by reference to that proxy statement.

PART IV
-------

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------

(a) The exhibits listed below are filed as part of this Report:

Exhibit
No. Description
- - ------- -------------

3.200.1 Restated Certificate of Incorporation of Citizens Utilities
Company, with all amendments to June 6, 1996
3.200.2 By-laws of the Company, as amended to-date of Citizens Utilities
Company, with all amendments to January 20, 1998
4.100.1 Indenture of Securities, dated as of August 15, 1991, to Chemical
Bank, as Trustee 4.100.2 First Supplemental Indenture, dated
August 15, 1991
4.100.3 Letter of Representations, dated August 20, 1991, from
Citizens Utilities Company and Chemical Bank, as Trustee, to
Depository Trust Company ("DTC") for deposit of securities
with DTC
4.100.4 Second Supplemental Indenture, dated January 15, 1992, to
Chemical Bank, as Trustee
4.100.5 Letter of Representations, dated January 29, 1992, from Citizens
Utilities Company and Chemical Bank, as Trustee, to DTC, for
deposit of securities with DTC
4.100.6 Third Supplemental Indenture, dated April 15, 1994, to Chemical
Bank, as Trustee
4.100.7 Fourth Supplemental Indenture, dated October 1, 1994, to
Chemical Bank, as Trustee
4.100.8 Fifth Supplemental Indenture, dated as of June 15, 1995, to
Chemical Bank , as Trustee
4.100.9 Sixth Supplemental Indenture, dated as of October 15, 1995, to
Chemical Bank, as Trustee
4.100.11 Seventh Supplemental Indenture, dated as of June 1, 1996
4.100.12 Eighth Supplemental Indenture, dated as of December 1, 1996
4.200.1 Indenture dated as of January 15, 1996, between Citizens
Utilities Company and Chemical Bank, as indenture trustee.
4.200.2 First Supplemental Indenture dated as of January 15, 1996,
between Citizens Utilities Company and Chemical Bank, as
indenture trustee.
4.200.3 5% Convertible Subordinated Debenture due 2036 (contained as
Exhibit A to Exhibit 4.200.2).
4.200.4 Amended and Restated Declaration of Trust dated as of January 15,
1996, of Citizens Utilities Trust.
4.200.5 Convertible Preferred Security Certificate (contained as
Exhibit A-1 to Exhibit 4.200.4)
4.200.6 Amended and Restated Limited Partnership Agreement dated as of
January 15, 1996 of Citizens Utilities Capital L.P.
4.200.7 Partnership Preferred Security Certificate (contained as
Annex A to Exhibit 4.200.6)
4.200.8 Convertible Preferred Securities Guarantee Agreement dated as
of January 15, 1996 between Citizens Utilities Company and
Chemical Bank, as guarantee trustee.
4.200.9 Partnership Preferred Securities Guarantee Agreement dated as
of January 15, 1996 between Citizens Utilities Company and
Chemical Bank, as guarantee trustee
4.200.10 Letter of Representations, dated January 18, 1996, from Citizens
Utilities Company and Chemical Bank, as trustee, to DTC, for
deposit of Convertible Preferred Securities with DTC
10.1 Incentive Deferred Compensation Plan, dated April 16, 1991
10.6 Deferred Compensation Plans for Directors, dated November 26,
1984 and December 10, 1984
10.6.1 Directors' Retirement Plan, effective January 1, 1989
10.6.2 Non-Employee Directors' Deferred Fee Equity Plan dated as of
June 28, 1994, with all amendments to May 5, 1997
10.16.1 Employment Agreement between Citizens Utilities Company and
Leonard Tow, effective July 11, 1996
10.17 1992 Employee Stock Purchase Plan, with all amendments to
May 5, 1997
10.18 Amendments dated May 21, 1993 and May 5, 1997, to the 1992
Employee Stock Purchase Plan
10.20 Asset Purchase Agreements, dated November 28, 1994
10.21 1996 Equity Incentive Plan and amendment dated May 5, 1997 to
1996 Equity Incentive Plan


31
Exhibit
No. Description
- - ------- -------------
12. Computation of ratio of earnings to fixed charges (this item is
included herein for the sole purpose of incorporation by
reference)
21. Subsidiaries of the Registrant
23. Auditors' Consent
24. Powers of Attorney
27. Financial Data Schedule

Exhibits 10.1, 10.6, 10.6.1, 10.6.2, 10.16.1, 10.17, 10.18 and
10.21 are management contract or compensatory plans or arrangements.

The Company agrees to furnish to the Commission upon request copies of the
Realty and Chattel Mortgage, dated as of March 1, 1965, made by Citizens
Utilities Rural Company, Inc., to the United States of America (the Rural
Utilities Services and Rural Telephone Bank) and the Mortgage Notes which that
mortgage secures; and the several subsequent supplemental Mortgages and Mortgage
Notes; copies of the instruments governing the long-term debt of Louisiana
General Services, Inc.; copies of separate loan agreements and indentures
governing various Industrial development revenue bonds; copies of documents
relating to indebtedness of subsidiaries acquired during 1996 and 1997, and
copies of the credit agreement between Electric Lightwave, Inc. and Citibank,
N.A. dated November 21, 1997.

Exhibit number 10.6 is incorporated by reference to the same
exhibit designation in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1984. Exhibit number 10.6.1 is incorporated by reference to
the same exhibit designation in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1989. Exhibit numbers 4.100.1, 4.100.2 and 4.100.3
are incorporated by reference to the same exhibit designation in the
Registrant's Quarterly Report on Form 10-Q for the nine months ended September
30, 1991. Exhibit numbers 4.100.4, 4.100.5 and 10.1 are incorporated by
reference to the same exhibit designation in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1991. Exhibit number 10.17 is
incorporated by reference to the same exhibit designation in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1992. Exhibit number
10.18 is incorporated by reference to the Registrant's Proxy Statement, dated
March 31, 1993 and the Registrant's proxy statement dated March 28, 1997.
Exhibit numbers 4.100.6 and 4.100.7 are incorporated by reference to the
Registrant's Form 8-K Current Reports filed on July 5, 1994 and January 3, 1995,
respectively. Exhibit number 4.100.11 and 4.100.12 are incorporated by reference
to the same exhibit designation in the Registrant's Form 10-K for the year ended
December 31, 1996. Exhibit number 10.20 is incorporated by reference to the same
exhibit designation in the Registrant's Form 10-K for the year ended December
31, 1994. Exhibit number 10.6.2 is incorporated by reference to the Registrant's
Proxy Statement, dated April 4, 1995 and the Registrant's proxy statement dated
March 28, 1997. Exhibits numbers 4.100.8 and 4.100.9 are incorporated by
reference to the Registrant's Form 8-K Current Reports filed March 29, 1996.
Exhibit number 3.200.1 is incorporated by reference to the same exhibit
designation in the Registrant's Form S-3 filed June 27, 1996. Exhibit number
10.21 is incorporated by reference to the Registrant's Proxy Statement dated
March 29, 1996 and the Registrant's proxy statement dated March 28, 1997.
Exhibits numbers 4.200.1, 4.200.2, 4.200.3, 4.200.4, 4.200.5, 4.200.6, 4.200.7,
4.200.8, 4.200.9 and 4.200.10 are incorporated by reference to the Registrant's
Form 8-K Current Report filed May 28, 1996. Exhibit number 10.16.1 is
incorporated by reference to the same exhibit designation in the Registrant's
Quarterly Report on Form 10-Q for the nine months ended September 30, 1996

(b) The Company filed on Form 8-K dated November 14, 1997, under Item 7 "
Financial Statements, Pro Forma Financial Information and Exhibits", the
Company's 1997 third quarter financial results and certain operating data.


32
SIGNATURES
----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

CITIZENS UTILITIES COMPANY
--------------------------
(Registrant)


By:/s/ Leonard Tow
-----------------
Leonard Tow
Chairman of the Board; Chief Executive Officer;
Member, Executive Committee and Director

March 11, 1998


33
Pursuant to the  requirements of the Securities  Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 11th day of March 1998.

Signature Title
--------- -----


/s/Robert J. DeSantis Chief Financial Officer,
- - ------------------------------- Vice President and Treasurer
(Robert J. DeSantis)

/s/Livingston E. Ross Vice President and Controller
- - -------------------------------
(Livingston E. Ross)

Norman I. Botwinik* Director
- - --------------------------------
(Norman I. Botwinik)

Aaron I. Fleischman* Member, Executive Committee and Director
- - --------------------------------
(Aaron I. Fleischman)

James C. Goodale* Director
- - --------------------------------
(James C. Goodale)

Stanley Harfenist* Member, Executive Committee and Director
- - --------------------------------
(Stanley Harfenist)

Andrew N. Heine* Director
- - --------------------------------
(Andrew N. Heine)

John L. Schroeder* Member, Executive Committee and Director
- - --------------------------------
(John L. Schroeder)

Robert D. Siff* Director
- - --------------------------------
(Robert D. Siff)

Robert A. Stanger* Director
- - --------------------------------
(Robert A. Stanger)

Edwin Tornberg* Director
- - --------------------------------
(Edwin Tornberg)

Claire L. Tow* Director
- - --------------------------------
(Claire L. Tow)

Charles H. Symington, Jr* Director
- - ------------------------------------
(Charles H. Symington, Jr.)


*By:/s/Robert J. DeSantis
----------------------------
(Robert J. DeSantis)
Attorney-in-Fact

34
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Index to Consolidated Financial Statements




Item Page
- - ---- ----
Independent Auditors' Report F-2

Consolidated balance sheets as of December 31, 1997, 1996 and 1995 F-3

Consolidated statements of income for the years ended
December 31, 1997, 1996 and 1995 F-4

Consolidated statements of shareholders' equity for the years ended
December 31, 1997, 1996 and 1995 F-5

Consolidated statements of cash flows for the years ended
December 31, 1997, 1996 and 1995 F-6

Notes to consolidated financial statements F-7


F-1
Independent Auditors' Report
----------------------------


The Board of Directors and Shareholders
Citizens Utilities Company:


We have audited the accompanying consolidated balance sheets of Citizens
Utilities Company and subsidiaries as of December 31, 1997, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Citizens Utilities
Company and subsidiaries as of December 31, 1997, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.



KPMG Peat Marwick LLP





New York, New York
March 11, 1998


F-2
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997, 1996 and 1995
($ in thousands)
<TABLE>
<CAPTION>

1997 1996 1995
---- ---- ----
Assets
Current assets:
<S> <C> <C> <C>
Cash $ 35,163 $ 24,230 $ 17,922
Accounts receivable:
Customers 239,226 198,138 164,798
Other 60,404 88,320 37,754
Less allowance for doubtful accounts 22,225 4,808 2,739
------------ ------------ ------------
Net accounts receivable 277,405 281,650 199,813

Materials and supplies 19,885 27,159 18,191
Other current assets 44,826 36,731 16,776
------------
------------ ------------
Total current assets 377,279 369,770 252,702
------------ ------------ ------------

Property, plant and equipment 5,297,737 4,582,869 4,187,354
Less accumulated depreciation 1,629,944 1,444,817 1,279,324
------------
------------ ------------
Net property, plant and equipment 3,667,793 3,138,052 2,908,030
------------ ------------ ------------

Investments 398,499 539,152 329,090
Regulatory assets 209,921 193,779 220,110
Deferred debits and other assets 219,360 282,395 208,255
----------- ------------ ------------
Total assets $ 4,872,852 $ 4,523,148 $ 3,918,187
============ ============ ============

Liabilities and Shareholders' Equity
Current liabilities:
Long-term debt due within one year $ 6,691 $ 3,593 $ 3,865
Short-term debt - - 140,650
Accounts payable 222,458 168,299 178,384
Income taxes accrued 45,064 90,317 72,494
Other taxes accrued 21,243 19,541 18,195
Interest accrued 25,413 24,522 22,527
Customers' deposits 22,095 21,400 20,501
Other current liabilities 74,906 81,817 47,062
------------ ------------ ------------
Total current liabilities 417,870 409,489 503,678

Deferred income taxes 420,708 347,975 314,094
Customer advances for construction 174,858 154,324 150,000
Deferred credits 128,984 115,291 101,300
Contributions in aid of construction 85,932 84,129 73,923
Regulatory liabilities 20,881 22,810 28,279
Long-term debt 1,706,532 1,509,697 1,187,000
Minority interest in subsidiary 36,626 - -
Company obligated mandatorily redeemable
convertible preferred securities * 201,250 201,250 -
Shareholders' equity 1,679,211 1,678,183 1,559,913
------------ ------------ ------------
Total liabilities and shareholders' equity $ 4,872,852 $ 4,523,148 $ 3,918,187
============ ============ ============

* Represents securities of a subsidiary trust, the sole assets of which are
securities of a subsidiary partnership, substantially all the assets of which
are convertible debentures of the Company.

The accompanying Notes are an integral part of these Consolidated Financial
Statements.

F-3
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
($ in thousands, except for per-share amounts)

1997 1996 1995
---- ---- ----

Revenues $ 1,393,619 $ 1,306,517 $ 1,069,032

Operating expenses:
Cost of services 344,683 285,749 209,179
Depreciation 235,812 193,733 158,935
Other operating expenses 797,282 531,349 446,745
----------- ------------ ------------

Total operating expenses 1,377,777 1,010,831 814,859
----------- ------------ ------------

Income from operations 15,842 295,686 254,173

Non operating gain on sale of subsidiary stock 78,734 - -
Investment income 33,739 48,972 41,667
Other income, net 4,481 17,483 18,288
Interest expense 109,329 92,695 87,775
----------- ------------ ------------

Income before income taxes 23,467 269,446 226,353

Income taxes 7,157 84,937 66,817
----------- ------------ ------------

Income before dividends on convertible preferred securities 16,310 184,509 159,536

Dividends on convertible preferred securities, net of income tax benefit 6,210 5,849 -
----------- ------------ ------------

Net income $ 10,100 $ 178,660 $ 159,536
=========== ============ ============

Net income per common share:
Basic $ .04 $ .70 $ .66
=========== ============ ============
Diluted $ .04 $ .70 $ .65
=========== ============ ============

</TABLE>











The accompanying Notes are an integral part of these Consolidated Financial
Statements.

F-4
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997,
1996 and 1995
($ in thousands, except for per-share amounts)

<TABLE>
<CAPTION>

Unrealized gain
Additional (loss) on
Common paid-in Retained available-for-
Stock($.25) capital earnings sale securities Total
------------- ------------- ------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995 $ 48,368 $ 861,981 $ 237,417 $ 9,130 $ 1,156,896
Acquisitions 222 (4,485) 374 (3,889)
Net income 159,536 159,536
Stock dividends in shares of Common
Stock Series A and Series B 3,398 158,693 (162,091) -
Common stock buybacks to fund stock
dividends (467) (21,561) (22,028)
Stock issuance 4,750 238,830 243,580
Stock plans 625 30,236 30,861
Change in unrealized gain (loss) on
securities classified as
available-for-
sale, net of income taxes (5,043) (5,043)
------------- ------------- ------------- ----------------- --------------
Balance December 31, 1995 $ 56,896 $ 1,263,694 $ 235,236 $ 4,087 $ 1,559,913
------------- ------------- ------------- ----------------- --------------
Acquisition 322 15,308 15,630
Net income 178,660 178,660
Stock dividends in shares of Common
Stock Series A and Series B 3,701 166,129 (169,830) -
Common stock buybacks to fund stock
dividends (1,639) (73,842) (75,481)
Stock plans 330 6,959 7,289
Stock issuances to fund EPPICS
dividends 178 7,621 7,799
EPPICS issuance cost (4,528) (4,528)
Change in unrealized gain (loss) on
securities classified as
available-for-
sale, net of income taxes (11,099) (11,099)
------------- ------------- ------------- ----------------- --------------
Balance December 31, 1996 $ 59,788 $ 1,381,341 $ 244,066 $ (7,012) $ 1,678,183
------------- ------------- ------------- ----------------- --------------
Acquisitions 604 2,736 8,318 11,658
Net income 10,100 10,100
Stock dividends in shares of Common
Stock 3,148 127,119 (130,267) -
Common stock buybacks to fund stock
dividends (1,226) (47,326) (48,552)
Stock plans 188 6,380 6,568
Stock issuances to fund EPPICS
dividends 247 10,175 10,422
Change in unrealized gain (loss) on
securities classified as
available-for-
sale, net of income taxes 10,832 10,832
------------- ------------- ------------- ----------------- -------------
Balance December 31, 1997 $ 62,749 $ 1,480,425 $ 132,217 $ 3,820 $ 1,679,211
============= ============= ============= ================= ==============


</TABLE>



The accompanying Notes are an integral part of these Consolidated Financial
Statements.

F-5
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
($ in thousands)
<TABLE>
<CAPTION>

1997 1996 1995
---- ---- ----

<S> <C> <C> <C>
Net cash provided by operating activities $ 230,432 $ 375,181 $ 338,611
------------ ------------ ------------

Cash flows used for investing activities:
Securities matured 16,205 43,608 120,691
Securities sold 578,494 87,447 92,224
Construction expenditures (530,744) (348,379) (245,241)
Securities purchased (434,030) (332,332) ( 86,058)
Business acquisitions (105,039) (87,683) (223,926)
Other 25,686 (47,802) 55
------------ ------------ ------------
(449,428) (685,141) (342,255)
------------ ------------ ------------

Cash flows from financing activities:
Long-term debt borrowings 159,769 351,053 321,280
Issuance of EPPICS - 196,722 -
Issuance of common stock 4,825 272,687
6,049
Issuance of subsidiary stock 118,554 - -
Short-term debt repayments - (140,650) (374,550)
Common stock buybacks to fund stock dividends (48,552) (75,481) (22,028)
Long-term debt principal payments (3,287) (20,243) (192,030)
Other (1,380) (1,182) 1 ,983
------------ ------------ ------------
229,929 316,268 7,342
------------
------------ ------------

Increase in cash 10,933 6,308 3,698
Cash at January 1, 24,230 17,922 14,224
------------ ------------ ------------
Cash at December 31, $ 35,163 $ 24,230 $ 17,922
============ ============ ============
</TABLE>





















The accompanying Notes are an integral part of these Consolidated Financial
Statements.

F-6
CITIZENS UTILITIES COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements

(1) Summary of Significant Accounting Policies:
------------------------------------------

(a) Description of Business:
-----------------------
The Company is a diversified communications and public services company
which provides, either directly or through subsidiaries,
telecommunications, electric transmission and distribution, natural gas
transmission and distribution, water distribution and wastewater
treatment services to customers in areas of 21 states. The Company is
not dependent upon any single geographic area or single customer for
its revenues. No single regulatory body regulated a service of the
Company that accounted for more than 19% of its 1997 revenues.

(b) Principles of Consolidation and Use of Estimates:
------------------------------------------------
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and include the accounts
of Citizens Utilities Company and all of its subsidiaries, after
elimination of intercompany balances and transactions. Certain
reclassifications of balances previously reported have been made to
conform to current presentation.

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

(c) Revenues:
--------
The Company records revenues from communications and public services
customers when services are provided. Certain communications revenues
are estimated under cost separation procedures that base revenues on
current operating costs and investments in facilities to provide
such services.

(d) Construction Costs and Maintenance Expense:
------------------------------------------
Property, plant and equipment are stated at original cost, including
general overhead and an allowance for funds used during construction
("AFUDC") for regulated businesses and capitalized interest for
unregulated businesses. Maintenance and repairs are charged to
operating expenses as incurred.

AFUDC represents the borrowing costs and a return on common equity of
funds used to finance construction of regulated assets. AFUDC is
capitalized as a component of additions to property, plant and
equipment and is credited to income. AFUDC does not represent current
cash earnings; however, under established regulatory rate-making
practices, after the related plant is placed in service, the Company is
permitted to include in the rates charged for utility services a fair
return on and depreciation of such AFUDC included in plant in service.
The amount of AFUDC relating to equity is included in other income, net
($6,881,000, $8,704,000 and $10,545,000 for 1997, 1996 and 1995,
respectively) and the amount relating to borrowings is included as a
reduction of interest expense ($2,978,000, $3,385,000 and $4,101,000
for 1997, 1996 and 1995, respectively). The 1997 income statement also
reflects a writeoff ($4,486,000 relating to equity and $1,744,000
relating to borrowings) pursuant to certain regulatory commission
orders (see Note 10). The book value, net of salvage, of routine
property, plant and equipment dispositions is charged against
accumulated depreciation for regulated operations.

Capitalized interest for unregulated construction activities credited
to interest expense amounted to $4,693,000, $3,109,000 and $330,000 in
1997, 1996 and 1995, respectively.

(e) Depreciation Expense:
--------------------
Depreciation expense, calculated using the straight-line method, is
based upon the estimated service lives of various classifications of
property, plant and equipment and represents approximately 5%, 5% and
4% for 1997, 1996 and 1995, respectively, of the gross depreciable
property, plant and equipment.

(f) Regulatory Assets and Liabilities:
---------------------------------
The Company's regulated operations are subject to the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 71;
"Accounting for the Effects of Certain Types of Regulation". SFAS 71
requires regulated entities to record regulatory assets and liabilities
as a result of actions of regulators.

F-7
The Company continuously monitors the applicability of  SFAS 71 to its
regulated operations. SFAS 71 may, at some future date, be deemed
inapplicable due to changes in the regulatory and competitive
environments and/or a decision by the Company to accelerate deployment
of new technology. If the Company were to discontinue the application
of SFAS 71 to one or more of its regulated operations, the Company
would be required to write off its regulatory assets and regulatory
liabilities and would be required to adjust the carrying amount of any
other assets, including property, plant and equipment, that would be
deemed not recoverable related to those operations. In addition, there
could be potential stranded costs associated with certain long term
fixed price contracts which may not be recoverable. The Company
believes its regulated operations continue to meet the criteria for
SFAS 71 and that the carrying value of its regulated property, plant
and equipment is recoverable in accordance with established rate-making
practices.

(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
--------------------------------------------------------------------
Of:
---
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," on January 1, 1996. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances, including the
actions of regulators, indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value.

(h) Accounting for Investments and Short-term Debt:
----------------------------------------------
Investments include high credit quality, short- and intermediate-term
fixed-income securities (primarily state and municipal debt
obligations) and equity securities. The Company classifies its
investments at purchase as available-for-sale or held-to-maturity
in accordance with SFAS 115, "Accounting for Certain Investments in
Debt and Equity Securities". The Company does not maintain a
trading portfolio.

Securities classified as available-for-sale are carried at estimated
fair market value. These securities are held for an indefinite period
of time, but might be sold in the future as changes in market
conditions or economic factors occur. Net aggregate unrealized gains
and losses related to such securities, net of taxes, are included as a
separate component of shareholder's equity. Securities classified as
held-to-maturity are carried at amortized cost, adjusted for
amortization of premiums/discounts and accretion over the period to
maturity and are those which the Company has the ability and intent to
hold to maturity. Interest, dividends and gains and losses realized on
sales of securities are reported in Investment income.

Short-term debt outstanding in 1995 was issued in the form of
commercial paper notes payable to temporarily and partially fund
certain communications acquisitions. This short-term debt was repaid
with the maturity proceeds of Company investments and with proceeds
from the issuance of Equity Providing Preferred Income Convertible
Securities ("EPPICS," see Note 7).

(i) Investment in Centennial Cellular Corp.:
---------------------------------------
In August 1991, the Company recorded its initial investment in 102,187
shares of Centennial Cellular Corp. ("Centennial") Convertible
Redeemable Preferred Stock (the "Preferred Security") at $49,842,000
and 1,367,099 shares of Centennial Class B Common Stock at $19,826,000,
which in the aggregate represented the historical cost of the Company's
investment in its subsidiary, Citizens Cellular Company, prior to its
merger with Centennial. During 1994, the Company purchased 615,195
additional shares of Centennial Class B Common Stock for $8,613,000
pursuant to a Centennial rights offering.

The terms of the Preferred Security provide that the Preferred Security
may be converted by the holder into Centennial common stock and that it
accreted a liquidation value preference through August 31, 1996 at a
fixed annual dividend rate of 7.5%, compounded quarterly, until the
Preferred Security reached a liquidation value preference of
$186,287,000 on August 31, 1996.

F-8
The Company recognized the non-cash accretion on the Preferred Security
as it was earned in each period through August 31, 1996 as investment
income and increased the book value of its investment in Centennial by
the same amount. The liquidation value preference earned on the
Preferred Security for 1996 and 1995 were $9,043,000 and $14,353,000,
respectively. From inception through August 31, 1996, $57,837,000 of
such accretion was accounted for in this manner. The Preferred Security
is mandatorily redeemable on August 30, 2006.

Commencing September 1, 1996, Centennial has the option to either (a)
declare and pay or accumulate an 8.5% annual dividend on the Preferred
Security's $186,287,000 liquidation value or (b) redeem the Preferred
Security for $186,287,000 in cash or in Centennial common stock. The
Company recorded and received $15,835,000 and $5,278,000 as dividend
income from Centennial related to 1997 and 1996, respectively.

On a quarterly basis, the Company assesses whether the book value of
the Preferred Security can be realized by comparing such book value to
the market value of Centennial's common equity and by evaluating other
relevant indicators of realizability including Centennial's ability to
redeem the Preferred Security. The carrying value of the Preferred
Security would be deemed impaired to the extent that such carrying
value exceeds the estimated realizability of the Preferred Security
based on all existing facts and circumstances including the Company's
assessment of its ability to realize the carrying value of the
Preferred Security through mandatory redemption. The Company believes
it can realize its investment in Centennial either by cash redemption
by the issuer funded through refinancing by the issuer, by temporary
conversion to common equity securities followed by the sale of the
common equity securities, or by sale of its current investment
holdings.

(j) Income Taxes, Deferred Income Taxes and Investment Tax Credits:
---------------------------------------------------------------
The Company and its subsidiaries are included in a consolidated federal
income tax return. The Company utilizes the asset and liability method
of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recorded for the tax effect of temporary
differences between the financial statement and the tax bases of assets
and liabilities using tax rates expected to be in effect when the
temporary differences are expected to turn around. Regulatory assets
and liabilities (see Note 1(f)) include income tax benefits previously
flowed through to customers and from the allowance for funds used
during construction, the effects of tax law changes and the tax benefit
associated with unamortized deferred investment tax credits. These
regulatory assets and liabilities represent the probable net increase
in revenues that will be reflected through future ratemaking
proceedings. The investment tax credits relating to utility properties,
as defined by applicable regulatory authorities, have been deferred and
are being amortized to income over the lives of the related properties.

(k) Employee Stock Plans:
---------------------
Prior to January 1, 1996, the Company accounted for its employee stock
option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. As such, compensation expense
is recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. On January 1, 1996,
the Company adopted SFAS 123, "Accounting for Stock-Based
Compensation," which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net
income and pro forma earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value based
method defined in SFAS 123 had been applied. The Company elected to
continue to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS 123 (see Note 9).

(l) Non Operating Gain on Sale of Subsidiary Stock:
----------------------------------------------
On November 24, 1997, ELI completed an initial public offering ("IPO")
of 8,000,000 shares of its Class A Common Stock at a price of $16 per
share. The Company's policy is to account for sales of subsidiary stock
as income statement transactions and as a result the Company recorded a
pre-tax non operating gain of approximately $78,700,000 resulting from
this transaction and continues to consolidate ELI. The Company retained
97.97% of the voting interest and 82.83% of the economic ownership in
ELI.

F-9
(m) Earnings Per Share:
------------------
The Company adopted the provisions of SFAS No. 128, "Earnings Per
Share" on December 31, 1997. SFAS 128 establishes standards for
computing and presenting earnings per share ("EPS") and supersedes APB
Opinion No. 15, "Earnings Per Share". It also requires presentation of
both basic and diluted EPS for net income on the face of the income
statement and a separate reconciliation of both EPS amounts (see Note
13). Basic EPS is computed using the weighted average number of common
shares outstanding during the period being reported on. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock at the beginning of the period being reported on. Both Basic and
Diluted EPS calculations are presented with adjustments for subsequent
stock dividends. No adjustment has been made for the .75% first quarter
1998 stock dividend declared on February 19, 1998, as its effect is
immaterial. All periods presented have been restated pursuant to SFAS
128.

(2) Property, Plant and Equipment:
-----------------------------

The components of property, plant and equipment at December 31, 1997, 1996
and 1995 are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
($ in thousands)
<S> <C> <C> <C>
Transmission and distribution facilities $ 3,205,529 $ 2,923,630 $ 2,641,594
Production and generating facilities 1,103,720 960,422 868,119
Administrative facilities 429,254 368,178 337,196
Construction work in progress 411,708 187,692 212,892
Pumping, storage and purification facilities 132,404 122,340 107,653
Other 15,122 20,607 19,900
------------- ------------- ------------
$ 5,297,737 $ 4,582,869 $ 4,187,354
============= ============= ============
</TABLE>

(3) Mergers and Acquisitions:
------------------------

In December 1997, the Company acquired Ogden Telephone Company ("Ogden") in
a stock for stock transaction. The Company issued 2,308,262 shares of
Common Stock to effect the merger. Ogden was an independent telephone
operating company providing services to residential and commercial
customers in Monroe County, New York. This transaction was accounted for
using the pooling of interests method of accounting. Prior year financial
statements were not restated as the amounts were not significant.

In October 1997, the Company purchased the St. John The Baptist Parish Gas
System in Louisiana, for approximately $2,100,000. This system serves 2,200
customers. This transaction was accounted for using the purchase method of
accounting and the results of operations of St. John The Baptist Parish Gas
System have been included in the accompanying financial statements from the
date of acquisition.

In October 1997, the Company purchased all of the outstanding stock of
Gasco, Inc., now known as The Gas Company ("TGC") for approximately
$100,000,000 in cash from BHP Hawaii. TGC is a gas distribution company
serving approximately 66,700 customers throughout Hawaii. This transaction
was accounted for using the purchase method of accounting and the results
of operations of TGC have been included in the accompanying financial
statements from the date of acquisition. The following pro forma financial
information presents the combined results of operations of the Company and
TGC as if the acquisition had occurred on January 1 of the year preceding
the date of acquisition. The effects of the other acquisition described
above would not significantly impact the pro forma results. The pro forma
financial information does not necessarily reflect the results of
operations that would have occurred had the Company and TGC constituted a
single entity during such periods.
<TABLE>
<CAPTION>
1997             1996
------------- --------------
($ in thousands, except for per share
amounts)
<S> <C> <C>
Revenues $ 1,470,000 $ 1,396,000
Net income $ 14,000 $ 184,000

Basic earnings per common share $ .06 $ .72
Diluted earnings per common share $ .06 $ .72

F-10
</TABLE>

In December 1996, the Company acquired Conference-Call USA, Inc.
("Conference-Call") in a stock for stock transaction. Conference-Call
provides nationwide conference calling services and its subsidiary, Dial,
Inc. ("Dial"), provides international dial-back services. The Company
issued 1,289,133 shares of common stock in exchange for all of the common
and preferred stock of Conference-Call. If Conference-Call and/or Dial
achieves specified financial results in future periods, the Company may be
required to issue up to 1,443,299 additional shares of common stock. In
February 1997, 113,785 additional shares were issued as part of this
provision. This transaction was accounted for using the purchase method of
accounting and the results of operations of Conference-Call have been
included in the accompanying financial statements from the date of
acquisition.

During 1995 and early 1996, the Company acquired from ALLTEL ("ALLTEL")
Corporation certain telecommunications properties in eight states serving
approximately 110,000 local telephone access lines and certain cable
television systems serving approximately 7,000 subscribers ("ALLTEL
telecommunications properties"). The purchase price of the ALLTEL
telecommunications properties (net of 3,600 of the Company's telephone
access lines which were valued at $10,000,000 and transferred to ALLTEL in
a tax free exchange) was $282,000,000. These transactions were accounted
for using the purchase method of accounting and the results of operations
of the ALLTEL telecommunications properties have been included in the
accompanying financial statements from their respective dates of
acquisition.

In July 1995, the Company acquired Flex Communications ("Flex") in a stock
for stock transaction. Flex was a switch-based, inter-exchange carrier
providing long distance, 800 Inbound long-distance, voice mail, paging,
private data networks and cellular services to approximately 5,500
customers in upstate New York. The Company issued 855,953 shares of Common
Stock for all of the outstanding shares of Flex. This transaction was
accounted for using the pooling of interests method of accounting. Prior
year financial statements were not restated as the amounts were not
significant.

In March 1995, the Company acquired Douglassville Water Company
("Douglassville") for $173,000 and 31,928 shares of Common Stock.
Douglassville provided water utility services in Pennsylvania to
approximately 870 customers. This transaction was accounted for using the
purchase method of accounting and the results of operations of
Douglassville have been included in the accompanying financial statements
from the date of acquisition.

In February 1995, the Company acquired from the town of Youngtown, Arizona,
for $1,192,000, the town's water and wastewater systems which served
approximately 3,400 customers. This acquisition was accounted for using the
purchase method of accounting and the results of operations of Youngtown
have been included in the accompanying financial statements from the date
of acquisition.

The effect of the aforementioned acquisitions would not significantly
impact the pro forma results presented above.

A subsidiary of the Company, in a joint venture with a subsidiary of
Century Communications Corp. ("Century"), acquired and operates three cable
television systems in southern California serving 69,500 basic subscribers
and has entered an agreement to acquire another 18,000 subscribers in
southern California. Century is a cable television company of which
Leonard Tow, the Chairman and Chief Executive Officer of the Company, is
Chairman and Chief Executive Officer. In addition, Claire Tow, a director
of the Company, is a Senior Vice President and a director of Century. A
management board on which the Company and Century are equally represented
governs the joint venture. A subsidiary of Century (the "Manager")
manages the day-to-day operations of the systems. The Manager does
not receive a management fee but is reimbursed only for the actual
costs it incurs on behalf of the joint venture. The Manager is
obligated to pass through to the joint venture any discount, up to 5%,
off the published prices of services or assets purchased for the
joint venture for use in the systems. The Manager is entitled to retain
any discount in excess of 5%. The Company accounts for the joint venture
following the equity method of accounting. Certain of the joint venture
properties are under consideration to be included in a strategic
partnership with TCIC, a cable operator in California. The
partnership would include combined TCIC, Century and Citizens/Century joint
venture properties in southern California serving approximately 745,000
customers. The Company would retain a percentage share ownership in the
partnership if the combination occurs.



F-11
(4) Investments:
-----------
<TABLE>
<CAPTION>

The components of investments at December 31, 1997, 1996 and 1995 are
as follows:


1997 1996 1995
---------- ------------ ------------
($ in thousands)
<S> <C> <C> <C>
State and municipal securities $ 212,743 $ 370,783 $ 172,518
Centennial Preferred Security 107,679 107,679 98,636
Marketable equity securities 75,855 58,351 57,528
Other fixed income securities 2,222 2,339 408
----------- --------- ---------
Total $ 398,499 $ 539,152 $ 329,090
=========== ========== ==========
</TABLE>

Marketable equity securities for 1997, 1996 and 1995 include the Company's
investments in Hungarian Telephone and Cable Corp. ("HTCC"), Centennial
Class B Common Stock (see Note 1 (i)) and Century Class A Common Stock. The
investment in the shares of Century Class A Common Stock represents
approximately 2% of the total outstanding common stock of Century. The
Chairman and Chief Executive Officer of the Company is also Chairman and
Chief Executive Officer of Century. There were no sales of marketable
equity securities in 1997 or 1996. Net realized gains on marketable equity
securities included in the determination of net income for 1995 were
$13,904,000. The cost of marketable equity securities sold during 1995 was
$9,863,000 based on the actual cost of the shares of each security held at
the time of sale. The Company recognized $22,138,000 in investment income
in 1996 for guarantees and financial support provided by the Company to
HTCC.

The following summarizes the amortized cost, gross unrealized holding gains
and losses and fair market value for investments.
<TABLE>
<CAPTION>

Unrealized Holding Aggregate Fair
Investment Classification Amortized Cost Gains (Losses) Market Value
- - ------------------------- --------------- ------- --------- --------------
($ in thousands)
As of December 31, 1997
- - -----------------------
<S> <C> <C> <C> <C>
Held-To-Maturity $ 107,679 $ 78,608 $ - $ 186,287
Available-For-Sale 284,630 19,673 (13,483) 290,820

As of December 31, 1996
- - -----------------------
Held-To-Maturity $ 107,679 $ 78,608 $ - $ 186,287
Available-For-Sale 442,834 2,903 (14,264) 431,473

As of December 31, 1995
- - -----------------------
Held-To-Maturity $ 244,982 $ 79,808 $ (59) $ 324,731
Available-For-Sale 77,485 8,422 (1,799) 84,108

</TABLE>

The amortized cost of held-to-maturity securities plus the aggregate fair
market value of available-for-sale securities for each year presented above
equals the total of investments presented in the foregoing investments
table. As of December 31, 1997 all investments except the Centennial
Preferred Security have been classified as available-for-sale.

The Company sold $68,458,000 of securities classified as held-to-maturity
during 1995 for the purpose of financing a portion of the acquisition of
the GTE Corporation ("GTE") and ALLTEL telecommunications properties; gross
realized gains on such sales for 1995 were $474,000 and gross realized
losses were $8,000.

F-12
(5)  Fair Value of Financial Instruments:
-----------------------------------

The following table summarizes the carrying amounts and estimated fair
values for certain of the Company's financial instruments at December 31,
1997, 1996 and 1995. For the other financial instruments, representing cash
and cash equivalents, accounts and notes receivables, short-term debt,
accounts payable and other accrued liabilities, the carrying amounts
approximate fair value due to the relatively short maturities of those
instruments.

<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------------- -------------------------
Carrying Carrying Carrying
Amount Fair Value Amount Fair Value Amount Fair Value
-------- ---------- ----------- ----------- ---------- ----------
($ in thousands)

<S> <C> <C> <C> <C> <C> <C>
Investments $ 398,499 $ 477,107 $ 539,152 $ 617,760 $ 329,090 $ 408,839
Long-term debt 1,706,532 1,786,622 1,509,697 1,532,251 1,187,000 1,263,000
EPPICS 201,250 192,194 201,250 192,194 - -
</TABLE>

The fair value of the above financial instruments, except for the
investment in the Centennial Preferred Security and certain options on
marketable equity securities, are based on quoted prices at the reporting
date for those financial instruments. The fair value of the Centennial
Preferred Security is estimated to be its accreted value at the respective
reporting dates (see Note 1(i)) while the fair value of certain options on
marketable equity securities is based on the Black-Scholes option pricing
model.

(6) Long-term Debt:
--------------
<TABLE>
<CAPTION>

Weighted average
interest rate at December 31,
December 31, 1997 Maturities 1997 1996 1995
----------------- ----------- ----------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Debentures 7.34% 2001 - 2046 $ 1,000,000 $ 1,000,000 $ 700,000
Industrial development revenue bonds 5.04% 2015 - 2032 439,277 391,789 374,089
Rural Utilities Service Loan Contracts 5.93% 2000 - 2027 87,053 77,909 71,609
Commercial paper notes payable 5.94% - 68,000 - 16,100
ELI bank credit facility 6.05% 2002 60,000 - -
Senior unsecured notes 8.05% 2012 36,000 36,000 23,000
Other long-term debt 6.27% 1998 - 2027 16,202 3,999 2,202
------------ ------------ -------------
Total long-term debt $ 1,706,532 $ 1,509,697 $ 1,187,000

============ ============ =============

</TABLE>
The total principal amounts of industrial development revenue bonds at
December 31, 1997, 1996 and 1995 were $480,195,000, $422,780,000 and
$406,080,000, respectively. Industrial development revenue bond funds
issued are held by a trustee until used for payment of qualifying
construction. The amounts presented in the table above represent funds that
have been used for construction through December 31, 1997, 1996 and 1995,
respectively.

On December 31, 1997, certain commercial paper notes payable were
classified as long-term debt because the obligations are expected to be
refinanced with long-term debt securities. On December 31, 1995, certain
commercial paper notes payable were classified as long-term debt because
the obligations were refinanced with long-term debt securities.

The Company has available lines of credit with commercial banks in the
amounts of $400,000,000 and $200,000,000, which expire on December 9, 1998
and December 16, 2003, respectively, and have associated facility fees of
one-thirty third of one percent (0.03%) per annum and one-twentieth of one
percent (0.05%) per annum, respectively. The terms of the lines of credit
provide the Company with extension options. Electric Lightwave, Inc.
("ELI"), a subsidiary of the Company, arranged for a $400,000,000 revolving
credit facility which is guaranteed by the Company and expires November 21,
2002. The credit facility has an associated facility fee of one-twentieth
of one percent (0.05%) per annum.

F-13
The  installment  principal  payments and maturities of long-term debt for
the next five years are as follows:

<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
($ in thousands)
<S> <C> <C> <C> <C> <C>
Installment principal payments $ 5,182 $ 5,370 $ 4,817 $ 4,438 $ 4,611
Maturities 1,509 - 274 50,000 60,000
-------- -------- -------- -------- --------
$ 6,691 $ 5,370 $ 5,091 $ 54,438 $ 64,611
======== ======== ======== ======== ========
</TABLE>

Holders of certain industrial development revenue bonds may tender at par
prior to maturity. The next tender date is April 1, 2001 for $14,400,000 of
principal amount of bonds. The Company expects to remarket all such bonds
which are tendered. In the years 1997, 1996 and 1995, respectively,
interest payments on short-term and long-term debt were $112,127,000,
$93,274,000 and $78,659,000.

(7) Company Obligated Mandatorily Redeemable Convertible Preferred Securities:
-------------------------------------------------------------------------

During the first quarter of 1996 a consolidated wholly-owned subsidiary of
the Company, Citizens Utilities Trust (the "Trust"), issued, in an
underwritten public offering, 4,025,000 shares of 5% Company Obligated
Mandatorily Redeemable Convertible Preferred Securities due 2036 ("Trust
Convertible Preferred Securities" or "EPPICS"), representing preferred
undivided interests in the assets of the Trust, with a liquidation
preference of $50 per security (for a total liquidation amount of
$201,250,000). The proceeds from the issuance of the Trust Convertible
Preferred Securities and a Company capital contribution were used to
purchase $207,475,000 aggregate liquidation amount of 5% Partnership
Convertible Preferred Securities due 2036 from another wholly owned
consolidated subsidiary, Citizens Utilities Capital L.P. (the
"Partnership"). The proceeds from the issuance of the Partnership
Convertible Preferred Securities and a Company capital contribution were
used to purchase from the Company $211,756,050 aggregate principal amount
of 5% Convertible Subordinated Debentures Due 2036. The sole assets of the
Trust are the Partnership Convertible Preferred Securities, and the
Company's Convertible Subordinated Debentures are substantially all the
assets of the Partnership. The Company's obligations under the agreements
related to the issuances of such securities, taken together, constitute a
full and unconditional guarantee by the Company of the Trust's obligations
relating to the Trust Convertible Preferred Securities and the
Partnership's obligations relating to the Partnership Convertible Preferred
Securities. The $196,722,000 of net proceeds from the issuances was used to
permanently fund a portion of the acquisition of telecommunications
properties.

In accordance with the terms of the issuances, the Company paid the 5%
interest on the Convertible Subordinated Debentures in Citizens' Common
Stock. During 1997, 986,579 shares of Common Stock were issued to the
Partnership in payment of interest of which 952,007 shares were sold by the
Partnership to satisfy cash dividend payment elections by the holders of
the EPPICS. The sales proceeds and the remaining 34,572 shares of Common
Stock were distributed by the Partnership to the Trust. During 1996,
709,748 shares of Common Stock Series A were issued to the Partnership in
payment of interest of which 654,119 shares were sold by the Partnership to
satisfy cash dividend payment elections by the holders of the EPPICS. The
sales proceeds and the remaining 55,629 shares of Common Stock Series A
were distributed by the Partnership to the Trust. The Trust distributed the
cash and shares as dividends to the holders of the EPPICS in both 1997 and
1996.

(8) Capital Stock:
-------------

The common stock of the Company had consisted of two series, Series A and
Series B. On August 25, 1997, the Board voted to convert the shares of
Series A Common Stock into Series B Common Stock at a ratio of one share of
Series B Common Stock for each share of Series A Common Stock. The results
of this conversion was one class of stock. The consolidated financial
statements give retroactive effect to the aforementioned conversion. The
Company is authorized to issue up to 600,000,000 shares of Common Stock
Series B. Quarterly stock dividends are declared and issued on Series B
Common Stock and shareholders have the option of enrolling in the "Series B
Common Stock Dividend Sale Plan." The Plan offers shareholders the
opportunity to have their stock dividends sold by the Plan Broker and the
net cash proceeds of the sale distributed to them quarterly.

The amount and timing of dividends payable on Common Stock are within the
sole discretion of the Company's Board of Directors. The Board of Directors
reviews alternative stock dividend cash equivalents and associated stock
dividend rates each quarter in order to determine and declare a prudent
stock dividend rate in light of the Company's actual and forecasted
financial position and results of operations, as well as dividend yields
of comparable communications and public services companies.
F-14
Quarterly and annual stock  dividend  rates  declared and annual stock  dividend
cash equivalents (adjusted for all stock dividends paid subsequent to all
dividends declared through December 31, 1997, and rounded to the nearest 1/16)
considered by the Board have been as follows:
<TABLE>
<CAPTION>
Dividend Rates
-------------------------------------------
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
First quarter 1.6 % 1.6 % 1.5 %
Second quarter 1.6 % 1.6 % 1.5 %
Third quarter 1.0 % 1.6 % 1.6 %
Fourth quarter 1.0 % 1.6 % 1.6 %
----- ----- -----
Total 5.2 % 6.4 % 6.2 %
===== ===== =====
Compounded Total 5.30% 6.56% 6.35%
===== ===== =====

Cash Equivalent 52 13/16 cent 68 1/8 cent 64 3/8 cent


</TABLE>
The Board of Directors declared a first quarter 1998 stock dividend at the
rate of .75% with consideration of a 71/16 cent stock dividend cash
equivalent. The lower third and fourth quarter 1997 and first quarter
1998 stock dividend cash equivalents and stock dividend rates reflect
the Board of Directors decision to declare dividends more reflective of
the Company's financial performance and with consideration of the impact
on retained earnings of the Company's second quarter 1997 charges to
earnings and the dividend yields of comparable communications and public
services companies.

On January 30, 1995, the Company, pursuant to an underwritten public
offering, issued 19,000,000 shares of its Common Stock Series A at an
issuance price of $133/8 per share (not adjusted for subsequent stock
dividends). The $244,200,000 of net proceeds from the issuance was used to
permanently fund a portion of the acquisition of telecommunications
properties.

In May 1997, 1996 and 1995, the Board of Director's authorized the buyback
of up to $75,000,000, $75,000,000 and $50,000,000, respectively, of Common
Stock solely for purposes of funding the Company's stock dividend policy.
The Company purchased 4,904,000 shares at a cost of $48,552,000 in 1997,
6,554,000 shares at a cost of $75,481,000 in 1996 and 1,865,000 shares at a
cost of $22,028,000 in 1995. All purchased shares have been used to pay
stock dividends.

The activity in shares of outstanding common stock during 1997, 1996 and
1995 is summarized as follows:

<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
Balance at January 1, 1995 193,472,000
Acquisitions 888,000
Common stock issuance 19,000,000
Common stock dividends 13,597,000
Common stock buybacks to fund stock dividends (1,865,000)
Stock plans 2,495,000
---------------
Balance at December 31,1995 227,587,000
Acquisition 1,289,000
Common stock dividends 14,803,000
Common stock issued to fund EPPICS dividends 710,000
Common stock buybacks to fund stock dividends (6,554,000)
Stock plans 1,313,000
---------------
Balance at December 31, 1996 239,148,000
Acquisitions 2,417,000
Common stock dividends 12,591,000
Common stock issued to fund EPPICS dividends 986,000
Common stock buybacks to fund stock dividends (4,904,000)
Stock plans 756,000
---------------
Balance at December 31, 1997 250,994,000
==============

The Company has 50,000,000 authorized but unissued shares of preferred
stock ($.01 par).
</TABLE>
F-15
(9) Stock Plans:
-----------

At December 31, 1997, the Company had four stock based compensation
plans and ELI had one stock based plan which are described below. The
Company applies APB Opinion No. 25 and related interpretations in
accounting for the employee stock plans. Accordingly, no compensation
cost has been recognized in the financial statements for options issued
pursuant to the Management Equity Incentive Plan ("MEIP"), Equity
Incentive Plan ("EIP"), Employee Stock Purchase Plan ("ESPP") or ELI
Equity Incentive Plan ("ELI EIP"). Compensation cost recognized for the
Directors' Deferred Fee Equity Plan was $352,017 in 1997, $161,231 in
1996, and $71,293 in 1995. Had the Company determined compensation cost
based on the fair value at the grant date for its MEIP, EIP, ESPP and
ELI EIP under SFAS 123, the Company's pro forma Net income and Net
income per share would have been as follows:
<TABLE>
<CAPTION>

1997 1996 1995
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Net Income As reported $10,100 $178,660 $159,536
Pro forma 7,374 176,662 159,022

Net Income per share As reported:
Basic $.04 $.70 $.66
Diluted .04 .70 .65
Pro forma:
Basic $.03 $.70 $.65
Diluted .03 .69 .65
</TABLE>

Pro forma net income reflects only the vested portion of options
granted in 1997, 1996 and 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS 123 is not
reflected in the pro forma amounts above because pro forma compensation
cost only includes costs associated with the vested portion of options
granted pursuant to the MEIP, EIP, ESPP and ELI EIP on or after January
1, 1995.

Management Equity Incentive Plan
---------------------------------
Under the MEIP, awards of the Company's Common Stock Series B may be
granted to eligible officers, management employees and non-management
exempt employees of the Company and its subsidiaries in the form of
incentive stock options, non-qualified stock options, stock
appreciation rights ("SARs"), restricted stock or other stock-based
awards. The MEIP is administered by the Compensation Committee of the
Board of Directors.

The maximum number of shares of common stock which may be issued
pursuant to awards at any time is 5% (12,550,000 as of December 31,
1997) of the Company's common stock outstanding . No awards will be
granted more than 10 years after the effective date (June 22, 1990) of
the MEIP. The exercise price of stock options and SARs shall be equal
to or greater than the fair market value of the underlying common stock
on the date of grant. Stock options are generally not exercisable on
the date of grant but vest over a period of time.

Under the terms of the MEIP, subsequent stock dividends and stock
splits have the effect of increasing the option shares outstanding,
which correspondingly decreases the average exercise price of
outstanding options.

F-16
The following  summary of shares  subject to option under the MEIP presents
option share activity adjusted for subsequent stock dividends.
<TABLE>
<CAPTION>

Shares Weighted
Subject to Average Option
Option Price Per Share
-------------- ---------------
<S> <C> <C>
Balance at January 1, 1995 8,771,000 $11.30
Options granted 110,000 9.86
Options exercised (291,000) 6.02
Options canceled or lapsed (121,000) 12.62
--------------
Balance at December 31, 1995 8,469,000 11.44
Options granted 2,993,000 10.86
Options exercised (381,000) 6.87
Options canceled or lapsed (587,000) 11.57
--------------
Balance at December 31, 1996 10,494,000 11.36
Options granted 1,593,000 8.79
Options exercised (103,000) 11.13
Options canceled or lapsed (613,000) 11.36
--------------
Balance at December 31, 1997 11,371,000 $11.05
==============
</TABLE>

The following table summarizes information about shares subject to options
under the MEIP at December 31, 1997.
<TABLE>
<CAPTION>

Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------------------ -----------------------------------
Weighted- Average
Number Range of Weighted-Average Remaining Number Weighted-Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
----------- --------------- ---------------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
13,000 $ 3 - 5 $ 4 7 13,000 $ 4
2,344,000 7 - 9 8 8 751,000 8
4,153,000 9 - 11 11 8 1,552,000 11
2,927,000 11 - 13 11 5 2,887,000 11
1,934,000 13 - 15 14 6 1,696,000 14
---------- ------------
11,371,000 $ 3 - 15 $ 11 7 6,899,000 $ 12
========== ============
</TABLE>

The weighted-average fair value of options granted during 1997, 1996, and
1995 were $4.23, $4.61 and $4.67, respectively. For purposes of the pro
forma calculation under SFAS 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions used for grants in 1997,
1996 and 1995:

1997 1996 1995
---- ---- ----
Dividend yield - - -
Expected volatility 32% 20% 20%
Risk-free interest rate 6.13% 5.63% 6.27%
Expected life 7 years 7 years 7 years

During 1996 and 1995, the Company granted restricted stock awards to key
employees in the form of the Company's Common Stock. The number of shares
issued as restricted stock awards during 1996 and 1995 were 550,007 and
10,352, respectively (adjusted for subsequent stock dividends). None of the
restricted stock awards may be sold, assigned, pledged or otherwise
transferred, voluntarily or involuntarily, by the employee until the
restrictions lapse. The restrictions lapse over six-month through
three-year periods. At December 31, 1997, 550,007 shares (adjusted for
subsequent stock dividends) of restricted stock were outstanding.

F-17
Equity Incentive Plan
---------------------
On May 23, 1996, the shareholders of the Company approved the EIP. Under
the EIP, awards of the Company's Common Stock may be granted to eligible
officers, management employees and non-management employees of the Company
and its subsidiaries in the form of incentive stock options, non-qualified
stock options, SARs, restricted stock or other stock-based awards. The EIP
is administered by the Compensation Committee of the Board of Directors.

The maximum number of shares of common stock which may be issued pursuant
to awards at any time is 11,300,000 shares, which may be adjusted for
subsequent stock dividends. No awards will be granted more than 10 years
after the effective date (May 23, 1996) of the EIP. The exercise price of
stock options and SARs shall be equal to or greater than the fair market
value of the underlying common stock on the date of grant. Stock options
are generally not exercisable on the date of grant but vest over a period
of time.

Under the terms of the EIP, subsequent stock dividends and stock splits
have the effect of increasing the option shares outstanding, which
correspondingly decrease the average exercise price of outstanding options.

The following summary of shares subject to option under the EIP presents
option share activity adjusted for subsequent stock dividends.
<TABLE>
<CAPTION>

Shares Weighted Average
Subject to Option Price Per
Option Share
------------- ------------------
Balance at December 31, 1996 - $ -
<S> <C> <C>
Options granted 2,132,000 8.81
Options canceled or lapsed (3,000) 8.79
=============
Balance at December 31, 1997 2,129,000 $ 8.81
=============
</TABLE>

The following table summarizes information about shares subject to options
under the EIP at December 31, 1997.
<TABLE>
<CAPTION>

Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------- -------------------------------
Weighted- Average
Number Range of Weighted-Average Remaining Number Weighted-Average
Outstanding Exercise Prices Exercise Price Life in Years Exercisable Exercise Price
- - --------------- --------------- ---------------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
2,031,000 $ 8 - 9 $ 9 9 - $ -
56,000 9 - 10 9 9 - -
21,000 10 - 11 11 9 21,000 11
21,000 11 - 12 11 9 - -
- - --------------- -------------
2,129,000 $ 8 - 12 $ 9 9 21,000 $ 11
=============== =============

</TABLE>
The weighted-average fair value of options granted during 1997 was
$4.25. For purposes of the pro forma calculation under SFAS 123, the
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants in 1997:

1997
--------
Dividend yield -
Expected volatility 32%
Risk-free interest rate 6.14%
Expected life 7 years

During 1997, the Company granted restricted stock awards to key employees
in the form of the Company's Common Stock Series B. The number of Series B
shares issued as restricted stock awards during 1997 were 22,341 (adjusted
for subsequent stock dividends). None of the restricted stock awards may be
sold, assigned, pledged or otherwise transferred, voluntarily or
involuntarily, by the employee until the restrictions lapse. The
restrictions lapse over one through three-year periods. At December 31,
1997, 22,341 shares (adjusted for subsequent stock dividends) of restricted
stock were outstanding.

F-18
Employee Stock Purchase Plan
----------------------------
The Company's ESPP was approved by shareholders on June 12, 1992 and
amended on May 22, 1997. Under the ESPP, eligible employees of the Company
and its subsidiaries may subscribe to purchase shares of Common Stock at
the lesser of 85% of the mean between the high and low market prices on the
first day of the purchase period or on the last day of the purchase period.
An employee may elect to have up to 20% of annual base pay withheld in
equal installments throughout the designated payroll-deduction period for
the purchase of shares. The value of an employee's subscription may not
exceed $25,000 in any one calendar year. An employee may not participate in
the ESPP if such employee owns stock possessing 5% or more of the total
combined voting power or value of all classes of capital stock of the
Company. As of December 31, 1997, there were 6,218,530 shares of Common
Stock reserved for issuance under the ESPP. These shares will be adjusted
for any future stock dividends or stock splits. The ESPP will terminate
when all 6,218,530 shares reserved have been subscribed for, unless
terminated earlier or extended by the Board of Directors. The ESPP is
administered by the 1992 Employee Stock Purchase Plan Committee of the
Board of Directors. As of December 31, 1997, the number of employees
participating in the ESPP was 2,318 and the total number of shares
subscribed for under the ESPP was 1,982,578. For purposes of the pro forma
calculation under SFAS 123, compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the
Black-Scholes option-pricing model with the following assumptions for
subscription periods beginning in 1997, 1996 and 1995:

1997 1996 1995
---- ---- ----
Dividend yield - - -
Expected volatility 32% 20% 20%
Risk-free interest rate 5.45% 5.29% 5.56%
Expected life 6 months 6 months 6 months

The weighted-average fair value of those purchase rights granted in
1997, 1996 and 1995 was $3.05, $3.47 and $3.54, respectively.

ELI Equity Incentive Plan
-------------------------
On October 22, 1997, the Board of Directors Compensation Committee of ELI
approved and adopted the ELI EIP which authorizes, among other things, the
grant of incentive stock options, nonqualified stock options, stock
appreciation rights or combinations thereof and restricted stock. The
exercise price for such awards shall be determined by the Compensation
Committee of the Board of Directors at the date of grant. The exercise
period for such awards is generally 10 years from the date of grant with a
vesting period of three years. ELI has reserved 4,170,600 shares for
issuance under the terms of the plan. On November 24, 1997, ELI granted
2,326,000 options of ELI Class A Common Stock exercisable at $16 per share
under the terms of the ELI EIP.

For purposes of the pro forma calculation under SFAS 123, compensation cost
is recognized for the fair value of the employees' purchase rights, which
was estimated using the Black-Scholes option-pricing model with the
following assumptions for subscription periods beginning in 1997:

1997
-------
Dividend yield -
Expected volatility 13%
Risk-free interest rate 5.87%
Expected life 7 years

The weighted-average fair value of those options granted in 1997 was $5.13.

During 1997, ELI granted restricted stock awards to key employees in the
form of the ELI Class A Common Stock. The number of shares issued as
restricted stock awards during 1997 were 535,000. Subsequently, 15,000
shares were returned and canceled. None of the restricted stock awards may
be sold, assigned, pledged or otherwise transferred, voluntarily or
involuntarily, by the employee until the restrictions lapse. The
restrictions lapse over one through three-year periods, however, the
restrictions on one-third of the stock will not lapse until ELI achieves
$100,000,000 of annual revenues, the restrictions on the second one-third
of the stock will not lapse until ELI achieves $125,000,000 of annual
revenues, and the restrictions on the last one-third of the stock will not
lapse until ELI achieves $155,000,000 of annual revenues. At December 31,
1997, 520,000 shares of restricted stock were outstanding and ELI had not
reached the $100,000,000 revenue requirement.

F-19
Directors' Deferred Fee Equity Plan
-----------------------------------
The Company's non-employee Directors' Deferred Fee Equity Plan (the
"Directors' Plan") was approved by shareholders on May 19, 1995 and
subsequently amended. The Directors' Plan includes an Option Plan, a
Stock Plan and a Formula Plan. Through the Option Plan, an eligible
director may elect to receive up to $30,000 per annum of his or
her director's fees for a period of up to five years in the form of options
to purchase Company common stock, the number of such options being equal to
such fees divided by 20% of the fair market value of Company common stock
on the effective date of the options and are exercisable at 90% of the fair
market value of company common stock on the effective date of the options.
Through the Stock Plan, an eligible director may elect to receive all or a
portion of his or her director's fees in the form of Plan Units, the number
of such Plan Units being equal to such fees divided by the fair market
value of Company common stock on certain specified dates. The Formula Plan
provides each Director of the Company options to purchase 5,000 shares of
common stock on the first day of each year beginning in 1997 and continuing
through 2002 regardless of whether the Director is participating in the
Option Plan or Stock Plan. In addition, on September 1, 1996, options to
purchase 2,500 shares of common stock were granted to each Director. The
exercise price of the options are 100% of the fair market value on the date
of grant and the options are exercisable six months after the grant date
and remain exercisable for ten years after the grant date. In the event of
termination of Directorship, a Stock Plan participant will receive the
value of such Plan Units in either stock or cash or installments of cash as
selected by the Participant at the time of the related Stock Plan election.
As of any date, the maximum number of shares of common stock which the Plan
may be obligated to deliver pursuant to the Stock Plan and the maximum
number of shares of common stock which shall have been purchased by
Participants pursuant to the Option Plan and which may be issued pursuant
to outstanding options under the Option Plan shall not be more than one
percent (1%) of the total outstanding shares of Common Stock of the Company
as of such date, subject to adjustment in the event of changes in the
corporate structure of the Company affecting capital stock. There are
currently 11 directors participating in the Directors' Plan. In 1997, the
total Options and Plan Units earned were 183,277, and 18,263, respectively
(adjusted for subsequent stock dividends). In 1996, the total Options and
Plan Units earned (adjusted for subsequent stock dividends) were 155,435,
and 15,125, respectively. In 1995, the total Options and Plan Units earned
(adjusted for stock dividends) were 106,162, and 7,129, respectively. At
December 31, 1997, 368,813 options were exercisable at a weighted average
exercise price of $10.72.

(10) Charges to Earnings:
-------------------

In 1996 and early 1997 the Company had been pursuing an aggressive growth
strategy to take advantage of opportunities in the emerging communications
marketplace. This strategy included the initiation and expansion of long
distance services which, in combination with other enhanced service
offerings, would enable the Company to offer an integrated package of
products and services.

Late in 1996, the Company began the transition of its long distance network
primarily to fixed cost leases, in order to achieve the lowest cost of
providing long distance service. In addition, the Company initiated a brand
recognition program to support the sales and marketing initiatives designed
to increase the Company's market share. The increase in revenues resulting
from this growth strategy, though significant, did not offset the resulting
increase in incremental expenses from the branding, sales, and marketing
initiatives. As a result, the Company's long distance service operations
generated unexpected losses during the first half of 1997 which had an
adverse impact on the Company's earnings and cash flow. During the second
quarter 1997 management re-evaluated this growth strategy in light of this
continuing impact on earnings and cash flow.

In connection with the re-evaluation of the Company's communications growth
strategy, the Company recorded $34,600,000 of charges to earnings in the
second quarter relating to the curtailment of certain long distance service
operations. These charges include expenses and costs associated with the
Communications sector workforce reductions, the curtailment of sales and
marketing initiatives and the termination of fixed cost network leases
associated with the reconfiguration of the Company's network cost structure
from fixed to variable, as well as an additional reserve for uncollectible
accounts receivable.

After reviewing its employee benefit plans to determine if such plans were
competitive with those provided in the industry, the Company decided to
curtail certain of its employee benefit plans. This decision required a
reassessment of the recoverability of certain related regulatory assets
that were expected to be recovered in rates in the Company's current
regulatory environment. The curtailment decision and assessment of
recoverability required the Company to record a second quarter charge to
earnings of approximately $34,700,000.

F-20
In 1995,  the Company,  through a strategic  partnership  began  developing
software and building new customer care and billing systems that would be
used for all of the Company's local exchange telephone properties. As of
June 30, 1997, the Company's Tennessee and New York local exchange
telephone properties were using these customer care and billing systems.
After reviewing the costs to develop this software and build these systems
and the incremental billing and customer care requirements placed on local
exchange companies by the Telecommunications Act of 1996 and subsequent
Federal Communications Commission orders, the Company determined that it
was not probable that all of the costs would be recoverable in the
Company's rates. As a result, the Company recorded a $67,400,000 charge to
second quarter earnings.

During the second quarter of 1997, the public utility commissions in the
states of Vermont, New York and Arizona issued orders which required the
Company to record $47,200,000 of charges to earnings. These orders affected
the Company's electric, communications and water properties. More
specifically, the Vermont order required refunds to customers and deemed
certain regulatory assets no longer recoverable. The New York order
required the Company to record an expense and liability for amounts paid by
ratepayers to GTE Corporation ("GTE") to fund postretirement benefits prior
to Citizens' acquisition of its New York local exchange properties from
GTE. The Arizona order disallowed recovery of certain property, plant and
equipment.

Also, in the second quarter, the Company recorded $13,400,000 of charges to
earnings related to certain accounting policy changes related to ELI in
anticipation of its IPO and for certain other adjustments. During the
fourth quarter of 1997 ELI completed its IPO.

Based on the aforementioned, the Company recorded approximately
$197,300,000 of charges to earnings in the second quarter as follows:

<TABLE>
<CAPTION>
($ in thousands)
--------------
<S> <C>
Curtailment of certain long distance service operations $ 34,600
Benefit plan curtailments and related regulatory assets 34,700
Telecommunications information systems and software 67,400
Regulatory commission orders 47,200
Other 13,400
--------
Total $197,300
========
</TABLE>

(11) Non Operating Gain on Sale of Subsidiary Stock:
----------------------------------------------

On November 24, 1997, ELI completed an IPO of 8,000,000 shares of its Class
A Common Stock at a price of $16 per share. The Company recorded a pre-tax
non operating gain of approximately $78,700,000 resulting from this
transaction and continues to consolidate ELI. The Company retained 97.97%
of the voting interest and 82.83% of the economic ownership in ELI.

F-21
(12) Income Taxes:
------------

The following is a reconciliation of the provision for income taxes at
federal statutory rates to the effective rates:
<TABLE>
<CAPTION>

1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Consolidated tax provision at federal statutory rate 35.0% 35.0% 35.0%
State income tax provisions, net of federal income tax 8.9% 0.5% 2.1%
benefit
Allowance for funds used during construction (4.4%) (2.0%) (2.3%)
Nontaxable investment income (20.5%) (1.7%) (1.7%)
Amortization of investment tax credits (7.6%) (0.7%) (0.9%)
Flow through depreciation 18.2% 1.6% 1.1%
All other, net 1.5% (1.2%) (3.8%)
----------- ----------- ------------
31.1% 31.5% 29.5%
=========== =========== ============
</TABLE>

As of December 31, 1997, 1996 and 1995, accumulated deferred income taxes
amounted to $408,310,000, $334,117,000 and $298,424,000, respectively, and
the unamortized deferred investment tax credits amounted to $12,398,000,
$13,858,000, and $15,670,000, respectively. Income taxes paid during the
year were $17,765,000, $22,525,000, and $39,425,000 for 1997, 1996 and
1995, respectively.

The components of the net deferred income tax liability at December 31, are
as follows:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
($ in thousands)

Deferred income tax liabilities:
- - -------------------------------
<S> <C> <C> <C>
Property, plant and equipment basis differences $ 338,170 $ 285,673 $ 246,128
Regulatory assets 76,504 63,447 63,871
Other, net 20,101 14,469 22,741
----------
----------- -----------
434,775 363,589 332,740
----------- ---------- -----------
Deferred income tax assets:
- - --------------------------
Regulatory liabilities 9,236 10,076 12,415
Deferred investment tax credits 4,831 5,538 6,231
----------- ---------- -----------
14,067 15,614 18,646
----------- ---------- -----------
Net deferred income tax liability $ 420,708 $ 347,975 $ 314,094
=========== ========== ===========
</TABLE>

F-22
The  provision  for federal and state  income  taxes,  as well as the taxes
charged or credited to Shareholders' equity, includes amounts both payable
currently and deferred for payment in future periods as indicated below:
<TABLE>
<CAPTION>

1997 1996 1995
---- ---- ----
($ in thousands)
Income taxes charged (credited) to the income statement
- - -------------------------------------------------------
Current:

<S> <C> <C> <C>
Federal $ 13,658 $ 19,775 $ 13,297
State 38 (3,256) 1,014

---------- ----------- ------------
Total current 13,696 16,519 14,311
---------- ----------- ------------
Deferred:
Federal (7,900) 64,895 48,168
Investment tax credits (1,740) (1,865) (2,057)
State 3,101 5,388 6,395
---------- ----------- ------------
Total deferred (6,539) 68,418 52,506
---------- ----------- ------------
7,157 84,937 66,817
---------- ----------- ------------
Income tax benefit on dividends on convertible preferred securities
Current:
Federal (3,344) (3,149) -
State (508) (479) -
---------- ----------- ------------
Total (3,852) (3,628) -
---------- ----------- ------------
Income taxes charged to the income statement (a) 3,305 81,309 66,817
---------- ----------- ------------

Income taxes charged (credited) to shareholders' equity
- - ----------------------------------------------------------
Deferred income taxes (benefits) on unrealized gains or losses
on securities classified as available-for-sale 6,718 (6,884) (3,052)
Current benefit arising from stock options exercised (164) (345) (406)
---------- ----------- ------------
Income taxes charged (credited) to shareholders' equity (b) 6,554 (7,229) (3,458)
========== =========== ============
Total income taxes (a) plus (b) $ 9,859 $ 74,080 $ 63,359
========== =========== ============

</TABLE>

The Company's alternative minimum tax credit as of December 31, 1997 is
$78,013,000 which can be carried forward indefinitely to reduce future
regular tax liability. Such amount is included as a debit against accrued
income taxes.

(13) Earnings Per Share:
------------------

The reconciliation of the earnings per share calculation required by SFAS
128 for the years ended December 31, 1997, 1996 and 1995 is as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------------------------ ------------------------------ -------------------------------
($ in thousands, except for per share amounts)
Per Per Per
Income Shares Share Income Shares Share Income Shares Share

------ ------ ----- ------ ------ ----- ------ ------ -----
Net Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $10,100 252,563 $ .04 $178,660 253,592 $.70 $159,536 243,109 $.66
Effect of dilutive options - 581 .00 - 779 .00 - 1,172 .01
Diluted EPS $10,100 253,144 $ .04 $178,660 254,371 $.70 $159,536 244,281 $.65
</TABLE>

All share amounts represent weighted average shares outstanding for each
respective period. All per share amounts have been adjusted for subsequent
stock dividends. No adjustment has been made for the 0.75% first quarter
1998 stock dividend declared on February 19, 1998, as its effect is
immaterial. Certain instruments were not included in the Diluted EPS
calculation as their effect was antidilutive.

F-23
(14) Segment Information:
-------------------
<TABLE>
<CAPTION>

Year Ended December 31,
-----------------------
1997 1996 1995
------------ -------------- --------------
($ in thousands)
Communications:
- - --------------
<S> <C> <C> <C>
Revenues $ 802,589 $ 752,209 $ 599,177
Operating income (loss) (5,921) 230,504 190,595
Depreciation 175,363 148,022 114,218
Capital expenditures, net 263,011 184,041 113,657
Assets 2,379,936 2,206,092 1,973,198

CLEC:
----
Revenue $ 57,743 $ 34,098 $ 17,570
Operating loss (44,860) (23,967) (16,399)
Depreciation 11,167 5,549 6,390
Capital expenditures, net 124,549 41,607 27,405
Assets 359,962 206,290 124,079

Public Services:
---------------

Natural Gas:
-----------
Revenues $ 252,098 $ 239,619 $ 197,902
Operating income 29,200 33,756 25,874
Depreciation 15,587 10,953 12,155
Capital expenditures, net 47,880 27,691 28,659
Assets 530,696 381,740 344,036

Electric:
--------
Revenues $ 191,470 $ 192,297 $ 175,351
Operating income 13,723 24,805 30,060
Depreciation 22,195 18,718 17,035
Capital expenditures, net 23,544 24,591 32,849
Assets 492,926 482,194 487,893

Water and Wastewater:
--------------------
Revenues $ 89,719 $ 88,294 $ 79,032
Operating income 23,700 30,588 24,043
Depreciation 11,500 10,491 9,137
Capital expenditures, net 32,171 21,048 27,958
Assets 556,559 511,628 505,851

</TABLE>
In the second quarter of 1997, the Company recorded approximately
$197,300,000 of pre-tax charges to earnings (see Note 10). The operating
income (loss) amounts above, in the aggregate, reflect approximately
$191,100,000 of the $197,300,000 of pre-tax charges to earnings. Of the
$191,100,000, $142,700,000 is allocated to Communications, $10,800,000 to
CLEC, $12,700,000 to Natural Gas, $22,100,000 to Electric and $2,800,000 to
Water and Wastewater.

F-24
(15) Quarterly Financial Data (unaudited):
------------------------------------
<TABLE>
<CAPTION>


Net Income Net Income (Loss) Per Share
----------- ---------------------------
Revenues (Loss) Basic Dilutive
---------- ----------- ----------------- ---------
1997 ($ in thousands)
----
<S> <C> <C> <C> <C>
First quarter $375,091 $30,584 $.12 $.12
Second quarter 308,857 (123,175) (.49) (.49)
Third quarter 338,802 23,507 .09 .09
Fourth quarter 370,868 79,184 .32 .31

Net Income Per Share
--------------------
Revenues Net Income Basic Dilutive
-------- ---------- ------- --------
1996 ($ in thousands)
----
First quarter $329,138 $38,856 $.15 $.15
Second quarter 318,128 46,251 .18 .18
Third quarter 319,959 46,032 .18 .18
Fourth quarter 339,292 47,521 .19 .19
</TABLE>

Second quarter 1997 results include approximately $197,300,000 pre-tax
($135,164,000 after tax) charges to earnings recorded during that period
(see Note 10). Fourth quarter 1997 results include a $78,700,000 pretax non
operating ($51,197,000 after tax) gain on the sale of subsidiary stock (see
Note 11).

The quarterly net income (loss) per share amounts are rounded to the
nearest cent. Annual earnings per share may vary depending on the effect of
such rounding.

(16) Supplemental Cash Flow Information:
----------------------------------

The following is a schedule of net cash provided by operating activities
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Net income $ 10,100 $ 178,660 $ 159,536
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense 235,812 193,733 158,935
Non cash write-off 153,348 17,321 -
Gain on sale of subsidiary stock (78,734) - -
HTCC non cash investment income - (21,692) -
Centennial non cash investment income - (9,043) (14,353)
Allowance for equity funds used during construction (6,881) (8,704) (10,545)
Deferred income tax and investment tax credit (6,373) 68,418 52,506
Change in operating accounts receivable (35,560) (46,342) (22,684)
Change in accounts payable and Other (36,881) 35,806 30,696
Change in accrued taxes and interest (3,498) (4,997) (6,923)
Change in other assets (901) (27,979) (8,557)
---------- ----------- ------------
Net cash provided by operating activities $ 230,432 $ 375,181 $ 338,611
========== =========== ============
</TABLE>

In conjunction with the acquisitions described in Note 3 the Company
assumed debt of $8,400,000 and $13,000,000, in 1997 and 1996, respectively,
at weighted average interest rates of 6.2% and 8.05%, respectively.




F-25
(17) Retirement Plans:
-----------------

Pension Plan
------------
The Company and its subsidiaries have a noncontributory pension plan
covering all employees who have met certain service and age requirements.
The benefits are based on years of service and final average pay or career
average pay. Contributions are made in amounts sufficient to fund the
plan's net periodic pension cost while considering tax deductibility. Plan
assets are invested in a diversified portfolio of equity and fixed-income
securities.

Pension costs for 1997, 1996 and 1995 are comprised of the following
components:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
($ in thousands)
<S> <C> <C> <C>
Service cost $ 8,815 $ 7,896 $ 6,549
Interest cost on projected benefit obligation 12,978 11,309 10,735
Return on plan assets (13,764) (11,268) (11,784)
Net amortization and deferral 865 488 335
----------- ---------- -----------
Net pension cost $ 8,894 $ 8,425 $ 5,835
=========== ========== ===========



The following table sets forth the plan's benefit obligations and fair
values of plan assets as of December 31, 1997, 1996 and 1995.
1997 1996 1995
---- ---- ----
($ in thousands)
Projected benefit obligation $ (208,520) $ (151,507) $ (145,008)
=========== =========== =============

Accumulated benefit obligation:
Vested $ (131,426) $ (87,089) $ (86,260)
Non vested (8,797) (9,886) (14,107)
----------- ----------- -------------
Total accumulated benefit obligation $ (140,223) $ (96,975) $ (100,367)
=========== =========== =============

Plan assets at fair value $ 201,834 $ 151,100 $ 133,700
=========== =========== =============

Assumptions used in the computation of pension costs/ year end benefit
obligations were as follows:

1997 1996 1995
---- ---- ----
Discount rate 8.0%/7.5% 7.5%/ 8.0% 8.25%/ 7.5%
Expected long-term rate of return on plan assets 8.5%/N/A 8.0%/ N/A 8.75%/ N/A
Rate of increase in compensation levels 4.0%/4.0% 4.0%/ 4.0% 4.5 %/ 4.0%

</TABLE>

F-26
Postretirement Benefits Other Than Pensions
-------------------------------------------
The Company provides certain medical, dental and life insurance benefits
for retired employees and their beneficiaries and covered dependents.
During 1997, in conjunction with the Company's elimination of its retiree
medical and dental plans for all non-union employees who were not eligible
to retire, the Company accounted for a negative plan amendment and a
curtailment in accordance with SFAS 106, "Employee's Accounting for
Postretirement Benefits Other than Pensions". The following table,
including the curtailment charge for 1997, sets forth the components of the
net periodic postretirement benefit costs, for the years ended December 31,
1997, 1996, and 1995:

<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
($ in thousands)
<S> <C> <C> <C>
Service cost 1,513 $ 1,786 $ 2,038
Interest cost on the projected benefit obligation 3,878 3,692 4,023
Amortization of transition obligation 1,038 1,038 1,038
Other (1,063) (489) 467
Curtailment charge 8,814 - -
--------- --------- --------
Net periodic postretirement benefit cost 14,180 $ 6,027 $ 7,566
========= ========= ========
</TABLE>

The following table, including the effect of the negative plan amendment
and curtailments for 1997, sets forth the plan's benefit obligations and
the postretirement benefit liability recognized on the Company's balance
sheets at December 31, 1997, 1996 and 1995:

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
($ in thousands)
Accumulated postretirement benefit obligation:
<S> <C> <C> <C>
Retirees $ (21,585) $ (18,990) $ (19,736)
Fully eligible active plan participants (9,808) (9,049) (9,964)
Other active plan participants (17,717) (21,876) (30,304)
----------- ------------ ------------
Total accumulated postretirement benefit
obligation (49,110) (49,915) (60,004)
Plan assets at fair value 6,661 3,156 912
Unrecognized transition obligation 2,494 16,600 17,638
Unrecognized prior service cost - 4,615 3,480
Unrecognized net (gain) (12,913) (17,570) (2,961)
----------- ------------ ------------
Net accumulated postretirement benefit obligation $ (52,868) $ (43,114) $ (40,935)
=========== ============ ============
</TABLE>

For purposes of measuring year end benefit obligations, the Company used
the same discount rates as were used for the pension plan and a 7% annual
rate of increase in the per-capita cost of covered medical benefits,
gradually decreasing to 5% in the year 2040 and remaining at that level
thereafter. The effect of a 1% increase in the assumed medical cost trend
rates for each future year on the aggregate of the service and interest
cost components of the total postretirement benefit cost would be $480,000
and the effect on the accumulated postretirement benefit obligation for
health benefits would be $4,920,000.

401(k) Savings Plans
--------------------
The Company sponsors employee savings plans under section 401(k) of the
Internal Revenue Code. The plans cover substantially all full-time
employees. Under the plans, the Company provides matching contributions in
Company stock based on qualified employee contributions. Matching
contributions were $4,883,000, $4,248,000 and $3,688,000 for 1997, 1996 and
1995, respectively.


(18) Commitments and Contingencies:
-----------------------------

The Company has budgeted capital expenditures in 1998 of approximately
$594,000,000 and certain commitments have been entered into in connection
therewith.

The Company conducts certain of its operations in leased premises and also
leases certain equipment and other assets pursuant to operating leases.

F-27
Future  minimum  rental   commitments  for  all  long-term   noncancellable
operating leases are as follows:

Year Amount
--------------- ------------------
($ in thousands)
1998 $ 22,478
1999 20,493
2000 17,142
2001 14,656
2002 9,479
2003 to 2021 28,670
---------------
Total $ 112,918
===============

Total rental expense included in the Company's results of operations for
the years ended December 31, 1997, 1996 and 1995 was $24,207,000,
$13,146,000 and $6,778,000, respectively.

The Company is also a party to contracts with several unrelated long
distance carriers. The contracts provide fees based on leased traffic
subject to minimum monthly fees aggregating $1,873,000, $1,086,000 and
$271,000 for 1998, 1999 and 2000, respectively.

Under various contracts the Company purchases capacity and associated
energy from various electric energy and natural gas suppliers.
Some of these contracts obligate the Company to pay certain capacity costs
whether or not energy purchases are made. These contracts are intended to
complement the other components in the Company's power supply to achieve
the most economic power-supply mix reasonably available. The capacity
costs for which the Company is obligated are associated with the energy
purchases that approximate 50% of the Company's total annual energy
requirement. At December 31, 1997, the estimated future payments for
capacity and energy that the Company is obligated to buy under these
contracts are as follows:

Year Amount
--------------- ------------------
($ in thousands)
1998 $ 96,407
1999 94,031
2000 80,203
2001 79,454
2002 79,648
2003 to 2021 466,774
---------------
Total $ 896,517
===============

The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or
liquidity.

F-28