CITIZENS COMMUNICATIONS COMPANY
                         -------------------------------



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



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


                     OF THE SECURITIES EXCHANGE ACT OF 1934
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                      FOR THE YEAR ENDED DECEMBER 31, 2002
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                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
<S>                                                                             <C>    

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

For the fiscal year ended December 31, 2002 
                          ------------------
                                       OR

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

For the transition period from _________ to ___________

                        Commission file number 001-11001
                                               ---------

                         CITIZENS COMMUNICATIONS 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
                   Stamford, Connecticut                     06905
                   --------------------                      -----
          (Address of principal executive offices)         (Zip Code)

Registrant's telephone number, including area code:  (203) 614-5600
                                                     ---------------

Securities registered pursuant to Section 12(b) of the Act:
   (Title of each class)                                                    (Name of each exchange on which registered)
-----------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.25 per share                                              New York Stock Exchange
Guarantee of Convertible Preferred Securities of Citizens Utilities Trust           New York Stock Exchange
Equity Units                                                                        New York Stock Exchange
Citizens Convertible Debentures                                                                N/A
Guarantee of Partnership Preferred Securities of Citizens Utilities Capital L.P.               N/A

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 12 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
90 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. [ ]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act).   Yes    X      No 
                                          -----        ----

The  aggregate  market  value of  common  stock  held by  non-affiliates  of the
registrant  on June 30,  2002  was  approximately  $2,282,096,740,  based on the
closing price of $8.36.

The number of shares outstanding of the registrant's Common Stock as of February
28, 2003 was 282,913,758.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  for the  registrant's  2003 Annual  Meeting of
Stockholders to be held on May 13, 2003 are  incorporated by reference into Part
III of this Form 10-K.

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                                   TABLE OF CONTENTS
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                                                                                  Page
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PART I
------

<S>                                                                                <C>

Item 1.    Business                                                                  2


Item 2.    Properties                                                                9


Item 3.    Legal Proceedings                                                        10


Item 4.    Submission of Matters to Vote of Security Holders                        11

Executive Officers                                                                  11


PART II
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Item 5.    Market for Registrant's Common Equity
               and Related Stockholder Matters                                      14


Item 6.    Selected Financial Data                                                  14


Item 7.    Management's Discussion and Analysis of
               Financial Condition and Results of Operations                        15


Item 7A.   Quantitative and Qualitative Disclosures About Market Risk               30


Item 8.    Financial Statements and Supplementary Data                              32


Item 9.    Changes in and Disagreements with Accountants on Accounting              32
               and Financial Disclosure


PART III
--------


Item 10.   Directors and Executive Officers of the Registrant                       32


Item 11.   Executive Compensation                                                   32


Item 12.   Security Ownership of Certain Beneficial Owners and
                Management and Related Stockholders Matters                         32


Item 13.   Certain Relationships and Related Transactions                           33


Item 14.    Controls and Procedures                                                 33


PART IV
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Item 15.   Exhibits, Financial Statement Schedules and Reports on Form 8-K          34

Signatures                                                                          38

Certifications                                                                      40

Index to Consolidated Financial Statements                                         F-1

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                                     PART I
                                     ------

This annual report on Form 10-K  contains  forward-looking  statements  that are
subject to risks and  uncertainties  that could cause  actual  results to differ
materially from those expressed or implied in the statements. Further discussion
regarding  forward-looking  statements,  including  the factors  which may cause
actual  results  to  differ  from  such  statements,   is  located  in  Item  7,
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" in this report. Citizens Communications Company and its subsidiaries
(Citizens) will be referred to as the "Company",  "we", "us" or "our" throughout
this report.


Item 1.  Business Overview
         -----------------

We are a  telecommunications-focused  company providing wireline  communications
services to rural areas and small and medium-sized  towns and cities,  including
the  Rochester,  New  York  metropolitan  area as an  incumbent  local  exchange
carrier,  or ILEC.  We offer our ILEC  services  under the  "Frontier"  name. In
addition,  we provide  competitive local exchange carrier,  or CLEC, services to
business customers and to other communications  carriers in certain metropolitan
areas in the western United States through Electric Lightwave, Inc., or ELI, our
wholly-owned  subsidiary.  We also provide  public  utility  services  including
natural  gas  transmission  and  distribution  and  electric   transmission  and
distribution  services to  primarily  rural and  suburban  customers in Vermont,
Hawaii  and  Arizona.  We  currently  have  contracts  to sell all of our public
utility  operations  in Hawaii and  Arizona.  These sales are  expected to close
during the second half of 2003.

Revenue from our ILEC, CLEC and public utility  operations was $2,062.9 million,
$175.1 million, and $431.3 million, respectively, in 2002.

Our ILEC segment has grown substantially over the last three years, primarily as
a result of  acquisitions.  During 2001, we purchased from Global  Crossing Ltd.
(Global) the 1.1 million access lines of the Frontier  local  exchange  business
for   approximately   $3,373.0  million  in  cash.   During  2000,  we  acquired
approximately 334,500 telephone access lines for approximately $986.2 million in
cash.

In June  2002,  we  acquired  all of the  common  stock  of ELI  that we did not
previously  own for $0.70  per share in cash.  Total  cost  (including  fees and
expenses) of the acquisition was approximately $6.8 million.

In 1999, we announced plans to divest our public utilities services segments. As
a  result,  in  2001  we sold  two of our  four  natural  gas  transmission  and
distribution  businesses  and during 2002 we sold our entire water  distribution
and wastewater treatment business and one of our three electric businesses.

In October 2002, we entered into  definitive  agreements to sell our Arizona gas
and electric divisions for $230.0 million in cash ($220.0 million if we close by
July 28, 2003) subject to adjustments  specified in the agreements.  In December
2002,  we entered into a definitive  agreement to sell our Hawaiian gas division
for $115.0 million in cash,  subject to adjustments  specified in the agreement.
These transactions,  which are subject to regulatory approvals,  are expected to
close during the second half of 2003. Currently,  we do not have an agreement to
sell our Vermont electric division,  but we continue to actively pursue a buyer.
All of our public  utility assets have been written down to our best estimate of
the net  realizable  value  upon  sale  (see  Note 4 to  Consolidated  Financial
Statements). Pending these divestitures, we continue to provide gas and electric
utility services.

Telecommunications Services

Our  telecommunications  services are principally ILEC services and also include
CLEC services  delivered through ELI. As of December 31, 2002, we operated ILECs
in 24 states,  serving approximately 2.4 million access lines and 71,000 digital
subscriber  line (DSL)  customers.  Our CLEC  services  are  marketed  under the
Electric   Lightwave   name   and   consist   of   a   variety   of   integrated
telecommunications products.

As an ILEC, we are typically  the dominant  incumbent  carrier in the markets we
serve and provide the "last mile" of telecommunications  services to residential
and business customers in these markets.  As an ILEC, we compete with CLECs that
may operate in our markets. As a CLEC, we provide telecommunications services to
businesses and other carriers in competition with the incumbent ILEC. As a CLEC,
we frequently  obtain the "last mile" access to customers  through  arrangements
with the applicable  ILEC.  ILECs and CLECs are subject to different  regulatory
frameworks of the Federal Communications  Commission (FCC). ELI does not compete
with our ILEC business.

                                       2

<PAGE>

The  telecommunications  industry in general, and the CLEC sector in particular,
are undergoing significant changes and difficulties. Demand and pricing for CLEC
services have decreased substantially,  particularly for long haul services, and
economic and competitive pressures are likely to cause these trends to continue.
These factors result in a challenging  environment  with respect to revenues for
our CLEC business and to a lesser extent our ILEC business.  These factors could
also result in more  bankruptcies in the sector and therefore affect our ability
to collect  money owed to us by bankrupt  carriers.  We  reserved  approximately
$10.9 million and $21.2 million of receivables  owed to us from bankrupt telecom
companies in 2002 and 2001, respectively.

ILEC Services
-------------

Our ILEC services segment accounted for $2,062.9  million,  or 77%, of our total
Company  revenues  in  2002.  Approximately  25% of our  ILEC  services  segment
revenues came from federal and state subsidies and regulated access charges.

Our ILEC services  business is primarily  with  residential  customers and, to a
lesser extent, non-residential customers. Our ILEC services segment provides:

         *        local network services,

         *        enhanced services,

         *        network access services,

         *        long distance and data services, and

         *        directory services.

Local  network  services.  We provide  telephone  wireline  access  services  to
residential  and  non-residential  customers in our service  areas.  Our service
areas are largely residential and are generally less densely populated than what
we believe to be the primary service areas of the five largest ILECs.

Enhanced  services.  We provide our ILEC customers a number of calling  features
including call forwarding, conference calling, caller identification,  voicemail
and call  waiting.  We offer  packages  of  telecommunications  services.  These
packages permit customers to bundle their basic telephone line with their choice
of enhanced  services,  or to customize a set of selected enhanced features that
fit their specific needs.

We intend to increase the penetration of existing enhanced services.  We believe
that increased  sales of such services in our ILEC markets will produce  revenue
with higher operating margins due to the relatively low marginal operating costs
necessary to offer such services. We believe that our ability to integrate these
services  with our core ILEC services  will provide us with the  opportunity  to
capture  an   increased   percentage   of  our   customers'   telecommunications
expenditures.

Network access  services.  We provide  network access  services to long distance
carriers and other  carriers in  connection  with the use of our  facilities  to
originate and terminate interstate and intrastate telephone calls. Such services
are generally  offered on a month-to-month  basis and the service is billed on a
minutes-of-use  basis.  Access  charges  to long  distance  carriers  and  other
customers are based on access rates filed with the FCC for  interstate  services
and with the respective state regulatory agency for intrastate services.

Long  distance and data  services.  Long  distance  network  service to and from
points  outside of a telephone  company's  operating  territories is provided by
interconnection with the facilities of interexchange carriers, or IXCs. We offer
long distance services in our territories to our ILEC customers. We believe that
many customers  prefer the convenience of obtaining their long distance  service
through their local telephone company and receiving a single bill.

We also offer data services including Internet access via dial up or DSL access,
frame relay and  asynchronous  transfer mode (ATM)  switching in portions of our
system.

Directory  services.  Directory  services  involves  the  provision of white and
yellow page listings of residential  and business  directories.  We provide this
service  through a third party  contractor  who pays us a percentage of revenues
realized  from  the sale of  advertising  in these  directories.  Our  directory
service also includes  "Frontier  Pages",  an  internet-based  directory service
which generates advertising revenue.


                                       3

<PAGE>

We  have  grown  from   approximately  1.0  million  access  lines  in  1999  to
approximately 2.4 million access lines primarily through acquisitions. From time
to time we are offered the  opportunity to evaluate the possibility of acquiring
additional telecommunications assets.

The following table sets forth certain information with respect to our telephone
access lines as of December 31, 2002. With the exception of 547,900 access lines
in the  greater  Rochester,  New York  area,  our  access  lines are  located in
primarily rural areas.

                 State                                ILEC Access 
                 -----                             ------------------
                                                    Lines at 12/31/02
                                                   ------------------

                 New York............                  1,009,700
                 Minnesota...........                    272,800
                 Arizona.............                    167,100
                 West Virginia.......                    158,600
                 California..........                    153,400
                 Illinois............                    131,600
                 Tennessee...........                     97,600
                 Wisconsin...........                     73,800
                 Iowa................                     62,800
                 All other states (15)...                317,000
                                                      ----------
                    Total                              2,444,400
                                                      ==========

CLEC Services
-------------

ELI provides a broad range of wireline  communications  products and services to
businesses and other  carriers in the western  United States.  ELI accounted for
$175.1 million, or 7%, of our total Company revenue in 2002.

ELI's  facilities-based  network  consists  of optical  fiber and voice and data
switches. ELI has a national Internet and data network with switches and routers
in key cities,  linked by leased transport  facilities.  In addition,  ELI has a
long-haul,  fiber-optic  network  connecting the cities it serves in the Western
United  States which  utilizes an  optically  self-healing  Synchronous  Optical
Network  (SONET)  architecture.  ELI  currently  provides  the full range of its
services in the following  cities and their  surrounding  areas:  Boise,  Idaho;
Portland,   Oregon;  Salt  Lake  City,  Utah;  Seattle,   Washington;   Spokane,
Washington; Phoenix, Arizona; and Sacramento, California.

ELI's  primary  focus in 2003 is obtaining new  customers,  increasing  customer
usage of ELI's  existing  products and  services,  focusing  more on company end
users and government  entities and  diversifying  the customer mix to place less
reliance on Internet Service Providers (ISPs), application service providers and
other carriers.  ELI expects to continue to emphasize  increased  penetration of
existing on-net  buildings,  a focus on sales to customers that are connected to
its network  and an increase in market  share in the cities in which it operates
and  surrounding  areas.  ELI will also  continue to market its  available  dark
fiber.

Regulatory Environment

ILEC Services Regulation
------------------------

The  Telecommunications  Act of 1996, or the 1996 Act,  dramatically changed the
telecommunications  industry.  The main thrust of the 1996 Act was to open local
telecommunications   marketplaces  to  competition  while  enhancing   universal
service.  The majority of our  operations  are regulated  extensively by various
state regulatory agencies, often called public service commissions, and the FCC.


                                       4

<PAGE>

The 1996 Act  preempts  state and local  laws to the  extent  that they  prevent
competitive  entry into the  provision of any switched  communications  service.
Under the 1996 Act, however,  states retain authority to impose  requirements on
carriers  necessary to preserve  universal  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.  In  order  to  create  an
environment in which local competition is a practical possibility,  the 1996 Act
imposes  a  number  of  access  to  network   facilities   and   interconnection
requirements  on all local  communications  providers.  All local  carriers must
interconnect with other carriers, permit resale of their services, provide local
telephone number portability and dialing parity, provide access to poles, ducts,
conduits, and rights-of-way, and complete calls originated by competing carriers
under termination arrangements.

We are subject to  incentive  regulation  plans under which prices are capped in
return for the elimination or relaxation of earnings oversight. Some states also
allow  us  flexibility  in price  changes  for  optional  services  and  relaxed
reporting  requirements.  The goal of these  plans is to provide  incentives  to
improve  efficiencies and increased pricing flexibility for competitive services
while ensuring that customers  receive  reasonable rates for basic services that
continue  to be deemed  part of a monopoly  while  allowing  us to  continue  to
recover our costs.

Our ILEC  services  segment  revenue  is subject  to  regulation  by the FCC and
various state  regulatory  agencies.  We expect  federal and state  lawmakers to
continue to review the statutes  governing the level and type of regulation  for
telecommunications services.

For  interstate  services  regulated  by the  FCC,  we  have  elected  a form of
incentive regulation known as price caps for most of our operations. Under price
caps, interstate access rates are capped and adjusted annually by the difference
between the level of inflation  and a  productivity  factor.  Most  recently the
productivity  factor was set at 6.5%. Given the relatively low inflation rate in
recent years,  interstate access rates have been adjusted downward annually.  In
May 2000,  the FCC adopted a revised  methodology  for regulating the interstate
access rates of price cap companies through May 2005. The program,  known as the
Coalition  for  Affordable  Local and Long  Distance  Services,  or CALLS  plan,
establishes a price floor for interstate-switched access services and phases out
many of the subsidies in interstate  access rates. We believe we will be able to
offset some of the reduction in interstate access rates through end-user charges
and an expanded  universal service program that benefits rural service providers
such as our ILEC services  segment.  Annual  adjustments based on the difference
between  inflation and the  productivity  factor will continue for several years
until the price floor for interstate switched access services is reached.

Another  goal of the 1996 Act was to remove  implicit  subsidies  from the rates
charged by local  telecommunications  companies.  The CALLS plan  addressed this
requirement for interstate services.  State legislatures and regulatory agencies
are  beginning to reduce the implicit  subsidies in intrastate  rates.  The most
common  subsidies are in access rates that  historically  have been priced above
their costs to allow basic local rates to be priced below cost.  Legislation has
been  considered  in several  states to require  regulators  to eliminate  these
subsidies and implement  state  universal  service  programs where  necessary to
maintain reasonable basic local rates. However, not all the reductions in access
charges  are  fully  offset.  In  Tennessee  for  example,  as a result  of such
legislation,  we are reducing  intrastate  access rates by $1.0 million per year
through 2003. We anticipate additional state legislative and regulatory pressure
to lower  intrastate  access rates in the near future.  However,  regulators are
cognizant  of  the  potential  impact  on  basic  local  rates  and  are  moving
cautiously. Many states are embracing the need for state universal service funds
to ensure protection for customers while ensuring that local  telecommunications
companies continue to have the incentive to recover in rates their investment in
their networks and new services.

State   legislatures   and  regulators  are  also  examining  the  provision  of
telecommunications  services to previously  unserved areas.  Since many unserved
areas are  located in rural  markets,  we may be  required to expand our service
territory  into some of these areas.  Given the  start-up  costs  involved  with
territory  expansion,  we expect legislatures and regulators to continue to move
cautiously  and provide  some means of recovery  for the costs  associated  with
serving these new areas.

ILEC Unbundling Obligations
---------------------------

The FCC recently  completed its triennial  review of the 1996 Act.  Although the
FCC's order  describing its decisions in detail has not yet been published,  the
FCC has provided a summary of its findings  and order.  The summary  essentially
keeps in place the existing  regulatory regime with respect to Unbundled Network
Elements Platform (UNEP) competition,  provides  significant  authority to state
regulators to implement UNEP competition and pricing,  and eliminated a previous
requirement  of ILECs to share their DSL lines with  competitors.  Because we do
not currently have UNEP  competition or competitors  providing DSL service,  the
FCC's order is not expected to have a material affect on us in the near term. We
will continue to evaluate the affect on us when the final order is published and
as litigation with respect to the order occurs.


                                       5

<PAGE>

Some state regulators (including New York and Illinois) have recently considered
imposing on regulated  companies  (including us) cash management  practices that
could limit the ability of companies to transfer cash between subsidiaries or to
the parent company.  None of the existing state  requirements  materially affect
our cash  management  but future  changes by state  regulators  could affect our
ability to freely transfer cash within our consolidated companies.

CLEC Services Regulation
------------------------

A central focus of the sweeping  federal policy reform under the 1996 Act was to
open local communications  markets to competition including the encouragement of
the development of CLECs, which compete for business with the existing carriers.
As a CLEC, ELI is subject to federal,  state and local regulation.  However, the
level of regulation is typically less than that  experienced by an ILEC. The FCC
exercises  jurisdiction  over  all  interstate  communications  services.  State
commissions  retain  jurisdiction over all intrastate  communications  services.
Local  governments may require ELI to obtain  licenses or franchises  regulating
the use of public rights-of-way necessary to install and operate its networks.

ELI has various  interconnection  agreements in the states in which it operates.
These agreements  govern reciprocal  compensation  relating to the transport and
termination  of  traffic  between  the  ILEC's  and ELI's  networks.  The FCC is
significantly  reducing intercarrier  compensation for ISP traffic also known as
"reciprocal compensation."

Most  state  public  service  commissions  require  competitive   communications
providers,  such as ELI,  to  obtain  operating  authority  prior to  initiating
intrastate  services.  Most states  also  require the filing of tariffs or price
lists  and/or  customer-specific  contracts.  ELI is not  currently  subject  to
rate-of-return  or price regulation.  However,  ELI is subject to state-specific
quality of service,  universal service,  periodic reporting and other regulatory
requirements,  although the extent of these  requirements is generally less than
those applicable to ILECs.

Competition

ILEC Services Competition
-------------------------

Competition in the telecommunications  industry is increasing.  Although we have
not faced as much  competition as larger,  more urban telecom  companies,  we do
experience  competition  from other wireline local  carriers  through  Unbundled
Network  Elements (UNE) and  potentially in the future through UNEP,  from other
long distance carriers (including Regional Bell Operating Companies), from cable
companies and internet  service  providers  with respect to internet  access and
potentially  in  the  future  cable  telephony,   and  from  wireless  carriers.
Competition  may result in a greater loss of access lines and minutes of use and
the  conversion of retail lines to wholesale  lines,  which  negatively  affects
revenues  and margins from those lines.  Competition  also puts  pressure on the
prices  we  are  able  to  charge  for  some  services,  particularly  for  some
non-residential  services.  Most of the wireline  competition  we face is in our
Rochester  market,  with limited  competition in a few other areas.  Competition
from cable  companies with respect to high-speed  Internet  access is intense in
Rochester and a few of our more suburban  markets such as Elk Grove,  California
(which is near  Sacramento).  Competition  from wireless  companies,  other long
distance  companies and Internet service providers is present in varying degrees
in all of our markets.

The 1996 Act and subsequent FCC  interconnection  decisions have established the
relationships  between ILECs and CLECs and the mechanisms for competitive market
entry. Though carriers like us, who serve rural markets, did receive a qualified
exemption  from some of the  technical  requirements  imposed upon all ILECs for
interconnection   arrangements,   we  did  not   receive   an   exemption   from
interconnection or local exchange competition in general.  The exemption,  known
as the rural telephone  company  exemption,  continues until a bona fide request
for  interconnection  is  received  from  a CLEC  and a  state  public  services
commission with jurisdiction  determines that discontinuance of the exemption is
warranted.  The state commission must determine that discontinuing the exemption
will not adversely impact the availability of universal service in the state nor
impose an undue economic  hardship on us and that the requested  interconnection
is technically feasible.

As of December 31, 2002, we had entered into 334 interconnection agreements with
CLECs.  These  agreements  allow CLECs to connect with some of our ILEC networks
and compete in our ILEC markets. In addition, in some markets, our ILEC services
provide reciprocal  compensation  payments and local number  portability.  These
competitors  are  mainly  serving   business   customers  and  Internet  service
providers.

                                       6

<PAGE>


CLEC Services Competition
-------------------------

ELI faces significant  competition from ILECs in each of its markets.  Principal
ILEC competitors  include Qwest, SBC and Verizon.  ELI also competes with all of
the major  Interexchange  Carriers  (IXCs),  Internet access providers and other
CLECs. CLEC service  providers have generally  encountered  intense  competitive
pressures,  the  result  of  which is the  failure  of a  number  of  CLECs  and
substantial financial pressures on others.

Competitors in ELI's markets  include,  in addition to the incumbent  providers:
AT&T,  Sprint,  Time Warner  Telecom,  MCI WorldCom,  Broadwing,  Integra and XO
Communications. In each of the markets in which ELI operates, at least one other
CLEC,  and in some  cases  several  other  CLECs,  offer  many of the same local
communications services that ELI provides, generally at similar prices.

Competition is based on price, quality,  network reliability,  customer service,
service features and responsiveness to the customer's needs.

The market for Internet  access,  long-haul  and related  services in the United
States is extremely competitive, with substantial overcapacity in the market. We
expect that  competition  will  intensify.  In addition,  new enhanced  Internet
services such as managed  router  service and web hosting are  constantly  under
development in the market and we expect additional  innovation in this market by
a range of  competitors.  Several  IXC's have filed for  bankruptcy  protection,
which will allow them to  substantially  reduce their cost  structure  and debt.
This  could  enable  such  companies  to  further  reduce  prices  and  increase
competition.

Many of these  competitors  have greater market presence and greater  financial,
technical,  marketing and human  resources,  more extensive  infrastructure  and
stronger customer and strategic relationships than are available to us.

Public Utilities Services

We have historically  provided public utilities  services  including natural gas
transmission and distribution,  electric  transmission and  distribution,  water
distribution and wastewater  treatment  services to primarily rural and suburban
customers  throughout  the  United  States.  In  1999,  we  announced  a plan of
divestiture for our public utilities  services  properties.  Since then, we have
divested or entered into  contracts to divest  almost all of our public  utility
operations for an aggregate of $1.9 billion. In 1999, we initially accounted for
the  planned   divestiture  of  our  public  utilities   services   segments  as
discontinued operations.  Because we had not yet entered into agreements to sell
our entire gas and electric  segments,  we reclassified all our gas and electric
assets and their related  liabilities  in the second half of 2000 as "net assets
held for sale." As a result,  our  discontinued  operations  only  reflected the
assets and related liabilities of the water and wastewater businesses.

In 2001, we sold our Louisiana gas operations for $363.4 million in cash and our
Colorado gas division for $8.9 million in cash.  In 2002,  we sold our water and
wastewater  services operations for $859.1 million in cash and $122.5 million in
assumed debt and other  liabilities,  and our Kauai electric division for $215.0
million in cash.  These  transactions  are  subject to  routine  purchase  price
adjustments.

In October 2002, we entered into  definitive  agreements to sell our Arizona gas
and electric  operations for $230.0 million in cash ($220.0  million if we close
by July 28, 2003) and in December  2002, we entered into a definitive  agreement
to sell our  Hawaiian  gas  division  for $115.0  million in cash,  in each case
subject to adjustments specified in the agreement. These transactions, which are
subject to regulatory approvals, are expected to close during the second half of
2003.

We intend to sell our one remaining  public utility asset,  which is an electric
utility operation in Vermont.

Natural Gas
-----------

Our natural gas segment  provides  natural  gas  transmission  and  distribution
services in Arizona,  as well as synthetic  natural gas  production  and propane
service in Hawaii to primarily  residential  customers.  Our natural gas segment
accounted for $216.5 million,  or 8%, of our total Company  revenues in 2002. At
December 31, 2002, the number of customers by state is as follows:

                                       7

<PAGE>

                  State                        Customers
                  -----                        ---------
                  Arizona.........               126,925
                  Hawaii...........               66,494
                                               ---------
                    Total                        193,419
                                               =========

Natural gas services  and/or rates  charged are subject to the  jurisdiction  of
federal and state  regulatory  agencies,  except for the  non-regulated  propane
rates charged to customers in Hawaii. We purchase the gas supply we need, except
for our  production of synthetic  natural gas in Hawaii.  We entered into a firm
supply  contract  with BP Energy for our  Arizona gas  division.  We believe our
natural  gas supply is  adequate  to meet  current  demands  and to provide  for
additional  sales to new  customers.  The  natural  gas  industry  is subject to
seasonal  demand,  except in Hawaii,  with the peak demand  occurring during the
heating  season  of  November  1 through  March  31.  Our  natural  gas  segment
experiences  third-party  competition  from  fuel  oil,  propane  and  other gas
suppliers for most of our large consumption  customers,  of which there are few,
and from  electric  suppliers  for our entire  customer  base.  The  competitive
position of gas at any given time depends  primarily  on the relative  prices of
gas and these other energy sources.

Electric
--------

Our electric segment provides electric transmission and distribution services in
Arizona and Vermont to primarily  residential  customers.  Our electric  segment
accounted for $214.8 million,  or 8%, of our total Company  revenues in 2002. At
December 31, 2002, the number of customers per state is as follows:

                       State                  Customers
                       -----                  ---------
                       Arizona .........        77,818
                       Vermont..........        20,603
                                              --------
                         Total                  98,421
                                              ========

Electric  services  and/or  rates  charged  are subject to the  jurisdiction  of
federal and state regulatory  agencies.  We purchased  approximately  99% of the
electric  energy  needed to provide  service  to our  customers  in Vermont  and
Arizona.  We believe  our supply is  adequate  to meet  current  demands  and to
provide for additional sales to new customers.  We have generating facilities in
Arizona and Vermont, which are used mainly for back-up power supply.  Generally,
our electric segment does not experience material seasonal fluctuations.

The electric  utility  industry in the United States is  undergoing  fundamental
changes.  For many years  electric  utilities  have 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  continues  its shift  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  separating the generation and transmission of power from the remainder
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. This change in the industry is in various stages of
development  around the United  States.  The pace and degree of regulation  vary
from state to state. The bankruptcies in 2001 and financial difficulties in 2002
of major  providers of electricity  may alter the nature and level of regulation
of electric utilities.

Our  Vermont  Electric  Division  is a member of the  Vermont  Joint  Owners,  a
consortium  of 14 Vermont  utilities  that has  entered  into a  purchase  power
agreement with a Canadian power generation facility.  The agreement provides for
up to 395 MW of power  per  annum  and  associated  energy  to be  delivered  to
Vermont,  in  varying  amounts,  between  1990 and  2020.  If any  member of the
consortium  defaults on its share of power under the  agreement,  the  remaining
members of the consortium are required by "step-up"  provisions of the agreement
to assume responsibility for a defaulting member's share on a pro-rata basis.

In July 2002,  the Vermont  Public  Service  Board  approved a rate  increase of
17.45% for services rendered on or after July 15, 2002.

On November 1, 2002,  we completed  the sale of our Kauai  electric  division to
Kauai Island  Utility  Cooperative  (KIUC) for $215.0  million in cash.  

                                       8

<PAGE>

Segment Information

Note 23 to Consolidated  Financial  Statements  provides  financial  information
about our industry segments for the last three fiscal years.

Financial Information about Foreign and Domestic Operations and Export Sales

We have no foreign  operations,  although we have a 19%  interest  in  Hungarian
Telephone and Cable Company (See Note 8 to Consolidated Financial Statements), a
company that provides wireline telephone service in Hungary.

General

Order backlog is not a significant  consideration in our businesses.  We have no
contracts or subcontracts  that may be subject to  renegotiations  of profits or
termination at the election of the Federal government. We also hold certificates
granted  by  various  state  commissions,  which  are  generally  of  indefinite
duration.  We have no special  working capital  practices,  and our research and
development  activities  are not  significant.  We hold no patents,  licenses or
concessions  that are material.  As of December 31, 2002,  we had  approximately
7,684 employees,  of whom 6,206 were associated with ILEC  operations,  565 were
associated  with ELI and 750 were  associated  with  public  utilities  services
operations. We consider our relations with our employees to be good.

Available Information

We make available  free of charge on or through our Internet  website our annual
reports on Form 10-K,  quarterly  reports on Form 10-Q,  current reports on Form
8-K and all amendments to those reports as soon as reasonably  practicable after
such material is  electronically  filed with or furnished to the  Securities and
Exchange Commission. Our Internet address is http://www.czn.net.


I
tem 2.   Properties
          ----------

Our principal  corporate  offices are located in leased premises at 3 High Ridge
Park, Stamford, Connecticut.

The  operations  support  office for our ILEC  segment is  currently  located in
leased premises at 180 South Clinton Avenue, Rochester, New York. In conjunction
with the Frontier acquisition,  we evaluated our facilities to take advantage of
operational  and  functional  synergies  between  the  two  companies  with  the
objective  of  concentrating  our  resources in the areas where we have the most
customers,  to better serve those customers.  In connection with that objective,
we closed our operations  support center in Plano,  Texas in April 2002 and sold
the building at that location in 2003. In addition,  our ILEC segment leases and
owns office space in various markets throughout the United States.

The operations support office for ELI is located in a building we own at 4400 NE
77th Avenue,  Vancouver,  Washington. In addition, our CLEC segment leases local
office space in various markets throughout the United States, and also maintains
a warehouse  facility in Portland,  Oregon. Our CLEC segment also leases network
hub and network equipment installation sites in various locations throughout the
areas in which it provides services.

Our ILEC and CLEC services  segments own  telephone  properties  which  include:
connecting lines between  customers'  premises and the central offices;  central
office  switching   equipment;   fiber-optic  and  microwave  radio  facilities;
buildings  and land;  and customer  premise  equipment.  The  connecting  lines,
including  aerial and underground  cable,  conduit,  poles,  wires and microwave
equipment,  are located on public  streets and  highways or on  privately  owned
land.  We have  permission  to use these lands  pursuant  to local  governmental
consent or lease, permit, franchise, easement or other agreement.

Our public utilities services segments are administered locally in the states in
which they operate.  Pending the sale of our public utilities services segments,
we own gas production,  transmission and distribution  facilities in Arizona and
Hawaii and electric  transmission  and  distribution  facilities  in Arizona and
Vermont.


                                       9

<PAGE>

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

On July 20, 2001, we notified Qwest Corporation (Qwest) that we were terminating
eight  acquisition  agreements.  On July 23, 2001, Qwest filed a notice of claim
for arbitration  with respect to the terminated  acquisition  agreements.  Qwest
asserts  that  we  wrongfully   terminated  theses  agreements  and  is  seeking
approximately  $64.0  million in damages,  which is the  aggregate of liquidated
damages  under  letters  of credit  established  in the  terminated  acquisition
agreements.  On September 7, 2001, we filed a response and  counterclaims in the
same arbitration  proceedings,  contesting Qwest's asserted claims and asserting
substantial  claims  against  Qwest for  material  breaches of  representations,
warranties,  and covenants in the terminated  acquisition  agreements and in the
acquisition  agreement  relating to North Dakota  assets that we purchased  from
Qwest. The parties are currently  engaged in discovery.  An arbitration  hearing
has been scheduled to commence in the third quarter of 2003.

On December 21,  2001,  we entered into a  settlement  agreement  resolving  all
claims in a class  action  lawsuit  pending  against  the  Company in Santa Cruz
County, Arizona (Chilcote, et al. v. Citizens Utilities Company, No. CV 98-471).
The lawsuit arose from claims by a class of plaintiffs  that included all of our
electric customers in Santa Cruz County for damages resulting from several power
outages that occurred  during the period  January 1, 1997,  through  January 31,
1999. Under the terms of the settlement agreement,  and without any admission of
guilt or  wrongdoing  by us, we have  paid the class  members  $5.5  million  in
satisfaction of all claims. The court approved the settlement agreement on March
29, 2002, and the lawsuit  against us was dismissed with  prejudice.  We accrued
the full settlement amount,  plus an additional amount sufficient to cover legal
fees and other  related  expenses,  during  the  fourth  quarter  of 2001 and no
accrual remains at December 31, 2002.

As part of the Frontier acquisition,  Global and we agreed to Global's transfer,
effective as of July 1, 2001, of certain liabilities and assets under the Global
pension plan for Frontier employees. Such transfer and assumption of liabilities
was to be to a trustee of a trust  established under our pension plan, and would
exclude (1) those  liabilities  relating to certain  current and former Frontier
employees who were not considered part of the Frontier  acquisition  (calculated
using the "safe harbor" methodology of the Pension Benefit Guaranty Corporation)
and (2) those assets attributable to such excluded liabilities. After filing for
bankruptcy on January 28, 2002,  Global  claimed that its obligation to transfer
the  Global  pension  plan's   transferred   assets  and  liabilities   remained
"executory"  under the  Bankruptcy  Code,  and refused to execute and deliver an
authorization  letter to the Frontier plan trustee (who was also the Global plan
trustee)  directing the trustee to transfer to our pension plan record ownership
of such assets and  liabilities.  We initiated an adversary  proceeding with the
Bankruptcy Court  supervising  Global's  bankruptcy  proceeding to determine and
declare that Global's  obligation was not  "executory,"  and to compel Global to
execute and deliver such  authorization  letter. On December 18, 2002 we entered
into a  stipulation  with Global and other  parties,  which was  approved by the
Bankruptcy Court, fully and finally settling the adversary proceeding.  Pursuant
to the stipulation and order,  on February 3, 2003,  among other things,  Global
instructed  the  Frontier  plan  trustee to  transfer  record  ownership  of the
transferred assets and liabilities to our pension plan, and the transfer in fact
took place on that date.

The City of Bangor,  Maine,  filed suit against us on November 22, 2002,  in the
U.S.  District  Court for the  District  of Maine  (City of  Bangor v.  Citizens
Communications Company, Civ. Action No. 02-183-B-S). The City has alleged, among
other things, that we are responsible for the costs of cleaning up environmental
contamination  alleged to have resulted from the operation of a manufactured gas
plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the
existence  of extensive  contamination  of the  Penobscot  River and nearby land
areas and has  asserted  that  money  damages  and other  relief at issue in the
lawsuit  could exceed  $50.0  million.  The City also  requested  that  punitive
damages be assessed against us. We have filed an answer denying liability to the
City,  and have asserted a number of counter  claims against the City. We intend
to defend ourselves vigorously against the City's lawsuit. In addition,  we have
identified  a  number  of  other  potentially  responsible  parties  that may be
responsible  for the damages  alleged by the City.  We expect to initiate  legal
action within the next few weeks to bring those parties into the lawsuit.

We also  have  demanded  that  various  of our  insurance  carriers  defend  and
indemnify us with respect to the City's lawsuit.  On or about December 26, 2002,
we filed a declaratory  judgment action against those insurance  carriers in the
Superior Court of Penobscot County, Maine, for the purpose of establishing their
obligations  to us with respect to the City's  lawsuit.  We intend to vigorously
pursue insurance coverage for the City's lawsuit.

On February 7, 2003, we received a letter from counsel  representing Enron North
America  Corporation  (formerly  known as Enron Gas Marketing,  Inc.)  demanding
payment of an "early termination  liability" of approximately $12.5 million that
Enron claims it is owed under a gas supply agreement that we lawfully terminated
in  November  2001.  The  demand was made in  connection  with  Enron's  ongoing
bankruptcy  proceeding  in the United States  Bankruptcy  Court for the Southern
District  of New York.  We  believe  Enron's  claim  lacks any merit and have so
advised that  company's  counsel.  Enron has threatened to initiate an adversary
proceeding  in the  bankruptcy  court to recover  the amount of its demand  plus
applicable  interest and  attorney's  fees. If that occurs,  we will  vigorously
defend against any such action.

                                       10

<PAGE>

During the fourth  quarter of 2002 we became aware of  irregularities  involving
payments  made by certain of our public  utilities  operations  for  services or
benefits  that we did not  receive.  The  payments  do not  involve  our current
operations  in Arizona,  Vermont,  or Hawaii.  With the  assistance  of forensic
specialists, outside auditors, and counsel, we investigated these irregularities
and identified a total of $7.8 million that had been embezzled from the Company.
These payments were reflected in our financial statements as charges to earnings
(primarily during 2002). The U.S.  Government has recovered  approximately  $6.0
million (which we believe will be turned over to us) and we believe that most of
the remaining funds outstanding will be reimbursed by insurance.

We have provided detailed information regarding the results of our investigation
to federal prosecutors and the Securities and Exchange Commission, including the
names of two of our former officers (Kenneth Cohen and Livingston Ross, who were
the President and Chief Operating  Officer of the Public Services Sector and the
Vice President of Reporting and Audit,  respectively) who approved the payments.
We have been advised by federal prosecutors that these individuals have admitted
their  involvement  in these schemes and we have  terminated  the  employment of
these individuals.

In  connection  with an  inquiry  that we  believe  has  arisen  as a result  of
allegations  made to  federal  authorities  during  their  investigation  of the
embezzlement,  we and our employees are cooperating fully with the Office of the
U.S. Attorney for the Southern District of New York and with the New York office
of the Securities and Exchange Commission.  We have provided requested documents
to the SEC and we have agreed to comply with an SEC request  that, in connection
with the informal inquiry that it has initiated,  we preserve financial,  audit,
and accounting records.

We are party to  proceedings  arising in the normal course of our business.  The
outcome of individual matters is not predictable.  However,  we believe that the
ultimate resolution of all such matters,  after considering  insurance coverage,
will not have a material  adverse effect on our financial  position,  results of
operations, or our cash flows.


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

None in fourth quarter 2002.

Executive Officers of the Registrant
------------------------------------

Information as to Executive Officers of the Company as of March 1, 2003 follows:

<TABLE>
<CAPTION>

          Name               Age      Current Position and Office
          ----               ---      ---------------------------
<S>                          <C>      <C>                                                
Leonard Tow                  74      Chairman of the Board and Chief Executive Officer
Scott N. Schneider           45      Vice Chairman of the Board, President and Chief Operating Officer
Donald B. Armour             55      Senior Vice President, Finance and Treasurer
Robert Braden                57      Executive Vice President, ILEC Sector
John H. Casey, III           46      President and Chief Operating Officer of the ILEC Sector and
                                     Executive Vice President
Jean M. DiSturco             39      Senior Vice President, Human Resources
Jerry Elliott                43      Senior Vice President and Chief Financial Officer
Michael G. Harris            56      Senior Vice President, Engineering and New Technology
Edward O. Kipperman          51      Vice President, Tax
Robert J. Larson             43      Senior Vice President and Chief Accounting Officer
Daniel J. McCarthy           38      President and Chief Operating Officer, Public Services Sector and
                                     Vice President
L. Russell Mitten            51      Senior Vice President, General Counsel and Secretary
Michael A. Zarrella          43      Vice President, Strategic Planning and Development
</TABLE>


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


                                       11

<PAGE>

LEONARD TOW has been associated with Citizens since April 1989 as a Director. In
June 1990, he was elected Chairman of the Board and Chief Executive Officer.  He
was also Chief Financial  Officer from October 1991 through November 1997. He is
a Director of  Hungarian  Telephone  and Cable  Corp.,  and is a Director of the
United States Telephone Association.

SCOTT N.  SCHNEIDER has been  associated  with Citizens  since November 1999. In
January 2001,  he was elected Vice  Chairman of the Board.  In July 2000, he was
elected a Director  of  Citizens.  He has served as Vice  Chairman of the Board,
President and Chief Operating Officer of Citizens since July 2002. Previously he
was Vice  Chairman,  Executive  Vice  President  from May 2001 to July  2002 and
Executive Vice President Strategic Planning and Development from May 2000 to May
2001 and Executive Vice President of Electric Lightwave,  Inc. from October 1999
to May 2000.  Prior to joining  Citizens,  he was Director  from October 1994 to
October 1999, Chief Financial Officer from December 1996 to October 1999, Senior
Vice  President  and  Treasurer  from  June  1991 to  October  1999  of  Century
Communications Corp. He also served as Director, Chief Financial Officer, Senior
Vice President and Treasurer of Centennial  Cellular from August 1991 to October
1999.

DONALD B. ARMOUR has been  associated  with Citizens  since October 2000. He was
elected  Senior  Vice  President,   Finance  and  Treasurer  in  December  2002.
Previously,  he was Vice  President,  Finance and Treasurer from October 2000 to
December  2002.  Prior to joining  Citizens,  he was the  Treasurer of the cable
television division of Time Warner Inc. from January 1994 to September 2000.

ROBERT BRADEN has been  associated with Citizens since December 1999. In January
2002, he became Executive Vice President,  ILEC Sector.  Previously he was Chief
Executive Officer from January 2002 to November 2002,  Director from May 2001 to
November 2002, Vice President and Chief Operating  Officer from February 2001 to
January 2002 and Vice  President,  Business  Development  from  February 2000 to
February 2001 of Electric Lightwave, Inc. Prior to joining Citizens, he was Vice
President,  Business  Development at Century  Communications  Corp. from January
1999 to October  1999. He was Senior Vice  President,  Business  Development  at
Centennial  Cellular Corp. from June 1996 to January 1999 and held other officer
positions with Centennial since November 1993.

JOHN H. CASEY,  III has been associated with Citizens since November 1999. He is
currently Executive Vice President of Citizens and President and Chief Operating
Officer  of our ILEC  Sector.  Previously  he was Vice  President  of  Citizens,
President and Chief  Operating  Officer,  ILEC Sector January 2002 to July 2002,
Vice President and Chief Operating Officer, ILEC Sector February 2000 to January
2002 and Vice President,  ILEC Sector  December 1999 to February 2000.  Prior to
joining Citizens, he was Vice President, Operations from January 1995 to January
1997 and then Senior Vice President, Administration of Centennial Cellular until
November 1999.

JEAN M. DISTURCO has been  associated  with Citizens since 1987. She was elected
Senior Vice  President,  Human Resources in December 2002.  Previously,  she was
Vice President, Human Resources since October 2001, Vice President, Compensation
and Benefits  since March 2001 and Director of  Compensation  from 1996 to March
2001.

JERRY ELLIOTT has been associated with Citizens since March 2002. He was elected
Senior Vice President and Chief Financial Officer in December 2002.  Previously,
he was Vice  President and Chief  Financial  Officer from March 2002 to December
2002. Prior to joining  Citizens,  he was Managing  Director of Morgan Stanley's
Communications  Investment  Banking Group from July 1998 to March 2002. Prior to
joining  Morgan  Stanley,  he was a  partner  with  the law firm of  Shearman  &
Sterling.

MICHAEL G. HARRIS has been  associated with Citizens since December 1999. He was
elected Senior Vice President,  Engineering and New Technology in December 2002.
Previously, he was Vice President,  Engineering and New Technology from December
1999 to December 2002. Prior to joining Citizens,  he was Senior Vice President,
Engineering  of Centennial  Cellular  from August 1991 to December  1999. He was
also Senior Vice  President,  Engineering of Century  Communications  Corp. from
June 1991 to October 1999.

EDWARD O.  KIPPERMAN has been  associated  with Citizens since February 1985. He
has served as Vice President, Tax since October 1991.

ROBERT J.  LARSON has been  associated  with  Citizens  since July 2000.  He was
elected  Senior  Vice  President  and Chief  Accounting  Officer of  Citizens in
December 2002.  Previously,  he was Vice President and Chief Accounting  Officer
from  July  2000 to  December  2002.  Prior  to  joining  Citizens,  he was Vice
President and Controller of Century  Communications  Corp.  from October 1994 to
October 1999.  He was also Vice  President,  Accounting  and  Administration  of
Centennial Cellular from March 1995 to October 1999.


                                       12

<PAGE>

DANIEL  McCARTHY has been  associated  with Citizens since December 1990. He was
elected  President and Chief Operating  Officer,  Electric  Lightwave in January
2002. Previously,  he was President and Chief Operating Officer, Public Services
Sector from November 2001 to January 2002,  Vice  President and Chief  Operating
Officer,  Public  Services  Sector  from  March  2001  to  November  2001,  Vice
President,  Citizens  Arizona  Energy  from  April  1998 to March  2001 and Vice
President, Citizens Arizona Gas from February 1997 to April 1998.

L. RUSSELL  MITTEN has been  associated  with  Citizens  since June 1990. He was
elected Senior Vice  President,  General Counsel and Secretary in December 2002.
Previously, he was Vice President,  General Counsel and Secretary from September
2000 to December 2002. He was also Vice President, General Counsel and Assistant
Secretary  from June 1991 to September  2000.  He was General  Counsel from June
1990 to June 1991.

MICHAEL  ZARRELLA has been  associated with Citizens since December 1999. He was
elected Vice  President,  Strategic  Planning and  Development  in October 2000.
Previously he was Director,  Strategic  Planning and  Development  from December
1999 to October 2000. Prior to joining Citizens,  he was Group Vice President of
Finance for Century  Communications  Corp.  from June 1996 to December  1999 and
Director, Financial Analysis from October 1990 to June 1996.


                                       13

<PAGE>

                                     PART II


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

                           PRICE RANGE OF COMMON STOCK
Our Common Stock is traded on the New York Stock  Exchange under the symbol CZN.
The  following  table  indicates  the high and low prices  per share  during the
periods indicated.

                                        2002                    2001
                                  ------------------    -----------------
                                   High        Low        High        Low
                                   ----        ---        ----        ---
           First Quarter          $11.30      $8.91      $15.88     $12.05
           Second Quarter         $11.52      $8.22      $15.00     $11.28
           Third Quarter          $ 8.80      $2.51      $13.10     $ 8.95
           Fourth Quarter         $10.99      $5.44      $11.53     $ 8.20

As of February 28, 2003, the approximate number of security holders of record of
our Common Stock was 31,752.  This  information  was obtained  from our transfer
agent.

                                    DIVIDENDS
The amount and timing of  dividends  payable on Common Stock are within the sole
discretion of our Board of Directors.  Our Board of Directors  discontinued  the
payment of dividends after the payment of the December 1998 stock dividend.

 RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED 
 SECURITIES

None


Item 6.  Selected Financial Data
         -----------------------

<TABLE>
<CAPTION>
($ in thousands, except per share amounts)                                  Year Ended December 31,
 ----------------------------------------               ---------------------------------------------------------------
                                                           2002           2001         2000          1999        1998
                                                        ------------- ------------ -----------   ----------- ------------
<S>                                                     <C>          <C>           <C>          <C>          <C>        
Revenue (1)                                              $2,669,332   $ 2,456,993   $1,802,358   $ 1,598,236  $ 1,448,588
Income (loss) from continuing operations before
  extraordinary expense and cumulative effect of         $ (822,976)  $   (63,926)  $  (40,071)  $   136,599  $    46,444
  changes in accounting principle (2)
Net income (loss)                                        $ (682,897)  $   (89,682)  $  (28,394)  $   144,486  $    57,060
Basic income (loss) per share of Common Stock
  from continuing operations before extraordinary expense
  and cumulative effect of changes in accounting
  principle (2)                                          $    (2.93)  $     (0.28)  $    (0.15)  $      0.53  $      0.18
Available for common shareholders per basic share        $    (2.43)  $     (0.38)  $    (0.11)  $      0.56  $      0.22
Available for common shareholders per diluted share      $    (2.43)  $     (0.38)  $    (0.11)  $      0.55  $      0.22
Stock dividends declared on Common Stock (3)                      -             -            -             -         3.03%

                                                                               As of December 31,
                                                        ---------------------------------------------------------------
                                                            2002         2001         2000        1999        1998
                                                        ------------- ------------ ----------- ----------- ------------
Total assets                                             $8,146,742  $ 10,553,600   $6,955,006   $ 5,771,745  $ 5,292,932
Long-term debt                                           $4,957,361  $  5,534,906   $3,062,289   $ 2,107,460  $ 1,775,338
Equity units                                             $  460,000  $    460,000   $        -   $         -  $         -
Shareholders' equity                                     $1,172,139  $  1,946,142   $1,720,001   $ 1,919,935  $ 1,792,771
</TABLE>

(1)  Represents  revenue from continuing  operations.  Revenue from acquisitions
     contributed  $569.8  million and $49.5 million for the years ended December
     31,  2001  and  2000,  respectively.   Revenue  from  gas  operations  sold
     represented  $218.8  million,  $232.3  million,  $175.4  million and $173.1
     million  in  2001,  2000,  1999 and  1998,  respectively.  Revenue  from an
     electric  operation sold represented  $76.6 million,  $94.3 million,  $95.1
     million,  $78.7 million and $72.6  million in 2002,  2001,  2000,  1999 and
     1998, respectively.
(2)  Extraordinary  expense  represents  an  extraordinary  after tax expense of
     $43.6 million related to the discontinuance of the application of Statement
     of Financial  Accounting  Standards No. 71 to our local exchange  telephone
     operations  in  2001.  The  cumulative  effect  of  changes  in  accounting
     principle represents write-off of ELI's goodwill of $39.8 million resulting
     from the adoption of Statement of Financial Accounting Standards No. 142 in
     2002 and an after tax charge of $2.3 million at ELI in 1998  resulting from
     the adoption of Statement of Position 98-5.
(3)  Compounded annual rate of quarterly stock dividends.


                                       14

<PAGE>

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  that could cause  actual  results to differ
materially from those  expressed or implied in the  statements.  Statements that
are not historical  facts are  forward-looking  statements  made pursuant to the
Safe Harbor Provisions of the Litigation Reform Act of 1995. In addition,  words
such  as  "believes",  "anticipates",  "expects"  and  similar  expressions  are
intended  to identify  forward-looking  statements.  Forward-looking  statements
(including oral  representations)  are only predictions or statements of current
plans, which we review continuously.  Forward-looking statements may differ from
actual  future  results  due  to,  but  not  limited  to,  any of the  following
possibilities:

     *    Changes in the number of our access lines;

     *    The effects of  competition  from wireless,  other  wireline  carriers
          (through Unbundled Network Elements (UNE),  Unbundled Network Elements
          Platform  (UNEP) or  otherwise),  high  speed  cable  modems and cable
          telephony;

     *    The effects of general and local economic conditions on our revenues;

     *    Our  ability  to   effectively   manage  and  otherwise   monitor  our
          operations, costs, regulatory compliance and service quality;

     *    Our  ability  to  divest  our  remaining  public  utilities   services
          businesses  and the  effect of the timing of the  divestitures  on the
          capital expenditures we make with respect to such businesses;

     *    Our ability to successfully  introduce new product offerings including
          our ability to offer bundled service  packages on terms  attractive to
          our customers, and our ability to sell enhanced and data services;

     *    Our ability to manage our operating expenses, capital expenditures and
          reduce our debt;

     *    The effects of greater  than  anticipated  competition  requiring  new
          pricing,  marketing  strategies or new product  offerings and the risk
          that we will not respond on a timely or profitable basis;

     *    The effects of bankruptcies in the  telecommunications  industry which
          could result in higher network access costs and potential bad debts;

     *    The effects of technological changes,  including the lack of assurance
          that our ongoing  network  improvements  will be sufficient to meet or
          exceed the capabilities and quality of competing networks;

     *    The effects of  increased  pension and retiree  medical  expenses  and
          related funding  requirements;  

     *    The  effects  of  changes  in  regulation  in  the  telecommunications
          industry as a result of the  Telecommunications  Act of 1996 and other
          federal and state  legislation  and regulation,  including  changes in
          access charges and subsidy payments;

     *    The effect of  restructuring  of  portions  of the  telecommunications
          market;

     *    The effects of possible state  regulatory cash management  policies on
          our ability to transfer cash among our  subsidiaries and to the parent
          company;

     *    Our ability to  successfully  renegotiate  expiring  union  contracts,
          including the contract covering the Communications  Workers of America
          members in Rochester that is scheduled to expire in January 2004; and


                                       15

<PAGE>
     *    The effects of more  general  factors,  including  changes in economic
          conditions;  changes  in the  capital  markets;  changes  in  industry
          conditions;  changes in our credit ratings;  and changes in accounting
          policies or practices adopted  voluntarily or as required by generally
          accepted accounting principles or regulators.

You should consider these important  factors in evaluating any statement in this
Form 10-K or otherwise  made by us or on our behalf.  The following  information
should be read in conjunction  with the  consolidated  financial  statements and
related notes included in this report. We have no obligation to update or revise
these forward-looking statements.

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

For the year  ended  December  31,  2002,  we used cash  flows  from  continuing
operations,  the  proceeds  from the sale of utility  properties,  cash and cash
equivalents  and  investment  balances to fund  capital  expenditures,  interest
payments and debt repayments.  On January 15, 2002, we completed the sale of our
water and  wastewater  operations for $859.1 million in cash plus the assumption
by the buyer of $122.5 million of our debt and other liabilities. On November 1,
2002 we completed  the sale of Kauai  Electric  division  for $215.0  million in
cash.  The proceeds  were used for general  corporate  purposes,  including  the
repayment of outstanding indebtedness.  As of December 31, 2002, we had cash and
cash equivalents aggregating $393.2 million.

For the year ended  December  31, 2002,  our actual  capital  expenditures  were
$468.7 million, including $288.8 million for the ILEC segment, $12.0 million for
the ELI segment (excluding the purchase of equipment  previously under lease for
$110.0  million  in cash),  $39.7  million  for the  public  utilities  services
segments and $18.2 million for general capital expenditures.

We have budgeted  approximately  $333.6  million for our 2003 capital  projects;
including $275.0 million for the ILEC segment, $13.4 million for the ELI segment
and $45.2 million for the public  utilities  segment.  In the ordinary course of
business,  capital  expenditures for the public utilities segment would increase
the amount of assets that would be reflected on the balance sheet. However, most
of the capital  expenditures with respect to our public utilities segment during
2003  will be  expensed  as  incurred  instead  of  capitalized  (see  "Loss  on
Impairment" below and Note 28).

During 1995, ELI entered into a construction  agency  agreement and an operating
lease  agreement  in  connection  with  the   construction  of  certain  network
facilities.  On April  30,  2002,  ELI  purchased  the  facilities  at the lease
termination  for $110.0  million in cash.  Citizens had  guaranteed all of ELI's
obligations under this operating lease and provided the funds for the purchase.

We have an available shelf  registration of $825.6 million and we have available
lines of credit with financial  institutions  in the aggregate  amount of $805.0
million. Associated facility fees vary, depending on our credit ratings, and are
0.25% per annum as of December 31, 2002. The expiration  date for the facilities
is October 24, 2006. During the term of the facilities we may borrow,  repay and
reborrow  funds.  As of December 31, 2002,  there were no  outstanding  advances
under these facilities.

Tender Offer
------------
On May 16, 2002, we commenced a tender offer, at $0.70 per share, for all of the
publicly  held Class A common  shares of ELI that we did not  already  own.  The
tender  offer  expired on June 17,  2002,  at which  time the  shares  tendered,
combined  with the ELI shares  already  owned by us,  represented  approximately
95.5% of total  outstanding ELI Class A shares. On June 20, 2002, we completed a
short-form merger in which ELI became our wholly owned subsidiary and each share
of common stock not tendered was converted into a right to receive $0.70 in cash
without interest. The total cost (including fees and expenses) of the tender was
approximately $6.8 million.

Debt Reduction
--------------
For the year ended December 31, 2002, we retired an aggregate  principal  amount
of $1.06 billion of debt. We intend to continue to reduce debt balances from the
proceeds  from the sale of our  public  service  utilities  and cash  flows from
continuing  operations and may use current cash and cash equivalent balances. If
the sale of our Arizona utility  businesses to UniSource is completed,  the sale
agreement  requires us to promptly  redeem $111.8  million  principal  amount of
industrial revenue bonds.

On January 7, 2002,  we  redeemed at par two of our  outstanding  1991 series of
industrial  development revenue bonds, the $20.0 million 7.15% Mohave series and
the $10.1 million 7.15% Santa Cruz series.


                                       16

<PAGE>

On January 31, 2002, we repaid  approximately  $76.9 million principal amount of
debt from the Rural  Utilities  Service,  Rural  Telephone  Bank and the Federal
Financing Bank. We paid a premium of $0.5 million on these redemptions.

On March 27, 2002, we repaid $40.0  million of Frontier  7.51% Medium Term Notes
at maturity.

On May 1,  2002,  we  redeemed  at par  six  of our  outstanding  variable  rate
industrial  development  revenue  bond series  aggregating  approximately  $20.3
million in principal amount.

On June 27, 2002, we redeemed at par $24.8 million principal amount of our 7.05%
Mohave Industrial Development Revenue Refunding Bonds due August 1, 2020.

On July 15, 2002, we redeemed at par three of our outstanding fixed and variable
rate industrial development revenue bond series aggregating  approximately $14.9
million in principal amount.

On August 7, 2002,  we  redeemed  at par one of our  outstanding  variable  rate
industrial  development  revenue bond series  totaling $5.5 million in principal
amount.

Following the  completion of the merger with ELI, we repaid and  terminated  the
entire $400.0 million outstanding under ELI's committed revolving line of credit
with a syndicate of commercial banks.

During the last three quarters of 2002, we executed a series of purchases in the
open market of a number of our outstanding  notes and debentures.  The aggregate
principal  amount of notes and  debentures  purchased was $106.9 million and the
purchases  generated a pre-tax gain from the early  extinguishment  of debt at a
discount of approximately $6.0 million.  We may from time to time repurchase our
debt in the open market.

During  December  2002,  we  completed a tender  offer with respect to our 6.80%
Debentures due 2026 (puttable at par in 2003) and ELI's 6.05%  Guaranteed  Notes
due  2004.  As a  result  of the  tender,  $82.3  million  and  $259.4  million,
respectively,  of these  securities  were  purchased and retired at a premium of
$12.8 million in excess of the principal amount of the securities purchased.

Interest Rate Management
------------------------
In order to  manage  our  interest  rate risk  exposure,  we  entered  into five
interest  swap  agreements  in 2001 and 2002  with  investment  grade  financial
institutions.  Each agreement covered a notional amount of $50.0 million.  Under
the  terms  of the  agreements,  we make  semi-annual,  floating  interest  rate
interest  payments  based on six  month  LIBOR and  receive a fixed  rate on the
notional amount.  There are two interest rate swap agreements that were executed
in 2001 that  receive a 6.375% fixed rate until the swaps'  termination  date of
August 15,  2004,  and there are three swaps  executed  in 2002 that  receive an
8.500% fixed rate until their  termination  date of May 15, 2006. The underlying
variable  rate on the swaps is set either in  advance,  in arrears or, as in the
case of one agreement,  based on each period's daily average six-month LIBOR. In
connection  with these swaps,  the Company entered into a series of supplemental
rate agreements which had the effect of setting the floating rate portion of the
swaps in advance of the contractually agreed upon rate determination date.

The net  effect  of the two 2001  interest  rate  swaps  and  supplemental  rate
agreements was to reduce the effective  interest rate on $100.0 million of fixed
rate debt from 6.375% to 3.665%  during  2002.  The net effect of the three 2002
swaps and supplemental rate agreements was to reduce the effective interest rate
on $150.0 million of fixed rate debt from 8.500% to 6.864% through  November 15,
2002,  the latest rate reset date. All swaps and  associated  supplemental  rate
agreements are accounted for under SFAS 133 as fair value hedges.


                                       17

<PAGE>
Future Commitments
------------------
A summary of our future contractual obligations and commercial commitments as of
December 31, 2002 is as follows:

<TABLE>
<CAPTION>
                                                          Less than                                After
($ in thousands)                              Total       1 year(2)   2-3 years    4-5 years      5 years
 --------------                            ----------    ----------   ---------    ---------    ----------
<S>                                        <C>              <C>        <C>          <C>          <C>       
Long-term debt (See Note 10) (1)           $5,476,272    $ 58,911     $392,390     $885,023     $4,139,948

Operating leases (See Note 28)                157,975      26,790       41,152       34,578         55,455

Long-term contracts (See Note 28)             388,752     100,812      117,591       44,599        125,750

Equity Providing Preferred                                                                    
   Income Convertible Securities              
     (EPPICS)(See Note 16)                    201,250           -            -            -        201,250
                                          -----------    ---------    --------     --------     ----------                    
 
Total contractual cash obligations         $6,224,249    $186,513     $551,133     $964,200     $4,522,403
                                          ===========    =========    ========     ========     ==========
</TABLE>

(1)  Includes the debt portion of the equity units ($460.0  million) and the net
     present value of payments under capital leases ($135.2 million).
(2)  If the sale of our Arizona utility  business to UniSource is completed,  we
     will redeem $111.8 million principal amount of long-term debt.

Covenants
---------
The terms  and  conditions  contained  in our  indentures  and  credit  facility
agreements  are of a general  nature,  and do not currently  impose  significant
financial performance criteria on us. These general covenants include the timely
and punctual  payment of principal and interest when due, the maintenance of our
corporate  existence,  keeping  proper  books and  records  in  accordance  with
Generally Accepted Accounting  Principles (GAAP),  restrictions on the allowance
of liens on our assets,  and restrictions on asset sales and transfers,  mergers
and other changes in corporate control. We currently have no restrictions on the
payment of dividends by us either by contract, rule or regulation.

The principal  financial  performance  covenant  under our $805.0 million credit
facilities  and our $200.0  million term loan facility with the Rural  Telephone
Finance  Cooperative  (RTFC)  requires the maintenance of a minimum net worth of
$1.5 billion.  These facilities define "net worth" as shareholders'  equity plus
equity units plus mandatorily redeemable convertible preferred securities. Under
the RTFC loan, in the event that our credit rating from either Moody's Investors
Service  or  Standard  & Poor's  declines  below  investment  grade  (Baa3/BBB-,
respectively),  we would also be required to maintain an interest coverage ratio
of 2.00 to 1 or greater  and a leverage  ratio of 6.00 to 1 or lower.  We are in
compliance with all of our debt covenants.

At December 31, 2002 the amount of our net worth as  calculated  pursuant to the
credit  facilities  and the RTFC  loan  facility  was $1.83  billion.  In future
periods, we may incur a reduction in shareholders' equity as a result of certain
pension matters described under "Critical  Accounting Policies and Estimates" or
for other reasons.  Although the potential  amount of future  reductions  cannot
currently be determined with certainty and assessments of the potential  amounts
require considerable  assumptions,  we believe that we will remain in compliance
with all of our debt covenants.

Acquisitions
------------
In 1999 and 2000 we entered into several  agreements to acquire telephone access
lines.  These  transactions have been accounted for using the purchase method of
accounting.  The results of  operations  of the  acquired  properties  have been
included in our consolidated  financial statements from the dates of acquisition
of each property.

In 2000,  we acquired from Verizon  Communications  Inc.  approximately  317,500
telephone  access lines for $948.2  million in cash,  and we acquired from Qwest
approximately  17,000 telephone  access lines in North Dakota for  approximately
$38.0 million in cash.

On June 29, 2001, we purchased  Frontier for  approximately  $3,373.0 million in
cash.

Divestitures
------------
On August 24, 1999, our Board of Directors  approved a plan of  divestiture  for
our public utilities services businesses, which included gas, electric and water
and wastewater businesses. During 2001 we sold two of our natural gas operations
and in 2002 we sold all of our water and wastewater treatment operations and one
electric business (see Note 7 to Consolidated Financial Statements).

                                       18

<PAGE>

On January 15, 2002, we sold our water and  wastewater  services  operations for
$859.1 million in cash and $122.5 million in assumed debt and other liabilities.

On October 29, 2002, we entered into  definitive  agreements to sell our Arizona
gas and electric divisions to UniSource Energy Corporation for $230.0 million in
cash  ($220.0  million  if we close by July 28,  2003)  subject  to  adjustments
specified in the agreements (see Note 7 to Consolidated  Financial  Statements).
The transaction,  which is subject to regulatory and other customary  approvals,
is expected to close during the second half of 2003.

On October 31, 2002,  we completed  the sale of  approximately  4,000  telephone
access lines in North Dakota for approximately $9.7 million in cash.

On November 1, 2002,  we completed the sale of our Kauai  electric  division for
$215.0 million in cash.

On  December  19,  2002,  we entered  into a  definitive  agreement  to sell our
Hawaiian gas  division to K-1 USA  Ventures,  Inc.  for $115.0  million in cash,
subject to adjustments under the terms of the agreement. The transaction,  which
is subject to regulatory  and other  customary  approvals,  is expected to close
during the fourth quarter of 2003.

Currently,  we do not have an agreement to sell our Vermont  electric  division,
but we continue  to actively  pursue a buyer.  All our gas and  electric  assets
(including   Arizona  gas  and  electric  and  Hawaii  gas)  and  their  related
liabilities are classified as "assets held for sale" and "liabilities related to
assets held for sale," respectively.  These assets have been written down to our
best estimate of the net realizable  value upon sale (see Note 4 to Consolidated
Financial  Statements).  During  the third  quarter  of 2002,  we  recognized  a
non-cash pre-tax impairment loss on these assets of $417.4 million. As discussed
below under "Loss on Impairment"  we will record  additional  impairment  losses
during 2003.

Discontinued operations in the consolidated statements of operations reflect the
results of operations  and the gain on sale of the  water/wastewater  properties
sold in January  2002  including  allocated  interest  expense  for the  periods
presented.  Interest expense was allocated to the discontinued  operations based
on the outstanding debt specifically identified with this business.

Discontinuation of SFAS 71
--------------------------
Prior to the 2000 and 2001 acquisitions,  our incumbent local exchange telephone
properties had been predominantly  regulated following a cost of service/rate of
return  approach.  Accordingly,  we  applied  the  provisions  of  Statement  of
Financial  Accounting  Standards  (SFAS)  No.  71  in  the  preparation  of  our
consolidated financial statements.

Currently,  pricing for a majority of our  revenues in our  previously  existing
incumbent local exchange telephone properties is based upon price cap plans that
limit prices to changes in general  inflation and estimates of productivity  for
the industry at large or upon market  pricing  rather than on the specific costs
of operating our business,  a requirement  for the application of SFAS 71. These
trends in the  deregulation  of pricing and the  introduction of competition are
expected to continue.  We intend to operate all of our properties as competitive
enterprises, to meet competitive entry and maximize revenue by providing a broad
range of products  and  services,  such as data  services.  Many of these future
services will not be regulated, further increasing the percentage of our revenue
provided by our networks that is not based upon  historical  cost/rate of return
regulation.

In the third quarter of 2001, we concluded based on the factors mentioned above,
that the provisions of SFAS 71 were no longer  applicable to our incumbent local
exchange telephone properties  (properties we owned prior to the acquisitions in
2000 and 2001).

As discussed further in Note 24 to Consolidated Financial Statements, in 2001 we
recorded  a non-cash  extraordinary  charge of $43.6  million  net of tax in our
statement of operations, to write-off regulatory assets and liabilities recorded
on our  balance  sheet in the past.  Based  upon our  evaluation  of the pace of
technological  change that is  estimated to occur in certain  components  of our
rural telephone  networks,  we concluded that minor  modifications  in our asset
lives were required for the major network  technology assets. In accordance with
the  provisions of SFAS 101 and SFAS 121, we performed a test of the  impairment
of the property,  plant and equipment accounts for our properties  discontinuing
SFAS 71 and based upon our  expectations  of future changes in sales volumes and
prices and the  anticipated  rate of entry of  additional  competition  into our
markets,  we concluded  that an asset  impairment  was not  warranted.  


                                       19

<PAGE>
Critical Accounting Policies and Estimates
------------------------------------------
We  review  all  significant  estimates  affecting  our  consolidated  financial
statements  on a  recurring  basis  and  record  the  effect  of  any  necessary
adjustment  prior to  their  publication.  Uncertainties  with  respect  to such
estimates  and   assumptions  are  inherent  in  the  preparation  of  financial
statements;  accordingly,  it is possible that actual  results could differ from
those  estimates  and changes to  estimates  could  occur in the near term.  The
preparation of our financial  statements  requires  management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
disclosure of the contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period.  Estimates  and  judgments  are used when  accounting  for allowance for
doubtful  accounts,   impairment  of  long-lived   assets,   intangible  assets,
depreciation  and  amortization,   employee  benefit  plans,  income  taxes  and
contingencies, among others.

Our estimate of anticipated losses related to telecommunications bankruptcies is
a "critical  accounting  estimate." We have  significant  on-going normal course
business relationships with many telecom providers, some of which have filed for
bankruptcy.  We  generally  reserve  approximately  95% of the  net  outstanding
pre-bankruptcy  balances  owed to us and  believe  that our  estimate of the net
realizable value of the amounts owed to us by bankrupt entities is appropriate.

We  believe  that the  accounting  estimate  related  to asset  impairment  is a
"critical  accounting  estimate".  With  respect to ELI,  the estimate is highly
susceptible  to change from period to period  because it requires  management to
make significant judgments and assumptions about future revenue, operating costs
and capital  expenditures  over the life of the  property,  plant and  equipment
(generally  5 to 15  years)  as well as the  probability  of  occurrence  of the
various scenarios and appropriate discount rates. Management's assumptions about
ELI's future revenue,  operating  costs and capital  expenditures as well as the
probability  of  occurrence  of  these  various  scenarios  require  significant
judgment  because  the CLEC  industry is changing  and because  actual  revenue,
operating costs and capital  expenditures  have  fluctuated  dramatically in the
past and may continue to do so in the future.  The  calculation of  depreciation
and amortization  expense is based on the estimated economic useful lives of the
underlying  property,  plant and equipment and identifiable  intangible  assets.
Although we believe it is unlikely  that any  significant  changes to the useful
lives of our tangible or  intangible  assets will occur in the near term,  rapid
changes in technology or changes in market  conditions could result in revisions
to such  estimates  that could affect the carrying value of these assets and our
future  consolidated  operating  results.  Our  depreciation  expense of the ELI
segment  will  decrease  substantially  in  future  periods  as a result  of the
impairment   write  down.  With  respect  to  our  remaining  gas  and  electric
properties,  our  estimate is based upon  expected  future sales prices of these
properties. (See Notes 4 and 7 to Consolidated Financial Statements).

In the third quarter  2002, we recognized a non-cash  pre-tax loss on impairment
of $656.7 million for the impairment of long-lived  assets in the ELI sector and
a total of $417.4  million of non-cash  pre-tax  losses on impairment in the gas
and  electric  sectors.  We  determined  that we may not be able to recover  the
previously  recorded carrying value of ELI's property,  plant, and equipment and
therefore  recorded  the  impairment  charge  accordingly.  The gas and electric
impairment is associated with the proposed sales of our Arizona gas and electric
and  Hawaiian  gas  properties  at a price that was less than the book  carrying
value.  We have also  written  down the value of our  remaining  utility  to our
estimate of net realizable sale price.

Our  indefinite  lived  intangibles  consist of goodwill  and trade name,  which
resulted from the purchase of ILEC  properties.  We test for impairment of these
assets annually, or more frequently,  as circumstances  warrant. All of our ILEC
properties share similar economic characteristics and as a result, our reporting
unit is the ILEC segment.  In determining fair value during 2002 we utilized two
tests.  One test utilized recent trading prices for completed ILEC  acquisitions
of similarly situated properties.  A second test utilized current trading values
for the Company's  publicly traded common stock. We reviewed the results of both
tests  for  consistency  to  insure  that  our  conclusions  were   appropriate.
Additionally,  we  utilized  a range of prices to gauge  sensitivity.  Our tests
determined  that fair values  exceeded book value.  Unless  economic  conditions
change significantly (i.e. we experience  unanticipated declines in revenue, and
or declines in both our stock price and ILEC property  values) we do not believe
that a charge for impairment is reasonably likely to occur in the near future.

Our  estimates of pension  expense,  other post  retirement  benefits  including
retiree  medical  benefits  and related  liabilities  are  "critical  accounting
estimates".  Our pension and other post retirement  benefits  expenses are based
upon a set of assumptions that include  projections of future interest rates and
asset returns.  Actual results may vary from these  estimates.  If future market
conditions  cause  either a decline in interest  rates used to value our pension
plan  liabilities  or  reductions  to the value of our  pension  plan  assets we
potentially could incur additional  charges to our  shareholder's  equity at the
end of 2003. Based upon market conditions  existing at the end of February 2003,
an additional charge of approximately $30 - $35 million would be required at the
end of 2003 should market conditions remain unchanged.


                                       20

<PAGE>

Management  has  discussed  the  development  and  selection  of these  critical
accounting  estimates with the audit committee of our board of directors and our
audit committee has reviewed our disclosure relating to them.

New Accounting Pronouncements
-----------------------------
In July 2001, the Financial  Accounting  Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets."  This  statement  requires  that  goodwill and other  intangibles  with
indefinite  useful  lives no longer be  amortized  to  earnings,  but instead be
reviewed for impairment.  We have no intangibles  with  indefinite  useful lives
other than goodwill and trade name. The  amortization of goodwill and trade name
ceased upon  adoption of the  statement on January 1, 2002.  We were required to
test for impairment of goodwill and other  intangibles  with  indefinite  useful
lives as of January 1, 2002 and at least annually  thereafter.  Any transitional
impairment  loss at January 1, 2002 is recognized as the cumulative  effect of a
change in accounting  principle in our statement of  operations.  As a result of
our adoption of SFAS 142, we recognized a transitional  impairment  loss related
to ELI of  $39.8  million  as a  cumulative  effect  of a change  in  accounting
principle  in our  statement  of  operations  in the first  quarter of 2002.  We
annually  examine the carrying value of our goodwill and other  intangibles with
estimated useful lives to determine  whether there are any impairment losses and
have  determined  for the  year  ended  December  31,  2002  that  there  was no
impairment.

SFAS No. 142 also requires that intangible assets with estimated useful lives be
amortized  over those lives and be reviewed for  impairment in  accordance  with
SFAS No. 144,  "Accounting  for  Impairment or Disposal or  Long-Lived  Assets."
During  the  first  quarter  of  2002,  we  reassessed  the  useful  life of our
intangible  assets with estimated useful lives and determined that no change was
required.  The impact of the  adoption of SFAS No. 142 is discussed in Note 6 to
Consolidated Financial Statements.

In August  2001,  the FASB issued  SFAS 143,  "Accounting  for Asset  Retirement
Obligations."  This statement  addresses the financial  accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement  costs. SFAS 143 requires that the fair value of
a liability  for an asset  retirement  obligation be recognized in the period in
which it is incurred  if a  reasonable  estimate of fair value can be made.  The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset and reported as a liability. This statement is effective
for fiscal years beginning after June 15, 2002. We are currently  evaluating the
impact of adoption of SFAS 143.

In October 2001,  the FASB issued SFAS 144,  "Accounting  for the  Impairment or
Disposal of Long-Lived  Assets." This statement  establishes a single accounting
model,  based on the  framework  established  in SFAS  121,  for  impairment  of
long-lived  assets held and used and for long-lived  assets to be disposed of by
sale,  whether  previously  held and used or newly  acquired,  and  broadens the
presentation of discontinued  operations to include more disposal  transactions.
We adopted this statement on January 1, 2002.

In April 2002, the FASB issued SFAS 145,  "Rescission of FASB  Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This
statement  eliminates the requirement that gains and losses from  extinguishment
of debt be aggregated and, if material, classified as an extraordinary item, net
of related  income tax  effect.  The  statement  requires  gains and losses from
extinguishment of debt to be classified as extraordinary items only if they meet
the criteria in  Accounting  Principles  Board  Opinion No. 30,  "Reporting  the
Results of  Operations  -  Reporting  the  Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions"  which provides guidance for distinguishing  transactions that are
part of an  entity's  recurring  operations  from  those  that  are  unusual  or
infrequent  or that meet the criteria  for  classification  as an  extraordinary
item. We adopted SFAS 145 in the second  quarter of 2002.  During the year ended
December  31,  2002,  we  recognized  $32.3  million  of gains  from  early debt
retirement as other income. There were no similar types of retirements in 2001.

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or Disposal  Activities,"  which nullified  Emerging Issues Task Force
(EITF) Issue No. 94-3,  "Liability  Recognition for Certain Employee Termination
Benefits  and Other Costs to Exit an  Activity."  SFAS No. 146  requires  that a
liability for a cost associated with an exit or disposal  activity be recognized
when the liability is incurred, rather than on the date of commitment to an exit
plan.  This  Statement is  effective  for exit or disposal  activities  that are
initiated after December 31, 2002. We are currently evaluating the impact of the
adoption of SFAS 146.


                                       21

<PAGE>
In December  2002,  the FASB issued SFAS No. 148,  "Accounting  for  Stock-Based
Compensation - Transition and Disclosure for Stock-Based Compensation." SFAS No.
148 provides  alternative  methods of transition  for a voluntary  change to the
fair value based method of accounting for  stock-based  compensation  and amends
the  disclosure  requirements  of SFAS No. 123. This  statement is effective for
fiscal  years  ending  after  December  15,  2002.  We have adopted the expanded
disclosure requirements of SFAS No. 148.

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

ILEC  revenue is generated  primarily  through the  provision of local,  network
access, long distance and data services. Such services are provided under either
a  monthly  recurring  fee or  based  on  usage  at a  tariffed  rate and is not
dependent  upon  significant  judgments by  management,  with the exception of a
determination of a provision for uncollectible amounts.

CLEC revenue is  generated  through  local,  long  distance,  data and long haul
services. These services are primarily provided under a monthly recurring fee or
based on usage at agreed  upon  rates  and are not  dependent  upon  significant
judgments by management with the exception of the  determination  of a provision
for  uncollectible  amounts and realizability of reciprocal  compensation.  CLEC
usage based revenue  includes amounts  determined under reciprocal  compensation
agreements.  While this  revenue is  governed  by  specific  contracts  with the
counterparty,  management  defers  recognition of portions of such revenue until
realizability is assured.  Revenue earned from long-haul contracts is recognized
over the term of the related agreement.

Revenue from the provision of public utility  services are  recognized  based on
usage without  significant  judgments made by management with the exception of a
provision for uncollectible accounts.

Consolidated  revenue  increased  $212.3  million,  or 9%,  in 2002  and  $654.6
million,  or 36%,  in 2001.  The  increase in 2002 was  primarily  due to $420.5
million of increased  telecommunications  revenue,  largely due to the impact of
the Frontier acquisition on June 29, 2001, partially offset by $195.0 million of
decreased  gas  revenue  largely due to the  disposition  of the  Louisiana  and
Colorado gas operations and the disposition of the Kauai electric division.  The
increase in 2001 was  primarily  due to the impact of  acquisitions  in the ILEC
sector as well as the  pass-through  to customers of the  increased  cost of gas
offset by the disposition of the Louisiana and Colorado gas operations.

<TABLE>
<CAPTION>
                TELECOMMUNICATIONS REVENUE

      ($ in thousands)                        2002                         2001                  2000
       --------------             ---------------------------    ----------------------------- ----------
                                   Amount    $ Change  % Change    Amount   $ Change  % Change  Amount
                                  ---------  ------------------- ---------  ------------------ ----------
<S>                              <C>         <C>           <C>   <C>         <C>           <C> <C>       
    Access services              $  673,456  $ 108,786     19%   $  564,670  $ 182,136     48% $  382,534
    Local services                  869,907    196,587     29%      673,320    277,574     70%    395,746
    Long distance and data service  305,455     97,181     47%      208,274    101,612     95%    106,662
    Directory services              104,383     32,008     44%       72,375     34,951     93%     37,424
    Other                           109,704     34,290     45%       75,414     34,037     82%     41,377
                                   ---------  ---------          ----------  ----------        ----------
     ILEC revenue                 2,062,905    468,852     29%    1,594,053    630,310     65%    963,743
    ELI                             175,079    (48,312)   -22%      223,391    (17,401)    -7%    240,792
                                  ---------   ---------          ----------  ----------        ----------
                                 $2,237,984  $ 420,540     23%   $1,817,444  $ 612,909     51% $1,204,535
                                  =========   =========          ==========  ==========        ==========
</TABLE>

Changes  in the  number of our access  lines is the most  fundamental  driver of
changes in our telecommunications revenue.  Historically,  rural local telephone
companies  experienced  steady  growth  in  access  lines  because  of  positive
demographic  trends,  steady rural local  economies and little  competition.  In
recent  quarters  many  rural  local  telephone  companies  (including  us) have
experienced  a loss of access  lines  primarily  because of  difficult  economic
conditions, increased competition from competitive wireline providers (including
from  Unbundled  Network  Elements),  from  wireless  providers  and from  cable
companies  (currently  with  respect  to  broadband  but which may in the future
expand to cable  telephony),  and by some customers  disconnecting  second lines
when they add DSL or cable modem service.  We lost  approximately  37,000 access
lines during 2002 but added  approximately  41,100 DSL  subscribers  during this
period.  The loss of lines during 2002 was equally weighted between  residential
and non-residential  customers. The non-residential line losses were principally
in Rochester,  while the  residential  losses were  throughout  our markets.  We
expect to continue to lose access lines  during  2003.  A continued  decrease in
access  lines,  combined  with  continuing  difficult  economic  conditions  and
increased competition, may cause our revenues to decrease in 2003.


                                       22

<PAGE>

Prior to 2002, we reported  subscriber line charges (SLC) in both the access and
local revenue categories.  Beginning in the second quarter 2002, all SLC revenue
is  reported  in the  local  services  category.  All  prior  periods  have been
conformed to this  presentation.  The average  amount of SLC that was previously
reported in access services is $22.9 million per quarter.

Access  services  revenue for the year ended December 31, 2002 increased  $108.8
million,  or 19%, as compared  with the prior year period  primarily  due to the
full year impact of Frontier of $92.4  million.  Increases in subsidies of $20.3
million and  non-switched  access revenue of $12.5 million due to higher circuit
sales were  partially  offset by a decrease in switched  access revenue of $16.5
million primarily from the effect of tariff rate reductions effective as of July
1, 2002.  Our subsidy  revenues in 2003 are  expected to be slightly  lower than
2002.

Access  services  revenue for the year ended December 31, 2001 increased  $182.1
million,  or 48%,  as  compared  with the prior  year  period  primarily  due to
additional  revenues of $159.1 million  resulting from  acquisitions.  Growth in
minutes of use, special access and subsidies  revenue  contributed $3.1 million,
$17.9 million and $20.0  million,  respectively.  The increases  were  partially
offset by $6.5 million from the effect of the FCC's CALLS  mandate which reduced
access  charges  paid  by long  distance  companies  and  $7.3  million  in rate
decreases  in effect as of July 1, 2001.  Access  services  revenue in 2001 also
includes a  reclassification  of $13.9 million in revenue that was classified as
local services revenue in 2000.

Local services  revenue for the year ended  December 31, 2002  increased  $196.6
million,  or 29%, as compared  with the prior year period  primarily  due to the
full year impact of Frontier of $184.8  million.  Increases  of $8.0  million in
enhanced services for feature packages and $12.5 million from SLC were partially
offset by an $8.6 million decrease  resulting from rate changes and line losses.
Although we  continue  to increase  our  penetration  of enhanced  services,  in
current economic conditions the rate of increase in sales is lower than in prior
periods and we expect this trend to  continue.  Local  services  revenue for the
year ended December 31, 2001 increased $277.6 million,  or 70%, as compared with
the prior year period primarily due to acquisitions,  which  contributed  $260.9
million and growth in enhanced services of $8.1 million.  Local services revenue
in 2001 also reflects a reduction for the  reclassification  of $13.9 million in
revenue that was classified as access revenue in 2000.

Long  distance and data  services  revenue for the year ended  December 31, 2002
increased  $97.2  million,  or 47%,  as  compared  with the  prior  year  period
primarily  due to the full  year  impact of  Frontier  of $72.4  million,  $13.7
million  growth  related  to data and  dedicated  circuits  and  growth  in long
distance  services of $11.0 million.  The rate of increases in our data and long
distance  revenues has been slowing recently because of economic  conditions and
intense  competition  in some of our  markets.  We  expect  these  factors  will
continue to affect our long  distance and data  services  revenues  during 2003.
Long  distance and data  services  revenue for the year ended  December 31, 2001
increased  $101.6  million,  or 95%,  as  compared  with the prior  year  period
primarily due to the impact of  acquisitions  of $78.2 million,  principally the
long-distance and data revenue associated with Frontier, which contributed $74.1
million.  Growth in data and  dedicated  circuits of $14.9 million and growth in
long distance services of $7.7 million also contributed to the increase.

Directory  services revenue for the year ended December 31, 2002 increased $32.0
million,  or 44%, as compared  with the prior year period  primarily  due to the
full  year  impact of  Frontier  of $30.0  million  and  growth in yellow  pages
advertising  revenue of $2.0 million.  Directory  services  revenue for the year
ended  December 31, 2001 increased  $35.0 million,  or 93%, as compared with the
prior year period primarily due to the impact of acquisitions, which contributed
$33.2 million, and growth of $1.8 million.

Other revenue for the year ended December 31, 2002 increased  $34.3 million,  or
45%,  as  compared  with the prior year  period  primarily  due to the full year
impact of Frontier of $32.8  million.  Other revenue for the year ended December
31, 2001 increased $34.0 million, or 82%, as compared with the prior year period
primarily due to the impact of acquisitions of $38.4 million,  partially  offset
by a decrease in miscellaneous revenue categories.

ELI revenue  for the years ended  December  31,  2002 and 2001  decreased  $48.3
million, or 22% and $17.4 million, or 7%,  respectively,  primarily due to lower
reciprocal  compensation  minutes and prices,  a decline in  Integrated  Service
Digital  Network  (ISDN)  services  due to less  demand  from  internet  service
providers  and lower demand and prices for long haul  services.  The decrease in
2001 was  also  attributable  to the  expiration  of a  material  data  services
contract in February 2001. ELI has  experienced  eight  consecutive  quarters of
declining revenue.


                                       23

<PAGE>

<TABLE>
<CAPTION>
                            GAS AND ELECTRIC REVENUE

   ($ in thousands)
    --------------                     2002                         2001                 2000
                         -----------------------------  ------------------------------- ----------
                          Amount    $ Change  % Change   Amount    $ Change  % Change    Amount
                         --------- -------------------  ---------- -------------------- ----------
<S>                      <C>        <C>           <C>   <C>         <C>          <C>    <C>      
    Gas revenue          $ 216,517  $ (195,017)  -47%   $ 411,534   $ 36,783     10%    $ 374,751
    Electric revene      $ 214,831  $  (13,184)   -6%   $ 228,015   $  4,943      2%    $ 223,072
</TABLE>


Gas revenue for the year ended December 31, 2002 decreased  $195.0  million,  or
47%, as compared  with the prior year  period  primarily  due to the sale of our
Louisiana and Colorado gas operations  partially  offset by higher purchased gas
costs passed on to consumers.  Gas revenue for the year ended  December 31, 2001
increased  $36.8  million,  or 10%,  as  compared  with the  prior  year  period
primarily due to higher purchased gas costs passed on to customers and increased
consumption  partially  offset  by  decreased  revenue  due to the  sale  of our
Louisiana and Colorado gas operations. Included in gas revenue for 2001 and 2000
is  approximately  $218.8 million and $232.3 million,  respectively,  of revenue
from our  Louisiana  and  Colorado gas  operations  that ceased upon the sale of
those  operations  on July 2, 2001 and November 30,  2001,  respectively.  Under
tariff  provisions,  the cost of our gas purchases  are  primarily  passed on to
customers.

Electric  revenue for the year ended December 31, 2002 decreased  $13.2 million,
or 6%, as compared  with the prior year period  primarily due to the sale of our
Kauai electric division  partially offset by increased unit sales and the effect
of a rate increase  approved in Vermont on July 15, 2002.  Electric  revenue for
the year ended December 31, 2001 increased $4.9 million, or 2%, as compared with
the prior year period primarily due to customer growth and increased consumption
due to warmer weather  conditions.  Included in electric  revenue for 2002, 2001
and 2000 is  approximately  $76.2  million,  $94.3  million  and $95.1  million,
respectively,  of revenue for our Kauai electric  operation that ceased upon its
sale on November 1, 2002.  Under  tariff  provisions,  the cost of our  electric
energy and fuel oil purchases are primarily passed on to customers.

<TABLE>
<CAPTION>
                                COST OF SERVICES

      ($ in thousands)                        2002                           2001                2000
       --------------             -----------------------------  ----------------------------- ---------
                                   Amount   $ Change   % Change   Amount    $ Change  % Change  Amount
                                  --------- -------------------  ---------- ------------------ ---------
<S>                               <C>        <C>           <C>   <C>         <C>          <C>  <C>      
      Network access              $ 235,462  $  41,368     21%   $ 194,094   $ 55,924     40%  $ 138,170
      Gas purchased                 122,915   (159,146)   -56%     282,061     52,523     23%    229,538
      Electric energy and fuel 
        oil purchased               118,543     (4,680)    -4%     123,223      9,258      8%    113,965
                                  ---------  ---------          ----------  ----------         ---------
                                  $ 476,920  $(122,458)   -20%   $ 599,378   $117,705     24%  $ 481,673
                                  =========  =========          ==========  ==========         =========
</TABLE>

Network access  expenses for the year ended  December 31, 2002  increased  $41.4
million,  or 21%, as compared  with the prior year period  primarily  due to the
full year  impact of  Frontier of $41.3  million  and  increased  costs of $16.6
million in the ILEC sector, partially offset by decreased costs of $16.5 million
in ELI as a result of decreases in demand.

Network access  expenses for the year ended  December 31, 2001  increased  $55.9
million,  or 40%, as compared  with the prior year period  primarily  due to the
impact of acquisitions and increased circuit expense  associated with additional
data product  introductions  partially  offset by a reduction  in long  distance
access  expense  related to rate changes in the ILEC sector and reduced  network
access expenses at ELI.

Gas purchased for the year ended December 31, 2002 decreased $159.1 million,  or
56%, as compared  with the prior year  period  primarily  due to the sale of our
Louisiana  and Colorado gas  operations  partially  offset by an increase in the
cost of gas due to higher  commodity  pricing.  Gas purchased for the year ended
December 31, 2001 increased  $52.5  million,  or 23%, as compared with the prior
year period  primarily  due to higher  purchased gas costs  partially  offset by
decreased  gas  purchased  due to the sale of our  Louisiana  and  Colorado  gas
operations.  Included in gas purchased for 2001 and 2000 is approximately $173.3
million and $151.4 million,  respectively, of gas purchased by our Louisiana and
Colorado gas operations that ceased upon the sale of those operations on July 2,
2001 and November 30, 2001, respectively.

Electric  energy and fuel oil  purchased  for the year ended  December  31, 2002
decreased $4.7 million,  or 4%, as compared with the prior year period primarily
due to the sale on  November  1,  2002 of Kauai  electric  partially  offset  by
increased  purchased  power  costs.  Included  in  electric  energy and fuel oil
purchased for 2002, 2001 and 2000 is approximately $27.5 million,  $37.9 million
and $37.9 million,  respectively, of electricity purchased by our Kauai electric
operation that ceased upon its sale on November 1, 2002.


                                       24

<PAGE>

Electric  energy and fuel oil  purchased  for the year ended  December  31, 2001
increased $9.3 million,  or 8%, as compared with prior year period primarily due
to higher purchased power prices,  customer growth and increased consumption due
to warmer  weather  conditions.  Gas,  electric  energy  and fuel oil  purchased
excludes amounts deferred for future recovery in rates.

In Arizona,  power costs  charged by our supplier were in excess of the rates we
charged our customers by approximately $123.6 million through December 31, 2002.
We believe that we are allowed to recover these charges from ratepayers  through
the  Purchase  Power Fuel  Adjustment  clause  that was  approved by the Arizona
Corporation  Commission and has been in place for several years.  However, in an
attempt to limit "rate shock" to our  customers,  we requested in September 2001
that our unrecovered power costs, plus interest,  be recovered over a seven-year
period.  As  a  result,  we  deferred  these  costs  on  the  balance  sheet  in
anticipation  of  recovery  through the  regulatory  process.  This  balance was
effectively  reduced by the public service impairment charge recorded during the
third quarter of 2002 which reduced the net assets of these  businesses to their
estimated  sale  value (See Note 4 to  Consolidated  Financial  Statements).  In
January  2003,  the  Commission  agreed  to  consolidate  this  matter  with the
application for approval of the sale of our Arizona  electric  property.  

<TABLE>
<CAPTION>
                            OTHER OPERATING EXPENSES

    ($ in thousands)                              2002                          2001                 2000
     --------------                  ------------------------------  ----------------------------- ---------
                                      Amount    $ Change   % Change   Amount    $ Change  % Change  Amount
                                     ---------  -------------------  ---------- ------------------ ----------
<S>                                  <C>          <C>           <C>  <C>        <C>           <C>  <C>      
    Operating expenses               $  762,053   $ 22,931      3%   $ 739,122  $ 101,919     16%  $ 637,203
    Taxes other than income taxes       131,258     15,448     13%     115,810     15,709     16%    100,101
    Sales and marketing                 109,044     12,266     13%      96,778     22,156     30%     74,622
                                     ----------   ---------          ---------- ----------         ---------
                                     $1,002,355   $ 50,645      5%   $ 951,710  $ 139,784     17%  $ 811,926
                                     ==========   =========          ========== ==========         =========
</TABLE>

Operating expenses for the year ended December 31, 2002 increased $22.9 million,
or 3%, as compared with prior year period  primarily due to increased  operating
expenses related to the full year impact of Frontier of $149.9 million partially
offset by increased  operating  efficiencies and a reduction of personnel in the
ILEC and ELI sectors,  and decreased operating expenses in the gas sector due to
the sale of our  Louisiana  and  Colorado  gas  operations  on July 2,  2001 and
November 30, 2001,  respectively.  The increase was also offset by the fact that
there were no acquisition  assimilation  costs in 2002 compared to $21.4 million
of such  costs in 2001.  We  routinely  review  our  operations,  personnel  and
facilities  to  achieve  greater  efficiencies.  These  reviews  may  result  in
reductions in personnel and an increase in severance costs.

Included in operating  expenses is pension  expense.  In future periods,  if the
value of our pension assets decline and/or projected benefit costs increase,  we
may have increased pension expenses. Based on current assumptions and plan asset
values,  we estimate that our pension expense will increase from $4.3 million in
2002 to  approximately  $13.0 - $15.0 million in 2003 and that a contribution to
our pension plans will be required in 2003 in an amount  currently  estimated at
$16.0 - $18.0 million.  In addition,  as medical costs increase the costs of our
retiree medical  obligations  also increase.  Our retiree medical costs for 2002
were $15.1 million and our current estimate for 2003 is approximately  $15 - $16
million.

Operating  expenses  for the year  ended  December  31,  2001  increased  $101.9
million,  or 16%, as compared  with the prior year period  primarily  due to the
impact of acquisitions. The increase was partially offset by decreased operating
expenses at ELI primarily due to a reduction in personnel,  decreased  operating
expenses  in the gas  sector  primarily  due to the  sale of the  Louisiana  and
Colorado  gas  operations  and a decrease  in  compensation  expense  related to
variable stock plans.

In future periods,  compensation  expense related to variable stock plans may be
materially  affected  by our stock  price.  A $1.00  change  in our stock  price
impacts  compensation  expense  by  approximately  $1.0  million.  There  was no
material impact for the year ended December 31, 2002.

Taxes other than income  taxes for the year ended  December  31, 2002  increased
$15.4  million,  or 13%, as compared to prior year period  primarily  due to the
full year impact of  Frontier of $25.6  million  partially  offset by  decreased
payroll taxes in the ILEC sector  related to workforce  reductions and decreased
taxes  in the gas  sector  due to the sale of our  Louisiana  and  Colorado  gas
operations on July 2, 2001 and November 30, 2001, respectively. Taxes other than
income for the year ended December 31, 2001 increased $15.7 million,  or 16%, as
compared to prior year period primarily due to the impact of acquisitions.


                                       25

<PAGE>

Sales and  marketing  expenses for the year ended  December  31, 2002  increased
$12.3  million,  or 13%, as compared to prior year period  primarily  due to the
full year impact of Frontier of $22.2  million,  partially  offset by  decreased
sales and  marketing  in the ELI  sector of $10.0  million,  primarily  due to a
reduction in personnel and related costs.  Sales and marketing expenses for year
ended  December 31, 2001 increased  $22.2 million,  or 30%, as compared to prior
year  period   primarily  due  to  the  impact  of  acquisitions  and  increased
telemarketing costs in the telecommunications sector.

<TABLE>
<CAPTION>
                       DEPRECIATION AND AMORTIZATION EXPENSE

      ($ in thousands)                2002                         2001                  2000
       --------------       ---------------------------  ----------------------------- ---------
                             Amount   $ Change % Change   Amount    $ Change  % Change  Amount
                            --------- -----------------  ---------- ------------------ ---------
<S>                         <C>       <C>          <C>   <C>        <C>           <C>  <C>      
      Depreciation expense  $ 630,113 $ 141,156    29%   $ 488,957  $ 118,838     32%  $ 370,119
      Amortization expense    125,409   (17,970)  -13%     143,379    125,891    720%     17,488
                            --------- ---------          ---------- ----------         ---------
                            $ 755,522 $ 123,186    19%   $ 632,336  $ 244,729     63%  $ 387,607
                            ========= =========          ========== ==========         =========
</TABLE>

Depreciation  expense  for the year ended  December  31, 2002  increased  $141.2
million, or 29%, as compared to prior year period primarily due to the full year
impact of Frontier of $82.6 million and increased  depreciation of $35.6 million
at ELI. The increase at ELI was primarily due to the purchase of $110.0  million
of  previously  leased  facilities in April 2002 and changes in our estimates of
the  depreciable  lives as of June 2002 offset by a decrease  related to the ELI
impairment  charge  recognized  during the third quarter of 2002. As a result of
the ELI impairment,  we expect 2003  depreciation  and  amortization  expense to
decline 10% - 15%.

Depreciation  expense  for the year ended  December  31, 2001  increased  $118.8
million, or 32%, as compared to prior year period primarily due to the impact of
acquisitions  of $119.1  million and $22.0 million of  accelerated  depreciation
related  to the  change in useful  lives of our  accounting  and human  resource
systems and our Plano,  Texas office  building,  furniture and fixtures.  Higher
property, plant and equipment balances in the telecommunications and ELI sectors
also  contributed  to the  increase.  The  increases  were  partially  offset by
decreased  depreciation  expense related to our classifying our gas and electric
sectors as "assets held for sale" which requires us to cease  depreciating these
assets.  Such  depreciation  expense would have been an additional $50.8 million
for the year ended  December  31,  2001.  The  increase  is also offset by $17.4
million  in the prior year  period of  accelerated  depreciation  related to the
change in useful life of an operating system in the telecommunications sector.

Amortization  expense  for the year ended  December  31,  2002  decreased  $18.0
million,  or 13%, as compared to the prior year period primarily due to the fact
that we ceased  amortization  of goodwill and trade name related to our previous
acquisitions  as of January 1, 2002 in accordance  with SFAS No. 142,  "Goodwill
and Other  Intangible  Assets."  As a result of ELI's  adoption  of SFAS 142, we
recognized  a  transitional  impairment  loss of $39.8  million as a  cumulative
effect of a change in accounting principle in our statement of operations in the
first quarter of 2002. For the year ended December 31, 2001 amortization expense
included  $91.2 million of goodwill and trade name  amortization.  This decrease
was offset by the impact of additional amortization of customer base of Frontier
of $47.6 million and $24.1 million in 2002 and 2001, respectively.  Amortization
expense  for the year  ended  December  31,  2001  increased  $125.9  million as
compared to prior year  period  primarily  due to  amortization  of  intangibles
related to acquisitions.

<TABLE>
<CAPTION>
           RESERVE FOR TELECOMMUNICATIONS BANKRUPTCIES / RESTRUCTURING AND OTHER EXPENSES


($ in thousands)                                   2002                         2001              2000
 --------------                      ---------------------------  ----------------------------- ---------
                                      Amount   $ Change % Change   Amount    $ Change  % Change  Amount
                                     --------- -----------------  ---------- ------------------ ---------
<S>                                  <C>       <C>           <C>   <C>        <C>         <C>     <C>  
Reserve for telecommunications 
  bankruptcies                       $ 10,880  $ (10,320)   -49%   $ 21,200   $ 21,200    100%    $    -
Restructuring and other expenses     $ 37,186  $  17,859     92%   $ 19,327   $ 19,976   3078%    $ (649)
</TABLE>


                                       26

<PAGE>
During the second quarter 2002, we reserved approximately $21.6 million of trade
receivables with WorldCom as a result of WorldCom's filing for bankruptcy. These
receivables   were   generated  as  a  result  of  providing   ordinary   course
telecommunications  services.  The $21.6 million charge was partially  offset by
reversals in our Global reserve as discussed below.

Concurrent with the acquisition of Frontier,  we entered into several  operating
agreements with Global.  We have ongoing  commercial  relationships  with Global
affiliates.  We  reserved  a total of $29.0  million  of Global  receivables  to
reflect our best estimate of the net realizable  value of  receivables  incurred
from these commercial relationships during 2001 and 2002 as a result of Global's
filing for  bankruptcy.  We recorded a  write-down  of such  receivables  in the
amount of $7.8 million in the first quarter 2002 and $21.2 million in the fourth
quarter of 2001. In 2002, as the result of a settlement  agreement  with Global,
we reversed $17.9 million of our previous reserve of the net realizable value of
these receivables.  Prior to the date of Global's bankruptcy filing, we provided
ordinary course telecommunications  services as well as transitional services to
Global. Global has provided us certain customer billing and collection functions
as well as other transitional services. Although some of these arrangements have
continued  after the bankruptcy  filing,  we are in the process of changing some
services and  functions  to provide them  ourselves.  The  Bankruptcy  Court has
granted relief to us and other telecommunications companies that provide service
to Global by,  among other  things,  directing a shortened  payment  period with
respect to post-petition  invoices, an expedited court process for post-petition
defaults in payments by Global,  and a priority for post-petition  expense items
over other unsecured debt. These procedures should minimize future economic loss
to us although we cannot guarantee that additional losses will not occur.

Restructuring  and other expenses for the year ended December 31, 2002 primarily
consist  of  $33.0   million   related  to   reductions   in  personnel  at  our
telecommunications  operations,  costs that were spent at both our Plano,  Texas
facility and at other locations as a result of transitioning functions and jobs,
and $6.8  million  related to our  tender  offer in June 2002 for all of the ELI
common shares that we did not already own. These costs were partially  offset by
a $2.8 million reversal of a 2001 ELI accrual discussed below.

     Plano Restructuring
     Pursuant  to a plan  adopted in  the third  quarter of 2001,  we closed our
     operations  support  center in Plano,  Texas in August 2002.  In connection
     with this plan, we recorded a pre-tax charge of $14.6 million in the second
     half of 2001, $0.8 million in the first quarter of 2002 and we adjusted our
     accrual  down by $0.1  million  and $0.6  million  in the  second and third
     quarter  of  2002,  respectively.  Our  objective  is  to  concentrate  our
     resources in areas where we have the most customers,  to better serve those
     customers.  We sold our Plano office  building in 2003.  The  restructuring
     resulted in the  termination of 750  employees.  We  communicated  with all
     affected  employees  during July 2001.  Certain  employees  were  relocated
     whereas others were offered  severance,  job training  and/or  outplacement
     counseling.  As of December 31, 2002,  approximately $14.7 million had been
     paid and all affected  employees  had been  terminated.  The  restructuring
     expenses primarily consist of severance benefits, retention payments earned
     through December 31, 2002, and other planning and communication costs.

     Sacramento Call Center Restructuring
     In April 2002, we closed our Sacramento Customer Care Center. In connection
     with this  closing,  we  recorded a pre-tax  charge of $0.7  million in the
     fourth quarter of 2001, and $0.1 million and $9,000 in the first and second
     quarters of 2002,  respectively.  We redirected  the call traffic and other
     work  activities to our Kingman,  Arizona call center.  This  restructuring
     resulted in the  elimination  of 98  employees.  We  communicated  with all
     affected   employees  during  November  2001.  As  of  December  31,  2002,
     approximately $0.8 million was paid, all affected employees were terminated
     and no accrual remained.

     ELI Restructuring
     In the first half of 2002, ELI redeployed the internet routers, frame relay
     switches and ATM switches from the Atlanta, Cleveland, Denver, Philadelphia
     and New York  markets  to other  locations  in ELI's  network.  ELI  ceased
     leasing the  collocation  facilities and off-net  circuits for the backbone
     and local loops  supporting the service  delivery in these markets.  It was
     anticipated  that this would lead to $4.2 million of termination fees which
     were  accrued for but not paid at  December  31,  2001.  During  2002,  ELI
     adjusted  its original  accrual  down by $2.8 million due to the  favorable
     settlements of termination  charges for off-net circuit  agreements.  As of
     December 31, 2002, $1.4 million has been paid and no accrual remained.


                                       27

<PAGE>
                  LOSS ON IMPAIRMENT

            ($ in thousands)         2002      2001     2000
             --------------      ----------  -------  --------
                                    Amount    Amount   Amount
                                 ----------  -------  --------
            Loss on impairment   $1,074,058   $  -     $  -

In the third quarter 2002, we recognized  non-cash pre-tax  impairment losses of
$656.7  million  related to property,  plant and equipment in the ELI sector and
$417.4 million  related to the gas and electric sector assets held for sale. Our
assessment  of  impairment  for ELI was a result of continued  losses at ELI and
continued actual revenue declines in excess of projected revenue  declines.  The
gas and electric sector impairments are associated with the proposed sale of our
Arizona and Hawaiian gas and  electric  properties  at prices that are less than
the previous  carrying values and the write down of our remaining utility to our
estimate of net  realizable  sales price.  Previously,  we believed that the net
realizable  value of these  properties  was  equal  to or above  their  carrying
values.  However,  as a result of market conditions,  and the desire to complete
the divestiture process quickly in order to focus on our core telecommunications
operations  and raise money to further reduce debt, in the third quarter of 2002
we made a strategic decision to accept proceeds less than carrying values rather
than  continue  to market  these  properties  for higher  prices  (See  Critical
Accounting Policies and Estimates above).

We expect to incur additional  impairment losses during 2003 with respect to our
public utility properties.  These properties are carried at our estimates of net
realizable values. Under the terms of the definitive  agreements relating to the
sale of our Arizona and Hawaiian properties, most of the capital expenditures we
will make during 2003 for these  properties will not be recovered.  As a result,
the amount of these expenditures (currently estimated at $28 million through the
expected closing dates) will be expensed as incurred and not capitalized.  These
expenditures are of a normal recurring nature and are necessary to provide safe,
reliable  utility  service to  customers.  We  generally do not enter into firm,
committed  contracts for such activities.  If the closing dates for the sales of
our Arizona and  Hawaiian  properties  actually  occur later than the  currently
expected dates, the actual amount of capital  expenditures  expensed will exceed
this estimate.

<TABLE>
<CAPTION>
       INVESTMENT AND OTHER INCOME (LOSS), NET / GAIN ON SALE OF ASSETS /
            MINORITY INTEREST / INTEREST EXPENSE / INCOME TAX BENEFIT

     ($ in thousands)                               2002                             2001               2000
      --------------                  ------------------------------  -------------------------------- ---------
                                        Amount   $ Change  % Change    Amount      $ Change  % Change  Amount
                                      ---------  ------------------   ----------- ------------------- ---------
<S>                                   <C>         <C>           <C>   <C>          <C>         <C>    <C>     
     Investment income (loss), net    $ (98,359)  $ (35,951)    58%   $ (62,408)   $ (67,144) -1418%  $  4,736
     Other income (loss), net         $  15,806   $  18,939    605%   $  (3,133)   $  (1,747)   126%  $ (1,386)
     Gain on sale of assets           $   9,798   $(129,506)   -93%   $ 139,304    $ 139,304    100%  $      -
     Minority interest                $       -   $       -      0%   $       -    $ (12,222)  -100%  $ 12,222
     Interest expense                 $ 471,296   $  91,970     24%   $ 379,326    $ 191,960    102%  $187,366
     Income tax benefit               $(414,874)  $(400,069)  2702%   $ (14,805)   $   1,327     -8%  $(16,132)
</TABLE>

Investment loss for the year ended December 31, 2002 increased $36.0 million, or
58%,  as compared to prior year period  primarily  due to the  recognition  of a
$95.3 million loss,  resulting from an other than temporary decline in the value
of our investment in Adelphia  Communications Corp.  (Adelphia),  an increase of
$16.3  million  compared to the loss of $79.0  million  recorded on our Adelphia
investment in 2001. As of June 30, 2002, we had written this  investment down to
zero, and therefore we have no additional  exposure  related to the market value
of  Adelphia  stock.  We also  recognized  during  2002 a loss of $16.4  million
resulting from an other than temporary decline in the value of our investment in
D & E Communications, Inc.

Investment  income for the year ended December 31, 2001 decreased  $67.1 million
as compared to the prior year period primarily due to the recognition of a $79.0
million loss resulting from a decline in value of our Adelphia  investment.  The
decrease  was  partially  offset by  increased  income from higher  money market
balances  resulting  from  the  temporary   investment  of  proceeds  from  debt
issuances.


                                       28

<PAGE>
Other income,  net for the year ended December 31, 2002 increased  $18.9 million
as compared to prior year period  primarily  due to $26.3 million of income from
the settlement of certain  retained  liabilities at less than face value,  which
are associated with customer  advances for construction  from our disposed water
properties. During 2002, we executed a series of purchases in the open market of
our  outstanding  notes and  debentures  that  generated a pre-tax gain from the
early  extinguishment  of  debt  of  approximately  $6.0  million,   which  also
contributed  to the  increase.  The increase was  partially  offset by the $12.8
million cost for a tender offer  completed in December  2002 with respect to our
6.80%  Debentures due 2026 (puttable at par in 2003) and ELI's 6.05%  Guaranteed
Notes due 2004.  Other loss, net increased $1.7 million in 2001 primarily due to

a decrease in miscellaneous income and capitalized interest.

Gain on sale of assets for the year ended December 31, 2002  represents the gain
recognized  from the sale of our Kauai electric  division on November 1, 2002 as
well  as an  adjustment  of the  gain on the  2001  sale  of our  Louisiana  gas
operation.  Gain  on  sale of  assets  for the  year  ended  December  31,  2001
represents  the initial gain on the sale of the Louisiana gas operation to Atmos
Energy  Corporation  on July 2, 2001.  The gain  recognized on our water sale is
classified in discontinued operations.

Minority interest  represents the former minority  shareholders'  share of ELI's
net loss.  Subsequent to ELI's public offering, we recorded minority interest on
our income statement and reduced  minority  interest on our balance sheet by the
amount of the former minority  interests' share of ELI's losses.  As of June 30,
2000,  the  minority  interest  on the balance  sheet had been  reduced to zero,
therefore,  from that point going forward,  we discontinued  recording  minority
interest income on our statement of operations.

Interest  expense for 2002 increased  compared to 2001 primarily  because of the
full year impact of $3.5  billion of notes,  $460.0  million of equity units and
$200.0 million of Rural Telephone  Finance  Cooperative notes issued during 2001
to refinance  debt  incurred in  connection  with our  acquisitions,  and higher
amortization  of debt issuance costs.  These increases were partially  offset by
the repayment of bank debt and  repurchases of debt described  under  "Liquidity
and Capital  Resources - Debt  Reduction."  During the year ended  December  31,
2002, we had average  long-term debt  outstanding  excluding our equity units of
$5.2 billion  compared to $4.3 billion  during the year ended December 31, 2001.
Our composite  average  borrowing  rate for the year ended  December 31, 2002 as
compared  with the year ended  December  31,  2001 was 53 basis  points  higher,
increasing  from 7.34% to 7.87% due to the impact of higher  interest rates as a
result of our refinancing our variable rate debt with fixed rate long-term debt.

Interest  expense  increased for 2001 compared to 2000 primarily  because of the
issuance of the  securities  described in the  preceding  paragraph,  borrowings
under bank facilities and higher amortization of debt issuance costs. During the
year  ended  December  31,  2001,  we had  average  long-term  debt  outstanding
excluding our equity units of $4.3 billion  compared to $2.6 billion  during the
year ended December 31, 2000. Our composite  average borrowing rate paid for the
year ended  December 31, 2001 as compared with the year ended  December 31, 2000
was 49 basis points higher, increasing from 6.85% to 7.34%, due to the impact of
higher interest rates on our new borrowings.

Income tax benefit for the year ended December 31, 2002 increased $400.1 million
as compared with prior year period  primarily  due to changes in taxable  income
(loss).  Income tax benefit for the year ended  December 31, 2001 decreased $1.3
million,  or 8%, as compared with prior year period  primarily due to changes in
taxable income (loss) and the write-off of regulatory assets related to our sale
of our Louisiana gas  operations.  The estimated  annual  effective tax rate for
2002 is 33.7% as compared with an effective tax rate of 20.4% for 2001.

<TABLE>
<CAPTION>
                             DISCONTINUED OPERATIONS

($ in thousands)                                 2002                         2001                  2000
 --------------                     -----------------------------  ------------------------------  ---------
                                     Amount   $ Change   % Change   Amount     $ Change  % Change   Amount
                                    --------- -------------------  ---------- -------------------  ---------
<S>                                 <C>       <C>            <C>   <C>         <C>          <C>   <C>      
Revenue                             $  4,650  $ (112,218)   -96%   $ 116,868   $ 11,666     11%   $ 105,202
Operating income (loss)             $   (415) $  (37,626)  -101%   $  37,211   $  9,796     36%   $  27,415
Income (loss) from discontinued
  operations, net of tax            $ (1,478) $  (19,353)  -108%   $  17,875   $  6,198     53%   $  11,677
Gain on disposal of water segment,
  net of tax                        $181,369  $  181,369    100%   $       -   $      -      0%   $       -
</TABLE>


                                       29

<PAGE>

Revenue, operating income (loss) and income (loss) from discontinued operations,
net of tax, for the year ended  December 31, 2002 decreased as compared with the
prior year  period  due to the sale of our water and  wastewater  businesses  in
January  2002.  On January  15,  2002,  we  completed  the sale of our water and
wastewater  operations to American Water Works,  Inc. for $859.1 million in cash
and  $122.5  million  of  assumed  debt and other  liabilities.  The gain on the
disposal of the water segment, net of tax was $181.4 million.

                              EXTRAORDINARY EXPENSE

($ in thousands)                                   2002      2001     2000
 --------------                                  ----------------------------
                                                  Amount    Amount    Amount
                                                 --------- --------  ---------
Extraordinary expense - discontinuation of
  Statement of Financial Accounting Standards
  No. 71, net of tax                              $   -     $ 43,631   $  -

Extraordinary  expense -  discontinuation  of Statement of Financial  Accounting
Standards No. 71, net of tax, of $43.6  million for the year ended  December 31,
2001,  relates to the write off of regulatory assets and liabilities  previously
recognized under SFAS 71.  Deregulation of most of our local exchange  telephone
properties  required us to cease  application  of SFAS 71 in the third  quarter,
resulting in a non-cash  extraordinary  charge of $43.6 million,  net of tax, in
our statement of operations. See discussion in Note 24 of Consolidated Financial
Statements.


I
tem 7A.  Quantitative and Qualitative Disclosures about Market Risk
          ----------------------------------------------------------

Disclosure of primary market risks and how they are managed
We are exposed to market risk in the normal  course of our  business  operations
due to ongoing  investing  and  funding  activities.  Market  risk refers to the
potential  change  in fair  value  of a  financial  instrument  as a  result  of
fluctuations in interest rates and equity and commodity  prices.  We do not hold
or issue  derivative  instruments,  derivative  commodity  instruments  or other
financial instruments for trading purposes. As a result, we do not undertake any
specific  actions to cover our  exposure to market risks and we are not party to
any  market  risk  management  agreements  other  than in the  normal  course of
business or to hedge  long-term  interest  rate risk.  Our  primary  market risk
exposures are interest rate risk and equity and commodity price risk as follows:

Interest Rate Exposure

Our exposure to market risk for changes in interest  rates relates  primarily to
the  interest-bearing  portion of our  investment  portfolio and interest on our
long term debt and  capital  lease  obligations.  The long-term debt and capital
lease  obligations  include  various  instruments  with various  maturities  and
weighted average interest rates.

Our  objectives  in managing our  interest  rate risk are to limit the impact of
interest  rate  changes  on  earnings  and cash  flows and to lower our  overall
borrowing costs. To achieve these objectives,  a majority of our borrowings have
fixed  interest  rates;  variable  rate debt is  refinanced  when  advantageous.
Consequently,  we have limited  material  future earnings or cash flow exposures
from  changes  in  interest  rates  on our  long-term  debt  and  capital  lease
obligations.  A hypothetical 10% adverse change in interest rates would increase
the  amount  that  we  pay on our  variable  obligations  and  could  result  in
fluctuations  in the fair  value of our fixed rate  obligations.  Based upon our
overall  interest  rate  exposure at December 31,  2002,  a near-term  change in
interest rates would not materially affect our consolidated  financial position,
results of operations or cash flows.

In order to  manage  our  interest  rate risk  exposure,  we  entered  into five
interest  swap  agreements  in 2001 and 2002  with  investment  grade  financial
institutions.  Each agreement covered a notional amount of $50.0 million.  Under
the  terms  of the  agreements,  we make  semi-annual,  floating  interest  rate
interest  payments  based on six  month  LIBOR and  receive a fixed  rate on the
notional amount.  There are two interest rate swap agreements that were executed
in 2001 that  receive a 6.375% fixed rate until the swaps'  termination  date of
August 15,  2004,  and there are three swaps  executed  in 2002 that  receive an
8.500% fixed rate until their  termination  date of May 15, 2006. The underlying
variable  rate on the swaps is set either in  advance,  in arrears or, as in the
case of one agreement,  based on each period's daily average six-month LIBOR. In
connection  with these swaps,  the Company entered into a series of supplemental
rate agreements which had the effect of setting the floating rate portion of the
swaps in advance of the contractually agreed upon rate determination date.

The net  effect  of the two 2001  interest  rate  swaps  and  supplemental  rate
agreements was to reduce the effective  interest rate on $100.0 million of fixed
rate debt from 6.375% to 3.665%  during  2002.  The net effect of the three 2002
swaps and supplemental rate agreements was to reduce the effective interest rate
on $150.0 million of fixed rate debt from 8.500% to 6.864% through  November 15,
2002,  the latest rate reset date. All swaps and  associated  supplemental  rate
agreements are accounted for under SFAS 133 as fair value hedges.


                                       30

<PAGE>
Sensitivity analysis of interest rate exposure
At December 31, 2002,  the fair value of our  long-term  debt and capital  lease
obligations  excluding our equity units was estimated to be  approximately  $5.4
billion,  based on our overall weighted  average  borrowing rate of 8.0% and our
overall weighted maturity of 13 years.  There has been no material change in the
weighted  average maturity since December 31, 2001. The overall weighted average
interest rate has increased by  approximately  37 basis points.  A  hypothetical
increase of 80 basis points in our weighted  average  interest  rate (10% of our
overall weighted average  borrowing rate) would result in an approximate  $272.3
million decrease in the fair value of our fixed rate obligations.

Equity Price Exposure

Our exposure to market risk for changes in equity  prices is minimal and relates
primarily to the equity portion of our investment portfolio.  The equity portion
of our investment  portfolio consists of equity securities  (principally  common
stock) of D&E Communications, Inc. and Hungarian Telephone and Cable Corp.

As of December 31, 2002, we owned 3,059,000  shares of Adelphia common stock. As
a result of Adelphia's  price declines and filing for bankruptcy,  we recognized
losses of $95.3 million and $79.0 million on our  investment for the years ended
December 31, 2002 and 2001, respectively,  as the declines were determined to be
other than  temporary.  As of June 30, 2002, we had written this investment down
to zero,  and  therefore we have no  additional  exposure  related to the market
value of Adelphia stock.

As of December  31,  2002,  we owned  1,333,500  shares of D & E  Communications
common stock. As the result of an other than temporary  decline in D & E's stock
price,  we  recognized a loss of $16.4  million on our  investment  for the year
ended December 31, 2002.

Sensitivity analysis of equity price exposure
At December 31,  2002,  the fair value of the equity  portion of our  investment
portfolio  was estimated to be $29.8  million.  A  hypothetical  10% decrease in
quoted market prices would result in an approximate $3.0 million decrease in the
fair value of the equity portion of our investment portfolio.

Commodity Price Exposure

We  purchase  monthly  gas  future  contracts,  from  time to  time,  to  manage
well-defined   commodity  price  fluctuations,   caused  by  weather  and  other
unpredictable factors, associated with our commitments to deliver natural gas to
customers at fixed prices.  Customers pay for gas service based upon prices that
are defined by a tariff.  A tariff is an  agreement  between the public  utility
commission  and us,  which  determines  the price  that will be  charged  to the
customer.  Fluctuations  in gas prices are routinely  handled  through a pricing
mechanism  called the purchase gas adjustor (PGA).  The PGA allows for a process
whereby  any price  change from the agreed upon tariff will be settled as a pass
through  to the  customer.  As a result,  if gas prices  increase,  the PGA will
increase and pass more costs on to the customer. If gas prices decrease, the PGA
will  decrease  and refunds  will be provided to the  customer.  This  commodity
activity  relates to our gas businesses and is not material to our  consolidated
financial  position or results of operations.  In all instances we take physical
delivery  of the gas  supply  purchased  or  contracted  for.  These gas  future
contracts and gas supply  contracts are  considered  derivative  instruments  as
defined by SFAS 133. However, such contracts are excluded from the provisions of
SFAS 133 since they are purchases  made in the normal course of business and not
for  speculative  purposes.  Based upon our overall  commodity price exposure at
December 31, 2002, a material near-term change in the quoted market price of gas
would not materially  affect our consolidated  financial  position or results of
operations.

Disclosure of limitations of sensitivity analysis
Certain  shortcomings  are  inherent in the method of analysis  presented in the
computation  of fair value of financial  instruments.  Actual  values may differ
from those presented should market  conditions vary from assumptions used in the
calculation of the fair value.  This analysis  incorporates only those exposures
that exist as of December 31,  2002.  It does not  consider  those  exposures or
positions, which could arise after that date. As a result, our ultimate exposure
with respect to our market risks will depend on the exposures  that arise during
the period and the fluctuation of interest rates and quoted market prices.


                                       31

<PAGE>

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

                                    PART III
                                    --------


Item 10.  Directors and Executive Officers of the Registrant
          --------------------------------------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2003 Annual Meeting of  Stockholders  to be
held May 13, 2003 to be filed with the  Commission  pursuant to  Regulation  14A
within  120  days  after  December  31,  2002.  See  "Executive  Officer  of the
Registrant" in Part I of this Report  following Item 4 for information  relating
to executive officers.


Item 11.  Executive Compensation
          ----------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2003 Annual Meeting of  Stockholders  to be
held May 13, 2003.


Item 12.  Security Ownership of Certain Beneficial Owners and Management and 
          ------------------------------------------------------------------
          Related Stockholder Matters
          ---------------------------

The  following  table  provides  information  as of December 31, 2002  regarding
compensation plans (including individual compensation  arrangements) under which
equity  securities  of  Citizens   Communications  Company  are  authorized  for
issuance.

<TABLE>
<CAPTION>
<S>                        <C>                         <C>                      <C>   
                                     (a)                       (b)                            (c)
                                                                                 Number of securities remaining
                           Number of securities to       Weighted-average        available for future issuance
                           be issued upon exercise      exercise price of       under equity compensation plans
                           of outstanding options,     outstanding options,    (excluding securities reflected in
     Plan category           warrants and rights       warrants and rights                column (a))
------------------------- --------------------------  ----------------------- -------------------------------------

Equity compensation
plans approved by
security holders                      23,051,350                  $ 11.80                             7,515,751

Equity compensation
plans not approved
by security holders                            -                        -                                     -

                          --------------------------  ----------------------- -------------------------------------
         Total                        23,051,350                  $ 11.80                             7,515,751
                          ==========================  ======================= =====================================
</TABLE>


See Note 18 to Consolidated  Financial Statements for information  regarding the
material features of the above plans.

The other  information  required by this Item is  incorporated by reference from
our definitive proxy statement for the 2003 Annual Meeting of Stockholders to be
held May 13, 2003.


                                       32

<PAGE>


Item 13.  Certain Relationships and Related Transactions
          ----------------------------------------------

The  information  required by this Item is  incorporated  by reference  from our
definitive  proxy  statement for the 2003 Annual Meeting of  Stockholders  to be
held May 13, 2003.


Item 14.  Controls and Procedures
          -----------------------

Within 90 days prior to the date of this report,  we carried out an  evaluation,
under the  supervision  and with the  participation  of our  management,  of the
effectiveness  of the  design  and  operation  of our  disclosure  controls  and
procedures.  Based on this  evaluation,  our  principal  executive  officer  and
principal   financial  officer  concluded  that  our  disclosure   controls  and
procedures  are  effective  in  timely  alerting  them to  material  information
required to be included in our periodic SEC reports. It should be noted that the
design of any system of controls is based in part upon certain assumptions,  and
there can be no assurance  that any design will succeed in achieving  its stated
goals.

In  addition,  we  reviewed  our  internal  controls,  and  there  have  been no
significant  changes in our  internal  controls or in other  factors  that could
significantly  affect  those  controls  subsequent  to the  date of  their  last
evaluation.

During the fourth  quarter of 2002 we became aware of  irregularities  involving
payments  made by certain of our public  utilities  operations  for  services or
benefits  that we did not  receive.  The  payments  do not  involve  our current
operations  in Arizona,  Vermont,  or Hawaii.  With the  assistance  of forensic
specialists, outside auditors, and counsel, we investigated these irregularities
and identified a total of $7.8 million that had been embezzled from the Company.
These payments were reflected in our financial statements as charges to earnings
(primarily during 2002). The U.S.  Government has recovered  approximately  $6.0
million (which we believe will be turned over to us) and we believe that most of
the remaining funds outstanding will be reimbursed by insurance.

We  presented  the  results of our most  recent  evaluation  to our  independent
auditors, KPMG LLP, and the Audit Committee of the Board of Directors.  Based on
such evaluation,  our management,  including the principal executive officer and
principal  financial  officer,   concluded  that  our  disclosure  controls  and
procedures are adequate to insure the clarity and material  completeness  of our
disclosure in our periodic  reports  required to be filed with the SEC and there
are no significant deficiencies in the design or operation of internal controls,
which could significantly affect our ability to record,  process,  summarize and
report  financial  data.  As a result of the matters  described in the preceding
paragraph, during 2002 we made changes to our internal controls,  procedures and
policies relating to our public services sector.


                                       33


<PAGE>

                                     PART IV
                                     -------


Item 15.  Exhibits, Financial Statement Schedule and Reports on Form 8-K
          --------------------------------------------------------------

          (a)  List of Documents Filed as a Part of This Report:

               (1)  Index to Consolidated Financial Statements:


                    Independent Auditors' Report

                    Consolidated balance sheets as of December 31, 2002 and 2001

                    Consolidated statements of operations for the years ended
                      December 31, 2002, 2001 and 2000

                    Consolidated statements of shareholders' equity for the 
                      years ended December 31, 2002, 2001 and 2000

                    Consolidated statements of comprehensive income (loss) for 
                      the years ended December 31, 2002, 2001 and 2000

                    Consolidated statements of cash flows for the years ended
                      December 31, 2002, 2001 and 2000

                    Notes to consolidated financial statements

               (2)  Index to Financial Statement Schedules:

 
                   Schedule II - Valuation and Qualifying Accounts

All other  schedules  have been  omitted  because the  required  information  is
included in the consolidated  financial  statements or the notes thereto,  or is
not applicable or required.

               (3)  Index to Exhibits:

Exhibit
  No.          Description
-------        -----------
3.200.1        Restated Certificate of Incorporation of Citizens  Communications
               Company,  as restated May 19, 2000  (incorporated by reference to
               Exhibit 3.200.1 to the Registrant's Quarterly Report on Form 10-Q
               for the six months ended June 30, 2000, File No. 001-11001).
3.200.2        By-laws of Citizens  Communications  Company, with all amendments
               to March 22, 2002  (incorporated by reference to Exhibits 3.1 and
               3.2 to the  Registrants  Form 8-K filed March 22, 2002,  File No.
               001-11001).
3.200.3        Amendment  to the  By-laws  of  Citizens  Communications  Company
               (effective July 30, 2002).
4.100.1        Certificate of Trust of Citizens Communications Trust dated as of
               April 27, 2001  (incorporated  by reference to Exhibit 4.5 of the
               Registrant's  Amendment  No.1  to  Form  S-3  filed  May 7,  2001
               (Registration No. 333-58044).
4.100.2        Trust  Agreement of Citizens  Capital  Trust I, dated as of April
               27,  2001  (incorporated  by  reference  to  Exhibit  4.6  of the
               Registrant's  Amendment  No.1  to  Form  S-3  filed  May 7,  2001
               (Registration No. 333-58044).
4.100.3        Form of 2006 Note  (incorporated  by  reference to Exhibit 4.3 of
               the  Registrant's  Current  Report  on Form 8-K  filed on May 24,
               2001, File No. 001-11001).
4.100.4        Form of 2011 Note  (incorporated  by  reference to Exhibit 4.4 of
               the  Registrant's  Current  Report  on Form 8-K  filed on May 24,
               2001, File No. 001-11001).
4.100.5        Warrant  Agreement,  dated as of June 19, 2001,  between Citizens
               Communications  Company and The Chase  Manhattan Bank, as Warrant
               Agent   (incorporated   by   reference  to  Exhibit  4.1  of  the
               Registrant's  Current  Report on Form 8-K filed on May 24,  2001,
               File No. 001-11001).
4.100.6        Form of  Senior  Note  due 2006  (incorporated  by  reference  to
               Exhibit 4.5 of the Registrant's  Current Report on Form 8-K filed
               on June 21, 2001, File No. 001-11001).

                                       34

<PAGE>
4.100.7        Form  of  Equity  Unit   (included   in  the  Warrant   Agreement
               incorporated  by  reference  to Exhibit  4.1 of the  Registrant's
               Current  Report  on Form 8-K  filed on June  21,  2001,  File No.
               001-11001).
4.100.8        Form of Treasury  Equity Unit (included in the Warrant  Agreement
               incorporated  by  reference  to Exhibit  4.1 of the  Registrant's
               Current  Report  on Form 8-K  filed on June  21,  2001,  File No.
               001-11001).
4.100.9        Form  of  Senior   Notes   due  2004,   due  2008  and  due  2031
               (incorporated  by  reference  to Exhibit 4.1 of the  Registrant's
               Current  Report on Form 8-K filed on August  22,  2001,  File No.
               001-11001).
4.200.1        First  Supplemental  Indenture  dated  as of  January  15,  1996,
               between  Citizens   Utilities   Company  and  Chemical  Bank,  as
               indenture  trustee  (incorporated by reference to Exhibit 4.200.2
               to the  Registrant's  Form 8-K Current Report filed May 28, 1996,
               File No. 001-11001).
4.200.2        5%  Convertible  Subordinated  Debenture  due 2036  (contained as
               Exhibit A to Exhibit  4.200.2),  (incorporated  by  reference  to
               Exhibit 4.200.2 to the Registrant's Form 8-K Current Report filed
               May 28, 1996, File No. 001-11001).
4.200.3        Amended and Restated Declaration of Trust dated as of January 15,
               1996, of Citizens  Utilities Trust (incorporated by reference  to
               Exhibit 4.200.4 to the Registrant's Form 8-K Current Report filed
               May 28, 1996, File No. 001-11001).
4.200.4        Convertible Preferred Security Certificate  (contained as Exhibit
               A-1 to Exhibit  4.200.4),  (incorporated  by reference to Exhibit
               4.200.4 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.5        Amended and Restated  Limited  Partnership  Agreement dated as of
               January 15, 1996 of Citizens Utilities Capital L.P. (incorporated
               by  reference  to Exhibit  4.200.6 to the  Registrant's  Form 8-K
               Current Report filed May 28, 1996, File No. 001-11001).
4.200.6        Partnership Preferred Security  Certificate (contained as Annex A
               to  Exhibit 4.200.6),  (incorporated  by  reference  to   Exhibit
               4.200.6 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.7        Convertible  Preferred Securities Guarantee Agreement dated as of
               January 15, 1996 between Citizens Utilities  Company and Chemical
               Bank, as guarantee trustee (incorporated by reference  to Exhibit
               4.200.8 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.8        Partnership Preferred Securities Guarantee Agreement  dated as of
               January 15, 1996 between Citizens Utilities  Company and Chemical

               Bank, as guarantee  trustee (incorporated by reference to Exhibit
               4.200.9 to the Registrant's Form 8-K Current Report filed May 28,
               1996, File No. 001-11001).
4.200.9        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
               (incorporated   by   reference   to  Exhibit   4.200.10   to  the
               Registrant's Form 8-K Current Report filed May 28, 1996, File No.
               001-11001).
4.300          Indenture of Securities, dated as of August 15, 1991, to Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.1 to
               the  Registrant's  Quarterly  Report  on Form  10-Q  for the nine
               months ended September 30, 1991, File No. 001-11001).
4.300.1        Second  Supplemental  Indenture,   dated  January  15,  1992,  to
               Chemical Bank, as Trustee (incorporated by  reference to  Exhibit
               4.100.4 to the Registrant's Annual  Report on  Form 10-K for  the
               year ended December 31, 1991, File No. 001-11001).
4.300.2        Third Supplemental  Indenture,  dated April 15, 1994, to Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.6 to
               the Registrant's Form 8-K Current Report filed July 5, 1994, File
               No. 001-11001).
4.300.3        Fourth Supplemental Indenture, dated October 1, 1994, to Chemical
               Bank, as Trustee (incorporated by reference to Exhibit 4.100.7 to
               Registrant's Form 8-K Current Report filed January 3, 1995,  File
               No. 001-11001).
4.300.4        Fifth  Supplemental  Indenture,  dated  as of June 15,  1995,  to
               Chemical Bank, as Trustee  (incorporated  by reference to Exhibit
               4.100.8 to  Registrant's  Form 8-K Current Report filed March 29,
               1996, File No. 001-11001).
4.300.5        Sixth  Supplemental  Indenture,  dated as of October 15, 1995, to
               Chemical Bank, as Trustee  (incorporated  by reference to Exhibit
               4.100.9 to  Registrant's  Form 8-K Current Report filed March 29,
               1996, File No. 001-11001).
4.300.6        Seventh  Supplemental  Indenture,   dated  as  of  June  1,  1996
               (incorporated   by   reference   to  Exhibit   4.100.11   to  the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 1996, File No. 001-11001).
4.300.7        Eighth  Supplemental  Indenture,  dated as of  December  1,  1996
               (incorporated   by   reference   to  Exhibit   4.100.12   to  the
               Registrant's  Annual  Report  on Form  10-K  for the  year  ended
               December 31, 1996, File No. 001-11001).

                                       35

<PAGE>
4.400          Senior  Indenture,  dated as of May 23,  2001,  between  Citizens
               Communications  Company and The Chase  Manhattan Bank, as trustee
               (incorporated  by  reference  to Exhibit 4.1 of the  Registrant's
               Current  Report  on Form  8-K  filed  on May 24,  2001,  File No.
               001-11001).
4.400.1        First Supplemental Indenture to Senior Indenture, dated as of May
               23,  2001  (incorporated  by  reference  to  Exhibit  4.2  of the
               Registrant's  Current  Report on Form 8-K filed on May 24,  2001,
               File No. 001-11001).
4.400.2        Second  Supplemental  Indenture,  dated as of June 19,  2001,  to
               Senior  Indenture,  dated  as of May 23,  2001  (incorporated  by
               reference to Exhibit 4.3 of the  Registrant's  Current  Report on
               Form 8-K filed on June 21, 2001, File No. 001-11001).
4.400.3        Pledge  Agreement,  dated as of June  19,  2001,  among  Citizens
               Communications  Company and The Bank of New York,  as  Collateral
               Agent,  Securities Intermediary and Custodial Agent and The Chase
               Manhattan  Bank, as Warrant Agent  (incorporated  by reference to
               Exhibit 4.2 of the Registrant's  Current Report on Form 8-K filed
               on June 21, 2001, File No. 001-11001).
4.400.4        Remarketing   Agreement  dated  June  19,  2001,  among  Citizens
               Communications  Company,  Morgan Stanley & Co.  Incorporated,  as
               Remarketing Agent, and The Chase Manhattan Bank, as Warrant Agent
               and   attorney-in-fact  for  the  Holders  of  the  Equity  Units
               (incorporated  by  reference  to Exhibit 4.4 of the  Registrant's
               Current  Report  on Form 8-K  filed on June  21,  2001,  File No.
               001-11001).
4.400.5        Indenture,   dated  as  of  August  16,  2001,  between  Citizens
               Communications  Company and The Chase  Manhattan Bank, as Trustee
               (incorporated  by  reference  to Exhibit 4.1 of the  Registrant's
               Current  Report on Form 8-K filed on August  22,  2001,  File No.
               001-11001).
10.1           Non-Employee Directors' Deferred Fee Equity Plan dated as of June
               28, 1994,  with all  amendments to May 5, 1997  (incorporated  by
               reference to Exhibit A to the Registrant's  Proxy Statement dated
               April 4, 1995 and Exhibit A to the  Registrant's  Proxy Statement
               dated March 28, 1997, respectively, File No.001-11001).
10.2           Employment  Agreement  between  Citizens  Utilities  Company  and
               Leonard Tow,  effective July 11, 1996  (incorporated by reference
               to Exhibit 10.16.1 to the  Registrant's  Quarterly Report on Form
               10-Q for the nine  months  ended  September  30,  1996,  File No.
               001-11001).
10.2.1         Employment Agreement between Citizens  Communications Company and
               Leonard Tow, effective October 1, 2000 (incorporated by reference
               to Exhibit 10.16.2 of the Registrants  Annual Report on Form 10-K
               for the year ended December 31, 2000, File No. 001-11001).
10.2.2         Letter  agreement,  dated  as  of  April 10, 2001,  amending  the
               employment agreement, effective October 1, 2000, between Citizens
               Communications Company and Leonard Tow (incorporated by reference
               to Exhibit 10 of the  Registrants'  Forms S-4/A filed February 4,
               2002, Registration No. 333-69740).
10.2.3         Letter  agreement,  dated  as  of  May  16,  2002,  amending  the
               employment agreement, effective October 1, 2000, between Citizens
               Communications Company and Leonard Tow (incorporated by reference
               to Exhibit 10.16.4 of the  Registrants'  Quarterly Report on Form
               10-Q for the nine  months  ended  September  30,  2002,  File No.
               001-11001).
10.4           Citizens  Executive  Deferred  Savings Plan dated January 1, 1996
               (incorporated  by reference to Exhibit 10.19 to the  Registrant's
               Annual Report on Form 10-K for the year ended  December 31, 1999,
               File No. 001-11001).
10.5           Citizens   Incentive   Plan   restated   as  of  March  21,  2000
               (incorporated  by reference to Exhibit 10.19 to the  Registrant's
               Annual Report on Form 10-K for the year ended  December 31, 1999,
               File No. 001-11001).
10.6           Indenture from ELI to Citibank,  N.A., dated April 15, 1999, with
               respect  to  ELI's  6.05%   Senior   Unsecured   Notes  due  2004
               (incorporated  by  reference  to Exhibit  10.24.1 of ELI's Annual
               Report on Form 10-K for the year ended  December 31,  1999,  File
               No. 0-23393).
10.6.1         First Supplemental Indenture from ELI, Citizens Utilities Company
               and  Citizens  Newco  Company to Citibank,  N.A.  dated April 15,
               1999,  with respect to the 6.05% Senior  Unsecured Notes due 2004
               (incorporated  by  reference  to Exhibit  10.24.2 of ELI's Annual
               Report on Form 10-K for the year ended  December 31,  1999,  File
               No. 0-23393).
10.6.2         Form of ELI's 6.05% Senior Unsecured Notes due 2004 (incorporated
               by  reference to Exhibit  10.24.3 of ELI's Annual  Report on Form
               10-K for the year ended December 31, 1999, File No. 0-23393).
10.7           2000 Equity  Incentive Plan dated May 18, 2000  (incorporated  by
               reference to Exhibit 10.33 to the  Registrant's  Annual Report on
               Form  10-K  for the  year  ended  December  31,  2000,  File  No.
               001-11001).


                                       36

<PAGE>
10.8           Citizens  401(K)  Savings  Plan  effective  as of January 1, 1997
               reflecting  amendments made through April 2001  (incorporated  by
               reference to Exhibit 10.37 to the  Registrant's  Quarterly Report
               on Form 10-Q for the six  months  ended June 30,  2001,  File No.
               001-11001).
10.9           Competitive  Advance and Revolving Credit Facility  Agreement for
               $705,000,000 dated October 24, 2001 (incorporated by reference to
               Exhibit 10.38 to the  Registrant's  Quarterly Report on Form 10-Q
               for  the  nine  months  ended   September  30,  2001,   File  No.
               001-11001).
10.10          Loan Agreement between Citizens  Communications Company and Rural
               Telephone Finance  Cooperative for $200,000,000 dated October 24,
               2001   (incorporated   by  reference  to  Exhibit  10.39  to  the
               Registrant's  Quarterly  Report on Form 10-Q for the nine  months
               ended September 30, 2001, File No. 001-11001).
10.11          Asset Purchase Agreement between Citizens  Communications Company
               and Kauai Island Utility CO-OP dated March 5, 2002.
10.12          Asset Purchase Agreement between Citizens  Communications Company
               and K-1 USA Ventures, Inc., dated December 19, 2002.
10.13          Asset Purchase Agreement between Citizens  Communications Company
               and UniSource Energy Corporation dated October 29, 2002, relating
               to the sale of a gas utility business.
10.14          Asset Purchase Agreement between Citizens  Communications Company
               and UniSource Energy Corporation dated October 29, 2002, relating
               to the sale of an electric utility buiness.
10.15          Sale agreement between Citizens Telecom Services Company  LLC and
               Pepsico, Inc., dated January 31, 2003.
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
99             Certifications  pursuant  to 18  U.S.C  Section  1350 as  adopted
               pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Exhibits 10.1,  10.2,  10.2.1,  10.2.2,  10.2.3,  10.4,  10.5, 10.7 and 10.8 are
management contracts or compensatory plans or arrangements.

We agree 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
separate loan agreements and indentures governing various Industrial Development
Revenue Bonds;  copies of documents  relating to  indebtedness  of  subsidiaries
acquired  during 1996, 1997 and 1998. We agree to furnish to the Commission upon
request copies of schedules and exhibits to items 10.11, 10.12, 10.13, 10.14 and
10.15.


(b)  Reports on Form 8-K:

     We filed on Form 8-K on October  30,  2002 under Item 5 "Other  Events",  a
     press release announcing the definitive  agreements to sell the Arizona Gas
     and Arizona  Electric  divisions to UniSource  Energy  Corporation for $230
     million in cash, subject to adjustments under the term of the agreements.

     We filed on Form 8-K on  November  6, 2002 under Item 5 "Other  Events",  a
     press release  announcing  the completion of the sale of the Kauai Electric
     division to the Kauai Island Utility Cooperative.

     We filed on Form 8-K on  November  12,  2002  under Item 9  "Regulation  FD
     Disclosure",  information  relating to the furnishing of  certifications to
     the SEC pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section
     906 of the Sarbanes-Oxley Act of 2002.

     We filed on Form 8-K on  November  25,  2002 under  Item 5 "Other  Events",
     information   regarding  the   investigation  of  possible   irregularities
     involving  payments made by the  Company's  public  utilities  division for
     services or benefits that the Company did not receive.

     We filed on Form 8-K on December  20, 2002 under Item 5 "Other  Events" and

     Item 7 "Financial Statements and Exhibits",  a press release announcing the
     definitive agreement to sell the Hawaiian Gas division to K-1 USA Ventures,
     Inc. for $115 million in cash,  subject to  adjustments  under the terms of
     the agreement and the conclusion of the internal  investigation  of a theft
     of $7.8 million by two former officers of the Company.


                                       37

<PAGE>



                                   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 COMMUNICATIONS COMPANY
                         -------------------------------
                                  (Registrant)

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

                                 March 24, 2003


                                       38

<PAGE>


     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 24th day of March 2003.

<TABLE>
<CAPTION>

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

<S>                                           <C>
     /s/ Robert J. Larson                     Senior Vice President and Chief Accounting Officer
-----------------------------------------
        (Robert J. Larson)

     /s/ Jerry Elliott                        Senior Vice President and Chief Financial Officer
-----------------------------------------
        (Jerry Elliott)

     /s/ Norman I. Botwinik                   Director
-----------------------------------------
        (Norman I. Botwinik)

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

     /s/ Rudy J. Graf                         Member, Executive Committee and Director
-----------------------------------------
        (Rudy J. Graf)

     /s/ Stanley Harfenist                    Member, Executive Committee and Director
-----------------------------------------
        (Stanley Harfenist)

     /s/ Andrew N. Heine                      Director
-----------------------------------------
        (Andrew N. Heine)

     /s/ William Kraus                        Director
-----------------------------------------
        (William Kraus)

     /s/ Scott N. Schneider                   Vice Chairman of the Board, President and
-----------------------------------------     Chief Operating Officer, and Director
        (Scott N. Schneider)                

     /s/ John L. Schroeder                    Director
-----------------------------------------
        (John L. Schroeder)

     /s/ Robert A. Stanger                    Member, Executive Committee and Director
-----------------------------------------
        (Robert A. Stanger)

     /s/ Edwin Tornberg                       Director
-----------------------------------------
        (Edwin Tornberg)

     /s/ Claire L. Tow                        Director
-----------------------------------------
        (Claire L. Tow)

</TABLE>



                                       39

<PAGE>



                                 CERTIFICATIONS
                                 --------------

I, Leonard Tow, certify that:

1. I have reviewed  this annual  report on Form 10-K of Citizens  Communications
Company;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     a) all  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 24, 2003
                                    By: /s/ Leonard Tow            
                                       -------------------
                                        Leonard Tow
                                        Chief Executive Officer and
                                        Chairman of the Board of Directors
                                        (Principal Executive Officer)


                                       40

<PAGE>


                           CERTIFICATIONS (continued)
                           --------------------------

I, Jerry Elliott, certify that:

1. I have reviewed  this annual  report on Form 10-K of Citizens  Communications
Company;

2.  Based on my  knowledge,  this  annual  report  does not  contain  any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others  within those  entities,  particularly  during the
period in which this annual report is being prepared;

     b) evaluated the effectiveness of the registrant's  disclosure controls and
procedures  as of a date  within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and

     c) presented in this annual report our conclusions  about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     a) all  significant  deficiencies  in the design or  operation  of internal
controls  which  could  adversely  affect  the  registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
registrant's auditors any material weaknesses in internal controls; and

     b) any fraud,  whether or not material,  that involves  management or other
employees who have a significant role in the registrant's internal controls; and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date: March 24, 2003
                                  By: /s/ Jerry Elliott            
                                     ---------------------
                                      Jerry Elliott
                                      Chief Financial Officer
                                      (Principal Financial Officer)



                                       41



<PAGE>

<TABLE>
<CAPTION>

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                   Index to Consolidated Financial Statements


Item                                                                                   Page
----                                                                                   ----

<S>                                                                                    <C>
Independent Auditors' Report                                                            F-2

Consolidated balance sheets as of December 31, 2002 and 2001                            F-3

Consolidated statements of operations for the years ended
   December 31, 2002, 2001 and 2000                                                     F-4

Consolidated statements of shareholders' equity for the years ended
   December 31, 2002, 2001 and 2000                                                     F-5

Consolidated statements of comprehensive income (loss) for the years ended
   December 31, 2002, 2001 and 2000                                                     F-5

Consolidated statements of cash flows for the years ended
   December 31, 2002, 2001 and 2000                                                     F-6

Notes to consolidated financial statements                                              F-7

</TABLE>


                                      F-1


<PAGE>



                          Independent Auditors' Report


The Board of Directors and Shareholders
Citizens Communications Company:


We have  audited  the  accompanying  consolidated  balance  sheets  of  Citizens
Communications Company and subsidiaries as of December 31, 2002 and 2001 and the
related   consolidated   statements   of   operations,   shareholders'   equity,
comprehensive  income  (loss)  and  cash  flows  for  each of the  years  in the
three-year  period  ended  December  31,  2002.  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 auditing standards generally accepted
in the  United  States of  America.  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
Communications Company and subsidiaries as of December 31, 2002 and 2001 and the
results  of their  operations  and their cash flows for each of the years in the
three-year  period ended  December  31,  2002,  in  conformity  with  accounting
principles  generally accepted in the United States of America.  As discussed in
Note 13 to the consolidated financial statements,  the Company adopted Statement
of  Financial  Accounting  Standards  No. 142,  "Goodwill  and Other  Intangible
Assets" as of January 1, 2002.



                                                           KPMG LLP




New York, New York
March 4, 2003



                                      F-2

<PAGE>

<TABLE>
<CAPTION>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001
                                ($ in thousands)

                                                                                                  2002           2001
                                                                                             -------------- --------------
ASSETS
------
Current assets:
<S>                                                                                            <C>           <C>         
   Cash and cash equivalents                                                                   $   393,177   $    215,869
   Accounts receivable, net                                                                        310,929        311,878
   Other current assets                                                                             49,114        150,573
   Assets held for sale                                                                            447,764      1,107,937
   Assets of discontinued operations                                                                     -        746,791
                                                                                             -------------- --------------
     Total current assets                                                                        1,200,984      2,533,048

Property, plant and equipment, net                                                               3,690,056      4,512,038

Goodwill, net                                                                                    1,869,348      1,957,600
Other intangibles, net                                                                             942,970      1,021,342
Investments                                                                                         29,846        141,208
Other assets                                                                                       413,538        388,364
                                                                                             -------------- --------------
        Total assets                                                                           $ 8,146,742   $ 10,553,600
                                                                                             ============== ==============

LIABILITIES AND EQUITY
----------------------
Current liabilities:
   Long-term debt due within one year                                                          $    58,911   $    483,906
   Accounts payable                                                                                195,278        239,676
   Income taxes accrued                                                                             83,065         96,901
   Other taxes accrued                                                                              41,068         33,637
   Interest accrued                                                                                105,668        112,282
   Customer deposits                                                                                 2,632         18,246
   Other current liabilities                                                                       134,191        124,833
   Liabilities related to assets held for sale                                                     150,053        218,775
   Liabilities of discontinued operations                                                                -        228,337
                                                                                             -------------- --------------
     Total current liabilities                                                                     770,866      1,556,593

Deferred income taxes                                                                              137,116        429,544
Customer advances for construction and contributions in aid of construction                        146,661        183,319
Other liabilities                                                                                  301,349        241,846
Equity units                                                                                       460,000        460,000
Long-term debt                                                                                   4,957,361      5,534,906
Company Obligated Mandatorily Redeemable Convertible Preferred Securities*                         201,250        201,250

Shareholders' equity:
   Common stock, $0.25 par value (600,000,000 authorized shares; 282,482,000 and 281,289,000
     outstanding and 294,080,000 and 292,840,000 issued at December 31, 2002 and 2001, 
     respectively)                                                                                  73,520         73,210
   Additional paid-in capital                                                                    1,943,406      1,927,518
   Retained earnings (accumulated deficit)                                                        (553,033)       129,864
   Accumulated other comprehensive income (loss)                                                  (102,169)         4,907
   Treasury stock                                                                                 (189,585)      (189,357)
                                                                                             -------------- --------------
     Total shareholders' equity                                                                  1,172,139      1,946,142
                                                                                             -------------- --------------
        Total liabilities and equity                                                           $ 8,146,742   $ 10,553,600
                                                                                             ============== ==============

</TABLE>


*  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

<PAGE>

<TABLE>
<CAPTION>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                 ($ in thousands, except for per-share amounts)
                                                                         2002           2001            2000
                                                                    --------------- --------------  --------------
<S>                                                                    <C>            <C>             <C>        
Revenue                                                                $ 2,669,332    $ 2,456,993     $ 1,802,358

Operating expenses:
    Cost of services                                                       476,920        599,378         481,673
    Other operating expenses                                             1,002,355        951,710         811,926
    Depreciation and amortization                                          755,522        632,336         387,607
    Reserve for telecommunications bankruptcies                             10,880         21,200               -
    Restructuring and other expenses                                        37,186         19,327            (649)
    Loss on impairment                                                   1,074,058              -               -
                                                                    --------------- --------------  --------------
Total operating expenses                                                 3,356,921      2,223,951       1,680,557
                                                                    --------------- --------------  --------------
Operating income (loss)                                                   (687,589)       233,042         121,801

Investment income (loss), net                                              (98,359)       (62,408)          4,736
Gain on sale of assets                                                       9,798        139,304               -
Minority interest                                                                -              -          12,222
Other income (loss), net                                                    15,806         (3,133)         (1,386)
Interest expense                                                           471,296        379,326         187,366
                                                                    --------------- --------------  --------------
    Loss from continuing operations before income taxes, dividends on
      convertible preferred securities, extraordinary expense and 
      cumulative effect of change in accounting principle               (1,231,640)       (72,521)        (49,993)

Income tax benefit                                                        (414,874)       (14,805)        (16,132)
                                                                    --------------- --------------  --------------
    Loss from continuing operations before dividends on convertible
      preferred securities, extraordinary expense and cumulative 
      effect of change in accounting principle                            (816,766)       (57,716)        (33,861)

Dividends on convertible preferred securities, net of income tax 
  benefit of  $(3,853)                                                       6,210          6,210           6,210
                                                                    --------------- --------------  --------------
Loss from continuing operations before extraordinary expense and
    cumulative effect of change in accounting principle                   (822,976)       (63,926)        (40,071)

Income (loss) from discontinued operations, net of income tax 
    (benefit) of $(554), $8,947 and $5,721, respectively                    (1,478)        17,875          11,677
Gain on disposal of water segment, net of income taxes of $135,303         181,369              -               -
                                                                    --------------- --------------  --------------
    Total income from discontinued operations, net of income taxes 
     of $134,749, $8,947 and $5,721, respectively                          179,891         17,875          11,677
                                                                    --------------- --------------  --------------
    Loss before extraordinary expense and cumulative effect of 
      change in accounting principle                                      (643,085)       (46,051)        (28,394)

Extraordinary expense - discontinuation of Statement of Financial 
    Accounting Standards No. 71, net of tax                                      -         43,631               -
Cumulative effect of change in accounting principle                         39,812              -               -
                                                                    --------------- --------------  --------------
     Net loss                                                          $  (682,897)   $   (89,682)    $   (28,394)
                                                                    =============== ==============  ==============

Carrying cost of equity forward contracts                                        -         13,650               -
                                                                    --------------- --------------  --------------
    Available for common shareholders                                  $  (682,897)   $  (103,332)    $   (28,394)
                                                                    =============== ==============  ==============
Basic income (loss) per common share:
    Loss from continuing operations before extraordinary expense
      and cumulative effect of change in accounting principle          $     (2.93)   $     (0.28)    $     (0.15)
    Income from discontinued operations                                $      0.64    $      0.06     $      0.04
    Loss before extraordinary expense and cumulative effect of 
      change in accounting principle                                   $     (2.29)   $     (0.22)    $     (0.11)
    Extraordinary expense                                              $         -    $     (0.16)    $         -
    Loss from cumulative effect of change in accounting principle      $     (0.14)   $         -     $         -
    Available for common shareholders                                  $     (2.43)   $     (0.38)    $     (0.11)

Diluted income (loss) per common share:
    Loss from continuing operations before extraordinary expense
      and cumulative effect of change in accounting principle          $     (2.93)   $     (0.28)    $     (0.15)
    Income from discontinued operations                                $      0.64    $      0.06     $      0.04
    Loss before extraordinary expense and cumulative effect of 
      change in accounting principle                                   $     (2.29)   $     (0.22)    $     (0.11)
    Extraordinary expense                                              $         -    $     (0.16)    $         -
    Loss from cumulative effect of change in accounting principle      $     (0.14)   $         -     $         -
    Available for common shareholders                                  $     (2.43)   $     (0.38)    $     (0.11)
</TABLE>

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

                                      F-4

<PAGE>

<TABLE>
<CAPTION>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                 ($ in thousands, except for per-share amounts)

                                                                                  
                                                                                    Accumulated                          
                                       Common Stock     Additional  Retained           Other       Treasury Stock       Total 
                                     -----------------   Paid-In    Earnings       Comprehensive   --------------    Shareholders'
                                     Shares    Amount    Capital    (Deficit)      Income (Loss)   Shares  Amount       Equity
                                     -------- -------- ----------- -------------  ---------------  ---------------    ----------

<S>             <C>                  <C>      <C>      <C>            <C>           <C>                     <C>       <C>        
Balance January 1, 2000              262,076  $65,519  $1,577,903    $  261,590   $   14,923            -  $       -   $1,919,935
                                     -------- -------- ----------- -------------  ------------   -------- ----------   ----------
   Acquisitions                          112       28       1,770             -            -          114      1,861        3,659
   Treasury stock acquisitions             -        -           -             -            -       (2,952)   (49,209)     (49,209)
   Stock plans                         3,580      895      42,156             -            -         (269)    (4,523)      38,528
   Equity forward contracts                -        -    (150,013)            -            -            -          -     (150,013)
   Net loss                                -        -           -       (28,394)           -            -          -      (28,394)
   Other comprehensive loss, net
     of tax and reclassifications 
     adjustments                           -        -           -             -      (14,505)           -          -     (14,505)
                                     -------- -------- ----------- -------------  ------------   -------- ----------   ----------
Balance December 31, 2000            265,768   66,442   1,471,816       233,196          418       (3,107)   (51,871)   1,720,001
                                     -------- -------- ----------- -------------  ------------   -------- ----------   ----------
   Stock plans                         1,916      479      17,449             -            -          696     12,527       30,455
   Common stock offering              25,156    6,289     283,272             -            -            -          -      289,561
   Equity units offering                   -        -       4,968             -            -            -          -        4,968
   Settlement of equity forward 
     contracts                             -        -     150,013       (13,650)           -       (9,140)  (150,013)     (13,650)
   Net loss                                -        -           -       (89,682)           -            -          -      (89,682)
   Other comprehensive income, 
     net of tax and reclassifications 
     adjustments                           -        -           -             -        4,489            -          -        4,489
                                     -------- -------- ----------- ------------- ------------    -------- ----------   ----------
Balance December 31, 2001            292,840   73,210   1,927,518       129,864        4,907      (11,551)  (189,357)   1,946,142
                                     -------- -------- ----------- ------------- ------------    -------- ----------   ----------
   Stock plans                         1,240      310      15,888             -            -          (47)      (228)      15,970
   Net loss                                -        -           -      (682,897)           -            -          -     (682,897)
   Other comprehensive loss, net 
     of tax and reclassifications 
     adjustments                           -        -           -             -     (107,076)           -          -     (107,076)
                                     -------- -------- ----------- ------------- ------------    -------- ----------   ----------
Balance December 31, 2002            294,080  $73,520  $1,943,406    $ (553,033)  $ (102,169)     (11,598) $(189,585)  $1,172,139
                                     ======== ======== =========== ============= ============    ======== ==========   ==========
 

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                 ($ in thousands, except for per-share amounts)


                                                                 2002            2001           2000
                                                             --------------  -------------  -------------

Net loss                                                        $ (682,897)     $ (89,682)     $ (28,394)
Other comprehensive income (loss), net of tax
  and reclassifications adjustments*                              (107,076)         4,489        (14,505)
                                                             --------------  -------------  -------------
  Total comprehensive loss                                      $ (789,973)     $ (85,193)     $ (42,899)
                                                             ==============  =============  =============
</TABLE>


* Consists of unrealized  holding  (losses)/gains  of marketable  securities and
minimum pension liability (see Note 22).



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


                                      F-5

<PAGE>

<TABLE>
<CAPTION>

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 and 2000
                                ($ in thousands)


                                                                      2002            2001            2000
                                                                 --------------  --------------  --------------

<S>                                                                  <C>             <C>             <C>      
Net cash provided by continuing operating activities                 $ 636,867       $ 476,936       $ 307,693

Cash flows from investing activities:
      Acquisitions                                                           -      (3,373,214)       (986,029)
      Proceeds from sale of assets                                     224,678         372,335               -
      Capital expenditures                                            (468,742)       (487,271)       (544,829)
      Securities purchased                                              (1,175)         (1,391)        (71,122)
      Securities sold                                                    8,212           1,434         381,698
      Securities matured                                                 2,014               -          16,072
      ELI share purchases                                               (6,800)              -         (38,748)
      Other                                                                727             639             104
                                                                 --------------  --------------  --------------
Net cash used by investing activities                                 (241,086)     (3,487,468)     (1,242,854)

Cash flows from financing activities:
      Long-term debt borrowings                                              -       3,703,483       1,063,158
      Long-term debt principal payments                             (1,062,169)     (1,077,931)        (46,972)
      Issuance of equity units                                               -         460,000               -
      Debt issuance cost                                                     -         (67,657)              -
      Common stock offering                                                  -         289,561               -
      Issuance of common stock for employee plans                       14,943          25,411          19,773
      Settlement of equity forward contracts                                 -        (163,662)              -
      Common stock buybacks                                                  -               -         (49,209)
      Repayment of customer advances for construction
        and contributions in aid of construction                        (4,895)        (27,816)         30,684
                                                                 --------------  --------------  --------------
Net cash (used) provided by financing activities                    (1,052,121)      3,141,389       1,017,434

Cash provided (used) by discontinued operations
      Proceeds from the sale of discontinued operations                859,064               -               -
      Net cash provided (used) by discontinued operations              (25,416)         14,926         (49,328)

Increase in cash and cash equivalents                                  177,308         145,783          32,945
Cash and cash equivalents at January 1,                                215,869          70,086          37,141
                                                                 --------------  --------------  --------------

Cash and cash equivalents at December 31,                            $ 393,177       $ 215,869       $  70,086
                                                                 ==============  ==============  ==============

Supplemental cash flow information:

Cash paid during the year for:
      Interest                                                       $ 470,175       $ 302,510       $ 188,955
      Income taxes (refunds)                                           (17,621)        (41,126)         37,935

Non-cash investing and financing activities:
      Assets acquired under capital lease                            $  38,000       $  33,985       $ 102,192
      Change in fair value of interest rate swaps                       16,229             430               -
      Investment writedown                                             117,455          79,114               -
      Equity forward contracts                                               -               -         150,013
      Issuance of shares for acquisitions                                    -               -           3,659
      Debt assumed from acquisitions                                         -         117,630               -

</TABLE>


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



                                      F-6

<PAGE>
                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements

(1) Description of Business and Summary of Significant Accounting Policies:
    -----------------------------------------------------------------------

     (a)  Description of Business:
          ------------------------
          Citizens  Communications  Company and its subsidiaries are referred to
          as  "we",  "us",  the  "Company"  or "our"  in this  report.  We are a
          telecommunications-focused  company providing wireline  communications
          services to rural areas and small and  medium-sized  towns and cities,
          including the Rochester,  New York metropolitan  area, as an incumbent
          local exchange carrier,  or ILEC. In addition,  we provide competitive
          local exchange carrier, or CLEC, services to business customers and to
          other  communications  carriers in certain  metropolitan  areas in the
          western United States through  Electric  Lightwave,  Inc., or ELI, our
          wholly-owned  subsidiary.  We also  provide  public  utility  services
          including  natural gas  transmission  and  distribution  and  electric
          transmission and distribution services to primarily rural and suburban
          customers in Vermont, Hawaii and Arizona.

          Our ILEC  segment has grown  substantially  over the last three years,
          primarily as a result of acquisitions.  During 2001, we purchased from
          Global  Crossing  Ltd.  (Global)  the 1.1 million  access lines of the
          Frontier  local  exchange  carrier  business  for  approximately  $3.4
          billion in cash (see Note 5). During 2000,  we acquired  approximately
          334,500 telephone access lines for approximately $986,200,000 in cash.
          Of our 2.4 million  telephone  access  lines as of December  31, 2002,
          approximately 41% are located in New York State, including the greater
          Rochester metropolitan area, another 11% are located in Minnesota.

          In 1999 we  announced  plans to divest our public  utilities  services
          segments. During 2001 we sold two of our four natural gas transmission
          and  distribution  businesses and during 2002 we sold our entire water
          distribution  and wastewater  treatment  business and one of our three
          electric  businesses.  We have  contracts  to sell  three  of our four
          remaining  properties.  We are  seeking a buyer for our one  remaining
          utility property,  which provides  electricity to approximately 21,000
          customers  in  Vermont.  Pending  these  divestitures,  we continue to
          provide gas and electric utility services (see Note 7).

          In June 2002,  we acquired all the common stock of ELI that we did not
          previously own and as a result ELI became our wholly-owned subsidiary.

     (b)  Principles of Consolidation and Use of Estimates:
          -------------------------------------------------
          Our consolidated financial statements have been prepared in accordance
          with accounting  principles generally accepted in the United States of
          America  (GAAP).  Certain  reclassifications  of  balances  previously
          reported have been made to conform to the current presentation.

          The  preparation  of  financial  statements  in  conformity  with GAAP
          requires management to make estimates and assumptions which affect the
          amounts of assets, liabilities,  revenue and expenses we have reported
          and our disclosure of contingent assets and liabilities at the date of
          the  financial  statements.  Actual  results  may  differ  from  those
          estimates.  We believe that our critical  estimates  are  depreciation
          rates,  pension  assumptions,  calculations of impairment  amounts and
          reserves established for telecommunication bankruptcies.

     (c)  Cash Equivalents:
          -----------------
          We consider all highly liquid investments with an original maturity of
          three months or less to be cash equivalents.

     (d)  Revenue Recognition:
          --------------------
          Incumbent  Local Exchange  Carrier (ILEC) - Revenue is recognized when
          services are provided or when  products  are  delivered to  customers.
          Revenue that is billed in advance includes:  monthly recurring network
          access services,  special access services and monthly  recurring local
          line  charges.  The  unearned  portion of this  revenue  is  initially
          deferred as a component of other  current  liabilities  on our balance
          sheet and  recognized in revenue over the period that the services are
          provided.  Revenue that is billed in arrears  includes:  non-recurring
          network access services, switched access services, non-recurring local
          services and long-distance  services.  The earned but unbilled portion
          of  this  revenue  is  recognized  in  revenue  in  our  statement  of
          operations  and accrued in accounts  receivable in the period that the
          services are provided. Excise taxes are recognized as a liability when
          billed.  Installation  fees and their related  direct and  incremental
          costs are  initially  deferred and  recognized  as revenue and expense
          over the average  term of a customer  relationship.  We  recognize  as
          current period expense the portion of installation  costs that exceeds
          installation fee revenue.


                                      F-7

<PAGE>
          ELI - Revenue is recognized  when the services are  provided.  Revenue
          from  long-term   prepaid  network   services   agreements   including
          Indefeasible  Rights to Use (IRU),  are deferred and  recognized  on a
          straight-line   basis  over  the  terms  of  the  related  agreements.
          Installation  fees and their related direct and incremental  costs are
          initially  deferred  and  recognized  as revenue and expense  over the
          average  term of a  customer  relationship.  We  recognize  as current
          period  expense  the  portion  of  installation   costs  that  exceeds
          installation fee revenue.

          Public  Utilities  Services - Revenue is recognized  when services are
          provided for public utilities services.  Certain revenue is based upon
          consumption  while other revenue is based upon a flat fee.  Earned but
          unbilled public  services  revenue is accrued and included in accounts
          receivable and revenue.

     (e)  Construction Costs and Maintenance Expense:
          -------------------------------------------
          Property, plant and equipment are stated at original cost, including a
          portion of related  overhead  and an  allowance  for funds used during
          construction (AFUDC) for regulated businesses and capitalized interest
          for unregulated telecommunications businesses. Maintenance and repairs
          are charged to operating expenses as incurred.  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 amounted
          to $7,390,000,  $5,675,000  and  $4,766,000  for 2002,  2001 and 2000,
          respectively.

     (f)  Intangibles:
          ------------
          Intangibles represent the excess of purchase price over the fair value
          of identifiable  tangible  assets  acquired.  We undertake  studies to
          determine  the fair values of assets  acquired and  allocate  purchase
          prices  to  property,   plant  and   equipment,   goodwill  and  other
          identifiable  intangibles.  On January 1, 2002,  we adopted  SFAS 142,
          "Goodwill and Other Intangible  Assets," which applies to all goodwill
          and other intangible  assets  recognized in the statement of financial
          position at that date,  regardless  of when the assets were  initially
          recognized.   This   statement   requires   that  goodwill  and  other
          intangibles  with  indefinite  useful  lives no longer be amortized to
          earnings,  but instead be reviewed for impairment,  at least annually.
          The  amortization  of goodwill and other  intangibles  with indefinite
          useful lives ceased upon adoption of the statement on January 1, 2002.
          We  annually  examine the  carrying  value of our  goodwill  and other
          intangibles  with indefinite  useful lives to determine  whether there
          are any  impairment  losses  and have  determined  for the year  ended
          December  31,  2002 that there was no  impairment  except for ELI (see
          Notes 6, 13 and 19).

     (g)  Impairment of Long-Lived  Assets and  Long-Lived  Assets to Be 
          --------------------------------------------------------------
          Disposed Of:
          ------------
          We adopted Statement of Financial  Accounting Standard (SFAS) No. 144,
          "Accounting for the Impairment or Disposal of Long-Lived Assets" as of
          January 1, 2002. In accordance with SFAS No. 144, we review long-lived
          assets to be held and used and  long-lived  assets to be disposed  of,
          including   intangible   assets  with  estimated   useful  lives,  for
          impairment  whenever events or changes in circumstances  indicate that
          the   carrying   amount  of  such  assets  may  not  be   recoverable.
          Recoverability  of assets to be held and used is measured by comparing
          the carrying amount of the asset to the future  undiscounted  net cash
          flows expected to be generated by the asset.  Recoverability of assets
          held for sale is  measured by  comparing  the  carrying  amount of the
          assets  to their  estimated  fair  market  value.  If any  assets  are
          considered to be impaired, the impairment is measured by the amount by
          which the carrying  amount of the assets  exceeds the  estimated  fair
          value (see Note 4).

     (h)  Derivative Instruments and Hedging Activities:
          ----------------------------------------------
          Effective  January 1, 2001, we adopted SFAS No. 133,  "Accounting  for
          Derivative  Instruments and Hedging Activities",  as amended. SFAS No.
          133, as amended,  requires that all  derivative  instruments,  such as
          interest rate swaps,  be recognized  in the financial  statements  and
          measured at fair value  regardless of the purpose or intent of holding
          them.

          On the date the derivative  contract is entered into, we designate the
          derivative  as either a fair value or cash flow hedge.  A hedge of the
          fair value of a recognized  asset or  liability or of an  unrecognized
          firm  commitment  is a fair  value  hedge.  A  hedge  of a  forecasted
          transaction  or the  variability  of cash flows to be received or paid
          related to a recognized  asset or  liability is a cash flow hedge.  We
          formally  document all relationships  between hedging  instruments and
          hedged  items, as  well as its risk-management objective and  strategy

                                      F-8

<PAGE>
          for undertaking the hedge  transaction.  This process includes linking
          all derivatives  that are designated as fair-value or cash flow hedges
          to specific assets and liabilities on the balance sheet or to specific
          firm commitments or forecasted transactions.
 
          We also  formally  assess,  both at the  hedge's  inception  and on an
          ongoing  basis,  whether  the  derivatives  that are  used in  hedging
          transactions are highly effective in offsetting changes in fair values
          or cash flows of hedged items.  If it is determined  that a derivative
          is not  highly  effective  as a hedge  or that it has  ceased  to be a
          highly  effective  hedge,  we  would   discontinue   hedge  accounting
          prospectively.

          All  derivatives  are  recognized  on the balance  sheet at their fair
          value. Changes in the fair value of derivative  financial  instruments
          are either recognized in income or stockholders equity (as a component
          of other comprehensive income), depending on whether the derivative is
          being used to hedge changes in fair value or cash flows.

          We entered into interest rate swap  arrangements  during 2001 and 2002
          related to a portion of our fixed rate debt.  These  hedge  strategies
          satisfy the fair value hedging  requirements of SFAS 133. As a result,
          the fair value of the hedges is carried on the balance  sheet in other
          current  assets  and  the  related  underlying  liabilities  are  also
          adjusted to fair value by the same amount.

     (i)  Investments:
          ------------
          We classify our investments at purchase as  available-for-sale.  We do
          not maintain a trading portfolio or held to maturity securities.

          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 shareholders'  equity.  Interest,  dividends and
          gains and losses  realized  on sales of  securities  are  reported  in
          Investment income.

          We evaluate our  investments  periodically  to  determine  whether any
          decline in fair value,  below the cost basis, is other than temporary.
          If we determine that a decline in fair value is other than  temporary,
          the cost basis of the  individual  investment  is written down to fair
          value which  becomes the new cost basis.  The amount of the write down
          is transferred from other comprehensive  income (loss) and included in
          the statement of operations as a loss.

     (j)  Income Taxes, Deferred Income Taxes and Investment Tax Credits:
          ---------------------------------------------------------------
          We file a consolidated federal income tax return. We utilize 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 basis
          and the tax basis of assets and  liabilities  using tax rates expected
          to be in  effect  when  the  temporary  differences  are  expected  to
          reverse. The investment tax credits relating to regulated  operations,
          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:
          ---------------------
          We have various employee stock-based  compensation plans. Awards under
          these plans are granted to eligible officers, management employees and
          non-management employees.  Awards may be made in the form of incentive
          stock options, non-qualified stock options, stock appreciation rights,
          restricted stock or other stock based awards.  As permitted by current
          accounting rules, we recognize  compensation  expense in the financial
          statements  only if the market price of the  underlying  stock exceeds
          the  exercise  price on the date of grant.  We  provide  pro forma net
          income  (loss)  and pro forma  net  income  (loss)  per  common  share
          disclosures  for  employee  stock  option  grants  made  in  1995  and
          thereafter based on the fair value of the options at the date of grant
          (see Note 18).  Fair value of options  granted is  computed  using the
          Black Scholes option-pricing model.

     (l)  Minority Interest and Minority Interest in Subsidiary:
          ------------------------------------------------------
          Minority interest  represents the former minority's share of ELI's net
          loss. Subsequent to ELI's initial public offering in 1997, we recorded
          minority  interest on our statement of operations and reduced minority
          interest  on our  balance  sheet by the amount of the former  minority
          interests'  share of ELI's  losses.  As of June 30,  2000,  the former
          minority  interest  on the  balance  sheet had been  reduced  to zero,
          therefore,  from that date forward, we discontinued recording minority
          interest income on our statement of operations.

                                      F-9

<PAGE>

     (m)  Net Income (loss) Per Common Share:
          -----------------------------------
          Basic net income  per  common  share is  computed  using the  weighted
          average  number of common shares  outstanding  during the period being
          reported  on.  Diluted  net  income  per  common  share  reflects  the
          potential  dilution that could occur if securities or other  contracts
          to  issue  common  stock  that  are in the  money  were  exercised  or
          converted  into  common  stock at the  beginning  of the period  being
          reported on.

(2)  Accounts Receivable:
     --------------------
     The  components of accounts  receivable,  net at December 31, 2002 and 2001
     are as follows:

($ in thousands)                                 2002             2001
 --------------                             --------------  ---------------

Customers                                       $ 258,165        $ 292,345
Other                                              91,710           87,134
Less:  Allowance for doubtful accounts            (38,946)         (67,601)
                                            --------------  ---------------
   Accounts receivable, net                     $ 310,929        $ 311,878
                                            ==============  ===============

(3)  Property, Plant and Equipment:
     ------------------------------
     The  components  of property,  plant and equipment at December 31, 2002 and
     2001 are as follows:

<TABLE>
<CAPTION>

                                                            Estimated
($ in thousands)                                           Useful Lives           2002              2001
 --------------                                         ------------------- ----------------- -----------------

<S>                                                       <C>                    <C>               <C>        
Telephone outside plant                                   6 to 55 years          $ 3,199,676       $ 3,280,542
Telephone central office equipment                        7 to 11 years            1,893,169         2,135,992
Information systems and other administrative assets       5 to 17 years              762,709           777,351
Other                                                                                 67,073            55,065
Construction work in progress                                                        217,145           450,978
                                                                            ----------------- -----------------
                                                                                   6,139,772         6,699,928
Less: accumulated depreciation                                                    (2,449,716)       (2,187,890)
                                                                            ----------------- -----------------
Property, plant and equipment, net                                               $ 3,690,056       $ 4,512,038
                                                                            ================= =================

</TABLE>

     Depreciation  expense,  calculated using the straight-line method, is based
     upon the estimated  service lives of various  classifications  of property,
     plant and equipment.  Depreciation  expense was $630,113,000,  $488,957,000
     and  $370,119,000  for the years ended  December 31,  2002,  2001 and 2000,
     respectively.  We ceased to record  depreciation  expense on the gas assets
     effective  October 1, 2000 and on the electric assets effective  January 1,
     2001,  both of which are  included  in  assets  held for sale (see Note 7).
     During 2002 and 2001, we recognized accelerated depreciation of $23,379,000
     and $22,000,000 related to the change in useful lives of our accounting and
     human resource systems and our Plano, Texas office building,  furniture and
     fixtures as a result of our  restructuring  (see Note 19).  During 2000, we
     recognized $17,400,000 in accelerated depreciation related to the change in
     useful life of an operating system in the ILEC segment.

(4)  Losses on Impairment:
     ---------------------
     In the third quarter 2002, we recognized non-cash pre-tax impairment losses
     of $656,658,000 related to property,  plant and equipment in the ELI sector
     and  $417,400,000  related to the gas and electric  sector  assets held for
     sale, in each case in accordance with the provisions of SFAS 144.

     ELI
     ---
     Prior to the third  quarter of 2002,  we tested for  impairment  of ELI and
     determined that,  based on our assumptions,  the sum of the expected future
     cash  flows,  undiscounted  and  without  interest  charges,  exceeded  the
     carrying value of its long-lived  assets and therefore we did not recognize
     an impairment.  Because sales for the nine months ended  September 30, 2002
     were  lower than those in 2001 and were  significantly  below our  original
     2002 budget  (which was used in the test for  impairment  at  December  31,
     2001), we evaluated the long-lived  assets of ELI as of September 30, 2002.
     At that date,  we estimated  that our  undiscounted  future cash flows were
     less  than the  carrying  value of our  long-lived  assets.  As a result we
     recognized a non-cash pre-tax impairment loss of $656,658,000, equal to the
     difference  between  the  estimated  fair  value of the  assets  (which  we
     determined by calculating the discounted value of the estimated future cash

                                      F-10

<PAGE>

     flows weighting various possible  scenarios for management's  assessment of
     probability of occurrence and  discounting  the  probability-weighted  cash
     flows at an appropriate rate) and the carrying amount of the assets. Making
     the  determinations  of  impairment  and the amount of  impairment  require
     significant  judgment by  management  and  assumptions  with respect to the
     future cash flows of the ELI  sector.  The  telecommunications  industry in
     general and the CLEC sector in particular is undergoing  significant change
     and disruption,  which makes judgments and assumptions  with respect to the
     future cash flows highly subjective.

     Gas and Electric Assets Held for Sale
     -------------------------------------
     On October 29,  2002,  our board  approved  the sale of our Arizona gas and
     electric utility  properties for  $230,000,000 in cash  ($220,000,000 if we
     close by July 28,  2003),  subject  to  adjustments  under the terms of the
     agreements. On December 19, 2002, our board approved the sale of our Hawaii
     gas property for  $115,000,000  in cash,  subject to adjustments  under the
     terms of the agreement.  The board also approved, in principle, the sale of
     Vermont Electric,  our only remaining utility property at currently offered
     prices,  which were below their then book carrying value.  This property is
     the only utility  property that does not have a definitive  sales contract.
     Previously,  we believed that the net realizable  value of these properties
     was equal to or above their carrying values. However, as a result of market
     conditions,  and the desire to complete the divestiture  process quickly in
     order to focus on our core telecommunications operations and raise money to
     further reduce debt, we made a strategic  decision to accept  proceeds less
     than carrying values.  Our estimate of net realizable value with respect to
     Vermont  is based on  current  negotiations  and may be  revised  in future
     periods.  As a result,  for the four  properties  noted above we recorded a
     non-cash  pre-tax  charge of  $417,400,000  in the third quarter of 2002 to
     reduce the carrying  value of our assets held for sale to our best estimate
     of net realizable value upon sale (see Note 7).

(5)  Acquisitions:
     -------------
     In  2000,  we  acquired   from  Verizon   Communications   Inc.   (Verizon)
     approximately  317,500 telephone access lines for $948,200,000 in cash, and
     we  acquired  from  Qwest  Communications   (Qwest)   approximately  17,000
     telephone access lines for  approximately  $38,000,000 in cash. On June 29,
     2001, we purchased Frontier for approximately $3,373,000,000 in cash. These
     acquisitions   have  been  accounted  for  using  the  purchase  method  of
     accounting.  The results of operations of the acquired properties have been
     included in our financial statements from the date of acquisition.


                                      F-11

<PAGE>

     The following summarizes the allocation of purchase prices for our 2001 and
     2000 acquisitions:

<TABLE>
<CAPTION>
                                                                                                                          Total
      ($ in thousands)                                     Qwest        Verizon                          2001         Acquisitions
       --------------         Verizon       Verizon        North       Illinois/     Total 2000      Acquisition         since
                             Nebraska      Minnesota       Dakota      Wisconsin    Acquisitions     of Frontier      January 2000
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Acquisition date             6/30/2000     8/31/2000     10/31/2000    11/30/2000                     6/29/2001

Assets acquired:
  Property, plant and
<S>                            <C>           <C>            <C>          <C>            <C>            <C>              <C>        
    equipment                  $ 51,903      $ 137,391      $ 13,910     $ 105,446      $ 308,650      $ 1,108,514      $ 1,417,164
  Current assets                      -          4,960             -             -          4,960          119,016          123,976
  Goodwill                      108,175        174,247        16,619       163,906        462,947        1,506,647        1,969,594
  Customer base                  46,060        120,742         7,466        34,565        208,833          791,983        1,000,816
  Trade name                          -              -             -             -              -          122,058          122,058
  Other assets                        -          1,557             -             -          1,557          151,172          152,729
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Total assets acquired           206,138        438,897        37,995       303,917        986,947        3,799,390        4,786,337
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Liabilities assumed:
  Debt                                -              -             -             -              -          146,920          146,920
  Other liabilities                 734              -             -             -            734          279,536          280,270
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Total liabilities assumed           734              -             -             -            734          426,456          427,190
                            ------------  ------------- ------------- ------------- --------------  ---------------  ---------------
Cash paid                      $205,404      $ 438,897      $ 37,995     $ 303,917      $ 986,213      $ 3,372,934      $ 4,359,147
                            ============  ============= ============= ============= ==============  ===============  ===============

Status of appraisal
    valuation                  Final         Final         Final         Final          Final           Final            Final

</TABLE>


     The following pro forma financial  information for the years ended December
     31, 2001 and 2000  represents  the combined  results of our  operations and
     acquisitions  as if the  acquisition  had occurred at the  beginning of the
     year of its  acquisition.  The pro  forma  financial  information  does not
     necessarily  reflect the results of operations that would have occurred had
     we constituted a single entity during such periods.

        ($ in thousands, except per share amounts)
         ----------------------------------------
                                                    2001             2000
                                               ---------------  ----------------
          Revenue                                $ 2,844,789       $ 2,693,824
          Net loss                               $  (161,619)      $  (148,754)
          Net loss per share                     $     (0.64)      $     (0.56)

     Included  in revenue  for the years  ended  December  31,  2001 and 2000 is
     approximately $313,070,000 and $327,300,000,  respectively, of revenue from
     our Louisiana and Colorado gas  operations  sold during 2001, and our Kauai
     electric division sold during 2002 (see Note 7).

(6)  Intangibles:
     ------------
     Intangibles at December 31, 2002 and 2001 are as follows:

($ in thousands) 
 --------------                                2002             2001
                                         ---------------  ----------------

Customer base - amortizable                  $1,000,816       $   970,925
Trade name - non-amortizable                    122,058           106,473
                                         ---------------  ----------------
    Other intangibles                         1,122,874         1,077,398
Accumulated amortization                       (179,904)          (56,056)
                                         ---------------  ----------------
    Total other intangibles, net             $  942,970       $ 1,021,342
                                         ===============  ================

     Amortization expense was $125,409,000, $143,379,000 and $17,488,000 for the
     years ended December 31, 2002, 2001 and 2000, respectively.


                                      F-12

<PAGE>

     We have recorded  assets  acquired at estimates of fair market values as of
     the  acquisition   dates  in  accordance  with  SFAS  No.  141,   "Business
     Combinations".   Our   allocations  of  purchase   prices  are  based  upon
     independent appraisals of the respective properties acquired.

     Our  acquisitions  were made in order for us to execute  upon our  business
     strategy.   Our   strategy   is   to   focus   exclusively   on   providing
     telecommunications  services,  primarily in rural,  small and  medium-sized
     towns and cities where we believe we have a competitive  advantage  because
     of our relatively  larger size,  greater  resources,  local focus and lower
     levels of competition.

     Our ILEC  operations  are  typically the dominant  provider of  independent
     local exchange carrier services in each of the markets in which we operate.
     We believe that our  operations  in these areas will provide us with steady
     revenue and margin enhancement  opportunities.  To reach our objectives, we
     intend  to  continue  to  achieve  economies  of scale  through  increasing
     operational   efficiencies,   among  other  strategies.  In  following  our
     strategy,  we selectively pursue  acquisitions that we believe will enhance
     shareholder   value  through   increased  revenue  growth  and  operational
     efficiencies consistent with our corporate strategy and objectives.

     We have paid more than the net book  values (of the  seller) of each of the
     businesses  acquired  in 2001 and  2000.  We based our  purchase  prices on
     estimates  of future  earnings  and  future  cash  flows of the  businesses
     acquired.  The "premium" to book value paid,  including  the  allocation to
     goodwill for each respective property, reflects the value created by all of
     the tangible and intangible operating assets (existing and acquired) of our
     businesses   coming  together  to  produce   earnings,   including  without
     limitation,  the fact that we were able to immediately  commence operations
     as the dominant local exchange  carrier in the applicable  operating  area.
     Additionally, the premiums paid were impacted by the fact that our purchase
     price  was  accepted  by  the  sellers  after  a  competitive  bidding  and
     negotiation process.

     We were willing to pay a premium  (i.e.,  goodwill)  over the fair value of
     the tangible and identifiable  intangible  assets acquired less liabilities
     assumed in order to obtain product cross-selling  opportunities,  economies
     of scale  (e.g.,  cost savings  opportunities)  and the  potential  benefit
     resident in expected population/demographic trends.

     The following table presents a reconciliation between reported net loss and
     adjusted  net  loss.  Adjusted  net  loss  excludes   amortization  expense
     recognized in prior periods  related to goodwill and trade name that are no
     longer being amortized as required by SFAS No. 142.

<TABLE>
<CAPTION>
(In thousands, except per-share amounts)                               2002             2001              2000
 --------------------------------------                          ---------------  ----------------  ---------------

<S>                                                                  <C>               <C>               <C>       
Reported attributable to common shareholders                         $ (682,897)       $ (103,332)       $ (28,394)
Add back: Goodwill and trade name amortization, net of tax                    -            61,938            9,202
                                                                 ---------------  ----------------  ---------------
Adjusted attributable to common shareholders                         $ (682,897)       $  (41,394)       $ (19,192)
                                                                 ===============  ================  ===============

Basic earnings per share:
-------------------------
Reported attributable to common shareholders                         $    (2.43)       $    (0.38)       $   (0.11)
Goodwill and trade name amortization, net of tax                              -              0.23             0.04
                                                                 ---------------  ----------------  ---------------
Adjusted attributable to common shareholders                         $    (2.43)       $    (0.15)       $   (0.07)
                                                                 ===============  ================  ===============

Diluted earnings per share:
---------------------------
Reported attributable to common shareholders                         $    (2.43)       $    (0.38)       $   (0.11)
Goodwill and trade name amortization, net of tax                              -              0.22             0.03
                                                                 ---------------  ----------------  ---------------
Adjusted attributable to common shareholders                         $    (2.43)       $    (0.16)       $   (0.08)
                                                                 ===============  ================  ===============
</TABLE>


(7)  Discontinued Operations and Net Assets Held for Sale:
     -----------------------------------------------------

     On August 24, 1999,  our Board of Directors  approved a plan of divestiture
     for our public utilities services businesses,  which included gas, electric
     and water and wastewater businesses.


                                      F-13

<PAGE>

          Water and Wastewater
          --------------------
          On January 15, 2002, we completed the sale of our water and wastewater
          operations to American Water Works,  Inc. for $859,100,000 in cash and
          $122,500,000 of assumed debt and other  liabilities.  The pre-tax gain
          on the sale recognized in 2002 was $316,672,000.

          Electric and Gas
          ----------------
          On October 29, 2002, we entered into definitive agreements to sell our
          Arizona gas and electric divisions to UniSource Energy Corporation for
          $230,000,000  in cash  ($220,000,000  if we close  by July 28,  2003),
          subject to adjustments  specified in the agreements  (see Note 4). The
          transactions,  which are  subject to  regulatory  and other  customary
          approvals, are expected to close during the second half of 2003.

          On  November  1, 2002,  we  completed  the sale of our Kauai  electric
          division to Kauai Island Utility  Cooperative  (KIUC) for $215,000,000
          in  cash.  The  pre-tax  gain  on the  sale  recognized  in  2002  was
          $8,273,000.

          On December 19, 2002,  we entered into a definitive  agreement to sell
          The Gas Company in Hawaii to K-1 USA Ventures, Inc for $115,000,000 in
          cash,  subject to adjustments  under the terms of the  agreement.  The
          transaction,  which is  subject  to  regulatory  and  other  customary
          approvals, is expected to close during the fourth quarter of 2003.

          On July 2, 2001, we completed the sale of our Louisiana Gas operations
          to Atmos Energy Corporation for $363,436,000 in cash. The pre-tax gain
          on the sale recognized in 2001 was $139,304,000.

          On November  30,  2001,  we sold our  Colorado  Gas division to Kinder
          Morgan  for  approximately  $8,900,000  in cash after  purchase  price
          adjustments.

     Currently,  we do not  have an  agreement  to sell our  remaining  electric
     property,  Vermont Electric. We continue to actively pursue a buyer for our
     remaining electric business.  All of our gas and electric assets (including
     Arizona gas and electric and Hawaii gas) and their related  liabilities are
     classified  as "assets  held for sale" and  "liabilities  related to assets
     held for sale,"  respectively.  These  assets have been written down to our
     best estimate of the net realizable value upon sale (see Note 4).

     Discontinued  operations  in  the  consolidated  statements  of  operations
     reflect the results of operations of the  water/wastewater  properties sold
     in January  2002  including  allocated  interest  expense  for the  periods
     presented.  Interest expense was allocated to the  discontinued  operations
     based  on  the  outstanding   debt   specifically   identified  with  these
     businesses.

     We  initially  accounted  for the  planned  divestiture  of all the  public
     utilities services properties as discontinued operations.  Subsequently, we
     reclassified  all of our gas (on  September  30,  2000)  and  electric  (on
     December 31, 2000) assets and their related liabilities to "assets held for
     sale" and "liabilities related to assets held for sale,"  respectively.  We
     also  reclassified  the  results  of  these  operations  from  discontinued
     operations  to  their  original  income  statement   captions  as  part  of
     continuing  operations.  Additionally,  we ceased  to  record  depreciation
     expense on the gas  assets  effective  October 1, 2000 and on the  electric
     assets effective January 1, 2001. Such depreciation expense would have been
     an additional  $41,340,000 and $50,830,000 for the years ended December 31,
     2002 and 2001, respectively.

     Summarized  financial  information  for  the  water/wastewater   operations
     (discontinued operations) is set forth below:


($ in thousands)                      For the years ended December 31,
 --------------                      ----------------------------------
                                       2002        2001        2000
                                     ----------  ----------  ----------
Revenue                                $ 4,650   $ 116,868   $ 105,202
Operating income (loss)                   (415)     37,211      27,415
Income taxes (benefit)                    (554)      8,947       5,721
Net income (loss)                       (1,478)     17,875      11,677
Gain on disposal of water segment, 
  net of tax                           181,369           -           -



                                      F-14


<PAGE>
     Summarized  balance sheet  information for the gas and electric  operations
     (assets held for sale) is set forth below:

<TABLE>
<CAPTION>

($ in thousands)
 --------------                                        2002             2001
                                                   --------------  ---------------
<S>                                                     <C>              <C>     
Current assets                                         $  49,549      $    66,511
Net property, plant and equipment                        358,135          805,653
Other assets                                              40,080          235,773
                                                   --------------  ---------------
Total assets held for sale                             $ 447,764      $ 1,107,937
                                                   ==============  ===============

Current liabilities                                    $  83,278      $    71,259
Long-term debt                                                 -           43,400
Other liabilities                                         66,775          104,116
                                                   --------------  ---------------
Total liabilities related to assets held for sale      $ 150,053      $   218,775
                                                   ==============  ===============

</TABLE>

(8)  Investments:
     ------------
     The components of investments at December 31, 2002 and 2001 are as follows:

($ in thousands)
 --------------                             2002             2001
                                     ---------------- ----------------
Marketable equity securities                $ 29,844        $ 139,188
Other fixed income securities                      2            2,020
                                     ---------------- ----------------
                                            $ 29,846        $ 141,208
                                     ================ ================

     As  of  December  31,  2002,   we  owned   3,059,000   shares  of  Adelphia
     Communications  Corp.  (Adelphia)  common stock.  As a result of Adelphia's
     price  declines  and  filing  for  bankruptcy,   we  recognized  losses  of
     $95,300,000  and $79,000,000 on our investment for the years ended December
     31, 2002 and 2001,  respectively,  as the declines  were  determined  to be
     other than  temporary.  As of June 30, 2002, we had written this investment
     down to zero, and therefore we have no additional  exposure  related to the
     market value of Adelphia stock.

     As of December 31, 2002, we owned 1,333,500  shares of D & E Communications
     common stock.  As the result of an other than temporary  decline in D & E's
     stock price,  we recognized a loss of $16,400,000 on our investment for the
     year ended December 31, 2002.

     The following  summarizes the adjusted cost, gross unrealized holding gains
     and losses and fair market value for investments.

<TABLE>
<CAPTION>
($ in thousands)
 --------------                  Adjusted             Unrealized Holding         Aggregate Fair
                                               ---------------------------------
Investment Classification          Cost            Gains          (Losses)       Market Value
                              ---------------- ---------------- ---------------- ----------------
As of December 31, 2002
-----------------------
<S>                              <C>               <C>              <C>             <C>      
Available-for-Sale               $  14,452         $ 15,394         $     -         $  29,846

As of December 31, 2001
-----------------------
Available-for-Sale               $ 132,935         $ 11,896         $ (3,623)       $ 141,208

</TABLE>

     Marketable  equity  securities for 2002 and 2001 include  2,305,908  common
     shares  which  represent  an  ownership  of 19% of the equity in  Hungarian
     Telephone  and Cable  Corp.,  a company  of which  our  Chairman  and Chief
     Executive  Officer is a member of the Board of Directors.  In addition,  we
     hold 30,000 shares of non-voting  convertible  preferred stock,  each share
     having a  liquidation  value of $70 per  share  and is  convertible  at our
     option into 10 shares of common stock.

(9)  Fair Value of Financial Instruments:
     ------------------------------------
     The following  table  summarizes  the carrying  amounts and estimated  fair
     values for certain of our  financial  instruments  at December 31, 2002 and
     2001. For the other  financial  instruments,  representing  cash,  accounts
     receivables, long-term debt due within one year, accounts payable and other
     accrued liabilities, the carrying amounts approximate fair value due to the
     relatively short maturities of those instruments.


                                      F-15

<PAGE>

<TABLE>
<CAPTION>

($ in thousands)
 --------------                                  2002                                2001
                                            ----------------------------------- ---------------------------------
                                               Carrying                            Carrying
                                                Amount          Fair Value          Amount         Fair Value
                                            ---------------- ------------------ ---------------- ----------------
<S>                                             <C>              <C>              <C>              <C>        
Investments                                     $    29,846      $    29,846      $   141,208      $   141,208
Long-term debt (1)                              $ 4,957,361      $ 5,411,069      $ 5,534,906      $ 5,605,368
Equity Providing Preferred
   Income Convertible Securities (EPPICS)       $   201,250      $   191,188      $   201,250      $   179,113
</TABLE>


The fair value of the above  financial  instruments is based on quoted prices at
the reporting date for those financial instruments.

(1) Excludes the $460,000,000 debt portion of the equity units.

(10) Long-term Debt:
     ---------------
     The activity in our  long-term  debt from December 31, 2001 to December 31,
     2002 is summarized as follows:

<TABLE>
<CAPTION>
                                                              Twelve Months Ended
                                                   --------------------------------------------
                                                                                                                Interest Rate*
                                                                Interest                                              at
                                     December 31,               Rate Swap/                        December 31,   December 31,
($ in thousands)                        2001       Borrowings  Reclassification     Payments***      2002            2002
 --------------                      ------------  ----------  ----------------     -----------   ------------   -------------
                                          
FIXED RATE
<S>                                     <C>            <C>            <C>            <C>             <C>            <C>   
  Rural Utilities Service Loan         $  110,860     $     -       $      -        $   (79,986)    $   30,874      6.210%
    Contracts

  Debentures                              850,778           -              -           (103,881)       746,897      7.538%

  2001 Notes                            3,700,430           -         16,229            (25,676)     3,690,983      8.267%

  Equity Units                            460,000           -              -                   -       460,000      7.480%

  Senior Unsecured Notes                  108,825           -              -            (37,825)        71,000      8.050%

  ELI Notes                               325,000           -              -           (319,025)         5,975      6.232%
  ELI Capital Leases                      137,382       1,512              -             (3,694)       135,200     11.798%
  Industrial Development Revenue         
    Bonds                                 249,205           -              -            (62,815)       186,390      6.091%
  Other                                        54           -              -                (14)            40     12.985%
                                        ---------     -------         -------          ---------     ---------     
TOTAL FIXED RATE                        5,942,534       1,512         16,229           (632,916)     5,327,359
                                        ---------     -------         -------          ---------     ---------

VARIABLE RATE

  ELI Bank Credit Facility                400,000           -              -           (400,000)             -      2.391%
  Industrial Development Revenue Bonds    136,278           -         43,400  **        (30,765)       148,913      3.563%
                                        ---------     -------         -------          ---------     ---------
TOTAL VARIABLE RATE                       536,278           -         43,400           (430,765)       148,913
                                        ---------     -------         -------          ---------     ---------

TOTAL LONG TERM DEBT                   $6,478,812     $ 1,512       $ 59,629        $(1,063,681)    $5,476,272
                                       ----------     =======       =========        ============    ----------

  Less:  Current Portion                (483,906)                                                     (58,911)
  Less:  Equity Units                   (460,000)                                                    (460,000)
                                        ---------                                                    ---------
                                       $5,534,906                                                   $4,957,361
                                       ==========                                                   ==========
</TABLE>

* Interest rate includes  amortization of debt issuance expenses,  debt premiums
or discounts.  The interest  rate for Rural  Utilities  Service Loan  Contracts,
Debentures,  ILEC Senior  Unsecured Notes,  and Industrial  Development  Revenue
Bonds represent a weighted average of multiple issuances.

**  Reclassification  from  liabilities  related  to  assets  held  for sale for
liabilities retained after sale of certain public utilities operations.

*** Includes purchases on the open market (see Note 13).

     Total future minimum cash payment  commitments over the next 25 years under
     ELI's long-term  capital leases amounted to $317,800,000 as of December 31,
     2002.


                                      F-16

<PAGE>

     The total outstanding  principal amounts of industrial  development revenue
     bonds were  $335,303,000  and  $385,483,000  at December 31, 2002 and 2001,
     respectively. The earliest maturity date for these bonds is in August 2015.

     We  have  an  available  shelf  registration  of  $825,600,000  and we have
     available  lines of credit with  financial  institutions  in the  aggregate
     amount of  $805,000,000.  Associated  facility fees vary,  depending on our
     credit  ratings,  and are 0.25%  per annum as of  December  31,  2002.  The
     expiration date for the facilities is October 24, 2006.  During the term of
     the facilities we may borrow,  repay and reborrow funds. As of December 31,
     2002, there were no outstanding advances under these facilities.

     During the last three  quarters of 2002,  we executed a series of purchases
     in the open market of a number of our outstanding notes and debentures. The
     aggregate   principal   amount  of  notes  and  debentures   purchased  was
     $106,906,000   and  they   generated   a   pre-tax   gain  from  the  early
     extinguishment of debt at a discount of approximately  $6,000,000  recorded
     in other income (loss), net.

     During December 2002, we completed a tender offer with respect to our 6.80%
     Debentures  due 2026  (puttable at par in 2003) and ELI's 6.05%  Guaranteed
     Notes due 2004. As a result of the tender,  $82,286,000  and  $259,389,000,
     respectively,  of these  securities  were purchased and retired at a pretax
     cost of  $12,800,000  in excess of the principal  amount of the  securities
     purchased.

     For the year ended  December  31, 2002,  we retired an aggregate  principal
     amount of $1,063,681,000 of debt.

     In May 2001, we issued an aggregate of $1.75 billion of notes consisting of
     $700,000,000  principal  amount of 8.50%  notes due May 15,  2006 and $1.05
     billion principal amount of 9.25% notes due May 15, 2011.

     On June 13, 2001, we issued 18,400,000 equity units at $25 per unit for net
     proceeds of $446,200,000 (after underwriting  discounts and commissions and
     before offering  expenses).  Each equity unit initially consists of a 6.75%
     senior  note due 2006 and a  purchase  contract  (warrant)  for our  common
     stock. The purchase  contract  obligates the holder to purchase from us, no
     later than  August  17,  2004 for a purchase  price of $25,  the  following
     number of shares of our common stock:

          *    1.7218 shares,  if the average  closing price of our common stock
               over the 20-day  trading  period  ending on the third trading day
               prior to August 17, 2004 equals or exceeds $14.52;

          *    A number of shares having a value,  based on the average  closing
               price over that  period,  equal to $25,  if the  average  closing
               price of our  common  stock  over the same  period  is less  than
               $14.25, but greater than $12.10; and

          *    2.0661 shares,  if the average  closing price of our common stock
               over the same period is less than or equal to $12.10.

     The  fair  market  value  of the  warrants  at the  date  of  issuance  was
     $4,968,000.  This  amount was  recorded  as debt  discount  and  additional
     paid-in  capital.  The equity  units  trade on The New York Stock  Exchange
     under the symbol "CZB."

     In August 2001, we issued an aggregate of $1.75 billion of notes consisting
     of $300,000,000 of 6.375% notes due 2004,  $750,000,000 principal amount of
     7.625% notes due 2008 and $700,000,000 principal amount of 9.000% notes due
     2031.

     In October 2001, we borrowed  $200,000,000  on an unsecured  basis from the
     Rural Telephone Finance Cooperative (RTFC). This note is due on October 24,
     2011 and has a fixed 6.27% rate of interest, payable quarterly.


                                      F-17

<PAGE>

     Our principal payments and capital lease payments  (principal only) for the
     next five years are as follows:

               ($ in thousands)
                --------------
                                    Principal        Capital
                                    ---------      --------------
                                    Payments       Lease Payments
                                    ---------      --------------
                2003                $ 50,939        $ 7,972
                2004                 385,005          3,061
                2005                     933          3,391
                2006                 875,992          3,772
                2007                   1,056          4,203

     Holders of certain industrial  development  revenue bonds may tender at par
     prior to maturity.  The next tender date is August 1, 2007 for  $30,350,000
     of  principal  amount of bonds.  We expect to remarket all such bonds which
     are  tendered.  If the  proposed  sale  of our  Arizona  electric  and  gas
     properties  to  UniSource  is  completed  we will  be  required  to  redeem
     $111,760,000  of industrial  development  revenue bonds  promptly after the
     sale is completed.

(11) Derivative Instruments and Hedging Activities:
     ----------------------------------------------
     Interest rate swap  agreements are used to hedge a portion of our debt that
     is  subject  to  fixed  interest  rates.   Under  our  interest  rate  swap
     agreements, we agree to pay an amount equal to a specified variable rate of
     interest  times a notional  principal  amount,  and to receive in return an
     amount equal to a specified  fixed rate of interest times the same notional
     principal amount.  The notional amounts of the contracts are not exchanged.
     No other cash payments are made unless the agreement is terminated prior to
     maturity,  in which case the  amount  paid or  received  in  settlement  is
     established  by agreement at the time of  termination  and  represents  the
     market  value,  at the then  current  rate of  interest,  of the  remaining
     obligations to exchange payments under the terms of the contracts.

     The  interest  rate  swap  contracts  are  reflected  at fair  value in our
     consolidated balance sheet and the related portion of fixed-rate debt being
     hedged is  reflected at an amount equal to the sum of its book value and an
     amount  representing  the  change  in fair  value of the  debt  obligations
     attributable  to the interest rate risk being  hedged.  Changes in the fair
     value of interest rate swap  contracts,  and the offsetting  changes in the
     adjusted carrying value of the related portion of the fixed-rate debt being
     hedged,  are  recognized  in the  consolidated  statements of operations in
     interest expense. The notional amounts of fixed-rate indebtedness hedged as
     of  December  31,  2002  and  December  31,  2001  was   $250,000,000   and
     $100,000,000, respectively. Such contracts require us to pay variable rates
     of interest  (average  pay rate of  approximately  4.85% as of December 31,
     2002) and receive fixed rates of interest (average receive rate of 7.65% as
     of December 31, 2002). The fair value of these  derivatives is reflected in
     other assets as of December 31, 2002, in the amount of $16,658,000  and the
     related  underlying  debt has been increased by a like amount.  The amounts
     received  during  the year  ended  December  31,  2002 as a result of these
     contracts  amounted  to  $3,820,000  and are  included  as a  reduction  of
     interest expense.

     We  do  not  anticipate  any  nonperformance  by  counter  parties  to  our
     derivative  contracts as all counter parties have  investment  grade credit
     ratings.

(12) Shareholder Rights Plan:
     ------------------------
     On March 6, 2002, our Board of Directors adopted a Shareholder Rights Plan.
     The purpose of the  Shareholder  Rights Plan is to deter coercive  takeover
     tactics and to  encourage  third  parties  interested  in  acquiring  us to
     negotiate  with our Board of Directors.  It is intended to  strengthen  the
     ability of our Board of Directors to fulfill its  fiduciary  duties to take
     actions which are in the best interest of our shareholders. The rights were
     distributed to shareholders as a dividend at the rate of one right for each
     share of our common stock held by shareholders of record as of the close of
     business  on  March  26,  2002.   Initially,   the  rights  generally  were
     exercisable only if a person or group acquired  beneficial  ownership of 15
     percent or more of our common stock (the "Acquiror") without the consent of
     our  independent  directors.  On January 21,  2003,  our Board of Directors
     amended  the terms of our Rights  agreement  increasing  the level at which
     these  rights will become  exercisable  to 20 percent of our common  stock.
     Each  right not owned by an  Acquiror  becomes  the right to  purchase  our
     common stock at a 50 percent discount.

                                      F-18

<PAGE>

(13) Changes in Accounting Principles:
     ---------------------------------
     In July 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
     141,  "Business  Combinations."  This statement  requires that all business
     combinations be accounted for under the purchase method of accounting. SFAS
     141 requires  that the purchase  method of  accounting be used for business
     combinations  initiated  after June 30, 2001 and  prohibits  the use of the
     pooling-of-interests  method of accounting. We adopted SFAS No. 141 on July
     1, 2001.  The adoption of SFAS 141 did not have any impact on our financial
     position or results of operations.

     In July 2001, the FASB issued SFAS No. 142,  "Goodwill and Other Intangible
     Assets." This statement  requires that goodwill and other  intangibles with
     indefinite useful lives no longer be amortized to earnings,  but instead be
     reviewed for impairment. The amortization of goodwill and other intangibles
     with  indefinite  useful  lives  ceased upon  adoption of the  statement on
     January 1, 2002. We have no other  intangibles  with indefinite lives other
     than goodwill and trade name.  We were  required to test for  impairment of
     goodwill  and  trade  name as of  January  1,  2002 and at  least  annually
     thereafter.  Any  transitional  impairment  loss at  January  1,  2002  was
     recognized as the cumulative effect of a change in accounting  principle in
     our  statement  of  operations.  During  the  first  quarter  of  2002,  we
     reassessed the useful lives of our intangible  assets with estimated useful
     lives and  determined  no change was  required.  We  annually  examine  the
     carrying value of our goodwill and other identifiable intangibles (customer
     base and trade name) to determine  whether there are any impairment  losses
     and have  determined for the year ended December 31, 2002 that there was no
     impairment  except for goodwill  related to ELI. SFAS No. 142 also requires
     that intangible  assets with estimated useful lives be amortized over those
     lives and be  reviewed  for  impairment  in  accordance  with SFAS No. 144,
     "Accounting for Impairment or Disposal or Long-Lived Assets." The impact of
     the adoption of SFAS 142 is discussed in Note 6 to  Consolidated  Financial
     Statements.

     As a result of our  adoption  of SFAS 142,  we  recognized  a  transitional
     impairment loss of $39,800,000 on ELI as a cumulative effect of a change in
     accounting principle in our statement of operations in the first quarter of
     2002.

     In October 2001, the FASB issued SFAS 144,  "Accounting  for the Impairment
     or Disposal of Long-lived Assets" (see Notes 1(g) and 4).

     In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
     4,  44,  and  64,  Amendment  of  FASB  Statement  No.  13,  and  Technical
     Corrections."  This  statement  eliminates the  requirement  that gains and
     losses from  extinguishment  of debt be required to be  aggregated  and, if
     material,  classified as an  extraordinary  item, net of related income tax
     effect. The statement requires gains and losses from extinguishment of debt
     to be classified as  extraordinary  items only if they meet the criteria in
     Accounting  Principles  Board  Opinion  No. 30,  "Reporting  the Results of
     Operations - Reporting  the Effects of Disposal of a Segment of a Business,
     and   Extraordinary,   Unusual  and   Infrequently   Occurring  Events  and
     Transactions" which provides guidance for distinguishing  transactions that
     are part of an entity's recurring operations from those that are unusual or
     infrequent or that meet the criteria for classification as an extraordinary
     item. We adopted SFAS 145 in the second quarter of 2002. For the year ended
     December  31,  2002,  we  recognized  $32,330,000  of gains from early debt
     retirement as well as a  $12,800,000  loss due to a tender offer related to
     certain debt  securities.  There were no similar  types of  retirements  in
     2001.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
     Compensation - Transition and  Disclosure  for  Stock-Based  Compensation."
     SFAS No. 148 provides  alternative  methods of  transition  for a voluntary
     change  to the fair  value  based  method  of  accounting  for  stock-based
     compensation  and amends the disclosure  requirements of SFAS No. 123. This
     statement is effective for fiscal years ending after  December 15, 2002. We
     adopted the expanded disclosure requirements of SFAS No. 148.

(14) Settlement of Retained Liabilities:
     -----------------------------------
     We were actively pursuing the settlement of certain retained liabilities at
     less than face value,  which are  associated  with  customer  advances  for
     construction  from  our  disposed  water  properties.  For the  year  ended
     December 31, 2002, we recognized  $26,330,000 in other income (loss),  net,
     as a result of these settlements.

(15) Global /WorldCom Receivables:
     -----------------------------
     During the second  quarter 2002, we reserved  approximately  $21,600,000 of
     trade  receivables  with  WorldCom  as a result of  WorldCom's  filing  for
     bankruptcy.  These  receivables  were  generated  as a result of  providing
     ordinary course  telecommunications  services.  The $21,600,000  charge was
     partially offset by reversals in our Global reserve as discussed below.


                                      F-19

<PAGE>
     Concurrent  with the  acquisition  of  Frontier,  we entered  into  several
     operating agreements with Global. We have ongoing commercial  relationships
     with  Global  affiliates.  We  reserved  a total of  $29,000,000  of Global
     receivables  to reflect our best  estimate of the net  realizable  value of
     receivables  incurred from these commercial  relationships  during 2001 and
     2002  as a  result  of  Global's  filing  for  bankruptcy.  We  recorded  a
     write-down  of such  receivables  in the amount of  $7,800,000 in the first
     quarter 2002 and $21,200,000 in the fourth quarter of 2001. In 2002, as the
     result of a settlement  agreement with Global,  we reversed  $17,900,000 of
     our  previous  reserve of the net  realizable  value of these  receivables.
     Prior to the date of  Global's  bankruptcy  filing,  we  provided  ordinary
     course  telecommunications  services  as well as  transitional  services to
     Global.  Global has  provided us certain  customer  billing and  collection
     functions as well as other  transitional  services.  Although some of these
     arrangements  have  continued  after the bankruptcy  filing,  we are in the
     process of changing some services and functions to provide them  ourselves.
     The Bankruptcy Court has granted relief to us and other  telecommunications
     companies that provide service to Global by, among other things,  directing
     a shortened  payment  period with  respect to  post-petition  invoices,  an
     expedited court process for  post-petition  defaults in payments by Global,
     and a priority for  post-petition  expense items over other unsecured debt.
     These  procedures  should  minimize  future economic loss to us although we
     cannot guarantee that additional losses will not occur.

(16) Company Obligated Mandatorily Redeemable Convertible Preferred
     --------------------------------------------------------------
     Securities:
     -----------
     In 1996, our consolidated wholly-owned subsidiary, 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 us $211,756,000  aggregate principal amount of 5% Convertible
     Subordinated  Debentures  due  2036.  The sole  assets of the Trust are the
     Partnership   Convertible   Preferred   Securities   and  our   Convertible
     Subordinated   Debentures   are   substantially   all  the  assets  of  the
     Partnership.  Our obligations under the agreements related to the issuances
     of such  securities,  taken together,  constitute a full and  unconditional
     guarantee  by  us  of  the  Trust's  obligations   relating  to  the  Trust
     Convertible Preferred Securities and the Partnership's obligations relating
     to the Partnership Convertible Preferred Securities.

     In accordance  with the terms of the issuances,  we paid the 5% interest on
     the Convertible Subordinated Debentures in 2002, 2001 and 2000. During 2002
     and 2001,  only cash was paid to the Partnership in payment of the interest
     on the Convertible Subordinated  Debentures.  The cash was then distributed
     by the Partnership to the Trust and then by the Trust to the holders of the
     EPPICS.

(17) Capital Stock:
     --------------
     We are  authorized to issue up to 600,000,000  shares of Common Stock.  The
     amount and timing of dividends  payable on Common Stock are within the sole
     discretion of our Board of Directors.

     Between December 1999 and April 2000, our Board of Directors authorized the
     purchase of up to  $200,000,000  worth of shares of our common stock.  This
     share  purchase  program  was  completed  in July 2000 and  resulted in the
     acquisition or contract to acquire  approximately  12,092,000 shares of our
     common  stock.  Of  those  shares,  2,952,000  shares  were  purchased  for
     approximately  $49,209,000  in cash and we entered  into an equity  forward
     contract for the acquisition of the remaining 9,140,000 shares.

     During  2000,  we entered  into a forward  contract to  purchase  9,140,000
     shares of our common stock with Citibank,  N.A. These  purchases and others
     made by us for cash during 2000 were made in open-market transactions.  The
     forward amount to be paid in the future included a carrying cost,  based on
     LIBOR plus a spread,  and the dollar amount paid for the shares  purchased.
     Our equity forward contract was a temporary financing arrangement that gave
     us the  flexibility  to purchase  our stock and pay for those  purchases in
     future  periods.   Pursuant  to  transition  accounting  rules,  commencing
     December  31, 2000  through  June 30,  2001 we were  required to report our
     equity  forward  contract as a reduction to  shareholders'  equity and as a
     component  of  temporary  equity  for the  gross  settlement  amount of the
     contract  ($150,013,000).  On June  28,  2001,  we  entered  into a  master
     confirmation  agreement  that  amended  the equity  forward  contract to no
     longer permit share  settlement  of the  contract.  In 2001, we settled the
     contract by paying the redemption  amount of $150,013,000  plus $13,650,000
     in associated carrying costs and took possession of our shares.

                                      F-20

<PAGE>

     In addition to our share purchase programs  described above, in April 2000,
     our Board of Directors authorized the purchase, from time to time, of up to
     $25,000,000  worth of  shares of Class A common  stock of ELI,  in the open
     market or in negotiated  transactions.  This ELI share purchase program was
     completed in August 2000 and resulted in the  acquisition of  approximately
     1,288,000 shares of ELI common stock for approximately $25,000,000 in cash.
     In August 2000, our Board of Directors  authorized the purchase,  from time
     to time, of up to an additional  1,000,000 shares of ELI on the open market
     or in negotiated  transactions.  The second ELI share purchase  program was
     completed  in  September   2000  and   resulted  in  the   acquisition   of
     approximately  1,000,000  shares  of ELI  common  stock  for  approximately
     $13,748,000 in cash.

(18) Stock Plans:
     ------------
     At December 31, 2002, we have four stock based compensation plans which are
     described below. We apply APB Opinion No. 25 and related interpretations in
     accounting  for  the  employee  stock  plans  resulting  in the  use of the
     intrinsic  value to  value  the  stock  option.  Compensation  cost has not
     generally  been  recognized in the financial  statements for options issued
     pursuant  to  the  Management  Equity  Incentive  Plan  (MEIP),  or  Equity
     Incentive  Plan (EIP),  as the exercise price for such options was equal to
     the market  price of the stock at the time of grant.  However,  during 2002
     the  expiration  date of  approximately  79,000  options was  extended  and
     compensation cost of approximately $219,700 was recognized. No compensation
     cost  has  been  recognized  in the  financial  statements  related  to the
     Employee  Stock  Purchase Plan (ESPP)  because the purchase price is 85% of
     the fair value. Compensation cost, recognized in operating expense, for our
     Directors' Deferred Fee Equity Plan was $607,151,  $741,438 and $691,956 in
     2002, 2001 and 2000, respectively.

     We have granted restricted stock awards to key employees in the form of our
     Common Stock. The number of shares issued as restricted stock awards during
     2002, 2001 and 2000 were 538,000, 100,000 and 3,120,000, respectively. None
     of the restricted stock awards may be sold, assigned,  pledged or otherwise
     transferred,  voluntarily  or  involuntarily,  by the  employees  until the
     restrictions  lapse. The restrictions are both time and performance  based.
     At  December  31,  2002,   3,171,000   shares  of  restricted   stock  were
     outstanding.  Compensation  expense,  recognized in operating  expense,  of
     $7,029,000,  $8,967,000  and  $9,084,000  for the years ended  December 31,
     2002,  2001 and 2000,  respectively,  has been recorded in connection  with
     these grants.

     Had we  determined  compensation  cost based on the fair value at the grant
     date for the MEIP,  EIP and  ESPP,  our pro forma net loss and net loss per
     common share would have been as follows:

<TABLE>
<CAPTION>
                                                                          2002            2001           2000
         ($ in thousands)                                            --------------- --------------- --------------
          --------------          
<S>                                                                     <C>           <C>              <C>       
         Net loss                                     As reported       $ (682,897)   $  (89,682)      $ (28,394)
         Add: Stock-based employee compensation                              
         expense included in reported net income,
         net of related tax effects                                          4,660         7,136           6,150
         Deduct: Total stock-based employee                                
         compensation expense determined under fair
         value based method for all awards, net of
         related tax effects                                               (16,665)      (35,971)        (29,026)
                                                                        -----------    ----------      ----------
                                                       Pro forma          (694,902)     (118,517)        (51,270)
                                                                        ===========    ==========      ==========               

         Net loss per common share                    As reported:
                                                         Basic          $    (2.43)   $    (0.38)      $   (0.11)
                                                         Diluted             (2.43)        (0.38)          (0.11)
                                                                             
                                                       Pro forma:
                                                         Basic          $    (2.48)   $    (0.48)      $   (0.20)
                                                         Diluted             (2.48)        (0.48)          (0.20)
                                                                             
</TABLE>


                                      F-21

<PAGE>

     The full impact of calculating  compensation  cost for stock options 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 and ESPP on or after January 1, 1995.

                        Management Equity Incentive Plan
                        --------------------------------
     Under the MEIP,  awards of our  Common  Stock may be  granted  to  eligible
     officers,  management employees and non-management employees in the form of
     incentive stock options,  non-qualified  stock options,  stock appreciation
     rights  (SARs),   restricted  stock  or  other  stock-based   awards.   The
     Compensation Committee of the Board of Directors administers the MEIP.

     Since the expiration  date of the MEIP plan on June 21, 2000, no awards can
     be granted under the MEIP.  The exercise price of stock options issued were
     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-22

<PAGE>
                              Equity Incentive Plan
                              ---------------------
     In May 1996,  our  shareholders  approved the 1996 EIP and in May 2001, our
     shareholders  approved  the 2001 EIP.  Under the EIP  plans,  awards of our
     Common Stock may be granted to eligible officers,  management employees and
     non-management   employees  in  the  form  of  incentive   stock   options,
     non-qualified  stock options,  SARs,  restricted stock or other stock-based
     awards.  The Compensation  Committee of the Board of Directors  administers
     the EIP.

     The maximum  number of shares of common stock which may be issued  pursuant
     to awards at any time for both plans is 25,358,000  shares,  which has been
     adjusted for  subsequent  stock  dividends.  No awards will be granted more
     than 10 years after the effective  dates (May 23, 1996 and May 17, 2001) of
     the EIP plans.  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 is a summary of share  activity  subject to option under the
     MEIP and EIP.

<TABLE>
<CAPTION>
                                                                                         Weighted
                                                                        Shares            Average
                                                                      Subject to        Option Price
                                                                        Option           Per Share
     ------------------------------------------------------------ ------------------- -----------------
<S>                                                                                       <C>   
      Balance at January 1, 2000                                      16,860,000          $  9.29                    
                                                                       
         Options granted                                               5,784,000            13.32
         Options exercised                                            (4,126,000)            9.53          
                                                                      
         Options canceled, forfeited or lapsed                          (897,000)            9.49
                                                                        
     ------------------------------------------------------------ -------------------
     Balance at December 31, 2000                                     17,621,000            10.72
         Options granted                                               3,969,000            13.62
         Options exercised                                            (1,728,000)            8.25
         Options canceled, forfeited or lapsed                          (805,000)           11.45
     ------------------------------------------------------------ -------------------
     Balance at December 31, 2001                                     19,057,000            11.87
         Options granted                                               3,065,000             9.53
         Options exercised                                              (812,000)            7.90
         Options canceled, forfeited or lapsed                        (2,178,000)           11.94
     ------------------------------------------------------------ -------------------
     Balance at December 31, 2002                                     19,132,000          $ 11.66
     ============================================================ ===================
</TABLE>


<TABLE>
<CAPTION>

     The following table summarizes  information about shares subject to options
     under the MEIP and EIP at December 31, 2002.

                                  Options Outstanding                                          Options Exercisable
    ---------------------------------------------------------------------------------    ---------------------------------
                                                                  Weighted Average                            Weighted
         Number             Range of         Weighted Average         Remaining               Number          Average
       Outstanding       Exercise Prices      Exercise Price        Life in Years          Exercisable     Exercise price
    ------------------ -------------------- -------------------- --------------------    ----------------- ---------------
<S>         <C>          <C>       <C>              <C>                 <C>                     <C>           <C>    
            14,000       $ 4.00 -  5.00             $  4.29             1.73                    14,000        $  4.29
         1,479,000         6.00 -  7.50                7.50             6.25                 1,464,000           7.50
         3,248,000         7.72 -  8.53                8.09             4.25                 3,227,000           8.09
           110,000         9.18 -  9.38                9.26             6.29                    70,000           9.31
         2,834,000         9.52 -  9.52                9.52             9.37                   503,000           9.52
         2,182,000        10.24 - 11.41               10.79             4.11                 2,182,000          10.79
         1,451,000        12.37 - 12.91               12.62             4.29                 1,138,000          12.61
         2,069,000        12.97 - 12.97               12.97             7.09                 1,514,000          12.97
           545,000        13.06 - 13.47               13.44             7.77                   524,000          13.45
         2,408,000        13.71 - 13.71               13.71             8.33                   621,000          13.71
         2,792,000        13.75 - 21.47               17.42             6.51                   941,000          14.92
    ------------------                                                                   -----------------
        19,132,000       $ 4.00 - 21.47             $ 11.66             6.00                12,198,000        $ 10.63
    ==================                                                                   =================

     The  number of  options  exercisable  at  December  31,  2001 and 2000 were
     10,676,342 and 8,839,000, respectively.
</TABLE>



                                      F-23

<PAGE>
     The weighted  average fair value of options  granted during 2002,  2001 and
     2000 were $4.98,  $6.00 and $6.31,  respectively.  For  purposes of the pro
     forma calculation,  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 2002, 2001 and
     2000:

                                         2002           2001           2000
      --------------------------- --------------- -------------- --------------
      Dividend yield                          -              -               -
      Expected volatility                    44%            36%            30%
      Risk-free interest rate              4.94%          5.10%          5.82%
      Expected life                      7 years        6 years        6 years
      --------------------------- --------------- -------------- --------------

                          Employee Stock Purchase Plan
                          ----------------------------
     Our ESPP was approved by  shareholders  on June 12, 1992 and amended on May
     22, 1997. Under the ESPP, eligible employees have the right to subscribe to
     purchase  shares of our Common  Stock at 85% of the average of the high and
     low market prices on the last day of the purchase  period.  An employee may
     elect to have up to 50% 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 and the minimum  contribution each purchase period is
     $50.00.  Active employees are required to hold their shares for three years
     from the date of each purchase  period.  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 our capital  stock.  As of December 31,
     2002,  there were  6,407,000  shares of Common Stock  reserved for issuance
     under the ESPP. These shares may be adjusted for any future stock dividends
     or stock splits. The ESPP will terminate when all shares reserved have been
     subscribed for and purchased,  unless terminated earlier or extended by the
     Board of Directors.  The  Compensation  Committee of the Board of Directors
     administers the ESPP.

     Effective   November  30,  2002,  the  employee  stock  purchase  plan  was
     temporarily  suspended for future purchase periods. In 2002, 146,406 shares
     were purchased under the ESPP and 4,072,647  shares were  outstanding as of
     date of suspension. For purposes of the pro forma calculation, 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 2002, 2001 and
     2000:

                                        2002          2001          2000
                                   ------------- ------------- -------------
      Dividend yield                         -             -             -
      Expected volatility                   44%           36%           30%
      Risk-free interest rate             1.93%         2.71%         6.23%
      Expected life                    6 months      6 months      6 months

     The weighted  average fair value of those purchase  rights granted in 2002,
     2001 and 2000 was $2.57, $2.39, and $3.26, respectively.

                       Directors' Deferred Fee Equity Plan
                       -----------------------------------
     Effective  June 30, 2000,  the annual cash  retainer  paid to  non-employee
     directors was eliminated.  Instead, each non-employee director was required
     to elect,  by August 1, 2000, to receive as an annual retainer either 2,500
     stock units or 10,000 stock  options.  Starting in July 2001,  the Board of
     Directors restored the ability of the non-employee directors to receive the
     annual  retainer in cash.  Each  non-employee  director must now elect,  by
     December 1 of the prior year, to receive either  $30,000 cash,  5,000 stock
     units or 20,000 stock  options as an annual  retainer.  Directors  making a
     stock unit election  must also elect to receive  payment in either stock or
     cash upon  retirement  from the Board of  Directors.  Stock options have an
     exercise  price  of the  fair  market  value  on the  date  of  grant,  are
     exercisable six months after the date of grant and have a 10-year term. The
     Formula Plan described below also remains in effect until its expiration in
     2012.

     For 2002, each non-employee director received fees of $2,000 for each Board
     of Directors and committee meeting attended. In addition,  committee chairs
     receive an additional fee of $5,000 per annum, paid quarterly.

     From  January 1, 2000 through June 30,  2000,  the  non-employee  directors
     could  choose to  receive  their fees in either  stock or stock  units or a
     combination  of  those  two  options.  Effective  July  2001,  non-employee
     directors  have the choice to receive  their fees paid in cash,  stock,  or
     stock units or a combination  of two of those three  options.  If stock was
     elected,  the stock was  granted at the  average of the high and low on the
     first trading date of the year (Initial Market Value).  If stock units were
     elected,  they were  purchased at 85% of the Initial  Market  Value.  Stock
     units (except in an event of hardship)  are held by us until  retirement or
     death. If Final Market Value (the average of the high and low prices of the
     stock on the last  trading day of  November)  is less than  Initial  Market
     Value,  the number of shares of stock or stock units will be adjusted based
     on Final Market Value.

                                      F-24

<PAGE>

     The Formula  Plan,  which  commenced in 1997 and  continues  through  2012,
     provides  each Director  options to purchase  5,000 shares of common stock.
     The exercise price of the options granted under the Formula Plan is 100% of
     the  average of the fair market  values on the third,  fourth,  fifth,  and
     sixth  trading  days of the year in which  the  options  are  granted.  The
     options  are  exercisable  six  months  after  the  grant  date and  remain
     exercisable  for ten years after the grant date. In addition,  on September
     1, 1996, each  non-employee  director was granted options to purchase 2,500
     shares of common stock.

     As of any date, the maximum number of shares of common stock which the Plan
     was obligated to deliver  pursuant to the Directors' Plan shall not be more
     than one percent (1%) of the total  outstanding  shares of our common stock
     as of such  date,  subject  to  adjustment  in the event of  changes in our
     corporate  structure  affecting  capital  stock.  There  were 11  directors
     participating  in the Directors'  Plan during all or part of 2002. In 2002,
     the total  options,  plan units and stock  earned were  99,583,  43,031 and
     1,514,  respectively.  In 2001,  the total  options,  plan  units and stock
     earned were  90,000,  55,285 and 1,321,  respectively.  In 2000,  the total
     Options,  Plan  Units and stock  earned  were  100,000,  42,017  and 2,860,
     respectively. At December 31, 2002, 1,538,868 options were exercisable at a
     weighted average exercise price of $10.70.

     We had also maintained a Non-Employee  Directors' Retirement Plan providing
     for the payment of specified sums annually to our  non-employee  directors,
     or their designated  beneficiaries,  starting at the director's retirement,
     death or termination of directorship. In 1999, we terminated this Plan. The
     vested  benefit of each  non-employee  director,  as of May 31,  1999,  was
     credited in the form of stock  units.  Such benefit will be payable to each
     director  upon  retirement,  death or  termination  of  directorship.  Each
     participant had until July 15, 1999 to elect whether the value of the stock
     units  awarded would be payable in our common stock  (convertible  on a one
     for one basis) or in cash. As of December 31, 2002,  the liability for such
     payments was $2,425,000 of which $1,294,000 will be payable in stock (based
     on the July 15, 1999 stock price) and  $1,131,000  will be payable in cash.
     While the number of shares of stock payable to those directors  electing to
     be paid in stock is fixed,  the amount of cash  payable to those  directors
     electing  to be paid in cash  will be based on the  number  of stock  units
     awarded multiplied by the stock price on the payment date.

(19) Restructuring and Other Expenses:
     ---------------------------------

     2002
     ----
     Restructuring  and other expenses  primarily consist of expenses related to
     our various restructurings,  $32,985,000 related to reductions in personnel
     at our telecommunications  operations,  costs that were spent at our Plano,
     Texas  facility  and  at  other  locations  as a  result  of  transitioning
     functions and jobs, and $6,800,000 related to our tender offer in June 2002
     for all of the publicly held ELI common shares that we did not already own.
     These costs were  partially  offset by a $2,825,000  reversal of a 2001 ELI
     accrual discussed below.

     2001
     ----
     During 2001,  we examined all aspects of our  business  operations  and our
     facilities  to take  advantage  of  operational  and  functional  synergies
     between  Frontier  and the  original  Citizens  businesses.  We continue to
     review  our  operations,   personnel  and  facilities  to  achieve  greater
     efficiency.

          Plano Restructuring
          Pursuant to a plan adopted in the third quarter of 2001, we closed our
          operations   support  center  in  Plano,  Texas  in  August  2002.  In
          connection with this plan, we recorded a pre-tax charge of $14,557,000
          in the second half of 2001,  $839,000 in the first quarter of 2002 and
          we adjusted our accrual down by $92,000 and $561,000 in the second and
          third quarter of 2002,  respectively.  Our objective is to concentrate
          our  resources  in areas where we have the most  customers,  to better
          serve those customers.  We sold our Plano office building in 2003. The
          restructuring  resulted  in  the  termination  of  750  employees.  We
          communicated  with all affected  employees  during July 2001.  Certain
          employees were relocated,  others were offered severance, job training
          and/or outplacement counseling. As of December 31, 2002, approximately
          $14,730,000 was paid and all affected  employees were terminated.  The
          restructuring   expenses  primarily  consist  of  severance  benefits,
          retention  earned  through  December 31, 2002,  and other planning and
          communication costs.


                                      F-25

<PAGE>

          Sacramento Call Center Restructuring
          In April 2002, we closed our Sacramento  Customer Care Center pursuant
          to a plan adopted in the fourth  quarter of 2001. In  connection  with
          this closing,  we recorded a pre-tax  charge of $731,000 in the fourth
          quarter of 2001, $62,000 and $9,000 in the first and second quarter of
          2002,  respectively.  We  redirected  the call  traffic and other work
          activities  to our Kingman,  Arizona call center.  This  restructuring
          resulted in the elimination of 98 employees.  We communicated with all
          affected  employees  during  November  2001.  As of December 31, 2002,
          approximately  $802,000  was  paid  and all  affected  employees  were
          terminated and no accrual remained.

          ELI Restructuring
          In the first half of 2002, ELI redeployed the Internet routers,  frame
          relay switches and ATM switches from the Atlanta,  Cleveland,  Denver,
          Philadelphia  and New York markets to other locations in ELI's network
          pursuant to a plan adopted in the fourth  quarter of 2001.  ELI ceased
          leasing  the  collocation  facilities  and  off-net  circuits  for the
          backbone  and local loops  supporting  the  service  delivery in these
          markets.  It was  anticipated  that this would lead to  $4,179,000  of
          termination  fees which were  accrued for but not paid at December 31,
          2001.   During  2002,  ELI  adjusted  its  original  accrual  down  by
          $2,825,000 due to the favorable settlements of termination charges for
          off-net circuit  agreements.  As of December 31, 2002,  $1,354,000 has
          been paid and no accrual remained.

          Tender Offer
          During May 2002,  we announced a tender offer for all of the shares of
          ELI that we did not  already  own for a price of $0.70 per  share.  We
          completed  the tender  offer in June 2002.  As a result,  ELI became a
          wholly-owned subsidiary, for total costs and expenses of approximately
          $6,800,000.  We  accounted  for this  transaction  as a  purchase  and
          allocated   the  entire   amount  to  goodwill.   We   evaluated   the
          recoverability  of this goodwill in  accordance  with SFAS No. 142 and
          determined  that a write-off was necessary  based on fair market value
          as   determined  by   discounted   cash  flows  and  other   valuation
          methodologies.  This  charge is included  in  restructuring  and other
          expenses.

     1999
     ----
     In the  fourth  quarter  of 1999,  we  adopted  a plan to  restructure  our
     corporate  office  activities.  In connection with this plan, we recorded a
     pre-tax   charge  of  $5,760,000  in  the  fourth   quarter  of  1999.  The
     restructuring  resulted in the  reduction  of 49 corporate  employees.  All
     affected  employees  were  communicated  with in the early part of November
     1999.  As of June 30,  2002,  approximately  $4,602,000  has been paid,  43
     employees  were  terminated  and  6  employees  who  were  expected  to  be
     terminated  took other  positions  within the  Company.  At June 30,  2002,
     December 31, 2001 and December 31, 2000,  we adjusted our original  accrual
     down by $11,000,  $139,000  and  $1,008,000,  respectively,  and no accrual
     remained as of June 30, 2002.


                                      F-26

<PAGE>

     The following tables display  rollforwards of the accruals  established for
     restructuring expenses by plan:

<TABLE>
<CAPTION>

($ in thousands)
 --------------      2001                       Severance       Benefits     Retention     Other        Total
                                           ----------------- ------------ ------------------------ -------------

2001 Plano Restructuring
<S>                                                 <C>          <C>          <C>         <C>          <C>     
Original accrued amount                             $ 9,353      $ 1,535      $ 1,178     $   936      $ 13,002
Amount paid                                          (1,386)         (35)         (80)       (177)       (1,678)
Additional accrual                                      551            -        1,793          27         2,371
Adjustments                                            (325)        (104)         (64)       (323)         (816)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2001                                  8,193        1,396        2,827         463        12,879
                                           ----------------- ------------ ------------------------ -------------
Amount paid                                          (7,599)      (1,355)      (3,752)       (346)      (13,052)
Additional accrual                                       65            -        1,150           -         1,215
Adjustments                                            (659)         (28)        (225)       (117)       (1,029)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2002                                $     -      $    13      $    -      $     -      $     13
                                           ================= ============ ======================== =============


2001 Sacramento Call Center Restructuring
Accrued @ 12/31/2001                                $   552      $    94      $    85     $     -      $    731
Amount paid                                            (529)         (83)        (190)          -          (802)
Additional accrual                                       45            -          116           -           161
Adjustments                                             (68)         (11)         (11)          -           (90)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2002                                $     -      $     -      $     -     $     -      $      -
                                           ================= ============ ======================== =============


ELI 2001 Restructuring
Accrued @ 12/31/2001                                $     -      $     -      $     -     $ 4,179      $  4,179
Amount paid                                               -            -            -      (1,354)       (1,354)
Additional accrual                                        -            -            -           -             -
Adjustments                                               -            -            -      (2,825)       (2,825)
                                           ----------------- ------------ ------------------------ -------------
Accrued @ 12/31/2002                                $     -      $     -      $     -     $     -      $      -
                                           ================= ============ ======================== =============


                                            Original Accrued    Amount       Accrual     Remaining
                   1999                         Amount        Paid to Date  Adjustments   Accrual
                                           ----------------- ------------- ------------ ------------

1999 Corporate Office Restructuring
For the year ended December 31, 2000               5,539       (3,993)      (1,008)        538
For the year ended December 31, 2001                 538         (199)        (139)        200
For the year ended December 31, 2002                 200         (189)         (11)          -
</TABLE>


(20) Income Taxes:
     -------------
     The  following is a  reconciliation  of the  provision for income taxes for
     continuing  operations computed at federal statutory rates to the effective
     rates:

<TABLE>
<CAPTION>
                                                                   2002         2001          2000
                                                              ------------- ------------  ------------
<S>                                                                  <C>          <C>           <C>  
Consolidated tax provision at federal statutory rate                 35.0%        35.0%         35.0%
State income tax (provisions) benefit, net of federal 
  income tax benefit                                                  1.3%       -10.8%         -6.4%
Write-off of regulatory assets                                       -2.6%       -11.7%          0.0%
Nontaxable investment income                                          0.0%         2.6%          5.4%
Flow through depreciation                                            -0.1%        -0.5%         -8.5%
Tax reserve adjustment                                                0.0%         1.0%         -5.6%
Minority interest                                                     0.0%         0.0%          8.7%
All other, net                                                        0.1%         4.8%          3.7%
                                                              ------------- ------------  ------------
                                                                     33.7%        20.4%         32.3%
                                                              ============= ============  ============
</TABLE>


     As of  December  31,  2002 and  2001,  accumulated  deferred  income  taxes
     amounted  to  $136,356,000   and   $423,486,000,   respectively,   and  the
     unamortized  deferred  investment  tax credits  amounted  to  $760,000  and
     $6,058,000, respectively.



                                      F-27

<PAGE>

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

<TABLE>
<CAPTION>

($ in thousands)                                               2002         2001
 --------------                                            ------------- ------------

Deferred income tax liabilities:
<S>                                                           <C>          <C>      
   Property, plant and equipment basis differences            $ 229,135    $ 492,712
   Deferred energy commodity charges                             51,633       30,421
   Gain on subsidiary stock IPO                                       -       30,246
   Other, net                                                    50,055       97,087
                                                           ------------- ------------
                                                                330,823      650,466
                                                           ------------- ------------

Deferred income tax assets:
   Minimum pension liability                                     69,209            -
   Tax operating loss carryforward                              193,329      126,597
   Alternate minimum tax credit carryforward                     49,864       69,836
   Other, net                                                    57,242       82,167
                                                           ------------- ------------
                                                                369,644      278,600
                                                           ------------- ------------
    Net deferred income tax liability (asset)                 $ (38,821)   $ 371,866
                                                           ============= ============

Deferred tax assets and liabilities are reflected in the following
   captions on the balance sheet:
    Income taxes accrued                                      $  (8,708)   $  46,186
    Deferred income taxes                                       137,116      429,544
    Other current assets                                              -     (103,864)
    Other assets                                               (167,229)           -
                                                           ------------- ------------
      Net deferred income tax liability (asset)               $ (38,821)   $ 371,866
                                                           ============= ============
</TABLE>

 
     Our federal and state tax operating loss  carryforwards  as of December 31,
     2002 are  $477,798,000  and  $344,194,000,  respectively.  Our federal loss
     carryforward  will begin to expire in the year 2020. A portion of our state
     loss carryforward will begin to expire in 2006. Our alternative minimum tax
     credit as of  December  31,  2002 can be carried  forward  indefinitely  to
     reduce  future  regular  tax  liability.  This  benefit is  presented  as a
     reduction of accrued income taxes.


                                      F-28

<PAGE>

     The provision  (benefit) 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>

($ in thousands)
 --------------                                                   2002         2001          2000
                                                              ------------- ------------  ------------

Income taxes charged (credited) to the income statement for
   continuing operations:
Current:
<S>                                                             <C>           <C>           <C>       
   Federal                                                      $ (159,844)   $ (37,003)    $ (66,759)
   State                                                            (2,562)       5,168        (2,588)
                                                              ------------- ------------  ------------
    Total current                                                 (162,406)     (31,835)      (69,347)

Deferred:
   Federal                                                        (230,388)      10,791        46,647
   Investment tax credits                                             (352)        (649)         (931)
   State                                                           (21,728)       6,888         7,499
                                                              ------------- ------------  ------------
    Total deferred                                                (252,468)      17,030        53,215
                                                              ------------- ------------  ------------
    Subtotal                                                      (414,874)     (14,805)      (16,132)
Income taxes charged (credited) to the income statement for
   discontinued operations:
Current:
   Federal                                                         169,246        5,093         2,749
   State                                                            11,328          774           418
                                                              ------------- ------------  ------------
    Total current                                                  180,574        5,867         3,167

Deferred:
   Federal                                                         (39,904)       2,726         2,260
   Investment tax credits                                                -         (332)         (326)
   State                                                            (5,921)         686           620
                                                              ------------- ------------  ------------
    Total deferred                                                 (45,825)       3,080         2,554
                                                              ------------- ------------  ------------
    Subtotal                                                       134,749        8,947         5,721
Income tax benefit on dividends on convertible preferred 
  securities:
Current:
   Federal                                                          (3,344)      (3,344)       (3,344)
   State                                                              (508)        (508)         (508)
                                                              ------------- ------------  ------------
    Subtotal                                                        (3,852)      (3,852)       (3,852)
Income taxes charged (credited) to the income statement for
   extraordinary expense - Discontinuation of Statement of 
   Financial Accounting Standards No. 71:
Deferred:
   Federal                                                               -       15,500             -
   State                                                                 -        6,157             -
                                                              ------------- ------------  ------------
    Subtotal                                                             -       21,657             -
                                                              ------------- ------------  ------------
      Total income taxes charged to the income statement (a)      (283,977)      11,947       (14,263)

Income taxes charged (credited) to shareholders' equity:
Deferred income taxes (benefits) on unrealized gains or losses on
   securities classified as available-for-sale                       2,726        2,908        (8,997)
Current benefit arising from stock options exercised                  (720)      (3,001)       (7,392)
Deferred income taxes (benefits) arising from recognition of
   a minimum pension liability                                     (69,209)           -             -
                                                              ------------- ------------  ------------
      Income taxes charged (credited) to shareholders' 
        equity (b)                                                 (67,203)         (93)      (16,389)

                                                              ------------- ------------  ------------
Total income taxes: (a) plus (b)                                $ (351,180)    $ 11,854     $ (30,652)
                                                              ============= ============  ============

</TABLE>




                                      F-29


<PAGE>

(21) Net Income (Loss) Per Common Share:
     -----------------------------------
     The  reconciliation  of the net income (loss) per common share  calculation
     for the years ended December 31, 2002, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>

(In thousands, except per-share amounts)
 --------------------------------------
<S>                                                          <C>                                   <C>                            
                                                             2002                                  2001                          
                                             ------------------------------------- ------------------------------------- 
                                                            Weighted                              Weighted               
                                                             Average                              Average                
                                                 Loss        Shares    Per Share       Loss        Shares    Per Share   
                                             ------------------------------------- ------------- ----------- ----------- 
Net loss per common share:
  Basic                                          $(682,897)    280,686                $ (89,682)    273,721              
  Carrying cost of equity forward contracts              -           -                   13,650           -              
                                             --------------------------            ------------- -----------             
  Available for common shareholders              $(682,897)    280,686    $ (2.43)    $(103,332)    273,721     $ (0.38) 
  Effect of dilutive shares                              -       3,887                        -       5,859              
                                             --------------------------            ------------- -----------             
  Diluted                                        $(682,897)    284,573    $ (2.43)    $(103,332)    279,580     $ (0.38) 
                                             ==========================            ============= ===========             


                                                              2000                               
                                                -----------------------------------   
                                                             Weighted                 
                                                              Average                 
                                                   Loss       Shares    Per Share     
                                                -----------------------------------   
 Net loss per common share:                                                                 
   Basic                                          $(28,394)    260,767               
   Carrying cost of equity forward contracts             -           -               
                                                 ----------------------              
   Available for common shareholders              $(28,394)    260,767    $ (0.11)   
   Effect of dilutive shares                             -      10,149               
                                                 ----------------------              
   Diluted                                        $(28,394)    270,916    $ (0.11)   
                                                 ========================              
</TABLE>

                                          
     All share amounts  represent  weighted average shares  outstanding for each
     respective   period.  The  diluted  net  income  (loss)  per  common  share
     calculation  excludes the effect of potentially  dilutive shares when their
     exercise  price exceeds the average  market price over the period.  We have
     4,025,000 shares of potentially dilutive Mandatorily Redeemable Convertible
     Preferred Securities which are convertible into common stock at a 3.76 to 1
     ratio at an exercise price of $13.30 per share and  14,391,000  potentially
     dilutive  stock  options at a range of $9.18 to $21.47  per share.  We also
     have  18,400,000  potentially  dilutive  equity  units.  Each  equity  unit
     initially  consists of a 6.75% senior note due 2006 and a purchase contract
     (warrant)  for our  common  stock.  These  items were not  included  in the
     diluted net income (loss) per common share calculation for any of the above
     periods  as their  effect  was  antidilutive.  Restricted  stock  awards of
     1,004,000, 1,232,000 and 829,000 shares at December 31, 2002, 2001 and 2000
     respectively,   are  excluded  from  our  basic  weighted   average  shares
     outstanding  and  included in our  dilutive  shares until the shares are no
     longer contingent upon the satisfaction of all specified conditions.

(22) Comprehensive Income (Loss):
     ----------------------------
     Comprehensive  income  consists  of net income  and other  gains and losses
     affecting shareowners' investment and minimum pension liability that, under
     GAAP, are excluded from net income.



                                      F-30

<PAGE>

     Our other  comprehensive  income  (loss) for the years ended  December  31,
     2002, 2001 and 2000 is as follows:

<TABLE>
<CAPTION>
                                                                             2002
                                                          --------------------------------------------
                                                           Before-Tax    Tax Expense/     Net-of-Tax
($ in thousands)                                             Amount        (Benefit)        Amount
 --------------                                           -------------  --------------  -------------

Net unrealized losses on securities:
<S>                                                          <C>             <C>            <C>       
   Net unrealized holding losses arising during period       $(101,137)      $ (38,078)     $ (63,059)
   Minimum pension liability                                  (180,799)        (69,210)      (111,589)
   Add: Reclassification adjustments for net gain/
     losses realized in net loss                               108,376          40,804         67,572
                                                          -------------  --------------  -------------
Other comprehensive loss                                     $(173,560)      $ (66,484)     $(107,076)
                                                          =============  ==============  =============


                                                                             2001
                                                          --------------------------------------------
                                                           Before-Tax    Tax Expense/     Net-of-Tax
($ in thousands)                                             Amount        (Benefit)        Amount
 --------------                                           -------------  --------------  -------------

Net unrealized losses on securities:
   Net unrealized holding losses arising during period       $ (70,771)      $ (27,015)     $ (43,756)
   Add: Reclassification adjustments for net losses
     realized in net loss                                       78,168          29,923         48,245
                                                          -------------  --------------  -------------
Other comprehensive income                                   $   7,397       $   2,908      $   4,489
                                                          =============  ==============  =============


                                                                             2000
                                                          --------------------------------------------
                                                           Before-Tax    Tax Expense/     Net-of-Tax
($ in thousands)                                             Amount        (Benefit)        Amount
 --------------                                           -------------  --------------  -------------
 
Net unrealized gains on securities:
   Net unrealized holding gains arising during period        $ (40,377)      $ (15,457)     $ (24,920)
   Less: Reclassification adjustments for net gains
     realized in net income                                     16,875           6,460         10,415
                                                          -------------  --------------  -------------
Other comprehensive loss                                     $ (23,502)      $  (8,997)     $ (14,505)
                                                          =============  ==============  =============
</TABLE>


(23) Segment Information:
     --------------------
     We operate in four segments, ILEC, ELI (a CLEC), gas and electric. The ILEC
     segment provides both regulated and unregulated  communications services to
     residential,   business  and  wholesale  customers  and  is  typically  the
     incumbent  provider in its service areas. Our gas and electric segments are
     intended  to be sold and are  classified  as  "assets  held for  sale"  and
     "liabilities related to assets held for sale."

     As an ILEC,  we compete  with CLECs that may operate in our  markets.  As a
     CLEC, we provide telecommunications services, principally to businesses, in
     competition  with the incumbent  ILEC. As a CLEC, we frequently  obtain the
     "last mile" access to customers  through  arrangements  with the applicable
     ILEC. ILECs and CLECs are subject to different regulatory frameworks of the
     Federal Communications Commission (FCC). Our ILEC operations and ELI do not
     compete with each other in any individual market.

     

                                      F-31

<PAGE>

<TABLE>
<CAPTION>

($ in thousands)                         For the year ended December 31, 2002
 --------------                 --------------------------------------------------------
                                                                                Total
                                  ILEC         ELI         Gas      Electric   Segments
                                ---------   ---------   ---------  ---------   ---------
<S>                             <C>         <C>         <C>        <C>        <C>        
Revenue                         $2,062,905  $ 175,079   $ 216,517  $ 214,831  $ 2,669,332
Depreciation and Amortization      643,123    112,035         148        216      755,522
Reserve for Telecommunications
  Bankruptcies                      10,446        434           -          -       10,880
Restructuring and Other Expenses    30,054      7,132           -          -       37,186
Loss on Impairment                       -    656,658     152,300    265,100    1,074,058
Operating Income (Loss)            413,241   (759,161)   (119,579)  (222,090)    (687,589)
Capital Expenditures, net          288,823    122,003 (1)  21,035     18,625 (3)  450,486
Assets                           6,675,928    214,252     389,737     58,027    7,337,944
  
($ in thousands)                       For the year ended December 31, 2001
 --------------                  --------------------------------------------------------
                                                                                  Total
                                  ILEC        ELI        Gas       Electric      Segments
                                 ---------  ---------  ---------  ----------   ----------
Revenue                         $1,594,053  $ 223,391   $ 411,534  $ 228,015  $ 2,456,993
Depreciation and Amortization      545,273     80,020         609      6,434      632,336
Reserve for Telecommunications
  Bankruptcies                      21,200         -           -          -        21,200
Restructuring and Other Expenses    15,148     4,179           -          -        19,327
Operating Income (Loss)            220,956   (71,165)     47,916     35,335       233,042
Capital Expenditures, net          391,377    28,233 (2)  34,138     32,706       486,454
Assets                           7,072,288   902,348     441,654    666,283     9,082,573
 

($ in thousands)                         For the year ended December 31, 2000
 --------------                  ---------------------------------------------------------
                                                                                  Total
                                  ILEC       ELI         Gas      Electric      Segments
                                 --------- ---------  ---------  ----------   ------------
Revenue                          $ 963,743 $ 240,792   $ 374,751  $ 223,072   $ 1,802,358
Depreciation and Amortization      276,250    63,500      19,228     28,629       387,607
Restructuring and Other Expenses      (649)        -           -          -          (649)
Operating Income (Loss)            157,896   (59,589)      8,268     15,226       121,801
Capital Expenditures, net          350,209   112,285 (2)  51,457     29,482       543,433
Assets                           3,558,562   949,774     692,351    589,801     5,790,488
                
</TABLE>

     (1) Includes  $110,000,000 of previously leased facilities purchased by ELI
     in April 2002.

     (2) Does not include approximately $33,985,000 and $102,192,000 of non-cash
     ELI capital lease additions in 2001 and 2000, respectively.

     (3) Does not include approximately  $38,000,000  of non-cash  capital lease
     additions.

                                      F-32

<PAGE>

     The following  tables are  reconciliations  of certain  sector items to the
     total consolidated amount.

($ in thousands)                               For the years ended December 31,
 --------------                                  2002       2001      2000
                                              ---------  ---------  ---------
Capital expenditures

Total segment capital expenditures            $ 450,486  $ 486,454  $ 543,433
General capital expenditures                     18,256        817      1,396
                                              ---------  ---------  ---------
Consolidated reported capital expenditures    $ 468,742  $ 487,271  $ 544,829
                                              =========  =========  =========

Assets                               2002            2001
                                  -----------    -----------
Total segment assets              $ 7,337,944    $ 9,082,573
General assets                        808,798        724,236
Discontinued operations assets              -        746,791
                                  -----------    ------------
Consolidated reported assets      $ 8,146,742    $10,553,600
                                  ===========    ============

(24) Discontinuation of SFAS 71:
     ---------------------------
     We  historically  applied  SFAS  71 in the  preparation  of  our  financial
     statements  because  our  incumbent  local  exchange  telephone  properties
     (properties  we  owned  prior to the  2000  and  2001  acquisitions  of the
     Verizon, Qwest and Frontier properties) were predominantly regulated in the
     past following a cost of service/rate of return approach.  Beginning in the
     third  quarter of 2001,  these  properties  no longer met the  criteria for
     application of SFAS 71 due to the continuing  process of  deregulation  and
     the  introduction  of  competition  to our  existing  rural local  exchange
     telephone  properties,  and our expectation that these trends will continue
     for all our properties.


                                      F-33

<PAGE>

     Currently,  pricing for a majority of our  revenues is based upon price cap
     plans that limit prices to changes in general  inflation  and  estimates of
     productivity for the industry at large, or upon market pricing, rather than
     on the specific  costs of operating  our business,  a  requirement  for the
     application of SFAS 71. These trends in the deregulation of pricing and the
     introduction  of competition are expected to continue in the near future as
     additional states adopt price cap forms of regulation.

     Discontinued  application  of SFAS 71  required  us to write off all of the
     regulatory assets and liabilities of our incumbent local exchange telephone
     operations.  As a result we recognized a non-cash  extraordinary  charge in
     our financial statements in the third quarter of 2001 as follows:

          ($ in thousands)
           --------------

          Assets:
            Deferred income tax assets                          $31,480
            Deferred cost of extraordinary plant retirements     25,348
            Deferred charges                                      6,885

          Liabilities:
            Plant related                                       (10,259)
                                                                
            Deferred income tax liabilities                      (2,531)
                                                              -----------
                                                                 
          Pre-tax charge                                         50,923

            Income tax benefit                                    7,292
                                                              -----------
          Extraordinary expense                                 $43,631
                                                              ===========

     Under SFAS 71, we depreciated our telephone  plant for financial  reporting
     purposes  over asset lives  approved  by the  regulatory  agencies  setting
     regulated rates. As part of the  discontinuance  of SFAS 71, we revised the
     depreciation lives of our core technology assets to reflect their estimated
     economic useful lives.  Based upon our evaluation of the pace of technology
     change  that is  estimated  to occur in  certain  components  of our  rural
     telephone networks, we concluded that minor modifications as of the date of
     discontinuance  were  required  in our asset  lives  for the major  network
     technology assets as follows:

                                      Average Remaining Life in Years
                                      -------------------------------   
                                      Regulated              Economic
                                       Life                   Life  
                                       ----                   ----
             Switching Equipment        6.4                   5.6
             Circuit Equipment          4.3                   4.9
             Copper Cable               8.5                   7.7

     Upon discontinuation of SFAS 71, we tested the balances of property,  plant
     and  equipment  associated  with the  incumbent  local  exchange  telephone
     properties  for  impairment  under SFAS 121 (as  required by SFAS 101).  No
     impairment charge was required.

     To reflect the expectation that competitive  entry will occur over time for
     certain of our properties acquired in prior purchase business combinations,
     we have shortened the amortization life for previously  acquired  franchise
     rights  related to these  properties to 20 years.  This action was taken to
     reflect the fact that our  dominant  position in the market  related to the
     existence  of the prior  monopoly in  incumbent  local  exchange  telephone
     service may be reduced over time as competitors enter our markets.


                                      F-34

<PAGE>

(25) Quarterly Financial Data (unaudited):
     -------------------------------------

<TABLE>
<CAPTION>

($ in thousands, except per share amounts)
 ----------------------------------------
                                                               First quarter  Second quarter  Third quarter  Fourth quarter
2002                                                           -------------  --------------  -------------  --------------
<S>                                                              <C>          <C>             <C>             <C>      
Revenue                                                          $ 679,334    $  662,439      $ 668,831       $ 658,728
Income (loss) before cumulative effect of changes in 
  accounting principle                                             123,038       (41,559)      (700,104)        (24,460)
Net income (loss)                                                   83,226       (41,559)      (700,104)        (24,460)
Income (loss) before cumulative effect of changes in 
  accounting principle available for common shareholders per 
  basic share                                                    $    0.44    $    (0.15)     $   (2.49)      $   (0.09)
Income (loss) before cumulative effect of changes in accounting 
  principle available for common shareholders per diluted share  $    0.43    $    (0.15)     $   (2.49)      $   (0.09)
Net income (loss) available for common shareholders per basic  
  share                                                          $    0.30    $    (0.15)     $   (2.49)      $   (0.09)
Net income (loss) available for common shareholders per diluted 
  share                                                          $    0.29    $    (0.15)     $   (2.49)      $   (0.09)

2001
Revenue                                                          $ 624,281    $  505,741      $ 661,121       $ 665,850
Net income (loss)                                                   19,723          (649)          (441)       (108,315)
Net income (loss) per basic share                                $    0.08    $    (0.05)     $   (0.01)      $   (0.39)
Net income (loss) per diluted share                              $    0.07    $    (0.05)     $   (0.01)      $   (0.39)

</TABLE>


     The quarterly net income (loss) per common share amounts are rounded to the
     nearest cent.  Annual net income (loss) per common share may vary depending
     on the effect of such rounding.  Quarterly  revenue has been  retroactively
     revised   from  their   original   presentations   to  conform  to  current
     presentation.

     On January 15,  2002,  we  completed  the sale of our water and  wastewater
     operations  to American  Water  Works,  Inc. for  $859,100,000  in cash and
     $122,500,000 of assumed debt and other liabilities. The pre-tax gain on the
     sale recognized in 2002 was $316,672,000.

     In the third quarter 2002, we recognized non-cash pre-tax impairment losses
     of $656,658,000 related to property,  plant and equipment in the ELI sector
     and  $417,400,000  related to the gas and electric  sector  assets held for
     sale, in each case in accordance with the provisions of SFAS 144.

     In the third  quarter  of 2002,  we  recognized  an  additional  $1,525,000
     pre-tax  gain on the 2001  sale of our  Louisiana  gas  operation  to Atmos
     Energy  Corporation.  The initial gain was  recognized  at the close of the
     sale in the third quarter of 2001.

     On October 31, 2002, we completed the sale of approximately 4,000 telephone
     access lines in North Dakota for  $9,700,000  in cash.  The pre-tax loss on
     the sale recognized in the fourth quarter of 2002 was $2,803,000.

     On November 1, 2002, we completed the sale of our Kauai  electric  division
     to KIUC for  $215,000,000  in cash. The pre-tax gain on the sale recognized
     in the fourth quarter of 2002 was $8,273,000.

     Restructuring   and  other  expenses  are  primarily   related  to  various
     restructurings,  $32,985,000 of pre-tax  expenses  related to reductions in
     personnel at our telecommunications operations, cost that were spent at our
     Plano,  Texas facility and at other locations as a result of  transitioning
     functions and jobs and $6,800,000 of pre-tax costs and expenses  related to
     our tender  offer in the  second  quarter of 2002 for all of the ELI common
     shares that we did not already own. These costs were partially  offset by a
     $2,825,000 pre-tax reversal of an ELI accrual.

     As a result of  Adelphia's  price  declines and filing for  bankruptcy,  we
     recognized pre-tax losses of $95,300,000 to be other than temporary.  As of
     June 30, 2002, we had written this  investment  down to zero, and therefore
     we have no  additional  exposure  related to the market  value of  Adelphia
     stock.

     As of December 31, 2002, we owned 1,333,500  shares of D & E Communications
     common stock.  As the result of an other than temporary  decline in D & E's
     stock price,  we recognized a pre-tax loss of $16,400,000 on our investment
     during the quarter ended December 31, 2002.


                                      F-35

<PAGE>

     Concurrent  with the  acquisition  of  Frontier,  we entered  into  several
     operating agreements with Global. We have ongoing commercial  relationships
     with  Global  affiliates.  We  reserved  a total of  $29,000,000  of Global
     receivables  to reflect our best  estimate of the net  realizable  value of
     receivables  incurred from these commercial  relationships  during 2001 and
     2002 as a result of Global's filing for  bankruptcy.  We recorded a pre-tax
     write-down  of such  receivables  in the amount of  $7,800,000 in the first
     quarter 2002 and $21,200,000 in the fourth quarter of 2001. In 2002, as the
     result of a settlement  agreement with Global,  we reversed  $17,900,000 of
     our  previous  reserve of the net  realizable  value of these  receivables.
     Prior to the date of  Global's  bankruptcy  filing,  we  provided  ordinary
     course  telecommunications  services  as well as  transitional  services to
     Global.  Global has  provided us certain  customer  billing and  collection
     functions as well as other  transitional  services.  Although some of these
     arrangements  have  continued  after the bankruptcy  filing,  we are in the
     process of changing some services and functions to provide them  ourselves.
     The Bankruptcy Court has granted relief to us and other  telecommunications
     companies that provide service to Global by, among other things,  directing
     a shortened  payment  period with  respect to  post-petition  invoices,  an
     expedited court process for  post-petition  defaults in payments by Global,
     and a priority for  post-petition  expense items over other unsecured debt.
     These  procedures  should  minimize  future economic loss to us although we
     cannot guarantee that additional losses will not occur.

     On July 2, 2001, we completed  the sale of our Louisiana Gas  operations to
     Atmos Energy  Corporation for $363,400,000 in cash. The pre-tax gain on the
     sale recognized in the third quarter was $139,300,000.

     Pre-tax  restructuring  expenses of  $13,000,000  for the third quarter and
     $6,300,000  for the  fourth  quarter of 2001 are  primarily  related to the
     closing  of  our  operations   support  center  in  Plano,  Texas  and  our
     Sacramento,  California call center and ELI's decision to exit certain long
     haul markets.  These  restructurings  are a result of our evaluation of our
     facilities to take advantage of operational and functional synergies.

     We recognized a pre-tax loss of $79,000,000 in the Adelphia investment as a
     reduction to investment income in the fourth quarter of 2001.

     Deregulation of most of our local exchange telephone properties required us
     to cease application of SFAS 71 in the third quarter of 2001,  resulting in
     a  non-cash  extraordinary  charge  of  $43,600,000,  net  of  tax,  in our
     statement of operations.

(26) Supplemental Cash Flow Information:
     -----------------------------------
     The  following is a schedule of net cash  provided by operating  activities
     for the years ended December 31, 2002, 2001 and 2000:

<TABLE>
<CAPTION>

($ in thousands)                                                       2002           2001           2000
 --------------                                                   --------------- -------------- -------------

Loss from continuing operations before extraordinary expense
<S>                                                                  <C>             <C>           <C>       
    and cumulative effect of change in accounting principle          $ (822,976)     $ (63,926)    $ (40,071)
Adjustments to reconcile net loss to net cash
  provided by operating activities:
    Depreciation and amortization expense                               755,522        632,336       387,607
    Investment write-down                                               117,455         79,114             -
    Gain on extinguishment of debt                                      (26,330)             -             -
    Investment (gains)/losses                                            (3,363)           660        18,314
    Gain on sale of assets                                               (9,798)      (139,304)            -
    Loss on impairment                                                1,074,058              -             -
    Allowance for equity funds used during construction                  (1,346)        (2,811)       (3,257)
    Deferred income tax and investment tax credit                      (387,771)        17,030        53,215
    Change in operating accounts receivable                               1,373         57,145       (11,685)
    Change in accounts payable and other                               (152,358)      (198,848)      (24,261)
    Change in accrued taxes and interest                                 (8,975)       166,815       (28,944)
    Change in other current assets                                      101,376        (71,275)      (43,225)
                                                                 --------------- -------------- -------------
        Net cash provided by continuing operating activities          $ 636,867      $ 476,936     $ 307,693
                                                                 =============== ============== =============
</TABLE>




                                      F-36

<PAGE>

(27) Retirement Plans:
     -----------------
                                  Pension Plan
                                  ------------
     We 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 meet ERISA funding  requirements while considering
     tax deductibility.  Plan assets are invested in a diversified  portfolio of
     equity and fixed-income securities.

     Effective  February 1, 2003,  the pension plan was frozen for all non-union
     plan participants. The vested benefit earned through that date is protected
     by law  and  will be  available  upon  retirement.  No  additional  benefit
     accruals  for  service  will  occur  after   February  1,  2003  for  those
     participants.

     The  following  tables set forth the plan's  benefit  obligations  and fair
     values of plan  assets as of December  31,  2002 and 2001 and net  periodic
     benefit cost for the years ended December 31, 2002, 2001 and 2000.



                                      F-37

<PAGE>

<TABLE>
<CAPTION>

($ in thousands)                                                   2002          2001
 --------------                                               ------------- --------------

Change in benefit obligation
----------------------------
<S>                                                              <C>            <C>      
Benefit obligation at beginning of year                          $ 759,927      $ 282,024
Service cost                                                        12,159         14,065
Interest cost                                                       53,320         37,680
Amendments                                                               -         (3,679)
Actuarial loss                                                      28,948         16,771
Acquisitions/Divestitures                                           (6,239)       447,279
Plant closings/Reduction in force                                   (5,609)             -
Benefits paid                                                      (62,269)       (34,213)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 780,237      $ 759,927
                                                              ============= ==============

Change in plan assets
---------------------
Fair value of plan assets at beginning of year                   $ 798,293      $ 249,400
Actual return on plan assets                                       (60,026)       (13,337)
Acquisitions                                                             -        583,190
Employer contribution                                               16,363         13,253
Benefits paid                                                      (62,269)       (34,213)
                                                              ------------- --------------
Fair value of plan assets at end of year                         $ 692,361      $ 798,293
                                                              ============= ==============

(Accrued)/Prepaid benefit cost
------------------------------
Funded status                                                    $ (87,876)     $  38,366
Unrecognized net liability                                              17             60
Unrecognized prior service cost                                     (1,450)        (1,599)
Unrecognized net actuarial loss                                    235,107         96,860
                                                              ------------- --------------
Prepaid benefit cost                                             $ 145,798      $ 133,687
                                                              ============= ==============

Amounts recognized in the statement of financial position
---------------------------------------------------------
Prepaid benefit cost                                             $   6,874      $ 133,687
Accrued benefit liability                                          (41,874)             -
Other comprehesive income                                          180,798              -
                                                              ------------- --------------
 Net amount recognized                                           $ 145,798      $ 133,687
                                                              ============= ==============
 

                                                                  2002          2001            2000
                                                              ------------- -------------- ---------------
Components of net periodic benefit cost
---------------------------------------
Service cost                                                      $ 12,159      $  14,065        $ 12,286
Interest cost on projected benefit obligation                       53,320         37,680          18,772
Return on plan assets                                              (63,258)       (44,852)        (19,743)
Amortization of prior service cost and unrecognized
       net obligation                                                 (106)          (242)            196
Amortization of unrecognized loss                                    2,137              -               -
                                                              ------------- -------------- ---------------
Net periodic benefit cost                                         $  4,252      $   6,651        $ 11,511
                                                              ============= ============== ===============
</TABLE>



                                      F-38

<PAGE>

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

                                                         2002          2001
                                                         ----          ----
Discount rate                                        7.25%/6.75%    7.5%/7.25%
Expected long-term rate of return on plan assets      8.25%/N/A     8.25%/N/A
Rate of increase in compensation levels               4.0%/4.0%     4.0%/4.0%

     In June 2001,  we  acquired  Frontier,  including  substantially  all their
     pension  assets and benefit  obligation.  This  acquisition  increased  the
     pension  benefit  obligation  by  $447,279,000  and the fair  value of plan
     assets by $583,190,000 as of June 29, 2001.

     As part of the Frontier  acquisition,  Global and we agreed to the transfer
     of pension  liabilities  and assets related to  substantially  all Frontier
     employees.  The liabilities associated with the Frontier employees retained
     by Global were valued following the Pension Benefit Guaranty  Corporation's
     "safe harbor" rules.  Prior to Global's  bankruptcy  filing,  Global and we
     reached  agreement on the value of the pension assets and liabilities to be
     retained  by Global as well as the time frame and  procedures  by which the
     remainder  of the  assets  were to  transfer  to a  pension  trust  held by
     Citizens.  Global failed to execute and deliver an authorization  letter to
     the Frontier plan trustee  directing the trustee to transfer to our pension
     plan record ownership of the transferred  assets. We initiated an adversary
     proceeding  with  the  Bankruptcy  Court  supervising  Global's  bankruptcy
     proceeding,  to determine  and declare  that  Global's  obligation  was not
     "executory", and to compel Global to execute and deliver such authorization
     letter.  On December 18, 2002 we entered into a stipulation with Global and
     other  parties,  "so ordered" by the  bankruptcy  court,  fully and finally
     settling the adversary  proceeding.  Pursuant to the stipulation and order,
     on February 3, 2003 Global instructed the Frontier Plan Trustee to transfer
     record  ownership  of  the  transferred  assets  with  a  market  value  of
     $447,800,000  to our pension  plan,  and the transfer in fact took place on
     that date.

The  assets  of the  Global  pension  plan  are  invested  primarily  in  equity
securities.  Due to the general decline in the equity  markets,  the assets have
declined in value. We recorded an adjustment to our minimum pension liability as
of  December  31,  2002 in the amount of  $180,798,000.  The  pension  liability
resulted from the declining  market value of the pension plan assets during 2002
combined with a lower market interest rate used to value the plan's liabilities.
As of December 31, 2002, the minimum pension liability is measured as the amount
of the plan's  accumulated  benefit  obligation  that is in excess of the plan's
market  value of assets at  December  31,  2002 plus any  balance  remaining  in
deferred or "prepaid"  benefit costs that was recorded  during  periods when our
pension plan assets exceeded our accumulated  benefit  obligation.  A charge was
recorded to shareholder's  equity, net of income tax benefits, as a component of
comprehensive  loss in the amount of  $111,589,000.  The adjustment was computed
separately  for each plan that we  maintain  but is mainly  attributable  to the
actual results of asset performance with respect to the Global pension plan (see
Note 28). This adjustment does not impact current year earnings,  or the funding
requirements of the plan.  However,  pension expense for 2003 will increase as a
result of these  market  declines and lower  interest  rates.  If future  market
conditions  cause  either a decline in interest  rates used to value our pension
plan  liabilities  or  reductions  to the value of our  pension  plan  assets we
potentially could incur additional  charges to our  shareholder's  equity at the
end of 2003. Based upon market conditions  existing at the end of February 2003,
an  additional  charge  of  approximately  $30,000,000  -  $35,000,000  would be
required at the end of 2003 should market conditions remain unchanged.



                                      F-39

<PAGE>

<TABLE>
<CAPTION>
                   Postretirement Benefits Other Than Pensions
                   -------------------------------------------
     We provide certain medical, dental, life insurance and telephone concession
     benefits  for  retired  employees  and  their   beneficiaries  and  covered
     dependents.  The following table sets forth the plan's benefit  obligations
     and the postretirement  benefit liability  recognized on our balance sheets
     at December 31, 2002 and 2001 and net periodic postretirement benefit costs
     for the years ended December 31, 2002, 2001 and 2000:

<C>                                                               <C>           <C> 
($ in thousands)                                                  2002          2001
 --------------                                                ------------- --------------

Change in benefit obligation
----------------------------
Benefit obligation at beginning of year                          $ 190,342      $  59,191
Service cost                                                         1,350            937
Interest cost                                                       13,753          8,812
Plan participants' contributions                                     3,771          1,023
Curtailments/settlements                                                 -        (14,223)
Actuarial loss                                                      21,406         20,321
Acquisitions/Divestitures                                           (4,348)       119,611
Plant closings/Reduction in force                                   (1,950)             -
Amendments                                                               -             20
Benefits paid                                                      (13,641)        (5,350)
                                                              ------------- --------------
Benefit obligation at end of year                                $ 210,683      $ 190,342
                                                              ============= ==============

Change in plan assets
---------------------
Fair value of plan assets at beginning of year                   $  29,090      $  25,412
Actual return on plan assets                                        (1,711)           310
Benefits paid                                                       (9,870)        (1,464)
Employer contribution                                                9,541          1,498
Acquisitions                                                             -          3,334
                                                              ------------- --------------
Fair value of plan assets at end of year                         $  27,050      $  29,090
                                                              ============= ==============

Accrued benefit cost
--------------------
Funded status                                                    $(183,633)     $(161,252)
Unrecognized transition obligation                                     234            258
Unrecognized prior service cost                                         16             18
Unrecognized loss                                                   35,048         18,174
                                                              ------------- --------------
Accrued benefit cost                                             $(148,335)     $(142,802)
                                                              ============= ==============

                                                                  2002          2001            2000
                                                              ------------- -------------- ---------------
Components of net periodic postretirement benefit cost
------------------------------------------------------
Service cost                                                      $  1,350        $   937         $   652
Interest cost on projected benefit obligation                       13,753          8,812           3,943
Return on plan assets                                               (2,438)        (2,227)         (1,688)
Amortization of prior service cost and transition obligation            26             25              23
Amortization of unrecognized (gain)/loss                             2,383            204            (793)
Curtailment gain                                                         -              -            (757)
Settlement loss                                                          -            491               -
Acquisition loss                                                         -              -             581
                                                              ------------- -------------- ---------------
Net periodic postretirement benefit cost                          $ 15,074        $ 8,242         $ 1,961
                                                              ============= ============== ===============
</TABLE>


     For purposes of measuring  year end benefit  obligations,  we used the same
     discount rates as were used for the pension plan and,  depending on medical
     plan  coverage  for  different  retiree  groups,  an 8 - 12% annual rate of
     increase in the  per-capita  cost of covered  medical  benefits,  gradually
     decreasing to 5% in the year 2010 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 $2,134,000 and
     the effect on the accumulated  postretirement benefit obligation for health
     benefits would be  $27,361,000.  The effect of a 1% decrease 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 $(1,759,000) and the effect on the accumulated postretirement
     benefit obligation for health benefits would be $(22,882,000).


                                      F-40

<PAGE>

     In August 1999, our Board of Directors  approved a plan of divestiture  for
     the public services properties.  Any pension and/or  postretirement gain or
     loss associated with the divestiture of these properties will be recognized
     when  realized.  During  2002,  we sold our entire water  distribution  and
     wastewater treatment business and one of our three electric businesses. The
     pension  plan has been  frozen  from the date of sale and we have  retained
     those  liabilities.  In both  transactions,  the buyer  assumed the retiree
     medical liabilities for those properties.

     In June 2001, we acquired  Frontier Corp.,  including their  postretirement
     benefit plans.  This acquisition  increased the accumulated  postretirement
     benefit  obligation  by  $118,819,000  and the fair value of plan assets by
     $3,334,000 as of June 29, 2001.

                              401(k) Savings Plans
                              --------------------

     We sponsor an employee  retirement savings plan under section 401(k) of the
     Internal  Revenue  Code.  The  Plan  covers   substantially  all  full-time
     employees.  Under the Plan, we provide matching and certain  profit-sharing
     contributions.  Effective May 1, 2002,  the Plan was amended to provide for
     employer  contributions  to be made  in cash  rather  than  Company  stock,
     impacting  all  non-union  employees  and most  union  employees.  Employer
     contributions  were  $10,331,000,  $6,878,000 and $5,973,000 for 2002, 2001
     and 2000, respectively.

(28) Commitments and Contingencies: 
     ------------------------------
     We  have   budgeted   capital   expenditures   in  2003  of   approximately
     $333,600,000,  including  $288,400,000 for ILEC and ELI and $45,200,000 for
     gas and electric.  Certain commitments have been entered into in connection
     therewith. We expect to incur additional impairment losses during 2003 with
     respect to our public utility  properties.  These properties are carried at
     our estimates of net realizable  values.  Under the terms of the definitive
     agreements  relating to the sale of our Arizona  and  Hawaiian  properties,
     most of the  capital  expenditures  we will  make  during  2003  for  these
     properties  will  not be  recovered.  As a  result,  the  amount  of  these
     expenditures  (currently  estimated  at  $28,000,000  through the  expected
     closing  dates) will be expensed as  incurred  and not  capitalized.  These
     expenditures  are of a normal recurring nature and are necessary to provide
     safe, reliable utility service to customers. We generally do not enter into
     firm, committed contracts for such activities. If the closing dates for the
     sales of our Arizona and Hawaiian  properties actually occur later than the
     currently  expected  dates,  the  actual  amount  of  capital  expenditures
     expensed will exceed these  estimates.  If the sale of our Arizona  utility
     businesses to UniSource is  completed,  the sale  agreement  requires us to
     promptly redeem $111,760,000 principal amount of industrial revenue bonds.

     We conduct  certain of our  operations  in leased  premises  and also lease
     certain  equipment and other assets  pursuant to operating  leases.  Future
     minimum rental commitments for all long-term noncancelable operating leases
     for continuing operations are as follows:

    ($ in thousands)          Year             Amount
     --------------       --------------   --------------
                              2003              $ 26,790
                              2004                22,234
                              2005                18,918
                              2006                17,385
                              2007                17,193
                           thereafter             55,455
                                           --------------
                              Total            $ 157,975
                                           ==============

     Total rental  expense  included in our results of operations  for the years
     ended December 31, 2002,  2001 and 2000 was  $36,550,000,  $38,829,000  and
     $33,042,000  respectively.  We sublease, on a month-to-month basis, certain
     office space in our corporate office to a charitable  foundation  formed by
     our Chairman.

     Minimum  payments on operating  leases are included in the table above. For
     payments on capital leases, see Note 9.


                                      F-41

<PAGE>

     We are a party to contracts with several unrelated long distance  carriers.
     The  contracts  provide  fees  based on leased  traffic  subject to minimum
     monthly fees. We also purchase  capacity and associated energy from various
     electric energy and natural gas suppliers. Some of these contracts obligate
     us to pay certain  capacity costs whether or not energy purchases are made.
     These  contracts  are intended to  complement  the other  components in our
     power supply to achieve the most  economic  mix  reasonably  available.  At
     December  31,  2002,  the  estimated  future  payments  for  long  distance
     contracts,  and  capacity  and  energy  that  we are  obligated  for are as
     follows:

<TABLE>
<CAPTION>
                                                               Public
($ in thousands)              Year          ILEC / ELI        Services            Total
 --------------          --------------   --------------   --------------    --------------
<S>                           <C>               <C>              <C>               <C>     
                              2003              $ 72,317        $  28,495         $ 100,812
                              2004                49,578           28,147            77,725
                              2005                16,781           23,085            39,866
                              2006                     -           23,236            23,236
                              2007                     -           21,363            21,363
                           thereafter                  -          125,750           125,750
                                           --------------   --------------    --------------
                              Total             $138,676        $ 250,076         $ 388,752
                                           ==============   ==============    ==============
</TABLE>

     The Vermont  Joint  Owners  (VJO),  a consortium  of 14 Vermont  utilities,
     including  us,  have  entered  into  a  purchase   power   agreement   with
     Hydro-Quebec.  The agreement contains "step-up"  provisions that state that
     if any VJO member defaults on its purchase obligation under the contract to
     purchase power from  Hydro-Quebec  the other VJO  participants  will assume
     responsibility  for the defaulting party's share on a pro-rata basis. As of
     December 31, 2002,  2001 and 2000,  our  obligation  under the agreement is
     approximately 10% of the total contract.  If any member of the VJO defaults
     on its obligations under the Hydro-Quebec agreement,  the remaining members
     of the VJO, including us, may be required to pay for a substantially larger
     share of the VJO's total power purchase obligation for the remainder of the
     agreement.  Such a result  could have a  materially  adverse  effect on our
     financial results.

     At December 31, 2002, we have outstanding  performance letters of credit as
     follows:

     ($ in thousands)
      --------------
                       Qwest                                $  64,280
                       Pinnacle West Capital Corporation       40,000
                       CNA                                     20,027
                       Water projects                           1,809
                       ELI projects                                50
                                                            ----------      
                          Total                             $ 126,166
                                                            ==========

     None of the above letters of credit restrict our cash balances.

On July 20, 2001, we notified Qwest that we were terminating  eight  acquisition
agreements. On July 23, 2001, Qwest filed a notice of claim for arbitration with
respect  to  the  terminated  acquisition  agreements.  Qwest  asserts  that  we
wrongfully terminated theses agreements and is seeking approximately $64,000,000
in damages, which is the aggregate of liquidated damages under letters of credit
established in the terminated acquisition  agreements.  On September 7, 2001, we
filed  a  response  and  counterclaims  in  the  same  arbitration  proceedings,
contesting  Qwest's  asserted  claims and asserting  substantial  claims against
Qwest for material breaches of representations, warranties, and covenants in the
terminated  acquisition  agreements and in the acquisition agreement relating to
North Dakota  assets that we  purchased  from Qwest.  The parties are  currently
engaged in discovery.  An arbitration  hearing has been scheduled to commence in
the third quarter of 2003.

On December 21,  2001,  we entered into a  settlement  agreement  resolving  all
claims in a class  action  lawsuit  pending  against  the  Company in Santa Cruz
County, Arizona (Chilcote, et al. v. Citizens Utilities Company, No. CV 98-471).
The lawsuit arose from claims by a class of plaintiffs  that included all of our
electric customers in Santa Cruz County for damages resulting from several power
outages that occurred  during the period  January 1, 1997,  through  January 31,
1999. Under the terms of the settlement agreement,  and without any admission of
guilt  or  wrongdoing  by us,  we have  paid the  class  members  $5,500,000  in
satisfaction of all claims. The court approved the settlement agreement on March
29, 2002, and the lawsuit  against us was dismissed with  prejudice.  We accrued
the full settlement amount,  plus an additional amount sufficient to cover legal
fees and other  related  expenses,  during  the  fourth  quarter  of 2001 and no
accrual remains at December 31, 2002.


                                      F-42

<PAGE>

As part of the Frontier acquisition,  Global and we agreed to Global's transfer,
effective as of July 1, 2001, of certain liabilities and assets under the Global
pension plan for Frontier employees. Such transfer and assumption of liabilities
was to be to a trustee of a trust  established under our pension plan, and would
exclude (1) those  liabilities  relating to certain  current and former Frontier
employees who were not considered part of the Frontier  acquisition  (calculated
using the "safe Harbor" methodology of the Pension Benefit Guaranty Corporation)
and (2) those assets attributable to such excluded liabilities. After filing for
bankruptcy on January 28, 2002,  Global  claimed that its obligation to transfer
the  Global  pension  plan's   transferred   assets  and  liabilities   remained
"executory"  under the  Bankruptcy  Code,  and refused to execute and deliver an
authorization  letter to the Frontier plan trustee (who was also the Global plan
trustee)  directing the trustee to transfer to our pension plan record ownership
of such assets and  liabilities.  We initiated an adversary  proceeding with the
Bankruptcy Court  supervising  Global's  bankruptcy  proceeding to determine and
declare that Global's  obligation was not  "executory,"  and to compel Global to
execute and deliver such  authorization  letter. On December 18, 2002 we entered
into a stipulation with Global and other parties, "so ordered" by the Bankruptcy
Court,  fully and finally  setting  the  adversary  proceeding.  Pursuant to the
stipulation  and  order,  on  February  3,  2003,  among  other  things,  Global
instructed  the  Frontier  plan  trustee to  transfer  record  ownership  of the
transferred assets and liabilities to our pension plan, and the transfer in fact
took place on that date.

The City of Bangor,  Maine,  filed suit against us on November 22, 2002,  in the
U.S.  District  Court for the  District  of Maine  (City of  Bangor v.  Citizens
Communications Company, Civ. Action No. 02-183-B-S). The City has alleged, among
other things, that we are responsible for the costs of cleaning up environmental
contamination  alleged to have resulted from the operation of a manufactured gas
plant by Bangor Gas Company, which we owned from 1948-1963. The City alleged the
existence  of extensive  contamination  of the  Penobscot  River and nearby land
areas and has  asserted  that  money  damages  and other  relief at issue in the
lawsuit could exceed $50,000,000.  The City also requested that punitive damages
be assessed  against us. We have filed an answer denying  liability to the City,
and have  asserted a number of counter  claims  against  the City.  We intend to
defend ourselves vigorously against the City's lawsuit.

We also  have  demanded  that  various  of our  insurance  carriers  defend  and
indemnify us with respect to the City's lawsuit.  On or about December 26, 2002,
we  filed  suit  against  those  insurance  carriers  in the  Superior  Court of
Penobscot County, Maine, for the purpose of establishing their obligations to us
with respect to the City's  lawsuit.  We intend to vigorously  pursue  insurance
coverage for the City's  lawsuit.  In addition,  we have  identified a number of
other  potentially  responsible  parties that may be responsible for the damages
alleged by the City.  We expect to  initiate  legal  action  within the next few
weeks to bring those parties into the lawsuit.

On February 7, 2003, we received a letter from counsel  representing Enron North
America  Corporation  (formerly  known as Enron Gas Marketing,  Inc.)  demanding
payment of an "early  termination  liability" of approximately  $12,500,000 that
Enron claims it is owed under a gas supply agreement that we lawfully terminated
in  November  2001.  The  demand was made in  connection  with  Enron's  ongoing
bankruptcy  proceeding  in the United States  Bankruptcy  Court for the Southern
District  of New York.  We  believe  Enron's  claim  lacks any merit and have so
advised that  company's  counsel.  Enron has threatened to initiate an adversary
proceeding  in the  bankruptcy  court to recover  the amount of its demand  plus
applicable  interest and  attorney's  fees. If that occurs,  we will  vigorously
defend against any such action.

During the fourth  quarter of 2002 we became aware of  irregularities  involving
payments  made by certain of our public  utilities  operations  for  services or
benefits  that we did not  receive.  The  payments  do not  involve  our current
operations  in Arizona,  Vermont,  or Hawaii.  With the  assistance  of forensic
specialists, outside auditors, and counsel, we investigated these irregularities
and  identified a total of $7,800,000  that had been embezzled from the Company.
These payments were reflected in our financial statements as charges to earnings
(primarily  during  2002).  The  U.S.  Government  has  recovered  approximately
$6,000,000 (which we believe will be turned over to us) and we believe that most
of the remaining funds outstanding will be reimbursed by insurance.

We have provided detailed information regarding the results of our investigation
to federal prosecutors and the Securities and Exchange Commission, including the
names of two of our former officers (Ken Cohen and Livingston Ross, who were the
President and Chief Operating Officer of the Public Services Sector and the Vice
President of Reporting and Audit,  respectively)  who approved the payments.  We
have been  advised  by  federal  prosecutors  that  these two  individuals  have
admitted  their  involvement  in  these  schemes  and  we  have  terminated  the
employment of these individuals.


                                      F-43

<PAGE>

In  connection  with an  inquiry  that we  believe  has  arisen  as a result  of
allegations  made to  federal  authorities  during  their  investigation  of the
embezzlement,  we and our employees are cooperating fully with the Office of the
U.S. Attorney for the Southern District of New York and with the New York office
of the Securities and Exchange Commission.  We have provided requested documents
to the SEC and we have agreed to comply with an SEC request  that, in connection
with the informal inquiry that it has initiated,  we preserve financial,  audit,
and accounting records.

We are party to  proceedings  arising in the normal course of our business.  The
outcome of individual matters is not predictable.  However,  we believe that the
ultimate resolution of all such matters,  after considering  insurance coverage,
will not have a material  adverse effect on our financial  position,  results of
operations, or our cash flows.


                                      F-44

<PAGE>


The Board of Directors and Shareholders
Citizens Communications Company:

We have audited and reported separately herein on the balance sheets of Citizens
Communications Company and subsidiaries as of December 31, 2002 and 2001 and the
related   consolidated   statements   of   operations,   shareholders'   equity,
comprehensive  income  (loss)  and  cash  flows  for  each of the  years  in the
three-year  period ended December 31, 2002. Our report refers to the adoption of
Statement  of  Financial  Accounting  Standards  No.  142,  "Goodwill  and Other
Intangibles Assets" as of January 1, 2002.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial statements of Citizens  Communications  Company and subsidiaries taken
as a whole. The supplementary  information  included in Schedule II is presented
for  purposes of  additional  analysis  and is not a required  part of the basic
financial  statements.  Such  information  has been  subjected  to the  auditing
procedures  applied in the audit of the basic  financial  statements and, in our
opinion,  is fairly  stated in all  material  respects  in relation to the basic
financial statements taken as a whole.




                                                         KPMG LLP



New York, New York
March 4, 2003




                                      F-45

<PAGE>

<TABLE>
<CAPTION>

 
    Schedule II

                CITIZENS COMMUNICATIONS COMPANY AND SUBSIDIARIES
                        Valuation and Qualifying Accounts
                                ($ In thousands)

                                                 Balance at       Charged to                                       Balance at       
                                               Beginning of       Revenue or        Frontier                         End of         
Accounts                                          Period           Expense        Acquisition     Deductions         Period
----------------------------------------   ----------------   -----------------  -------------   --------------    ------------

<S>                                             <C>                 <C>              <C>            <C>               <C>
Allowance for doubtful accounts
                     2000                         28,278           16,719                 -         (21,084)          23,913
                     2001                         23,913           41,233  (1)       10,709          (8,254)          67,601
                     2002                         67,601           66,935  (2)            -         (95,590) (3)      38,946


        (1) Includes the reserve for Global receivables (See Note 15 to Consolidated Financial Statements).
        (2) Net of recoveries of amounts previously written off.
        (3) Includes the sale of WorldCom receivables.

</TABLE>


                                      F-46








                                                        Exhibit 3.200.3
                                                        ---------------


                                    Amendment
                                     to the
                   BY-LAWS of CITIZENS COMMUNICATIONS COMPANY
                            (Effective July 30, 2002)

                            -------------------------


The first  sentence  of SECTION 5 of the  By-laws is amended in its  entirety to
read as follows:

     The  property  and  business  of  the  corporation  shall  be  managed  and
     controlled by its Board of Directors,  which shall consist of not less than
     seven nor more than fifteen members.







                                                                Exhibit 10.11
                                                                -------------



                              AMENDED AND RESTATED

                           PURCHASE AND SALE AGREEMENT
                                (KAUAI ELECTRIC)

                                     between

                         CITIZENS COMMUNICATIONS COMPANY

                                       and

                           KAUAI ISLAND UTILITY CO-OP


                            Dated as of March 5, 2002



<PAGE>

<TABLE>
<CAPTION>

                                                  TABLE OF CONTENTS

                                                                                                               Page

<S>                                                                                                              <C>
ARTICLE I         DEFINITIONS.....................................................................................1
         Section 1.1      Certain Defined Terms...................................................................1
         Section 1.2      Other Defined Terms.....................................................................9

ARTICLE II        PURCHASE AND SALE...............................................................................9
         Section 2.1      Purchase and Sale of Assets.............................................................9
         Section 2.2      Assumed Liabilities.....................................................................9
         Section 2.3      Retained Liabilities...................................................................11
         Section 2.4      Condition on Assignment or Assumption of Contracts and Rights..........................12

ARTICLE III       PURCHASE PRICE.................................................................................12
         Section 3.1      Purchase Price.........................................................................12
         Section 3.2      Calculation of Purchase Price..........................................................12

ARTICLE IV        REPRESENTATIONS AND WARRANTIES OF BUYER........................................................13
         Section 4.1      Organization, Existence and Qualification..............................................13
         Section 4.2      Authority Relative to this Agreement and Binding Effect................................14
         Section 4.3      Governmental Approvals.................................................................14
         Section 4.4      Availability of Funds..................................................................14
         Section 4.5      Filings................................................................................14
         Section 4.6      Brokers................................................................................14
         Section 4.7      Independent Investigation..............................................................15
         Section 4.8      Public Utility Holding Company Status; Regulation as a Public Utility..................15
         Section 4.9      Buyer's Financial Statements. .........................................................15
         Section 4.10     Buyer's Insurance......................................................................15

ARTICLE V         REPRESENTATIONS AND WARRANTIES OF SELLER.......................................................15
         Section 5.1      Organization,
 Existence and Qualification..............................................15
         Section 5.2      Authority Relative to this Agreement and Binding Effect................................15
         Section 5.3      Governmental and Other Required Consents...............................................16
         Section 5.4      Public Utility Holding Company Status; Regulation as a Public Utility..................16
         Section 5.5      Title to Assets; Liens.................................................................16
         Section 5.6      Financial Statements...................................................................16
         Section 5.7      Compliance with Legal Requirements; Governmental Permits...............................17
         Section 5.8      Legal Proceedings; Outstanding Orders. ................................................17
         Section 5.9      Taxes..................................................................................17
         Section 5.10     Intellectual Property..................................................................17
         Section 5.11     Personal Property......................................................................18
         Section 5.12     Material Contracts; Existing Loan Documents............................................18
         Section 5.13     Employee Benefit Matters...............................................................18
         Section 5.14     Environmental Matters..................................................................18
         Section 5.15     No Material Adverse Change.............................................................19
         Section 5.16     State Regulatory Matters...............................................................19
         Section 5.17     Brokers................................................................................19
         Section 5.18     Disclaimer.............................................................................20

                                                          i



<PAGE>


ARTICLE VI        COVENANTS......................................................................................20
         Section 6.1      Covenants of Seller....................................................................20
         Section 6.2      Covenants of Buyer.....................................................................22
         Section 6.3      Governmental Filings...................................................................23
         Section 6.4      Citizens Marks.........................................................................24
         Section 6.5      Acknowledgment by Buyer................................................................24
         Section 6.6      Transition Plan.  .....................................................................25
         Section 6.7      IDRB Obligations.......................................................................25

ARTICLE VII       CONDITIONS PRECEDENT...........................................................................26
         Section 7.1      Seller's Conditions Precedent to Closing...............................................26
         Section 7.2      Buyer's Conditions Precedent to Closing................................................27

ARTICLE VIII        CLOSING......................................................................................29
         Section 8.1      Closing................................................................................29

ARTICLE IX          TERMINATION..................................................................................30
         Section 9.1      Termination Rights.....................................................................30
         Section 9.2      Limitation on Right to Terminate; Effect of Termination................................31

ARTICLE X           EMPLOYEE MATTERS.............................................................................31
         Section 10.1     Employment of Transferred Employees....................................................31
         Section 10.2     Assumption of Collective Bargaining Agreement Obligations..............................32
         Section 10.3     Cessation of Participation in Seller's Plans; Proration of Bonuses.....................32
         Section 10.4     Similarity of Benefit Packages.........................................................32
         Section 10.5     Defined Benefit Pension Plan. .........................................................32
         Section 10.6     401(k) Plan............................................................................33
         Section 10.7     Welfare Benefits.......................................................................33
         Section 10.8     Flexible Spending Accounts.............................................................34
         Section 10.9     Employment Agreements..................................................................34
         Section 10.10    Vacation...............................................................................34
         Section 10.11    Severance..............................................................................35
         Section 10.12    Plant Closing Notice...................................................................35

ARTICLE XI          TAX MATTERS..................................................................................35
         Section 11.1     Purchase Price Allocation..............................................................35
         Section 11.2     Cooperation with Respect to Like-Kind Exchange.........................................35
         Section 11.3     Transaction Taxes......................................................................36
         Section 11.4     Taxes Based on Revenues................................................................36

ARTICLE XII         ENVIRONMENTAL MATTERS........................................................................37
         Section 12.1     Environmental Due Diligence............................................................37

ARTICLE XIII        INDEMNIFICATION..............................................................................39
         Section 13.1     Indemnification by Seller..............................................................39
         Section 13.2     Indemnification by Buyer...............................................................39
         Section 13.3     Limitations on Seller's Liability......................................................40

                                                         ii



<PAGE>


         Section 13.4     Claims Procedure.......................................................................41
         Section 13.5     Exclusive Remedy.......................................................................42
         Section 13.6     Indemnification for Negligence.........................................................42
         Section 13.7     Waiver and Release.....................................................................43

ARTICLE XIV         GENERAL PROVISIONS...........................................................................43
         Section 14.1     Expenses...............................................................................43
         Section 14.2     Notices................................................................................43
         Section 14.3     Assignment.............................................................................44
         Section 14.4     Successor Bound........................................................................44
         Section 14.5     Governing Law..........................................................................45
         Section 14.6     Dispute Resolution.....................................................................45
         Section 14.7     Cooperation............................................................................46
         Section 14.8     Construction of Agreement..............................................................46
         Section 14.9     Publicity.  ...........................................................................46
         Section 14.10    Waiver.................................................................................46
         Section 14.11    Parties in Interest....................................................................47
         Section 14.12    Section and Paragraph Headings.........................................................47
         Section 14.13    Amendment..............................................................................47
         Section 14.14    Entire Agreement.......................................................................47
         Section 14.15    Counterparts...........................................................................47
         Section 14.16    Severability...........................................................................47

                                                         iii
</TABLE>


<PAGE>

                        LIST OF EXHIBITS

Exhibit 6.7          Form of IDRB Obligations Agreement
Exhibit 7.1(g)       Form of Buyer's Opinion of Counsel
Exhibit 7.2(g)       Form of Seller's Opinion of Counsel
Exhibit 8.1(a)       Form of Bill of Sale



                        LIST OF SCHEDULES

Schedule 1.1(b)      Excluded Assets
Schedule 2.2(d)      Certain Assumed Proceedings
Schedule 5.2         Seller's Authority
Schedule 5.3         Seller's Governmental and Other Required Consents
Schedule 5.5         Encumbrances; Owned Real Property
Schedule 5.6(a)      Financial Statements
Schedule 5.6(b)      Certain Liabilities
Schedule 5.7         Compliance with Legal Requirements; Governmental Permits
Schedule 5.8         Legal Proceedings; Outstanding Orders
Schedule 5.9         Taxes
Schedule 5.10        Intellectual Property
Schedule 5.12        Material Contracts
Schedule 5.13        Employee Matters
Schedule 5.14        Environmental Matters
Schedule 5.15        Material Adverse Changes
Schedule 5.16        State Regulatory Matters
Schedule 6.1         Conduct of Business
Schedule 6.2(c)      Citizens' Guarantees and Surety Instruments
Schedule 10.1        Active Employees
Schedule 10.7        Retirees and "Grandfathered Employees"



<PAGE>

                             AMENDED AND RESTATED
                           PURCHASE AND SALE AGREEMENT
                                (KAUAI ELECTRIC)

     This AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT (this "Agreement") is
made as of March  5,  2002  (the  "Effective  Date"),  by and  between  CITIZENS
COMMUNICATIONS   COMPANY  (f/k/a  Citizens   Utilities   Company),   a  Delaware
corporation   ("Seller"),   and  Kauai  Island   Utility  Co-Op,  a  cooperative
association  formed  pursuant  to the  provision  of Chapter  421C of the Hawaii
Revised  Statutes  ("Buyer").  Capitalized  terms  used  herein  shall  have the
meanings ascribed to them in Article I, unless otherwise provided.

                              W I T N E S S E T H :

     WHEREAS, Seller owns all of the Assets;

     WHEREAS,  Seller and Buyer  entered  into that  certain  Purchase  and Sale
Agreement (Kauai Electric),  dated as of February 11, 2000, for the purchase and
sale of the Assets (the "Original Agreement");

     WHEREAS,  Seller  and  Buyer  desire  to amend  and  restate  the  Original
Agreement  to give  effect to certain  agreements  reached  between  the parties
regarding the purchase and sale of the Assets; and

     WHEREAS, Buyer desires to purchase, and Seller desires to sell, the Assets,
subject in all respects to the provisions of this Agreement.

     NOW,  THEREFORE,  in  consideration  of the  premises  and  other  good and
valuable  consideration,  the  receipt  and  sufficiency  of  which  are  hereby
acknowledged, the parties hereby agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

     Section 1.1 Certain  Defined  Terms.  For purposes of this  Agreement,  the
following  terms have the  meanings  specified  or referred to in this Article I
(such definitions to be equally applicable to both the singular and plural forms
of the terms defined):

     "Affiliates"   or  "Affiliated   Entities"  --  entities  shall  be  deemed
"Affiliated" as to each other to the extent (i) one of the entities  directly or
indirectly  controls the other, or the direct or indirect  control of one of the
entities is exercised by the officers,  directors,  stockholders, or partners of
the other  entity  (whether or not such persons  exercise  such control in their
capacities as officers, directors,  stockholders, or partners) or (ii) is deemed
to be an Affiliate under existing statutes or regulations of the SEC.

     "Assets" -- all of the assets,  property  and  interests  of every type and
description,  real, personal or mixed, tangible and intangible,  owned by Seller
and relating primarily to the Business, other than the Excluded Assets.


<PAGE>

     "Assumed Environmental Liabilities" -- means any of the following:

     (a) All Environmental Liabilities of Seller relating to the Business or the
Assets and arising  from or relating to the  environmental  matters or incidents
either  disclosed  by  Seller  on  Schedule  5.14  as of the  Effective  Date or
otherwise known to Buyer on or before the Effective Date that remain outstanding
as of the Closing Date, it being  understood by the parties that the  unadjusted
Purchase Price reflects  Buyer's  estimate of any Losses that could arise on and
after the Closing Date with respect to such Environmental Liabilities;

     (b) All Environmental Liabilities of Seller relating to the Business or the
Assets and arising  from or relating to the  environmental  matters or incidents
either  disclosed to Buyer by Seller after the  Effective  Date  (including  any
additional  disclosures  appearing  on  Schedule  5.14 as  revised by Seller and
delivered to Buyer prior to the Closing Date) or otherwise  known to Buyer as of
the Closing Date that remain  outstanding as of the Closing Date, other than any
such  Environmental  Liabilities  that are properly  designated  by Buyer as New
Material  Environmental  Liabilities in accordance with Section 12.1(g) and that
by the Closing Date have not been remedied or responded to by Seller in a manner
reasonably satisfactory to Buyer;

     (c) All Environmental Liabilities of Seller relating to the Business or the
Assets that were  outstanding  or had arisen  prior to the Closing Date but with
respect to which Seller had no Knowledge as of the Closing Date; and

     (d)  Except  for  the  Retained   Environmental   Liabilities,   any  other
Environmental  Liability of Seller relating to the Business or the Assets, Buyer
or any Affiliate,  successor or assign of Buyer,  whether arising or relating to
the period before or after the Closing, including with respect to the removal of
asbestos or  asbestos-containing  materials in connection with any renovation or
structural change to any Asset conducted after Closing.

     "Bonds" -- means any of the bonds  issued  pursuant  to the  Indentures  of
Trust,  the proceeds from the issuance of which were advanced to Seller and used
in connection with the Business or the Assets of the Business pursuant to any of
the IDRB Documents.

     "Business" -- means collectively:

     (a) the regulated  electricity  generation,  transmission  and distribution
business  conducted by Seller on the island of Kauai,  Hawaii  through its Kauai
Electric division; and

     (b) the  provision of related  services and products and the  engagement in
related  activities by Seller on the island of Kauai,  Hawaii  through its Kauai
Electric division.

     "Buyer's IDRB  Obligations"  - means the  obligations of Buyer set forth in
Section  6.7(a)  and  in the  IDRB  Obligations  Agreement  to be  executed  and
delivered by Buyer on or prior to the Closing Date in  accordance  with Sections
6.7(a) and 8.1(d).

                                       2

<PAGE>

     "Capital  Budget" -- means the capital  budget for the  Business for fiscal
year 2001 or 2002, as applicable, as adopted by the Board of Directors of Seller
and  provided to Buyer prior to the  Effective  Date or promptly  upon  adoption
thereof, if later.

     "Claim  Notice"  --  means a  written  notice  of a claim  given by a party
seeking  indemnification  pursuant to the terms of this Agreement that specifies
in reasonable  detail the nature of the Losses and the estimated  amount of such
Losses.

     "Confidentiality Agreement" -- means that certain confidentiality agreement
dated October 15, 1999, between Buyer and Seller.

     "Consent"  --  any  approval,  consent,  ratification,   waiver,  or  other
authorization from any Person.

     "Contract" -- any agreement,  contract, document,  instrument,  obligation,
promise or  undertaking  (whether  written  or oral)  that is  legally  binding,
including Easements.

     "Easements"-- means all easements,  rights of way, permits,  licenses,  and
other ways of necessity, whether or not of record.

     "Encumbrance"  -- any charge,  adverse  claim,  lien,  mortgage,  pledge or
security interest.

     "Environmental Law"-- any Order or Legal Requirement,  and any judicial and
administrative  interpretation  thereof and  related  policies,  guidelines  and
standards,  relating to pollution or protection of the  environment  and natural
resources,  including those relating to (a) emissions,  discharges,  Releases or
threatened  Releases  of  Hazardous  Material  into the  environment  (including
ambient air,  surface  water,  groundwater  or land),  and (b) the  manufacture,
processing,  distribution,  use,  treatment,  storage,  disposal,  transport  or
handling  of  Hazardous  Material,   each  as  in  effect  as  of  the  date  of
determination.

     "Environmental  Liability"  --  means  any  liability,   responsibility  or
obligation arising out of or relating to:

     (a) the presence of any  Hazardous  Material in the  fixtures,  structures,
soils,  groundwater,  surface water or air on, under or about or emanating  from
the assets and properties currently or formerly used,  operated,  owned, leased,
controlled,  possessed,  occupied  or  maintained  by a  Person,  and  any  such
Hazardous Material emanating to adjoining or other properties;

     (b) the  use,  generation,  production,  manufacture,  treatment,  storage,
disposal,  Release,  threatened Release,  discharge,  spillage, loss, seepage or
filtration  of  Hazardous  Materials  by a Person  or its  employees,  agents or
contractors  from,  on,  under or about the assets or  properties  currently  or
formerly used,  operated,  owned,  leased,  controlled,  possessed,  occupied or
maintained  by  such  Person  or  the  presence  therein  or  thereunder  of any
underground or above-ground  tanks for the storage of fuel oil,  gasoline and/or
other petroleum products or by-products or other Hazardous Material;

     (c) the violation or noncompliance or alleged violation or noncompliance by
a Person  or its  employees,  agents or  contractors  of any  Environmental  Law
arising from or related to its or their  conduct,  actions or  operations or the
former  or  current  use,  operation,  ownership,  lease,  possession,  control,
occupancy,  maintenance  or condition of any of such Person's  former or current
assets or properties;

                                       3


<PAGE>

     (d) the failure by a Person or its  employees,  agents,  or  contractors to
have obtained or maintained in effect any  certificate,  permit or authorization
required by any Environmental  Law as a result of its or their conduct,  actions
or operations or the use,  operation,  ownership,  lease,  control,  possession,
occupancy, maintenance or condition of such Person's assets or properties;

     (e) any  and  all  Proceedings  arising  out of any of the  above-described
matters, including Proceedings by Governmental Bodies for enforcement,  cleanup,
removal,  treatment,   response,  remedial  or  other  actions  or  damages  and
Proceedings by any third Person seeking damages, contribution,  indemnification,
cost recovery, compensation or injunctive relief; and

     (f) any and all  remedial  work  and  other  corrective  action  (including
investigation  or monitoring of site conditions,  or any clean-up,  containment,
restoration  or  removal)  taken by, or the costs of which are imposed  upon,  a
Person arising from any of the above-described matters.

     "ERISA" - the Employee  Retirement Income Security Act of 1974, as amended,
or any successor law, and  regulations  and rules issued pursuant to that act or
any successor law.

     "Excluded  Assets" -- means the following  assets of Seller,  each of which
shall be excluded from the Assets, and not acquired by the Buyer, at Closing:

     (a) assets that Seller uses in both the Business and in Seller's other gas,
electric or communications businesses, the material items of which are described
on Schedule 1.1(b), and Contracts regarding the procurement of services or goods
by Seller for use in such in other businesses;

     (b) cash and cash equivalents in transit, in hand or in bank accounts;

     (c) except as otherwise set forth in Article X, assets  attributable  to or
related to a Benefit Plan of Seller;

     (d) the stock  record and minute books of Seller,  duplicate  copies of all
books and records  transferred to Buyer, all records prepared in connection with
the sale of the  Business  (including  bids  received  from  third  parties  and
analysis relating to the Business) and all IDRB Documents;

     (e) assets  disposed of by Seller  after the  Effective  Date to the extent
such dispositions are not prohibited by this Agreement;

     (f) except to the extent  set forth in  Section  3.4,  rights to refunds of
Taxes payable with respect to the Business,  assets, properties or operations of
Seller  or any  member  of any  affiliated  group of which  either  of them is a
member;

     (g) accounts owing, by and among Seller and its Affiliates;

     (h) all deferred tax assets or collectibles;

     (i) any insurance policy, bond, letter of credit or other similar item, and
any cash surrender value in regard thereto;

                                       4

<PAGE>

     (j) the Citizens Marks; and

     (k) the other assets listed on Schedule 1.1(b).

     "Existing   Loan   Documents"--   means  all  Contracts   relating  to  the
indebtedness  for money  borrowed  by  Seller  and used in  connection  with the
Business  or the  Assets  as of the  date  hereof  to which  Seller  is a party,
including all IDRB Documents, but excluding line extension agreements or similar
arrangements  involving customer advances for construction,  it being understood
and agreed that customer advances,  customer deposits and construction  advances
do not create indebtedness for money borrowed.

     "Final  Order"  -- an  action by a  Governmental  Body as to which:  (a) no
request for stay of the action is pending,  no such stay is in effect and if any
time period is  permitted  by statute or  regulation  for filing any request for
such  stay,  such  time  period  has  passed;  (b) no  petition  for  rehearing,
reconsideration  or application for review of the action is pending and the time
for filing any such petition or application  has passed;  (c) such  Governmental
Body does not have the action  under  reconsideration  on its own motion and the
time in which such reconsideration is permitted has passed; and (d) no appeal to
a court, or a request for stay by a court of the  Governmental  Body's action is
pending or in effect and the  deadline for filing any such appeal or request has
passed.

     "Future Regulatory Obligations" -- means all liabilities,  responsibilities
and  obligations  relating  to the  Assets or the  Business,  including  capital
expenditure  obligations  and  liabilities  of the types that appear as "Accrued
Liabilities" and "Non-Current  Liabilities" on the Balance Sheet, arising out of
any Legal Requirement or other action of any Governmental  Body,  including with
respect to all Proceedings of any state  regulatory  commission  relating to the
Assets or the Business commenced before or after the Closing Date, regardless of
whether  the Legal  Requirement  or other  action is or  purports to be based on
conduct,  actions,  facts,  circumstances  or  conditions  arising,  existing or
occurring at any time prior to the Closing Date,  but other than relating to any
Retained Environmental Liability.

     "GAAP" -- generally accepted United States accounting  principles,  applied
on a consistent basis.

     "Governmental  Body"  -- any  of the  following  that  possesses  competent
jurisdiction:

     (a) federal, state, county, local, municipal or other governmental body;

     (b) governmental or  quasi-governmental  authority of any nature (including
any governmental agency, branch, department, official or entity and any court or
other tribunal); or

     (c)  any  governmental  body  entitled  to  exercise  any   administrative,
executive,  judicial,  legislative,  police,  regulatory or taxing  authority or
power of any nature.


                                       5

<PAGE>

     "Hazardous Materials" -- any waste or other chemical, material or substance
that is listed, defined,  designated,  or classified as, or otherwise determined
to be, hazardous,  radioactive, toxic, or a pollutant or a contaminant, or words
of similar import,  under or pursuant to any  Environmental  Law,  including any
admixture or solution  thereof,  and  specifically  including oil,  natural gas,
petroleum  and  all  derivatives  thereof  or  synthetic  substitutes  therefor,
asbestos  or   asbestos-containing   materials,   any  flammable  substances  or
explosives,  any  radioactive  materials,  any toxic wastes of substances,  urea
formaldehyde foam insulation, toluene or polychlorinated biphenyls.

     "HSR Act" -- the Hart-Scott-Rodino  Antitrust  Improvements Act of 1976, as
amended,  or any  successor  law, and  regulations  and rules issued by the U.S.
Department  of Justice or the Federal Trade  Commission  pursuant to that act or
any successor law.

     "IDRB  Documents"  --  means  the  Loan  Agreements,   the  Tax  Regulatory
Agreements and Tax Representations  and Project  Certificates listed in Schedule
5.12.

     "IDRB  Indebtedness"  -- means  the  indebtedness  of  Seller  owing to the
issuers of the Bonds and arising under the Loan  Agreements  included  among the
IDRB Documents.  The IDRB Indebtedness is described further in Schedule 5.12 and
in Exhibit 6.7.

     "IRC" -- the Internal Revenue Code of 1986, as amended.

     "IRS" -- the Internal Revenue Service or any successor agency.

     "Knowledge"  -- means,  with  respect to Seller,  the actual  knowledge  of
Seller's Chief Financial  Officer;  Vice President and Chief Operating  Officer,
Citizens Public Services;  Vice President and General  Manager,  Kauai Electric;
Manager  of Power  Supply,  Kauai  Electric;  and  Manager of  Transmission  and
Distribution,  Kauai  Electric;  or their  respective  successors  holding  such
offices or having comparable duties and responsibilities.

     "Legal  Requirement"  -- any  federal,  state,  county,  local,  municipal,
foreign,   international,   multinational,   or  other   administrative   Order,
constitution, law, ordinance, adopted code, principle of common law, regulation,
rule,  directive,  approval,  notice,  tariff,  franchise agreement,  statute or
treaty.

     "Losses" -- shall mean all claims, losses,  liabilities,  causes of action,
costs  and  expenses  (including,  without  limitation,  involving  theories  of
negligence  or  strict  liability  and  including  court  costs  and  reasonable
attorneys' fees and disbursements in connection therewith).

     "Mandated  Capital  Expenditures"  -- shall have the  meaning  set forth in
Section 6.1(a)(6) of this Agreement.

     "Material Adverse Effect" -- an occurrence or condition that has a material
adverse effect on the operation, financial condition or results of operations of
the Business, taken as a whole. For purposes of this Agreement, an occurrence or
condition  shall not constitute a Material  Adverse Effect (a) if it arises from
general  business,  economic or financial  market  conditions,  from  conditions
generally  affecting the industries in which the Business competes,  or from the
transactions  contemplated by this Agreement,  (b) if it is of the type normally
recoverable by the Business  through rates,  (c) to the extent that the Business
may realize the benefit of insurance  maintained by Seller or to the extent that
Seller or Buyer may receive or recover  payments  in respect of such  occurrence
from any other source  (whether in a lump sum or stream of payments),  or (d) if
it relates to or results from a threatened or pending condemnation Proceeding by
the County of Kauai.


                                       6

<PAGE>

     "Material  Contract" -- a Contract  relating  primarily to the Business and
involving a total  commitment by or to any party thereto of at least $250,000 on
an annual basis and which cannot be  terminated  by Seller with notice of ninety
(90) days or less without penalty to Seller.

     "Order" -- any award, decision, injunction,  judgment, order, writ, decree,
ruling,  subpoena,  or verdict entered,  issued, made, or rendered by any court,
administrative  agency,  other Governmental Body, or by any arbitrator,  each of
which possesses competent jurisdiction.

     "Organizational  Documents" -- the articles or certificate of incorporation
and the bylaws of a corporation or the comparable  organizational  and governing
documents of other Persons.

     "Permitted Encumbrances" -- means any of the following:

     (a) mechanics',  carriers', workers' and other similar liens arising in the
ordinary  course of business and which in the aggregate are not  substantial  in
amount and do not  interfere  with the  present  use of the Assets to which they
apply;

     (b) liens for current Taxes and assessments not yet due and payable;

     (c) usual and customary nonmonetary real property Encumbrances,  covenants,
imperfections in title, Easements, restrictions and other title matters (whether
or not the same are recorded) that do not and will not materially interfere with
the operation of that portion of the Business  currently  conducted on such real
property;

     (d) Encumbrances  securing the payment or performance of any of the Assumed
Liabilities;

     (e) all applicable zoning ordinances and land use restrictions;

     (f) with  respect  to any Asset  which  consists  of a  leasehold  or other
possessory   interests   in  real   property,   all   Encumbrances,   covenants,
imperfections in title, Easements, restrictions and other title matters (whether
or not the same are  recorded) to which the  underlying  fee estate in such real
property  is  subject  that  do not  currently  interfere  materially  with  the
operation of that portion of the Business currently  conducted on such property;
and

     (g)  any   other   Encumbrances,   Contracts,   obligations,   defects   or
irregularities of any kind whatsoever,  affecting the Assets that,  individually
or in the aggregate,  are not such as are  reasonably  likely to have a Material
Adverse Effect or that will be  terminated,  released or waived on or before the
Closing Date.

     "Person"  --  any   individual,   corporation   (including   any  nonprofit
corporation),  general or limited partnership,  limited liability company, joint
venture, estate, trust, association, organization or Governmental Body.

     "Proceeding" -- any claim, action, arbitration, hearing, litigation or suit
commenced,  brought,  conducted,  or heard by or before, or otherwise involving,
any Governmental Body or arbitrator.

                                       7

<PAGE>

     "PUHCA" - the Public Utility  Holding  Company Act of 1935, as amended,  or
any successor law, and  regulations and rules issued by the SEC pursuant to that
act or any successor law.

     "Real  Property"  -- all real  property  owned or  leased  by Seller in the
operation  of the  Business,  together  with  all  interests  in  real  property
(including  Easements)  used or held for use by Seller in the  operation  of the
Business.

     "Related  Documents" -- any Contract  provided for in this  Agreement to be
entered  into  by one or more of the  parties  hereto  in  connection  with  the
transactions contemplated by this Agreement.

     "Release"  --  any  presence,  emission,  dispersal,   disposal,  spilling,
leaking,  emitting,   discharging,   depositing,   pumping,  pouring,  escaping,
leaching, dumping, releasing or migration into the indoor or outdoor environment
(including  the  abandonment  or disposal of any  barrels,  containers  or other
closed receptacles containing any Hazardous Materials),  or in, into or from any
facility,  including  the movement of any Hazardous  Materials  through the air,
soil, surface water, groundwater or property.

     "Representative"  -- with respect to a  particular  Person,  any  director,
officer,  employee, agent, consultant,  advisor, or other representative of such
Person, including legal counsel, accountants, and financial advisors.

     "Retained  Environmental  Liabilities"  -- means (a) any fines or penalties
imposed under applicable  Environmental  Laws by a Governmental Body as a result
of Seller's failure to report any incident or condition  required to be reported
under   applicable   Environmental   Laws,   which   shall  be  subject  to  the
indemnification by Seller under Section 13.1 without regard to the deductible or
limit on liability otherwise applicable to such  indemnification  under Sections
13.3(c)  and (d);  and (b)  Environmental  Liability  of Seller  that  Buyer has
properly designated to be a New Material  Environmental  Liability in accordance
with  Section  12.1(h) and that has not been  remedied or responded to by Seller
prior to Closing in a manner reasonably satisfactory to Buyer.

     "SEC" -- the  United  States  Securities  and  Exchange  Commission  or any
successor agency.

     "Tax" -- any tax (including any income tax, capital gains tax,  value-added
tax, sales and use tax, franchise tax, payroll tax,  withholding tax or property
tax), levy, assessment,  tariff, duty (including any customs duty),  deficiency,
franchise fee or payment,  payroll tax, utility tax, gross receipts tax or other
fee or payment,  and any related charge or amount (including any fine,  penalty,
interest or addition to tax),  imposed,  assessed or  collected  by or under the
authority of any Governmental Body.

     "Tax Return" -- any return  (including  any  information  return),  report,
statement,  schedule,  notice, form, or other document or information filed with
or submitted to, or required to be filed with or submitted to, any  Governmental
Body in connection with the determination, assessment, collection, or payment of
any Tax or in connection with the administration, implementation, or enforcement
of or compliance with any Legal Requirement relating to any Tax.

                                       8

<PAGE>

     "Threatened"  -- a claim,  dispute,  or other matter will be deemed to have
been  "Threatened"  if any demand or  statement  has been made in writing or any
notice has been given in writing, and Seller has Knowledge of the same.

     Section 1.2   Other Defined  Terms.  In  addition  to the terms  defined in
Section 1.1,  certain  other terms are defined  elsewhere  in this  Agreement as
indicated below and, whenever such terms are used in this Agreement,  they shall
have their respective defined meanings.

Term                                                            Section
----                                                            -------

Active Employees                                                10.1
Antitrust Authorities                                           6.3
Assumed Liabilities                                             2.2
Balance Sheet                                                   5.6(a)
Bill of Sale                                                    8.1
Buyer Indemnitees                                               13.1
Buyer's Pension Plan                                            10.5
Buyer Welfare Plans                                             10.7(a)
CERCLA                                                          5.14(e)
Citizens Marks                                                  6.4
Closing                                                         8.1
Closing Date                                                    8.1
Employee Plans                                                  5.13
Environmental Data                                              12.1(c)
Estimated Purchase Price                                        3.3(a)
Financial Statements                                            5.6
Purchase Price                                                  3.1
Retained Liabilities                                            2.3
Seller Indemnitees                                              13.2
Seller's Pension Plan                                           10.5
Seller's 401(k) Plan                                            10.6
Seller Welfare Plan                                             10.7
Transaction Taxes                                               11.3
Transferred Employee                                            10.1

                                       9

<PAGE>

                                   ARTICLE II
                                PURCHASE AND SALE

     Section 2.1  Purchase and Sale of Assets. Upon the terms and subject to the
conditions  contained  herein,  at the  Closing,  Seller  shall sell,  transfer,
assign,  convey  and  deliver  to Buyer,  and Buyer  shall  purchase  and accept
delivery from Seller, all of the Assets.

     Section 2.2  Assumed Liabilities. In further  consideration for the sale of
the Assets at the  Closing,  Buyer will  assume  and agree to pay,  perform  and
discharge when due, all  liabilities and  obligations,  of every kind or nature,
arising out of or relating to:

     (a) Seller's  ownership of the Assets and Seller's  conduct or operation of
the Business, prior to the Closing Date, other than the Retained Liabilities;

     (b) all  non-delinquent  trade  payables and other accrued  expenses of the
Business outstanding on the Closing Date, including the following:

     (i) electric, gas, telephone and other utility charges;

     (ii)  payroll  expenses,  payroll  taxes,  reimbursable  employee  business
expenses and accrued vacation time of the Transferred Employees;

     (iii)  accrued  non-delinquent  payment  obligations  under  the  Contracts
assigned to and assumed by Buyer at Closing; and

     (iv)  subject  to  Section  11.4,  Taxes  such as sales,  franchise,  gross
receipts and similar Taxes based upon revenues of the Business.

     (c) Buyer's  ownership or use of the Assets and the conduct or operation of
the Business by Buyer, in each case on and after the Closing Date, including all
liabilities,  responsibilities  and obligations  relating to or arising from the
following:

     (i)  Transferred  Employees  (except to the extent  otherwise  provided  in
Article X and except for any continuing obligations for any workers compensation
claims  where  the  basis of the  claim  occurred  prior to the  Closing  Date),
including any termination of any Transferred  Employee for any reason (including
constructive dismissal) and Buyer's hiring practices or decisions;

     (ii)  performance  of the Contracts  included among the Assets (except that
Buyer shall not assume any  liabilities or obligations for any breach or default
by, or  delinquent  payment  obligations  of,  Seller  under  any such  Contract
occurring or arising or accruing prior to the Closing Date);

     (iii)  customer  advances,  customer  deposits and  construction  advances,
unperformed   service   obligations,   Easement  relocation   obligations,   and
engineering  and  construction  required  to  complete  scheduled  construction,
construction work in progress,  and other capital expenditure  projects, in each
case  relating to the Business and  outstanding  on or arising after the Closing
Date;

                                       10

<PAGE>

     (iv) Future Regulatory Obligations;

     (v) Assumed Environmental Liabilities;

     (vi)  Transaction  Taxes  arising  out of the sale of the  Assets  to Buyer
hereunder;

     (vii)  Proceedings  based on  conduct,  actions,  facts,  circumstances  or
conditions  arising or occurring on or after the Closing  Date,  Proceedings  in
respect  of  Future  Regulatory   Obligations  regardless  of  when  filed,  and
Proceedings arising from or related to any other Assumed Liability; and

     (viii) the Buyer's IDRB Obligations.

     (4) the Proceedings  described in Schedule  2.2(d) as Assumed  Liabilities;
and

     (e) all Proceedings  involving Seller,  the Assets or the Business based on
conduct, actions, facts,  circumstances or conditions arising or occurring prior
to the Closing  Date that are pending or  Threatened  as of the Closing Date and
that are disclosed to Buyer by Seller after the Effective  Date but prior to the
Closing Date (except any such Proceedings  described as Retained  Liabilities on
Schedule 2.2(d) and any such  Proceedings  relating to the Retained  Liabilities
described in Sections 2.3(a),  (b), (c), (d), and (f)), provided that any Losses
incurred by Buyer in connection with any such individual Proceeding in excess of
$200,000  shall  be  Retained  Liabilities  and  Seller  shall be  obligated  to
indemnify  Buyer  pursuant to Section 13.1 (but subject to  limitations  on such
obligations  provided in Section 13.3) for such Losses  incurred by Buyer in the
amount of such excess;

The  liabilities,  responsibilities  and  obligations  to be  assumed  by  Buyer
pursuant to this  Section 2.2 are  hereinafter  collectively  referred to as the
"Assumed  Liabilities." Buyer hereby irrevocably and unconditionally  waives and
releases Seller from all Assumed  Liabilities and all liabilities or obligations
relating  to the  Business  or the Assets to the extent  arising  from events or
occurrences on or after the Closing Date or to the extent otherwise  relating to
the period commencing on the Closing Date,  including any liabilities created or
which arise by statute or common law, including CERCLA (it being understood that
this shall not  constitute a waiver and release of any claims arising out of the
contractual  relationships and  indemnification  arrangements  between Buyer and
Seller).  Notwithstanding anything in this Section 2.2 to the contrary, "Assumed
Liabilities" shall not include any liabilities,  responsibilities or obligations
expressly stated to be Retained Liabilities pursuant to Section 2.3.

     Section 2.3 Retained Liabilities. Buyer shall not assume and at the Closing
Seller  shall  retain  and pay,  perform  and  discharge  when  due,  all of the
liabilities  and   obligations   relating  to  or  arising  from  the  following
(collectively referred to herein as the "Retained Liabilities"):

     (a) all obligations of Seller under the IDRB Documents except to the extent
also included in Buyer's IDRB Obligations,  and any other indebtedness for money
borrowed  by Seller  (including  items due to  Seller's  Affiliates)  other than
payment  obligations  arising on or after the Closing  Date under any  equipment
lease listed in Part VII of Schedule 5.12 or under any line extension  Contracts
or similar construction  arrangements,  it being understood and agreed that such
leases,  Contracts and similar arrangements do not create indebtedness for money
borrowed;

     (b) Taxes of  Seller  based on income  and any motor  vehicle  registration
Taxes for periods prior to the year in which Closing occurs;

     (c) Excluded Assets;

     (d)  Non-Transferred  Employees,  the Seller's  Employee  Benefit Plans and
Employee  Plans  (except  to  the  extent  provided  in  Article  X  or  Section
2.2(b)(ii)) and any breach or default by, or payment obligations of, Seller with
respect to any  Transferred  Employee  occurring or arising or accruing prior to
the Closing Date (except to the extent any such payment  obligation  becomes the
responsibility  and obligation of Buyer in accordance  with Article X or Section
2.2(b)(ii));

                                       11


<PAGE>

     (e)  Proceedings  involving  Seller,  the Assets or the  Business  based on
conduct  (including  Seller's  performance under any Contract included among the
Assets),  action, facts,  circumstances or conditions arising or occurring prior
to the Closing Date including  Proceedings  described as Retained Liabilities in
Schedule  2.2(d),  but expressly  excluding any such  liabilities or obligations
relating to any Proceeding  described as Assumed  Liabilities in Schedule 2.2(d)
and any Proceeding relating to (x) Assumed  Liabilities  (subject to the proviso
set forth in Section 2.2(e) with respect to the Proceedings described in Section
2.2(e)),  (y) Future  Regulatory  Obligations and (z) Proceedings  affecting the
industries in which the Business competes; and

     (f) Retained Environmental Liabilities.

Seller hereby irrevocably and unconditionally waives and releases Buyer from all
Retained Liabilities including any liabilities created or which arise by statute
or common  law,  including  CERCLA  (it  being  understood  that this  shall not
constitute  a waiver and release of any claims  arising  out of the  contractual
relationships and indemnification arrangements between Buyer and Seller).

     Section 2.4  Condition on Assignment or Assumption of Contracts and Rights.
Anything in this Agreement to the contrary notwithstanding, this Agreement shall
not  constitute  an  agreement  to assign or assume any Contract or any claim or
right or any benefit arising  thereunder or resulting  therefrom if an attempted
assignment or assumption thereof,  without the Consent of a third party thereto,
would constitute a breach thereof. Any transfer or assignment to Buyer by Seller
of any property or property rights or any Contract which requires the Consent of
any third party shall be made subject to such Consent  being  obtained.  If such
Consent  is  not  obtained,  or if an  attempted  assignment  thereof  would  be
ineffective or would affect the rights of Seller  thereunder so that Buyer would
not in fact receive all such  rights,  Seller will  cooperate  with Buyer in any
arrangement  reasonably  designed to provide  for Buyer,  at Buyer's  cost,  the
benefits under any such Contract including, without limitation,  enforcement for
the  benefit  of Buyer of any and all  rights  of Seller  against a third  party
thereto  arising  out of the  breach  or  cancellation  by such  third  party or
otherwise  To the extent  that  Buyer  does  receive  the  benefits  of any such
Contract pursuant to the preceding  sentence,  such Contract shall be a Contract
deemed to have  been  assigned  or  transferred  to Buyer  pursuant  to  Section
2.2(c)(ii).

                                       12

<PAGE>

                                   ARTICLE III
                                 PURCHASE PRICE

     Section 3.1  Purchase Price.  Subject to the terms and  conditions  of this
Agreement,  the aggregate  purchase price for the Assets (the "Purchase  Price")
shall be an amount  equal to  $215,000,000  in cash,  subject  to  increase  for
certain  Mandated  Capital  Expenditures  (as such term is  defined  in  Section
6.1(a)(6))  in  accordance  with  Section 3.2,  and the  assumption  by Buyer at
Closing of the Assumed Liabilities.

     Section 3.2  Calculation  of Purchase  Price.  The Purchase  Price shall be
increased by the amount of Mandated Capital Expenditures made by Seller from and
after the Effective Date through the day immediately  preceding the Closing Date
and which are not included in the 2001 or 2002 Capital  Budget,  but only to the
extent that Seller did not have  Knowledge  of the need to incur the  particular
expenditures  comprising such Mandated Capital Expenditures at the time the 2002
Capital  Budget was adopted by the Board of Directors of Seller.  Such increase,
if applicable, shall be determined in accordance with the following:

     (a) The amount of Mandated Capital Expenditures by which the Purchase Price
is increased  shall be estimated by Seller in good faith based upon the relevant
account  balances  at the end of the month for which  Seller's  books are closed
next preceding the Closing Date, with such  adjustments as may be appropriate to
reflect changes in such account  balances  occurring  between such month-end and
the Closing Date. Any such estimated  amount shall be set forth in a certificate
of  Seller  delivered  to Buyer at least  five (5)  business  days  prior to the
Closing  Date,  which  certificate  shall set forth an estimate of the  Purchase
Price (the "Estimated  Purchase  Price"),  including the estimated amount of any
increase in the  Purchase  Price  pursuant  to this  Section  3.2,  and shall be
accompanied by reasonably detailed supporting documentation.

     (b) Within one hundred  twenty  (120) days after the Closing  Date,  Seller
shall  notify  Buyer of the actual  amount as  recorded  on  Seller's  books and
records  for  the  Business  of any  Mandated  Capital  Expenditures  that  were
estimated in arriving at the  Estimated  Purchase  Price.  Buyer may dispute any
amount so determined by Seller,  by written notice to Seller within fifteen (15)
days after  receipt of Seller's  notice.  If Buyer does not so dispute any item,
the party owing the  difference  between the  Estimated  Purchase  Price and the
Purchase Price shall pay such difference to the other party within ten (10) days
after the expiration of such fifteen (15) day period, plus interest at 8.25% per
annum on such amount from the Closing  Date to (but not  including)  the date of
payment.  If Buyer disputes the actual amount of any item, the undisputed amount
plus  interest at 8.25% per annum on such  amount from the Closing  Date to (but
not including) the date of payment shall be paid promptly by the owing party. If
such  dispute  cannot be  resolved  within  sixty  (60) days after the giving of
Buyer's notice that there exists a disputed amount,  then an independent auditor
mutually  agreeable to Buyer and Seller shall,  upon written  notice from either
Buyer or Seller,  resolve such dispute  within sixty (60) days after  receipt of
such  notice.  The  fees  and  expenses  of such  independent  auditor  shall be
allocated  between  Buyer  and  Seller so that  Seller's  share of such fees and
expenses  shall be in the same  proportion  that the  aggregate  amount  of such
remaining  disputed  amounts  so  submitted  by Buyer to such  auditor  that are
successfully  disputed by Buyer (as finally determined by such auditor) bears to
the total  amount of such  remaining  disputed  amounts so submitted by Buyer to
such auditor. Any determination by such independent auditor shall be binding and
conclusive upon the parties without  further appeal  therefrom.  Within ten (10)
days after the independent  auditor shall have resolved such dispute,  the party
owing the determined amount shall pay such determined amount to the other party,
plus interest at 8.25% per annum on such determined amount from the Closing Date
to (but not including) the date of payment.

                                       13

<PAGE>

                                   ARTICLE IV
                     REPRESENTATIONS AND WARRANTIES OF BUYER

     Section  4.1  Organization,   Existence  and  Qualification.   Buyer  is  a
cooperative  association  duly  incorporated,  validly  existing,  and  in  good
standing under the laws of the State of Hawaii,  with full  corporate  power and
authority  to conduct its business as it is now being  conducted,  to own or use
the  properties  and assets  that it  purports  to own or use,  to  perform  its
obligations  under all  Contracts  to which it is a party,  and to  execute  and
deliver this Agreement and the Related Documents to which Buyer is a party.

     Section 4.2  Authority Relative to this Agreement and Binding  Effect.  The
execution,  delivery and performance of this Agreement and the Related Documents
by Buyer  have  been  duly  authorized  by  Buyer's  Board of  Directors,  which
constitutes  all necessary  corporate  action  required on the part of Buyer for
such authorizations.  The execution,  delivery and performance of this Agreement
and the Related  Documents by Buyer will not result in (a) any conflict  with or
breach or violation of or default under the  Organizational  Documents of Buyer,
or (b) a  violation  or breach of any term or  provision  of,  or  constitute  a
default or accelerate the performance  required under, any indenture,  mortgage,
deed of trust, security agreement, loan agreement, or Contract to which Buyer is
a party or by which its assets are bound, or (c) a violation of any Order of any
Governmental  Body,  except for such exceptions to the foregoing clauses (b) and
(c) that,  individually or in the aggregate,  would not be reasonably  likely to
have a material  adverse effect on Buyer.  This Agreement  constitutes,  and the
Related  Documents  to be executed by Buyer when  executed  and  delivered  will
constitute, valid and binding obligations of Buyer, enforceable against Buyer in
accordance with their respective  terms,  except as such  enforceability  may be
limited by (i) bankruptcy or similar laws from time to time in effect  affecting
the  enforcement  of creditors'  rights  generally or (ii) the  availability  of
equitable remedies generally.

     Section 4.3  Governmental Approvals. Except for those Consents described in
Schedule  5.3 to the extent (but only to the  extent)  applicable  to Buyer,  no
Consent  of any  Governmental  Body is  required  to be  obtained  by  Buyer  in
connection  with the  execution  and delivery by Buyer of this  Agreement or the
Related  Documents or the consummation of the transactions  contemplated by this
Agreement  or the  Related  Documents.  Buyer has no  knowledge  of any facts or
circumstances  relating  to Buyer or its  Affiliates  that  reasonably  would be
likely to preclude or prolong the receipt of such required Consents.

     Section  4.4   Availability of Funds.  Buyer has  available,  and will have
available on the Closing Date,  sufficient  funds to enable it to consummate the
transactions  contemplated  by  this  Agreement.  Buyer  has  received,  and has
provided to Seller a true and complete copy of, that certain  commitment  letter
dated  as of  January  7,  2002 for the  Purchase  Price,  including  reasonable
flexibility  to account for  increases in the Purchase  Price,  duly executed by
Buyer and the National Rural Utilities Cooperative Finance Corporation.

     Section 4.5  Filings.  No statement furnished by Buyer for inclusion in any
filing with any Governmental Body in connection with obtaining such Governmental
Body's Consent for the  consummation  of the  transactions  contemplated by this
Agreement  will contain,  as of the date such  information  is so provided,  any
untrue  statement of a material fact or will omit to state,  as of the date such
information  is so provided,  any  material  fact which is necessary to make the
statements  contained  therein,  in light of the circumstances  under which they
were made, not misleading.

                                       14

<PAGE>

     Section  4.6   Brokers.   Other  than  the   investment   banking  firm  of
Christenberry  Collet & Company,  Inc.,  no broker or finder has acted for or on
behalf of Buyer or any Affiliate of Buyer in connection  with this  Agreement or
the transactions contemplated by this Agreement. No broker or finder is entitled
to any  brokerage  or finder's  fee, or to any  commission,  based in any way on
agreements,  arrangements or understandings made by or on behalf of Buyer or any
Affiliate of Buyer for which Seller or any  Affiliate of Seller has or will have
any liability or obligations (contingent or otherwise).  Buyer acknowledges full
responsibility for the fees owed to Christenberry Collet & Company, Inc.

     Section  4.7  Independent  Investigation.  Buyer,  through  its  agents  or
otherwise,  is knowledgeable  about the businesses  engaged in by Seller through
its  Kauai  Electric  division  and of the  usual  and  customary  practices  of
companies engaged in businesses similar to such businesses and has had access to
the Assets,  the officers and  employees of Seller,  and the books,  records and
files of Seller relating to the Business and the Assets.  In making the decision
to enter into this  Agreement and to consummate  the  transactions  contemplated
hereby,  Buyer  has  relied  solely  on the  basis  of its own  independent  due
diligence  investigation  of the  Business  and  upon  the  representations  and
warranties made in Article V.  Accordingly,  Buyer  acknowledges that Seller has
not made, and Seller is expressly disclaiming and negating any representation or
warranty  (other  than those  express  representations  and  warranties  made in
Article V), express,  implied, at common law, by statute or otherwise,  relating
to the Business.

     Section 4.8  Public Utility Holding Company Status;  Regulation as a Public
Utility.  Neither  Buyer nor any of its  Affiliates  is a "holding  company",  a
"subsidiary"  of a "public  utility  company" or of a "holding  company,"  or an
"affiliate" of a "public utility company" or of a "holding  company," within the
meaning of such terms in PUHCA.

     Section 4.9  Buyer's Financial Statements.  As Buyer is not presently doing
business,  and has done no  business  prior  to the  Effective  Date,  it has no
historical  financial  statements.  Buyer  agrees to deliver to Seller pro forma
financial  statements of Buyer, based on the Financial Statements and reflecting
Buyer's financing for the acquisition contemplated by this Agreement,  within 30
days after the Effective Date.

     Section 4.10 Buyer's Insurance. At least ten (10) days prior to the Closing
Date,  Buyer will deliver to Seller a Schedule  that lists the Buyer's  policies
and  contracts  in  effect  as of the date  hereof  for  casualty  and  property
insurance  covering its assets and properties and the operation of its business,
together with the risks insured against, coverage limits, deductible amounts and
carriers.

                                       15

<PAGE>

                                    ARTICLE V
                    REPRESENTATIONS AND WARRANTIES OF SELLER

     Section  5.1  Organization,   Existence  and  Qualification.  Seller  is  a
corporation duly incorporated,  validly existing, and in good standing under the
laws of the State of  Delaware,  with full  corporate  power  and  authority  to
conduct the Business as it is now being conducted,  to own or use the Assets, to
perform  its  obligations  under all  Contracts  to which it is a party,  and to
execute and deliver this Agreement and the Related  Documents to which Seller is
a party. Seller is duly qualified to do business as a foreign corporation and is
in good  standing  under the laws of the State of Hawaii and each other state in
which the failure to be so qualified or in good  standing  would have a Material
Adverse Effect.

     Section 5.2  Authority Relative to this Agreement and Binding  Effect.  The
execution,  delivery and performance of this Agreement and the Related Documents
by Seller have been duly authorized by all requisite corporate action. Except as
set forth in Schedule  5.2,  the  execution,  delivery and  performance  of this
Agreement  and the  Related  Documents  by  Seller  will not  result  in (a) any
conflict  with or breach or  violation  of or default  under the  Organizational
Documents  of Seller,  (b) to Seller's  Knowledge,  a violation or breach of any
term or provision  of, or  constitute a default or  accelerate  the  performance
required under, any indenture, mortgage, deed of trust, security agreement, loan
agreement,  or Material  Contract to which  Seller is a party or by which any of
the Assets are bound, or (c) a violation of any Order of any Governmental  Body,
except  for  such  exceptions  to  the  foregoing  clauses  (b)  and  (c)  that,
individually  or in the  aggregate,  would  not be  reasonably  likely to have a
Material Adverse Effect or that will be cured,  waived or otherwise  remedied on
or prior  to the  Closing  Date.  This  Agreement  constitutes  and the  Related
Documents to be executed by Seller when executed and delivered  will  constitute
valid  and  binding  obligations  of  Seller,   enforceable  against  Seller  in
accordance  with their  terms,  except as  enforceability  may be limited by (i)
bankruptcy or similar laws from time to time in effect affecting the enforcement
of creditors'  rights generally or (ii) the  availability of equitable  remedies
generally.

     Section 5.3  Governmental and Other Required Consents.  Except as set forth
in Schedule 5.3, no Consent of any Governmental Body or third Person is required
to be obtained by Seller in connection with the execution and delivery by Seller
of this Agreement or the Related  Documents or the consummation by Seller of the
transactions contemplated by this Agreement or the Related Documents, other than
(i) any Consent the failure of which to obtain would not be reasonably likely to
have a Material  Adverse Effect and (ii) any Consent that is obtained or made on
or prior to the Closing Date.

     Section 5.4  Public Utility Holding Company Status;  Regulation as a Public
Utility.  Seller is a "public  utility  company"  (as such  term is  defined  in
PUHCA).  Seller is not a "holding company",  a "subsidiary" of a "public utility
company,"  or an  "affiliate"  of a "public  utility  company"  or of a "holding
company," within the meaning of such terms in PUHCA.

     Section 5.5  Title to Assets; Liens. Seller has good and indefeasible title
to the Assets  reflected in the  Financial  Statements  except those that in the
aggregate are not material to the Business and those  disposed of since the date
of the  Financial  Statements  in the  ordinary  course of business or otherwise
disposed of in accordance with this Agreement. None of the Assets are subject to
any  Encumbrance  except (i)  Encumbrances  described  in Schedule  5.5 and (ii)
Permitted Encumbrances. Schedule 5.5 lists each material parcel of Real Property
owned in fee simple that is a part of the Assets. To Seller's Knowledge,  except
as described on Schedule 5.5,  Seller owns or possesses all Easements  necessary
to conduct the Business as now being  conducted  without any known conflict with
the rights of others,  in each case except to the extent that the failure to own
or possess  such  Easements  would not have a Material  Adverse  Effect.  Seller
enjoys  peaceful and  undisturbed  possession  under all material  real property
leases included in the Assets,  and to the Knowledge of Seller,  all such leases
are valid and subsisting and in full force and effect.


                                       16

<PAGE>

     Section 5.6  Financial Statements.

     (a) Schedule 5.6(a) sets forth the unaudited proforma balance sheet for the
Business as of December 31, 2001 (the "Balance  Sheet") and  unaudited  proforma
income statement of the Business for the twelve-month  period ended December 31,
2001 (collectively, the "Financial Statements"). Except as set forth in Schedule
5.6(a),  the  Financial  Statements  have been  prepared  on a pre-tax  basis in
accordance,  in all material  respects,  with GAAP applied on a basis consistent
with prior  periods.  To the  Knowledge of Seller and except as set forth in the
notes to the  Financial  Statements,  the Balance Sheet  presents  fairly in all
material respects the financial condition of the Business as of its date and the
income  statement  included in the Financial  Statements  presents fairly in all
material  respects  the results of  operations  of the  Business for the periods
covered  thereby.  The books and  records  of Seller  from  which the  Financial
Statements were prepared were complete and accurate in all material  respects at
the time of such preparation.

     (b) To the  Knowledge of Seller,  as of the  Effective  Date,  there are no
Liabilities  except for  Liabilities  (i) reflected in the Balance  Sheet,  (ii)
arising under the Existing Loan Documents,  (iii) listed in Schedule 5.6(b),  or
(iv) which  individually or in the aggregate are not reasonably likely to result
in a  Material  Adverse  Effect.  As used  in  this  Section  5.6(b),  the  term
"Liabilities"  shall  only mean  claims of  creditors  and  Governmental  Bodies
against Seller arising out of activities,  operations or  transactions of Seller
relating to the Business  occurring  before the  Effective  Date which have been
Threatened or resulted in a Proceeding  against  Seller and that have become due
or accrued or could  reasonably be expected to become due or accrued  within the
twelve-month  period following the Effective Date, but excluding any Liabilities
under Legal Requirements,  Orders and Contracts where Seller is not currently in
material violation of or default under any provision thereof.

     Section 5.7   Compliance  with Legal  Requirements;  Governmental  Permits.
Except as set forth in Schedule 5.7, to the  Knowledge of Seller:  (a) Seller is
not in violation of any Legal  Requirement or Order that is applicable to it, to
the conduct or operation of the  Business,  or to the ownership or use of any of
the Assets, other than such violations,  if any, which are not,  individually or
in the aggregate,  reasonably likely to have a Material Adverse Effect;  and (b)
Seller possesses all permits,  licenses,  and  authorizations  from Governmental
Bodies required by any applicable Legal Requirement or Order necessary to permit
the  operation  of the  Business  in the manner in which it is  currently  being
conducted  by Seller,  except  where the  failure to  possess  any such  permit,
license  or  authorization  is not  reasonably  likely to  result in a  Material
Adverse Effect.

     Section 5.8  Legal Proceedings; Outstanding Orders.  Except as set forth in
Schedule  5.8,  there is no pending or Threatened  Proceeding  (a) that has been
commenced  against Seller that is reasonably  likely to have a Material  Adverse
Effect or (b) as of the Effective  Date, that  challenges,  or that may have the
effect of preventing,  delaying,  making illegal, or otherwise interfering with,
the transactions contemplated hereby. Except as disclosed in Schedule 5.8, there
are currently no outstanding  Orders against Seller which relate to or arise out
of the conduct of the Business or the  ownership,  condition or operation of the
Business  or the Assets  (other than any Order  relating  to rates,  tariffs and
similar matters  arising in the ordinary course of business) which  individually
or in the aggregate would have a Material Adverse Effect.

     Section 5.9  Taxes.  Seller has filed all United States federal,  state and
local  income  Tax  Returns  required  to be filed by  Seller  or  requests  for
extensions to file such Tax Returns have been timely filed,  and Seller has paid
and discharged or made adequate  provision for all Taxes except where failure to
so file, pay, discharge or make adequate provision for are not,  individually or
in the aggregate, reasonably likely to have a Material Adverse Effect. There are
no pending  audits or other  examinations  relating to any Tax matters except as
set forth in  Schedule  5.9.  There are no Tax  liens on the  Assets.  As of the
Effective Date,  Seller has not granted any waiver of any statute of limitations
with  respect to, or any  extension of a period for the  assessment  of, any Tax
except as set forth in Schedule 5.9.

     Section  5.10  Intellectual  Property.  Schedule  5.10  lists all  patents,
trademarks,  service  marks  and  copyrights  used  or held  for  use by  Seller
primarily in the operation of the  Business.  Seller has no Knowledge of (i) any
infringement or claimed infringement by Seller of any patent, trademark, service
mark or copyright of others or (ii) any  infringement of any patent,  trademark,
service mark or  copyright  owned by or under  license to Seller  except for any
such  infringements  of the type  described  in clause (i) or (ii) that are not,
individually or in the aggregate,  reasonably  likely to have a Material Adverse
Effect.

     Section 5.11  Personal Property.  Except for normal wear and tear, and with
such exceptions as are not, individually or in the aggregate,  reasonably likely
to have a Material  Adverse Effect,  the tangible Assets are in normal operating
condition and in a state of reasonable maintenance and repair.


                                       17

<PAGE>

     Section 5.12  Material Contracts;  Existing Loan  Documents.  Schedule 5.12
contains,  to Seller's  Knowledge,  a complete  and correct  list as of the date
hereof of all  Material  Contracts  (other  than line  extension  Contracts  and
similar construction  arrangements),  including all Existing Loan Documents.  To
Seller's  Knowledge,  there  are no  defaults  under  any such  Contracts  that,
individually or in the aggregate, will have a Material Adverse Effect. Except as
set forth in Schedule 5.12,  Seller is not obligated under any Contract relating
to the Business or the Assets with respect to  industrial  development  bonds or
other  obligations  with respect to which the interest  thereon is excluded from
gross income of the holder for federal or state income tax purposes.

     Section 5.13  Employee Benefit Matters.

     (a) Schedule 5.13 lists (i) each  "Employee  Benefit Plan," as such term is
defined in Section 3(3) of ERISA, which is covered by any provision of ERISA and
which is maintained by Seller for the benefit of the Active Employees; (ii) each
other material fringe benefit plan, policy or arrangement  currently  maintained
by Seller for the  benefit  of Active  Employees  which  provides  for  pension,
deferred  compensation,  bonuses,  severance,  employee  insurance  coverage  or
similar  employee  benefits  (collectively,  "Employee  Plans");  and (iii) each
collective   bargaining,   union  or  other  employee   association   agreement,
employment,    managerial   advisory,   and   consulting   agreement,   employee
confidentiality  agreement,  and all other  material  agreements,  policies,  or
arrangements  maintained  by Seller  for the Active  Employees.  Seller has made
available to Buyer  copies,  which were  accurate and complete as of the date so
made  available,  of  all  such  documents  and  (if  applicable)  summary  plan
descriptions with respect to such plans, agreements and arrangements, or summary
description(s)  of any such plans,  agreements or arrangements  not otherwise in
writing.

     (b) Seller's  Pension Plan and Seller's  401(k) Plan are the only  Employee
Benefit  Plans which are intended to be qualified  under  Section  401(a) of the
IRC.

     (c) To the  Knowledge  of  Seller,  each  Employee  Benefit  Plan  has been
established  and  administered  in all material  respects in accordance with the
material terms of ERISA and the applicable provisions of the IRC.

     Section 5.14  Environmental Matters.

     (a) Except as listed in Schedule 5.14, since December 31, 1996,  Seller has
not  received  a written  notice  from a  Governmental  Body  that  Seller is in
violation of any  Environmental  Law arising out of Seller's  ownership,  use or
operation  of the  Assets  or the  operation  of the  Business,  except  for any
violation not reasonably likely to result in a Material Adverse Effect.

     (b) Except as listed in Schedule 5.14, there are no Proceedings  pending or
Threatened  with  respect to Seller's  compliance  with  Environmental  Laws and
relating to the Business or the Assets.

     (c) Except as listed in Schedule 5.14, since December 31, 1996,  Seller has
not received any written notice from any Governmental  Body that Seller does not
have all certificates,  permits and authorizations required by any Environmental
Law for Seller's  ownership,  use or operation of the Assets or the operation of
the Business (other than any such  environmental  permit the absence of which is
not reasonably likely to result in a Material Adverse Effect).

     (d)  Except  as set forth in  Schedule  5.14,  to  Seller's  Knowledge,  no
environmental  remediation  of any  Release is  occurring  on any Real  Property
included in the Assets nor has Seller issued a request for proposal or otherwise
asked  an  environmental  remediation  contractor  to begin  plans  for any such
environmental remediation.

     (e) Except as set forth in Schedule 5.14,  none of the Real Property is (i)
situated in a federal "Superfund" site or, to Seller's Knowledge, in any federal
"Superfund" study area designated under the federal Comprehensive  Environmental
Response,  Compensation  and  Liability  Act  ("CERCLA"),  or (ii)  to  Seller's
Knowledge, situated in any site or study area designated under any state statute
comparable to CERCLA.

     Section 5.15  No Material  Adverse Change.  Except as set forth in Schedule
5.15,  between the date of the Balance Sheet and the Effective Date, no Material
Adverse  Effect has occurred.  Except for actions  taken in connection  with the
contemplated  sale of the Business and this  Agreement,  between the date of the
Balance  Sheet and the  Effective  Date,  the  Business  has been  conducted  in
substantially the same manner in which it has been previously conducted.


                                       18

<PAGE>

     Section 5.16  State Regulatory Matters.

     (a) To Seller's  Knowledge,  Schedule  5.16  reflects all of the  currently
pending rate filings  relating to the Business  heretofore made by Seller before
state regulatory commissions and each other currently pending Proceeding of such
state regulatory commission that is reasonably likely to have a Material Adverse
Effect.

     (b)  To  Seller's  Knowledge,  all  currently  effective  material  filings
relating  to the  Business  heretofore  made by  Seller  with  state  regulatory
commissions  were made in compliance  with Legal  Requirements  then  applicable
thereto  and the  information  contained  therein  was true and  correct  in all
material respects as of the respective dates of such filings.

     Section 5.17  Brokers.  Except for Morgan  Stanley & Co.  Incorporated,  no
broker or finder has acted for or on behalf of Seller or any Affiliate of Seller
in  connection  with this  Agreement or the  transactions  contemplated  by this
Agreement.  No broker or finder is entitled to any brokerage or finder's fee, or
to  any   commission,   based  in  any  way  on  agreements,   arrangements   or
understandings  made by or on behalf of Seller or any  Affiliate  of Seller  for
which  Buyer has or will have any  liabilities  or  obligations  (contingent  or
otherwise).

     Section 5.18  Disclaimer.  Except as otherwise  expressly set forth in this
Article V, Seller expressly  disclaims any  representations or warranties of any
kind or nature, express or implied, as to the condition, value or quality of the
assets or  properties  currently  or formerly  used,  operated,  owned,  leased,
controlled, possessed, occupied or maintained by Seller, and Seller SPECIFICALLY
DISCLAIMS ANY REPRESENTATION OR WARRANTY OF MERCHANTABILITY,  USAGE, SUITABILITY
OR FITNESS FOR ANY PARTICULAR PURPOSE WITH RESPECT TO SUCH ASSETS OR PROPERTIES,
OR ANY PART THEREOF,  OR AS TO THE  WORKMANSHIP  THEREOF,  OR THE ABSENCE OF ANY
DEFECTS THEREIN,  WHETHER LATENT OR PATENT, IT BEING UNDERSTOOD THAT SUCH ASSETS
AND PROPERTIES ARE BEING ACQUIRED, "AS IS, WHERE IS" ON THE CLOSING DATE, AND IN
THEIR  PRESENT  CONDITION,  WITH ALL FAULTS AND THAT BUYER SHALL RELY ON ITS OWN
EXAMINATION AND INVESTIGATION THEREOF.

                                       19

<PAGE>

                                   ARTICLE VI
                                    COVENANTS

     Section 6.1  Covenants of Seller.  Seller agrees to observe and perform the
following covenants and agreements:

     (a) Conduct of the Business Prior to the Closing Date.  With respect to the
Business,  except (i) as contemplated in this Agreement or in Schedule 6.1, (ii)
as required by any Legal  Requirement  or Order or (iii) as otherwise  expressly
consented to in writing by Buyer which consent will not be unreasonably withheld
or delayed, prior to the Closing, Seller will, with respect to the Business:

          (1) Not make or permit any  material  change in the general  nature of
     the Business;

          (2)  Maintain  the  Business  in the  ordinary  course of  business in
     accordance with prudent business judgment and consistent with past practice
     and policy, and maintain the Assets in their present condition,  reasonable
     wear and tear excepted,  subject to  retirements in the ordinary  course of
     business;

          (3) Not enter into any material transaction or Material Contract other
     than in the ordinary course of business;

          (4) Not purchase,  sell,  lease,  dispose of or otherwise  transfer or
     make any Contract for the purchase,  sale,  lease,  disposition or transfer
     of, or  subject  to  Encumbrance,  any  material  Assets  other than in the
     ordinary course of business;

          (5) Not hire any new  employee  unless  such  employee  is a bona fide
     replacement  for  either a  presently-filled  position  or a vacancy  in an
     authorized position with the Business;

          (6)  Continue to make  capital  expenditures  necessary  to  maintain,
     operate or repair the Assets or to replace  Assets  damaged or destroyed by
     casualty loss, and to make Mandated Capital  Expenditures,  in each case in
     the  ordinary  course of  business  in  accordance  with  prudent  business
     judgment and consistent  with past practice and policy,  including  capital
     expenditures   required   to  (i)  provide   service  to  ensure   adequate
     transmission or distribution  facilities under power supply contracts,  and
     (ii) fulfill  requirements  under the Certificate of Public Convenience and
     Necessity.  Notwithstanding  the foregoing,  Seller will not be required to
     make any capital  expenditures  relating to any capital project that is not
     included in the  applicable  Capital  Budget unless such  expenditures  are
     required to comply with either a tariff for the  Business or a mandate by a
     Governmental Body (in either case,  "Mandated Capital  Expenditures").  For
     purposes  of  clarification,   Mandated  Capital  Expenditures  also  shall
     include, without duplication,  expenditures to purchase materials, supplies
     and other  capital  items that are dedicated to, but as of Closing have not
     been used in, mandated capital projects and other expenditures  relating to
     mandated  capital projects that are recorded as an asset of the Business as
     of  the  Closing  Date  to  the  extent  such   expenditures  are  normally
     recoverable through rates,  including all such expenditures recorded in the
     Preliminary  Survey and  Investigation  account of the Business.  If Seller
     becomes obligated to incur any Mandated Capital  Expenditures,  then Seller
     shall  provide  to Buyer a  written  description  of the  mandated  capital
     project to which the  expenditures  relate.  Seller  also shall  deliver to
     Buyer a copy of the 2002 Capital  Budget  promptly  after it is approved by
     the Board of  Directors  of Seller.  If at  Closing  Seller's  actual  2002
     capital expenditures for the Business through the day immediately preceding
     the Closing  Date are less than the capital  expenditures  proposed in such
     approved fiscal year 2002 Capital Budget,  then Seller nonetheless shall be
     deemed to have  complied  with this  Section  6.1(a)(6) if such actual 2002
     capital expenditures  reasonably  approximate an appropriate  proportion of
     such approved 2002 budgeted capital  expenditures in light of the number of
     months in 2002 that have  passed  prior to the  Closing  Date,  the project
     timelines  used by Seller to plan for and to complete the various  approved
     capital projects,  and other facts and circumstances  relating to when such
     approved capital  expenditures  should  reasonably be expected to have been
     incurred during the 2002 fiscal year;

                                       20

<PAGE>

          (7) Comply in all material respects with all applicable material Legal
     Requirements and Orders, including without limitation those relating to the
     filing of  reports  and the  payment  of Taxes due to be paid  prior to the
     Closing, other than those contested in good faith;

          (8) Except in the ordinary  course of business or in  accordance  with
     the terms of any existing Contract,  Employee Plan or collective bargaining
     agreement,  not grant any material increase or change in total compensation
     or benefits (taken as a whole) to any of the Transferred Employees or enter
     into any employment, severance or similar Contract with any Person or amend
     any such existing  Contracts to increase any amounts payable  thereunder or
     benefits provided  thereunder,  provided that Seller agrees to consult with
     Buyer  prior to  granting  any  increase in the  aggregate  recurring  cash
     compensation of the non-union  Transferred Employees by an amount in excess
     of three percent (3%) in any year;

          (9) Not terminate any Material Contract except in the case of a breach
     of such Contract by the other party thereto; or

          (10) Not create,  incur, assume,  guarantee or otherwise become liable
     with  respect  to any  indebtedness  for money  borrowed  other than in the
     ordinary  course of business (it being  understood and agreed that customer
     advances,  customer  deposits  and  construction  advances  do  not  create
     indebtedness  for money  borrowed),  except in connection  with  additional
     borrowings  under the Existing Loan  Documents and any renewal,  extension,
     rearrangement or refunding of any  indebtedness  created under or evidenced
     by the Existing  Loan  Documents,  and except  pursuant to advances made by
     Seller to the Business.

     (b) Access to the Business, Assets and Records; Updating Information.

          (1) From and after the date hereof and until the Closing Date,  Seller
     shall permit Buyer and its  Representatives  to have, on reasonable  notice
     and at reasonable times, reasonable access to all books, papers and records
     to the extent  that they  reasonably  relate to the  ownership,  operation,
     obligations  and  liabilities  of the  Business  and the Assets;  provided,
     however,  that  such  access  shall  not  unreasonably  interfere  with the
     operation of the Business; and provided,  further, that Buyer hereby agrees
     to defend,  indemnify and hold harmless  Seller from and against all Losses
     arising  out of or  relating to Buyer's  access  provided  pursuant to this
     Section 6.1(b)(1).  Without limiting the application of the Confidentiality
     Agreement, all documents or information furnished by Seller hereunder shall
     be subject to the Confidentiality Agreement.

          (2)  Seller  will  notify  Buyer as  promptly  as  practicable  of any
     significant  change in the ordinary course of business for the Business and
     of any material Proceedings  (Threatened or pending) involving or affecting
     the Business or the transactions  contemplated by this Agreement, and shall
     use reasonable efforts to keep Buyer fully informed of such events.

     (c) Consents. Seller will use its commercially reasonable efforts to obtain
all necessary  Consents from any Person required to consummate the  transactions
contemplated  hereby,  including  the Consent of any Person  required  under any
Legal Requirement or Contract applicable to the Business.

                                       21

<PAGE>

     Section 6.2  Covenants  of Buyer.  Buyer  agrees to observe and perform the
following covenants and agreements:

          (a) Consents.  Buyer will use its commercially  reasonable  efforts to
     assist Seller in obtaining all necessary  Consents from any Person required
     to consummate the transactions  contemplated hereby,  including the Consent
     of any Person required under any Legal  Requirement or Contract  applicable
     to the Business, and will use its commercially reasonable efforts to obtain
     all Consents listed in Schedule 4.2 or Schedule 4.3.

          (b) Access to Information.  After Closing,  Buyer will, and will cause
     its  Representatives to, afford to Seller,  including its  Representatives,
     reasonable access to all books, records, files and documents related to the
     Business in order to permit  Seller to prepare and file its tax returns and
     to prepare for and participate in any  investigation  with respect thereto,
     to prepare for and  participate in any other  investigation  and defend any
     Proceedings  relating  to or  involving  Seller or the  Business  for which
     Seller  may  be  responsible,  to  discharge  its  obligations  under  this
     Agreement and the other  Related  Documents to which its is a party and for
     other reasonable  purposes and will afford Seller reasonable  assistance in
     connection  therewith.  Buyer will cause such records to be maintained  for
     not less than seven  years from the  Closing  Date and will not  dispose of
     such records  without first  offering in writing to deliver them to Seller;
     provided,  however, that in the event that Buyer transfers all or a portion
     of the Business to any third party  during such period,  Buyer may transfer
     to such  third  party all or a portion  of the  books,  records,  files and
     documents related thereof,  provided such third party transferee  expressly
     assumes in writing the obligations of Buyer under this Section  6.2(b).  In
     addition,  on and after the Closing Date, at Seller's request,  Buyer shall
     make available to Seller and its Affiliates, employees, representatives and
     agents, those employees of Buyer requested by Seller in connection with any
     Proceeding,  including  to  provide  testimony,  to be  deposed,  to act as
     witnesses and to assist counsel; provided, however, that (x) such access to
     such employees shall not unreasonably  interfere with the normal conduct of
     the  operations  of Buyer  and (y)  Seller  shall  reimburse  Buyer for the
     allocated  time  charges  of such  employees  and the  out-of-pocket  costs
     reasonably incurred by Buyer in making such employees available to Seller.

          (c) Citizens  Guarantees and Surety  Instruments.  Buyer shall use its
     reasonable efforts to assist Seller in obtaining full and complete releases
     on the guarantees,  letters of credit,  bonds and other surety  instruments
     listed in Schedule 6.2(c). For purposes of this Section 6.2(c),  reasonable
     efforts shall include: (i) Buyer's assumption of the Contracts on the terms
     set forth in this Agreement; and (ii) an obligation on the part of Buyer to
     provide a guaranty,  letter of credit,  bond or other surety  instrument at
     Closing to the extent required by any Contract  assumed by Buyer at Closing
     and, in general,  an equivalent surety instrument to be substituted for any
     surety  instrument  provided by Citizens to any  beneficiary  in connection
     with the Business.

          (d) Other Covenants of Buyer.  Buyer agrees to submit to regulation by
     the Hawaii  Public  Utilities  Commission  to the same extent as such state
     regulatory  commission  currently  regulates  Seller in connection with the
     Business,  it being agreed that this covenant  shall  terminate and have no
     further effect upon Closing. Buyer also agrees to make no filings with such
     state regulatory commission or take any other action in connection with any
     Proceeding or Legal Requirement  relating to any other businesses conducted
     by Seller  that also are  subject to  regulation  by such state  regulatory
     commission.

                                       22

<PAGE>

          Section 6.3  Governmental Filings.

     (a) HSR Act Filing.  Buyer and Seller shall comply promptly with the notice
and  reporting  requirements  of the HSR Act.  Buyer  and  Seller  shall  comply
substantially with any additional  requests for information,  including requests
for  production  of documents  and  production  of witnesses  for  interviews or
depositions,  made by the Antitrust  Division of the United States Department of
Justice,  the  United  States  Federal  Trade  Commission  or the  antitrust  or
competition   law  authorities  of  any  other   jurisdiction   (the  "Antitrust
Authorities"). Buyer shall exercise its best efforts, and Seller shall cooperate
fully with Buyer, to prevent the entry in any Proceeding brought by an Antitrust
Authority or any Governmental Body which would prohibit,  make unlawful or delay
the  consummation of the  transactions  contemplated  by this Agreement.  Seller
shall not oppose any efforts of Buyer,  including  Buyer's proffer of consent to
any Order, to complete lawfully the transactions contemplated by this Agreement,
and shall  cooperate in good faith with Buyer and the Antitrust  Authorities  to
the same effect.

     (b) Other Regulatory Filings.  Buyer and Seller will, as soon as reasonably
practicable   following  the  Effective   Date,   prepare  and  file  with  each
Governmental  Body,  including  a  joint  application  with  the  Hawaii  Public
Utilities  Commission,  requests for such  Consents as may be necessary  for the
transfer of the Assets (including the transfer of Seller's franchise relating to
the Business) in accordance with the terms of this  Agreement.  Buyer and Seller
will  diligently  pursue such  Consents  and will  cooperate  with each other in
seeking such  Consents.  To this end, the parties  agree to make  available  the
personnel  and other  resources of their  respective  organizations  in order to
accomplish actions reasonably required by them to obtain all such Consents.

     Section 6.4  Citizens Marks. Buyer acknowledges and agrees with Seller that
Seller has the absolute and  exclusive  proprietary  right to all names,  marks,
trade names, trademarks and corporate symbols and logos incorporating "Citizens"
and "CZN"  (collectively and together with all other names,  marks, trade names,
trademarks  and  corporate  symbols  and  logos  owned by  Seller  or any of its
Affiliates,  the  "Citizens  Marks"),  all  rights  to  which  and the  goodwill
represented thereby and pertaining thereto are being retained by Seller.  Within
one hundred  eighty (180) days after the Closing  Date,  Buyer shall cease using
any Citizens  Mark and shall remove from the Assets any and all Citizens  Marks.
Thereafter, Buyer shall not use any Citizens Mark in connection with the sale of
any products or services or otherwise in the conduct of its  businesses.  In the
event that Buyer breaches this Section 6.4, Seller shall be entitled to specific
performance  of  this  Section  6.4 and to  injunctive  relief  against  further
violations,  as well as any  other  remedies  at law or in equity  available  to
Seller.

     Section 6.5  Acknowledgment  by Buyer.  In order to induce  Seller to enter
into and perform this Agreement and the Related  Documents,  Buyer  acknowledges
and agrees with Seller as follows:

     (a) To the knowledge of Buyer, Seller's representations and warranties made
in Article V are true and correct as of the  Effective  Date.  To the extent any
representation  or warranty of Seller made herein is, to the  knowledge of Buyer
acquired prior to the Effective Date, untrue or incorrect,  (i) Buyer shall have
no rights  under  this  Agreement  or any  Related  Documents  by reason of such
untruth or inaccuracy,  and (ii) any such  representation  or warranty by Seller
shall be deemed to be amended to the extent  necessary  to render it  consistent
with such knowledge of Buyer.

     (b) Other than any  additional  environmental  due diligence that Buyer may
conduct pursuant to Section 12.1 of this Agreement, Buyer has concluded whatever
inspections, studies, tests and investigations Buyer desired to conduct relating
to the Business and the Assets,  including  economic reviews and analyses,  soil
tests,   engineering  analyses,   environmental   analyses  (including  Phase  I
environmental  assessments of the Assets) and analyses of any applicable records
of any Governmental Body. Buyer is relying solely on its own investigation as to
the  Business  and the Assets and is assuming  the risk that  adverse  physical,
economic or other  conditions or  circumstances  (including soil and groundwater
conditions) may not have been revealed by such investigation.

     (c) NONE OF SELLER OR ANY OF ITS  AFFILIATES OR  REPRESENTATIVES  MAKES ANY
REPRESENTATION   OR  WARRANTY  AS  TO  THE  ACCURACY  OR   COMPLETENESS  OF  ANY
INFORMATION,  WRITTEN OR ORAL,  FURNISHED TO OR PREPARED AT THE REQUEST OF BUYER
OR ANY OF ITS AFFILIATES OR REPRESENTATIVES  WITH RESPECT TO THE BUSINESS OR THE
ASSETS.

                                       23


<PAGE>

     (d) THE  REPRESENTATIONS  AND  WARRANTIES  SET  FORTH IN  ARTICLE V OF THIS
AGREEMENT  CONSTITUTE THE SOLE AND EXCLUSIVE  REPRESENTATIONS  AND WARRANTIES OF
SELLER TO BUYER IN CONNECTION WITH THE TRANSACTIONS  CONTEMPLATED  HEREBY AND BY
THE  RELATED  DOCUMENTS  THERE ARE NO  REPRESENTATIONS,  WARRANTIES,  COVENANTS,
UNDERSTANDINGS OR AGREEMENTS,  ORAL OR WRITTEN,  IN RELATION THERETO BETWEEN THE
PARTIES  OTHER  THAN  THOSE  INCORPORATED  HEREIN  AND  THEREIN.  EXCEPT FOR THE
REPRESENTATIONS  AND  WARRANTIES  EXPRESSLY  SET  FORTH  IN  ARTICLE  V OF  THIS
AGREEMENT, BUYER DISCLAIMS RELIANCE ON ANY REPRESENTATIONS OR WARRANTIES, EITHER
EXPRESS  OR  IMPLIED,   BY  OR  ON  BEHALF  OF  SELLER  OR  ITS   AFFILIATES  OR
REPRESENTATIVES.  WITHOUT  LIMITING  THE  GENERALITY  OF  THE  FOREGOING,  BUYER
ACKNOWLEDGES AND AGREES THAT, EXCEPT AS PROVIDED IN SECTIONS 5.7, 5.11 AND 5.14,
THERE ARE NO  REPRESENTATIONS  OR  WARRANTIES  OF  SELLER  WITH  RESPECT  TO THE
CONDITION OF THE ASSETS,  COMPLIANCE WITH  ENVIRONMENTAL  LAWS AND ENVIRONMENTAL
PERMITS OR THE  PRESENCE  OR  RELEASES OF  HAZARDOUS  MATERIAL IN THE  FIXTURES,
SOILS,  GROUNDWATER,  SURFACE WATER OR AIR ON, UNDER OR ABOUT OR EMANATING  FROM
ANY OF THE PROPERTIES OR ASSETS OF SELLER.

     Section 6.6  Transition Plan. If Buyer and Seller have not already done so,
then (i) within 30 days after the Effective Date,  Buyer shall deliver to Seller
a list of its proposed  representatives  to a joint transition team, which shall
include expertise from various functional  specialties associated or involved in
providing  billing,  payroll and other support services provided to the Business
by any automated or manual  process using  facilities or employees  that are not
included among the Assets or Transferred Employees, and (ii) Seller will add its
representatives  to such team within 15 days after receipt of Buyer's list. Such
team will be responsible for preparing as soon as reasonably  practicable  after
the Effective  Date and at least 60 days prior to the Closing  Date,  and timely
implementing,  a transition plan which will identify and describe  substantially
all of the various  transition  activities  that the parties will cause to occur
before and after the Closing and any other transfer of control  matters that any
party reasonably believes should be addressed in such transition plan, including
the  migration  or  conversion  of the data  relating  to the  Business  that is
included among the Assets to Buyers information systems (it being understood and
agreed  that such  activity  will be at Buyer's  sole cost and expense and to be
performed by consultants  reasonable  satisfactory  to Seller).  If requested by
either party, the terms and conditions governing such transition activities will
be more fully set forth in a Transition Agreement reasonably satisfactory to the
parties.  If the parties  have not already  done so, then Buyer and Seller shall
use their commercially reasonable efforts to cause their Representatives on such
transition  team to  cooperate  in good  faith  and  take all  reasonable  steps
necessary to develop a mutually acceptable  transition plan by no later than 120
days after the Effective Date.

                                       24

<PAGE>

     Section 6.7 IDRB Obligations.

     (a)  Buyer's   Obligations   Regarding   IDRB   Indebtedness.   Each  party
acknowledges that (x) Seller is and on and after the Closing Date shall continue
to be and shall remain the primary obligor with respect to all IDRB Indebtedness
and related Bonds  outstanding  immediately on and after the Closing Date to the
same  extent as though no sale of the Assets had been made and that Buyer  shall
have no payment  obligations with respect to such IDRB  Indebtedness and related
Bonds  and (y) the IDRB  Documents  require  Seller  not to take or permit to be
taken any action  which  would  have the  effect,  directly  or  indirectly,  of
subjecting the interest on any of the Bonds to federal or state income taxation.
Accordingly,  Buyer  covenants  and agrees at Closing to execute  and deliver to
Seller an agreement  substantially  in the form attached  hereto as Exhibit 6.7,
with  respect to the Bonds  that will be  outstanding  on and after the  Closing
Date.  Buyer  represents,  warrants,  covenants and agrees,  that so long as any
Bonds are  outstanding,  (a) as the  "successor  in interest" to Seller (as such
term is used in Section  142(f)(3)(B)  of the IRC),  Buyer will cause the Assets
that were acquired, constructed,  improved or equipped with the proceeds of such
Bonds to be used as  facilities  for the local  furnishing  of  electric  energy
within  the  meaning  of  Sections  142(a)(8)  and  142(f)  of the  IRC  or,  if
applicable,  Section  103(b)(4)(E)  of the  Internal  Revenue  Code of 1954,  as
amended (that is, the local furnishing of electric energy from such Assets shall
only include  furnishing solely within the area consisting of (i) a city and one
contiguous county, or (ii) two contiguous counties; provided that such use shall
be to  provide  service  within  the same  service  area as  served by Seller on
January 1, 1997 (or within a county or a city any potion of which is within such
area)),  (b)  Buyer  has not made and shall  not make an  election  pursuant  to
Section  142(f)(4)(B) of the IRC to terminate tax-exempt bond financing by Buyer
and (c) Buyer  shall not  otherwise  take or permit to be taken any action  with
respect to the Assets and its use and  operation  thereof  which  would have the
effect,  directly or indirectly,  of subjecting interest on any of such Bonds to
federal or state income  taxation.  Buyer  acknowledges and agrees that Seller's
bond counsel may rely on Buyer's  representations,  warranties  and covenants as
hereinabove provided for the purpose of rendering legal opinions, as required by
the IDRB  Documents as a precondition  to the sale by Seller of such Assets,  to
the effect that the sale of such Assets will not result in the  inclusion of the
interest  on the Bonds in the gross  income of the  recipient  for  purposes  of
federal income  taxation.  Nothing in this Agreement is intended to nor shall it
be  interpreted  as (i) an assignment to, and assumption by, Buyer of any of the
IDRB  Documents,  or (ii) as an  undertaking  or  agreement  by Buyer to assume,
guarantee or pay any of Seller's loan or other payment  obligations  pursuant to
the IDRB Documents.

     (b) Consents and Legal  Opinions.  The parties  shall use their  respective
commercially reasonable efforts to obtain all Consents and legal opinions as may
be required  under the IDRB  Documents to enable Seller to retain until maturity
the IDRB  Indebtedness  and to sell the Assets to Buyer  without the result that
the interest on the Bonds will be included in the gross income of the  recipient
for purposes of federal income taxation.

                                       25

<PAGE>


                                   ARTICLE VII
                              CONDITIONS PRECEDENT

     Section 7.1  Seller's Conditions  Precedent to Closing.  The  obligation of
Seller to consummate the  transactions  contemplated  by this Agreement shall be
subject to fulfillment prior to the Closing of the following conditions:

     (a)  Representations  and Warranties  True as of the Closing Date.  Buyer's
representations  and  warranties  in this  Agreement  shall  have  been true and
correct in all material  respects as of the Effective Date and shall be true and
correct  in all  material  respects  as of the  Closing  Date  as if made on the
Closing Date,  subject to changes  expressly  contemplated and permitted by this
Agreement,  except that representations and warranties made as of, or in respect
of, only a specified  date or period  shall be true and correct in all  material
respects as of, or in respect of, such date or period.

     (b) Compliance with  Agreements.  The covenants,  agreements and conditions
required by this Agreement to be performed and complied with by Buyer shall have
been  performed  and complied with in all material  respects  prior to or at the
Closing Date.

     (c) Certificate. Buyer shall execute and deliver to Seller a certificate of
an  authorized  officer  of Buyer,  dated the  Closing  Date,  stating  that the
conditions  specified in Sections  7.1(a) and 7.1(b) of this Agreement have been
satisfied.

     (d) Governmental  Approvals and Other Consents. The Hawaii Public Utilities
Commission  shall have issued an Order approving the  transactions  contemplated
hereby,  the terms and  conditions  of such  Order  shall be  acceptable  in all
material  respects  to Seller in its  reasonable  discretion  and shall  have no
significant adverse effect on Seller's acquisition and divestiture activities in
the State of Hawaii  (including the  divestiture of the Assets),  and such Order
shall have  become a Final  Order.  Seller  also shall have  obtained  all other
Consents of Governmental Bodies and other Persons which are required in order to
consummate the  transactions  contemplated  hereby and to transfer the Assets to
Buyer without incurring material liability under any Legal Requirement, Order or
Contract.

     (e) HSR Act. The  applicable  waiting period under the HSR Act with respect
to the  transactions  contemplated  hereby  shall  have  expired  or  have  been
terminated.

     (f)  Injunctions.  On the  Closing  Date,  there  shall be no Orders  which
operate  to  restrain,  enjoin or  otherwise  prevent  the  consummation  of the
transactions contemplated by this Agreement.

     (g) Opinion of Counsel.  On the Closing  Date,  Seller shall have  received
from counsel to Buyer an opinion in the form of Exhibit 7.1(g).

     (h)   Documents.   Buyer  shall  have   delivered  all  the   certificates,
instruments,  contracts  and other  documents  specified  to be  delivered by it
hereunder  prior to the Closing  Date,  including  pursuant to Section  8.1, and
shall have taken such actions as Seller may have  requested  pursuant to Section
11.2 hereof.

     (i) IDRB  Indebtedness.  Seller shall have  obtained all Consents and legal
opinions  required  under the IDRB Documents to enable Seller to retain the IDRB
Indebtedness until maturity,  and to sell the Assets to Buyer without the result
that the  interest on any of the Bonds will be  included in the gross  income of
the recipient for purposes of federal  income  taxation and without any event of
taxability   (as  such  term  is  customarily   used  in  municipal   securities
transactions)  arising from the sale of the Assets  pursuant to this  Agreement,
and  Buyer  shall  have  duly  executed  and  delivered  all of the  instruments
contemplated by Section 6.7(a).


                                       26

<PAGE>

     Section 7.2  Buyer's Conditions  Precedent to Closing.  The  obligation  of
Buyer to consummate the  transactions  contemplated  by this Agreement  shall be
subject to fulfillment prior to the Closing of the following conditions:

     (a)  Representations  and Warranties True as of the Closing Date.  Seller's
representations  and  warranties  in this  Agreement  shall  have  been true and
correct in all material  respects as of the Effective Date and shall be true and
correct  in all  material  respects  as of the  Closing  Date  as if made on the
Closing Date,  subject to changes  expressly  contemplated and permitted by this
Agreement;  except (i) that  representations  and  warranties  made as of, or in
respect  of, only a  specified  date or period  shall be true and correct in all
material respects as of, or in respect of, such date or period,  and (ii) to the
extent that any failure of such  representations  and  warranties to be true and
correct  as  aforesaid  when  taken in the  aggregate  would not have a Material
Adverse Effect.

     (b) Compliance with  Agreements.  The covenants,  agreements and conditions
required by this Agreement to be performed and complied with by
Seller shall have been performed and complied with in all material respects
prior to or at the Closing Date, except where the failure to so perform or
comply when taken in the aggregate would not have a Material Adverse Effect.

     (c) Certificate. Seller shall execute and deliver to Buyer a certificate of
an  authorized  officer of Seller,  dated the  Closing  Date,  stating  that the
conditions  specified in Sections  7.2(a) and 7.2(b) of this Agreement have been
satisfied.

     (d) Governmental  Approvals.  The Hawaii Public Utilities  Commission shall
have issued an Order approving the transactions  contemplated hereby, such Order
shall not contain any restrictions or conditions  (other than those in effect on
the Effective Date or requiring  that the  regulatory  treatment with respect to
the Business in  existence  as of the  Effective  Date  applicable  to Seller be
continued following the Closing) which would have a Material Adverse Effect, and
such Order shall have  become a Final  Order.  In  addition,  Seller  shall have
obtained all other Consents of  Governmental  Bodies and other Persons which are
required in order to consummate the transactions  contemplated hereby other than
those the failure of which to obtain would not have a Material Adverse Effect.

     (e) HSR Act. The  applicable  waiting period under the HSR Act with respect
to the  transactions  contemplated  hereby  shall  have  expired  or  have  been
terminated.

     (f)  Injunctions.  On the  Closing  Date,  there  shall be no Orders  which
operate  to  restrain,  enjoin or  otherwise  prevent  the  consummation  of the
transactions contemplated by this Agreement.

     (g) Opinion of Counsel. On the Closing Date, Buyer shall have received from
L. Russell Mitten,  Vice President and General Counsel of Seller,  an opinion in
the form of Exhibit 7.2(g) hereto.

     (h)  Documents.  Seller  shall  have  delivered  all of  the  certificates,
instruments,  contracts  and other  documents  specified  to be  delivered by it
hereunder,  including  pursuant to Section 8.1, and shall have made arrangements
reasonably  satisfactory to Buyer to deliver to Buyer as promptly as practicable
after the  Closing  such  records  (including  customer  and  employee  records)
necessary to own and operate the Business.

     (i) No Material  Adverse  Change.  Since the  Effective  Date,  no Material
Adverse Effect shall have occurred that has continuing  effect as of the Closing
Date.

                                       27

<PAGE>
                                  ARTICLE VIII
                                     CLOSING

     Section 8.1  Closing.  The closing of the  purchase  and sale of the Assets
(the "Closing") will take place at the offices of Fleischman and Walsh,  L.L.P.,
1400 Sixteenth  Street,  N.W., Suite 600,  Washington,  D.C. 20036, on the first
calendar  day  of the  month  immediately  following  the  month  in  which  the
conditions  specified in Sections 7.1(d) and 7.2(d) have been satisfied,  unless
another time, date and place is agreed to in writing by the parties. The date of
the  Closing  is  referred  to in this  Agreement  as the  "Closing  Date."  The
transactions  to be consummated on the Closing Date shall be deemed to have been
consummated  as of 12:01 a.m. on the Closing  Date. At the Closing the following
events shall occur, each event being deemed to have occurred simultaneously with
the other events.

     (a) Bill of Sale.  Seller and Buyer  shall  execute and deliver the Bill of
Sale and  Assignment  and  Assumption  Agreement  in the form of Exhibit  8.1(a)
hereto (the "Bill of Sale").

     (b) Payment of Purchase Price.  Buyer will pay to Seller an amount equal to
the Estimated  Purchase Price by wire  transferring such amount, in lawful money
of the United States of America in immediately  available funds, to such account
as Seller shall have  designed by notice to Buyer.  If the Closing Date is not a
business day on which financial institutions are open and operating,  then on or
before  the last  business  day on  which  financial  institutions  are open and
operating  before the Closing Date,  Buyer shall deliver the Estimated  Purchase
Price to Buyer's lead bank (the "Escrow  Agent") in immediately  available funds
in U.S.  dollars.  Upon  receipt,  the Escrow Agent shall  invest the  Estimated
Purchase Price in an interest-bearing account mutually agreed upon by Seller and
Buyer.  At Closing,  Buyer  shall sign and  deliver to Seller a statement  which
confirms  that the Closing has occurred and which  instructs the Escrow Agent to
transfer to Seller the funds  representing the Estimated Purchase Price, plus an
amount  representing the interest earned on and after the Closing Date until the
date the funds are  transferred,  to an account that Seller  shall  designate at
least two (2)  business  days  prior to the date the funds  are  required  to be
transferred  hereunder.  The Escrow Agent shall refund the balance to Buyer. The
fees and expenses of Escrow Agent shall be paid equally by Seller and Buyer.

     (c)  Other  Related  Documents.  To the  extent  consistent  with the other
provisions of this Agreement,  Seller (or the  appropriate  Affiliate of Seller)
and Buyer shall  execute and deliver  such other  Related  Documents  (including
special warranty deeds,  conveyances,  certificates of title,  bills of sale and
assignment and assumption  instruments) reasonably requested by a party that are
necessary in order to satisfy any applicable Legal Requirements  relating to the
transfer of the Assets to Buyer or the assumption of the Assumed  Liabilities by
Buyer or which  are  customarily  given in the  State of  Hawaii  to  accomplish
transfers of assets of the type  involved;  provided,  however,  that nothing in
this clause (c) shall  obligate  Seller or any Affiliate of Seller to execute or
deliver any  document  that  affects,  in a manner  adverse to Seller,  Seller's
liability to Buyer as expressed herein and in the Bill of Sale.

     (d) IDRB Indebtedness.  Buyer and Seller shall execute and deliver the IDRB
Obligations  Agreement   contemplated  by  Section  6.7(a)  to  the  extent  not
previously executed and delivered by Buyer and Seller.


                                       28

<PAGE>

                                   ARTICLE IX
                                   TERMINATION

     Section 9.1  Termination  Rights.  This  Agreement may be terminated in its
entirety at any time prior to the Closing:

     (a) By the mutual written agreement of Seller and Buyer;

     (b) By Buyer, on the one hand, or Seller,  on the other hand, in writing if
there shall be in effect a  nonappealable  Order  prohibiting  the  transactions
contemplated by this Agreement;

     (c) By  Buyer,  upon  the  breach  in any  material  respect  of any of the
representations  and warranties of Seller  contained herein or in the failure by
Seller to perform and comply in any material  respect with any of the agreements
and  obligations  required by this Agreement to be performed or complied with by
Seller, provided that such breach or failure is reasonably likely to result in a
Material  Adverse Effect and is not cured or otherwise  addressed by Seller in a
manner  reasonably  acceptable to Buyer within 30 days of Seller's  receipt of a
written  notice  from  Buyer  that such a breach or  failure  has  occurred  (or
significant  efforts have not been commenced to cure such  misrepresentation  or
breach if it is  susceptible  to cure but not capable of being cured within such
30 days);

     (d) By  Seller,  upon the  breach  in any  material  respect  of any of the
representations and warranties of Buyer contained herein or the failure by Buyer
to perform and comply in any  material  respect with any of the  agreements  and
obligations  required by this  Agreement  to be  performed  or complied  with by
Buyer,  provided that such breach or failure is not cured or otherwise addressed
by Buyer in a manner  reasonably  acceptable to Seller within 30 days of Buyer's
receipt  of a written  notice  from  Seller  that such a breach or  failure  has
occurred  (or  significant   efforts  have  not  been  commenced  to  cure  such
misrepresentation  or breach if it is  susceptible  to cure but not  capable  of
being cured within such 30 days);

     (e) By either  party in  writing if the  Closing  has not  occurred  within
twelve (12) months after the Effective Date; provided,  however,  that the right
to terminate this  Agreement  under this Section 9.1(e) will not be available to
any  party  that  is in  material  breach  of its  representations,  warranties,
covenants or agreements contained herein; provided, however, that if Closing has
not occurred  within such period of time,  then Seller shall have the unilateral
right to  extend  such  period  of time by a further  six (6)  months,  and upon
Seller's exercise of such right, such period of time shall be so extended;

     (f) By Seller or Buyer,  as  appropriate,  if any  Governmental  Body whose
Consent is  required to fulfill a  condition  precedent  to Closing set forth in
Section  7.1(d) (with  respect to Seller) or in Section  7.2(d) (with respect to
Buyer) has  affirmatively  indicated that such Consent will not be given or will
contain terms or  conditions  (or, if such Consent has been  obtained,  contains
terms or  conditions)  that, in the  reasonable  business  judgment of Seller or
Buyer, as appropriate, will result in a condition precedent to Closing set forth
in Section 7.1(d) (with respect to Seller) or in Section 7.2(d) (with respect to
Buyer) not being satisfied; or


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<PAGE>

     (g) By Seller if Buyer  shall  have  failed  to pay the  Purchase  Price at
Closing or if Seller reasonably  concludes that Buyer does not have available to
it committed sources of funding with which to pay the Purchase Price.

     Section 9.2  Limitation on Right to Terminate; Effect of Termination.

     (a) A party  shall not be  allowed  to  exercise  any right of  termination
pursuant to Section 9.1 if the event giving rise to the termination  right shall
be due to the willful  failure of such party seeking to terminate this Agreement
to perform or observe in any material respect any of the covenants or agreements
hereof to be performed or observed by such party.

     (b) If this  Agreement is terminated  as permitted  under Section 9.1, such
termination shall be without liability of or to any party to this Agreement,  or
any shareholder or Representative of such party; provided, however, that if such
termination  shall  result  from the  willful  failure of any party to fulfill a
condition to the performance of any other party or to perform a covenant of this
Agreement or from a material and willful  breach by any party to this  Agreement
(it being understood that the failure to cure a breach shall not, by itself,  be
a willful  breach of this  Agreement),  then such party  shall  (subject  to the
limitation  set forth in the last  sentence  of this  Section  9.2(b))  be fully
liable for any and all damages  sustained  or incurred  by the other  party.  If
prior to Closing either party to this Agreement  resorts to legal proceedings to
enforce  this  Agreement,  the  prevailing  party in such  proceedings  shall be
entitled  to  recover  all costs  incurred  by such party  including  reasonable
attorney's  fees,  in  addition  to any other  relief to which such party may be
entitled;  provided,  however,  and notwithstanding  anything to the contrary in
this  Agreement,  in no event  shall  either  party be  entitled  to receive any
punitive, indirect or consequential damages.

                                    ARTICLE X
                                EMPLOYEE MATTERS

     Section 10.1  Employment of Transferred Employees.

     (a) Schedule  10.1 lists the total number of salaried and hourly,  nonunion
and union, employees actively employed as of the Effective Date by Seller or its
Affiliates whose primary duties relate to the Business ("Active Employees").  As
of the Closing Date,  Buyer shall employ all Active Employees of Seller employed
in  the  Business  being  acquired  ("Transferred  Employees")  in the  same  or
substantially   equivalent  positions,   and  at  the  same  compensation  level
(including wages,  salary and bonuses) as were in effect with Seller immediately
prior to the Closing  Date.  For  purposes of the  preceding  sentence,  "Active
Employees"  shall include all full-time  and part-time  employees,  employees on
military leave, maternity leave, leave under the Family and Medical Leave Act of
1993, on short-term  disability,  on layoff with recall rights, and employees on
other  leaves  of  absences  where  there  is a legal  or  contractual  right to
reinstatement.


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<PAGE>

     (b) Prior to the  Effective  Date,  Seller has delivered to Buyer a list of
the  persons who would have been  Transferred  Employees  had the  Closing  Date
occurred on September 30, 2001, showing the following  information for each such
person:  (i) the name of each such  person;  (ii) the name of his or her current
employer; (iii) his or her current base pay and 2000 bonus; (iv) his or her hire
date,  any  rehire  date (if  available)  and years of  service;  (v) his or her
then-current  position and job title; (vi) whether such employee is subject to a
collective  bargaining  agreement or represented by a labor organization and, if
so, the name of the union and local,  (vii) whether such employee is on military
leave,  maternity  leave,  leave under the Family and Medical Leave Act of 1993,
short-term  disability,  on layoff  with  recall  rights,  or on other  leave of
absence with a legal or contractual right to reinstatement.  Seller shall update
such list  reflecting  such  information  as of a date not more than thirty (30)
days prior to the Closing  Date and deliver  such updated list to Buyer at least
ten (10) days prior to the Closing Date.

     Section 10.2  Assumption of Collective Bargaining Agreement Obligations. On
and after the Closing Date, Buyer, shall assume all of the Seller's  obligations
under, and be bound by the provisions of, each collective  bargaining  agreement
to the extent of provisions  covering  Transferred  Employees.  Each  collective
bargaining  agreement  shall be  identified on a Schedule 10.2 to be prepared by
Seller and submitted to Buyer prior to the Closing Date.  Seller shall cooperate
with Buyer in Buyer's  efforts to contact  the unions  representing  Transferred
Employees.

     Section 10.3  Cessation of Participation  in Seller's  Plans;  Proration of
Bonuses. From and after the Closing Date,  Transferred Employees shall accrue no
additional  benefits  under  any  employee  benefit  plan,  policy,  program  or
arrangement  of Seller or its  Affiliates.  Seller and Buyer shall  pro-rate the
obligation  to pay any bonuses  declared by Seller on or after the Closing  Date
that would have been payable to the  Transferred  Employees had the  Transferred
Employees remained employed by Seller or its Affiliates  throughout the calendar
year in which the Closing Date occurs,  in accordance with the provisions of any
policy,  plan,  practice or  arrangement  of Seller under which such bonus would
have been paid.  Buyer shall be obligated to pay that portion of each such bonus
determined by multiplying the amount of such bonus by a fraction,  the numerator
of which is the number of days from and after the Closing  Date  through the end
of the calendar year in which the Closing Date occurs,  and the  denominator  of
which is 365.

     Section 10.4  Similarity of Benefit  Packages.  As of the Closing Date, and
except as otherwise  expressly  provided in this Article X, Buyer shall  include
each Transferred  Employee in a benefit package  providing  benefits that are in
the  aggregate  substantially  similar  to  those  provided  by  Seller  to such
Transferred Employees immediately prior to the Closing Date. Notwithstanding the
foregoing, to the extent that one or more collective bargaining agreements being
assumed by Buyer  contains  provisions  pertaining to employee  benefits,  Buyer
shall provide the Transferred Employees covered by such agreements with benefits
that  are  consistent  with  the  terms  of  such  agreements  or are  otherwise
acceptable to the  applicable  Union.  For purposes of the  preceding  sentence,
Buyer's  401(k) Plan (as defined in Section 10.6) shall not be deemed to fail to
provide benefits that are consistent with the terms of the applicable collective
bargaining   agreement   merely  by  reason  of  the  fact  that  (i)   matching
contributions  under  Buyer's  401(k) Plan are made in cash rather than employer
stock, (ii) Buyer's 401(k) Plan offers comparable, but not identical, investment
options to the  investment  options  (other than employer  stock) under Seller's
401(k)  Plan,  and (iii)  Buyer's  401(k) Plan  employs a different  third-party
administrator than Seller's 401(k) Plan. Except as otherwise  expressly provided
in this  Article X, Buyer shall treat all service and  compensation  credited to
each such  Transferred  Employee as if such  service and  compensation  had been
rendered to, and paid by, Buyer for all purposes  under Buyer's  benefit  plans,
arrangements, and policies.


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<PAGE>

     Section  10.5  Defined  Benefit  Pension  Plan.  Seller  shall  retain  all
liabilities and assets for pension  benefits accrued through the day immediately
preceding the Closing Date by Transferred  Employees under the Citizens' Pension
Plan (the "Seller's Pension Plan"). Buyer shall cause all Transferred  Employees
to be  included  in Buyer's  defined  benefit  plan to be  established  prior to
Closing ("Buyer's Pension Plan") providing  benefits no less valuable than those
provided in Seller's  Pension  Plan.  Buyer shall take all actions  necessary to
cause  Buyer's  Pension  Plan to  recognize  the  service  that all  Transferred
Employees  had under  Seller's  Pension  Plan for  purposes  of such  Employees'
eligibility to participate,  vesting, attainment of retirement dates, subsidized
benefits,  entitlement  to  optional  forms of  payment,  and  benefit  accrual;
provided,  however, that a Transferred  Employee's benefit under Buyer's Pension
Plan shall be offset by his or her accrued benefit under Seller's  Pension Plan,
such  offset  amount to be based on the benefit  that would have been  available
with respect to such  Transferred  Employee under the terms of Seller's  Pension
Plan had  such  Seller's  Pension  Plan  benefit  commenced  on the  Transferred
Employee's annuity starting date under Buyer's Pension Plan and been paid in the
same form as the benefit paid under Buyer's Pension Plan.

     Section 10.6 401(k) Plan. Seller shall vest Transferred  Employees in their
account balances under Citizens 401(k) Savings Plan ("Seller's  401(k) Plan") as
of the Closing Date. Buyer shall take all action necessary to ensure that, as of
the Closing Date, it includes all  Transferred  Employees in a qualified  401(k)
plan  ("Buyer's  401(k)  Plan")  providing for matching  contributions  at least
equivalent in value to those provided to the Transferred Employee under Seller's
401(k) Plan immediately  prior to the Closing Date. Buyer shall take all actions
necessary to cause  Buyer's  401(k) Plan (i) to  recognize  the service that the
Transferred  Employees had in Seller's  401(k) Plan for purposes of  determining
such Employees'  eligibility to participate,  vesting,  attainment of retirement
dates, contribution levels and, if applicable, eligibility for optional forms of
benefit payments,  and (ii) to accept  direct-rollover  transfers of Transferred
Employees' account balances in Seller's 401(k) Plan, including transfers of loan
balances and related promissory notes.

     Section 10.7  Welfare Benefits.

     (a) Buyer shall take all action  necessary and  appropriate to ensure that,
on and after the Closing Date, Buyer maintains medical, health, dental, flexible
spending account,  accident,  life, short-term disability,  long-term disability
and  other  employee  welfare  benefit  plans  for the  benefit  of  Transferred
Employees that, in the case of nonunion Transferred  Employees are substantially
similar to those  benefits  provided by Seller under its  corresponding  welfare
benefit plans as in effect  immediately  prior to the Closing Date (the "Buyer's
Nonunion Welfare  Plans"),  and in the case of union  Transferred  Employees are
consistent with the terms of the applicable  collective  bargaining agreement or
are otherwise acceptable to the applicable Union (the "Buyer's Bargained Welfare
Plans").  The Buyer's Nonunion Welfare Plans and the Buyer's  Bargained  Welfare
Plans are hereinafter referred to collectively as the "Buyer Welfare Plans." For
purposes of determining eligibility to participate, and entitlement to benefits,
in each Buyer Welfare Plan,  each  Transferred  Employee  shall be credited with
service,   determined  under  the  terms  of  the  corresponding  welfare  plans
maintained by Seller immediately prior to the Closing Date (hereinafter referred
to collectively as the "Seller Welfare Plans"). Any restrictions on coverage for
pre-existing  conditions,  actively at work requirements,  waiting periods,  and
requirements for evidence of insurability under the Buyer Welfare Plans shall be
waived in the Buyer Welfare Plans for  Transferred  Employees,  and  Transferred
Employees  shall receive  credit under the Buyer Welfare Plans for  co-payments,
payments under a deductible limit made by them, and for  out-of-pocket  maximums
applicable to them during the plan year of the Seller  Welfare Plan in which the
Closing Date occurs. As soon as practicable on or after the Closing Date, Seller
shall  deliver to Buyer a list of the  Transferred  Employees  who had  credited
service  under a Seller  Welfare  Plan,  together  with  each  such  Transferred
Employee's  service,  co-payment,  deductible and out-of-pocket  payment amounts
under such plan.


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<PAGE>

     (b) Buyer shall provide or cause to be provided  retiree  medical,  dental,
and life benefits to each retiree of the Business identified in Schedule 10.7 as
updated as of the Closing Date (the "Retirees") and to each Transferred Employee
who is considered to be a  "grandfathered  employee"  (as  hereinafter  defined)
under the same terms and  conditions  as applied to such Retiree or  Transferred
Employee  immediately  prior to the  Closing  Date,  and  Seller  shall  have no
obligation or liability,  contingent or otherwise,  to provide retiree  medical,
dental or life benefits to any such Retiree or Transferred  Employee on or after
the Closing Date. For purposes of this Section 10.7, a "grandfathered  employee"
is a union or nonunion  Transferred  Employee  who met "Rule 55"  (meaning  such
employee's age plus years of service equaled or exceeded  fifty-five (55)) as of
November 30,  1998.  Schedule  10.7  identifies,  as of December 31, 2001,  each
Retiree and each Active Employee who is a "grandfathered employee." Seller shall
update and deliver to Buyer an updated Schedule 10.7  concurrently with Seller's
updating and delivery to Buyer of the updated list required by Section  10.1(b).
Buyer agrees not to terminate or materially modify those post-retirement benefit
provisions  covering  "grandfathered"  Transferred  Employees,  Retirees,  their
spouses and dependents that are in effect immediately prior to the Closing Date.

     (c)  Within  sixty  (60) days  after the  Closing  Date,  Seller  agrees to
transfer to an exempt trust  established by Buyer under Section 501(c)(9) of the
IRC ("Buyer's VEBA") the amount held under any trust established by Seller under
Section  501(c)(9) of the IRC ("Seller's VEBA") to fund  post-retirement  health
care  and  life  insurance  benefits  for the  Business.  Such  amount  shall be
determined  based upon the  records of Seller  and any third  Person  engaged by
Seller to administer Seller's VEBA. Buyer agrees that Buyer's VEBA will apply an
amount at least equal to the sum of the assets  transferred  from  Seller's VEBA
(and  earnings  thereon  calculated  at the rate of return  generated by Buyer's
VEBA) to provide  post-retirement health care and life insurance benefits on and
after the Closing  Date to the  Retirees  and, as  applicable,  the  Transferred
Employees who become  eligible for such benefits  after  Closing.  Upon Closing,
Buyer  shall  be   responsible   for  all   obligations  of  Seller  to  provide
post-retirement  health care and life  insurance  benefits  to such  Transferred
Employees  and  Retirees,  and Seller and Seller's  VEBA shall cease to have any
liability, contingent or otherwise, for such benefits.

     Section 10.8  Flexible Spending Accounts.  Within sixty (60) days after the
Closing  Date,  Seller  shall  transfer to Buyer's  flexible  benefits  plan any
balances standing to the credit of Transferred Employees under Seller's flexible
benefits plan as of the date  immediately  prior to the Closing Date. As soon as
practicable  after the Closing  Date,  Seller  shall  provide to Buyer a list of
those  Transferred  Employees that have  participated in the health or dependent
care reimbursement accounts of Seller,  together with their elections made prior
to the Closing Date with respect to such account, and balances standing to their
credit as of the date immediately prior to the Closing Date.

     Section 10.9  Employment Agreements.  Buyer shall assume all obligations of
each employment agreement to which Seller or its Affiliates is a party and which
covers any Transferred Employee immediately prior to the Closing Date.

     Section  10.10  Vacation.  Seller shall pay to  Transferred  Employees  any
"banked"  vacation  credited to them prior to the Closing Date. On and after the
Closing Date,  Buyer shall provide to each Transferred  Employee  vacation in an
amount equal to the Transferred  Employee's vacation entitlement for the year of
the  Closing  reduced  by the  number of  vacation  days  that such  Transferred
Employee has taken prior to the Closing.


                                       33

<PAGE>

     Section 10.11 Severance. In the event that Buyer terminates the services of
any Transferred  Employee within  twenty-four  (24) months following the Closing
Date  without  cause,  Buyer  shall  provide  to any such  Transferred  Employee
severance or separation pay benefits that are at least equal to the severance or
separation pay benefits that would have been paid by Seller had Seller continued
to employ such Transferred  Employee through the period ending on the employee's
date of termination  from Buyer,  based on Seller's  severance or separation pay
program at the Closing Date; provided,  however, that if a collective bargaining
agreement that is applicable to a union Transferred Employee would provide for a
greater benefit to be paid by Buyer,  the terms and conditions of such agreement
shall instead be applicable.

     Section  10.12  Plant Closing  Notice.  Upon not less than 60 days' written
notice from Buyer of Buyer's then present intention to terminate any Transferred
Employees  after the Closing,  Seller shall give any notice required to be given
by Seller under Chapter 394B, Hawaii Revised Statutes,  as amended.  Buyer shall
have the right to review and approve  such notice  prior to Seller's  release of
the same.  Seller  shall not be  obligated  to provide any notice if in Seller's
reasonable opinion,  after consultation with counsel and with Buyer, such action
(including  the  content of such  notice)  reasonably  could  result in Seller's
violation of any Legal Requirement or Order.

                                   ARTICLE XI
                                   TAX MATTERS

     Section 11.1  Purchase Price Allocation.  Prior to the Closing Date,  Buyer
and Seller shall use their good faith efforts to agree upon the allocation  (the
"Allocation") of the Purchase Price, the Assumed  Liabilities and other relevant
items  (including,  for  example,  adjustments  to the  Purchase  Price)  to the
individual assets or classes of assets within the meaning of Section 1060 of the
IRC. If Buyer and Seller agree to such  Allocation  prior to Closing,  Buyer and
Seller  covenant  and agree  that (i) the values  assigned  to the assets by the
parties' mutual  agreement  shall be conclusive and final for all purposes,  and
(ii)  neither  Buyer nor Seller will take any position  before any  Governmental
Body or in any Proceeding that is in any way inconsistent  with such Allocation.
Notwithstanding  the  foregoing,   if  Buyer  and  Seller  cannot  agree  to  an
Allocation,  Buyer and Seller  covenant  and agree to file,  and to cause  their
respective Affiliates to file, all Tax Returns and schedules thereto (including,
for example,  amended  returns,  claims for refund,  and those returns and forms
required under Section 1060 of the IRC and any Treasury regulations  promulgated
thereunder) consistent with each of such party's good faith Allocations,  unless
otherwise required because of a change in any Legal Requirement.


                                       34

<PAGE>
     Section 11.2  Cooperation with Respect to Like-Kind Exchange.  Buyer agrees
that Seller may, at Seller's election prior to the Closing Date, direct that all
or a portion of the Purchase  Price be  delivered to a "qualified  intermediary"
(as defined in Treasury Regulation  ss.1.1031(k) - (g)(4)) as to enable Seller's
relinquishment  of the  Assets to  qualify as part of a  like-kind  exchange  of
property  covered by Section  1031 of the IRC. If Seller so elects,  Buyer shall
cooperate  with Seller (but without  being  required to incur any  out-of-pocket
costs in the course thereof) in connection with Seller's  efforts to effect such
like-kind exchange, which cooperation shall include, without limitation,  taking
such  actions  as Seller  requests  in order to enable  Seller to  qualify  such
transfer as part of a like-kind  exchange of property covered by Section 1031 of
the IRC  (including  any actions  required to facilitate the use of a "qualified
intermediary"),  and Buyer  agrees  that  Seller  may  assign all or part of its
rights and delegate  all or part of its  obligations  under this  Agreement to a
person or entity acting as a qualified  intermediary  to qualify the transfer of
the Assets as part of a like-kind  exchange of property  covered by Section 1031
of the IRC.  Buyer and Seller agree in good faith to use  reasonable  efforts to
coordinate  the  transactions  contemplated  by this  Agreement  with any  other
transactions  engaged in by either Buyer or Seller;  provided  that such efforts
are not required to include an  unreasonable  delay in the  consummation  of the
transactions contemplated by this Agreement.

     Section 11.3  Transaction  Taxes.  Buyer shall bear and be responsible  for
paying any Hawaii sales, use, transfer, documentary,  registration, business and
occupation and other similar Taxes,  other than Hawaii General Excise Taxes,  if
any,  (including  related  penalties  (civil or criminal),  additions to tax and
interest)  imposed with respect to the  transfer of Assets  (including  the Real
Property)  to  Buyer  ("Transaction  Taxes"),  regardless  of  whether  the  tax
authority seeks to collect such Taxes from Seller or Buyer. Seller shall prepare
all tax filings  related to any  Transaction  Taxes  (other than with respect to
Real Property and motor vehicle title transfer and registration,  which shall be
prepared by Buyer).  Seller shall bear and be responsible  for any costs similar
to Transaction  Taxes imposed by any  Governmental  Body other than the State of
Hawaii or one of its political  subdivisions.  Fifteen (15) days prior to making
any such  filings,  the filing party shall  provide to the  nonfiling  party the
filing party's work papers for the nonfiling  party's  review and approval.  Ten
(10) days prior to the filing date,  the  non-filing  party shall provide to the
filing party approval of such work papers.  Buyer shall also be responsible  for
(i)  administering  the payment of such  Transaction  Taxes,  (ii)  defending or
pursuing any Proceedings related thereto,  and (iii) paying any expenses related
thereto.  Seller  shall  give  prompt  written  notice to Buyer of any  proposed
adjustment  or  assessment  of  any  Transaction   Taxes  with  respect  to  the
transaction, or of any examination of said transaction in a sales, use, transfer
or similar tax audit.  In any  proceedings,  whether formal or informal,  Seller
shall permit Buyer to participate and control the defense of such proceeding and
shall  take all  actions  and  execute  all  documents  required  to allow  such
participation.  Seller shall not  negotiate a settlement  or  compromise  of any
Transaction  Taxes  without the prior  written  consent of Buyer,  which consent
shall not be unreasonably withheld.

     Section 11.4 Taxes Based on Revenues. All Taxes arising with respect to the
revenues of the Business shall be prorated between Buyer and Seller, with Seller
being  obligated to reimburse Buyer only for the portion of any such Tax that is
applicable to the cash received by Seller prior to the Closing Date that relates
to the  revenues of the Business  being taxed.  Upon receipt by Buyer of the tax
bill, invoice or other statement regarding such Taxes, Buyer shall calculate the
pro rata share of such tax bill,  invoice  or other  statement  attributable  to
Buyer and Seller. Buyer then shall forward, as soon as practicable,  to Seller a
copy  of  such  tax  bill,  invoice  or  statement  along  with  the  supporting
documentation  relating  to the  calculation  of the pro rata  share to  Seller.
Seller then shall forward to Buyer payment in immediately available funds of its
pro rata share of such Taxes as soon as  practicable  in advance of the due date
of the tax bill,  invoice or statement  and in time to avoid the  incurrence  of
penalties or interest. Upon its receipt of such payment, Buyer will pay the full
amount of the tax bill, invoice or statement to the applicable taxing authority.
In the event Seller first receives a tax bill,  invoice or statement relating to
the revenues of the Business from a taxing  authority,  Seller shall immediately
forward such tax bill, invoice or statement to Buyer.


                                       35

<PAGE>

                                   ARTICLE XII
                              ENVIRONMENTAL MATTERS

     Section 12.1  Environmental Due Diligence.

     (a) Right to Conduct Environmental Due Diligence.  Regarding  environmental
matters,  other than any additional  environmental  due diligence that Buyer may
conduct  pursuant to this Section 12.1,  Buyer has completed its  reasonable and
prudent  environmental  due diligence prior to the Effective  Date,  including a
review of the  Environmental  Data and Phase I environmental  assessments of the
Assets.  Buyer also has required Seller to make the  representations  concerning
environmental matters set forth in Section 5.14, upon which Buyer is relying. In
light of these actions, Buyer agrees not to conduct additional environmental due
diligence   (including   employee  interviews  and  sampling  of  any  media  or
wastewater) except in accordance with this Section 12.1. All activities of Buyer
regarding  environmental  due  diligence  shall be  conducted  to  minimize  any
inconvenience  or  interruption  of the normal use and enjoyment of the Business
and the Assets.

     (b) Delivery of Environmental  Reports.  Seller has made available to Buyer
before the Effective Date copies of all written environmental audits, reports or
studies in Seller's  possession  of which  Seller has  Knowledge  and which were
prepared after December 31, 1996  (including any updated  environmental  audits,
reports and studies  regarding the foregoing  which were prepared after the date
of execution of the Original  Agreement),  concerning  the existence or possible
existence  of  Hazardous  Materials  on, or under or adjacent to any of the Real
Property  or  relating  to  potential   Environmental  Liability  of  Seller  in
connection with the Business or the Assets. Buyer shall provide to Seller copies
of all reports,  assessments and other information composed or compiled by Buyer
or  Buyer's  environmental  consultant(s)  promptly  following  Buyer's  receipt
thereof.  Buyer shall treat all such  information  delivered  to, or composed or
compiled by, Buyer or Buyer's environmental  consultant(s) as Environmental Data
in accordance with the procedures of Section 12.1(c).

     (c) Confidentiality of Environmental Data. All audits,  reports and studies
delivered  to or  prepared  by Buyer and all  other  information  collected  and
generated as a result of Buyer's  environmental  due  diligence  ("Environmental
Data")  will be  subject  to the terms  and  conditions  of the  Confidentiality
Agreement,  except as otherwise expressly provided in this Section 12.1. Neither
Buyer  nor  its  environmental  consultant(s)  shall  disclose  or  release  any
Environmental  Data  without  the prior  written  consent of Seller and all such
information shall be kept strictly confidential. The Environmental Data shall be
prepared at the request of counsel to Buyer and, to the fullest extent permitted
by law,  shall be the work product of such counsel and  constitute  confidential
attorney/client  communications.  The  Environmental  Data shall be  transferred
among  Buyer  and its  consultant(s)  in a manner  that  will  preserve,  to the
greatest extent possible, such privileges. Buyer expressly agrees that until the
Closing,  it will not  distribute  the  Environmental  Data to any  third  party
without Seller's prior written consent.  After the Closing, Buyer agrees that it
will not distribute the  Environmental  Data to any third party without Seller's
prior  written  consent,  except as required by law or by express  provisions of
Buyer's  corporate  compliance  program if Seller is provided  written notice at
least ten (10) days prior to such distribution,  provided,  however,  that for a
period of two (2) years  after  the  Closing  Date,  Buyer  may  distribute  the
Environmental  Data to any  potential  purchaser  of the Assets only after first
notifying the Seller.


                                       36

<PAGE>

     (d)  Environmental  Consultants.  Buyer  may  retain  one or  more  outside
environmental   consultants  to  assist  in  its   environmental  due  diligence
concerning the Assets and shall notify Seller of the environmental consultant or
consultants Buyer intends to retain. Thereafter, Seller shall have five (5) days
after  receipt of such  notification  to notify  Buyer in  writing  of  Seller's
objection  (which  must be for good cause) and  substantiate  the basis for that
objection.  If Seller  does not  object  for good  cause and  substantiate  that
objection  within  said  five (5) day  period,  Seller  shall be  deemed to have
consented to Buyer's selection.

     (e)   Completed   Phase  I  Reviews.   Buyer  has  completed  its  Phase  I
environmental  assessment  activities  with  respect  to the  Assets,  including
reviewing existing  environmental reports,  correspondence,  permits and related
materials regarding the Assets,  individual site inspections and all other Phase
I activities as set forth in the ASTM protocol  regarding  Phase I environmental
assessments, and has delivered to Seller a true and complete copy of the related
Phase I assessment  report from Buyer's  environmental  consultant.  The parties
mutually acknowledge that all incidents and conditions addressed in such Phase I
assessment  report  comprise  either  incidents  and  conditions  that  had been
previously  disclosed  by Seller in  writing  to Buyer or,  with  respect to the
previously  undisclosed  incidents and conditions,  are incidents and conditions
that are not  reasonably  likely  to  result  in any  significant  Environmental
Liabilities.

     (f) Further  Phase I Reviews.  Buyer may not  conduct  any further  Phase I
environmental assessment activities with respect to the Assets without the prior
written consent of Seller, which consent may be withheld, conditioned or delayed
by Seller in its sole discretion.  Any further Phase I environmental  assessment
activities  permitted  by Seller  shall not  include any  sampling or  intrusive
testing and shall be conducted in accordance with ASTM standards regarding Phase
I assessments. As soon as reasonably practicable after completion of any further
Phase I assessment  activities,  Buyer's environmental  consultant shall prepare
and deliver to Buyer a written report with respect thereto.

     (g) Phase II  Reviews.  Buyer may not  conduct  any Phase II  environmental
assessment activities with respect to the Assets (including, but not limited to,
the taking and analysis of soil, surface water and groundwater samples,  testing
of buildings,  drilling wells,  taking soil borings and excavating)  without the
prior written consent of Seller,  which consent may be withheld,  conditioned or
delayed by Seller in its sole discretion.

     (h) Additional Due Diligence.  Notwithstanding  the foregoing,  if prior to
Closing  Seller  receives  notice of any  Proceeding  or  Threatened  Proceeding
arising under  Environmental Laws or if Seller otherwise acquires Knowledge that
is reasonably likely to require a change to Schedule 5.14, Seller promptly shall
notify  Buyer of the same and Buyer may request that Seller  authorize  Buyer to
conduct specific  additional  environmental due diligence measures if and to the
extent that such  measures are required to determine the extent of any potential
Environmental  Liability  relating  thereto.  Such  authorization  shall  not be
unreasonably  withheld,  conditioned or delayed by Seller.  Any such  additional
environmental  due diligence shall be conducted at Buyer's sole expense.  Within
ten (10) days  following the  completion  of any  additional  environmental  due
diligence  conducted  by Buyer  pursuant to this  Section  12.1(h),  Buyer shall
notify  Seller of each incident of potential  Environmental  Liability of Seller
that Buyer in good faith has determined is reasonably likely to result in Losses
in excess of $1,000,000 (each, a "New Material Environmental Liability").  Prior
to  Closing,  Seller may  respond to and remedy any New  Material  Environmental
Liability.  Any  New  Material  Environmental  Liability  not  responded  to and
remedied by Seller to Buyer's  reasonable  satisfaction  shall be  considered  a
Retained Environmental Liability for purposes of this Agreement.

                                       37

<PAGE>

     (i)  Indemnity  for  Due  Diligence  Activities.  Buyer  hereby  agrees  to
indemnify and hold harmless  Seller,  Seller's  Affiliates and their  respective
officers, directors,  employees, agents, successors and assigns from and against
any and all Losses  with  respect to persons or  property  arising  out of or in
connection with any site visit by Buyer or its  environmental  consultant(s) and
resulting from an act or omission of Buyer or its environmental consultant(s).

                                  ARTICLE XIII
                                 INDEMNIFICATION

     Section 13.1  Indemnification by Seller. From and after Closing and subject
to the other  provisions of this Article XIII,  Seller shall  indemnify and hold
harmless  Buyer,  its  Representatives,  Affiliates,  successors  and  permitted
assigns  (collectively,  the "Buyer  Indemnitees")  from and against any and all
Losses arising out of or resulting from:

     (a) any representations and warranties made by Seller in this Agreement not
being true and correct when made or when  required by this  Agreement to be true
and  correct,  or any  breach or  default  by Seller in the  performance  of its
covenants,  agreements,  or  obligations  under this  Agreement  required  to be
performed prior to Closing;

     (b) any breach or default by Seller in the  performance  of its  covenants,
agreements,  or obligations under this Agreement  required to be performed after
Closing; and

     (c)  the  Retained  Liabilities,   including  the  Retained   Environmental
Liabilities.

     Section 13.2  Indemnification  by Buyer. From and after Closing and subject
to the other  provisions  of this Article XIII,  Buyer shall  indemnify and hold
harmless  Seller,  its  Representatives,  Affiliates,  successors  and permitted
assigns  (collectively,  the "Seller  Indemnitees") from and against any and all
Losses arising out of or resulting from:

     (a) any  representations and warranties made by Buyer in this Agreement not
being true and correct when made or when  required by this  Agreement to be true
and  correct,  or any  breach  or  default  by Buyer in the  performance  of its
covenants,  agreements,  or  obligations  under this  Agreement  required  to be
performed prior to Closing;

     (b) any  breach or default by Buyer in the  performance  of its  covenants,
agreements,  or obligations under this Agreement  required to be performed after
Closing, including the Buyer's IDRB Obligations;

     (c) Assumed Liabilities,  including the Assumed Environmental  Liabilities;
and

     (d) any  event as a result  of  which  the  interest  on the  Bonds  may be
included in the gross income of the  recipient  for  purposes of federal  income
taxation,  to the  extent  such event  arises  out of or  results  from any act,
negligence,  fault or failure of Buyer or any  assignee,  lessee or successor of
Buyer, including any violation of the representations, warranties, covenants and
agreements  set forth in  Section  6.7(a) or in the IDRB  Obligations  Agreement
executed and delivered by Buyer in accordance with Sections 6.7(a) and 8.1(d).


                                       38

<PAGE>

     Section 13.3 Limitations on Seller's Liability. Notwithstanding anything to
the contrary in this Agreement, the liability of Seller under this Agreement and
any documents  delivered in connection  herewith or contemplated hereby shall be
limited as follows:

     (a) IN NO EVENT  SHALL  SELLER BE LIABLE TO THE BUYER  INDEMNITEES  FOR ANY
EXEMPLARY,  PUNITIVE,  SPECIAL, INDIRECT,  CONSEQUENTIAL,  REMOTE OR SPECULATIVE
DAMAGES;  provided,  however,  that if Buyer is held liable to a third party for
any of such damages and Seller is  obligated  to indemnify  Buyer for the matter
that gave rise to such  damages,  then Seller shall be liable for, and obligated
to reimburse Buyer for, such damages.

     (b) The representations, warranties, covenants and agreements of Seller set
forth in this Agreement  shall survive the Closing for a period of one year, and
all representations,  warranties,  covenants and agreements of Seller under this
Agreement and the indemnities  granted by Seller in Section 13.1 shall terminate
at 5:00 p.m., local time in Stamford,  Connecticut,  on the first anniversary of
the Closing Date;  provided,  however,  that such indemnities shall survive with
respect  only to the  specific  matters  that is the  subject of a proper  Claim
Notice  delivered  in good faith in  compliance  with the  requirements  of this
Section  13.3  until  the  earlier  to  occur  of (A) the  date on which a final
nonappealable  resolution of the matter  described in such Claim Notice has been
reached or (B) the date on which the matter  described  in such Claim Notice has
otherwise reached final  resolution.  In no event shall any amounts be recovered
from Seller under  Section  13.1 or  otherwise  for any matter for which a Claim
Notice  is not  delivered  to  Seller  prior  to the  close of  business  on the
applicable date set forth above.

     (c) Notwithstanding anything to the contrary in this Agreement, in no event
shall Seller indemnify the Buyer Indemnitees,  or be otherwise liable in any way
whatsoever to the Buyer Indemnitees,  for any Losses until the Buyer Indemnitees
have  suffered  Losses  (determined  after giving  effect to the  provisions  of
Section  13.3(f))  that are in excess  of a  deductible  in an  amount  equal to
$5,400,000,  after which point  Seller will be obligated  only to indemnify  the
Buyer Indemnitees from and against further Losses in excess of such deductible.

     (d) Notwithstanding anything to the contrary in this Agreement, in no event
shall Seller indemnify the Buyer Indemnitees,  or be otherwise liable in any way
whatsoever  to the Buyer  Indemnitees,  for any Losses  that are in excess of an
amount equal to $5,400,000.

     (e) No amount shall be  recovered  from Seller for the breach or untruth of
any of Seller's representations, warranties, covenants or agreements, or for any
other matter, to the extent that Buyer had knowledge of such breach,  untruth or
other  matter prior to the  Closing,  nor shall Buyer be entitled to  rescission
with respect to any such matter.


                                       39

<PAGE>


     (f)  Seller  shall  have no  liability  for any  claim  or Loss (A) that is
covered by insurance  maintained by or for the benefit of Buyer or any Affiliate
of Buyer (including any such insurance  coverage  applicable to the Business the
benefit of which the Buyer will realize) or for which Buyer  otherwise  recovers
payments in respect of such Loss from any other  sources  (whether in a lump sum
or stream  of  payments)  or (B) that is the type  normally  recoverable  by the
Business  through rates.  No cost or expense  relating to any such claim or Loss
shall be  included  in  determining  the extent of Losses  suffered by the Buyer
Indemnitees for purposes of Section 13.3(c) or Section 13.3(d).  Buyer agrees to
use its  commercially  reasonable  efforts to give timely and effective  written
notice  to  the   appropriate   insurance   carrier(s)  of  any   occurrence  or
circumstances which, in the judgment of Buyer consistent with its customary risk
management  practices,  appear likely to give rise to a claim against Buyer that
is likely to involve one or more  insurance  policies of Buyer.  Any such notice
shall be given in good  faith by Buyer  without  regard  to the  possibility  of
indemnification payments by Seller under Section 13.1, and shall be processed by
Buyer  in good  faith  and in a  manner  consistent  with  its  risk  management
practices involving claims for which no third party contractual  indemnification
is  available.  Buyer agrees that (i) if it is entitled to receive  payment from
Seller for a Loss, and (ii) if Buyer has obtained  insurance which may cover the
claim or matter  giving rise to such Loss,  then (iii) such  insurance  shall be
primary coverage and Buyer will make a claim under such insurance (if such claim
can be made in good faith) before  enforcing  its right to receive  payment from
Seller.  If at any time  subsequent  to the receipt by a Buyer  Indemnitee of an
indemnity payment from Seller hereunder, such Buyer Indemnitee (or any Affiliate
thereof) receives any recovery, settlement or other similar payment with respect
to the Loss for which it receives such indemnity payment,  such Buyer Indemnitee
shall  promptly  pay to Seller an amount  equal to the amount of such  recovery,
less (for  insurance  proceeds  only) any  out-of-pocket  costs incurred by such
Buyer  Indemnitee (or its Affiliates) in connection  with claim  preparation and
settlement,  but in no event  shall any such  payment  exceed the amount of such
indemnity  payment;  provided,  that if such net  recover  reduces the amount of
Losses actually  incurred by the Buyer  Indemnitees  below the deductible amount
set forth in Section  13.3(c) and if Seller has made other payments to the Buyer
Indemnitees  for other Losses in excess of such  deductible  amount,  then Buyer
also  shall  promptly  pay to  Seller  an amount  equal to the  portion  of such
payments  made by Seller  that  Seller  would not have  been  obligated  to make
pursuant to Section 13.3(c) had the Losses of the Buyer Indemnitees not included
the Losses covered by such net recovery.  No other costs or expense  relating to
any such recovery shall reduce the amount of such payment to Seller.

     (g)   Notwithstanding  any  language  contained  in  any  Related  Document
(including deeds and other conveyance  documents relating to the Real Property),
the  representations  and  warranties of Seller set forth in this Agreement will
not be merged into any such Related Document and the indemnification obligations
of Seller, and the limitations on such obligations,  set forth in this Agreement
shall  control.  No provision  set forth in any such Related  Document  shall be
deemed to enlarge, alter or amend the terms or provisions of this Agreement.

     Section 13.4  Claims Procedure.


                                       40

<PAGE>

     (a) All claims for indemnification under Section 13.1 or 13.2, or any other
provision  of this  Agreement  except as  otherwise  expressly  provided in this
Agreement,  shall be asserted and resolved  pursuant to this Article  XIII.  Any
Person claiming indemnification hereunder referred to as the "Indemnified Party"
and any Person  against whom such claims are asserted  hereunder is  hereinafter
referred  to as the  "Indemnifying  Party."  In the event  that any  Losses  are
asserted against or sought to be collected from an Indemnified  Party by a third
party,  said Indemnified Party shall with reasonable  promptness  provide to the
Indemnifying Party a Claim Notice. The Indemnifying Party shall not be obligated
to  indemnify  the  Indemnified  Party with  respect  to any such  Losses if the
Indemnified  Party fails to notify the Indemnifying  Party thereof in accordance
with the provisions of this Agreement in reasonably  sufficient time so that the
Indemnifying Party's ability to defend against the Losses is not prejudiced. The
Indemnifying  Party shall have 30 days from the personal  delivery or receipt of
the Claim  Notice  (the  "Notice  Period") to notify the  Indemnified  Party (i)
whether  or not it  disputes  the  liability  of the  Indemnifying  Party to the
Indemnified  Party  hereunder with respect to such Losses and/or (ii) whether or
not it  desires,  at the sole cost and  expense of the  Indemnifying  Party,  to
defend the Indemnified Party against such Losses;  provided,  however,  that any
Indemnified  Party is hereby authorized prior to and during the Notice Period to
file any  motion,  answer or other  pleading  that it shall  deem  necessary  or
appropriate to protect its interests or those of the Indemnifying  Party (and of
which it shall have given notice and opportunity to comment to the  Indemnifying
Party) and not  prejudicial  to the  Indemnifying  Party.  In the event that the
Indemnifying  Party notifies the Indemnified Party within the Notice Period that
it desires to defend the Indemnified Party against such Losses, the Indemnifying
Party  shall  have the right to defend  all  appropriate  proceedings,  and with
counsel of its own  choosing,  which  proceedings  shall be promptly  settled or
prosecuted by them to a final  conclusion.  If the Indemnified  Party desires to
participate in, but not control,  any such defense or settlement it may do so at
its  sole  cost  and  expense.  If  requested  by the  Indemnifying  Party,  the
Indemnified  Party  agrees  to  cooperate  with the  Indemnifying  Party and its
counsel in contesting any Losses that the  Indemnifying  Party elects to contest
or,  if  appropriate  and  related  to the  claim in  question,  in  making  any
counterclaim  against  the  Person  asserting  the third  party  Losses,  or any
cross-complaint  against  any  Person.  No claim  may be  settled  or  otherwise
compromised without the prior written consent of the Indemnifying Party.

     (b) The  Indemnified  Party  shall  provide  reasonable  assistance  to the
Indemnifying Party and provide access to its books, records and personnel as the
Indemnifying  Party reasonably  requests in connection with the investigation or
defense of the Losses.  The  Indemnifying  Party shall  promptly upon receipt of
reasonable  supporting   documentation   reimburse  the  Indemnified  Party  for
out-of-pocket  costs  and  expenses  incurred  by the  latter in  providing  the
requested assistance.

     (c) With regard to third party claims for which Buyer or Seller is entitled
to  indemnification  under Section 13.1 or 13.2, such  indemnification  shall be
paid by the  Indemnifying  Party  upon:  (i) the entry of an Order  against  the
Indemnified  Party and the expiration of any applicable appeal period; or (ii) a
settlement  with the consent of the  Indemnifying  Party,  provided that no such
consent need be obtained if the Indemnifying Party fails to respond to the Claim
Notice as provided in Section 13.4(a). Notwithstanding the foregoing but subject
to  Section  13.4(a),   and  provided  that  there  is  no  dispute  as  to  the
applicability of  indemnification,  expenses of counsel to the Indemnified Party
shall be  reimbursed  on a current  basis by the  Indemnifying  Party as if such
expenses are a liability of the Indemnifying Party.

     Section 13.5  Exclusive Remedy. Except as otherwise provided in Section 6.4
or 14.6, the rights,  remedies and obligations of the Buyer  Indemnitees and the
Seller  Indemnitees set forth in this Article XIII will be the exclusive rights,
remedies and  obligations of such Persons after the Closing with respect to this
Agreement,  the  events  giving  rise to  this  Agreement  and the  transactions
provided  for  herein or  contemplated  hereby or  thereby.  No  Proceeding  for
termination or  rescission,  or claiming  repudiation,  of this Agreement or the
Bill of Sale may be brought or  maintained  by either party against the other on
and after the  Closing  Date no matter  how  severe,  grave or  fundamental  any
breach, default or nonperformance may be by one party. Accordingly,  the parties
hereby  expressly  waive and forego any and all rights they may possess to bring
any such Proceeding.


                                       41

<PAGE>


     Section 13.6  Indemnification for Negligence. WITHOUT LIMITING OR ENLARGING
THE SCOPE OF THE  INDEMNIFICATION  OBLIGATIONS SET FORTH IN THIS  AGREEMENT,  AN
INDEMNIFIED PARTY SHALL BE ENTITLED TO  INDEMNIFICATION  HEREUNDER IN ACCORDANCE
WITH THE TERMS  HEREOF,  REGARDLESS  OF WHETHER THE LOSS OR CLAIM GIVING RISE TO
SUCH  INDEMNIFICATION  OBLIGATION  IS THE  RESULT  OF THE  SOLE,  CONCURRENT  OR
COMPARATIVE  NEGLIGENCE,  STRICT LIABILITY,  VIOLATION OF ANY LAW OR OTHER LEGAL
FAULT OF OR BY SUCH  INDEMNIFIED  PARTY.  THE PARTIES AGREE THAT THIS  PARAGRAPH
CONSTITUTES A CONSPICUOUS LEGEND.

     Section 13.7  Waiver and Release. Buyer, on behalf of itself and each other
Buyer Indemnitee,  hereby forever waives, relieves,  releases and discharges the
Seller  Indemnitees  and their  successors  and assigns from any and all rights,
liabilities,  Proceedings (including future Proceedings) and Losses of any Buyer
Indemnitee,  whether  known or  unknown  on the  Closing  Date,  which any Buyer
Indemnitee has or incurs, or may in the future have or incur,  arising out of or
related to any Assumed Environmental Liability.

                                   ARTICLE XIV
                               GENERAL PROVISIONS

     Section 14.1  Expenses.  Except as otherwise specifically  provided herein,
each Party will pay all costs and expenses of its  performance of and compliance
with this  Agreement,  except Buyer will pay all real estate  transfer taxes and
real estate  recording fees, if any,  including  expenses of counsel  associated
with real estate title, transfer and recording issues.

     Section  14.2  Notices.  All  notices,  requests  and other  communications
hereunder  shall be in  writing  and shall be deemed  to have  been  given  upon
receipt if either (a)  personally  delivered,  (b) sent by prepaid  first  class
mail,  and  registered or certified and a return  receipt  requested (c) sent by
overnight delivery via a nationally  recognized carrier or (d) by facsimile with
completed transmission acknowledged:

                  If to Seller, to:

                  Citizens Communications Company
                  1460 Poydras Street, Suite 1800
                  New Orleans, LA 70112
                  Attention: Kenneth L. Cohen
                  Telecopier:  (504) 544-5822

                  with a copy to:

                  Citizens Communications Company
                  High Ridge Park
                  Stamford, CT 06905
                  Attention:  L. Russell Mitten
                  Telecopier:  (203) 614-4651

                  and:


                                       42

<PAGE>


                  Fleischman and Walsh, L.L.P.
                  1400 Sixteenth Street, N.W.
                  Washington, D.C.  20036
                  Attention:  Jeffry L. Hardin
                  Telecopier:  (202) 387-3467

                  If to Buyer, to:

                  Kauai Island Utility Co-Op
                  2970 Haleko Road, Suite #205
                  Lihue, Kauai, HI  96766
                  Attention: Gregg Gardiner, Chairman
                  Telecopier: (808) 245-7428

                  with a copy to:

                  McCorriston Miller Mukai MacKinnon LLP 5 Waterfront Plaza, 4th
                  Floor 500 Ala Moana Blvd.
                  Honolulu, HI 96813
                  Attention: Brian Hirai
                  Telecopier: (808) 524-8293

or at such  other  address  or number as shall be given in writing by a party to
the other party.

     Section 14.3  Assignment.  This Agreement may not be assigned, by operation
of law or otherwise,  by any party hereto  without the prior written  consent of
the other party hereto, such consent not to be unreasonably withheld;  provided,
however,  in the event of any such  assignment  by a party by  operation  of law
without the consent of the other party as required  above,  such other party may
consent to such  assignment  after it has  occurred  and,  in such  event,  this
Agreement  and all the  provisions  hereof  shall be  binding  upon  the  Person
receiving such  assignment by operation of law.  Notwithstanding  the foregoing,
(a) Buyer may  assign  this  Agreement,  without  the prior  written  consent of
Seller, to any direct or indirect wholly-owned subsidiary of Buyer provided such
subsidiary  assumes  in  writing  all of the  duties  and  obligations  of Buyer
hereunder (provided that no such assignment by Buyer shall in any way operate to
enlarge,  alter or change any  obligation  due to Seller or relieve Buyer of its
obligations hereunder if such subsidiary fails to perform such obligations, with
the  understanding  that Buyer shall be jointly and  severally  liable with such
subsidiary for any  nonperformance of Buyer's  obligations  hereunder);  and (b)
Seller  may  assign  all or part of its  rights or  delegate  all or part of its
duties under this  Agreement,  without the prior written  consent of Buyer, to a
qualified  intermediary  chosen  by  Seller  to  structure  all or  part  of the
transactions  contemplated hereby as a like-kind exchange of property covered by
Section 1031 of the IRC.

     Section 14.4  Successor  Bound.  Subject to the provisions of Section 14.3,
this  Agreement  shall be binding  upon and inure to the  benefit of the parties
hereto and their respective successors and permitted assigns.

                                       43


<PAGE>

     Section 14.5  Governing Law. The validity, performance,  and enforcement of
this  Agreement  and all Related  Documents,  unless  expressly  provided to the
contrary,  shall be governed by the laws of the State of Delaware without giving
effect to the principles of conflicts of law of such state.

     Section 14.6  Dispute Resolution.  Except as otherwise provided in Sections
3.2(b) and 6.4, and this Section 14.6, any dispute, controversy or claim between
the parties relating to, arising out of or in connection with this Agreement (or
any subsequent agreements or amendments thereto), including as to its existence,
enforceability,  validity,  interpretation,  performance  or  breach  or  as  to
indemnification or damages,  including claims in tort, whether arising before or
after the termination of this Agreement (any such dispute,  controversy or claim
being herein referred to as a "Dispute") shall be settled without litigation and
only by use of the following alternative dispute resolution procedure:

     (a) At  the  written  request  of a  party,  each  party  shall  appoint  a
knowledgeable, responsible representative to meet and negotiate in good faith to
resolve any Dispute.  The  discussions  shall be left to the  discretion  of the
representatives.   Upon  agreement,   the   representatives  may  utilize  other
alternative  dispute  resolution  procedures  such as mediation to assist in the
negotiations.  Discussions and correspondence among the parties' representatives
for purposes of these negotiations shall be treated as confidential  information
developed for the purposes of settlement,  exempt from discovery and production,
and without the  concurrence  of both  parties  shall not be  admissible  in the
arbitration  described  below,  or in any lawsuit.  Documents  identified  in or
provided  with such  communications,  which are not prepared for purposes of the
negotiations,  are not so exempted and may, if otherwise admissible, be admitted
in the arbitration.

     (b) If  negotiations  between  the  representatives  of the  parties do not
resolve the Dispute within 60 days of the initial written  request,  the Dispute
shall be submitted to binding arbitration by a single arbitrator pursuant to the
Commercial  Arbitration  Rules,  as then amended and in effect,  of the American
Arbitration Association (the "Rules").  Either party may demand such arbitration
in accordance with the procedures set out in the Rules.  The  arbitration  shall
take  place in San  Francisco,  California.  The  arbitration  hearing  shall be
commenced within 60 days of such party's demand for arbitration.  The arbitrator
shall have the power to and will instruct each party to produce evidence through
discovery (i) that is reasonably requested by the other party to the arbitration
in order to prepare and  substantiate  its case and (ii) the production of which
will not  materially  delay the  expeditious  resolution  of the  dispute  being
arbitrated;  each party hereto agrees to be bound by any such  discovery  order.
The  arbitrator  shall  control  the  scheduling  (so as to  process  the matter
expeditiously) and any discovery.  The parties may submit written briefs. At the
arbitration  hearing,  each party may make written and oral presentations to the
arbitrator,  present  testimony and written evidence and examine  witnesses.  No
party  shall be  eligible  to  receive,  and the  arbitrator  shall not have the
authority to award,  exemplary or punitive damages. The arbitrator shall rule on
the  Dispute  by  issuing a written  opinion  within 30 days  after the close of
hearings.  The arbitrator's  decision shall be binding and final.  Judgment upon
the  award  rendered  by the  arbitrator  may be  entered  in any  court  having
jurisdiction.


                                       44

<PAGE>

     (c) Each  party  will bear its own costs and  expenses  in  submitting  and
presenting its position with respect to any Dispute to the arbitrator; provided,
however,  that if the  arbitrator  determines  that  the  position  taken in the
Dispute  by the  nonprevailing  party  taken  as a whole  is  unreasonable,  the
arbitrator may order the nonprevailing party to bear such fees and expenses, and
reimburse the prevailing  party for all or such portion of its reasonable  costs
and expenses in submitting and presenting its position,  as the arbitrator shall
reasonably  determine  to be fair  under the  circumstances.  Each  party to the
arbitration  shall pay one-half of the fees and expenses of the  arbitrator  and
the American Arbitration Association.

     (d) Notwithstanding any other provision of this Agreement, (i) either party
may commence an action to compel  compliance  with this Section 14.6 and (ii) if
any party, as part of a Dispute,  seeks injunctive relief or any other equitable
remedy,  including specific  enforcement,  then such party shall be permitted to
seek such  injunctive  or  equitable  relief in any  federal  or state  court or
competent  jurisdiction  before,  during or after the pendency of a mediation or
arbitration proceed under this Section 14.6.

     Section  14.7  Cooperation.  Each of the parties  hereto  agrees to use its
reasonable  best  efforts to take or cause to be taken all action,  and to do or
cause to be done all things  necessary,  proper or  advisable  under  applicable
laws,  regulations  or  otherwise,  to  consummate  and to  make  effective  the
transactions contemplated by this Agreement,  including, without limitation, the
timely  performance of all actions and things  contemplated by this Agreement to
be taken or done by each of the parties hereto.

     Section 14.8  Construction  of Agreement.  The terms and provisions of this
Agreement  represent the results of negotiations  between Buyer and Seller, each
of which has been  represented  by counsel of its own  choosing,  and neither of
which  has  acted  under  duress  or  compulsion,  whether  legal,  economic  or
otherwise.  Accordingly,  the terms and  provisions of this  Agreement  shall be
interpreted and construed in accordance with their usual and customary meanings,
and  Buyer and  Seller  hereby  waive the  application  in  connection  with the
interpretation  and  construction  of this  Agreement  of any rule of law to the
effect that  ambiguous  or  conflicting  terms or  provisions  contained in this
Agreement  shall be  interpreted  or construed  against the party whose attorney
prepared  the  executed  draft or any  earlier  draft of this  Agreement.  It is
understood and agreed that neither the specification of any dollar amount in the
representations and warranties  contained in this Agreement nor the inclusion of
any  specific  item in the  Schedules or Exhibits is intended to imply that such
amounts or higher or lower amounts, or the items so included or other items, are
or are not  material,  and none of the parties shall use the fact of the setting
of such amounts or the fact of any  inclusion of any such item in the  Schedules
or Exhibits in any dispute or controversy  between the parties as to whether any
obligation, item or matter is or is not material for purposes hereof.

     Section 14.9  Publicity.  No party  hereto  shall issue,  make or cause the
publication  of any press  release or other  announcement  with  respect to this
Agreement  or the  transactions  contemplated  hereby,  or  otherwise  make  any
disclosures  relating  thereto,  without  the consent of the other  party,  such
consent not to be unreasonably withheld or delayed; provided, however, that such
consent shall not be required where such release or  announcement is required by
applicable law or the rules or regulations  of a securities  exchange,  in which
event  the  party so  required  to issue  such  release  or  announcement  shall
endeavor,  wherever possible, to furnish an advance copy of the proposed release
to the other party.


                                       45

<PAGE>

     Section  14.10  Waiver.  Except as  otherwise  expressly  provided  in this
Agreement,  neither  the  failure  nor any  delay  on the  part of any  party to
exercise  any right,  power or  privilege  hereunder  shall  operate as a waiver
thereof,  nor shall any single or partial  exercise or waiver of any such right,
power or  privilege  preclude  any other or  further  exercise  thereof,  or the
exercise of any other right,  power or privilege  available to each party at law
or in equity.

     Section 14.11  Parties in Interest. This Agreement (including the documents
and  instruments  referred to herein) is not intended to confer upon any Person,
other than the parties hereto and their  successors and permitted  assigns,  any
rights  or  remedies  hereunder;  provided,  however,  that the  indemnification
provisions  in Article XIII shall inure to the benefit of the Buyer  Indemnitees
and the Seller Indemnitees as provided therein.

     Section 14.12  Section and  Paragraph  Headings.  The section and paragraph
headings in this Agreement are for reference  purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.

     Section  14.13  Amendment.  This  Agreement  may  be  amended  only  by  an
instrument in writing executed by the parties hereto.

     Section 14.14  Entire Agreement. This Agreement, the Exhibits and Schedules
hereto and the documents specifically referred to herein and the Confidentiality
Agreement  constitute the entire agreement,  understanding,  representations and
warranties  of the parties  hereto,  and supersede  all prior  agreements,  both
written and oral,  between Buyer and Seller,  including the Original  Agreement.
All  Exhibits  and  Schedules  annexed  hereto or  referred to herein are hereby
incorporated  in and  made a part  of this  Agreement  as if set  forth  in full
herein.  Disclosure  of any  fact  or  item  in  any  Schedule  referenced  by a
particular paragraph or Section in this Agreement shall, should the existence of
the fact or item or its contents be relevant to any other  paragraph or Section,
be deemed to be  disclosed  with  respect  to that  other  paragraph  or Section
whether or not any explicit cross-reference appears therein.

     Section  14.15  Counterparts.  This  Agreement  may be executed in multiple
counterparts,  each of  which  shall be  deemed  an  original,  and all of which
together shall constitute one and the same instrument.

     Section  14.16  Severability.  If any  term  or  other  provision  of  this
Agreement is invalid,  illegal or incapable of being enforced by any rule of law
or public policy,  all other  conditions and provisions of this Agreement  shall
nevertheless  remain in full force and effect so long as the  economic  or legal
substance of the transactions  contemplated hereby is not affected in any manner
materially  adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall  negotiate  in good  faith to modify  this  Agreement  so as to effect the
original intent of the parties as closely as possible in an acceptable manner to
the end that  transactions  contemplated  hereby are  fulfilled  to the greatest
extent possible.

                      [SIGNATURES APPEAR ON FOLLOWING PAGE]



                                       46


<PAGE>


     IN WITNESS WHEREOF,  the parties have executed and delivered this Agreement
as of the date first written above.



                         CITIZENS COMMUNICATIONS COMPANY



                         By: /s/  Scott N. Schneider                         
                            ------------------------------------------
                            Scott N. Schneider,
                            Vice Chairman and Executive Vice President



                         KAUAI ISLAND UTILITY CO-OP



                         By:  /s/  Gregg Gardiner                         
                            ----------------------------
                            Gregg Gardiner,
                            Chairman




              [Signature page to Amended and Restated Purchase and
                Sale Agreement (Kauai Electric) between Citizens
                 Communications Company and Kauai Island Utility
                                     Co-Op.]


                                       47



                                                               Execution copy
================================================================================

                                                               Exhibit 10.12
                                                               -------------



                            ASSET PURCHASE AGREEMENT

                                 by and between

                   CITIZENS COMMUNICATIONS COMPANY, as SELLER,

                                       and

                        K-1 USA VENTURES, INC., as BUYER,



                          Dated as of December 19, 2002



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

<PAGE>

<TABLE>
<CAPTION>

                                TABLE OF CONTENTS

                                                                                                               Page

<S>                                                                                                             <C>
ARTICLE I  DEFINITIONS..................................................................................          1

ARTICLE II  PURCHASE AND SALE...........................................................................         15
   2.1    Transfer of Assets............................................................................         15
   2.2    Excluded Assets...............................................................................         16
   2.3    Assumed Liabilities...........................................................................         18
   2.4    Excluded Liabilities..........................................................................         20
   2.5    Control of Litigation.........................................................................         21

ARTICLE III  THE CLOSING................................................................................         22
   3.1    Closing.......................................................................................         22
   3.2    Closing Payment...............................................................................         22
   3.3    Adjustment to Base Purchase Price.............................................................         22
   3.4    Prorations....................................................................................         25
   3.6    Deliveries by Seller..........................................................................         25
   3.5    Deliveries by Buyer...........................................................................         27
   3.7    Work in Progress..............................................................................         27

ARTICLE  IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS
OF SELLER ..............................................................................................         28
   4.1    Incorporation; Qualification..................................................................         28
   4.2    Authority.....................................................................................         28
   4.3    Consents and Approvals; No Violation..........................................................         28
   4.4    Insurance.....................................................................................         29
   4.5    Real Property Leases..........................................................................         29
   4.6    Environmental Matters.........................................................................         29
   4.7    Labor Matters.................................................................................         30
   4.8    Benefit Plans:  ERISA.........................................................................         30
   4.9    Real Property.................................................................................         32
   4.10   Condemnation..................................................................................         32
   4.11   Assigned Agreements...........................................................................         32
   4.12   Legal Proceedings.............................................................................         33
   4.13   Permits ......................................................................................         33
   4.14   Taxes.........................................................................................         33
   4.15   Intellectual Property.........................................................................         34
   4.16   Capital Expenditures..........................................................................         34
   4.17   Compliance With Laws..........................................................................         34
   4.18   Title.........................................................................................         34
   4.19   DISCLAIMERS...................................................................................         34
   4.20   Financial Statements..........................................................................         35
   4.21   SEC Filings; Financial Statements.............................................................         35
   4.22   Sufficiency of Assets.........................................................................
         36
   4.23   Easements.....................................................................................         36
   4.24   Tangible Personal Property....................................................................         36
   4.25   Regulatory Matters............................................................................         36

                                       i

<PAGE>

ARTICLE V  REPRESENTATIONS AND WARRANTIES OF BUYER......................................................         36
   5.1    Organization..................................................................................         36
   5.2    Authority.....................................................................................         37
   5.3    Consents and Approvals; No Violation..........................................................         37
   5.4    Availability of Funds.........................................................................         38
   5.5    Public Company Filings; Financial Statements..................................................         38
   5.6    Legal Proceedings.............................................................................         38
   5.7    No Knowledge of Seller's Breach...............................................................         38
   5.8    Qualified Buyer...............................................................................         39
   5.9    Inspections...................................................................................         39
   5.10   WARN Act......................................................................................         39
   5.11   Public Utility Holding Company Status; Regulation as a Public Utility.........................         39
   5.12   Ownership and Control of Buyer................................................................         39

ARTICLE VI  COVENANTS OF THE PARTIES....................................................................         40
   6.1    Conduct of Business and Operation of Assets...................................................         40
   6.2    Access to Information.........................................................................         41
   6.3    Additional Inspections and Information........................................................         42
   6.4    Confidentiality...............................................................................         44
   6.5    Public Statements.............................................................................         45
   6.6    Expenses......................................................................................         45
   6.7    Further Assurances............................................................................         45
   6.8    Consents and Approvals........................................................................         46
   6.9    Fees and Commissions..........................................................................         49
   6.10   Tax Matters...................................................................................         49
   6.11   Advice of Changes.............................................................................         51
   6.12   Seller Employees..............................................................................         51
   6.13   Risk of Loss..................................................................................         56
   6.14   Tax Exempt Financing..........................................................................         57
   6.15   Seller Guarantees and Surety Instruments......................................................         61
   6.16   Citizens and Gasco Marks......................................................................         61
   6.17   Title Commitments.............................................................................         62
   6.18   Post-Execution Delivery of Schedules..........................................................         62
   6.19   Transition Plan...............................................................................         62
   6.20   Certain Transactions..........................................................................         63

ARTICLE  VII CONDITIONS.................................................................................         63
   7.1    Conditions to Obligations of Buyer............................................................         63
   7.2    Conditions to Obligations of Seller...........................................................         64

ARTICLE VIII POST-CLOSING INDEMNIFICATION...............................................................         65
   8.1    Indemnification of Seller by Buyer............................................................         65
   8.2    Indemnification of Buyer by Seller............................................................         65
   8.3    Certain Limitations on Indemnification........................................................         66
   8.4    Defense of Claims.............................................................................         69
   8.5    BHP Indemnity Arrangements....................................................................         70

                                       ii

<PAGE>

ARTICLE IX  TERMINATION.................................................................................         72
   9.1    Termination...................................................................................         72
   9.2    Procedure and Effect of Termination...........................................................         73
   9.3    Liquidated Damages............................................................................         73

ARTICLE X   MISCELLANEOUS...............................................................................         74
   10.1   Amendment and Modification....................................................................         74
   10.2   Waiver of Compliance; Consents................................................................         74
   10.3   [Intentionally Omitted].......................................................................         74
   10.4   Notices.......................................................................................         74
   10.5   Assignment....................................................................................         76
   10.6   Governing Law.................................................................................         76
   10.7   Counterparts..................................................................................         77
   10.8   Interpretation................................................................................         77
   10.9   Schedules and Exhibits........................................................................         77
   10.10  Entire Agreement..............................................................................         77
   10.11  U.S. Dollars..................................................................................         77
   10.12  Bulk Sales Laws...............................................................................         77
   10.13  Construction of Agreement.....................................................................         77
   10.14  Severability..................................................................................         78
   10.15  Third Party Beneficiary.......................................................................         78
</TABLE>


                                      iii


<PAGE>
                            ASSET PURCHASE AGREEMENT

     ASSET PURCHASE AGREEMENT, dated as of December 19, 2002 (this "Agreement"),
by and among Citizens Communications Company, a Delaware corporation ("Seller"),
and K-1 USA  Ventures,  Inc.  ("K-1  USA" and  until the  effective  time of the
assignment  of  this  Agreement  to the  k1  Designee  as  required  by  Section
6.8(f)(i), the "Buyer"), a Delaware corporation and a wholly-owned subsidiary of
k1 Ventures Limited, a Singapore corporation.  Seller and Buyer are referred to,
individually, as a "Party" and, together, as the "Parties."

                               W I T N E S S E T H
                               -------------------

     WHEREAS, Seller owns all of the Assets (as defined below); and

     WHEREAS,  Buyer desires to purchase and assume,  and Seller desires to sell
and assign, the Assets, and certain associated  liabilities,  upon the terms and
conditions hereinafter set forth in this Agreement; and

     WHEREAS, (i) on the date hereof k1 Ventures Limited and Seller have entered
into  a  letter  agreement  wherein  k1  Ventures  Limited   undertakes  certain
obligations to provide  financial  support to enable Buyer to satisfy certain of
Buyer's financial  obligations  under this Agreement (the "Support  Agreement"),
and (ii) Kephinance Investments Pte Ltd and PCG Greenstreet Venture I, L.P. have
entered into Voting  Agreements with Seller pursuant to which such  shareholders
of k1 Ventures Limited have agreed to vote, in accordance with the terms of such
Voting  Agreements,  all shares of voting securities of k1 Ventures Limited over
which they have the power to control  the voting  thereof  (which  shares in the
aggregate  exceed the number of shares  that are needed to approve  the  matters
addressed in such Voting Agreements).

     NOW, THEREFORE, in consideration of the mutual covenants,  representations,
warranties and  agreements  hereinafter  set forth,  and intending to be legally
bound hereby, the Parties agree as follows:

                                    ARTICLE I

                                   DEFINITIONS

     1.1  Definitions.  As used in this Agreement,  the following terms have the
meanings specified in this Section 1.1.

     "Affiliate"  of any Person  means a Person  that  directly,  or  indirectly
through one or more intermediaries,  controls,  or is controlled by, or is under
common control with, the Person specified.

     "Agreement" means this Asset Purchase Agreement together with the Schedules
and Exhibits attached hereto, as the same may be from time to time amended.

     "Allocation" has the meaning set forth in Section 6.10(f).



<PAGE>

     "ALTA" has the meaning set forth in Section 6.17.

     "Ancillary   Agreements"  means  the  agreements,   contracts,   documents,
instruments and  certificates  provided for in this Agreement to be entered into
by one or more of the Parties or any of their  Affiliates in connection with the
transactions contemplated by this Agreement.

     "Assets" has the meaning set forth in Section 2.1.

     "Asset Material Adverse Effect" means any occurrence or condition,  arising
after the date  hereof,  that has or would  reasonably  be  expected  to have an
aggregate   adverse   economic   impact,   taking  into   account  all  relevant
considerations,  in excess of $10,000,000 on the condition of the Assets,  taken
as a whole, or on the business,  operations,  financial  condition or results of
operations of the Business,  taken as a whole, other than any such occurrence or
condition (a) arising from business,  economic or financial  market  conditions,
considered  generally,  (b)  arising  from  the  conditions  in the gas  utility
industry,  considered  generally and not  specifically  as to the Business,  (c)
which is remedied,  cured or  otherwise  reversed  (including  by the payment of
money or application of insurance  proceeds) before the Termination Date, or (d)
arising  from  entering  into  this  Agreement  or  the   announcement   of  the
transactions  contemplated  by this  Agreement;  it  being  understood  that the
occurrences  and/or  conditions which could,  depending on the nature and extent
thereof,  be deemed to result in an Asset Material Adverse Effect shall include,
without limitation, (x) the terms or conditions of a Final Order with respect to
any Required Regulatory Approval,  considered  individually or together with any
other  such  Final  Order(s)  with  respect  to any  other  Required  Regulatory
Approval(s),  other than Regulatory  Exceptions,  and (y) facts or circumstances
relating to the Assets and/or the Business  which come to the attention of Buyer
between the date of this Agreement and the Closing Date,  whether as a result of
Buyer's  Inspection of the Assets or its  examination  of  information  and data
relating to the Assets and/or the Business,  as  contemplated  by Section 6.2 or
6.3, or otherwise.

     "Assigned  Agreements" means any contracts,  agreements,  software licenses
and related  contracts,  Easements,  Real Property Leases and personal  property
leases entered into by Seller or any of its Affiliates (and any amendment to any
of the foregoing) with respect to the ownership, operation or maintenance of the
Assets  or the  Business,  including  without  limitation,  the  CBA  and  those
disclosed on Schedules 4.5 and 4.11(a) and excluding those disclosed on Schedule
2.2.

     "Assignment and Assumption  Agreement"  means the Assignment and Assumption
Agreement  between  Seller  and  Buyer  substantially  in the form of  Exhibit A
attached hereto.

     "Assumed Liabilities" has the meaning set forth in Section 2.3.

     "Balance Sheet" has the meaning set forth in Section 4.20.

     "Base Purchase Price" has the meaning set forth in Section 3.2.

                                       2

<PAGE>

     "Benefit Plans" means each of Seller's deferred compensation and each bonus
or other incentive compensation,  stock purchase,  stock option and other equity
compensation  plan,  program,  agreement  or  arrangement;   each  severance  or
termination pay, medical,  surgical,  hospitalization,  life insurance and other
"welfare"  plan,  fund or program (within the meaning of Section 3(1) of ERISA);
each  profit-sharing,  stock  bonus or other  "pension"  plan,  fund or  program
(within the meaning of Section 3(2) of ERISA);  each employment,  termination or
severance  agreement;  and each other  employee  benefit  plan,  fund,  program,
agreement  or  arrangement,  in each  case,  that is  sponsored,  maintained  or
contributed  to or required to be  contributed  to by such Party or by any ERISA
Affiliate,  in any case  maintained  for employees of Seller  connected with the
Business, or in which such employees participate.

     "BHP" means  collectively BHP Hawaii,  Inc. and The Broken Hill Proprietary
Company Limited, and any successors thereof.

     "BHP Stock Sale Agreement" has the meaning set forth in Section 8.5.

     "Bill of Sale" means the Bill of Sale, substantially in the form of Exhibit
B attached hereto,  to be delivered at the Closing by Seller with respect to the
Tangible Personal Property included in the Assets transferred to Buyer.

     "Bond Counsel" has the meaning set forth in Section 6.14(c)(i).

     "Business" -- means collectively:

          (a) the  regulated  utility  business  of  manufacturing,  selling and
     distributing  synthetic natural gas on the island of Oahu,  Hawaii,  and of
     propane gas within the State of Hawaii, conducted by Seller through The Gas
     Company division of Seller;

          (b) the  non-utility  business of  purchasing,  marketing  and selling
     propane gas conducted by Seller within the State of Hawaii  through The Gas
     Company division of Seller;

          (c) the  appliance  repair and service  business  and propane  vehicle
     conversion  business conducted by Seller within the State of Hawaii through
     The Gas Company division of Seller; and

          (d) the provision of related  services and products and the engagement
     in related  activities by Seller within the State of Hawaii through The Gas
     Company division of Seller.

     "Business Day" means any day other than Saturday,  Sunday and any day which
is a day on which banking  institutions in the States of Hawaii and New York are
authorized by law or other governmental action to remain closed.

     "Buyer" has the meaning set forth in the Preamble.

                                       3

<PAGE>

     "Buyer Indemnifiable Loss" has the meaning set forth in Section 8.2.

     "Buyer Indemnitee" has the meaning set forth in Section 8.2.

     "Buyer  Material  Adverse  Effect"  means a Material  Adverse  Effect  with
respect to Buyer.

     "Buyer  Required  Regulatory   Approvals"  means  the  Required  Regulatory
Approvals set forth in Schedule 5.3(b).

     "CBA" has the meaning set forth in Section 6.12(a).

     "CERCLA"   means  the   federal   Comprehensive   Environmental   Response,
Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., as amended.

     "Capital  Expenditures"  means  capital  additions  to or  replacements  of
property,  plants and equipment  included in the Assets or otherwise relating to
the Business and other expenditures or repairs on property, plants and equipment
included  in  the  Assets  or  otherwise  relating  to  the  Business  that  are
customarily  capitalized  by  Seller  in  accordance  with  GAAP and its  normal
accounting policies.

     "Capital Expenditures Schedule" has the meaning set forth in Section 4.16.

     "Citizens Marks" has the meaning set forth in Section 2.2(c).

     "Classified Plan" means the Pension Plan for Classified Employees of Gasco,
Inc.

     "Closing" has the meaning set forth in Section 3.1.

     "Closing  Date" means one minute after 11:59 p.m. on the date which is five
(5)  Business  Days  following  the  date on which  the  last of the  conditions
precedent  to the Closing set forth in Article VII of this  Agreement  have been
either  satisfied  or waived by the Party  for  whose  benefit  such  conditions
precedent  exist,  subject to such  extensions (not to exceed six (6) months) as
may be  required  by  Seller  to repair or  replace  lost or  damaged  Assets in
accordance with Section 6.13(c),  or such other date as the Parties may mutually
agree.

     "COBRA" means the Consolidated Omnibus Budget Reconciliation Act of 1984.

     "COBRA Continuation Coverage" means the requirements of Section 4980B(f) of
the Code.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "Commercially  Reasonable  Efforts"  means  efforts  by a Party  which  are
reasonably within the contemplation of the Parties at the time of executing this
Agreement  and which do not  require  the  performing  Party to expend any funds
other than  expenditures  which are customary and reasonable in  transactions of
the kind and nature  contemplated  by this Agreement in order for the performing
Party to satisfy its obligations hereunder.


                                       4

<PAGE>

     "Current Retirees" has the meaning set forth in Section 6.12(d)(iii)(G).

     "Direct Claim" has the meaning set forth in Section 8.4(c).

     "Easements"  means  all  easements,   rights  of  way,  permits,  licenses,
prescriptive rights and other ways of necessity, and other similar real property
grants, whether or not of record, relating to real property.

     "Encumbrances"  means any mortgages,  pledges,  liens,  security interests,
conditional  and  installment  sale  agreements,  activity and use  limitations,
conservation easements, deed restrictions, encumbrances and charges of any kind.

     "Environmental   Claim"  means  any  and  all  pending  and/or   threatened
administrative,  regulatory or judicial actions, suits, orders, claims, demands,
liens, notices, notices of violations, investigations,  complaints, requests for
information,  proceedings,  or other written communication,  whether criminal or
civil,  pursuant to or relating to any applicable  Environmental Law or pursuant
to a common  law  theory,  by any Person  (including,  but not  limited  to, any
Governmental  Authority,   private  person  and  citizens'  group)  based  upon,
alleging,  asserting,  or claiming any actual or potential  (a) violation of, or
liability  under any  Environmental  Law,  (b)  violation  of any  Environmental
Permit, or (c) liability for investigatory  costs, cleanup costs, removal costs,
remedial costs,  response costs,  natural  resource  damages,  property  damage,
personal injury,  fines, or penalties  arising out of, based on, resulting from,
or related to any Environmental  Condition or any Release or threatened  Release
into the environment of any Regulated  Substances at any location related to the
Assets,  including, but not limited to, any Off-Site Location to which Regulated
Substances,  or materials containing Regulated Substances,  were transported for
handling, storage, treatment, or disposal.

     "Environmental  Condition"  means the  presence  or Release of a  Regulated
Substance  (other than a  naturally-occurring  substance) on or in environmental
media, or structures on Real Property, at an Off-Site Location or other property
(including  the  presence in surface  water,  groundwater,  soils or  subsurface
strata,  or air),  including  the  subsequent  migration  of any such  Regulated
Substance,   regardless  of  when  such  presence  or  Release  occurred  or  is
discovered.

     "Environmental Data" has the meaning set forth in Section 6.3(d).

     "Environmental Laws" means all federal, state, local,  provincial,  foreign
and  international  civil and criminal  laws,  regulations,  rules,  ordinances,
codes, decrees, judgments, directives, or judicial or administrative orders, and
any judicial or administrative interpretations thereof, relating to pollution or
the  regulation and protection of the  environment,  natural  resources or human
health and safety, including,  without limitation,  laws relating to Releases or
threatened  Releases of Regulated  Substances  (including,  without  limitation,
Releases  to  ambient  air,  surface  water,  groundwater,   land,  surface  and
subsurface  strata)  or  otherwise  relating  to  the  manufacture,  processing,
distribution,  use, treatment, storage, Release, transport, disposal or handling
of  Regulated  Substances.  "Environmental  Laws"  include:  (a) with respect to
federal law, CERCLA, the Hazardous Materials Transportation Act (49 U.S.C.ss.ss.
1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C.ss.ss.  6901
et seq.),  the Federal  Water  Pollution  Control Act (33  U.S.C.ss.ss.  1251 et
seq.),  the Clean Air Act (42  U.S.C.ss.ss.  7401 et seq.), the Toxic Substances
Control Act (15  U.S.C.ss.ss.  2601 et seq.),  the Oil  Pollution Act (33 U.S.C.
ss.ss. 2701 et seq.), the Emergency Planning and Community Right-to-Know Act (42
U.S.C.ss.ss.  11001  et  seq.),  the  Occupational  Safety  and  Health  Act (29
U.S.C.ss.ss.  651 et seq.),  the Safe Drinking Water Act (42 U.S.C.ss.  300f et.
seq.),  the Surface  Mine  Conservation  and  Reclamation  Act (30  U.S.C.ss.ss.
1251-1279),  and regulations adopted pursuant thereto, and counterpart state and
local laws, regulations adopted pursuant thereto; and (b) with respect to Hawaii
law, laws comparable to such federal  statutes and regulations  adopted pursuant
thereto.


                                       5

<PAGE>

     "Environmental  Liabilities"  means any  liabilities,  responsibilities  or
obligations  arising  under  Environmental  Laws or  relating  to  Environmental
Conditions or Regulated  Substances  (including  Environmental Claims and common
law liabilities relating to Environmental  Conditions and Regulated  Substances)
including but not limited to:

     (i) costs of  compliance  (including  capital,  operating  and other costs)
relating  to any  violation  or alleged  violation  of  Environmental  Laws with
respect to the ownership of the Assets or operation of the Business;

     (ii) property damage or natural resource damage arising from  Environmental
Conditions or Releases of Regulated  Substances at, on, in, under,  adjacent to,
or migrating from any Assets;

     (iii) any Remediation of Environmental  Conditions or Regulated  Substances
that are present or have been Released at, on, in, adjacent to or migrating from
the Assets;

     (iv) any  Environmental  Claims with respect to the ownership of any Assets
or operation of the Business;

     (v) any bodily injury or loss of life arising from Environmental Conditions
or Releases of Regulated Substances at, on, in, under,  adjacent to or migrating
from any Asset;

     (vi) any bodily injury,  loss of life, property damage, or natural resource
damage arising from the storage, transportation, treatment, disposal, discharge,
recycling or Release, at any Off-Site Location,  or arising from the arrangement
for such activities,  of Regulated  Substances  generated in connection with the
ownership of the Assets or the operation of the Business; and

     (vii)  any  Remediation  of  any  Environmental  Condition  or  Release  of
Regulated  Substances  arising  from  the  storage,  transportation,  treatment,
disposal, discharge,  recycling or Release, at any Off-Site Location, or arising
from the arrangement for such activities,  of Regulated  Substances generated in
connection with the ownership or operation of the Assets.


                                    6

<PAGE>

     "Environmental  Permits"  means any permits,  registrations,  certificates,
certifications,   licenses  and   authorizations,   consents  and  approvals  of
Governmental  Authorities  issued under  Environmental  Laws held by Seller with
respect to the Assets or the Business.

     "Environmental Reports" has the meaning set forth in Section 4.6.

     "ERISA"  means the Employee  Retirement  Income  Security  Act of 1974,  as
amended.

     "ERISA  Affiliate" means a trade or business,  whether or not incorporated,
that  together  with a Party  would be deemed a  "single  employer"  within  the
meaning of Section 4001(b) of ERISA.

     "Estimated Adjustment" has the meaning set forth in Section 3.3(b).

     "Estimated Closing Statement" has the meaning set forth in Section 3.3(b).

     "Excluded Assets" has the meaning set forth in Section 2.2.

     "Excluded Liabilities" has the meaning set forth in Section 2.4.

     "Exempt  Facilities" means those facilities listed in Exhibit A to the Loan
Agreement included in the IDRB Documents.

     "Final Order" means an action by the relevant  Governmental  Authority that
has not been reversed, stayed, enjoined, set aside, annulled or suspended and/or
with  respect  to  which  any  waiting  period  prescribed  by  law  before  the
transactions  contemplated  hereby may be  consummated  has expired and the time
period  permitted  by statute or  regulation  for filing any request for a stay,
petition for rehearing,  reconsideration or application for review of the action
or for filing a court appeal has passed.

     "Financial Statements" has the meaning set forth in Section 4.20(a).

     "FIRPTA  Affidavit"  means the Foreign  Investment in Real Property Tax Act
Certification and Affidavit to be executed by Seller.

     "GAAP" means U.S. generally accepted accounting principles. 

     "Gas Franchise  Act" means The Gas Franchise Act (Act 262,  Session Laws of
Hawaii 1967), as unamended.

     "Good Utility Practices" means those practices, methods, standards, guides,
or acts, as applicable, that (a) are generally accepted in the region during the
relevant time period for use in the gas, transmission and distribution industry,
(b) are commonly used in prudent gas, transmission and distribution engineering,
construction,  project  management and operations,  and (c) would be expected if
the Business is to be conducted at a reasonable cost in a manner consistent with
laws,  rules and  regulations  applicable to the Business and the  objectives of
reliability,  safety,  environmental  protection,  economy and expediency.  Good
Utility  Practice is  intended  to be  acceptable  practices,  methods,  or acts
generally  accepted  in the  region,  and is not  intended  to be limited to the
optimum practices, methods, or acts to the exclusion of all others.


                                       7

<PAGE>

     "Governmental Authority" means any foreign,  federal, state, local or other
governmental,   regulatory  or   administrative   agency,   court,   commission,
department,  board, or other governmental subdivision,  legislature,  rulemaking
board, court, tribunal, arbitrating body or other governmental authority.

     "Grandfathered  Active  Employees"  has the  meaning  set forth in  Section
6.12(d)(iii)(G).

     "Grandfathered   Individuals"   has  the   meaning  set  forth  in  Section
6.12(d)(iii)(G).

     "HTAWU" means Hawaii Teamsters and Allied Workers Union Local 996. 

     "HPUC" means the Public Utilities Commission of the State of Hawaii.

     "HSR Act" means the Hart-Scott-Rodino  Antitrust  Improvements Act of 1976,
as amended.

     "IDRB Documents" has the meaning set forth in Section 6.14(l).

     "IDRB   Indebtedness"  means  the  indebtedness  of  Seller  owing  to  the
Department  of Budget and  Finance of the State of Hawaii,  as the issuer of the
Revenue  Bonds and  arising  under the Loan  Agreement  included  among the IDRB
Documents.

     "Income Tax" means any federal, state, local or foreign Tax (a) based upon,
measured  by or  calculated  with  respect  to gross or net  income,  profits or
receipts (including,  without limitation, capital gains Taxes and minimum Taxes)
or (b) based upon,  measured by or  calculated  with  respect to multiple  bases
(including, without limitation, corporate franchise taxes) if one or more of the
bases on which such Tax may be based, measured by or calculated with respect to,
is described in clause (a), in each case together with any interest,  penalties,
or additions to such Tax.

     "Indemnifying  Party" means a Party  obligated  to provide  indemnification
under this Agreement.


                                       8

<PAGE>

     "Indemnitee" means a Person entitled to receive  indemnification under this
Agreement.

     "Independent  Accounting  Firm" means such  independent  accounting firm of
national reputation as is mutually appointed by the Buyer and Seller.

     "Inspection"   means  all  tests,   reviews,   examinations,   inspections,
investigations,  interviews,  verifications,  samplings  and similar  activities
conducted by Buyer or its  Representatives  prior to the Closing with respect to
the Assets, including "Phase I" and/or "Phase II" environmental assessments.

     "Intellectual  Property"  means patents and patent  rights,  trademarks and
trademark  rights,  service  marks and  rights  to  service  marks,  inventions,
copyrights and copyright rights, and all pending  applications for registrations
of patents, trademarks, and copyrights.

     "Inventories"  means  materials,  spare parts,  consumable  supplies,  fuel
supplies and chemical inventories relating to the Assets or the operation of the
Business.

     "Iwilei Property" means that certain parcel of real property formerly owned
by Gasco,  Inc.  located at 432  Pacific  Street  (formerly  known as 616 Iwilei
Road),  Honolulu,  Hawaii, and which is the same parcel of real property defined
as the "Iwilei Property" in the BHP Stock Sale Agreement.

     "k1 Designee" has the meaning set forth in Section 6.8(f)(i).

     "K-1 USA" means K-1 USA Ventures, Inc., a Delaware corporation.

     "Knowledge"  means the actual  knowledge,  as of the date  hereof or,  with
respect to any certificate  delivered  pursuant to this  Agreement,  the date of
delivery of such  certificate,  of the Persons  identified  on Schedule  1.1 and
successors to each such Person's employment responsibilities.

     "Loss"  means any  claim,  demand,  suit,  proceeding,  investigation  by a
Governmental  Authority,   loss,  liability,  fine,  levy,  damage,  obligation,
payment, cost or expense (including, without limitation, the cost and expense of
any action, suit,  proceeding,  assessment,  judgment,  settlement or compromise
relating thereto and reasonable attorneys' fees and reasonable  disbursements in
connection therewith).

     "Material Adverse Effect" means any occurrence or condition,  arising after
the date hereof,  that has or would  reasonably be expected to have an aggregate
adverse economic  impact,  taking into account all relevant  considerations,  in
excess  of  $10,000,000  on  the  business,  operations,  properties,  financial
condition or results of operations of any Party (including its Affiliates, taken
as a whole)  or on the  ability  of  either  Party to  perform  in all  material
respects its obligations under this Agreement and the Ancillary Agreements.

     "Material Taking" has the meaning set forth in Section 6.13(b).

     "Non-Union Employees" has the meaning set forth in Section 6.12(b).

     "Off-Site Location" means any real property or location other than the Real
Property.

     "Order" means any award,  decision,  injunction,  judgment,  order, consent
order,  writ,  decree,  consent decree,  ruling,  subpoena,  or verdict entered,
issued, made or rendered by any court, administrative agency, other Governmental
Authority, or by an arbitrator, each of which possesses competent jurisdiction.


                                       9

<PAGE>

     "Party" has the meaning set forth in the Recitals.

     "Permitted Encumbrances" means any of the following:

     (a) mechanics',  carriers', workers' and other similar liens arising in the
ordinary  course of business  for charges  that are not  delinquent  or that are
being contested in good faith and have not proceeded to judgment;

     (b) liens for current Taxes and assessments not yet due and payable;

     (c) with  respect to the Real  Property,  usual and  customary  nonmonetary
Encumbrances,   covenants,  Easements,  restrictions  and  other  title  matters
(whether or not recorded) that do not and are not reasonably likely to interfere
materially with the operation of that portion of the Business  conducted on such
Real Property or the Business as a whole;

     (d) Encumbrances  securing the payment or performance of any of the Assumed
Liabilities;

     (e) all applicable zoning ordinances and land use restrictions in effect as
of the date of this  Agreement  and all  changes to or new  adoptions  of zoning
ordinances and land use  restrictions  prior to the Closing Date that do not and
are not  reasonably  likely to interfere  materially  with the operation of that
portion of the  Business  conducted  on such Real  Property or the Business as a
whole;

     (f) with  respect  to any Asset  which  consists  of a  leasehold  or other
possessory interests in real property, all Encumbrances,  covenants,  Easements,
restrictions  and other title  matters  (whether or not  recorded)  to which the
underlying  fee estate in such real  property is subject that do not and are not
reasonably likely to interfere  materially with the operation of that portion of
the Business  currently  conducted on such  property or the Business as a whole;
and

     (g) any other Encumbrances,  obligations,  defects or irregularities of any
kind whatsoever affecting title to the Assets that will be terminated,  released
or waived on or before the Closing Date or that are not,  individually or in the
aggregate, reasonably likely to interfere materially with the present use of the
Assets or to interfere materially with the operation of the Business as a whole.

     "Permits"  means  any  permits,  licenses,   registrations,   certificates,
franchises  and other  authorizations,  consents and  approvals of  Governmental
Authorities held by Seller with respect to the Assets or the Business.


                                       10

<PAGE>

     "Person" means any  individual,  partnership,  limited  liability  company,
joint venture, corporation,  trust, unincorporated organization, or governmental
entity or any department or agency thereof.

     "Post-Closing Adjustment" has the meaning set forth in Section 3.3(d).

     "Post-Retirement  Life  Insurance  Benefits"  has the  meaning set forth in
Section 6.12(d)(iii)(G).

     "Proposed  Post-Closing  Adjustment"  has the  meaning set forth in Section
3.3(c).

     "Proprietary  Information" of a Party means all information about the Party
or  its  Affiliates,   including  their  respective  properties  or  operations,
furnished  to the  other  Party  or its  Representatives  by  the  Party  or its
Representatives,  before or after the date hereof,  regardless  of the manner or
medium  in which  it is  furnished  and all  analyses,  reports,  tests or other
information  created  or  prepared  by,  or on  behalf  of, a Party  during  the
performance  of  "Phase  I"  or  "Phase  II"  environmental   site  assessments.
Proprietary  Information  does not include  information  that: (a) is or becomes
generally available to the public, other than as a result of a disclosure by the
other Party or its  Representatives;  (b) was  available to the other Party on a
nonconfidential   basis   prior  to  its   disclosure   by  the   Party  or  its
Representatives;  (c) becomes  available to the other Party on a nonconfidential
basis  from a person,  other than the Party or its  Representatives,  who is not
otherwise  bound  by  a   confidentiality   agreement  with  the  Party  or  its
Representatives, or is not otherwise under any obligation to the Party or any of
its  Representatives  not to transmit the  information to the other Party or its
Representatives; or (d) is independently developed by the other Party.

     "PUHCA" has the meaning set forth in Section 4.25.

     "PUHCA Staff Concurrence" has the meaning set forth in Section 6.8(f)(ii).

     "Purchase Price" has the meaning set forth in Section 3.2.

     "Qualifying Offer" means an offer to a Transferred  Employee of the same or
similar  job  that is at  least  100%  of such  employee's  current  total  cash
compensation  at the time the  offer was made  (consisting  of base  salary  and
participation  in 2003  incentive  bonus  as  contemplated  in  Section  6.12(i)
hereof),  and does not require,  as a condition of  acceptance,  a relocation of
residence as described in Section 6.12(f).

     "Real Property" has the meaning set forth in Section 2.1(a).  Any reference
to the Real Property includes, by definition, Seller's right, title and interest
in  and to  the  surface  and  subsurface  elements,  including  the  soils  and
groundwater  present at the Real  Property,  and any  reference to items "at the
Real Property"  includes all items "at, on, in, upon,  over,  across,  under and
within" the Real Property.

     "Real Property Leases" has the meaning set forth in Section 4.5.

     "Recovery Costs" has the meaning set forth in Section 8.4(d).


                                       11

<PAGE>

     "Regulated  Substances" means (a) any petrochemical or petroleum  products,
oil or coal ash, radioactive materials,  radon gas, asbestos in any form that is
or could become friable,  urea formaldehyde foam insulation and dielectric fluid
containing polychlorinated biphenyls; (b) any chemicals, materials or substances
defined as or included in the definition of "hazardous  substances,"  "hazardous
wastes," "hazardous materials," "hazardous constituents,"  "restricted hazardous
materials,"    "extremely    hazardous    substances,"    "toxic    substances,"
"contaminants," "pollutants," "toxic pollutants" or words of similar meaning and
regulatory  effect  under any  applicable  Environmental  Law; and (c) any other
chemical, material or substance, exposure to which or whose discharge, emission,
disposal  or  Release is  prohibited,  limited or  regulated  by any  applicable
Environmental Law.

     "Regulations" has the meaning set forth in Section 6.14(a)(iii).

     "Regulatory Exceptions" means any of the following:

     (a) an  imposition  by the HPUC of a  reasonable  rate  moratorium  for the
Business  or a  requirement  by the HPUC of the  filing  of a rate  case for the
Business;

     (b) an imposition by the HPUC  requiring  Buyer to provide  service,  or to
improve  service,  to Persons  located  in any  authorized  service  area of the
Business,   provided  such   requirement  has  a  corresponding   rate  recovery
opportunity; and

     (c) terms and  conditions  imposed by any  Governmental  Authority  that is
required to issue a Required  Regulatory  Approval that are either (i) usual and
customary;  (ii)  applicable  to the Business as of the date of this  Agreement,
including the terms and conditions of the tariffs applicable to the Business; or
(iii)  contemplated  by this  Agreement,  including  the  understandings  of the
Parties referenced in Section 6.8(c)(i).

     "Regulatory  Material  Adverse Effect" means,  with respect to any Party, a
Material Adverse Effect resulting from the effect on such Party of the terms and
conditions  of a Final Order with  respect to any Required  Regulatory  Approval
other than  Regulatory  Exceptions,  and  additionally  with respect to Buyer, a
Regulatory  Material  Adverse Effect also shall result from a denial by the HPUC
of the Parties'  joint request for Buyer to republish and file, in Buyer's name,
Seller's  existing rates and tariffs for the Business upon Closing except to the
extent any  required  changes  would not have a material  effect on Buyer  after
taking into account all relevant considerations.

     "Release" means release,  emission,  spill,  leak,  discharge,  dispose of,
pump, pour, emit, empty, inject,  leach, dump or allow to escape into or through
the environment.

     "Remediation"  means  any  action  taken  in  the  investigation,  removal,
confinement,  mitigation,  cleanup,  treatment, or monitoring of a Release or an
Environmental  Condition  on Real  Property  or  Off-Site  Location,  including,
without limitation,  (a) obtaining any Permits or Environmental Permits required
for such remedial activities, and (b) implementation of any engineering controls
and institutional controls. The term "Remediation" includes, without limitation,
any action which constitutes "removal action" or "remedial action" as defined by
Section  101  of  CERCLA,  Section  6901(23)  and  (24);  or  any  action  which
constitutes  "remedial  action" as defined by Hawaii Revised  Statutes  Sections
128D-1.


                                       12

<PAGE>

     "Representatives" of a Party means such Party's authorized representatives,
including without limitation, its professional and financial advisors.

     "Required Regulatory  Approvals" means with respect to a Party, any consent
or approval of, filing with, or notice to, any  Governmental  Authority  that is
necessary  for the  execution  and delivery of this  Agreement and the Ancillary
Agreements  by  such  Party  or the  consummation  thereby  of the  transactions
contemplated hereby, other than such consents, approvals, filings or notices (i)
which are not  required in the  ordinary  course to be obtained or made prior to
the Closing and the transfer of the Assets, (ii) which, if not obtained or made,
will not prevent such Party from performing its material obligations  hereunder,
or (iii) that relate to a Permit or an Assigned  Agreement  that is not material
to the Business, taken as a whole.

     "Required Shareholder Actions" has the meaning set forth in Section 5.3(c).

     "Revenue Bonds" has the meaning set forth in Section 6.14(a)(i).

     "Savings Plan" has the meaning set forth in Section 6.12(d)(iii)(H).

     "SEC" means the Securities and Exchange Commission and any successor agency
thereto.

     "Seller" has the meaning set forth in the Preamble.

     "Seller Indemnifiable Loss" has the meaning set forth in Section 8.1.

     "Seller Indemnitee" has the meaning set forth in Section 8.1.

     "Seller  Material  Adverse  Effect"  means a Material  Adverse  Effect with
respect to Seller.

     "Seller  Required  Regulatory  Approvals"  means  the  Required  Regulatory
Approvals set forth in Schedule 4.3(b).

     "Seller SEC Reports" has the meaning set forth in Section 4.21.

     "Seller's   Pension   Plan"  has  the   meaning   set   forth  in   Section
6.12(d)(iii)(E).

     "Seller's   401(k)  Plan"  means  the   Citizens   401(k)   Savings   Plan.

     "Special Warranty Deed" means a special warranty deed  substantially in the
form of Exhibit C attached hereto.

     "Subsidiary" when used in reference to any Person means any entity of which
outstanding  securities  having ordinary voting power to elect a majority of the
Board of Directors or other Persons  performing similar functions of such entity
are owned directly or indirectly by such Person.


                                       13

<PAGE>

     "Sufficient Notice" has the meaning set forth in Section 6.14(c)(ii).

     "Support  Agreement"  has the  meaning set forth in clause (i) of the third
recital to this Agreement.

     "Taking" has the meaning set forth in Section 6.13(b).

     "Tangible Personal Property" has the meaning set forth in Section 2.1(c).

     "Taxes"  means  all  taxes,  charges,  fees,  levies,  penalties  or  other
assessments  imposed by any federal,  state,  local or foreign taxing authority,
including,  but not limited  to,  income,  excise,  property,  sales,  transfer,
franchise,  payroll,  withholding,  social  security,  gross receipts,  license,
stamp, occupation,  employment or other taxes, including any interest, penalties
or additions attributable thereto.

     "Tax Impact" has the meaning set forth in Section 6.14(a)(vi).

     "Tax Return" means any return,  report,  information  return,  declaration,
claim for  refund or other  document  (including  any  schedule  or  related  or
supporting  information)  required to be supplied to any taxing  authority  with
respect to Taxes including amendments thereto.

     "Termination Date" has the meaning set forth in Section 9.1(b).

     "Third Party Claim" means any claim,  action, or proceeding made or brought
by any Person who is not (a) a Party to this Agreement, or (b) an Affiliate of a
Party to this Agreement.

     "Title Commitment" has the meaning set forth in Section 6.17.

     "Title Company" has the meaning set forth in Section 6.17.

     "Title Policies" has the meaning set forth in Section 6.17.

     "Transfer Taxes" means any real property  transfer or gains tax, sales tax,
conveyance  fee, use tax,  stamp tax,  stock  transfer tax or other similar tax,
including  any related  penalties,  interest and additions to tax, but excluding
any Income Tax.

     "Transferable  Permits" means those Permits and Environmental  Permits with
respect to the Assets or the Business  which may be transferred to Buyer with or
without a filing  with,  notice to,  consent of or approval of any  Governmental
Authority, and excluding those Permits and Environmental Permits with respect to
the Assets or the Business which are  non-transferable to Buyer and with respect
to which Buyer must apply for and obtain replacements.


                                       14

<PAGE>

     "Transferred   Employees"  means   Transferred   Non-Union   Employees  and
Transferred Union Employees.

     "Transferred  Employee Records" means records related to Seller's employees
who become employees of Buyer but only to the extent such records pertain to (A)
skill and development  training and biographies,  (B) seniority  histories,  (C)
salary  and   benefit   information,   (D)   Occupational,   Safety  and  Health
Administration reports, or (E) subject to the limitation of the Health Insurance
Portability  and  Accountability  Act of 1996 and any  applicable  state privacy
legislation and regulations, active medical restriction forms.

     "Transferred  Non-Union  Employees"  has the  meaning  set forth in Section
6.12(b).

     "Transferred Union Employees" has the meaning set forth in Section 6.12(a).

     "Union Employees" has the meaning set forth in Section 6.12(a).

     "WARN Act" means the Federal Worker Adjustment  Retraining and Notification
Act of 1988, as amended.

     1.2 Certain  Interpretive  Matters.  In this Agreement,  unless the context
otherwise  requires,  the singular shall include the plural, the masculine shall
include  the  feminine  and  neuter,  and vice  versa.  The term  "includes"  or
"including"  shall mean  "including  without  limitation."  The terms  "hereof,"
"herein" and  "herewith"  and words of similar  import shall,  unless  otherwise
stated, be construed to refer to this Agreement as a whole (including all of the
Schedules  and  Exhibits  hereto) and not to any  particular  provision  of this
Agreement.  References to a Section,  Article,  Exhibit or Schedule shall mean a
Section,  Article,  Exhibit or Schedule of this  Agreement,  and  reference to a
given  agreement  or  instrument  shall  be a  reference  to that  agreement  or
instrument as modified, amended, supplemented or restated through the date as of
which such reference is made.

                                   ARTICLE II

                                PURCHASE AND SALE

     2.1 Transfer of Assets.  Upon the terms and subject to the  satisfaction of
the conditions  contained in this Agreement,  at the Closing,  Seller will sell,
assign,  convey,  transfer and deliver to the k1 Designee,  as Buyer, and the k1
Designee,  as Buyer,  will  purchase,  assume and acquire from Seller,  free and
clear of all Encumbrances (except for Permitted  Encumbrances),  all of Seller's
right, title and interest in and to all the assets (except for Excluded Assets),
real, personal or mixed, tangible, or intangible, used or held for use by Seller
in or in  connection  with,  or  otherwise  necessary  for,  the  conduct of the
Business,  each as in existence on the Closing Date (such assets,  collectively,
the "Assets"), including, without limitation, those assets described below, each
as in existence on the Closing Date:

     (a) those certain  parcels of real property  owned by Seller  together with
all fixtures,  buildings,  facilities,  storage  tanks,  and other  improvements
thereon and all  appurtenances  thereto as  described in Schedule 4.9 (the "Real
Property");


                                       15

<PAGE>

     (b) all accounts  receivable and earned but unbilled revenues  attributable
to the Business, and all Inventories;

     (c)   all   machinery   (mobile   or   otherwise),   equipment   (including
communications  equipment and  computers),  vehicles,  rolling stock,  transport
vessels,  barges,  tools,  furniture and furnishings and other personal property
related to the Business, owned by Seller and located on the Real Property on the
Closing Date, together with all the personal property of Seller used principally
in the  operation  of the  Business  that are in the  possession  of Seller  and
whether  or not  located  on the  Real  Property  (collectively,  the  "Tangible
Personal Property"), and all transmission, distribution and other pipelines used
by  Seller in the  operation  of the  Business,  and all  fixtures,  facilities,
storage tanks and other  improvements  related to the Business,  owned by Seller
and located on any real property leased by Seller on the Closing Date;

     (d) subject to the provisions of Section 6.7(c), all rights of Seller under
all Assigned Agreements;

     (e) subject to the provisions of Section 6.7(c), all rights of Seller under
all Real Property Leases;

     (f) all rights of Seller under all  Transferable  Permits and all rights of
Seller, and the franchise granted to Seller, under the Gas Franchise Act;

     (g) all books,  customer lists and customer  information  databases,  meter
reading and service data,  accounts payable and receivable  data,  operating and
maintenance records,  warranty  information,  operating,  safety and maintenance
manuals,    engineering   design   plans,   blueprints   and   as-built   plans,
specifications,  procedures and similar items of Seller relating specifically to
the Assets  and  necessary  for the  operation  of the  Assets and the  Business
(subject to the right of Seller to retain copies of same for its use) other than
such items which are  proprietary to third parties and accounting  records,  and
the books and records of Gasco, Inc. to the extent reasonably available;

     (h) all  unexpired,  transferable  warranties  and  guarantees  from  third
parties with respect to any Asset as of the Closing Date;

     (i) Seller prepaid expenses;

     (j) petty cash held locally for the benefit of the Business; and

     (k) to the  extent  transferable,  the  insurance  policies  of Seller  (or
designated  rights  of  Seller  thereunder,  as the  case may be)  described  in
Schedule 2.1(k).

     2.2 Excluded  Assets.  Nothing in this Agreement will constitute a transfer
to Buyer of, or be construed as conferring on Buyer, and Buyer is not acquiring,
any right,  title or interest in or to the following  specific  assets which are
associated  with the Assets or the Business,  but which are hereby  specifically
excluded  from the sale and the  definition  of  Assets  herein  (the  "Excluded
Assets"):


                                       16

<PAGE>

     (a) assets that Seller uses in both the Business  and Seller's  electric or
communications  businesses,  the  material  items of  which  are  identified  in
Schedule 2.2 hereto,  and any contracts or agreements  regarding the procurement
of goods or services by Seller other than primarily for use in the Business;

     (b) cash and cash equivalents  (including checks) in transit, in hand or in
bank  accounts,  other  than  petty  cash held  locally  for the  benefit of the
Business;

     (c)  the  rights  of  Seller  and its  Affiliates  to the  names  "Citizens
Communications Company", "Citizens Energy Services", "Citizens Utilities", "CZN"
or "Citizens" or any other trade names,  trademarks,  service  marks,  corporate
names, corporate symbols or logos or any part, derivative or combination thereof
(the "Citizens Marks");

     (d) the stock  record and minute books of Seller,  duplicate  copies of all
books and records  transferred to Buyer, all records prepared in connection with
the sale of the  Business  (including  bids  received  from  third  parties  and
analyses  relating to the Business and all  original  documents  relating to the
Revenue Bonds  (provided that copies of such  documents  relating to the Revenue
Bonds have been furnished to Buyer);

     (e) assets  disposed of by Seller  after the date of this  Agreement to the
extent such dispositions are not prohibited by this Agreement;

     (f) the  rights  of Seller in and to any  causes  of action  against  third
parties  (including  indemnification  and  contribution)  relating  to any  Real
Property or Tangible Personal Property,  Permits,  Environmental Permits, Taxes,
Real Property Leases or the Assigned Agreements, if any, and not relating to any
of the Assumed Liabilities  (subject to the proviso in Section 2.3(f) and to the
provisions of Section 8.5, to the extent  applicable),  including any claims for
refunds,  prepayments,  offsets,  recoupment,  insurance  proceeds  (subject  to
Section 6.13(c)),  condemnation  awards (subject to Section 6.13(b)),  judgments
and the like, whether received as payment or credit against future  liabilities,
relating  specifically  to the Real  Property  or any  improvements  thereon and
relating to any period prior to the Closing Date;

     (g) all  personnel  records of Seller and its  Affiliates  relating  to the
Transferred  Employees other than Transferred Employee Records or other records,
the  disclosure  of which is required by law or legal or  regulatory  process or
subpoena;

     (h) any and all of Seller's  rights and  interests in any contract  that is
not an Assigned Agreement or that is an intercompany  transaction between Seller
and an Affiliate of Seller and all accounts owing by and among Seller and any of
its  Affiliates,  whether or not any such  intercompany  transaction  or account
relates  to  the  provision  of  goods  and  services,   payment   arrangements,
intercompany charges or balances, or the like;

     (i) except to the extent  set forth in  Section  3.4,  rights to refunds of
Taxes  payable with respect to the  Business,  the Assets,  or any other assets,
properties or operations of Seller or any Affiliate  thereof,  including without
limitation all rights to refunds of the overpayment of public utility Taxes paid
prior to the Closing Date;

     (j) all deferred tax assets or collectibles;


                                       17

<PAGE>

     (k) any insurance  policy,  bond, letter of credit or similar item, and any
cash surrender  value in regard thereto,  other than the insurance  policies (or
the  designated  rights of Seller  thereunder,  as the case may be) described in
Section 2.1(k);

     (l)  except as  otherwise  set forth in  Section  6.12  (including  Section
6.12(d)(iii)(D)  with respect to the Classified Plan), assets attributable to or
related to a Benefit Plan; and

     (m) all other assets listed in Schedule 2.2 hereto.

     2.3 Assumed  Liabilities.  On the Closing Date, the k1 Designee,  as Buyer,
shall deliver to Seller the  Assignment  and  Assumption  Agreement  pursuant to
which the k1 Designee,  as Buyer,  shall assume and agree to discharge when due,
without  recourse by Buyer against  Seller,  in accordance  with the  respective
terms and  subject to the  respective  conditions  thereof,  all of the  Assumed
Liabilities.  The following liabilities and obligations of Seller or Buyer which
relate to, or arise by virtue of Seller's or Buyer's  ownership of the Assets or
operation  of the  Business  (other  than  Excluded  Liabilities  as provided in
Section 2.4) are referred to collectively as the "Assumed Liabilities":

     (a) except as otherwise  provided in Section  6.7(c),  all  liabilities and
obligations  of Seller or Buyer  arising on or after the Closing  Date under the
Assigned  Agreements,  the Real Property Leases, and the Transferable Permits in
accordance with the terms thereof,  including,  without limitation, the Assigned
Agreements  entered  into by Seller (i) prior to the date  hereof and (ii) after
the date hereof consistent with the terms of this Agreement, except in each case
to the extent such liabilities and  obligations,  but for a breach or default by
Seller,  would have been paid,  performed or otherwise discharged on or prior to
the  Closing  Date and are not  otherwise  included  among the items  causing an
adjustment  to the Base  Purchase  Price  contemplated  in Section 3.3 or to the
extent such  liabilities or obligations  arise out of any such breach or default
or out of any event  which after the giving of notice or passage of time or both
would constitute a default by Seller;

     (b) all liabilities and obligations of Seller for accounts  payable,  other
taxes accrued,  and other current and accrued liabilities to the extent included
among  the  items  included  in  the  adjustment  to  the  Base  Purchase  Price
contemplated in Section 3.3;

     (c) all  liabilities  and  obligations  associated  with the  Assets or the
Business in respect of Taxes for which  Buyer is liable  pursuant to Section 3.4
or 6.10(a) hereof;

     (d) all  liabilities and obligations of Seller or Buyer with respect to the
Transferred  Employees incurred prior to, on or after the Closing Date for which
Buyer is responsible pursuant to Section 6.12;

     (e) all  Environmental  Liabilities,  in each case, to the extent that such
liability,  responsibility,  obligation,  Environmental  Claim or Remediation is
attributable  to or  arises  from an act,  event,  occurrence  or  Environmental
Condition  transpiring,  occurring or arising on or after the Closing Date.  For
purposes  of  clarity  and  subject  to  Section   2.3(f),   (i)  a   liability,
responsibility,  obligation,  Environmental Claim or Remediation attributable to
or arising from an Environmental  Condition or an Environmental Claim arising or
asserted on or after the Closing Date, but relating to an act, event, Release or
occurrence that transpired or occurred prior to the Closing Date shall not be an
Assumed   Liability   under  this   Section   2.3(e),   and  (ii)  a  liability,
responsibility,  obligation,  Environmental Claim or Remediation attributable to
or arising from an Environmental Condition or Release that commenced or occurred
prior to the Closing Date and  continued  after the Closing Date shall be deemed
to be an Assumed  Liability  under this Section 2.3(e) in such  proportion as is
reasonably  allocable  to the  post-Closing  period  taking into account all the
relevant facts and circumstances relating thereto;


                                       18

<PAGE>

     (f) until  Buyer has  incurred  at least  but not more than  $1,150,000  of
otherwise indemnifiable Losses (determined after giving effect to the provisions
of Section  8.3) and thereby has become  entitled to  indemnification  by Seller
under  Section 8.2 and in  accordance  with Section  8.3(c),  all  Environmental
Liabilities  of  Seller,  in each  case,  to the  extent  that  such  liability,
responsibility,  obligation,  Environmental Claim or Remediation is attributable
to  or  arises  from  an  act,  event,  occurrence  or  Environmental  Condition
transpiring, occurring or arising prior to the Closing Date, it being understood
and agreed that a liability, responsibility,  obligation, Environmental Claim or
Remediation  attributable  to or  arising  from an  Environmental  Condition  or
Release that commenced or occurred prior to the Closing Date and continued after
the Closing Date shall be deemed to be an Assumed  Liability  under this Section
2.4(f) in such proportion as is reasonably  allocable to the pre-Closing  period
taking into account all the relevant facts and  circumstances  relating thereto;
provided,  that nothing set forth in this Section  2.3(f) shall require Buyer to
assume any  liabilities,  responsibilities  or  obligations  of Seller  that are
expressly  excluded in Section  2.4(h)  (relating  to the Iwilei  Property)  or,
subject  to  Section  8.5,  for any  Losses  which  either  Party,  as a  "Buyer
Indemnified  Party"  under the BHP Stock  Sale  Agreement,  is  entitled  to and
actually receives  indemnification  recovery from BHP as contemplated in Section
8.5;

     (g) any Tax that may be imposed by any federal,  state or local  government
on the ownership, sale (except as otherwise provided in Section 3.4 or 6.10(a)),
operation  of the  Business or use of the Assets on or after the  Closing  Date,
except for any Income Taxes attributable to the income of Seller;

     (h) all liabilities and obligations of Seller or Buyer arising on and after
the Closing  Date  pursuant to the tariff  applicable  to the  Business or under
those Orders  specifically  relating to the Assets or the Business  issued by or
entered into with any  Governmental  Authority and listed in Schedule  2.3(h) or
imposed on Buyer in any Required Regulatory Approval;

     (i) customer advances,  customer deposits, customer contributions in aid of
construction,  unperformed service obligations, Easement relocation obligations,
and engineering and construction  required to complete  scheduled  construction,
construction work in progress,  and other capital expenditure  projects, in each
case directly  related to the Business and  outstanding  on or arising after the
Closing Date; and

     (j) actions and proceedings  based on conduct,  actions,  circumstances  or
conditions  arising or  occurring  on or after the  Closing  Date,  actions  and
proceedings  described in Schedule 2.3(j),  actions and proceedings arising from
or directly related to any other Assumed Liability, and generic or industry-wide
actions and  proceedings  outstanding on or arising on or after the Closing Date
that are applicable to the Business.


                                       19

<PAGE>

     2.4 Excluded Liabilities.  Notwithstanding anything to the contrary in this
Agreement,  Buyer shall not assume or be obligated to pay,  perform or otherwise
discharge the following liabilities or obligations of Seller (collectively,  the
"Excluded Liabilities"):

     (a)  any  liabilities  or  obligations  of  Seller  that  are  not  Assumed
Liabilities,  including  in respect of any  Excluded  Assets or other  assets of
Seller that are not Assets;

     (b) any  liabilities or obligations  with respect to Taxes  attributable to
Seller's  ownership,  or use of the  Assets or  operation  of the  Business  for
taxable periods, or portions thereof, ending before the Closing Date, except for
Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof;

     (c) any  liabilities  or  obligations  of Seller  accruing under any of the
Assigned  Agreements  prior to the Closing Date or any liability,  other than an
Assumed  Liability,  underlying  a  Permitted  Encumbrance,  in each case to the
extent not included  among the items  causing an adjustment to the Base Purchase
Price contemplated in Section 3.3;

     (d) without duplication of any of the liabilities and obligations  relating
to environmental  matters  addressed in Section 2.4(g) or Section 2.4(h),  which
shall be the  exclusive  expression  of all  Excluded  Liabilities  relating  to
environmental  matters,  any and  all  asserted  or  unasserted  liabilities  or
obligations  to third  parties  (including  employees)  for injuries or damages,
whether arising from tortious conduct or otherwise,  or similar causes of action
relating to the Assets or the Business  arising  during or  attributable  to the
period  prior to the  Closing  Date,  other than such that  relate to any of the
Assumed Liabilities;

     (e) all  obligations  and  liabilities  of Seller  relating  to any accrual
included among the other current and accrued  liabilities of Seller attributable
to the Business that Seller excludes,  or that Buyer requires Seller to exclude,
from  the  adjustment  to  the  Base  Purchase  Price  contemplated  in  Section
3.3(a)(ii);

     (f) any payment  obligations of Seller pursuant to the Assigned  Agreements
accruing  prior to the Closing  Date,  including,  but not  limited  to,  rental
payments  pursuant to the Real Property  Leases,  in each case to the extent not
included  among the items  included in the adjustment to the Base Purchase Price
contemplated in Section 3.3;

     (g) subject to Section 2.3(f), all Environmental  Liabilities of Seller, in
each  case,  to the  extent  that such  liability,  responsibility,  obligation,
Environmental  Claim or  Remediation is  attributable  to or arises from an act,
event, occurrence or Environmental  Condition transpiring,  occurring or arising
prior to the Closing  Date,  it being  understood  and agreed  that,  subject to
Section 2.3(f), a liability, responsibility,  obligation, Environmental Claim or
Remediation  attributable  to or  arising  from an  Environmental  Condition  or
Release that commenced or occurred prior to the Closing Date and continued after
the Closing Date shall be deemed to be an Retained  Liability under this Section
2.4(g) in such proportion as is reasonably  allocable to the pre-Closing  period
taking into account all the relevant facts and circumstances relating thereto;

     (h) any and all asserted or unasserted liabilities or obligations of Seller
with respect to the Iwilei Property;


                                       20

<PAGE>

     (i) subject to Section 6.12, any liabilities or obligations of Seller,  any
Seller  Subsidiary or any ERISA Affiliate of Seller relating to any Benefit Plan
including but not limited to any such liability (i) relating to benefits payable
under  any  Benefit  Plan;  (ii)  relating  to  the  Pension  Benefit   Guaranty
Corporation  under Title IV of ERISA;  (iii) relating to a multi-employer  plan;
(iv) with  respect to  non-compliance  with the notice and benefit  continuation
requirements of COBRA;  (v) with respect to any  noncompliance  with ERISA,  the
Code or any other applicable laws; or (vi) with respect to any suit,  proceeding
or claim  which is brought  against  Seller,  Buyer,  any Benefit  Plan,  or any
fiduciary or former fiduciary of any such Benefit Plan;

     (j) subject to Section 6.12, any  liabilities  or obligations  arising from
facts or  circumstances  prior to the Closing Date relating to the employment or
termination of employment, including discrimination,  wrongful discharge, unfair
labor  practices,  or  constructive  termination  by Seller  of any  individual,
attributable  to any actions or  inactions  by Seller  prior to the Closing Date
other than  actions or  inactions  taken at the written  direction  of Buyer (it
being  understood and agreed that Buyer shall have no liability for action taken
by Seller pursuant to Section 6.12 except as expressly provided therein);

     (k) subject to Section 6.12, any obligations of Seller for wages, overtime,
employment taxes,  severance pay, transition payments in respect of compensation
or similar  benefits  accruing or arising prior to the Closing under any term or
provision of any contract,  plan, instrument or agreement relating to any of the
employees of Seller;

     (l) all  obligations  of Seller with  respect to the Revenue  Bonds and any
other indebtedness for money borrowed by Seller (including items due to Seller's
Affiliates) other than payment  obligations arising on or after the Closing Date
under any  equipment  lease of the kind listed in Schedule  4.11(a) or under any
line  extension  contracts  or  similar  construction  arrangements,   it  being
understood and agreed that such leases,  contracts and similar  arrangements  do
not create indebtedness for money borrowed; and

     (m) any liability of Seller arising out of a breach by Seller of any of its
obligations under this Agreement or the Ancillary Agreements.

     2.5  Control of Litigation.

     (a) The  Parties  agree and  acknowledge  that,  from and after the Closing
Date,  Seller shall be entitled  exclusively  to control,  defend and settle any
litigation,  administrative or regulatory  proceeding,  and any investigation or
Remediation activity (including without limitation any environmental  mitigation
or  Remediation  activities),   arising  out  of  or  related  to  any  Excluded
Liabilities,  and Buyer agrees to cooperate  reasonably in connection  therewith
and in connection  therewith,  shall comply with the  provisions of Section 6.2,
provided  that,  in no event shall  Seller's  exercise of its rights  under this
Section  2.5(a)  either  (i)  unreasonably  interfere  with  Buyer's  conduct or
operation  of  the  Business,   (ii)  place  any  environmental  liens  or  deed
restrictions  on the Real  Property,  (iii)  cause Buyer to be  responsible  for
maintaining  any  institutional  or  engineering  controls that may be part of a
Remediation activity, or (iv) cause Buyer to expend any material amount of money
that is not subject to reimbursement by Seller.


                                       21

<PAGE>

          (b) The Parties agree and acknowledge that, from and after the Closing
     Date, Buyer shall be entitled exclusively to control, defend and settle any
     litigation,  administrative or regulatory proceeding, and any investigation
     or Remediation  activity  (including  without  limitation any environmental
     mitigation  or  Remediation  activities),  arising out of or related to any
     Assumed   Liabilities,   and  Seller  agrees  to  cooperate  reasonably  in
     connection  therewith  and in connection  therewith,  shall comply with the
     provisions  of  Section  6.2;  provided  that,  in no event  shall  Buyer's
     exercise of its rights under this Section 2.5(b) cause Seller to expend any
     material amount of money that is not subject to reimbursement by Buyer.

                                  ARTICLE III

                                  THE CLOSING

     3.1  Closing.  Upon  the  terms  and  subject  to the  satisfaction  of the
conditions in Article VII of this Agreement,  each of (i) the sale,  assignment,
conveyance,  transfer  and  delivery of the Assets to Buyer by Seller,  (ii) the
payment of the Purchase  Price to Seller by Buyer,  (iii) the  assumption of the
Assumed  Liabilities by Buyer, and (iv) the consummation of the other respective
obligations of the Parties  contemplated  by this Agreement to be consummated on
the Closing  Date shall take place at a closing (the  "Closing"),  to be held at
the  offices of Seller's  Hawaii  regulatory  counsel in  Honolulu,  Hawaii,  or
another  mutually  acceptable  location,  at 9:00 a.m. local time on the Closing
Date.

     3.2 Closing Payment.  Upon the terms and subject to the satisfaction of the
conditions contained in this Agreement,  in consideration of the aforesaid sale,
assignment,  assumption,  conveyance, transfer and delivery of the Assets, Buyer
will pay or cause to be paid to Seller at the  Closing  an  aggregate  amount in
U.S.  dollars of one hundred fifteen million dollars  ($115,000,000)  (the "Base
Purchase  Price") plus or minus any  adjustments  pursuant to the  provisions of
this Agreement (the "Purchase Price"), by wire transfer of immediately available
funds  denominated in U.S.  dollars or by such other means as are agreed upon by
Seller and Buyer.

     3.3 Adjustment to Base Purchase Price.

     (a) Subject to Section  3.3(b),  at the Closing,  the Base  Purchase  Price
shall be adjusted to account for the items set forth in this Section 3.3(a):

     (i) the Base Purchase  Price shall be increased by the aggregate  amount of
all accounts receivable and earned but unbilled revenues (other than any amounts
that are due from any of Seller's  Affiliates  or that  otherwise  are  Excluded
Assets) attributable to the Business as of day immediately preceding the Closing
Date net of  Seller's  reserve  for  allowance  for bad debt  (as  reflected  in
Seller's written policy for allowance for bad debt as of the date hereof);

     (ii) the Base  Purchase  Price shall be decreased by all accounts  payable,
other taxes accrued,  other current and accrued  liabilities,  and the financial
cost of the accrued vacation time of the Transferred Employees,  in each case of
Seller and attributable to the Business as of the day immediately  preceding the
Closing Date (other than any liability that is an Excluded Liability);


                                       22

<PAGE>

     (iii) the Base Purchase price shall be decreased by the aggregate amount of
customer deposits  (including interest accrued on customer deposits) relating to
the Business outstanding as of the day immediately preceding the Closing Date;

     (iv) the Base Purchase Price shall be increased by the aggregate  amount of
Inventories  (exclusive  of spare parts and net of (x) fifty (50) percent of the
aggregate amount of the consumable  supplies  included in Inventories other than
fuel  supplies and (y) $22,000 for "line pack")  recorded on Seller's  books and
records in  accordance  with  Seller's  historic  practice  as it relates to the
Business as of day immediately preceding the Closing Date;

     (v) the Base  Purchase  Price  shall be  adjusted  to  account  for the net
balance payable to or by Seller,  if any, for items prorated pursuant to Section
3.4, other than the items addressed in Section 3.4(a);

     (vi) the Base Purchase  Price shall be increased or decreased if and to the
extent required by Section 6.13; and

     (vii)  the  Base  Purchase  Price  will  be  increased  or  decreased,   as
appropriate,  to  the  extent  (A)  the  aggregate  amount  of all  (i)  Capital
Expenditures  that result from  expenditures made by Seller between December 31,
2002 and the latest  month-end  arising  prior to the  Closing  Date  (including
expenditures  made during such period and recorded in the  Construction  Work in
Progress account of the Business as of the day immediately preceding the Closing
Date and  relating to such  Capital  Expenditures),  (ii)  without  duplication,
expenditures made during such period to purchase  materials,  supplies and other
capital  items that are  dedicated  to, but as of Closing have not been used in,
the construction or improvement of the property, plant or equipment and relating
to such Capital Expenditures and (iii) without  duplication,  other expenditures
made during such period and  recorded as an asset of the  Business as of the day
immediately   preceding   the  Closing   Date  and   relating  to  such  Capital
Expenditures,  is greater than  (resulting  in an increase to the Base  Purchase
Price) or is less than  (resulting in a decrease to the Base Purchase Price) (B)
the amount of  depreciation  booked by Seller in accordance  with prior practice
and  GAAP  with  respect  to  the  Assets  during  such  period   (pro-rated  as
appropriate);  provided,  that for purposes of such  adjustment,  the  following
Capital  Expenditures and related expenditures and related depreciation shall be
disregarded:  (x)  expenditures  in excess of $500,000 in the aggregate that are
not included in the Capital Expenditure  Schedule and are not otherwise approved
in writing by Buyer; (y) expenditures  incurred to repair or replace Assets that
are affected by any casualty loss or damage;  and (z) the amount of depreciation
otherwise included in subclause (B) above that relates to any depreciable Assets
resulting  from the  expenditures  described  in  subclause  (x) above or,  with
respect  to the  Assets  described  in clause  (y)  above,  to the  extent  such
depreciation  exceeds the amount of depreciation  that otherwise would have been
incurred on the lost or damaged Assets described in subclause (y) above had they
not been lost or damaged.

     (b) At least  ten  (10),  but no more than  thirty  (30) days  prior to the
Closing  Date,  Seller  shall  prepare  in good  faith and  deliver  to Buyer an
estimated closing statement (the "Estimated  Closing  Statement") that shall set
forth  Seller's best estimate of the estimated  adjustments to the Base Purchase
Price required by Section 3.3(a) (the "Estimated  Adjustment").  Within five (5)
Business Days following the delivery of an Estimated Closing Statement to Buyer,
Buyer may object in good faith to such Estimated Closing Payment in writing.  In
the event of any such  objection,  the Parties  shall  attempt to resolve  their
differences by negotiation.  If the Parties are unable to do so before three (3)
days  prior to the  Closing  Date,  then (i) the full  amount  of the  Estimated
Adjustment shall be used to adjust the Base Purchase Price at the Closing if the
amount in dispute is less than $500,000,  or (ii) the undisputed  portion of the
Estimated  Adjustment  shall be used to adjust  the Base  Purchase  Price at the
Closing if the amount in dispute is  $500,000  or more.  The  disputed  portions
shall be paid as a  Post-Closing  Adjustment  if and to the extent  required  by
Section 3.3(d).


                                       23

<PAGE>

     (c) Within sixty (60) days following the Closing Date, Seller shall prepare
and  deliver  to  Buyer  a final  closing  statement  setting  forth  the  final
adjustments to the Base Purchase Price required by Section 3.3(a) (the "Proposed
Post-Closing  Adjustment").   All  calculations  of  the  Proposed  Post-Closing
Adjustments shall be prepared using the same accounting principles, policies and
methods as Seller has  historically  used in connection  with the calculation of
the items reflected on such Proposed Post-Closing Adjustments.

     (d)  Within  thirty  (30)  days   following  the  delivery  of  a  Proposed
Post-Closing Adjustment to Buyer, Buyer may object to such Proposed Post-Closing
Adjustment in writing.  Seller  agrees to cooperate  with Buyer to provide Buyer
and  Buyer's   Representatives   information   used  to  prepare  the   Proposed
Post-Closing Adjustments and information relating thereto. If Buyer objects to a
Proposed  Post-Closing  Adjustment,  the Parties  shall  attempt to resolve such
dispute by  negotiation.  If such  Parties  are unable to resolve  such  dispute
within  thirty  (30) days of any such  objection  by Buyer,  the  Parties  shall
appoint  an  Independent   Accounting  Firm.  The  fees  and  expenses  of  such
Independent  Accounting Firm shall be allocated between Buyer and Seller so that
Seller's  share of such fees and expenses shall be in the same  proportion  that
the aggregate amount of such remaining disputed amounts so submitted by Buyer to
such auditor that is  successfully  disputed by Buyer (as finally  determined by
such auditor)  bears to the total amount of such remaining  disputed  amounts so
submitted by Buyer to such auditor. The Independent Accounting Firm shall review
such Proposed Post-Closing  Adjustment and Buyer's written objection thereto and
determine the appropriate  adjustment to the Base Purchase Price, if any, within
thirty (30) days of such  appointment.  The Parties agree to cooperate  with the
Independent  Accounting  Firm  and  provide  it  with  such  information  as  it
reasonably requests to enable it to make such determination. The finding of such
Independent  Accounting  Firm  shall be  binding  on the  Parties  hereto.  Upon
determination  by  agreement of the Parties or by binding  determination  of the
Independent  Accounting Firm of the appropriate  adjustment to the Base Purchase
Price (in either case,  the  "Post-Closing  Adjustment"),  if such  Post-Closing
Adjustment  results  in a  change  to the Base  Purchase  Price,  as  previously
adjusted  pursuant  to Section  3.3(b),  the Party  owing the  difference  shall
deliver  such  difference  to the Party  owed such  amount no later than two (2)
Business  Days  after the  determination  of such Post  Closing  Adjustment,  in
immediately  available  funds or in any other manner as reasonably  requested by
the Party owed such amount,  plus interest at 6.0% per annum on such  determined
amount from the Closing Date to (but not including) the date of payment.


                                       24

<PAGE>

     3.4  Prorations.  Buyer and  Seller  agree  that all of the items  normally
prorated,  including  those  listed  below  (but not  including  Income  Taxes),
relating to the Business and operation of the Assets shall be prorated as of the
Closing Date,  with Seller liable for such items to the extent such items relate
to any time period prior to the Closing Date, and Buyer liable for such items to
the  extent  such items  relate to  periods  commencing  with the  Closing  Date
(measured  in the same  units used to compute  the item in  question,  otherwise
measured by calendar  days).  The Base Purchase  Price shall be increased to the
extent  Buyer will  benefit  financially  due to Seller's  payment  prior to the
Closing  Date of the  portion  of any such item  allocable  to Buyer  under this
Section , and (except with  respect to the items  addressed in clause (a) below)
shall be decreased to the extent Seller will benefit  financially due to Buyer's
payment  prior to the Closing Date of the portion of any such item  allocable to
Seller under this Section. The items subject to proration include the following:

     (a)  Subject  to  Section  6.10(b),  personal  property,  real  estate  and
occupancy  Taxes,  assessments and other charges,  if any, on or with respect to
the Business and operation of the Assets;

     (b) rent,  Taxes (other than Income  Taxes) and all other items  (including
prepaid  services or goods not included in Inventories)  payable by or to Seller
under any of the Assigned  Agreements  to the extent not included in the account
payables  and other  taxed  accrued of the  Business  outstanding  as of the day
immediately preceding the Closing Date;

     (c) any permit, license,  registration,  compliance assurance fees or other
fees with respect to any Transferable Permit or other Asset;

     (d) sewer  rents and charges for water,  telephone,  electricity  and other
utilities with respect to the Assets;

     (e) rent and Taxes payable by or to Seller under the Real  Property  Leases
assigned to Buyer to the extent not  included in the account  payables and other
taxes accrued of the Business  outstanding as of the day  immediately  preceding
the Closing Date;

     (f) deposits made by Seller to the extent transferred to Buyer;

     (g) prepaid expenses paid by Seller to the extent  transferred to Buyer and
prepaid employee benefits with respect to Transferred Employees; and

     (h) petty cash held  locally for the benefit of the  Business to the extent
transferred to Buyer.

     3.5 Deliveries by Seller. At the Closing,  Seller will deliver, or cause to
be delivered, the following to Buyer:

     (a) The Bill of Sale, duly executed by Seller;

     (b) Copies (or originals if  reasonably  feasible) of any and all consents,
waivers  or  approvals  obtained  or  required  to be  obtained  by Seller  from
Government Authorities or non-governmental  Persons with respect to the transfer
of the Assets,  or the  consummation  of the  transactions  contemplated by this
Agreement;


                                       25

<PAGE>

     (c) One or more Special Warranty Deeds conveying title to the Real Property
to Buyer, duly executed and acknowledged by Seller and in recordable form;

     (d) An opinion  from  Seller's  general  counsel,  dated the Closing  Date,
substantially  in the form of Exhibit D  attached  hereto,  and an opinion  from
Seller's Bond  Counsel,  dated the Closing  Date,  substantially  in the form of
Exhibit E attached hereto;

     (e) The Assignment and Assumption Agreement, duly executed by Seller;

     (f) A FIRPTA Affidavit and a HARPTA  Certificate (Form N-289 -- Certificate
for  Exemption  from  the  Withholding  of Tax on  Disposition  of  Hawaii  Real
Property), each duly executed by Seller;

     (g) Copies, certified by the Secretary or Assistant Secretary of Seller, of
corporate  resolutions  authorizing the execution and delivery of this Agreement
and all of the agreements and instruments to be executed and delivered by Seller
in connection  herewith,  and the consummation of the transactions  contemplated
hereby;

     (h) A  certificate  of the  Secretary  or  Assistant  Secretary  of  Seller
identifying  the name and title and bearing the  signatures  of the  officers of
Seller authorized to execute and deliver this Agreement and the other agreements
and instruments contemplated hereby;

     (i)  Certificate  of Good  Standing  with respect to Seller,  issued by the
Secretary of State of the State of Delaware;

     (j) To the extent  available,  originals of all Assigned  Agreements,  Real
Property Leases and Transferable Permits and, if not available, true and correct
copies thereof  (delivery of the foregoing  documents will be deemed made in the
case of any such  documents  then located at any of the offices  included in the
Assets,  but  only to the  extent  that  Seller  delivers  to  Buyer a  schedule
generally  identifying each such office and the general  categories of documents
located in each such office);

     (k) All such other  instruments of  assignment,  transfer or conveyance and
certificates  of title or  vessel  documentation  as  shall,  in the  reasonable
opinion of Buyer and its  counsel,  be necessary to transfer the Assets to Buyer
or to  register  Buyer as the  owner of the  Assets,  in  accordance  with  this
Agreement and where necessary or desirable in recordable form;

     (l) Such other  agreements,  documents,  instruments  and  writings  as are
required to be delivered  by Seller at or prior to the Closing Date  pursuant to
this  Agreement  (including  a Bulk Sales Tax  Clearance  Certificate  and a Tax
Clearance Certificate from the Department of Taxation of the State of Hawaii, as
contemplated  in Sections  6.8 and 10.12) or otherwise  reasonably  requested by
Buyer in connection herewith; and


                                       26

<PAGE>

     (m) A certificate  dated the Closing Date  executed by Seller's  President,
Public Services  Sector,  to the effect that, to such officer's  Knowledge,  the
conditions set forth in Sections 7.1(e) and (f) have been satisfied by Seller.

     3.6 Deliveries by Buyer. At the Closing, Buyer will deliver, or cause to be
delivered, the following:

     (a) The  Purchase  Price,  as  adjusted  pursuant  to Section  3.3, by wire
transfer  of  immediately   available  funds  denominated  in  U.S.  dollars  in
accordance with Seller's  instructions or by such other means as are agreed upon
by Seller and Buyer;

     (b) The Assignment and Assumption Agreement, duly executed by Buyer;

     (c) All such other  instruments of transfer or assumption as shall,  in the
reasonable  opinion  of  Seller  and its  counsel,  be  necessary  for the sale,
conveyance,  assignment  and transfer of the Assets to, or the assumption of the
Assumed Liabilities by, Buyer in accordance with this Agreement;

     (d) Copies,  certified by the Secretary or Assistant Secretary of Buyer, of
resolutions  authorizing the execution and delivery of this Agreement and all of
the  agreements  and  instruments  to be executed and  delivered by the Buyer in
connection  herewith,  and the  consummation  of the  transactions  contemplated
hereby;

     (e) A  certificate  of the  Secretary  or  Assistant  Secretary  of  Buyer,
identifying  the name and title and bearing the  signatures  of the  officers of
Buyer  authorized to execute and deliver this Agreement and the other agreements
and instruments contemplated hereby;

     (f) An opinion from Buyer's legal counsel reasonably  acceptable to Seller,
dated the Closing Date, substantially in the form of Exhibit F attached hereto;

     (g) Certified copies of any and all consents, waivers or approvals obtained
or  required  to  be  obtained   by  Buyer  from   Government   Authorities   or
non-governmental  Persons  with  respect  to the  transfer  of the Assets or the
consummation of the transactions contemplated by this Agreement;

     (h) Such other  agreements,  documents,  instruments  and  writings  as are
required to be delivered  by Buyer at or prior to the Closing  Date  pursuant to
this  Agreement  or  otherwise  reasonably  requested  by Seller  in  connection
herewith;

     (i)  Certificate  of Good  Standing  with  respect to Buyer,  issued by the
Secretary of State of Hawaii; and

     (j) A  certificate  dated  the  Closing  Date  executed  by  Buyer's  Chief
Financial  Officer  to  the  effect  that,  to  such  officer's  knowledge,  the
conditions  set forth in Sections  7.2(e),  (f) and (g) have been  satisfied  by
Buyer.

     3.7 Work in Progress. The Parties agree to work together before the Closing
Date to effect on the Closing Date an orderly transition with respect to work in
progress.

                                       27

<PAGE>

                                   ARTICLE IV

              REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER

     Seller hereby represents and warrants to Buyer as follows:

     4.1   Incorporation;   Qualification.   Seller   is  a   corporation   duly
incorporated,  validly existing and in good standing under the laws of the State
of Delaware and has all requisite  corporate  power and authority to own, lease,
and operate its material  assets and  properties and to carry on its business as
is now being  conducted.  Seller is duly  qualified  to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction in which
its  business,  as now being  conducted,  shall  require it to be so  qualified,
except  where the failure to be so  qualified  would not have a Seller  Material
Adverse Effect.

     4.2 Authority. Seller has full corporate power and authority to execute and
deliver this Agreement and each of the Ancillary Agreements to which Seller is a
signatory and to consummate the transactions contemplated hereby or thereby. The
execution  and delivery by Seller of this  Agreement  and each of the  Ancillary
Agreements to which Seller is a signatory and the  consummation by Seller of the
transactions  contemplated  hereby  and  thereby  have  been  duly  and  validly
authorized by all necessary  corporate action required on the part of Seller and
this Agreement has been duly and validly executed and delivered by Seller.  Each
of this  Agreement and the  Ancillary  Agreements to which Seller is a signatory
constitutes  the legal,  valid and  binding  agreement  of  Seller,  enforceable
against  Seller  in  accordance  with its  terms,  except as may be  limited  by
applicable  bankruptcy,   insolvency,  fraudulent  conveyance,   reorganization,
moratorium  or other  similar  laws  affecting  or  relating to  enforcement  of
creditors'  rights  generally and general  principles of equity  (regardless  of
whether enforcement is considered in a proceeding at law or in equity).

     4.3 Consents and Approvals; No Violation.

     (a) Neither the execution,  delivery and  performance of this Agreement nor
the execution,  delivery and  performance of the Ancillary  Agreements by Seller
will  (i)  conflict  with  or  result  in any  breach  of any  provision  of the
Certificate of Incorporation  or Bylaws of Seller,  (ii) result in a default (or
give rise to any right of termination,  cancellation or acceleration)  under any
of the terms,  conditions or provisions of any note, bond, mortgage,  indenture,
material  agreement or other instrument or obligation to which Seller is a party
or by which it, or any of the Assets may be bound,  except for such defaults (or
rights of  termination,  cancellation  or  acceleration)  as to which  requisite
waivers or consents  have been  obtained and for such rights of  termination  or
cancellation   of  Permits  and   Assigned   Agreements   that   purport  to  be
non-transferable by their terms, in each case that would not, individually or in
the aggregate,  result in a Seller Material  Adverse Effect or an Asset Material
Adverse  Effect or (iii)  subject to obtaining  the Seller  Required  Regulatory
Approvals,  constitute  violations of any law,  regulation,  order,  judgment or
decree applicable to Seller, which violations, individually or in the aggregate,
would result in a Seller  Material  Adverse Effect or an Asset Material  Adverse
Effect.


                                       28

<PAGE>

     (b) Except as set forth in  Schedule  4.3(b)  (the  filings  and  approvals
referred  to in  Schedule  4.3(b) are  collectively  referred  to as the "Seller
Required  Regulatory  Approvals"),  no consent or approval of,  filing with,  or
notice to,  any  Governmental  Authority  is  necessary  for the  execution  and
delivery  of this  Agreement  and the  Ancillary  Agreements  by  Seller  or the
consummation  by Seller of the  transactions  contemplated  hereby and  thereby,
other  than  those the  failure  to obtain  which  would not  result in a Seller
Material  Adverse  Effect  or an Asset  Material  Adverse  Effect  and would not
otherwise result in a material violation of law by Buyer.

     4.4 Insurance.  Schedule 4.4 lists, as of the date of this  Agreement,  all
material policies of fire,  liability,  workers' compensation and other forms of
insurance (if any) owned or held by, or on behalf of, Seller with respect to the
Assets and the Business. Except as set forth in such Schedule, all such policies
are in full force and effect,  all premiums  with respect  thereto  covering all
periods  up to and  including  the  date  hereof  have  been  paid  (other  than
retroactive  premiums  which  may be  payable  with  respect  to  auto,  general
liability  and  workers'  compensation  insurance  policies),  and no  notice of
cancellation  or  termination  has been received with respect to any such policy
which was not replaced on substantially  similar terms prior to the date of such
cancellation.  Except as described in Schedule 4.4,  within the thirty-six  (36)
months  preceding  the date of this  Agreement,  Seller has not been refused any
insurance  with respect to the Assets or the Business nor has its coverage  been
limited with  respect to the Assets or the Business  other than due to insurance
limitations  generally applicable to property or businesses located in Hawaii by
any  insurance  carrier to which it has applied for any such  insurance  or with
which it has carried insurance during the last twelve (12) months.

     4.5  Real  Property  Leases.  Schedule  4.5  lists,  as of the date of this
Agreement,  all material real property  leases under which Seller is a lessee or
lessor and which relate to the Assets, including all leases of office space used
by Seller in the conduct of the Business (the "Real  Property  Leases").  Seller
has  delivered to Buyer true,  correct and  complete  copies of each of the Real
Property Leases.

     4.6  Environmental  Matters.  Seller has heretofore  delivered to Buyer all
environmental  reports and all  environmental  site assessments  relating to the
Assets that have been identified by Seller after diligent inquiry, which reports
are  identified in a schedule  delivered to Buyer on or prior to the date hereof
("Environmental  Reports").  Notwithstanding the immediately preceding sentence,
Seller  shall  not be  required  to make  available  to  Buyer  any  information
regarding  the  condition  or  remediation  of the  Iwilei  Property.  Except as
disclosed in Schedule 4.6 or in the Environmental Reports:

     (a) Seller holds, and is in substantial  compliance with, all Environmental
Permits  that are  required  for Seller to conduct the  Business and operate the
Assets, and Seller is otherwise in compliance with applicable Environmental Laws
with  respect to the  Business  and  operation  of the  Assets,  except for such
failures to hold or comply with required Environmental Permits, or such failures
to  be  in  compliance  with  applicable   Environmental  Laws,  as  would  not,
individually or in the aggregate, result in an Asset Material Adverse Effect;

     (b) Seller has not received  (i) any written  request for  information,  or
been notified that it is a potentially  responsible  party,  under CERCLA or any
similar state law with respect to any of the Real Property,  or (ii) any written
notification  from a  Governmental  Authority with respect to pending or ongoing
investigations or enforcement actions related to alleged or potential violations
of any applicable Environmental Law with respect to any of the Real Property;


                                       29

<PAGE>

     (c) Seller has not entered  into or agreed to any  consent  decree or order
relating to the Assets, and is not subject to any outstanding judgment,  decree,
or  judicial  order  relating to  compliance  with any  Environmental  Law or to
Remediation of Regulated  Substances under any Environmental Law relating to the
Assets; and

     (d) To Seller's Knowledge,  no Release of Regulated Substances has occurred
at, from, in, on, or under the Real Property,  and, except as legally permitted,
no Regulated  Substances  are present in, on,  about or migrating  from the Real
Property, in each case that would give rise to an Environmental Claim related to
the Assets for which  Remediation  would  reasonably be required,  except in any
such case to the extent that any such Release or Environmental  Claim would not,
individually or in the aggregate,  result in an Environmental Claim in excess of
$50,000.

     4.7  Labor  Matters.  Schedule  4.7 sets  forth all  collective  bargaining
agreements,  and  amendments  thereto,  to which Seller is a party in connection
with the  Business.  Seller has  previously  delivered to Buyer true and correct
copies of all such collective bargaining agreements and amendments thereto. With
respect  to the  Assets  and the  Business,  except to the  extent  set forth in
Schedule  4.7 and except for such matters as would not,  individually  or in the
aggregate,  result  in an  Asset  Material  Adverse  Effect,  (a)  Seller  is in
compliance  with  all  applicable  laws  respecting  employment  and  employment
practices,  occupational safety and health, plant closing,  mass layoffs,  terms
and  conditions of employment  and wages and hours;  (b) Seller has not received
any written notice of any unfair labor practice complaint against Seller pending
before the National Labor Relations Board; (c) no arbitration proceeding arising
out of or under any collective  bargaining  agreement is pending against Seller;
and (d) Seller  has not  experienced  any work  stoppage  within the  three-year
period  prior to the date hereof and to  Seller's  Knowledge  none is  currently
threatened.

     4.8 Benefit Plans: ERISA.

     (a) Schedule 4.8 lists all material Benefit Plans. True and complete copies
of all such Benefit Plan  documents,  amendments  and summary plan  descriptions
have been made available to Buyer.  With respect to the Classified Plan,  Seller
has provided to Buyer true and complete copies of the following  documents:  (i)
all documents  embodying or governing the Classified Plan and any funding medium
for such plan (including, without limitation, trust agreements) as they may have
been amended to the date hereof; (ii) the most recent IRS determination  letter;
(iii) the most  recently  filed Form 5500,  with all  applicable  schedules  and
accountants'  opinions attached  thereto;  and (iv) the summary plan description
for such plan (or other descriptions of such plan provided to employees) and all
modifications thereto.

     (b) No liability  under Title IV or Section 302 of ERISA has been  incurred
by Seller or any ERISA  Affiliate of Seller that has not been satisfied in full,
no  condition  exists  that  presents  a  material  risk to  Seller or any ERISA
Affiliate of Seller of incurring any such  liability,  other than  liability for
premiums due to the Pension Benefit  Guaranty  Corporation  (which premiums have
been paid when due).  Insofar as the  representation  made in this  Section  4.8
applies to  Sections  4064,  4069 or 4204 of Title IV of ERISA,  it is made with
respect to any employee benefit plan, program,  agreement or arrangement subject
to Title IV of ERISA to which Seller or any ERISA  Affiliate of Seller made,  or
was required to make,  contributions  during the five (5)-year  period ending on
the last day of the most recent plan year ended prior to the Closing Date.


                                       30

<PAGE>

     (c) The Classified Plan is not a "multiemployer plan" as defined in Section
3(37) of ERISA.  As of November 30,  2002,  the market value of assets under the
Classified Plan exceeded the present value of liabilities thereunder (determined
under FAS 35 by Deloitte and Touche using the  interest  crediting  rate for the
funding  standard  account as  described in Section  412(b)(5)(A)  of the Code).
Prior to the Closing Date all required contributions to the Classified Plan will
be made. The Classified Plan has not incurred an accumulated  funding deficiency
(whether  or not  waived)  within the meaning of Section 302 of ERISA or Section
412 of the  Code.  With  respect  to the  Classified  Plan  there  have  been no
"reportable   events,"  within  the  meaning  of  ERISA  Section  4043,  or  the
regulations thereunder,  for which the notice requirement is not waived under 29
C.F.R.  Part  4043.  The  Classified  Plan  is  not  presently  under  audit  or
examination  (nor has notice been received of a potential  audit or examination)
by the  Internal  Revenue  Service,  the  Department  of  Labor,  or  any  other
governmental agency or entity, and no matters are pending under the IRS Employee
Plans Compliance  Resolution System, the IRS closing agreement program, or other
similar program.

     (d) Except as expressly provided in this Agreement, the consummation of the
transactions  contemplated  by this  Agreement  will  not,  either  alone  or in
combination  with another event,  (i) entitle any current or former  employee or
officer  of  Seller  or  any  ERISA   Affiliate  of  Seller  to  severance  pay,
unemployment  compensation or any other payment,  or (ii) accelerate the time of
payment or vesting, or increase the amount of compensation due any such employee
or officer.

     (e) There has been no material  failure of any of the Benefit Plans that is
a group health plan (as defined in Section  5000(b)(1)  of the Code) to meet the
requirements  of  Section  4980B(f)  of the Code  with  respect  to a  qualified
beneficiary (as defined in Section 4980B(g) of the Code). Neither Seller nor any
ERISA Affiliate of Seller has  contributed to a nonconforming  group health plan
(as defined in Section 5000(c) of the Code) and no ERISA Affiliate of Seller has
incurred  a tax under  Section  5000(e)  of the Code  that is or could  become a
liability of Buyer.

     (f) To the Knowledge of Seller,  the Classified  Plan has been  maintained,
funded and administered  substantially in accordance with the terms of such plan
and  substantially  complies  in  form  and in  operation  with  the  applicable
requirements  of ERISA and the Code. To the Knowledge of Seller,  the Classified
Plan is qualified under Section 401(a) of the Code.

     (g) Prior to the Closing  Date,  full  payment  will be made of all amounts
that the Seller is required to have paid as premiums or  contributions,  for all
periods prior to Closing, to the Hawaii Teamsters Health and Welfare Trust.

     (h) There are no pending, or to Seller's Knowledge, threatened claims by or
on behalf of any Benefit Plans, by any employee or beneficiary covered under any
such Benefit  Plans,  or otherwise  involving any such Benefit Plans (other than
routine claims for benefits).


                                       31

<PAGE>

     (i) Seller's  Pension Plan, the Classified  Plan, and Seller's  401(k) Plan
(as such terms are defined in Section 6.12 hereof) are the only  Employee  Plans
which are intended to be qualified under Section 401(a) of the IRC.

     4.9 Real Property. Schedule 4.9 contains a description of the Real Property
included  in the  Assets.  True  and  correct  copies  of any  current  surveys,
abstracts,  title  commitments  and title  opinions  identified  by Seller after
diligent  inquiry  to be in  Seller's  possession  and  all  policies  of  title
insurance  currently in force and identified by Seller after diligent inquiry to
be in the possession of Seller with respect to the Real Property have heretofore
been made available to Buyer.

     4.10  Condemnation.  Except as set forth in Schedule  4.10,  Seller has not
received any written notices of and otherwise has no Knowledge of any pending or
threatened  proceedings or actions by any  Governmental  Authority to condemn or
take by power of eminent domain all or any part of the Assets.

     4.11 Assigned Agreements.

     (a)  Schedule  4.11(a)  lists  each  Assigned  Agreement  (other  than Real
Property   Leases,   line   extension   agreements   and  similar   construction
arrangements,  propane and synthetic natural gas supply contracts with customers
of the  Business,  and  Easements  held by  Seller)  which  is  material  to the
Business, other than those (i) that are listed or described on another Schedule,
(ii) that  provide for annual  payments by Seller  after the date hereof of less
than $100,000 or (iii) that, when aggregated with all other Assigned  Agreements
not listed on Schedule 4.5 or 4.11(a),  provide for payments by Seller after the
date hereof of less than $500,000 in the aggregate.  Schedule 4.11(a) also lists
each agreement that is material to the Assets or the Business that may expire or
that  Seller  expects  to  terminate  prior to the  Closing  Date other than any
agreement that is an Excluded Asset.

     (b) Except as disclosed in Schedule  4.11(b),  (i) each Assigned  Agreement
listed on  Schedule  4.5 or  4.11(a)  constitutes  a legal,  valid  and  binding
obligation of Seller and, to Seller's Knowledge, constitutes a valid and binding
obligation of the other parties thereto, and (ii) may be transferred to Buyer as
contemplated by this Agreement  without the consent of the other parties thereto
and will continue in full force and effect  thereafter,  unless in any such case
the impact of such lack of legality, validity or binding nature, or inability to
transfer,  would  not,  individually  or in the  aggregate,  result  in an Asset
Material Adverse Effect.

     (c)  Except  as set  forth in  Schedule  4.11(c),  there is not,  under the
Assigned  Agreements  listed on Schedule  4.5 or  4.11(a),  any default or event
which,  with notice or lapse of time or both,  would constitute a default on the
part of the Seller or to Seller's  Knowledge,  any of the other parties thereto,
except such events of default and other events which would not,  individually or
in the aggregate, result in an Asset Material Adverse Effect.

     4.12 Legal  Proceedings.  Except as set forth in Schedule 4.12, there is no
action or  proceeding  pending or, to  Seller's  Knowledge,  threatened  against
Seller before any court,  arbitrator  or  Governmental  Authority,  which would,
individually  or in the aggregate,  reasonably be expected to result in a Seller
Material Adverse Effect or an Asset Material Adverse Effect. Except as set forth
in  Schedule  4.12 Seller is not  subject to any  outstanding  Order that would,
individually or in the aggregate,  result in a Seller Material Adverse Effect or
an Asset Material Adverse Effect.


                                       32

<PAGE>

     4.13 Permits.  Seller has all Permits  (other than  Environmental  Permits,
which are  addressed  in Section  4.6 hereof)  necessary  to own and operate the
Assets except where the failure to have such Permits would not,  individually or
in the aggregate,  create a Seller Material  Adverse Effect or an Asset Material
Adverse  Effect.  Except as disclosed on Schedule 4.13,  Seller has not received
any written  notification  that it is in violation of any such  Permits,  except
notifications of violations  which would not,  individually or in the aggregate,
result in a Seller Material  Adverse Effect or an Asset Material Adverse Effect.
Seller is in compliance with all Permits except where such non-compliance  would
not,  individually  or in the  aggregate,  result in a Seller  Material  Adverse
Effect or an Asset Material Adverse Effect.

     4.14 Taxes.

     (a)  Seller  has  filed or  caused  to be filed  all Tax  Returns  that are
required to be filed by it with respect to any Tax relating to the Assets or the
Business,  and has paid or caused to be paid all Taxes  that have  become due as
indicated  thereon,  except  where such Tax is being  contested in good faith by
appropriate proceedings, or where the failure to so file or pay would not result
in a Seller Material Adverse Effect or an Asset Material Adverse Effect.  Seller
has  complied in all  material  respects  with all  applicable  laws,  rules and
regulations relating to withholding Taxes relating to Transferred Employees. All
Tax  Returns  relating  to the  Assets or the  Business  are true,  correct  and
complete in all material respects.  There are no liens for Taxes upon the Assets
except for liens for Taxes not yet due and Permitted Encumbrances.

     (b)  Except as set forth in  Schedule  4.14,  no  notice of  deficiency  or
assessment  has  been  received  from  any  taxing  authority  with  respect  to
liabilities for Taxes of Seller in respect of the Assets or the Business,  which
have not been fully paid or finally  settled,  and any such deficiency  shown in
Schedule 4.14 is being contested in good faith through appropriate proceedings.

     (c)  Except  as set  forth  in  Schedule  4.14,  there  are no  outstanding
agreements or waivers  extending the applicable  statutory periods of limitation
for Taxes  associated  with the Assets or the Business that will be binding upon
Buyer after the Closing.

     (d) Except as set forth on  Schedule  4.14,  none of the Assets is property
that is required to be treated as being  owned by any other  person  pursuant to
the so-called safe harbor lease provisions of former Section 168(f) of the Code,
and none of the  Assets is  "tax-exempt  use"  property  within  the  meaning of
Section 168(h) of the Code.

     (e) Schedule 4.14 sets forth the taxing  jurisdictions in which Seller owns
assets or conducts business that require a notification to a taxing authority of
the  transactions  contemplated by this  Agreement,  if the failure to make such
notification,  or obtain Tax clearance  certificates  in  connection  therewith,
would  either  require  Buyer to withhold  any portion of the  consideration  or
subject Buyer to any liability for any Taxes of Seller.


                                       33

<PAGE>

     4.15  Intellectual  Property.  The Citizens Marks,  the Gasco Marks and the
software licenses and related  contracts  described in Schedules 2.2 and 4.11(a)
constitute all of the material Intellectual Property necessary for the operation
and  maintenance  of the Assets or the  conduct of the  Business,  each of which
Seller either has all right,  title and interest in or valid and binding  rights
under  contract to use in  connection  with the  operation of the Assets and the
Business.  Except as disclosed in Schedule  4.15,  (a) Seller is not, nor has it
received  any  notice  that it is, in  default  (or with the giving of notice or
lapse of time or both,  would be in  default),  under any  contract  to use such
Intellectual Property, and (b) to Seller's Knowledge, such Intellectual Property
is not being  infringed  by any other  Person.  Except as  disclosed in Schedule
4.15,  Seller has not received  notice that it is  infringing  any  Intellectual
Property of any other Person in connection with the Assets or the Business,  and
Seller,  to its Knowledge,  is not infringing any  Intellectual  Property of any
other  Person  which,  individually  or in the  aggregate,  would  have an Asset
Material Adverse Effect.

     4.16  Capital  Expenditures.  Seller has  heretofore  delivered  to Buyer a
schedule of all Capital Expenditures that, as of the date of this Agreement, are
planned by Seller from the date hereof  through  December 31, 2003 (the "Capital
Expenditures Schedule").

     4.17  Compliance  With Laws.  Seller is in compliance  with all  applicable
laws,  rules and  regulations  with  respect to its  ownership of the Assets and
operation of the Business  except  where the failure to be in  compliance  would
not,  individually  or in the  aggregate,  result in a Seller  Material  Adverse
Effect or an Asset Material Adverse Effect.

     4.18 Title.  Seller has, and will have as of the Closing Date,  good, valid
and  indefeasible  title to the Real  Property  and the  other  Assets  owned or
purported  to be owned by  Seller,  free and  clear of all  Encumbrances  except
Permitted Encumbrances.

     4.19 DISCLAIMERS.  EXCEPT FOR THE  REPRESENTATIONS AND WARRANTIES SET FORTH
IN THIS  ARTICLE IV, THE ASSETS ARE  TRANSFERRED  "AS IS,  WHERE IS", AND SELLER
EXPRESSLY  DISCLAIMS  ANY  REPRESENTATIONS  OR WARRANTIES OF ANY KIND OR NATURE,
EXPRESS OR IMPLIED,  AS TO  LIABILITIES,  OPERATIONS  OF THE ASSETS,  CONDITION,
VALUE OR QUALITY OF THE ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS
AND  OTHER  INCIDENTS  OF THE  ASSETS  AND  SELLER  SPECIFICALLY  DISCLAIMS  ANY
REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR
ANY PARTICULAR PURPOSE WITH RESPECT TO THE ASSETS, OR ANY PART THEREOF, OR AS TO
THE WORKMANSHIP  THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN,  WHETHER LATENT
OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL  REQUIREMENTS,  OR THE APPLICABILITY
OF ANY GOVERNMENTAL REQUIREMENTS, INCLUDING BUT NOT LIMITED TO ANY ENVIRONMENTAL
LAWS, OR WHETHER SELLER POSSESSES  SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY
TO OPERATE THE ASSETS.  EXCEPT AS OTHERWISE  EXPRESSLY  PROVIDED HEREIN,  SELLER
FURTHER  SPECIFICALLY  DISCLAIMS ANY  REPRESENTATION  OR WARRANTY  REGARDING THE
ABSENCE OF HAZARDOUS  SUBSTANCES  OR LIABILITY  OR POTENTIAL  LIABILITY  ARISING
UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE ASSETS.


                                       34

<PAGE>

     4.20 Financial Statements.

     (a) Schedule 4.20 sets forth the  unaudited  balance sheet for the Business
as of December 31, 2001 (the  "Balance  Sheet") and the  unaudited  statement of
income of the  Business  for the  twelve-month  period  ended  December 31, 2001
(collectively,  the  "Financial  Statements").  Except as set forth in  Schedule
4.20,  the  Financial  Statements  have  been  prepared  on a  pre-tax  basis in
accordance,  in all material  respects,  with GAAP applied on a basis consistent
with prior periods  except for the omission of full  footnotes to such Financial
Statements.  Except as set forth in Schedule  4.20,  the Balance Sheet  presents
fairly in all material  respects the  financial  condition of the Business as of
its date and the income statement included in the Financial  Statements presents
fairly in all material  respects the results of  operations  of the Business for
the  periods  covered  thereby.  The books and  records of Seller from which the
Financial  Statements  were derived  were  complete and accurate in all material
respects at the time of such preparation.

     (b) Schedule 4.20 also sets forth property level  financial  statements for
the Business as of and for the period  ending  September  30, 2002, as extracted
from Seller's SAP financial statement software. Such property level reports have
been prepared on a basis  consistent  with prior periods,  were derived from the
books and records of Seller,  and present  fairly in all  material  respects the
financial  information of the Business presented therein as of the dates and for
the periods covered thereby,  subject to normal course adjustments and corporate
adjustments and  consolidations  consistent  with the corporate  adjustments and
consolidations made in the Financial Statements.

     4.21 SEC Filings; Financial Statements.

     (a)  Seller  has  filed,  or caused to be filed,  all  forms,  reports  and
documents required to be filed by Seller with the SEC since January 1, 2001, and
has  heretofore  delivered or made available to Buyer in the form filed with the
SEC, together with any amendments  thereto,  its (i) Annual Reports on Form 10-K
for the fiscal year ended December 31, 2000 and 2001, (ii) Quarterly  Reports on
Form 10-Q for the fiscal quarter ended March 31 and June 30, 2002, and (iii) all
other  reports or  registration  statements  filed by Seller  with the SEC since
January 1, 2001 (collectively, the "Seller SEC Reports"). The Seller SEC Reports
were  prepared   substantially  in  accordance  with  the  requirements  of  the
Securities Act of 1933, as amended,  or the Securities  Exchange Act of 1934, as
amended,  as the case may be, and the rules and  regulations  promulgated  under
each of such  respective  acts,  and did not at the time they were filed contain
any  untrue  statement  of a  material  fact or omit to  state a  material  fact
required  to be stated  therein  or  necessary  in order to make the  statements
therein,  in the light of the  circumstances  under  which they were  made,  not
misleading.

     (b) The financial  statements,  including all related notes and  schedules,
contained  in the Seller SEC  Reports (or  incorporated  by  reference  therein)
fairly  present  the  consolidated  financial  position  of  Seller  as  at  the
respective  dates thereof and the  consolidated  results of operations  and cash
flows of Seller for the periods  indicated in accordance  with GAAP applied on a
consistent  basis  throughout  the  periods  involved  (except  for  changes  in
accounting principles disclosed in the notes thereto) and subject in the case of
interim financial statements to normal year-end adjustments.


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<PAGE>

     4.22 Sufficiency of Assets. The Assets and the Excluded Assets are the only
assets  owned,  used,  or held for use by Seller in, or in  connection  with, or
otherwise  necessary  for, the conduct of the  Business as presently  conducted,
except for such  assets the  failure to own,  use, or hold for use, as would not
have an Asset Material Adverse Effect or a Material Adverse Effect for Buyer.

     4.23 Easements. To Seller's Knowledge, except as set forth in Schedule 4.13
(Seller Permit Violations),  Seller owns or possesses all Easements necessary to
conduct the Business as now being conducted  without any known conflict with the
right of others,  in each case  except to the extent  that the failure to own or
possess such Easements would not have an Asset Material Adverse Effect.

     4.24 Tangible Personal Property.  Except for normal wear and tear, and with
such exceptions as are not, individually or in the aggregate,  reasonably likely
to have an Asset Material Adverse Effect,  the Tangible  Personal Property is in
normal operating condition and in a state of reasonable maintenance and repair.

     4.25  Regulatory  Matters.  The Gas  Franchise  Act serves as the operating
authority  for  Seller  rather  than a  Certificate  of Public  Convenience  and
Necessity otherwise required of public utilities pursuant to Chapter 269, Hawaii
Revised  Statutes.  The Gas Franchise Act does not obligate  Seller to serve the
entire  area of the State of  Hawaii.  Seller  operates  the  Business,  and the
Business is regulated as a public  utility,  only in the State of Hawaii.  As of
the date of this  Agreement,  Seller has no present  intention  to make any rate
filing or take any other action seeking to change the rates, charges,  standards
of service or accounting of Seller with respect to the regulated  portion of the
Business  from  those in effect on the date of this  Agreement,  or  seeking  to
effect with the HPUC any  agreement,  commitment,  arrangement  or consent  with
respect thereto. Seller is not a "Holding Company," a "Subsidiary Company" or an
"Affiliate"  of a "Holding  Company"  within the  meaning of the Public  Utility
Holding Company Act of 1935, as amended ("PUHCA").


                                    ARTICLE V

                     REPRESENTATIONS AND WARRANTIES OF BUYER

     Buyer represents and warrants to Seller as follows:

     5.1  Organization.  K-1  USA is a  Delaware  corporation,  duly  organized,
validly  existing and in good  standing  under the laws of the State of Delaware
and has all requisite  corporate  power and authority to own,  lease and operate
the Assets and to carry on the Business as is now being conducted.

     5.2 Authority.  Buyer has full corporate power and authority to execute and
deliver this Agreement and each of the Ancillary  Agreements to which Buyer is a
signatory and to consummate the  transactions  contemplated  hereby and thereby.
The  execution  and  delivery  by  Buyer  of this  Agreement  and the  Ancillary
Agreements  to which Buyer is a signatory and the  consummation  by Buyer of the
transactions  contemplated  hereby  and  thereby  have  been  duly  and  validly
authorized  by all  necessary  corporate  and,  except as set forth in  Schedule
5.3(a),  shareholder action required on the part of Buyer and this Agreement and
the Ancillary  Agreements  have been duly and validly  executed and delivered by
Buyer.  Each of this Agreement and the Ancillary  Agreements to which Buyer is a
signatory,   constitute  the  legal,  valid  and  binding  agreement  of  Buyer,
enforceable against Buyer in accordance with its terms, except as may be limited
by applicable  bankruptcy,  insolvency,  reorganization,  fraudulent conveyance,
moratorium  or other  similar  laws  affecting  or  relating to  enforcement  of
creditors'  rights  generally and general  principles of equity  (regardless  of
whether enforcement is considered in a proceeding at law or in equity).


                                       36

<PAGE>

     5.3 Consents and Approvals; No Violation.

     (a) Except as set forth in Schedule 5.3(a), neither the execution, delivery
and  performance  of this  Agreement  by Buyer nor the  execution,  delivery and
performance  of the Ancillary  Agreements by Buyer or any of its  Affiliates nor
the  consummation by Buyer of the transactions  contemplated  hereby and thereby
will  (i)  conflict  with  or  result  in any  breach  of any  provision  of the
organizational  and governing  documents of Buyer, or any of its Affiliates,  or
(ii) result in a default (or give rise to any right of termination, cancellation
or acceleration)  under any of the terms,  conditions or provisions of any note,
bond, mortgage,  indenture, material agreement or other instrument or obligation
to which  Buyer  or any of its  Affiliates  is a party or by which  any of their
respective  assets  may be  bound,  except  for  such  defaults  (or  rights  of
termination,  cancellation or  acceleration)  as to which  requisite  waivers or
consents  have  been  obtained  or  which  would  not,  individually  or in  the
aggregate,  have a Buyer  Material  Adverse Effect or (iii) subject to obtaining
the Buyer Required Regulatory  Approvals and the assignment of this Agreement to
the k1 Designee in accordance with Section 6.8(f),  constitute violations of any
law,  regulation,   order,   judgment  or  decree  applicable  to  Buyer,  which
violations,  individually or in the aggregate,  would result in a Buyer Material
Adverse Effect.

     (b) Except as set forth in  Schedule  5.3(b)  (the  filings  and  approvals
referred to in such Schedule are collectively referred to as the "Buyer Required
Regulatory  Approvals"),  no consent or approval of,  filing with, or notice to,
any  Governmental  Authority is necessary for Buyer's  execution and delivery of
this  Agreement  and the  Ancillary  Agreements  or the  consummation  by the k1
Designee,  as the Buyer, of the  transactions  contemplated  hereby and thereby,
other than such consents,  approvals, filings or notices, which, if not obtained
or made, will not (i) prevent Buyer from  performing its obligations  under this
Agreement  and the  Ancillary  Agreements  or (ii)  result  in a Buyer  Material
Adverse Effect.

     (c) The affirmative  votes of a simple majority of the votes entitled to be
cast by holders of  outstanding  ordinary  shares of S$0.10  each of k1 Ventures
Limited  that are  present in person or by proxy and  voting at a duly  convened
meeting of shareholders of k1 Ventures  Limited at which a quorum is present are
the only  votes of the  holders  of any class or series of  capital  stock of k1
Ventures Limited necessary to approve k1 Ventures Limited's provision of funding
to  Buyer  in  connection  with  this  Agreement,   participation  (directly  or
indirectly)  in the  transactions  contemplated  in  this  Agreement  (including
pursuant to the Support  Agreement) or taking any other corporate  action by any
direct or indirect  subsidiary of k1 Ventures  Limited in  connection  with such
transactions (the "Required  Shareholder  Actions").  To Buyer's knowledge,  the
shareholders  of k1 Ventures  Limited that have  executed the Voting  Agreements
described in clause (ii) of the third recital to this  Agreement own or are able
to direct the voting of the shares of voting  securities of k1 Ventures  Limited
described in such Voting Agreements and such shares,  when voted in favor of the
Required  Shareholder  Actions,  will be  sufficient  to  approve  the  Required
Shareholder  Actions.  The execution and delivery of, and the  performance by k1
Ventures Limited of its obligations  under the Support  Agreement have been duly
authorized by all Board action of k1 Ventures Limited, and the Support Agreement
constitutes  the legal,  valid and binding  obligation  of k1 Ventures  Limited,
enforceable  against k1 Ventures Limited in accordance with its terms, except as
may be limited by applicable bankruptcy, insolvency, reorganization,  fraudulent
conveyance,   moratorium  or  other  similar  laws   affecting  or  relating  to
enforcement  of creditors'  rights  generally  and general  principles of equity
(regardless  of whether  enforcement  is considered in a proceeding at law or in
equity).


                                       37

<PAGE>

     5.4  Availability  of Funds.  Buyer  acknowledges  and  agrees  that on the
Closing Date, it will have sufficient funds to pay the Purchase Price under this
Agreement 5.5

     5.5 Public Company Filings; Financial Statements.

     (a) Buyer  heretofore  delivered  or made  available  to Seller  the Annual
Report of k1  Ventures  Limited for the fiscal year ended June 30, 2002 (the "k1
Ventures Annual  Report").  The k1 Ventures Annual Report did not as of the date
of such report contain any untrue  statement of a material fact or omit to state
a material fact required to be stated  therein or necessary in order to make the
statements  therein,  in the light of the  circumstances  under  which they were
made, not misleading.

     (b) The financial  statements,  including all related notes and  schedules,
contained  in the k1 Ventures  Annual  Report  fairly  present the  consolidated
financial  position  of k1  Ventures  Limited  as at the  date  thereof  and the
consolidated results of operations and cash flows of k1 Ventures Limited for the
periods  indicated in accordance with the Singapore  Companies Act and Singapore
Statements of Accounting  Standard  applied on a consistent basis throughout the
periods involved (except for changes in accounting  principles  disclosed in the
notes thereto).

     5.6 Legal Proceedings.  There are no actions or proceedings  pending or, to
Buyer's knowledge  threatened  against Buyer or any of its Affiliates before any
court or arbitrator or  Governmental  Authority,  which,  individually or in the
aggregate,  would result in a Buyer Material  Adverse Effect.  Neither Buyer nor
any of its  Affiliates  is  subject  to any  outstanding  Orders,  which  would,
individually or in the aggregate, result in a Buyer Material Adverse Effect.

     5.7 No Knowledge of Seller's  Breach.  Buyer has no knowledge of any breach
by Seller of any  representation or warranty of Seller or of any other condition
or  circumstance  that would  excuse  Buyer from its timely  performance  of its
obligations   hereunder.   Buyer  shall  notify  promptly  Seller  if  any  such
information comes to Buyer's attention prior to the Closing.

     5.8  Qualified  Buyer.  Buyer will be  qualified  to obtain any Permits and
Environmental  Permits  necessary  for Buyer to own and operate the Assets as of
the Closing.


                                       38

<PAGE>

     5.9 Inspections. Buyer is knowledgeable about the Business as engaged in by
Seller  and of the  usual  and  customary  practices  of  companies  engaged  in
businesses  similar  to the  Business  and has had  access  to the  Assets,  the
officers  and  employees of Seller,  and the books,  records and files of Seller
relating to the Business and the Assets.  In making its decision to execute this
Agreement,  and to purchase the Assets, and without derogation to any of Buyer's
rights to  indemnification  under  Section  8.2,  Buyer  has  relied on and will
continue to rely upon the results of its Inspections,  the Environmental Reports
and Seller's  representations  and warranties in Section 4.6. Buyer acknowledges
and agrees that the  representations  and  warranties set forth in Article IV of
this Agreement constitute the sole and exclusive  representations and warranties
of Seller to Buyer in connection with the transactions  contemplated  hereby and
by the  Ancillary  Agreements,  and  there are no  representations,  warranties,
covenants,  understandings or agreements,  oral or written,  in relation thereto
between the Parties other than those incorporated herein, including Section 6.3,
and therein.  Except for the representations and warranties  expressly set forth
in Article IV of this Agreement, Buyer disclaims reliance on any representations
or  warranties,  either  express  or  implied,  by or on behalf of Seller or its
Affiliates or Representatives. Without limiting the generality of the foregoing,
Buyer acknowledges and agrees that, except as provided in Section 4.6, there are
no  representations  or warranties  of Seller with respect to the  Environmental
Condition of the Assets,  compliance with  Environmental  Laws and Environmental
Permits of the  presence  or  Releases of  hazardous  material in the  fixtures,
soils,  groundwater,  surface water or air on, under or about or emanating  from
any of the Assets.

     5.10 WARN Act.  Buyer  does not  intend to engage in a "Plant  Closing"  or
"Mass  Layoff" as such terms are  defined in the WARN Act, or to take any action
that would require the giving of any notice under Chapter 394B,  Hawaii  Revised
Statutes, as amended, within sixty days after the Closing Date.

     5.11 Public Utility Holding Company Status; Regulation as a Public Utility.
Following the assignment of this Agreement to the k1 Designee and on the Closing
Date, neither Buyer nor any of its "affiliates" (within the meaning of such term
in PUHCA) will be a "holding company," a "subsidiary company," or an "affiliate"
of a "public utility  company" or of a "holding  company," within the meaning of
such terms in PUHCA and  regulations  and rules  issued by the SEC  pursuant  to
PUHCA.  No approval or other action by the SEC will be required  under PUHCA for
the k1 Designee or any of its  "affiliates"  (within the meaning of such term in
PUCHA) to consummate the transactions contemplated in this Agreement.

     5.12 Ownership and Control of Buyer.

     (a) K-1 USA is a wholly-owned indirect subsidiary of k1 Ventures Limited, a
Singapore corporation.  The ownership and control of k1 Ventures is as set forth
in the k1 Ventures Annual Report.

     (b) The k1 Designee will be organized,  owned and  controlled in accordance
with the provisions of the Section 6.8(f).

                                   ARTICLE VI

                            COVENANTS OF THE PARTIES

     6.1 Conduct of Business and Operation of Assets.

     (a) Except as described in Schedule  6.1(a),  as required by an  applicable
law  or by  any  Governmental  Authority,  as  expressly  contemplated  by  this
Agreement or to the extent Buyer otherwise consents in writing (such consent not
to be unreasonably withheld),  during the period from the date of this Agreement
to the Closing Date,  Seller shall (i) operate the Assets in the ordinary course
of business consistent with its past practices and Good Utility Practices,  (ii)
use all  Commercially  Reasonable  Efforts to preserve  intact the Assets in all
material respects,  and endeavor to preserve the goodwill and relationships with
customers, suppliers and others having business dealings with it, (iii) maintain
insurance  described  in Section  4.4 (or  replacements  thereto  providing  for
substantially  the same  coverage),  and (iv)  comply with all  applicable  laws
relating to the Assets,  including without  limitation,  all Environmental Laws,
except  where the  failure to so comply  would not  result in an Asset  Material
Adverse Effect.


                                       39

<PAGE>
     (b) Without  limiting  the  generality  of Section  6.1(a)  and,  except as
contemplated  in this  Agreement  or as  described  in  Schedule  6.1(a),  or as
required under  applicable law or by any  Governmental  Authority,  prior to the
Closing Date, without the prior written consent of Buyer (such consent not to be
unreasonably withheld), Seller shall not:

     (i) Make any  material  change  in the  levels of  Inventories  customarily
maintained by Seller with respect to the Business,  other than changes which are
consistent with Good Utility Practices;

     (ii) Sell,  lease (as  lessor),  encumber,  pledge,  transfer or  otherwise
dispose of, any Asset (except for Inventories used,  consumed or replaced in the
ordinary  course of business  consistent  with past  practices of Seller or with
Good Utility  Practices)  other than to encumber  any such Asset with  Permitted
Encumbrances;

     (iii)  Modify,  amend or  voluntarily  terminate,  prior to the  respective
expiration date of any of the Assigned Agreements or Real Property Leases or any
of the  Permits or  Environmental  Permits  with  respect to such  Assets in any
material  respect,  other than (A) in the ordinary  course of  business,  to the
extent  consistent with the past practices of Seller or Good Utility  Practices,
(B) with cause,  to the extent  consistent with past practices of Seller or Good
Utility  Practices,  or (C) as may be required in connection  with  transferring
Seller's rights or obligations thereunder to Buyer pursuant to this Agreement;

     (iv)  Except as  otherwise  provided  herein and except  for  propane  sale
agreements entered into in the ordinary course of business and containing market
terms,  enter into any commitment for the purchase,  sale, or  transportation of
fuel for the Business  having a term greater than six months and not  terminable
on or before the  Closing  Date  either (A)  automatically,  or (B) by option of
Seller  (or,  after  the  Closing,  by  Buyer)  in its sole  discretion,  if the
aggregate  payment  under  such  commitment  for fuel and all other  outstanding
commitments  for fuel for the  Business not  previously  approved by Buyer would
exceed $1,000,000;

     (v)  Except  as  otherwise  provided  herein,   enter  into  any  contract,
agreement,  commitment or arrangement for the Business that individually exceeds
$250,000 or in the  aggregate  exceeds  $1,000,000  unless it is  terminable  by
Seller (or, after the Closing Date, by Buyer) without penalty or premium upon no
more than sixty (60) days notice;


                                       40

<PAGE>

     (vi) Except as  otherwise  required by the terms of the CBA or as otherwise
provided in Section  6.12,  (A) hire,  or transfer  any  employees of or for the
Business  prior  to the  Closing,  other  than to  fill  vacancies  in  existing
positions  in the  reasonable  discretion  of Seller,  (B)  materially  increase
salaries or wages of employees  employed in connection  with such Asset prior to
the  Closing,  (C) take any  action  prior to the  Closing  to affect a material
change in the CBA or (D) take any action  prior to the  Closing  to enhance  the
aggregate  benefits  payable  to  the  employees  (considered  as a  group),  or
materially to enhance the aggregate benefits payable to any individual employee,
employed in connection with the Business;

     (vii) Not terminate the  employment of any member of the senior  management
of the Business except for cause; and

     (viii) Except as otherwise provided herein,  enter into any written or oral
contract,  agreement,  commitment  or  arrangement  with  respect  to any of the
proscribed transactions set forth in the foregoing paragraphs (i) through (vii).

     6.2 Access to Information.

     (a) Between the date of this  Agreement and the Closing Date,  Seller will,
at  reasonable  times  and  upon  reasonable  notice,   provide  Buyer  and  its
Representatives:

     (i) reasonable  access to their  respective  managerial  personnel,  to all
books, records,  plans,  equipment,  offices and other facilities and properties
constituting part of the Assets;

     (ii) such  historical  financial and operating  data and other  information
with  respect  to the  Assets  or the  Business  as Buyer  may from time to time
reasonably request, to the extent reasonably available;

     (iii) upon  request,  a copy of each  material  report,  schedule  or other
document,  if any,  filed by Seller with  respect to the Assets or the  Business
with the SEC, HPUC or any other Governmental Authority;

     (iv) access to all Assets for  Inspection by Buyer and its  Representatives
at  reasonable   times  during  regular   business  hours   scheduled  for  such
Inspections, and shall provide qualified management, engineering, operations and
maintenance and other  personnel to make  presentations  as required,  to escort
such  Persons  and to assist  in all  aspects  of  conducting  the  Inspections,
provided  that  each  of  Buyer  and  Seller  shall  bear  their  own  costs  of
participating in the Inspections; and

     (v) access to all such other  information  in the  possession or control of
Seller as shall be reasonably  necessary to enable Buyer or its  Representatives
to verify the accuracy of the representations and warranties of Seller contained
in this  Agreement;  provided,  however,  that  any  such  Inspections  shall be
conducted in such a manner as not to interfere  unreasonably  with the operation
of the Assets.  In the event that Seller's  provision of information  under this
Section 6.2 would (A) constitute a waiver of any legal privilege,  including the
attorney-client privilege or work product privilege, or (B) violate any legal or
contractual  obligation  of Seller to a third  party,  then  Seller  shall first
notify Buyer with respect to the existence and general  nature of the restricted
information.  If the restricted  information  relates to the Assets, the Parties
shall thereupon  mutually agree upon a reasonable  procedure in order to provide
Buyer with access to the information  while protecting the legitimate  interests
of  Seller  thereto.   The  mutually  agreed  procedure  may  include,   without
limitation,  a  limited  waiver by Seller  of the  relevant  privilege,  Buyer's
agreement to maintain the  information in strict  confidence,  limited review or
inspection of the  information by specified  individuals,  or any combination of
the foregoing.


                                       41

<PAGE>

Notwithstanding anything in this Section 6.2(a) to the contrary, with respect to
employee  records Seller will only furnish or provide such access to Transferred
Employee  Records  and will not  furnish  or  provide  access to other  employee
personnel records or medical  information unless required by law or specifically
authorized by the affected employee.

     (b) The Parties  shall  cooperate to schedule  Buyer's  Inspections  of the
Assets so that, to the extent  reasonably  feasible,  any interference  with the
operation of the Business is minimized,  and Buyer may complete its  Inspections
of the Assets within ninety (90) working days of commencement of Inspections and
within six (6) months after the execution of this Agreement.

     (c) Until the  conclusion  of Buyer's  next rate case for the  Business (or
such longer  period as may be required by  applicable  law),  each Party and its
Representatives  shall have  reasonable  access to all of the books and  records
relating  to the Assets and the  Business  (for the  Seller,  only to the extent
relating  to periods  prior to the  Closing  Date),  including  all  Transferred
Employee  Records in the  possession  of Buyer or Seller to the extent that such
access may reasonably be required in connection with the Assumed  Liabilities or
the  Excluded  Liabilities,  or other  matters  relating  to or  affected by the
operation  of the  Business or the Assets.  Such access shall be afforded by the
Party in  possession  of any such books and records upon  receipt of  reasonable
advance notice and during normal business hours. The Party exercising this right
of access shall be solely  responsible for any costs or expenses  incurred by it
or the holder of the  information  with respect to such access  pursuant to this
Section  6.2(c).  If the Party in  possession  of such books and  records  shall
desire to dispose of any books and records  upon or prior to the  expiration  of
such above-stated period (or any such longer period), such Party shall, prior to
such disposition, give the other Party a reasonable opportunity, at the latter's
expense, to segregate and remove such books and records as it may select.

     (d) Buyer  agrees  that,  prior to the  Closing  Date,  neither  it nor its
Representatives  will  contact  any  vendors,  suppliers,  employees,  or  other
contracting  parties of Seller or its  Affiliates  with respect to any aspect of
the Assets or the transactions  contemplated  hereby,  without the prior written
consent of Seller, which consent shall not be unreasonably withheld.

     6.3 Additional Inspections and Information.

     (a) Seller will deliver to Buyer by June 30, 2003, a balance  sheet for the
Business as of December 31, 2002, and a statement of income for the Business for
the  twelve-month  period ending  December 31, 2002,  together with an auditor's
report thereon by KPMG LLP,  Seller's  independent  accounting firm. Seller will
bear  the  cost of such  audit.  If  Buyer  requires  any  additional  financial
statement(s)  of the  Business  to be  prepared  and  audited,  then Seller will
deliver  to  Buyer  such  additional  audited  financial  statement(s)  within a
reasonable  period of time following  Buyer's request  therefore,  provided that
Buyer will  reimburse  Seller for the costs and  expenses  incurred by Seller in
connection therewith,  including reasonable overhead costs of Seller's employees
relating to the preparation and audit of such additional financial statement(s).
Nothing in this Section 6.3(a) shall  obligate  Seller to execute or deliver any
document  that affects,  in a manner  adverse to Seller,  Seller's  liability to
Buyer as expressed herein.


                                       42

<PAGE>

     (b) Buyer has conducted various  environmental  assessment  activities with
respect to the  Assets,  including  reviewing  existing  environmental  reports,
correspondence,  permits  and related  materials  regarding  the Assets.  Seller
acknowledges  that,  between the date of this  Agreement  and the Closing  Date,
Buyer  will  continue  to conduct  Inspections  with  respect  to  environmental
matters,  including  "Phase I"  environmental  assessments  to the extent  Buyer
reasonably  concludes that such  assessments are warranted by the  Environmental
Reports  or the  findings  of  Buyer's  assessments  prior  to the  date of this
Agreement.  Any such Inspections  shall be conducted as provided in Section 6.2.
Buyer may not conduct any "Phase II"  environmental  assessment  activities with
respect to the Assets  other  than the  taking and  analysis  of hand auger soil
samples  from  locations  on  Real  Property  that  are  identified  by  Buyer's
environmental  consultant as areas with recognized  Environmental  Conditions in
accordance with the ASTM protocol for Phase I environmental assessments.  If, as
a result  of  Buyer's  environmental  assessment  activities,  Buyer  reasonably
concludes that additional  "Phase II"  environmental  assessment  activities are
required to determine the extent of a recognized Environmental Condition on Real
Property,  then Seller and Buyer  shall  design a mutually  acceptable  Phase II
environmental   assessment  plan  and  Seller  shall  engage  an   environmental
consulting firm reasonably acceptable to Buyer to conduct such assessment. Buyer
shall reimburse Seller for the fees and expenses of such consultant,  and of any
laboratory used by such  consultant,  incurred by Seller in connection with such
assessment.  Seller will provide to Buyer,  promptly  following Seller's receipt
thereof,  copies  of all  reports,  laboratory  results  and  other  information
composed or compiled by such consultant in connection with any such assessment.

     (c) Buyer  shall  provide to Seller,  promptly  following  Buyer's  receipt
thereof,  copies  of  all  audits,  reports,  studies,   assessments  and  other
information  composed or compiled,  or to be composed or  compiled,  by Buyer or
Buyer's Representatives in connection with environmental  assessment activities.
Buyer shall treat all such information delivered to, or composed or compiled by,
Buyer or Buyer's  Representative  as  Environmental  Data in accordance with the
procedures of Section 6.3(d).

     (d)  All  audits,  reports,  studies,  assessments  and  other  information
delivered  to or  prepared  by Buyer and all  other  information  collected  and
generated as a result of Buyer's  environmental  due  diligence  ("Environmental
Data")  will be  subject  to the terms  and  conditions  of the  Confidentiality
Agreement,   dated   October   14,   2002,   between   Seller   and  Buyer  (the
"Confidentiality  Agreement"),  except as otherwise  expressly  provided in this
Section  6.3(d).  Except  to the  extent  necessary  to  fulfill  any  reporting
obligation under any  Environmental  Law, neither Buyer nor its  Representatives
shall  disclose  or release any  Environmental  Data  without the prior  written
consent of Seller and all such information shall be kept strictly  confidential.
To the extent reasonably  practicable,  the Environmental Data shall be prepared
at the  request  of  counsel to Buyer or Seller,  as  appropriate,  and,  to the
fullest  extent  permitted by law, shall be the work product of such counsel and
constitute confidential attorney/client  communications.  The Environmental Data
shall be transferred among Buyer and its  Representatives  in a manner that will
preserve, to the extent reasonably practicable, such privileges. Buyer expressly
agrees that until the Closing,  it will not distribute the Environmental Data to
any third party without  Seller's prior written  consent (such consent not to be
unreasonably  withheld).  After  the  Closing,  Buyer  agrees  that it will  not
distribute  the  Environmental  Data to any third party without  Seller's  prior
written consent,  except as required by law or by express  provisions of Buyer's
corporate  compliance  program if Seller is provided written notice at least ten
(10)  days  prior  to such  distribution;  provided,  however,  that  Buyer  may
distribute  the  Environmental  Data to any  potential  purchaser  of any of the
Assets or an ownership interest therein (either directly or through the purchase
of an  ownership  interest in an entity  holding  any of the Assets)  only after
first notifying the Seller.


                                       43

<PAGE>

     6.4 Confidentiality.

     (a) Each Party shall,  and shall use its  reasonable  best efforts to cause
its Representatives to, (i) keep all Proprietary  Information of any other Party
confidential and not to disclose or reveal any such  Proprietary  Information to
any  person  other  than  such  Party's  Representatives  and  (ii) not use such
Proprietary  Information  other than in connection with the  consummation of the
transactions  contemplated hereby. After the Closing Date and except as provided
in Section  6.3(d),  any Proprietary  Information,  to the extent related to the
Assets  acquired by Buyer,  shall no longer be subject to the  restrictions  set
forth herein.  The obligations of the Parties under this Section 6.4(a) shall be
in full  force and  effect  for three (3) years  from the date  hereof  and will
survive  the  termination  of  this  Agreement,   the  discharge  of  all  other
obligations owed by the Parties to each other and the Closing Date.

     (b)  Notwithstanding  the terms of Section 6.4(a) above,  the Parties agree
that prior to the Closing, Buyer may reveal or disclose Proprietary  Information
to any other Persons in connection with (i) the financing of Buyer's purchase of
the Assets or any equity  participation in Buyer's purchase of the Assets,  (ii)
obtaining  insurance for the Assets and (iii) performing  Inspections;  provided
that such  Persons  agree in  writing to  maintain  the  confidentiality  of the
Proprietary   Information   in   accordance   with   this   Agreement   and  the
Confidentiality Agreement.

     (c) Upon the other  Party's  prior  written  approval  (which  shall not be
unreasonably  withheld),  any of the Parties may provide Proprietary Information
of the other Parties to the SEC, HPUC or any other  Governmental  Authority with
jurisdiction or any securities exchange,  as may be necessary to obtain Required
Regulatory Approvals or to comply generally with any relevant law or regulation.
The  disclosing  Party  will seek  confidential  treatment  for the  Proprietary
Information provided to any Governmental Authority and the disclosing Party will
notify the other Party as far in advance as is  practicable  of its intention to
release to any Governmental Authority any Proprietary Information.

     6.5 Public  Statements.  Subject to the  requirements  imposed by law,  any
Governmental  Authority or  securities  exchange,  prior to the Closing Date, no
press  release or other public  announcement  or public  statement or comment in
response  to any  inquiry  relating  to the  transactions  contemplated  by this
Agreement shall be issued or made by any Party without the prior approval of the
other Party (which  approval shall not be  unreasonably  withheld).  The Parties
agree to cooperate in preparing any such announcements.


                                       44

<PAGE>

     6.6 Expenses. Except to the extent specifically provided herein, whether or
not the transactions contemplated hereby are consummated, all costs and expenses
incurred in connection  with this  Agreement and the  transactions  contemplated
hereby  shall  be  borne  by  the  Party  incurring  such  costs  and  expenses.
Notwithstanding  anything to the contrary herein,  Buyer will be responsible for
all  filing  fees  under the HSR Act  relating  to the  Assets it would  acquire
hereunder.

     6.7  Further Assurances.

     (a) Subject to the terms and conditions of this Agreement, each Party shall
use its  Commercially  Reasonable  Efforts  to take,  or cause to be taken,  all
actions,  and to do,  or cause to be  done,  all  things  necessary,  proper  or
advisable under applicable laws and regulations to consummate and make effective
the purchase,  sale,  transfer and delivery of the Assets and the  assumption of
the Assumed Liabilities pursuant to this Agreement.  Such actions shall include,
without  limitation,  each Party using its  Commercially  Reasonable  Efforts to
ensure  satisfaction of the conditions  precedent to its obligations  hereunder,
including  obtaining all necessary  consents,  approvals,  and authorizations of
third parties and Governmental  Authorities  required to be obtained in order to
consummate  the  transactions  hereunder,  and to  effectuate  a transfer of the
Transferable  Permits to Buyer. Seller shall cooperate with Buyer in its efforts
to obtain all other  Permits and  Environmental  Permits  necessary for Buyer to
operate the Assets.  None of the Parties  hereto  shall,  without  prior written
consent  of the  other  Party,  take or fail to take  any  action,  which  might
reasonably be expected to prevent or materially impede,  interfere with or delay
the transactions contemplated by this Agreement.

     (b) In the event  that any Asset  shall not have been  assigned,  conveyed,
transferred  and  delivered  hereunder  to Buyer at the Closing,  Seller  shall,
subject  to  Section  6.7(c),  use  Commercially  Reasonable  Efforts to assign,
convey,  transfer and deliver such Assets to Buyer as promptly as is practicable
after the Closing.

     (c) (i) To the extent that Seller's rights under any Assigned  Agreement or
Real Property  Lease may not be assigned  without the consent of another  Person
which consent has not been obtained by the Closing Date,  this  Agreement  shall
not constitute an agreement to assign the same, if an attempted assignment would
constitute a breach thereof or be unlawful.

     (ii) Seller  agrees that if any consent to an  assignment  of any  Assigned
Agreement  or Real  Property  Lease shall not be  obtained  or if any  attempted
assignment  would  be  ineffective  or  would  impair  the  Buyer's  rights  and
obligations under the Assigned Agreement or Real Property Lease in question,  so
that  Buyer  would not in effect  acquire  the  benefit  of all such  rights and
obligations,  Seller,  at the Buyer's option and to the maximum extent permitted
by law and such Assigned  Agreement or Real  Property  Lease,  shall,  after the
Closing Date,  appoint Buyer to be Seller's  agent with respect to such Assigned
Agreement or Real Property Lease, or, to the maximum extent permitted by law and
such  Assigned  Agreement or Real  Property  Lease,  enter into such  reasonable
arrangements  with Buyer or take such other  actions as are necessary to provide
Buyer with the same or  substantially  similar  rights and  obligations  of such
Assigned  Agreement  or Real  Property  Lease as Buyer may  reasonably  request.
Seller shall cooperate and shall use  Commercially  Reasonable  Efforts prior to
and after the Closing  Date to obtain an  assignment  to Buyer of each  Assigned
Agreement or Real Property Lease.


                                       45

<PAGE>

     (d) To the extent  that  Seller's  rights  under any  warranty  or guaranty
described in Section  2.1(h) may not be assigned  without the consent of another
Person,  which consent has not been obtained by the Closing Date, this Agreement
shall not constitute an agreement to assign the same, if an attempted assignment
would  constitute a breach  thereof,  or be unlawful.  Seller agrees that if any
consent to an assignment of any such warranty or guaranty shall not be obtained,
or if any attempted  assignment  would be  ineffective  or would impair  Buyer's
rights and obligations under the warranty or guaranty in question, so that Buyer
would not in effect  acquire  the  benefit of all such  rights and  obligations,
Seller,  at  Buyer's  option  and  expense,  shall use  Commercially  Reasonable
Efforts,  to the extent  permitted by law and by such  warranty or guaranty,  to
enforce  such  warranty  or  guaranty  for the benefit of Buyer so as to provide
Buyer to the maximum extent  possible with the benefits and  obligations of such
warranty or guaranty.

     6.8 Consents and Approvals.

     (a) As promptly as advisable after the execution of this  Agreement,  Buyer
and  Seller  shall  each  file  or  cause  to  be  filed  with  the  appropriate
Governmental  Authority any notifications required to be filed under the HSR Act
and the  rules  and  regulations  promulgated  thereunder  with  respect  to the
transactions  contemplated  hereby.  Buyer and Seller shall use their respective
reasonable  best  efforts to respond  promptly to any  requests  for  additional
information made with respect to such HSR Act filings,  and to cause the waiting
periods  under the HSR Act to terminate or expire at the earliest  possible date
after the date of filing of such  notification.  Buyer will pay all filing  fees
under the HSR Act relating to the Assets, but each of Seller and Buyer will bear
its own costs of the preparation of any such filing.

     (b) The Parties shall cooperate and use all Commercially Reasonable Efforts
to  promptly  prepare  and file  all  necessary  documentation,  to  effect  all
necessary applications,  notices, petitions, filings and other documents, and to
obtain all necessary  permits,  consents,  approvals and  authorizations  of all
Governmental  Authorities  necessary or advisable to consummate the transactions
contemplated  by this Agreement,  including,  without  limitation,  the Required
Regulatory Approvals and the PUHCA Staff Concurrence. Buyer shall have the right
to review and approve in advance all the  information  relating to Buyer, on the
one hand,  and Seller  shall have the right to review and approve in advance all
the  information  relating to Seller,  on the other hand, in either case,  which
appear in any filing made in connection  with the  transactions  contemplated by
this Agreement. Buyer and Seller agree that they will consult and cooperate with
each  other  with  respect  to the  obtaining  of all  such  necessary  permits,
consents, approvals and authorizations of Governmental Authorities and the PUHCA
Staff Concurrence.

     (c) In  connection  with  applications  and other  filings for the Required
Regulatory Approvals,  and the prosecution of any pending regulatory proceedings
material to the Business Buyer and Seller shall jointly,  and on an equal basis,
coordinate  the  overall  development  of the  positions  to be  taken  and  the
regulatory actions to be requested in such applications and filings for approval
of the sale by the  Seller and the  purchase  by the Buyer of the Assets and the
Business,  of all other matters  contemplated  by this  Agreement  which require
regulatory approval and of all other regulatory matters incidental thereto which
are to be addressed  in such  applications  and  filings.  Efforts to obtain any
necessary  approvals  (including  from the HPUC) shall be  prosecuted by counsel
mutually agreed upon by the Parties, and acting as joint counsel to the Parties,
it being understood,  however,  that (i) all positions taken in the filings with
such Governmental Authorities shall be consistent with the mutual understandings
of the Parties,  including the Parties'  agreement that their joint  application
filed with the HPUC shall seek,  among  other  things,  permission  for Buyer to
republish and file, in Buyer's name, Seller's existing rates and tariffs for the
Business to be effective  upon Closing,  and (ii) Buyer's  efforts to obtain the
PUHCA Staff  Concurrence shall be the  responsibility  of Buyer's counsel,  with
Seller's  special PUHCA counsel  providing such support and assistance as may be
appropriate taking into account all relevant facts and circumstances.


                                       46

<PAGE>

     (d) Seller and Buyer shall  cooperate with each other and promptly  prepare
and file  notifications  with, and request Tax clearances  from, state and local
taxing authorities in any jurisdictions in which a portion of the Purchase Price
may be required to be withheld or in which Buyer would  otherwise  be liable for
any Tax liabilities of Seller pursuant to such state and local Tax law.

     (e) Seller shall have the primary  responsibility for securing the transfer
and assignment of the  Transferable  Permits,  effective as of the Closing Date.
Buyer  shall  have  the  primary   responsibility  for  securing  the  transfer,
reissuance or procurement of the Permits and  Environmental  Permits (other than
Transferable  Permits)  effective as of the Closing Date. Seller shall cooperate
with Buyer's  efforts in this regard and assist in any transfer or reissuance of
a Permit or Environmental Permit held by Seller, or the procurement of any other
Permit or Environmental Permit when so requested by Buyer.

     (f) (i) As soon as reasonably practicable, but in any event by the date the
Parties'  joint  application  is filed with the HPUC,  K-1 USA will  assign this
Agreement to a newly formed limited liability company organized under the Hawaii
limited liability company statute and owned, controlled and governed in a manner
consistent with this Section 6.8 (the "k1 Designee"), pursuant to assignment and
assumption  documentation  reasonably acceptable to Seller and its counsel. Upon
the  effective  time of such  assignment,  (x) the kl Designee will be deemed to
have assumed,  ratified and agreed to be bound by and to perform all obligations
of Buyer in this  Agreement,  (y) all  references  in this  Agreement and in any
Ancillary  Agreement to "Buyer"  shall  thereafter be deemed to be references to
the k1 Designee,  in each case without the necessity for further act or evidence
by the Parties  hereto or the k1 Designee and (z) K-1 USA shall be released from
Buyer's obligation to pay the Purchase Price at Closing; provided, however, that
except as provided in the foregoing clause (z), no such assignment shall relieve
or discharge K-1 USA from any of its obligations under this Agreement arising on
or before the Closing  Date or k1 Ventures  Limited from its  obligations  under
that certain letter agreement with Seller dated as of the date of this Agreement
wherein k1 Ventures Limited agrees to provide such financial support to Buyer as
may be  required  to enable  Buyer to pay the  Purchase  Price at Closing or the
liquidated damages payment if required by Section 9.3(b).

     (ii) As soon as  reasonably  practicable,  but not later than  January  17,
2003, K-1 USA shall review with the staff of the SEC which administers PUHCA the
proposed  ownership,  control and  governance  of the k1 Designee  and any other
facts  relevant  to PUHCA  compliance  by the k1 Designee  and its  "affiliates"
(within  the meaning of such term in PUHCA) and seek the verbal  concurrence  or
non-objection of such SEC staff that, based on the information presented to such
SEC  staff,  (x) no  approval  from  the  SEC is  required  for  Buyer  and  its
"affiliates"  (within the meaning of such term under  PUHCA) to  consummate  the
transactions  contemplated  in this  Agreement  and (y) that  either  the  PUHCA
"holding company"  provisions are inapplicable,  or one or more exemptions under
PUHCA are available, to the k1 Designee and such "affiliates" of the k1 Designee
(the "PUHCA Staff Concurrence").  If the PUHCA Staff Concurrence is not obtained
at the time of such SEC review,  then K-1 USA promptly  (and in event within ten
(10)  Business  Days after the date of such SEC  review)  will  reformulate  the
proposed  arrangements  regarding  the  k1  Designee  to  satisfy  the  concerns
expressed by such SEC staff (and taking into  account any  guidance  provided by
such SEC staff or by Seller's  special  PUHCA  counsel) and review with such SEC
staff  such  reformulation  in  another  attempt  to  receive  the  PUHCA  Staff
Concurrence.  K-1 USA agrees not to participate , or to permit its Affiliates or
representatives to participate, in any substantive meeting or discussion, either
in person or by  telephone,  with  such SEC staff in  connection  with the PUHCA
Staff  Concurrence  unless it consults with Seller in advance and, to the extent
not  prohibited by such SEC staff,  gives Seller the  opportunity  to attend and
participate  with  counsel.  The k1  Designee  shall be  owned,  controlled  and
governed in a manner consistent with the information presented to such SEC staff
on which the PUHCA Staff Concurrence was based.


                                       47

<PAGE>

     (iii) As soon as reasonably  practicable  after the date on which the PUHCA
Staff Concurrence is obtained, the organizational  documents of the k1 Designee,
including its operating  agreement,  will be amended to the extent  necessary or
desirable to be consistent with the information  forming the basis for obtaining
the PUHCA Staff Concurrence and pursuant to documentation  reasonably acceptable
to Seller and its counsel.

     (iv) Buyer  agrees  that the k1  Designee  shall be owned,  controlled  and
governed such that the k1 Designee and its  "affiliates"  (within the meaning of
such term under PUHCA), either singly or collectively, either will not be deemed
a "holding  company"  under PUHCA or will be entitled to one or more  exemptions
from  the  registration  requirements  of  PUHCA.  Accordingly,   none  of  such
"affiliates" of the k1 Designee shall own five percent (5%) or more, directly or
indirectly,  of the outstanding  voting  securities of any other "public utility
company" (within the meaning of such term under PUHCA).

     (v) K-1 USA  presently  intends that the Persons  identified  in the letter
from Buyer's counsel to Mr. Jim R. Yates dated October 25, 2002, will own and/or
hold  the  voting  interests,   beneficial  ownership  interests  and  governing
interests or other positive or negative control rights described in such letter.
K-1 USA may make such changes to such  proposed k1 Designee  structure as may be
necessary  or desirable to obtain or to  facilitate  the  obtaining of the PUHCA
Staff Concurrence and the approval of the HPUC and such other changes as are not
prohibited by the next succeeding sentence. K-1 USA may not change such proposed
k1 Designee structure in any way that Seller reasonably  concludes is reasonably
likely either (w) to affect  adversely  the legal  validity,  enforceability  or
binding  nature of the  Support  Agreement  or to  result  in any  breach of the
representations  and  warranties  made by k1  Ventures  Limited  in the  Support
Agreement,  (x) to cause a delay in obtaining the PUHCA Staff Concurrence or the
HPUC  approval,  (y) to require  any  approval  by the SEC under PUHCA or (z) to
result  in  the  k1  Designee  or  any of  its  "affiliates"  either  singly  or
collectively  being deemed a "holding company" (within the meaning of such terms
under  PUHCA),   and  not  entitled  to  an  exemption  from  the   registration
requirements of PUHCA.


                                       48

<PAGE>

     6.9 Fees and Commissions. Each of Seller and Buyer represent and warrant to
the other that,  except for Morgan Stanley & Co.  Incorporated,  which is acting
for and at the expense of Seller,  and Credit  Suisse First Boston  Corporation,
which is acting  for and at the  expense of Buyer,  no  broker,  finder or other
Person is entitled  to any  brokerage  fees,  commissions  or  finder's  fees in
connection  with the  transactions  contemplated  hereby by reason of any action
taken by the Party making such representation. Each of Seller and Buyer will pay
to the others or otherwise  discharge,  and will  indemnify  and hold the others
harmless from and against,  any and all claims or liabilities  for all brokerage
fees,  commissions  and  finder's  fees  (other than the fees,  commissions  and
finder's  fees  payable to the party  listed  above)  incurred  by reason of any
action taken by the indemnifying party.

     6.10  Tax Matters.

     (a) All Transfer Taxes  incurred in connection  with this Agreement and the
transactions  contemplated  hereby,  including,  without limitation,  (A) Hawaii
sales tax;  (B) the Hawaii  transfer  tax,  conveyance  fees or  conveyances  of
interests  in real  and/or  personal  property;  and (C)  Hawaii  sales  tax and
transfer  tax on deeds shall be borne as  follows:  fifty  percent  (50%) by the
Buyer and fifty  percent  (50%) by the Seller.  Seller shall file, to the extent
required by, or permissible under, applicable law, all necessary Tax Returns and
other documentation with respect to all such Transfer Taxes, and, if required by
applicable  law,  Buyer shall join in the  execution of any such Tax Returns and
other documentation.  Prior to the Closing Date, to the extent applicable, Buyer
shall provide to Seller  appropriate  certificates  of Tax  exemption  from each
applicable taxing authority.

     (b) With respect to Taxes to be prorated in accordance  with Section 3.4 of
this  Agreement and except as provided in Section  6.10(c),  Buyer shall prepare
and timely file all Tax Returns required to be filed after the Closing Date with
respect to the Assets and the  Business,  and shall duly and timely pay all such
Taxes shown to be due on such Tax Returns.  Buyer's  preparation of any such Tax
Returns  shall be subject to  Seller's  approval,  which  approval  shall not be
unreasonably withheld.  Buyer shall make such Tax Returns available for Seller's
review and approval no later than fifteen  (15)  Business  Days prior to the due
date for filing  each such Tax  Return.  Upon  receipt by Buyer of the tax bill,
invoice or other  statement  regarding  such real and personal  property  Taxes,
Buyer  shall  calculate  the pro rata  share of such tax bill,  invoice or other
statement attributable to Buyer and Seller. Buyer shall then forward, as soon as
possible, to Seller a copy of such tax bill, invoice or statement along with the
supporting  documentation  relating to the  calculation of the pro rata share to
Seller and Seller will promptly pay to Buyer Seller's pro rata share of such tax
bill,  invoice or  statement.  In the event  Seller  first  receives a tax bill,
invoice or  statement  relating  to the Assets from a taxing  authority,  Seller
shall promptly forward such tax bill, invoice or statement to Buyer.

     (c) All Taxes  arising with respect to the Assets and the Business  that as
of the day  immediately  preceding the Closing Date are accrued for by Seller in
its SAP financial reporting system account styled "Other Taxes Accrued" shall be
included in the  calculation  of Adjusted  Working  Capital and shall be Assumed
Liabilities.  Upon receipt by Buyer of the tax bill,  invoice or other statement
regarding such Taxes,  Buyer promptly shall forward to Seller a copy of such tax
bill,  invoice or  statement.  In the event  Seller  first  receives a tax bill,
invoice or statement  relating to such Taxes,  Seller shall immediately  forward
such tax bill,  invoice or statement to Buyer. Buyer will pay the full amount of
the tax bill,  invoice or statement to the applicable  taxing authority no later
than the due date of the tax bill, invoice or statement and in time to avoid the
incurrence of penalties or interest.\


                                       49

<PAGE>

     (d) Buyer and Seller shall  provide the other with such  assistance  as may
reasonably be requested by the other Party in connection with the preparation of
any Tax Return,  any audit or other examination by any taxing authority,  or any
judicial or administrative proceedings relating to liability for Taxes, and each
shall retain and provide the  requesting  Party with any records or  information
which may be relevant to such return,  audit,  examination or  proceedings.  Any
information  obtained  pursuant to this Section 6.10(d) or pursuant to any other
Section  hereof  providing for the sharing of  information  or review of any Tax
Return or other instrument  relating to Taxes shall be kept  confidential by the
Parties hereto.

     (e) In the event  that a dispute  arises  between  Buyer and  Seller,  with
respect to Taxes in Sections  6.10(a) and 6.10(b),  or concerning any amount due
under this Section 6.10, the Parties shall attempt in good faith to resolve such
dispute and any agreed upon amount shall be paid to the  appropriate  Party.  If
such  dispute is not  resolved  within  thirty  (30) days,  the  Parties to such
dispute  shall  submit  the  dispute  to the  Independent  Accounting  Firm  for
resolution,  which  resolution  shall be final,  conclusive  and binding on such
Parties.  Notwithstanding  anything in this Agreement to the contrary,  the fees
and expenses of such Independent  Accounting Firm shall be allocated between the
Parties so that the non-disputing  Party's share of such fees and expenses shall
be in the same proportion that the aggregate  amount of such remaining  disputed
amounts so submitted by the disputing Party to such auditor that is successfully
disputed by the disputing Party (as finally determined by such auditor) bears to
the total amount of such remaining disputed amount so submitted by the disputing
Party to such  auditor.  Any  payment  required  to be made as a  result  of the
resolution  of the  dispute  by the  Independent  Accounting  Firm shall be made
within ten days after such resolution,  together with any interest determined by
the Independent Accounting Firm to be appropriate.

     (f) Buyer agrees that Seller may, at Seller's election prior to the Closing
Date,  direct  that all or a portion of the  Purchase  Price be  delivered  to a
"qualified  intermediary" (as defined in Treasury Regulation Section 1.1031(k) -
(g)(4)) as to enable Seller's relinquishment of the Assets to qualify as part of
a like-kind  exchange of property covered by Section 1031 of the Code. If Seller
so elects,  Buyer shall  cooperate  with Seller (but without  being  required to
incur any out-of-pocket costs in the course thereof) in connection with Seller's
efforts to effect such  like-kind  exchange,  which  cooperation  shall include,
without  limitation,  taking such actions as Seller  requests in order to enable
Seller to qualify  such  transfer  as part of a  like-kind  exchange of property
covered  by  Section  1031  of the  Code  (including  any  actions  required  to
facilitate the use of a "qualified intermediary"),  and Buyer agrees that Seller
may assign all or part of its rights and delegate all or part of its obligations
under this Agreement to a person or entity acting as a qualified intermediary to
qualify  the  transfer of the Assets as part of  like-kind  exchange of property
covered  by  Section  1031 of the Code.  Any such  assignment  shall not  reduce
Seller's obligations under this Agreement.  Buyer and Seller agree in good faith
to use reasonable  efforts to coordinate the  transactions  contemplated by this
Agreement  with any other  transactions  engaged  in by either  Buyer or Seller;
provided that such efforts are not required to include an unreasonable  delay in
the consummation of the transactions contemplated by this Agreement.

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<PAGE>

     (g) Prior to the Closing Date,  Buyer and Seller shall use their good faith
efforts to agree upon the allocation (the  "Allocation")  of the Purchase Price,
the Assumed  Liabilities  and other  relevant  items  (including,  for  example,
adjustments to the Base Purchase  Price) to the individual  assets or classes of
assets within the meaning of Section 1060 of the Code. If Buyer and Seller agree
to such  Allocation  prior to Closing,  Buyer and Seller covenant and agree that
(i) the values assigned to the assets by the Parties' mutual  agreement shall be
conclusive  and final for all  purposes,  and (ii) neither Buyer nor Seller will
take any position before any Governmental Authority or in any Proceeding that is
in any way inconsistent with such Allocation.  Notwithstanding the foregoing, if
Buyer and Seller cannot agree to an  Allocation,  Buyer and Seller  covenant and
agree to file, and to cause their respective Affiliates to file, all Tax Returns
and schedules  thereto  (including,  for example,  amended  returns,  claims for
refund,  and those returns and forms required under Section 1060 of the Code and
any Treasury regulations  promulgated  thereunder)  consistent with each of such
Party's good faith Allocations, unless otherwise required because of a change in
any applicable law.

     6.11 Advice of Changes. Prior to the Closing, each Party will timely advise
the other in writing with respect to any matter arising after  execution of this
Agreement  which  becomes  known to that Party and which  either  constitutes  a
breach of such Party's  covenants in this Agreement or, if existing or occurring
at the date of this Agreement,  would have been required to be set forth in this
Agreement,  including any of the Schedules or Exhibits hereto.  Any such written
notice  will  not be  deemed  to have  amended  this  Agreement,  including  the
appropriate  Schedule or Exhibit,  or to have  qualified any  representation  or
warranty contained in this Agreement,  or to have cured any misrepresentation or
breach of warranty that otherwise might have existed  hereunder by reason of the
development.

     6.12 Seller Employees.

     (a) On a date  reasonably  prior to the  Closing  Date,  Buyer  shall  give
Qualifying  Offers of  employment  to all employees of Seller who are covered by
the Hawaii  Teamsters and Allied Workers Union Local 996  collective  bargaining
agreement with Seller (the "CBA") and are employed in positions  relating to the
Business  (collectively,  "Union  Employees").  Each  such  person  who  becomes
employed  by Buyer  pursuant  to this  section  shall be referred to herein as a
"Transferred Union Employee".

     (b) On a date  reasonably  prior to the  Closing  Date,  Buyer  shall  give
Qualifying  Offers of  employment  to all  salaried  employees of Seller who are
employed  in  positions  relating  to  the  Business  (collectively,  "Non-Union
Employees").  Each such  person who becomes  employed by Buyer  pursuant to this
section shall be referred to herein as a "Transferred Non-Union Employee."

     (c) All offers of employment made by Buyer pursuant to Sections 6.12(a) and
(b) shall be made in accordance  with all applicable laws and  regulations,  and
for Union Employees,  in accordance with the CBA, shall remain open for a period
of ten (10)  working  days,  and shall  specify that  employment  by Buyer shall
commence on the Closing Date.  Any such offer which is accepted  within such ten
(10) working day period shall thereafter be irrevocable,  except for good cause,
until the  earlier of the  Closing  Date or the  termination  of this  Agreement
pursuant to its terms.  Following acceptance of such offers, Buyer shall provide
written  notice  thereof to Seller and Seller shall provide Buyer with access to
the  files and  records  of  employees  accepting  such  offers,  to the  extent
permitted by contract, the CBA and/or applicable law.


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<PAGE>

     (d)  The  following   shall  be  applicable  with  respect  to  Transferred
Employees:

     (i) From and after the Closing Date,  Transferred Employees shall accrue no
additional  benefits  under  any  employee  benefit  plan,  policy,  program  or
arrangement of Seller or its Affiliates.

     (ii) For such Transferred Union Employees,  Buyer shall recognize the HTAWU
as the exclusive collective bargaining representative and shall assume the terms
and conditions of the CBA, to the extent  applicable to such  Transferred  Union
Employees,  until the expiration of said agreement, and will further comply with
all applicable  legal  obligations  with respect to collective  bargaining under
federal labor law thereafter.

     (iii)  As of  the  Closing  Date,  Buyer  shall  include  each  Transferred
Non-Union  Employee in a benefit package  providing  benefits  (including a cash
incentive compensation plan) that are in the aggregate  substantially similar to
those provided by Seller to such  Transferred  Employees as of the Closing Date,
and shall cause  Transferred  Union  Employees to be provided with benefits that
are  consistent  with the terms of the CBA or are  otherwise  acceptable  to the
applicable  union.  The  commitments  under this  paragraph  shall  require  the
following:

          (A) Buyer shall take all action  necessary and  appropriate  to ensure
     that, as of the Closing Date,  Buyer  maintains  medical,  health,  dental,
     flexible spending account, accident, life, short-term disability, long-term
     disability  and other  employee  welfare  benefit  plans for the benefit of
     Transferred  Non-Union  Employees that are  substantially  similar to those
     benefits  provided  by Seller  under the  corresponding  non-union  welfare
     benefit plans maintained by the Seller as in effect as of the Closing Date.

          (B) With  respect to health  care plans,  Buyer  agrees to waive or to
     cause the  waiver of all  limitations  as to  pre-existing  conditions  and
     actively-at-work  exclusions and waiting periods for such employees, except
     that Buyer may  require  the  employee  or his/her  dependents  who, on the
     Closing Date, is then in the process of satisfying any similar exclusion or
     waiting  period  under the Seller  health  care plans to satisfy  fully the
     balance of the applicable  time period for such exclusion or waiting period
     under the applicable Buyer plan. With respect to the calendar year in which
     the Closing  Date  occurs,  all health care  expenses  incurred by any such
     employees  and/or  any  eligible  dependent   thereof,   including  without
     limitation  any  alternate  recipient  pursuant to qualified  medical child
     support  orders,  in the portion of the calendar year preceding the Closing
     Date  that  were  qualified  to be  taken  into  account  for  purposes  of
     satisfying  any deductible or  out-of-pocket  limit under any Seller health
     care plans shall be taken into  account  for  purposes  of  satisfying  any
     deductible or  out-of-pocket  limit under the health care plan of Buyer for
     such calendar year.


                                       52

<PAGE>

          (C) With respect to service and seniority,  Buyer shall recognize each
     such  employee's  service and  seniority  with Seller and any  affiliate of
     Seller  for  all  non-pension  purposes,  including  the  determination  of
     eligibility  and extent of service or  seniority-related  welfare  benefits
     such as vacation and sick pay  benefits.  From and after the Closing  Date,
     Buyer  shall  provide to each  Transferred  Employee  vacation in an amount
     equal to the Transferred  Employee's  vacation  entitlement for the year of
     the  Closing  reduced  by the number of  vacation  days for the year of the
     Closing that such Transferred Employee has taken before the Closing Date.

          (D) As of the Closing  Date,  Buyer shall  assume the Pension Plan for
     Classified Employees of GASCO, Inc. (the "Classified Plan") and continue to
     accrue  benefits  thereunder  pursuant  to  the  terms  of  any  applicable
     collective   bargaining  agreement.   Thereafter,   Seller  shall  have  no
     obligation  or  liability  (contingent  or  otherwise)  to provide  pension
     benefits to any participant in the Classified  Plan. Buyer and Seller shall
     cooperate  in causing  such steps to be taken as may be necessary to effect
     the  provisions  of  this  Section   6.12(d)(iii)(D),   including   without
     limitation the transfer of the Classified Plan's assets currently held in a
     master trust to a separate trust of which Buyer is the grantor.

          (E) The Citizens  Pension Plan ("Seller's  Pension Plan") shall retain
     all  liabilities  and assets for pension  benefits  accrued by  Transferred
     Non-Union Employees through the day immediately preceding the Closing Date,
     and Seller shall cause all such accrued  benefits to become fully vested as
     of the Closing  Date.  Seller shall,  within 90 days  following the Closing
     Date, notify Transferred  Non-Union  Employees who are entitled to deferred
     vested benefits under Seller's Pension Plan of the amount of such benefits.

          (F) On and after the Closing Date, Buyer shall perform all obligations
     imposed on the employer by Articles 26 and 27 of the collective  bargaining
     agreement  between  Seller and Hawaii  Teamsters and Allied  Workers Union,
     Local 996 with  respect  to the  provision  of health  care and group  life
     insurance  coverage  for  Transferred  Union  Employees  and retired  union
     employees of the Business.

          (G)   Buyer   shall   assume   all   liabilities,    obligations   and
     responsibilities  with respect to providing  post-retirement life insurance
     benefits  ("Post-Retirement  Life  Insurance  Benefits")  to (i)  non-union
     retirees of the  Business as of the Closing Date (the  "Current  Retirees")
     and (ii)  Transferred  Non-Union  Employees who as of the Closing Date have
     satisfied the age and service eligibility  requirements for Post-Retirement
     Life   Insurance   Benefits   under  the   applicable   Seller  plans  (the
     "Grandfathered  Active  Employees" and, together with the Current Retirees,
     the "Grandfathered Individuals").  The Grandfathered Individuals are listed
     in Schedule 6.12(d)(iii)(G). Buyer shall continue to provide to the Current
     Retirees  Post-Retirement  Life  Insurance  Benefits that are comparable to
     those  Post-Retirement  Life  Insurance  Benefits  provided to such Current
     Retirees   immediately  prior  to  the  Closing  Date,  under  cost-sharing
     structures that are at least as favorable as the cost-sharing structures in
     effect for and available to the Current Retirees  immediately  prior to the
     Closing Date.  Buyer shall provide to the  Grandfathered  Active  Employees
     Post-Retirement  Life  Insurance  Benefits  that  are  comparable  to those
     Post-Retirement  Life  Insurance  Benefits  provided to such  Grandfathered
     Active Employees  immediately prior to the Closing Date,  commencing at the
     time such Grandfathered Active Employees retire.


                                       53

<PAGE>

          (H) With respect to the  Seller's  401(k)  Savings Plan (the  "Savings
     Plan"),  Seller  shall vest  Transferred  Employees  in their  Savings Plan
     account balances as of the Closing Date.  Seller hereby represents to Buyer
     that the Savings  Plan is intended  to be  qualified  within the meaning of
     Section 401 of the Code.  Buyer shall take all actions  necessary to ensure
     that, as of the Closing Date,  it includes all  Transferred  Employees in a
     qualified  401(k) plan  ("Buyer's  401(k)  Plan")  providing  for  matching
     contributions  (if any) at least  equivalent in value to those  provided to
     the Transferred  Employee under the Savings Plan  immediately  prior to the
     Closing  Date.  Buyer shall take all  actions  necessary  to cause  Buyer's
     401(k) Plan (x) to recognize the service that the Transferred Employees had
     in the Savings Plan for purposes of determining such Transferred Employees'
     eligibility  to  participate,  vesting,  attainment  of  retirement  dates,
     contribution levels, and, if applicable,  eligibility for optional forms of
     benefit  payments,   and  (y)  to  accept   direct-rollover   transfers  of
     Transferred  Employees'  account  balances in the Savings  Plan,  including
     transfers of loan balances and related promissory notes, provided that such
     loans  would not be treated as taxable  distributions  at any time prior to
     such transfer.

          (I) Within  sixty  (60) days  after the  Closing  Date,  Seller  shall
     transfer to Buyer's  flexible  benefits  plan any balances  standing to the
     credit of Transferred Employees under Seller's flexible benefits plan as of
     the day  immediately  preceding the Closing  Date.  As soon as  practicable
     after the  Closing  Date,  Seller  shall  provide  to Buyer a list of those
     Transferred  Employees  that have  participated  in the health or dependent
     care reimbursement  accounts of Seller,  together with their elections made
     prior to the  Closing  Date with  respect  to such  account,  and  balances
     standing to their credit as of the day  immediately  preceding  the Closing
     Date.

     (e)  With  respect  to  severance  benefits,  Buyer  shall  provide  to any
Transferred Non-Union Employee who is terminated by Buyer (other than for cause)
prior  to the date  which is one year  following  the  Closing  Date,  severance
benefits  at the level set forth in a schedule  provided  to Buyer  prior to the
date hereof.  Any employee provided severance benefits under this section may be
required to execute a release of claims against  Seller and Buyer,  in such form
as Buyer shall prescribe, as a condition for the receipt of such benefits.


                                       54

<PAGE>

     (f) Each  Transferred  Non-Union  Employee  who is initially  assigned,  or
assigned  within twelve (12) months of the Closing Date, by Buyer to a principal
place of work that  requires  such  employee to relocate his  residence  will be
reimbursed  by  Buyer  for  all  relocation  expenses  in  accordance  with  the
relocation benefits plans set forth in a schedule provided to Buyer prior to the
date hereof.  For purposes of the  foregoing a required  relocation of residence
shall include a change in the principal place of work that is more than 30 miles
farther from such employee's  principal place of work  immediately  prior to the
Closing  Date and requires an average  commute from his current  residence of at
least one hour in each direction.

     (g)  Seller  shall  be  responsible,  with  respect  to the  Business,  for
performing  and  discharging  all  requirements  under  the WARN  Act and  under
applicable  state and local laws and  regulations  for the  notification  of its
employees  of any  "employment  loss"  within the  meaning of the WARN Act which
occurs on or prior to the Closing Date.  Seller shall give all notices  required
to be given by Seller under Chapter 394B, Hawaii Revised Statutes, as amended.

     (h) Buyer shall not be  responsible  for, but Seller  shall be  responsible
for, extending COBRA Continuation Coverage to any employees and former employees
of  Seller,  or to any  qualified  beneficiaries  of such  employees  and former
employees,  who become or became entitled to COBRA  Continuation  Coverage on or
before the Closing Date, including those for whom the Closing Date occurs during
their COBRA election period.

     (i)  Seller  or  its  Affiliates  shall  pay or  cause  to be  paid  to all
Transferred  Employees,  all  compensation  (excluding  vacation pay),  workers'
compensation or other  employment  benefits to which they are entitled under the
terms of the applicable  compensation  or Seller benefit plans or programs as of
the Closing Date. Buyer shall pay to each Transferred Employee all unpaid salary
or  other  compensation  or  employment  benefits  which  have  accrued  to such
employees  following the Closing Date, at such times as provided under the terms
of  the  applicable  compensation  or  benefit  programs.   Notwithstanding  the
foregoing,  Seller and Buyer shall  pro-rate the  obligation  to pay any bonuses
declared  by Seller on or after the  Closing  Date (but  prior to March 1 of the
calendar  year  following  the year in which the Closing Date occurs) that would
have been payable to the  Transferred  Employees had the  Transferred  Employees
remained  employed by Seller or its  Affiliates  throughout the calendar year in
which the Closing Date occurs,  in  accordance  with the  provisions of the cash
incentive  compensation  plan of Seller  under  which such bonus would have been
paid. Buyer shall be obligated to pay that portion of each such bonus determined
by multiplying the amount of such bonus by a fraction, the numerator of which is
the  number  of days  from and after the  Closing  Date  through  the end of the
calendar year in which the Closing Date occurs,  and the denominator of which is
365.

     (j) Seller  shall be  responsible  for  maintaining  workers'  compensation
coverage for all Union Employees and Non-Union  Employees for claims relating to
occurrences prior to the Closing Date.

     (k) Individuals  who are otherwise  Union Employees or Non-Union  Employees
but who on any date are not  actively at work due to a leave of absence  covered
by the Family and Medical Leave Act (FMLA), or due to any other authorized leave
of absence, including, without limitation,  short-term disability, or who are on
long-term  disability,  shall nevertheless be treated as "Union Employees" or as
"Non-Union Employees",  as the case may be, on such date if they are able (i) to
return to work within the  protected  period  under the FMLA or such other leave
(which in any event  shall not extend  more than  twelve  (12)  weeks  after the
Closing  Date),  whichever  is  applicable,  and (ii) to perform  the  essential
functions of their job, with or without a reasonable accommodation.


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<PAGE>

     (l)  Buyer  shall  be  responsible,  with  respect  to  the  Business,  for
performing  and  discharging  all  requirements  under  the WARN  Act and  under
applicable state and local laws and regulations  (including Chapter 394B, Hawaii
Revised  Statutes,  as amended)  for the  notification  of its  employees of any
"employment  loss"  within the  meaning of the WARN Act or as required by Hawaii
law which occurs following the Closing Date.

     (m) Buyer is  responsible  for  extending  and  continuing  to extend COBRA
Continuation Coverage to all Transferred Employees,  and qualified beneficiaries
of such  employees  who  become  entitled  to such COBRA  Continuation  Coverage
following the Closing Date.

     (n) The provisions of this Section 6.12 shall not be construed as being for
the  benefit  for any person  other than the  Parties  hereto,  and shall not be
enforceable by persons other than such Parties (including,  without limitations,
the Transferred Employees).

     6.13 Risk of Loss.

     (a) From the date  hereof  through the  Closing  Date,  all risk of loss or
damage to the assets included in the Assets shall be borne by Seller, other than
loss  or  damage  caused  by the  acts  or  negligence  of  Buyer  or any  Buyer
Representative, which loss or damage shall be the responsibility of Buyer.

     (b) If, before the Closing Date, all or any portion of the Assets are taken
by eminent  domain,  municipalization  or  condemnation  or are the subject of a
pending  taking which has not been  consummated,  (such event being  called,  in
either case, a "Taking"),  then Seller shall notify Buyer promptly in writing of
such Taking.

     (i) If such Taking relates to Assets of Seller having an aggregate net book
value in excess of $10,000,000,  then such Taking shall be a "Material  Taking."
Upon a Material Taking,  Seller and Buyer shall negotiate to settle the loss, if
any,  resulting from such Material Taking (and such  negotiation  shall include,
without  limitation,  the  negotiation of a fair and equitable  reduction in the
Base Purchase Price to offset such loss, if any, based on  consideration  of all
relevant  circumstances).  If Seller and Buyer shall fail to agree to settle the
loss, if any, resulting from said Material Taking, said Material Taking shall be
conclusively deemed to be an Asset Material Adverse Effect.

     (ii) If such Taking is not a Material Taking,  then (A) Buyer may elect to,
in the name of Seller,  negotiate for, claim, contest and receive the portion of
the award properly allocable to those Assets that are the subject of the Taking,
(B) to the extent the Taking shall have been  consummated  prior to the Closing,
Seller shall be relieved of its  obligation to convey to Buyer those Assets that
were the subject of the Taking, (C) at the Closing,  Seller will assign to Buyer
all of its rights to damages payable as a result of the Taking,  and will pay to
Buyer all damages  previously paid to it in connection with the Taking,  in each
case to the extent  properly  allocable  to those Assets that are the subject of
the Taking, and (D) following the Closing, Seller will give to Buyer any further
assurances  of such rights and  assignment  with  respect to the Taking as Buyer
reasonably may request from time to time.


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<PAGE>

     (c) (i) If any casualty loss or damage to the Assets shall occur before the
Closing Date, then the Base Purchase Price shall be reduced,  to the extent such
loss or damage is not remedied prior to the Closing Date, by an amount  mutually
acceptable  to the  Parties,  which  amount  shall  be  equal  to the  estimated
out-of-pocket costs and expenses which Buyer reasonably can be expected to incur
to repair or replace,  in accordance with Good Utility  Practices,  such lost or
damaged Assets after  Closing.  If the actual  out-of-pocket  costs and expenses
which Buyer  reasonably  incurred to repair or replace,  in accordance with Good
Utility  Practices,  such lost or damaged Assets exceeds such estimated  amount,
Seller shall  reimburse Buyer for such excess costs. If the Parties do not agree
to an  adjustment to the Base  Purchase  Price in respect of the casualty  loss,
then the Closing  shall be postponed  for such period of time (not to exceed six
(6) months),  and Seller  shall repair or replace the lost or damaged  Assets in
accordance  with Good Utility  Practices and Buyer or its  Representatives  will
have the right to inspect and observe and approve,  all repairs or  replacements
made by Seller to remedy such casualty loss.

     (ii) Notwithstanding  anything to the contrary in Section 6.13(c)(i) above,
if Seller shall have failed to remedy,  cure or otherwise reverse by the Closing
Date  any  casualty  loss or  damage  to the  Assets  such  that  the  estimated
out-of-pocket  costs and expenses that Buyer reasonably can be expected to incur
to repair or replace such lost or damaged Assets exceeds $10,000,000,  such loss
or damage shall be conclusively deemed to be an Asset Material Adverse Effect.

     6.14 Tax Exempt Financing

     (a) Seller represents that:

     (i) The Exempt Facilities have been financed, in whole or in part, with the
proceeds of the issuance and sale by the Department of Budget and Finance of the
State of Hawaii of private  activity  bonds the interest on which,  with certain
exceptions,  is  excluded  from gross  income  for  purposes  of Federal  income
taxation (such bonds, as currently outstanding, the "Revenue Bonds"); and Seller
is the economic obligor in respect of such Revenue Bonds;

     (ii) The Revenue Bonds are described in Schedule 6.14(a);

     (iii) The basis for the  exclusion  of interest  on the Revenue  Bonds from
gross income for Federal income tax purposes is the use of the Exempt Facilities
for "the local  furnishing of electric  energy or gas" under Sections  142(a)(8)
and  142(f)  of  the  Code  and  the  applicable   Treasury   Regulations   (the
"Regulations") thereunder;

     (iv) The use of the Exempt Facilities for a purpose other than a qualifying
purpose indicated in subsection (iii) above could impair (A) such exclusion from
gross income of the interest on the Revenue  Bonds,  possibly  with  retroactive
effect,  unless  appropriate  remedial  action were taken (which  could  include
prompt   defeasance  or  redemption  of  the  Revenue   Bonds)  and/or  (B)  the
deductibility  of  payments  by  Seller  or  Buyer  of  interest  based  on  the
restrictions in Section 150(b) of the Code;


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<PAGE>

     (v) After August 20,  1996,  at least the  following  bonds exempt from tax
under  Section  103 of the Code and in whole  or in part  described  in  Section
142(a)(8) of the Code have been issued with respect to  facilities of Seller for
the "local  furnishing  of electric  energy or gas":  $19,600,000  Department of
Budget and Finance of the State of Hawaii Special Purpose Revenue Bonds (The Gas
Company Project) Series 2000; and

     (vi) Any breach by Buyer of its  obligations  under this Section 6.14 could
result in the incurrence by Seller of additional costs and expenses with respect
to the Revenue Bonds, including,  without limitation,  increased interest costs,
loss of the interest  deduction for tax purposes and transaction  costs relating
to any refinancing,  redemption  and/or defeasance of all or part of the Revenue
Bonds (cumulatively, the "Tax Impact").

     (b) Buyer  agrees that Buyer will  indemnify  Seller for costs  incurred by
Seller in respect of any Tax Impact  that would not have  arisen but for Buyer's
breach of its obligations  under Section 6.14(c) (except as excused elsewhere in
this Section 6.14).

     (c) Buyer  represents that it has not made an election  pursuant to Section
142(f)(4)(B)  of the Code to  terminate  tax exempt bond  financing  by Buyer of
facilities  described by Section  142(a)(8) of the Code.  So long as any Revenue
Bonds remain outstanding with respect to Exempt Facilities in any county,  Buyer
agrees that it shall not (I) use, or take any  deliberate  act to permit the use
of, or fail to take any act within its  control  that would  prevent the use of,
the Exempt  Facilities within that county for any purpose or in any manner other
than as shall be consistent with the Exempt Facility Operating Protocol (as such
Exempt Facility Operating  Protocol may have been updated,  amended or corrected
by Seller  for the  purpose  of its  accuracy  on or before  the  Closing  Date;
provided that such changes do not  materially  impact  Buyer's  operation of the
Assets) delivered by Seller to Buyer on or before the date of this Agreement, or
(II) make an election pursuant to Section  142(f)(4)(B) of the Code to terminate
tax exempt bond financing by Buyer of facilities  described by Section 142(a)(8)
of the Code, unless in either case Buyer:

     (i) has  obtained  at its own  expense  an opinion  addressed  to Seller of
nationally  recognized  bond  counsel  reasonably  acceptable  to Seller  ("Bond
Counsel")  that such use will not impair (x) the exclusion  from gross income of
the interest on any issue of Revenue  Bonds for Federal  income tax purposes and
(y) the deductibility of Seller's payments of interest based on the restrictions
in Section 150(b) of the Code; or

     (ii) has provided written notice to Seller of any election,  act or failure
to act  not  later  than 45  days  after  the  effective  date  of  such  action
("Sufficient  Notice").  (Reference is made to Schedule 6.14(a) for the optional
redemption provisions applicable to the Revenue Bonds.)

     (d) Notwithstanding any other provision of this Agreement,  it is expressly
understood and agreed that the provisions of Section  6.14(c) shall not prohibit
Buyer from (and Buyer shall incur no  liability  to Seller for or in  connection
with Buyer)  suspending  the operation of the Exempt  Facilities (in whole or in
part) on a temporary  basis,  or from  terminating  the  operation of the Exempt
Facilities  (in  whole or in part)  on a  permanent  basis  and  shutting  down,
retiring,  abandoning and/or  decommissioning the Exempt Facilities (in whole or
in part); provided, however, that if the Exempt Facilities, in whole or in part,
are  dismantled  and sold,  including  any sale for scrap,  at any time when any
Revenue  Bonds  remain  outstanding,  then the  proceeds  of such sale of Exempt
Facilities  shall within six months from the date of sale be expended to acquire
replacement  property to be used as described in the Exempt  Facility  Operating
Protocol,  unless (I) Buyer has obtained at its own expense an opinion addressed
to Seller of Bond  Counsel  that the failure to take this action will not impair
(x) the  exclusion  from gross  income of the  interest  on any issue of Revenue
Bonds for Federal  income tax  purposes  and (y) the  deductibility  of Seller's
payments of interest  based on the  restrictions  in Section 150(b) of the Code;
(II) the  proceeds of such sales are less than  $50,000 in a calendar  year;  or
(III) Buyer has provided Sufficient Notice of such action to Seller.


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<PAGE>

     (e) Buyer agrees that it shall not issue, or have issued on its behalf, any
tax-exempt  bonds  to  finance  or  refinance  its  acquisition  of  the  Exempt
Facilities, provided that it is expressly understood and agreed that this clause
(e) shall not prohibit  Buyer's use of tax-exempt  bonds to finance or refinance
any  improvement to the Exempt  Facilities made after the date of acquisition or
to any assets other than the Exempt Facilities.

     (f)  Buyer  agrees  to  provide  prompt  written  notice  to  Seller of any
condemnation  of, or casualty  loss with respect to, the Exempt  Facilities,  in
whole or in substantial part, to cooperate in good faith with Seller in Seller's
efforts to ascertain the  consequences of any such eminent domain  proceeding or
casualty  loss for the (A) exclusion of interest on the Revenue Bonds from gross
income for Federal  income tax  purposes and (B) the  deductibility  of Seller's
payments of interest based on the restrictions in Section 150(b) of the Code.

     (g)  Seller  hereby  represents  that  it  has  performed  all  duties  and
obligations of "Company" under the documents relating to the Revenue Bonds, that
the  representations  and warranties under the documents relating to the Revenue
Bonds remain true and correct, and that there has been no breach of any covenant
or agreement by Seller under the documents relating to the Revenue Bonds. Seller
hereby  covenants  that,  until all of the Revenue Bonds have been paid upon the
stated maturity  thereof or have been redeemed in advance of the stated maturity
date,  Seller will perform all duties and  obligations  of  "Company"  under the
documents  relating to the Revenue  Bonds,  that  Seller's  representations  and
warranties  under such  documents  will  remain true and correct and that Seller
will not  breach any  covenant  or  agreement  of Seller  under such  documents;
provided  that Seller's  covenant in this sentence  shall not extend to any such
duties, obligations,  representations,  warrantees,  covenants or agreements the
necessary  predicate  for which is  Seller's  actual  ownership,  possession  or
control  of the  Exempt  Facilities  from and after  the  Closing  Date.  Seller
acknowledges  and agrees that  although  Seller from and after the Closing  Date
will not own,  possess or control the Exempt  Facilities,  Seller  shall  remain
primarily  obligated  under the documents  relating to the Revenue Bonds and, as
between  itself and each issuer of the Revenue  Bonds,  shall remain  subject to
each  of  Seller's   representations,   warranties,   covenants  and  agreements
thereunder.  Buyer  shall have no  liability  under  this  Section  6.14  unless
interest on the Revenue  Bonds would be excluded  from gross  income for Federal
income tax purposes absent an act or failure to act by Buyer in contravention of
the terms of Section 6.14(c).


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<PAGE>

     (h) In any case  where  Buyer has  provided  notice to  Seller  under  this
Section  6.14,  Buyer  agrees that it will join and  cooperate  with Seller with
respect to any  request by Seller to the  Internal  Revenue  Service to obtain a
private letter ruling  regarding any Tax Impacts of the act or failure to act by
Buyer that prompted such notice.  Seller will join and cooperate with Buyer with
respect to any  request  by Buyer to the  Internal  Revenue  Service to obtain a
private letter ruling  regarding any Tax Impacts.  The Party seeking the private
letter   ruling  shall  bear  all  costs  of  the  filing,   legal  and  related
out-of-pocket expenses incurred in the course of such request.

     (i) Seller  agrees  that it has sole  responsibility  to make any  required
payments of principal  and  interest on the Revenue  Bonds and that Buyer has no
responsibility  to make such  payments.  Seller  agrees that it will  indemnify,
protect,  defend and hold  harmless  Buyer from and against any claim that Buyer
owes any payment of principal or interest on the Revenue  Bonds.  Seller  agrees
that Buyer shall retain any payments  with respect to any casualty  event or any
condemnation  of the Exempt  Facilities and that,  except as Buyer has otherwise
agreed under  Section  6.14(c),  Buyer shall not be restricted in its use of any
such proceeds.

     (j) If Buyer shall sell,  exchange,  transfer or  otherwise  dispose of the
Exempt  Facilities in whole or substantial  part (aggregate price of $500,000 or
more in a calendar year) to one or more third  parties,  Buyer shall cause to be
included  in the  documentation  relating  to  such  transaction  covenants  and
agreements on the part of such third party  substantially  identical to those on
the part of  Buyer  contained  in this  Section  6.14,  and  effective  upon the
consummation of such disposition  Buyer shall have no further  obligations under
this  Section  6.14 with  respect  to the Exempt  Facilities  which have been so
disposed.

     (k) The covenants and agreements on the part of Buyer and Seller  contained
in this  Section  6.14 shall  continue  in effect so long as any of the  Revenue
Bonds shall remain  outstanding.  Seller shall notify Buyer  promptly when there
shall be no Revenue Bonds outstanding.

     (l) Buyer  acknowledges  and agrees that  Seller's bond counsel may rely on
Buyer's  representations,  warranties and covenants as hereinabove  provided for
the  purpose of  rendering  a legal  opinion or  opinions,  as  required  by the
Indenture of Trust, the Loan Agreement and the Tax Regulatory Agreement relating
to the Revenue Bonds ("IDRB  Documents") as a precondition to the sale by Seller
of such Exempt Facilities, to the effect that the sale of such Exempt Facilities
will not result in (I) the inclusion of the interest on the Revenue Bonds in the
gross income of the recipient for purposes of Federal income taxation,  and (II)
disallowance  of interest  expense to Seller under  Section  150(b) of the Code.
Seller  acknowledges  and  agrees  that  Buyer  shall  be an  addressee  of  the
above-described  opinion  letters of Seller's  bond  counsel or shall  receive a
reliance  letter from  Seller's bond counsel  authorizing  Buyer to rely on such
opinion letters.

     (m) Nothing in this Agreement is intended to nor shall it be interpreted as
(i) an assignment to, and assumption by, Buyer of any of the IDRB Documents,  or
(ii) as an undertaking or agreement by Buyer to assume,  guarantee or pay any of
Seller's loan or other payment obligations pursuant to the IDRB Documents. Other
than as stated in this Section 6.14, Buyer shall have no liability in respect of
the Revenue Bonds.


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<PAGE>

     (n) Each of Buyer and Seller shall use its Commercially Reasonable Efforts,
and shall cooperate with the other Party in the other Party's efforts, to obtain
all consents, bond counsel opinions and IRS rulings as may be required under the
IDRB Documents and the Code to enable Seller, at its option, to defease, prepay,
redeem or retain until the stated  maturity  date the IDRB  Indebtedness  and to
sell the Assets to Buyer  without  the result  that the  interest on the Revenue
Bonds will be  included in the gross  income of the  recipient  for  purposes of
Federal income taxation;  provided, however, that Buyer shall have no obligation
in respect of its ownership or operation of the Exempt Facilities (including but
not limited to rates imposed by Buyer in respect of utility service  provided by
the Exempt  Facilities  or by any other  facilities  of Buyer or  affiliates  of
Buyer) other than to comply with the Exempt Facility Operating Protocol.

     6.15 Seller Guarantees and Surety Instruments. Buyer shall use Commercially
Reasonable  Efforts to assist Seller in obtaining full and complete  releases of
the guarantees,  letters of credit, bonds and other surety instruments listed in
Schedule 6.15. In this connection, Buyer agrees to provide a guaranty, letter of
credit,  bond or other surety  instrument  at Closing to replace those listed in
Schedule 6.15.

     6.16  Citizens and Gasco Marks.

     (a) Buyer  acknowledges and agrees with Seller that Seller has the absolute
and exclusive  proprietary  right to the Citizens Marks, all rights to which and
the goodwill  represented  thereby and pertaining  thereto are being retained by
Seller.  Within ninety (90) days after the Closing Date, Buyer shall cease using
any Citizens  Mark and shall remove from the Assets any and all Citizens  Marks.
Thereafter, Buyer shall not use any Citizens Mark in connection with the sale of
any products or services or otherwise in the conduct of the  businesses.  In the
event that Buyer  breaches  this  Section  6.16(a),  Seller shall be entitled to
specific  performance and to injunctive  relief against further  violations,  as
well as any other remedies at law or in equity available to Seller.

     (b) The parties  acknowledge and agree that the Assets include the absolute
and exclusive proprietary right to all names, marks, trade names, trademarks and
corporate symbols and logos incorporating "The Gas Company," "TGC," or "Honolulu
Gas Equipment  Company"  (collectively,  the "Gasco  Marks").  All rights to the
Gasco Marks and the goodwill represented thereby and pertaining thereto shall be
assigned and  transferred to Buyer at Closing.  After the Closing Date,  neither
Seller  nor any of its  Affiliates  shall  use  any of the  Gasco  Marks  in any
corporate  name or in  connection  with the sale of any  products or services or
otherwise in the  operation of any business.  This Section  6.16(b) shall not be
construed to prohibit Seller from using the name "Gasco" or "The Gas Company" in
connection  with the filing of any Tax Returns for periods  prior to the Closing
Date or the filing of any other documents required by any Governmental Body.

     6.17 Title Commitments. Prior to Closing, Seller shall cooperate with Buyer
and use  Commercially  Reasonable  Efforts to assist  Buyer if Buyer  desires to
obtain  American Land Title  Association  ("ALTA") title  insurance  commitments
(collectively, the "Title Commitments," and each a "Title Commitment"), in final
form,  from one or more  title  insurance  companies  (collectively,  the "Title
Company"), committing the Title Company (subject only to the satisfaction of any
industry standard requirements  contained in the Title Commitment) to issue ALTA
(or its  local  equivalent)  form  of  title  insurance  policies  in an  amount
acceptable to the Buyer and the Title Company insuring good, valid, indefeasible
fee simple title to the Real  Property in Buyer,  in all cases,  at Buyer's sole
expense and in the  respective  amounts  that Buyer  requests  prior to Closing,
subject to no  Encumbrances  or other  exceptions to title other than  Permitted
Encumbrances  (collectively  the "Title  Policies").  On or prior to the Closing
Date,  Seller shall execute and deliver,  or cause to be executed and delivered,
to the Title Company, at no cost to Seller, any customary  affidavits,  standard
gap  indemnities,  evidence of corporate  existence and  authority,  and similar
documents  reasonably  requested  by the Title  Company in  connection  with the
issuance of the Title  Commitments  or the Title  Policies;  provided  that such
efforts and Buyer's request for Title Policies or Title Commitments shall, in no
event, result in any delay in the consummation of the transactions  contemplated
by this  Agreement,  except to the extent  caused by or resulting  from Seller's
breach of this  Agreement;  and provided  further,  that nothing in this Section
6.17 shall obligate Seller to execute or deliver any document that affects, in a
manner adverse to Seller, Seller's liability to Buyer as expressed herein and in
the Special Warranty Deed.


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<PAGE>

     6.18 Post-Execution  Delivery of Schedules. By March 31, 2003, Seller shall
deliver to Buyer a schedule, to be identified as Schedule 6.18, which sets forth
all of the following identified by Seller after reasonable investigation (i) all
Permits,  (ii) all  material  items of Tangible  Personal  Property  (other than
Inventories),  (iii)  quantities of  Inventories  recorded in Seller's books and
records for the Business as of the last day of the month  preceding  the date of
this Agreement, together with the net book values of such Inventories as of such
date, (iv) all Easements held by Seller in connection with the Business, and (v)
all line extension  agreements and similar construction  arrangements.  Schedule
6.18 will also (x)  designate  those  Permits  that  require  the consent of the
respective  Governmental  Authority  to  transfer  and those that  purport to be
non-transferable and (y) describe the current status of each such Permit.

     6.19  Transition  Plan.  Within 30 days  after the  execution  date of this
Agreement,  Buyer shall deliver to Seller a list of its proposed representatives
to a joint transition team, which shall include  individuals with expertise from
various  functional  specialties  associated  or involved in providing  billing,
payroll and other support services  provided to the Business by any automated or
manual  process using  facilities or employees  that are not included  among the
Assets or Transferred  Employees.  Seller will add its  representatives  to such
team within 15 days after receipt of Buyer's list. Such team will be responsible
for preparing as soon as reasonably practicable after the execution date of this
Agreement  and  at  least  60  days  prior  to  the  Closing  Date,  and  timely
implementing,  a transition plan which will identify and describe  substantially
all of the various  transition  activities  that the parties will cause to occur
before and after the Closing and any other transfer of control  matters that any
party  reasonably  believes  should be addressed  in such  transition  plan.  If
requested by either party,  the terms and conditions  governing such  transition
activities  will be more fully set forth in a  Transition  Agreement  reasonably
satisfactory  to the  parties.  Buyer and  Seller  shall use their  Commercially
Reasonable  Efforts to cause their  Representatives  on such  transition team to
cooperate  in good faith and take all  reasonable  steps  necessary to develop a
mutually acceptable  transition plan by no later than 120 days after the date of
this Agreement.

     6.20 Certain Transactions. Buyer shall not, and shall not permit any of its
Affiliates to, acquire or agree to acquire by merging or consolidating  with, or
by  purchasing  a  substantial  portion of the assets of or equity in, or by any
other manner, any business or any corporation, partnership, association or other
business  organization  or division  thereof,  or otherwise  acquire or agree to
acquire any assets if the entering into of a definitive  agreement  relating to,
or  the  consummation  of  such  acquisition,   merger  or  consolidation  would
reasonably be expected to (i) impose any material  delay in the obtaining of, or
significantly increase the risk of not obtaining, any authorizations,  consents,
orders,  declarations or approvals of any  Governmental  Authority  necessary to
consummate the transactions  contemplated by this Agreement or the expiration or
termination of any applicable waiting period,  (ii)  significantly  increase the
risk  of  any  Governmental   Authority   entering  an  order   prohibiting  the
consummation  of  the  transactions   contemplated  by  this  Agreement,   (iii)
significantly  increase  the risk of not being  able to remove any such order on
appeal or otherwise or (iv) materially  delay or prevent the consummation of the
transactions contemplated by this Agreement.


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<PAGE>

                                  ARTICLE VII

                                   CONDITIONS

     7.1 Conditions to  Obligations of Buyer.  The obligation of Buyer to effect
purchase of the Assets and the other transactions contemplated by this Agreement
shall be subject  to the  fulfillment  of the  following  conditions,  or waiver
thereof, by Buyer at or prior to the Closing Date:

     (a) The waiting period under the HSR Act applicable to the  consummation of
the  sale  of  the  Assets  contemplated  hereby  shall  have  expired  or  been
terminated;

     (b) No preliminary or permanent  injunction or other order or decree by any
Governmental Authority which prevents the consummation of the sale of the Assets
contemplated  herein  shall have been  issued and remain in effect  (each  Party
agreeing to use its reasonable best efforts to have any such  injunction,  order
or decree lifted) and no statute,  rule or regulation shall have been enacted by
any state or  federal  government  or  Governmental  Authority  prohibiting  the
consummation of the sale of the Assets;

     (c) Buyer shall have received all of Buyer's Required Regulatory  Approvals
by Final Order, and such Required  Regulatory  Approvals shall not contain terms
and  conditions  that would result in a Regulatory  Material  Adverse Effect for
Buyer or an Asset Material Adverse Effect;

     (d)  Seller  shall  have  received  all  of  Seller's  Required  Regulatory
Approvals by Final  Order,  and such  Required  Regulatory  Approvals  shall not
contain terms and conditions that would result in a Regulatory  Material Adverse
Effect for Buyer or an Asset Material Adverse Effect;

     (e) Seller shall have performed and complied with each of its covenants and
agreements  contained in this  Agreement  which are required to be performed and
complied with by Seller on or prior to the Closing Date except where the failure
to so  perform or comply,  when taken in the  aggregate,  would not have a Buyer
Material Adverse Effect or an Asset Material Adverse Effect;


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<PAGE>

     (f)  The  representations  and  warranties  of  Seller  set  forth  in this
Agreement shall be true and correct as of the Closing Date as though made at and
as of the Closing Date, except (i) subject to Section 6.11, to the extent due to
changes expressly  permitted by this Agreement or otherwise in writing by Buyer,
(ii) that  representations  and warranties  made as of, or in respect of, only a
specified date or period shall be true and correct as of, or in respect of, such
date or period and (iii) to the extent that any failure of such  representations
and  warranties to be true and correct as aforesaid  when taken in the aggregate
would not have a Buyer  Material  Adverse  Effect or an Asset  Material  Adverse
Effect;

     (g) No Asset Material Adverse Effect shall have occurred and be continuing;

     (h) Seller shall have  delivered,  caused to be  delivered,  or be standing
ready to deliver, to Buyer at the Closing, Seller's closing deliveries described
in Section 3.5; and

     (i) Buyer shall have received  consents of third  parties  required for the
assignment to Buyer of the Assigned Agreements described in a schedule delivered
by Buyer to Seller prior to the execution of this Agreement and entitled, "Third
Party Consent  Required for  Closing,"  and such  consents  shall be in form and
substance reasonably acceptable to Buyer, it being understood and agreed that no
such third party  consent  shall be  unacceptable  to Buyer  because it requires
commercially reasonably security arrangements for Buyer's payment obligations.

     7.2  Conditions to  Obligations  of Seller.  The  obligations  of Seller to
effect the sale of the Assets and the other  transactions  contemplated  by this
Agreement  shall be subject to the fulfillment of the following  conditions,  or
the waiver thereof, by Seller at or prior to the Closing Date:

     (a) The waiting period under the HSR Act applicable to the  consummation of
the  sale  of  the  Assets  contemplated  hereby  shall  have  expired  or  been
terminated;

     (b) No preliminary or permanent  injunction or other order or decree by any
Governmental Authority which prevents the consummation of the sale of the Assets
contemplated  herein shall have been issued and remain in effect (each of Seller
and  Buyer  agreeing  to use  its  reasonable  best  efforts  to have  any  such
injunction,  order or decree  lifted) and no statute,  rule or regulation  shall
have been enacted by any state or federal  government or Governmental  Authority
in the United States prohibiting the consummation of the sale of the Assets;

     (c)  Seller  shall  have  received  all  of  Seller's  Required  Regulatory
Approvals by Final  Order,  and such  Required  Regulatory  Approvals  shall not
contain terms and conditions that would have an Asset Material Adverse Effect or
a Seller Material Adverse Effect;


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<PAGE>

     (d) Seller shall have received any consents of third  parties  required for
the  assignment to Buyer of any of the Assigned  Agreements  other than consents
that, if not obtained, would not have a Seller Material Adverse Effect;

     (e) Buyer shall have  performed and complied with each of its covenants and
agreements  contained in this  Agreement  which are required to be performed and
complied  with by Buyer on or prior to the Closing Date except where the failure
to so perform or comply,  when taken in the  aggregate,  would not have a Seller
Material Adverse Effect;

     (f) The representations and warranties of Buyer set forth in this Agreement
shall be true and correct as of the Closing Date as though made at and as of the
Closing  Date,  except (i) subject to Section 6.11, to the extent due to changes
expressly  permitted by this  Agreement or otherwise in writing by Seller,  (ii)
that  representations  and  warranties  made as of,  or in  respect  of,  only a
specified date or period shall be true and correct as of, or in respect of, such
date or period and (iii) to the extent that any failure of such  representations
and  warranties to be true and correct as aforesaid  when taken in the aggregate
would not have a Seller Material Adverse Effect;

     (g) Buyer shall have assumed,  as set forth in and subject to Section 6.12,
all of the applicable obligations under the CBA;

     (h) Buyer shall have delivered, caused to be delivered or standing ready to
deliver,  to Seller at the  Closing,  Buyer's  closing  deliveries  described in
Section 3.6; and

     (i) Seller  shall  have  received  an opinion  letter  from  Seller's  Bond
Counsel,  dated the Closing Date,  substantially  in the form attached hereto as
Exhibit E.

                                 ARTICLE VIII

                          POST-CLOSING INDEMNIFICATION

     8.1  Indemnification  of Seller by Buyer.  After  Closing,  and  subject to
Section  8.3,  Buyer  shall  indemnify,  defend and hold  harmless  Seller,  its
officers,  directors,  employees,  shareholders,  Affiliates and agents (each, a
"Seller  Indemnitee")  from and against any and all Losses  asserted  against or
paid or incurred by any Seller Indemnitee (each, a "Seller  Indemnifiable Loss")
in any way relating to,  resulting from or arising out of or in connection  with
(i) any breach by Buyer of any covenant or agreement of Buyer  contained in this
Agreement  or any failure or  inaccuracy  of any  representation  or warranty of
Buyer contained in this Agreement, (ii) the Assumed Liabilities,  (iii) any loss
or damages resulting from or arising solely out of any Inspection of the Assets,
and (iv) any Third  Party  Claims  against  a Seller  Indemnitee  to the  extent
arising out of or in  connection  with  Buyer's  ownership  or  operation of the
Assets on or after the Closing Date.

     8.2  Indemnification  of Buyer by Seller.  After  Closing,  and  subject to
Section  8.3,  Seller  shall  indemnify,  defend and hold  harmless  Buyer,  its
officers,  directors,  employees,  shareholders,  Affiliates and agents (each, a
"Buyer Indemnitee") from and against any and all Losses asserted against or paid
or incurred by any Buyer Indemnitee (each, a "Buyer  Indemnifiable Loss") in any
way relating to,  resulting from or arising out of or in connection with (i) any
breach  by Seller of any  covenant  or  agreement  of Seller  contained  in this
Agreement or failure or inaccuracy of any  representation  or warranty of Seller
contained in this Agreement, (ii) the Excluded Liabilities,  (iii) noncompliance
by Seller with any bulk sales or transfer laws as provided in Section 10.12, and
(iv) any Third  Party  Claims  against a Buyer  Indemnitee  arising out of or in
connection  with  Seller's  ownership or operation of the Excluded  Assets on or
after the Closing Date.


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<PAGE>

     8.3  Certain Limitations on Indemnification.

     (a) Notwithstanding anything to the contrary contained herein:

     (i) any Indemnitee  shall use Commercially  Reasonable  Efforts to mitigate
all Losses relating to a claim under these indemnification provisions, including
availing itself of any defenses,  limitations,  rights of  contribution,  claims
against  third  persons  and other  rights at law or  equity.  The  Indemnitee's
Commercially  Reasonable  Efforts shall include the  reasonable  expenditure  of
money  to  mitigate  or  otherwise  reduce  or  eliminate  any  Loss  for  which
indemnification  would  otherwise  be due,  and  the  Indemnifying  Party  shall
reimburse  the  Indemnitee  for  the  Indemnitee's  reasonable  expenditures  in
undertaking the mitigation; and

     (ii) any  indemnifiable  Loss  shall  be net of the  dollar  amount  of any
insurance or other  proceeds  actually  received by the Indemnitee or any of its
Affiliates with respect to the  indemnifiable  Loss. Any Party seeking indemnity
hereunder shall use Commercially  Reasonable Efforts to seek coverage (including
both costs of defense and indemnity)  under applicable  insurance  policies with
respect to any such indemnifiable Loss.

     (b)  Except  as   otherwise   provided   in  this   Section   8.3(b),   the
representations,  warranties,  covenants and agreements of the Parties set forth
in this  Agreement  shall survive the Closing Date for a period of eighteen (18)
months,  and all  representations,  warranties,  covenants and agreements of the
Parties under this Agreement and the related indemnities granted in this Article
VIII shall terminate at 5:00 p.m., local time in New York City, New York, on the
day that is eighteen (18) months after the Closing Date; provided, however, that

     (i)  Seller's  representations  and  warranties  set forth in  Section  4.8
(Benefit  Plans;  ERISA) and Section 4.14 (Taxes) shall survive the Closing Date
until the  expiration  of the statute of  limitations  applicable  to such ERISA
matters or applicable for each Tax and taxable year, as the case may be;

     (ii) Seller's  indemnification  obligation  arising  under Section  8.2(ii)
relating to Excluded  Liabilities (other than the Excluded  Liabilities referred
to in Sections 2.4(g) and 2.4(m),  which are the subject of Section 8.3(b)(iii),
and the  Excluded  Liabilities  referred  to in Sections  2.4(h),  which are the
subject of Section  8.3(b)(iv))  shall  terminate and be extinguished on the day
that is thirty-six (36) months after the Closing Date;

     (iii) Seller's  indemnification  obligations  arising under Section 8.2(ii)
and relating to the  Excluded  Liabilities  referred to in Section  2.4(g) or in
Section 2.4(m) shall  terminate and be  extinguished on the day that is eighteen
(18) months after the Closing Date;


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<PAGE>

     (iv) Seller's indemnification  obligations arising under Section 8.2(iv) or
under Section  8.2(ii) and relating to the Excluded  Liabilities  referred to in
Section  2.4(h)  relating  to the  Iwilei  Property  shall not  terminate  or be
extinguished at any time and will survive Closing in perpetuity; and

     (v) Buyer's  indemnification  obligations  arising under Section 8.1(ii) or
Section  8.1(iv)  shall not  terminate or be  extinguished  at any time and will
survive Closing in perpetuity.

Notwithstanding the foregoing clauses (ii) and (iii), if after the relevant date
of termination  and  extinguishment,  a Buyer  Indemnitee  successfully  defends
against a Third Party Claim  relating to the Excluded  Liabilities  that are the
subject of such  clauses on the basis that the matter  giving rise to such Third
Party Claim was not an Assumed Liability,  then Seller,  regardless of when such
Third Party Clause was asserted or resolved, promptly shall reimburse such Buyer
Indemnitee for the reasonable attorneys' fees and reasonable  disbursements paid
by such Buyer  Indemnitee in connection  with such defense,  but no other Losses
with  respect to such Third Party Claim or the matter  giving rise to such Third
Party Claim shall be  indemnifiable  by Seller.  The expiration,  termination or
extinguishment of any representation,  warranty, covenant or agreement shall not
affect  the  Parties'  obligations  under  Section  8.1  or  8.2  hereof  if the
Indemnitee  provided the  Indemnifying  Party with proper notice of the claim or
event for which indemnification is sought prior to such expiration,  termination
or  extinguishment.  Notwithstanding  the  foregoing  provisions of this Section
8.3(b), the representations,  warranties,  covenants and agreements contained in
Sections 3.3(e),  6.2(c),  6.3(d), 6.4(a), 6.10, 6.12, 6.14, 6.16, 8.3, 8.4, 8.5
and in Article X, will survive the Closing in accordance with their terms.

     (c)  Notwithstanding  anything to contrary in this  Agreement,  in no event
shall Buyer indemnify Seller  Indemnitees or Seller indemnify Buyer Indemnitees,
or otherwise be liable in any way whatsoever to said Indemnitees, for any Losses
otherwise subject to indemnification by the Indemnifying Party (determined after
giving  effect to the other  provisions  of this  Section  8.3)  until the Buyer
Indemnitees  or the  Seller  Indemnitees,  as the  case  may be,  have  incurred
otherwise  indemnifiable Losses that in the aggregate exceed a deductible amount
equal to $1,150,000 (the "Deductible"), after which Buyer or Seller, as the case
may be, shall then be liable for all Losses in excess of the Deductible incurred
by  the  Seller  Indemnitees  or  the  Buyer  Indemnitees,  as  applicable.  The
limitations on indemnification  set forth in this Section 8.3(c) shall not apply
to any Losses asserted  against or suffered by an Indemnitee in any way relating
to,  resulting  from or arising out of or in connection  with the failure of (i)
the  appropriate  Party  to  make  the  payment  required  to be  made  by it in
accordance with Section  3.3(d),  (ii) Buyer to discharge  Assumed  Liabilities,
(iii) Seller to discharge  Excluded  Liabilities  other than those  specified in
Sections 2.4(g) and 2.4(m),  and (iv) Seller to make any payment to Buyer if and
to the extent required by Section  6.10(b) or 6.13(c),  and any such Losses also
shall be disregarded when determining  whether the Deductible has been exceeded.
Losses  incurred  by Buyer in the  performance  or  satisfaction  of the Assumed
Liabilities  described  in Section  2.3(f)  shall be included  when  determining
whether the Deductible has been exceeded.

     (d)  Losses  of a Buyer  Indemnitee  relating  to a  particular  breach  of
Seller's  representations  and warranties or any  performance,  satisfaction  or
discharge of a particular  Excluded Liability  described in Section 2.4(g) shall
not constitute  indemnifiable Losses, and therefore shall not be applied towards
the Deductible or be  indemnifiable  by Seller hereunder (and, as a consequence,
shall  constitute an Assumed  Liability  under Section 2.3(f) to the extent such
Losses relate to a breach of Section 4.6 (Environmental  Matters) or an Excluded
Liability  described  in Section  2.4(g)),  unless such Losses  relating to such
particular  breach or Excluded  Liability  described  in Section  2.4(g)  exceed
$50,000.


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<PAGE>

     (e) Notwithstanding anything to the contrary in this Agreement, in no event
shall  Seller  indemnify  the  Buyer   Indemnitees  or  Buyer  indemnify  Seller
Indemnitees,  or be otherwise liable in any way whatsoever to said  Indemnitees,
for any Losses otherwise subject to  indemnification  by the Indemnifying  Party
(determined  after giving  effect to the other  provisions  of this Section 8.3)
that in the aggregate exceed an amount equal to sixty-five  percent (65%) of the
Purchase Price; provided, however, that the limitation set forth in this Section
8.3(e) shall not apply to Losses of a Buyer  Indemnitee  relating to a breach by
Seller of Section 6.14 (Revenue Bonds), and therefore such Losses shall be fully
indemnifiable by Seller hereunder.

     (f) For purposes of this  Article  VIII only and except as provided  below,
the  existence  of a breach  of a Party's  representation  or  warranty  in this
Agreement and the  calculation  of Losses  arising out of a Party's  breach of a
representation or warranty in this Agreement shall be determined  without giving
effect to any exception or qualification of such  representation  or warranty as
to the Asset  Material  Adverse  Effect of such breach or the  Material  Adverse
Effect on any Person of such breach; provided that this Section 8.3(f) shall not
apply to a breach  of  Seller's  representations  and  warranties  set  forth in
Section  4.22 or  Section  4.24.  Notwithstanding  the  foregoing,  the  Parties
acknowledge   and  agree  that  effect  shall  be  given  to  any  exception  or
qualification  of any  representation  or warranty in this  Agreement  of either
Party  that is based  on use of the term  "materiality"  or the  phrase  "in all
material respects" and similar undefined terms and phrases.

     (g) Except to the extent  otherwise  provided in Section 3.3  (relating  to
adjustments  to  the  Base  Purchase  Price),   Section  6.10(b)   (relating  to
post-Closing   reimbursements   for  Taxes),   Section   6.13(c)   (relating  to
post-Closing  reimbursement  of excess costs and  expenses of repairing  lost or
damaged  Assets),  and  Section  6.16  (relating  to  specific  performance  and
injunctive relief with respect to Citizens Marks and Gasco Marks), after Closing
the  rights  and  remedies  of Seller  and Buyer  under  this  Article  VIII are
exclusive  and in lieu of any and all other  rights and  remedies  which each of
Seller and Buyer may have under this Agreement or otherwise for monetary relief,
with respect to (i) all  post-Closing  claims  relating to this  Agreement,  the
events giving rise to this Agreement and the transactions provided for herein or
contemplated  hereby or thereby, or (ii) the Assumed Liabilities or the Excluded
Liabilities,  as the case may be.  Notwithstanding any language contained in any
Ancillary  Agreement  (including the Special Warranty Deed), the representations
and warranties of Seller set forth in this Agreement will not be merged into any
such Ancillary Agreement and the indemnification  obligations of Seller, and the
limitations on such obligations,  set forth in this Agreement shall control.  No
provision set forth in any such Ancillary  Agreement shall be deemed to enlarge,
alter or amend the terms or provisions of this Agreement.

     (h)  Notwithstanding  anything to the contrary  contained  herein, no Party
(including  an  Indemnitee)  shall be entitled  to recover  from any other Party
(including an Indemnifying  Party) for any  liabilities,  damages,  obligations,
payments,  losses,  costs, or expenses under this Agreement any amount in excess
of the actual compensatory  damages,  court costs and reasonable  attorney's and
other  advisor fees  suffered by such Party.  Each of Buyer and Seller waive any
right to recover  punitive,  incidental,  special,  exemplary and  consequential
damages  arising  in  connection  with or with  respect to this  Agreement.  The
provisions of this Section 8.3(h) shall not apply to indemnification for a Third
Party Claim.


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<PAGE>

     (i) The  limitations set forth in this Section 8.3 do not apply to fraud or
willful misconduct of a Party.

     (j) No amount shall be recovered  from a Party for the breach or untruth of
any of such Party's representations, warranties, covenants or agreements, or for
any other  matter,  to the extent  that the other  Party had  knowledge  of such
breach,  untruth or other matter at or prior to the Closing, nor shall the other
Party be entitled to rescission with respect to any such matter.

     8.4 Defense of Claims.

     (a) If any Indemnitee  receives  notice of the assertion or commencement of
any Third  Party  Claim made or brought by any Person who is not a Party to this
Agreement or any  Affiliate of a Party to this  Agreement  with respect to which
indemnification is to be sought from an Indemnifying Party, the Indemnitee shall
give such Indemnifying  Party reasonably  prompt written notice thereof,  but in
any event such notice shall not be given later than ten (10) calendar days after
the Indemnitee's  receipt of notice of such Third Party Claim. Such notice shall
describe the nature of the Third Party Claim in reasonable detail (as it is then
known  to  the  Indemnitee)  and  shall  indicate  the  estimated   amount,   if
practicable,  of the Indemnifiable Loss that has been or may be sustained by the
Indemnitee.  The Indemnifying Party will have the right to participate in or, by
giving written notice to the  Indemnitee,  to elect to assume the defense of any
Third Party Claim at such Indemnifying  Party's expense and by such Indemnifying
Party's own counsel,  provided that the counsel for the  Indemnifying  Party who
shall  conduct  the  defense  of such  Third  Party  Claim  shall be  reasonably
satisfactory to the Indemnitee.  The Indemnitee shall cooperate in good faith in
such defense at such Indemnitee's own expense.  If an Indemnifying  Party elects
not to assume or to  participate  in the defense of any Third Party  Claim,  the
Indemnitee may compromise or settle such Third Party Claim over the objection of
the  Indemnifying  Party,  which  settlement  or compromise  shall  conclusively
establish  the  Indemnifiable  Loss for  which  the  Indemnified  Party may seek
indemnification from the Indemnifying Party pursuant to this Agreement.

     (b) (i) If,  within ten (10)  calendar  days after an  Indemnitee  provides
written  notice  to the  Indemnifying  Party  of any  Third  Party  Claims,  the
Indemnitee  receives  written  notice  from the  Indemnifying  Party  that  such
Indemnifying  Party has  elected to assume the defense of such Third Party Claim
as provided in Section 8.4(a), the Indemnifying Party will not be liable for any
legal expenses  subsequently  incurred by the Indemnitee in connection  with the
defense thereof; provided, however, that if the Indemnifying Party shall fail to
take  reasonable  steps  necessary to defend  diligently  such Third Party Claim
within twenty (20) calendar days after receiving notice from the Indemnitee that
the Indemnitee  believes the  Indemnifying  Party has failed to take such steps,
the  Indemnitee may assume its own defense and the  Indemnifying  Party shall be
liable for all reasonable expenses thereof.


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<PAGE>

     (ii) Without the prior written consent of the Indemnitee,  the Indemnifying
Party shall not enter into any  settlement  of any Third Party Claim which would
lead to  liability,  constitute  an  admission  of a criminal  act or create any
financial  or other  obligation  on the part of the  Indemnitee  for  which  the
Indemnitee is not entitled to indemnification hereunder. If a firm offer is made
to settle a Third Party Claim  without  leading to  liability,  the admission of
criminal  fault or liability or the creation of a financial or other  obligation
on the part of the  Indemnitee  for  which the  Indemnitee  is not  entitled  to
indemnification hereunder and the Indemnifying Party desires to accept and agree
to  such  offer,  the  Indemnifying  Party  shall  give  written  notice  to the
Indemnitee to that effect. If the Indemnitee fails to consent to such firm offer
within ten (10) calendar days after its receipt of such notice, the Indemnifying
Party shall be relieved of its  obligations to defend such Third Party Claim and
the  Indemnitee may contest or defend such Third Party Claim at its own expense.
In such event, the maximum liability of the Indemnifying  Party as to such Third
Party Claim will be the amount of such settlement  offer plus  reasonable  costs
and expenses paid or incurred by Indemnitee up to the date of said notice.

     (c) Any claim by an  Indemnitee on account of an  Indemnifiable  Loss which
does not result from a Third Party Claim (a "Direct Claim") shall be asserted by
giving the Indemnifying Party reasonably prompt written notice thereof,  stating
the  nature of such claim in  reasonable  detail and  indicating  the  estimated
amount,  if  practicable,  but in any event such notice shall not be given later
than ten (10)  calendar days after the  Indemnitee  becomes aware of such Direct
Claim,  and the  Indemnifying  Party shall have a period of thirty (30) calendar
days within which to respond to such Direct  Claim.  If the  Indemnifying  Party
does not respond within such thirty (30) calendar day period,  the  Indemnifying
Party shall be deemed to have accepted  such claim.  If the  Indemnifying  Party
rejects such claim, the Indemnitee will be free to seek enforcement of its right
to indemnification under this Agreement.

     (d) If the amount of any indemnifiable  Loss, at any time subsequent to the
making of an  indemnity  payment in  respect  thereof,  is reduced by  recovery,
settlement or otherwise under or pursuant to any insurance  coverage or pursuant
to any claim,  recovery,  settlement  or payment  by,  from or against any other
entity,  the amount of such reduction (less any out-of-pocket  costs incurred in
connection  therewith and the cost of any adjusted premium charges to the extent
directly relating to the claim for such indemnifiable  Loss ("Recovery  Costs"),
together with interest  thereon from the date of payment thereof at the publicly
announced prime rate then in effect of Citibank, shall promptly be repaid by the
Indemnitee to the Indemnifying Party.

     (e) A failure to give timely  notice as provided in this  Section 8.4 shall
not affect the rights or obligations of any Party hereunder  except if, and only
to the extent that, as a result of such failure, the Party which was entitled to
receive such notice was actually prejudiced as a result of such failure.


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<PAGE>

     8.5  BHP  Indemnity   Arrangements.   Seller  acquired  Gasco,   Inc.,  the
predecessor owner and operator of the Business,  from BHP Hawaii,  Inc. pursuant
to a Stock Sale  Agreement  between  Seller and BHP  Hawaii,  Inc.,  dated as of
January 9, 1997, as amended on October 30, 1997 (as amended, the "BHP Stock Sale
Agreement").  In  Section  9.2 of the BHP Stock  Sale  Agreement,  BHP agreed to
indemnify the "Buyer Indemnified  Parties" for a "Buyer Loss" (as such terms are
defined  in  Section  9.2 of the BHP Stock  Sale  Agreement)  arising  out of or
resulting from the environment  matters  described in Sections 9.2(c),  (d), (e)
and (g) of the bhp Stock Sale  Agreement.  Upon  Closing,  Buyer will become the
successor  and assign of Seller with  respect to the Business and the Assets and
one of the "Buyer  Indemnified  Parties"  (as  defined in Section 9.2 of the BHP
Stock Sale Agreement). Buyer has agreed to assume the environmental liabilities,
responsibilities  and obligations  described in Sections 2.3(e) and (f), some of
which may be covered by BHP's indemnity. The parties' intent with respect to the
foregoing  is that to the extent any Losses  incurred by Buyer may be reduced by
recovery,  settlement  or  otherwise  under or pursuant to any claim,  recovery,
settlement  or payment by or against BHP under Section 9.2 of the BHP Stock Sale
Agreement,  then appropriate action under and consistent with the BHP Stock Sale
Agreement  should be taken to seek to obtain  the  benefits  of BHP's  indemnity
under the BHP Stock Sale Agreement.  Buyer shall use its Commercially Reasonable
Efforts to give timely and effective  written notice to Seller of any occurrence
or circumstances that have given or could give rise to a claim against BHP under
Section 9.2 of the BHP Stock Sale Agreement.  Buyer and Seller,  acting jointly,
or Buyer and/or Seller acting separately, as the Parties may determine from time
to time, then shall use their respective Commercially Reasonable Efforts to give
BHP timely and  effective  notice in accordance  with Section  9.4(b) of the BHP
Stock Sale Agreement.  To the extent a Buyer  Indemnitee also is an "Indemnitee"
as defined in Section 9.4(b) of the BHP Stock Sale Agreement,  then Buyer shall,
and shall cause each other  Buyer  Indemnitee  that may be such an  "Indemnitee"
under the BHP Stock Sale Agreement,  to comply with the pertinent  provisions of
the BHP Stock Sale Agreement relating to any claim notice submitted to BHP by or
on behalf of such Buyer Indemnitee,  including the provisions of Sections 9.4(b)
and 9.5(c) of the BHP Stock Sale  Agreement,  and to  cooperate  with  Seller in
connection with Seller's  compliance with such provisions and the submission and
prosecution  of any such claim notice  submitted to BHP. In the  submission  and
prosecution of any claim made by or on behalf of a Buyer Indemnitee  against BHP
under Sections 9.2,  9.4(b) and/or 9.5(c) of the BHP Stock Sale  Agreement,  the
Parties in good faith will endeavor  mutually to select counsel,  to control the
prosecution  of such claim and to make  decisions  concerning  the settlement of
such  claim,  provided  that if the Parties  fail to mutually  agree on any such
matter,  Buyer will have the exclusive right to select counsel,  to control such
prosecution and to make such settlement decisions after consultation with Seller
and with the understanding that Buyer will keep Seller timely and fully informed
of any plans or developments  regarding such matters.  Subject to Section 9.5(c)
of the BHP Stock Sale Agreement, Losses relating to the underlying occurrence or
circumstances  giving  rise  to  any  such  claim  and to  the  prosecution  and
settlement of any such claim shall be borne by Buyer  (directly or, if necessary
or desirable to preserve better the Parties'  ability to recover against BHP, by
loan advances to Seller on terms  mutually  acceptable to the Parties,  it being
understood  that  a  Party  shall  not be  required  to  enter  into  such  loan
arrangements if such Party would incur adverse  financial or tax consequences as
a result) until such time, if ever,  that such Losses  become  indemnifiable  by
Seller in accordance  with this  Agreement.  Each Party agrees to cooperate with
the other Party in providing  assistance  and access to personnel and records to
facilitate either Party's  prosecution of claims against BHP under the BHP Stock
Sale  Agreement,  and  neither  Party  will take any  action to hinder the other
Party's  efforts to submit and to prosecute  claims for  indemnification  by BHP
under the BHP Stock Sale Agreement.


                                       71

<PAGE>

                                   ARTICLE IX

                                   TERMINATION

     9.1  Termination.

     (a) This  Agreement may be terminated at any time prior to the Closing Date
by mutual written consent of Seller and Buyer.

     (b) This  Agreement may be terminated by Seller or Buyer if (i) any federal
or state court of competent jurisdiction shall have issued an order, judgment or
decree permanently restraining,  enjoining or otherwise prohibiting the Closing,
and such order,  judgment or decree shall have become final and  nonappeallable;
(ii) any  statute,  rule,  nonappeallable  order or  regulation  shall have been
enacted or issued by any Governmental Authority which prohibits the consummation
of the  Closing;  or (iii) the Closing  shall have not occurred on or before the
day which is fifteen  (15)  months from the date of this  Agreement,  subject to
such  extensions  (not to exceed  six  months) as may be  required  by Seller to
repair or replace lost or damaged Assets in accordance with Section 6.13(c) (the
"Termination  Date");  provided that the right to terminate this Agreement under
this Section 9.1(b)(iii),  and any other Section,  shall not be available to any
Party whose failure to fulfill any obligation  under this Agreement has been the
cause of, or resulted in the event  giving  rise to the  applicable  termination
right.

     (c) Except as otherwise  provided in this Agreement,  this Agreement may be
terminated  by Buyer if any of the  Buyer  Required  Regulatory  Approvals,  the
receipt of which is a condition to the  obligation  of Buyer to  consummate  the
Closing as set forth in Section  7.1(c),  shall have been denied (and a petition
for rehearing or refiling of an application  initially denied without  prejudice
shall  also have  been  denied)  or, if such  Required  Regulatory  Approval  is
obtained,  contains  terms or conditions  that would have a Regulatory  Material
Adverse  Effect for Buyer or an Asset  Material  Adverse  Effect (after  Buyer's
petition for rehearing  objecting to such terms and conditions has been denied),
in either case that is not cured or otherwise  addressed in a manner  reasonably
acceptable to Buyer by the Closing Date.

     (d) Except as otherwise  provided in this Agreement,  this Agreement may be
terminated by Seller if any of the Seller  Required  Regulatory  Approvals,  the
receipt of which is a condition to the  obligation of Seller to  consummate  the
Closing as set forth in Section  7.2(c),  shall have been denied (and a petition
for rehearing or refiling of an application  initially denied without  prejudice
shall  also have  been  denied)  or, if such  Required  Regulatory  Approval  is
obtained,  contains  terms or conditions  that would have a Regulatory  Material
Adverse Effect for Seller (after  Seller's  petition for rehearing  objecting to
such terms and conditions has been denied),  in either case that is not cured or
otherwise  addressed in a manner reasonably  acceptable to Seller by the Closing
Date.

     (e) This Agreement may be terminated by Buyer if there has been a violation
or breach by Seller of any  covenant,  representation  or warranty  contained in
this  Agreement  provided  that such  violation  or breach  would  have an Asset
Material  Adverse Effect or a Buyer Material Adverse Effect that is not cured or
otherwise addressed by Seller in a manner reasonably  acceptable to Buyer by the
Closing Date and such violation or breach has not been waived by Buyer.


                                       72

<PAGE>

     (f) This  Agreement  may be  terminated  by  Seller,  if  there  has been a
violation  or  breach  by  Buyer of any  covenant,  representation  or  warranty
contained in this Agreement  provided that such violation or breach would have a
Seller Material Adverse Effect (it being agreed by Buyer that Buyer's failure to
pay the  Purchase  Price on the  Closing  Date  shall be deemed to have a Seller
Material  Adverse Effect) and such violation or breach is not cured or otherwise
addressed by Buyer in a manner  reasonably  acceptable  to Seller by the Closing
Date, and such violation or breach has not been waived by Seller.

     (g) This  Agreement  may be  terminated  by either  Party if  either  (i) a
special meeting of the  shareholders of k1 Ventures Limited is duly convened and
the  requisite  vote of such  shareholders  required  to  approve  the  Required
Shareholder  Actions is not obtained at such special  meeting or any adjournment
thereof or (ii) a special  meeting of the  shareholders  of k1 Ventures  Limited
called for the purpose of voting upon the  Required  Shareholder  Actions is not
duly convened by April 30, 2003.

     9.2 Procedure and Effect of  Termination.  In the event of  termination  of
this  Agreement by either or both Seller and Buyer  pursuant to this Article IX,
written notice thereof shall forthwith be given by the terminating  Party to the
other Party,  whereupon the liabilities of the Parties hereunder will terminate,
except as otherwise  expressly  provided in this  Agreement  (including  Section
9.3),  and  thereafter  none of the Parties shall have any recourse  against any
other  Party by reason  of this  Agreement.  If prior to  Closing  either  Party
resorts to legal proceedings to enforce this Agreement,  the prevailing Party in
such proceedings  shall be entitled to recover all costs incurred by such Party,
including  reasonable  attorney's fees, in addition to any other relief to which
such Party may be entitled;  provided,  however, and notwithstanding anything to
the  contrary in this  Agreement,  in no event shall either Party be entitled to
receive any punitive, indirect or consequential damages

     9.3  Liquidated Damages.

     (a) Seller shall pay to Buyer $5,750,000 if Buyer terminates this Agreement
pursuant to Section 9.1(e).

     (b) Buyer  shall pay to Seller  $5,750,000  if (i) Seller  terminates  this
Agreement  pursuant to Section  9.1(f),  (ii) Seller  terminates  this Agreement
pursuant to Section 9.1(d) because the requisite  Required  Regulatory  Approval
from the HPUC has not been obtained due in whole or in  substantial  part to the
HPUC's findings about Buyer's financial,  legal or operational qualifications or
capabilities,  (iii) Buyer terminates this Agreement pursuant to Section 9.1(c),
because the requisite  Required  Regulatory  Approval from the HPUC has not been
obtained,  due in whole or in  substantial  part to the  HPUC's  findings  about
Buyer's financial, legal or operational qualifications or capabilities,  or (iv)
either Party terminates this Agreement pursuant to Section 9.1(g).


                                       73

<PAGE>

     (c) In view of the  difficulty of  determining  the amount of damages which
may result from a termination  pursuant to Sections 9.3(a) or 9.3(b) or pursuant
to any of the Sections of this Agreement referenced in Section 9.3(a) or 9.3(b),
and the failure to consummate the  transactions  contemplated by this Agreement,
Buyer and Seller have  mutually  agreed that each of the  payments  set forth in
Sections 9.3(a) and 9.3(b) shall be made to the appropriate  Party as liquidated
damages,  and not as a penalty,  and this Agreement shall thereafter become null
and void except for those provisions which by their terms survive termination of
this Agreement.  In the event of any such  termination,  the Parties have agreed
that each of the payments  set forth in Sections  9.3(a) and 9.3(b) shall be the
sole and  exclusive  remedy of the Party  entitled to receive any such  payment.
ACCORDINGLY,  THE PARTIES HEREBY ACKNOWLEDGE THAT (1) THE EXTENT OF DAMAGES TO A
PARTY  CAUSED BY THE  FAILURE OF THIS  TRANSACTION  TO BE  CONSUMMATED  WOULD BE
IMPOSSIBLE OR EXTREMELY DIFFICULT TO ASCERTAIN, (2) THE AMOUNT OF THE LIQUIDATED
DAMAGES  PROVIDED  FOR IN EACH OF  SECTIONS  9.3(a)  AND  9.3(b)  ARE  FAIR  AND
REASONABLE  ESTIMATES OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND (3) RECEIPT OF
SUCH LIQUIDATED  DAMAGES BY THE APPROPRIATE PARTY DOES NOT CONSTITUTE A PENALTY.
THE PARTIES HEREBY FOREVER WAIVE AND AGREE TO FOREGO TO THE FULLEST EXTENT UNDER
APPLICABLE  LAW ANY AND ALL RIGHTS  THEY HAVE OR IN THE FUTURE MAY HAVE TO BRING
ANY ACTION OR ARBITRAL PROCEEDING DISPUTING OR OTHERWISE OBJECTING TO ANY OR ALL
OF THE FOREGOING PROVISIONS OF THIS SECTION 9.3.

     (d) All  payments  under this  Section  9.3 shall be from payor to payee by
wire  transfer of  immediately  available  funds to a bank account in the United
States of  America  designated  in  writing  by payee not later  than  three (3)
business days following payor's receipt of such account designation from payee.

                                    ARTICLE X

                                  MISCELLANEOUS

     10.1 Amendment and Modification. This Agreement may be amended, modified or
supplemented only by written agreement of the Parties.

     10.2 Waiver of Compliance;  Consents.  Except as otherwise provided in this
Agreement,  any  failure of any of the  Parties to comply  with any  obligation,
covenant,  agreement or condition  herein may be waived by the Party entitled to
the benefits thereof only by a written  instrument  signed by the Party granting
such  waiver,  but any such waiver of such  obligation,  covenant,  agreement or
condition  shall not  operate as a waiver of, or estoppel  with  respect to, any
subsequent failure to comply therewith.

     10.3 [Intentionally Omitted]

     10.4 Notices.  All notices and other  communications  hereunder shall be in
writing  and shall be  deemed  given if  delivered  personally  or by  facsimile
transmission with completed transmission acknowledgment,  or mailed by overnight
delivery via a nationally  recognized  courier or registered or certified  first
class mail (return receipt  requested),  postage prepaid, to the recipient Party
at its  address  (or at such other  address or  facsimile  number for a Party as
shall be specified by like notice;  provided;  however, that notices of a change
of address shall be effective only upon receipt thereof):


                                       74

<PAGE>

                  (a)      If to Seller, to:

                           Citizens Communications Company
                           High Ridge Park
                           Stamford, CT 06905
                           Attention:  Jerry Elliott
                           Telephone:  (203) 614-6722
                           Telecopier:  (203) 614-4661

                           with a copy to:

                           Citizens Communications Company
                           High Ridge Park
                           Stamford, CT 06905
                           Attention:  L. Russell Mitten
                           Telephone:  (203) 614-5047
                           Telecopier:  (203) 614-4651

                           and:

                           Fleischman and Walsh, L.L.P.
                           1400 Sixteenth Street, N.W.
                           Washington, D.C. 20036
                           Attention:  Jeffry L. Hardin
                           Telephone:  (202) 939-7914
                           Telecopier:  (202) 387-3467

                  (b)      if to Buyer, to:

                           c/o K-1 USA Ventures, Inc.
                           2601 Bayshore Drive
                           Suite 1775
                           Coconut Grove, FL  33133
                           Attention:  Jeff Safchik
                           Telephone: (305) 858-4225
                           Telecopier: (305) 858-2334




                                       75

<PAGE>

                           with a copy to:

                           K-1 USA Ventures, Inc.
                           1880 Century Park East
                           Suite 213
                           Los Angeles, CA 90067
                           Attention:  Cary Meadow
                           Telephone:  (310) 201-6861
                           Telecopier:  (310) 201-6858

                           and:

                           Jones Walker Waechter Poitevent Carrere & Denegre
                           201 St. Charles Avenue
                           New Orleans, LA 70170
                           Attention:  Curtis R. Hearn
                           Telephone:  (504) 582-8308
                           Telecopier:  (504) 589-8308

     10.5 Assignment.  This Agreement and all of the provisions  hereof shall be
binding upon and inure to the benefit of the Parties hereto and their respective
successors and permitted  assigns,  but, except to the extent  permitted by this
Section  10.5,  neither  this  Agreement  nor any of the  rights,  interests  or
obligations  hereunder  shall be  assigned  by any Party  hereto,  including  by
operation of law,  without the prior written consent of each other Party, nor is
this  Agreement  intended  to confer  upon any other  Person  except the Parties
hereto any  rights,  interests,  obligations  or remedies  hereunder;  provided,
however,  in the event of any such  assignment  by a Party by  operation  of law
without the consent of the other Party,  this  Agreement and all the  provisions
hereof shall be binding upon the Person  receiving such  assignment by operation
of law.  Notwithstanding the foregoing,  (i) K-1 USA shall assign this Agreement
to the k1 Designee in accordance with Section 6.8(f),  and such assignment shall
have the legal  effect  provided  in Section  6.8(f),  and (ii) Buyer may make a
security  assignment  to any lender  providing  financing  in respect of Buyer's
acquisition of the Assets.

     10.6 Governing  Law. This  Agreement  shall be governed by and construed in
accordance  with the law of the  State  of  Hawaii  (without  giving  effect  to
conflict of law  principles)  as to all  matters,  including  but not limited to
matters of validity,  construction,  effect, performance and remedies (except to
such matters of real estate law that must be governed by the law of the State of
Hawaii).  THE  PARTIES  HERETO  AGREE  THAT  VENUE  IN ANY AND ALL  ACTIONS  AND
PROCEEDINGS  RELATED TO THE  SUBJECT  MATTER OF THIS  AGREEMENT  SHALL BE IN THE
STATE AND FEDERAL  COURTS IN AND FOR HONOLULU,  HAWAII,  WHICH COURTS SHALL HAVE
EXCLUSIVE  JURISDICTION  FOR SUCH PURPOSE,  AND THE PARTIES  HERETO  IRREVOCABLY
SUBMIT TO THE EXCLUSIVE  JURISDICTION OF SUCH COURTS AND  IRREVOCABLY  WAIVE THE
DEFENSE  OF AN  INCONVENIENT  FORUM TO THE  MAINTENANCE  OF ANY SUCH  ACTION  OR
PROCEEDING.  SERVICE OF PROCESS  MAY BE MADE IN ANY  MANNER  RECOGNIZED  BY SUCH
COURTS.  EACH OF THE PARTIES HERETO IRREVOCABLY WAIVES ITS RIGHT TO A JURY TRIAL
WITH  RESPECT TO ANY ACTION OR CLAIM  ARISING OUT OF ANY  DISPUTE IN  CONNECTION
WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.


                                       76

<PAGE>

     10.7  Counterparts.   This  Agreement  may  be  executed  in  two  or  more
counterparts,  each of  which  shall be  deemed  an  original,  but all of which
together shall constitute one and the same instrument.

     10.8 Interpretation.  The articles, section and schedule headings contained
in this  Agreement are solely for the purpose of reference,  are not part of the
agreement  of the  Parties  and  shall  not in any way  affect  the  meaning  or
interpretation of this Agreement.

     10.9  Schedules  and  Exhibits.   Except  as  otherwise  provided  in  this
Agreement,  all Exhibits and Schedules referred to herein are intended to be and
hereby  are  specifically  made a part of this  Agreement.  Any  matter  or item
disclosed  on any  Schedule  shall not be  deemed to give rise to  circumstances
which result in an Asset Material  Adverse  Effect or a Material  Adverse Effect
solely by reason of it being so disclosed. Any matter or item disclosed pursuant
to any  Schedule  shall be deemed to be disclosed  for all  purposes  under this
Agreement  reasonably  related thereto and any matter  disclosed in one Schedule
will be deemed  disclosed with respect to another Schedule if such disclosure is
made in such a way as to make its relevance  with respect to such other Schedule
readily apparent.

     10.10 Entire Agreement.  This Agreement,  the Ancillary  Agreements and the
Exhibits, Schedules, documents,  certificates and instruments referred to herein
or therein,  embody the entire agreement and understanding of the Parties hereto
in respect of the  transactions  contemplated  by this  Agreement.  There are no
restrictions, promises, representations,  warranties, covenants or undertakings,
other than those  expressly  set forth or referred  to herein or  therein.  This
Agreement  and the  Ancillary  Agreements  supersede  all prior  agreements  and
understandings between the Parties other than the Confidentiality Agreement with
respect to such transactions.

     10.11 U.S. Dollars.  Unless otherwise stated,  all dollar amounts set forth
herein are United States (U.S.) dollars.

     10.12 Bulk Sales Laws. Buyer acknowledges that, notwithstanding anything in
this  Agreement  to  the  contrary  and  except  for  Seller's  delivery  of the
certificates  specified  in Section  3.5(l),  Seller  will not  comply  with the
provision  of the bulk sales laws of any  jurisdiction  in  connection  with the
transactions  contemplated by this Agreement.  Buyer hereby waives compliance by
Seller  with  the   provisions  of  the  bulk  sales  laws  of  all   applicable
jurisdictions to the extent permitted by law.

     10.13 Construction of Agreement. The terms and provisions of this Agreement
represent the results of  negotiations  between Buyer and Seller,  each of which
has been  represented  by counsel of its own choosing,  and neither of which has
acted  under  duress  or  compulsion,  whether  legal,  economic  or  otherwise.
Accordingly, the terms and provisions of this Agreement shall be interpreted and
construed in accordance with their usual and customary  meanings,  and Buyer and
Seller hereby waive the  application in connection with the  interpretation  and
construction  of this  Agreement of any rule of law to the effect that ambiguous
or  conflicting  terms  or  provisions  contained  in this  Agreement  shall  be
interpreted or construed  against the Party whose attorney prepared the executed
draft or any earlier draft of this  Agreement.  It is understood and agreed that
neither  the  specification  of any  dollar  amount in the  representations  and
warranties contained in this Agreement nor the inclusion of any specific item in
the  Schedules  or Exhibits is intended to imply that such  amounts or higher or
lower amounts, or the items so included or other items, are or are not material,
and none of the Parties shall use the fact of the setting of such amounts or the
fact of any  inclusion  of any such item in the  Schedules  or  Exhibits  in any
dispute or controversy between the Parties as to whether any obligation, item or
matter is or is not material for purposes hereof.


                                       77

<PAGE>

     10.14  Severability.  If any term or other  provision of this  Agreement is
invalid,  illegal or  incapable  of being  enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect so long as the  economic or legal  substance  of
the transactions  contemplated  hereby is not affected in any manner  materially
adverse to any Party. Upon such  determination  that any term or other provision
is invalid,  illegal or incapable of being enforced, the Parties shall negotiate
in good faith to modify this  Agreement so as to effect the  original  intent of
the  Parties as  closely as  possible  in an  acceptable  manner to the end that
transactions contemplated hereby are fulfilled to the greatest extent possible.

     10.15 Third Party Beneficiary.  No provision of this Agreement shall create
any third party beneficiary  rights in any employee or former employee of Seller
(including  any  beneficiary  or  dependant  thereof)  in respect  of  continued
employment  or resumed  employment,  and no  provision of this  Agreement  shall
create any rights in any such  Persons  in respect of any  benefits  that may be
provided,   directly  or  indirectly,   under  any  employee   benefit  plan  or
arrangement.


                                       78

<PAGE>


     IN WITNESS  WHEREOF,  Buyer and Seller  have caused  this  Agreement  to be
signed by their  respective duly authorized  officers as of the date first above
written.



K-1 USA VENTURES, INC.                         CITIZENS COMMUNICATIONS COMPANY

By: /s/ Jeffrey A. Satchik                     By: /s/ Michael A. Zarrella
   -----------------------                        --------------------------
Name: Jeffrey A. Satchik                       Name: Michael A. Zarrella
      --------------------                           -----------------------
Title: Chief Executive Officer                 Title: Vice President Corporate
       -----------------------                        Development
                                                      ------------------------


                                       79


<PAGE>




                         LIST OF EXHIBITS AND SCHEDULES
                         ------------------------------


EXHIBITS
Exhibit A       Form of Assignment and Assumption Agreement
Exhibit B       Form of Bill of Sale
Exhibit C       Special Warranty Deed
Exhibit D       Form of Seller General Counsel Opinion
Exhibit E       Form of Seller Bond Counsel Opinion
Exhibit F       Form of Buyer General Counsel Opinion

SCHEDULES
1.1             Seller Employees on Whose Knowledge Buyer May Rely 
2.1(k)          Certain Seller Insurance Policies 
2.2             Excluded Assets 
2.3(h)          Governmental Orders 
2.3(j)          Assumed Actions and Proceedings 
4.3(b)          Seller Required Regulatory Approvals 
4.4             Seller Insurance 
4.5             Seller Real Property Leases 
4.6             Seller Environmental Matters 
4.7             Seller Labor Matters 
4.8             Seller Benefit Plans 
4.9             Seller Real Property 
4.10            Seller Condemnation Matters 
4.11(a)         Certain Seller Material Agreements 
4.11(b)         Certain Seller Material Agreements Requiring Consent to Transfer
4.11(c)         Defaults Under Certain Material Agreements 
4.12            Legal Proceedings Involving Seller 
4.13            Seller Permit Violations 
4.14            Seller Tax Matters 
4.15            Seller Intellectual Property Exceptions 
4.20            Seller Financial Statements 
5.3(a)          Buyer's Conflicts, Defaults and Violations 
5.3(b)          Buyer Required Regulatory Approvals
6.1(a)          Exceptions to Conduct of Business and Operation of the Assets
6.12(d)(iii)(D) Retirees 
6.14(a)         Seller Revenue Bonds 
6.15            Seller Surety Instruments






                                                          ARIZONA GAS
                                                          EXECUTION VERSION

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

                                                          Exhibit 10.13
                                                          -------------



                            ASSET PURCHASE AGREEMENT

                                 by and between

                   CITIZENS COMMUNICATIONS COMPANY, as SELLER,

                                       and

                     UNISOURCE ENERGY CORPORATION, as BUYER,



                             Dated October 29, 2002

                       ---------------------------------



                    Relating to Purchase by Buyer of Seller's
                  Gas Utility Business in the State of Arizona






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


<PAGE>

<TABLE>
<CAPTION>
                                TABLE OF CONTENTS


                                                                                                               Page


<S>                                                                                                              <C>
ARTICLE I DEFINITIONS.............................................................................................1

         1.1        Definitions...................................................................................1

         1.2        Certain Interpretive Matters.................................................................14


ARTICLE II PURCHASE AND SALE.....................................................................................14

         2.1        Transfer of Assets...........................................................................14

         2.2        Excluded Assets..............................................................................15

         2.3        Assumed Liabilities..........................................................................17

         2.4        Excluded Liabilities.........................................................................18

         2.5        Control of Litigation........................................................................20


ARTICLE III THE CLOSING..........................................................................................21

         3.1        Closing......................................................................................21

         3.2        Closing Payment..............................................................................21

         3.3        Adjustment to Base Purchase Price............................................................21

         3.4        Prorations...................................................................................24

         3.5        Deliveries by Seller.........................................................................24

         3.6        Deliveries by Buyer..........................................................................26

         3.7        Work in Progress.............................................................................26


ARTICLE IV REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER.................................................27

         4.1        Incorporation; Qualification.................................................................27

         4.2        Authority....................................................................................27

         4.3        Consents and Approvals; No Violation.........................................................27

         4.4        Insurance....................................................................................28

         4.5        Real Property Leases.........................................................................28

         4.6        Environmental Matters........................................................................28

         4.7        Labor Matters................................................................................29

         4.8        Benefit Plans:  ERISA........................................................................29


                                       i

<PAGE>

         4.9        Real Property................................................................................30

         4.10       Condemnation.................................................................................30

         4.11       Assigned Agreements..........................................................................30

         4.12       Legal Proceedings............................................................................31

         4.13       Permits......................................................................................31

         4.14       Taxes........................................................................................31

         4.15       Intellectual Property........................................................................32

         4.16       Capital Expenditures.........................................................................32


         4.17       Compliance With Laws.........................................................................32

         4.18       Title........................................................................................32

         4.19       DISCLAIMERS..................................................................................32

         4.20       Financial Statements.........................................................................33

         4.21       SEC Filings; Financial Statements............................................................33

         4.22       Sufficiency of Assets........................................................................33


ARTICLE V REPRESENTATIONS AND WARRANTIES OF BUYER................................................................34

         5.1        Organization.................................................................................34

         5.2        Authority....................................................................................34

         5.3        Consents and Approvals; No Violation.........................................................34

         5.4        Availability of Funds........................................................................35

         5.5        SEC Filings; Financial Statements............................................................35

         5.6        Legal Proceedings............................................................................35

         5.7        No Knowledge of Seller's Breach..............................................................36

         5.8        Qualified Buyer..............................................................................36

         5.9        Inspections..................................................................................36

         5.10       WARN Act.....................................................................................36


ARTICLE VI COVENANTS OF THE PARTIES..............................................................................37

         6.1        Conduct of Business and Operation of Assets..................................................37

         6.2        Access to Information........................................................................38

                                       ii

<PAGE>

         6.3        Environmental Inspections and Information....................................................40

         6.4        Confidentiality..............................................................................41

         6.5        Public Statements............................................................................42

         6.6        Expenses.....................................................................................42

         6.7        Further Assurances...........................................................................42

         6.8        Consents and Approvals.......................................................................43

         6.9        Fees and Commissions.........................................................................44

         6.10       Tax Matters..................................................................................45

         6.11       Advice of Changes............................................................................47

         6.12       Seller Employees.............................................................................47

         6.13       Risk of Loss.................................................................................52

         6.14       Tax Exempt Financing.........................................................................53

         6.15       Seller Guarantees and Surety Instruments.....................................................58

         6.16       Citizens Marks...............................................................................58

         6.17       Title Commitments............................................................................58

         6.18       Joint Use Agreement re: Easements............................................................58

         6.19       [Intentionally Omitted]......................................................................58

         6.20       Post-Execution Delivery of Schedules.........................................................59


ARTICLE VII CONDITIONS...........................................................................................59

         7.1        Conditions to Obligations of Buyer...........................................................59

         7.2        Conditions to Obligations of Seller..........................................................60


ARTICLE VIII INDEMNIFICATION.....................................................................................61

         8.1        Indemnification of Seller by Buyer...........................................................61

         8.2        Indemnification of Buyer by Seller...........................................................61

         8.3        Certain Limitations on Indemnification.......................................................62

         8.4        Defense of Claims............................................................................64


ARTICLE IX TERMINATION...........................................................................................66

         9.1        Termination..................................................................................66


                                      iii

<PAGE>

         9.2        Procedure and Effect of Termination..........................................................67

         9.3        Liquidated Damages; Termination Fees.........................................................68


ARTICLE X MISCELLANEOUS PROVISIONS...............................................................................69

         10.1       Amendment and Modification...................................................................69

         10.2       Waiver of Compliance; Consents...............................................................69

         10.3       [Intentionally Omitted]......................................................................69

         10.4       Notices......................................................................................69

         10.5       Assignment...................................................................................71

         10.6       Governing Law................................................................................71

         10.7       Counterparts.................................................................................71

         10.8       Interpretation...............................................................................71

         10.9       Schedules and Exhibits.......................................................................71

         10.10      Entire Agreement.............................................................................72

         10.11      U.S. Dollars.................................................................................72

         10.12      Bulk Sales Laws..............................................................................72

         10.13      Construction of Agreement....................................................................72

         10.14      Severability.................................................................................72

         10.15      Third Party Beneficiary......................................................................73

</TABLE>


                                       iv

<PAGE>

                            ASSET PURCHASE AGREEMENT


     ASSET PURCHASE AGREEMENT, dated October 29, 2002 (this "Agreement"), by and
among Citizens  Communications  Company, a Delaware  corporation  ("Seller") and
UniSource Energy Corporation, an Arizona corporation ("Buyer"). Seller and Buyer
are referred to, individually, as a "Party" and, together, as the "Parties."

                               W I T N E S S E T H
                               -------------------

     WHEREAS, Seller owns all of the Assets (as defined below); and

     WHEREAS,  Buyer desires to purchase and assume,  and Seller desires to sell
and assign, the Assets, and certain associated  liabilities,  upon the terms and
conditions hereinafter set forth in this Agreement.

     NOW, THEREFORE, in consideration of the mutual covenants,  representations,
warranties and  agreements  hereinafter  set forth,  and intending to be legally
bound hereby, the Parties agree as follows:

                                    ARTICLE I
                                   DEFINITIONS

     1.1  Definitions.  As used in this Agreement,  the following terms have the
meanings specified in this Section 1.1.

          "ACC"  means the  Arizona  Corporation  Commission  and any  successor
     agency thereto.

          "ADEQ" means the Arizona  Department of Environmental  Quality and any
     successor agency thereto.

          "Advances" has the meaning set forth in Section 3.3(e).

          "Adverse Environmental Condition" has the meaning set forth in Section
     6.3(c).

          "Affiliate" of any Person means a Person that directly,  or indirectly
     through one or more  intermediaries,  controls,  or is controlled by, or is
     under common control with, the Person specified.

          "Agreement"  means this Asset  Purchase  Agreement  together  with the
     Schedules  and Exhibits  attached  hereto,  as the same may be from time to
     time amended.

          "Allocation" has the meaning set forth in Section 6.10(f).

          "ALTA" has the meaning set forth in Section 6.17.




<PAGE>

          "Ancillary  Agreements"  means the agreements,  contracts,  documents,
     instruments and  certificates  provided for in this Agreement to be entered
     into by one or more of the Parties or any of their Affiliates in connection
     with the transactions contemplated by this Agreement.

          "APBO" has the meaning set forth in Section 6.12(d)(iii)(D).

          "Approved Capital  Expenditures"  means the Capital  Expenditures that
     have been expressly approved by Buyer in writing and that are identified in
     said  writing  as  Approved  Capital  Expenditures  for  purposes  of  this
     Agreement.

          "Arizona  Electric  Purchase  Agreement"  has the meaning set forth in
     Section 7.1(j).

          "Assets" has the meaning set forth in Section 2.1.

          "Asset  Material  Adverse  Effect" means any  occurrence or condition,
     arising after the date hereof,  that has or would reasonably be expected to
     have a material adverse effect with an aggregate  economic  impact,  taking
     into account all relevant considerations,  in excess of $10,000,000 (except
     as provided otherwise in Sections 6.3(c), 6.13(b)(i) or 6.13(c)(ii)) on the
     condition of the Assets, taken as a whole, or on the business,  operations,
     financial  condition or results of operations  of the Business,  taken as a
     whole,  other  than any such  occurrence  or  condition  (a)  arising  from
     business,  economic or financial market conditions,  considered  generally,
     (b) arising from the  conditions  in the gas utility  industry,  considered
     generally and not  specifically as to the Business,  (c) which is remedied,
     cured  or  otherwise  reversed  (including  by  the  payment  of  money  or
     application  of insurance  proceeds)  before the  Termination  Date, or (d)
     arising  from  entering  into this  Agreement  or the  announcement  of the
     transactions  contemplated by this Agreement;  it being understood that the
     occurrences  and/or  conditions  which  could,  depending on the nature and
     extent  thereof,  be deemed to result in an Asset  Material  Adverse Effect
     shall include,  without limitation,  (x) the terms or conditions of a Final
     Order  with  respect  to  any  Required  Regulatory  Approval,   considered
     individually or together with any other such Final Order(s) with respect to
     any  other  Required   Regulatory   Approval(s),   other  than   Regulatory
     Exceptions,  and (y) facts or  circumstances  relating to the Assets and/or
     the Business  which come to the attention of Buyer between the date of this
     Agreement and the Closing Date,  whether as a result of Buyer's  Inspection
     of the Assets or its  examination of  information  and data relating to the
     Assets  and/or the  Business,  as  contemplated  by Section  6.2 or 6.3, or
     otherwise.

          "Assigned  Agreements"  means  any  contracts,   agreements,  software
     licenses  and  related  contracts,  Easements,  Real  Property  Leases  and
     personal  property  leases  entered into by Seller or any of its Affiliates
     with respect to the  ownership,  operation or  maintenance of the Assets or
     the Business,  including  those  disclosed on Schedules 4.5 and 4.11(a) and
     excluding those disclosed on Schedule 2.2,  including  without  limitation,
     the IBEW CBA.


                                       2

<PAGE>

          "Assignment  and  Assumption   Agreement"  means  the  Assignment  and
     Assumption  Agreement between Seller and Buyer substantially in the form of
     Exhibit A attached hereto.

          "Assumed Liabilities" has the meaning set forth in Section 2.3.

          "Arizona  Electric  Purchase  Agreement"  has the meaning set forth in
     Section 7.1(j).

          "Balance Sheet" has the meaning set forth in Section 4.20.

          "Base Purchase Price" has the meaning set forth in Section 3.2.

          "Benefit Plans" means each of Seller's deferred  compensation and each
     bonus or other incentive  compensation,  stock  purchase,  stock option and
     other equity  compensation plan,  program,  agreement or arrangement;  each
     severance or termination  pay,  medical,  surgical,  hospitalization,  life
     insurance and other  "welfare" plan, fund or program (within the meaning of
     Section 3(1) of ERISA); each profit-sharing, stock bonus or other "pension"
     plan, fund or program  (within the meaning of Section 3(2) of ERISA);  each
     employment,  termination  or severance  agreement;  and each other employee
     benefit plan, fund, program,  agreement or arrangement,  in each case, that
     is sponsored, maintained or contributed to or required to be contributed to
     by such  Party  or by any  ERISA  Affiliate,  in any  case  maintained  for
     employees of Seller connected with the Business, or in which such employees
     participate.

          "Bill of Sale"  means the Bill of Sale,  substantially  in the form of
     Exhibit B attached  hereto,  to be  delivered at the Closing by Seller with
     respect  to  the  Tangible   Personal   Property  included  in  the  Assets
     transferred to Buyer.

          "Bond Counsel" has the meaning set forth in Section 6.14(c)(i).

          "Business"  means,   collectively,   (a)  the  regulated  natural  gas
     distribution  business  conducted  by Seller  within  the State of  Arizona
     through  its  Arizona Gas  divisions,  (b) the  natural gas  transportation
     business  conducted  by Seller  within  the State of  Arizona  through  its
     Arizona  Gas  divisions  and (c) the  provision  of  related  services  and
     products and the engagement in related  activities,  including financing of
     conversions to gas and  agreements as to  appliances,  by Seller within the
     State of Arizona through its Arizona Gas divisions.

          "Business Day" means any day other than  Saturday,  Sunday and any day
     which is a day on which banking  institutions  in the States of Arizona and
     New York are  authorized  by law or other  governmental  action  to  remain
     closed.

          "Buyer" has the meaning set forth in the Preamble.

          "Buyer Indemnifiable Loss" has the meaning set forth in Section 8.2.


                                       3

<PAGE>

          "Buyer Indemnitee" has the meaning set forth in Section 8.2.

          "Buyer Material  Adverse Effect" means a Material  Adverse Effect with
     respect to Buyer.

          "Buyer Required  Regulatory  Approvals" means the Required  Regulatory
     Approvals set forth in Schedule 5.3(b).

          "CERCLA"  means  the  federal  Comprehensive  Environmental  Response,
     Compensation,  and  Liability  Act,  42  U.S.C.  Section  9601 et seq.,  as
     amended.

          "Capital  Expenditures"  means capital additions to or replacements of
     property, plants and equipment included in the Assets or otherwise relating
     to the Business and other  expenditures or repairs on property,  plants and
     equipment included in the Assets or otherwise relating to the Business that
     would be  capitalized  by Seller in accordance  with its normal  accounting
     policies.

          "Capital  Expenditures  Schedule" has the meaning set forth in Section
     4.16.

          "Citizens Marks" has the meaning set forth in Section 2.2(c).

          "Closing" has the meaning set forth in Section 3.1.

          "Closing  Date" means one minute after 11:59 p.m. on the date which is
     five  (5)  Business  Days  following  the  date on  which  the  last of the
     conditions  precedent  to the  Closing  set  forth in  Article  VII of this
     Agreement  have  been  either  satisfied  or  waived by the Party for whose
     benefit such conditions precedent exist, subject to such extensions (not to
     exceed six (6)  months) as may be  required  by Seller to repair or replace
     lost or damaged Assets in accordance  with Section  6.13(c),  or such other
     date as the Parties may mutually agree.

          "COBRA" means the Consolidated  Omnibus Budget  Reconciliation  Act of
     1984.

          "COBRA  Continuation  Coverage"  means  the  requirements  of  Section
     4980B(f) of the Code.

          "Code" means the Internal Revenue Code of 1986, as amended.

          "Commercially  Reasonable  Efforts" means efforts by a Party which are
     reasonably within the contemplation of the Parties at the time of executing
     this Agreement and which do not require the performing  Party to expend any
     funds  other  than  expenditures  which are  customary  and  reasonable  in
     transactions of the kind and nature contemplated by this Agreement in order
     for the performing Party to satisfy its obligations hereunder.

          "Current   Retirees"   has  the   meaning   set   forth   in   Section
     6.12(d)(iii)(D).

          "Direct Claim" has the meaning set forth in Section 8.4(c).


                                       4

<PAGE>

          "Easements"  means all easements,  rights of way,  permits,  licenses,
     prescriptive  rights and other ways of  necessity,  and other  similar real
     property grants, whether or not of record, relating to real property.

          "Encumbrances"   means  any  mortgages,   pledges,   liens,   security
     interests,  conditional and installment sale  agreements,  activity and use
     limitations,  conservation easements,  deed restrictions,  encumbrances and
     charges of any kind.

          "Environmental  Claim"  means any and all  pending  and/or  threatened
     administrative or judicial actions,  suits, orders, claims, liens, notices,
     notices   of   violations,   investigations,   complaints,   requests   for
     information,  proceedings, or other written communication, whether criminal
     or civil,  pursuant to or relating to any applicable  Environmental  Law or
     pursuant to a common law theory, by any Person (including,  but not limited
     to, any Governmental  Authority,  private person and citizens' group) based
     upon,  alleging,  asserting,  or  claiming  any  actual  or  potential  (a)
     violation of, or liability  under any  Environmental  Law, (b) violation of
     any Environmental Permit, or (c) liability for investigatory costs, cleanup
     costs,  removal costs,  remedial costs,  response costs,  natural  resource
     damages,  property damage, personal injury, fines, or penalties arising out
     of, based on, resulting from, or related to any Environmental  Condition or
     any Release or  threatened  Release into the  environment  of any Regulated
     Substances  at any  location  related  to the  Assets,  including,  but not
     limited  to,  any  Off-Site  Location  to which  Regulated  Substances,  or
     materials containing Regulated Substances, were sent for handling, storage,
     treatment, or disposal.

          "Environmental Condition" means the presence or Release of a Regulated
     Substance   (other  than  a   naturally-occurring   substance)   on  or  in
     environmental  media,  or  structures  on  Real  Property,  at an  Off-Site
     Location  or other  property  (including  the  presence  in surface  water,
     groundwater,  soils or subsurface strata, or air), including the subsequent
     migration of any such Regulated Substance, regardless of when such presence
     or Release occurred or is discovered.

          "Environmental Data" has the meaning set forth in Section 6.3(e).

          "Environmental  Laws" means all  federal,  state,  local,  provincial,
     foreign and  international  civil and criminal  laws,  regulations,  rules,
     ordinances,   codes,  decrees,   judgments,   directives,  or  judicial  or
     administrative   orders   relating  to  pollution  or   protection  of  the
     environment,  natural  resources  or human  health and  safety,  including,
     without  limitation,  laws relating to Releases or  threatened  Releases of
     Regulated Substances  (including,  without limitation,  Releases to ambient
     air, surface water,  groundwater,  land,  surface and subsurface strata) or
     otherwise  relating  to the  manufacture,  processing,  distribution,  use,
     treatment,  storage, Release, transport,  disposal or handling of Regulated
     Substances.  "Environmental Laws" include: (a) with respect to federal law,
     CERCLA, the Hazardous Materials Transportation Act (49 U.S.C.ss.ss. 1801 et
     seq.), the Resource Conservation and Recovery Act (42 U.S.C.ss.ss.  6901 et
     seq.),  the Federal Water Pollution  Control Act (33  U.S.C.ss.ss.  1251 et
     seq.),  the  Clean  Air  Act (42  U.S.C.ss.ss.  7401 et  seq.),  the  Toxic
     Substances  Control Act (15 U.S.C.  ss.ss. 2601 et seq.), the Oil Pollution
     Act (33 U.S.C.ss.ss.  2701 et seq.),  the Emergency  Planning and Community
     Right-to-Know Act (42 U.S.C.ss.ss.  11001 et seq.), the Occupational Safety
     and Health Act (29  U.S.C.ss.ss.  651 et seq.), the Safe Drinking Water Act
     (42 U.S.C.ss. 300f et. seq.), the Surface Mine Conservation and Reclamation
     Act (30 U.S.C.ss.ss.  1251-1279), and regulations adopted pursuant thereto,
     and counterpart state and local laws, regulations adopted pursuant thereto;
     and (b) with  respect to  Arizona  law,  laws  comparable  to such  federal
     statutes and regulations adopted pursuant thereto.


                                       5

<PAGE>

          "Environmental    Permits"    means   any   permits,    registrations,
     certificates,  certifications,  licenses and  authorizations,  consents and
     approvals of Governmental  Authorities issued under Environmental Laws held
     by Seller with respect to the Assets.

          "Environmental  Price Adjustment" has the meaning set forth in Section
     6.3(c).

          "Environmental Reports" has the meaning set forth in Section 4.6.

          "Environmental Threshold" has the meaning set forth in Section 6.3(c).

          "ERISA" means the Employee  Retirement Income Security Act of 1974, as
     amended.

          "ERISA   Affiliate"  means  a  trade  or  business,   whether  or  not
     incorporated,  that  together  with a  Party  would  be  deemed  a  "single
     employer" within the meaning of Section 4001(b) of ERISA.

          "Estimated Adjustment" has the meaning set forth in Section 3.3(b).

          "Estimated  Closing  Statement"  has the  meaning set forth in Section
     3.3(b).

          "Excluded Assets" has the meaning set forth in Section 2.2.

          "Excluded Liabilities" has the meaning set forth in Section 2.4.

          "Exempt Facilities" means those facilities listed in Exhibit A to each
     Loan Agreement included in the IDRB Documents.

          "FERC" means the Federal Energy Regulatory Commission or any successor
     agency thereto.

          "Final Order" means an action by the relevant  Governmental  Authority
     that has not been  reversed,  stayed,  enjoined,  set  aside,  annulled  or
     suspended and/or with respect to which any waiting period prescribed by law
     before the transactions  contemplated hereby may be consummated has expired
     and the time  period  permitted  by  statute or  regulation  for filing any
     request for a stay, petition for rehearing,  reconsideration or application
     for review of the action or for filing a court appeal has passed.

          "Financial Statements" has the meaning set forth in Section 4.20.


                                       6

<PAGE>

          "FIRPTA  Affidavit" means the Foreign  Investment in Real Property Tax
     Act Certification and Affidavit to be executed by Seller.

          "GAAP" means U.S. generally accepted accounting principles.

          "Good Utility  Practices"  means any  practices,  methods,  standards,
     guides,  or acts, as  applicable,  that (a) are  generally  accepted in the
     region during the relevant time period for use in the gas, transmission and
     distribution  industry,  (b) are commonly used in prudent gas, transmission
     and  distribution   engineering,   construction,   project  management  and
     operations, and (c) would be expected if the Business is to be conducted at
     a reasonable cost in a manner  consistent with laws,  rules and regulations
     applicable  to the  Business and the  objectives  of  reliability,  safety,
     environmental protection,  economy and expediency. Good Utility Practice is
     intended to be acceptable practices, methods, or acts generally accepted in
     the region,  and is not  intended  to be limited to the optimum  practices,
     methods, or acts to the exclusion of all others.

          "Governmental  Authority" means any foreign,  federal, state, local or
     other governmental, regulatory or administrative agency, court, commission,
     department,   board,  or  other  governmental   subdivision,   legislature,
     rulemaking board, court,  tribunal,  arbitrating body or other governmental
     authority.

          "Grandfathered  Active Employees" has the meaning set forth in Section
     6.12(d)(iii)(D).

          "Grandfathered  Individuals"  has the  meaning  set  forth in  Section
     6.12(d)(iii)(D).

          "HSR Act" means the  Hart-Scott-Rodino  Antitrust  Improvements Act of
     1976, as amended.

          "IBEW" means International Brotherhood of Electrical Workers.

          "IBEW CBA" has the meaning set forth in Section 6.12(a).

          "IDRB Documents" has the meaning set forth in Section 6.14(m).

          "IDRB  Indebtedness"  means the  indebtedness  of Seller  owing to the
     issuers of the Revenue Bonds and arising under the Loan Agreements included
     among the IDRB Documents.

          "Income Tax" means any federal,  state, local or foreign Tax (a) based
     upon,  measured  by or  calculated  with  respect  to gross or net  income,
     profits or receipts (including, without limitation, capital gains Taxes and
     minimum Taxes) or (b) based upon, measured by or calculated with respect to
     multiple bases (including,  without limitation,  corporate franchise taxes)
     if one or more of the bases on which such Tax may be based,  measured by or
     calculated  with  respect  to, is  described  in clause  (a),  in each case
     together with any interest, penalties, or additions to such Tax.


                                       7

<PAGE>

          "Indemnifiable Loss" means any claim,  demand, suit, loss,  liability,
     damage,   obligation,   payment,   cost  or  expense  (including,   without
     limitation,   the  cost  and  expense  of  any  action,  suit,  proceeding,
     assessment,   judgment,  settlement  or  compromise  relating  thereto  and
     reasonable  attorneys'  fees and  reasonable  disbursements  in  connection
     therewith).

          "Indemnifying    Party"   means   a   Party   obligated   to   provide
     indemnification under this Agreement.

          "Indemnitee" means a Person entitled to receive  indemnification under
     this Agreement.

          "Independent  Accounting Firm" means such independent  accounting firm
     of national reputation as is mutually appointed by the Buyer and Seller.

          "Inspection"  means all  tests,  reviews,  examinations,  inspections,
     investigations, interviews, verifications, samplings and similar activities
     conducted by Buyer or its Representatives prior to the Closing with respect
     to  the  Assets,  including  "Phase  I"  and/or  "Phase  II"  environmental
     assessments.

          "Intellectual  Property"  means patents and patent rights,  trademarks
     and trademark rights, inventions,  copyrights and copyright rights, and all
     pending  applications  for  registrations  of  patents,   trademarks,   and
     copyrights.

          "Inventories" means materials,  spare parts, consumable supplies, fuel
     supplies and chemical  inventories  relating to the Assets or the operation
     of the Business.

          "Knowledge" means the actual knowledge, as of the date hereof or, with
     respect to any certificate  delivered pursuant to this Agreement,  the date
     of delivery of such certificate,  of the Persons identified on Schedule 1.1
     and successors to each such Person's employment responsibilities.

          "Material  Adverse Effect" means any occurrence or condition,  arising
     after the date hereof,  that has or would  reasonably be expected to have a
     material  adverse  effect with an  aggregate  an adverse  economic  impact,
     taking into account all relevant  considerations,  in excess of $10,000,000
     on the business, operations,  properties, financial condition or results of
     operations of any Party (including its Affiliates,  taken as a whole) or on
     the  ability  of either  Party to  perform  in all  material  respects  its
     obligations under this Agreement and the Ancillary Agreements.

          "Material Taking" has the meaning set forth in Section 6.13(b).

          "Non-Union Employees" has the meaning set forth in Section 6.12(b).

          "Off-Site  Location"  means  any  real  property  other  than the Real
     Property.

          "Order"  means  any  award,  decision,  injunction,  judgment,  order,
     consent order, writ, decree, consent decree,  ruling,  subpoena, or verdict
     entered,  issued,  made or  rendered by any court,  administrative  agency,
     other Governmental Authority, or by an arbitrator,  each of which possesses
     competent jurisdiction.


                                       8

<PAGE>

          "Party" has the meaning set forth in the Recitals.

          "Permitted Encumbrances" means any of the following:

          (a) mechanics', carriers', workers' and other similar liens arising in
     the ordinary course of business for charges that are not delinquent or that
     are being contested in good faith and have not proceeded to judgment;

          (b) liens for current Taxes and assessments not yet due and payable;

          (c) with respect to the Real Property, usual and customary nonmonetary
     Encumbrances,  covenants,  Easements,  restrictions and other title matters
     (whether or not  recorded)  that do not and are not expected to  materially
     interfere  with the operation of that portion of the Business  conducted on
     such Real Property or the Business as a whole;

          (d)  Encumbrances  securing the payment or  performance  of any of the
     Assumed Liabilities;

          (e) all  applicable  zoning  ordinances and land use  restrictions  in
     effect as of the date of this Agreement and all changes to or new adoptions
     of zoning  ordinances and land use  restrictions  prior to the Closing Date
     that do not and are not expected to materially interfere with the operation
     of that  portion of the  Business  conducted  on such Real  Property or the
     Business as a whole;

          (f) with  respect to any Asset which  consists of a leasehold or other
     possessory  interests  in  real  property,  all  Encumbrances,   covenants,
     Easements,  restrictions  and other title matters (whether or not recorded)
     to which the underlying fee estate in such real property is subject that do
     not or will not interfere  materially with the operation of that portion of
     the  Business  currently  conducted  on such  property or the Business as a
     whole; and

          (g) any other Encumbrances,  obligations, defects or irregularities of
     any kind whatsoever  affecting title to the Assets that will be terminated,
     released  or  waived  on or  before  the  Closing  Date  or that  are  not,
     individually or in the aggregate, reasonably likely to materially interfere
     with the present use of the Assets or to  materially  increase  the cost of
     conducting the Business.

          "Permits" means any permits, licenses,  registrations,  franchises and
     other  authorizations,  consents and approvals of Governmental  Authorities
     held by Seller with respect to the Assets or the Business.

          "Person" means any individual, partnership, limited liability company,
     joint  venture,   corporation,   trust,  unincorporated  organization,   or
     governmental entity or any department or agency thereof.


                                       9

<PAGE>

          "Post-Closing Adjustment" has the meaning set forth in Section 3.3(d).

          "Post-Retirement  Welfare  Benefits"  has the  meaning  set  forth  in
     Section 6.12(d)(iii)(D).

          "Proposed  Post-Closing  Adjustment"  has the  meaning  set  forth  in
     Section 3.3(c).

          "Proprietary  Information" of a Party means all information  about the
     Party  or  its  Affiliates,   including  their  respective   properties  or
     operations,  furnished  to the other  Party or its  Representatives  by the
     Party or its Representatives,  before or after the date hereof,  regardless
     of the manner or medium in which it is furnished and all analyses, reports,
     tests or other information created or prepared by, or on behalf of, a Party
     during  the  performance  of  "Phase I" or "Phase  II"  environmental  site
     assessments. Proprietary Information does not include information that: (a)
     is or becomes generally available to the public,  other than as a result of
     a disclosure by the other Party or its  Representatives;  (b) was available
     to the other Party on a  nonconfidential  basis prior to its  disclosure by
     the Party or its Representatives;  (c) becomes available to the other Party
     on a  nonconfidential  basis  from a  person,  other  than the Party or its
     Representatives,  who is not otherwise bound by a confidentiality agreement
     with the  Party  or its  Representatives,  or is not  otherwise  under  any
     obligation to the Party or any of its  Representatives  not to transmit the
     information  to  the  other  Party  or  its  Representatives;   or  (d)  is
     independently developed by the other Party.

          "Purchase Price" has the meaning set forth in Section 3.2.

          "Qualifying Offer" means an offer to a Transferred  Non-Union Employee
     of the same or similar job that is at least 100% of such employee's current
     total cash  compensation at the time the offer was made (consisting of base
     salary and target incentive bonus), and does not require, as a condition of
     acceptance, a relocation of residence as described in Section 6.12(f).

          "Real  Property"  has the  meaning  set forth in Section  2.1(a).  Any
     reference to the Real Property  includes,  by definition,  Seller's  right,
     title and interest in and to the surface and subsurface elements, including
     the soils and groundwater  present at the Real Property,  and any reference
     to items "at the Real Property" includes all items "at, on, in, upon, over,
     across, under and within" the Real Property.

          "Real Property Leases" has the meaning set forth in Section 4.5.

          "Recovery Costs" has the meaning set forth in Section 8.4(d).

          "Regulated  Substances"  means  (a)  any  petrochemical  or  petroleum
     products,  oil or coal ash, radioactive  materials,  radon gas, asbestos in
     any form that is or could become friable, urea formaldehyde foam insulation
     and  dielectric  fluid  containing   polychlorinated   biphenyls;  (b)  any
     chemicals, materials or substances defined as or included in the definition
     of  "hazardous  substances,"  "hazardous  wastes,"  "hazardous  materials,"
     "hazardous  constituents,"  "restricted  hazardous  materials,"  "extremely
     hazardous  substances," "toxic substances,"  "contaminants,"  "pollutants,"
     "toxic  pollutants" or words of similar meaning and regulatory effect under
     any applicable  Environmental Law; and (c) any other chemical,  material or
     substance,  exposure  to which or whose  discharge,  emission,  disposal or
     Release is prohibited, limited or regulated by any applicable Environmental
     Law.


                                       10

<PAGE>

          "Regulations" has the meaning set forth in Section 6.14(a)(iii).

          "Regulatory Exceptions" means any of the following:

          (a) a refusal by the ACC or the FERC to  authorize an increase in base
     rates  for the  Business,  an  imposition  by the ACC or the FERC of a rate
     moratorium for the Business, or a requirement by the ACC or the FERC of the
     filing of a rate case for the Business;

          (b) an imposition by the ACC requiring Buyer to provide service, or to
     improve service,  to Persons located in any authorized  service area of the
     Business,  provided  such  requirement  has a  corresponding  rate recovery
     opportunity;

          (c) an imposition  by the ACC of  performance,  safety or  reliability
     standards  for Buyer's  operation  of the Business  that are  substantially
     equivalent to those standards being met by Buyer or its Affiliates in their
     other  utility  operations  in  Arizona,  provided  (i)  Buyer  is  given a
     reasonable  period of time after Closing to meet such imposed standards and
     (ii) such imposed standards have a corresponding rate recovery opportunity;
     and

          (d) terms and conditions imposed by any Governmental Authority that is
     required to issue a Required  Regulatory Approval that are either (i) usual
     and customary; (ii) applicable to the Business or to Buyer or any Affiliate
     of Buyer as of the date of this  Agreement;  or (iii)  contemplated by this
     Agreement,  including  the  understandings  of the  Parties  referenced  in
     Section 6.8(c)(i).

          "Regulatory Material Adverse Effect" means, with respect to any Party,
     a Material  Adverse  Effect  resulting from the effect on such Party of the
     terms  and  conditions  of a  Final  Order  with  respect  to any  Required
     Regulatory Approval other than Regulatory Exceptions.

          "Release" means release,  spill,  leak,  discharge,  dispose of, pump,
     pour, emit, empty,  inject,  leach, dump or allow to escape into or through
     the environment.

          "Remediation"  means any action taken in the  investigation,  removal,
     confinement,   cleanup,  treatment,  or  monitoring  of  a  Release  or  an
     Environmental  Condition on Real Property or Off-Site Location,  including,
     without  limitation,  (a)  obtaining any Permits or  Environmental  Permits
     required  for  such  remedial  activities,  and (b)  implementation  of any
     engineering  controls and institutional  controls.  The term  "Remediation"
     includes, without limitation, any action which constitutes "removal action"
     or "remedial action" as defined by Section 101 of CERCLA,  Section 6901(23)
     and (24);  or any  action  which  constitutes  "remediation"  or  "remedial
     action"  as  defined  by  Arizona  Revised  Statutes  Sections   49-151(4),
     49-171(8) and 49-282.02(C)(2).


                                       11

<PAGE>

          "Representatives"   of  a  Party   means   such   Party's   authorized
     representatives,   including  without  limitation,   its  professional  and
     financial advisors.

          "Required  Regulatory  Approvals"  means with respect to a Party,  any
     consent or  approval  of,  filing  with,  or notice  to,  any  Governmental
     Authority  that  is  necessary  for  the  execution  and  delivery  of this
     Agreement  and the Ancillary  Agreements by such Party or the  consummation
     thereby of the transactions  contemplated hereby, other than such consents,
     approvals,  filings or notices (i) which are not  required in the  ordinary
     course to be obtained or made prior to the Closing and the  transfer of the
     Assets,  (ii) which,  if not obtained or made,  will not prevent such Party
     from performing its material obligations hereunder, or (iii) that relate to
     a Permit that is not material to the Business, taken as a whole.

          "Revenue Bonds" has the meaning set forth in Section 6.14(a)(i).

          "Savings Plan" has the meaning set forth in Section 6.12(d)(iii)(E).

          "SEC" means the Securities  and Exchange  Commission and any successor
     agency thereto.

          "Seller" has the meaning set forth in the Preamble.

          "Seller Indemnifiable Loss" has the meaning set forth in Section 8.1.

          "Seller Indemnitee" has the meaning set forth in Section 8.1.

          "Seller  Material Adverse Effect" means a Material Adverse Effect with
     respect to Seller.

          "Seller Required  Regulatory  Approvals" means the Required Regulatory
     Approvals set forth in Schedule 4.3(b).

          "Seller SEC Reports" has the meaning set forth in Section 4.21.

          "Seller's   Pension  Plan"  has  the  meaning  set  forth  in  Section
     6.12(d)(iii)(C).

          "Severance Cost" has the meaning set forth in Section 6.12(b).

          "Special Warranty Deed" means a special warranty deed substantially in
     the form of Exhibit C attached hereto.

          "Subsidiary"  when used in reference to any Person means any entity of
     which  outstanding  securities  having  ordinary  voting  power  to elect a
     majority of the Board of  Directors  or other  Persons  performing  similar
     functions of such entity are owned directly or indirectly by such Person.

          "Sufficient Notice" has the meaning set forth in Section 6.14(c)(ii).


                                       12

<PAGE>

          "Taking" has the meaning set forth in Section 6.13(b).

          "Tangible  Personal  Property"  has the  meaning  set forth in Section
     2.1(c).

          "Taxes" means all taxes,  charges,  fees,  levies,  penalties or other
     assessments  imposed  by  any  federal,  state,  local  or  foreign  taxing
     authority,  including, but not limited to, income, excise, property, sales,
     transfer, franchise, payroll, withholding, social security, gross receipts,
     license,  stamp,  occupation,  employment  or other  taxes,  including  any
     interest, penalties or additions attributable thereto.

          "Tax Impact" has the meaning set forth in Section 6.14(a)(vi).

          "Tax   Return"   means  any  return,   report,   information   return,
     declaration,  claim for refund or other document (including any schedule or
     related or  supporting  information)  required to be supplied to any taxing
     authority with respect to Taxes including amendments thereto.

          "Termination Date" has the meaning set forth in Section 9.1(b).

          "Third Party Claim" means any claim,  action,  or  proceeding  made or
     brought by any Person who is not (a) a Party to this  Agreement,  or (b) an
     Affiliate of a Party to this Agreement.

          "Title Commitment" has the meaning set forth in Section 6.17.

          "Title Company" has the meaning set forth in Section 6.17.

          "Title Policies" has the meaning set forth in Section 6.17.

          "Transfer Taxes" means any real property  transfer or gains tax, sales
     tax,  conveyance  fee,  use tax,  stamp tax,  stock  transfer  tax or other
     similar tax,  including  any related  penalties,  interest and additions to
     tax.

          "Transferable  Permits" means those Permits and Environmental  Permits
     with  respect to the Assets or the  Business  which may be  transferred  to
     Buyer with or without a filing with,  notice to,  consent of or approval of
     any Governmental  Authority,  and excluding those Permits and Environmental
     Permits   with   respect   to  the  Assets  or  the   Business   which  are
     non-transferable  to Buyer and with  respect to which  Buyer must apply for
     and obtain replacements.

          "Transferred  Employees"  means  Transferred  Non-Union  Employees and
     Transferred Union Employees.

          "Transferred  Employee  Records"  means  records  related to  Seller's
     employees who become employees of Buyer but only to the extent such records
     pertain  to  (A)  skill  and  development  training  and  biographies,  (B)
     seniority histories, (C) salary and benefit information,  (D) Occupational,
     Safety and Health Administration  reports, or (E) subject to the limitation
     of the Health Insurance  Portability and Accountability Act of 1996 and any
     applicable  state  privacy  legislation  and  regulations,  active  medical
     restriction forms.


                                       13

<PAGE>

          "Transferred Non-Union Employees" has the meaning set forth in Section
     6.12(b).

          "Transferred  Union  Employees"  has the  meaning set forth in Section
     6.12(a).

          "Union Employees" has the meaning set forth in Section 6.12(a).

          "UniSource" means UniSource Energy Corporation, an Arizona corporation
     and a direct or indirect parent corporation of Buyer.

          "UniSource  Designee"  means  a  wholly-owned  subsidiary,  direct  or
     indirect,  of either UniSource or Tucson Electric Power Company, an Arizona
     corporation  named in the  approvals  by the ACC and the FERC as an  entity
     that may acquire the Assets.

          "UniSource SEC Reports" has the meaning set forth in Section 5.5.

          "WARN  Act"  means  the  Federal  Worker  Adjustment   Retraining  and
     Notification Act of 1988, as amended.

          "1954 Code" has the meaning set forth in Section 6.14(a)(iii).

     1.2 Certain  Interpretive  Matters.  In this Agreement,  unless the context
otherwise  requires,  the singular shall include the plural, the masculine shall
include  the  feminine  and  neuter,  and vice  versa.  The term  "includes"  or
"including"  shall mean  "including  without  limitation."  The terms  "hereof,"
"herein" and  "herewith"  and words of similar  import shall,  unless  otherwise
stated, be construed to refer to this Agreement as a whole (including all of the
Schedules  and  Exhibits  hereto) and not to any  particular  provision  of this
Agreement.  References to a Section,  Article,  Exhibit or Schedule shall mean a
Section,  Article,  Exhibit or Schedule of this  Agreement,  and  reference to a
given  agreement  or  instrument  shall  be a  reference  to that  agreement  or
instrument as modified, amended, supplemented or restated through the date as of
which such reference is made.

                                   ARTICLE II

                                PURCHASE AND SALE

     2.1 Transfer of Assets.  Upon the terms and subject to the  satisfaction of
the conditions  contained in this Agreement,  at the Closing,  Seller will sell,
assign,  convey,  transfer and deliver to Buyer or the UniSource  Designee,  and
Buyer or such UniSource Designee will purchase,  assume and acquire from Seller,
free and clear of all Encumbrances (except for Permitted  Encumbrances),  all of
Seller's right, title and interest in and to all the assets (except for Excluded
Assets), real, personal or mixed, tangible, or intangible,  used or held for use
by Seller in or in connection  with, or otherwise  necessary for, the conduct of
the Business,  including, without limitation, those assets described below, each
as in existence on the Closing Date (such assets, collectively, the "Assets"):


                                       14

<PAGE>

     (a) those certain  parcels of real property  owned by Seller  together with
all buildings,  facilities, and other improvements thereon and all appurtenances
thereto as described in Schedule 4.9 (the "Real Property");

     (b) all accounts  receivable and earned but unbilled revenues  attributable
to the Business, and all Inventories;

     (c)   all   machinery   (mobile   or   otherwise),   equipment   (including
communications  equipment  and  computers),   vehicles,   tools,  furniture  and
furnishings and other personal property related to the Business, owned by Seller
and  located on the Real  Property on the Closing  Date,  together  with all the
personal  property of Seller used  principally  in the operation of the Business
that are in the  possession  of Seller and  whether  or not  located on the Real
Property (collectively, the "Tangible Personal Property");

     (d) subject to the provisions of Section 6.7(c), all Assigned Agreements;

     (e) subject to the provisions of Section 6.7(c), all Real Property Leases;

     (f) all Transferable Permits;

     (g) all books,  customer lists and customer  information  databases,  meter
reading and service data,  accounts payable and receivable  data,  operating and
maintenance records,  warranty  information,  operating,  safety and maintenance
manuals,    engineering   design   plans,   blueprints   and   as-built   plans,
specifications,  procedures and similar items of Seller relating specifically to
the Assets  and  necessary  for the  operation  of the  Assets and the  Business
(subject to the right of Seller to retain copies of same for its use) other than
such items which are proprietary to third parties and accounting records;

     (h) all  unexpired,  transferable  warranties  and  guarantees  from  third
parties with respect to any Asset as of the Closing Date;

     (i) Seller prepaid expenses; and

     (j) petty cash held locally for the benefit of the Business.

     2.2  Excluded  Assets.  Notwithstanding  anything  to the  contrary in this
Agreement,  nothing in this Agreement  will  constitute a transfer to Buyer or a
UniSource  Designee of, or be construed  as  conferring  on Buyer or a UniSource
Designee, and neither Buyer nor said UniSource Designee is acquiring, any right,
title or interest in or to the following  specific  assets which are  associated
with the Assets or the Business, but which are hereby specifically excluded from
the sale and the definition of Assets herein (the "Excluded Assets"):

     (a) assets that Seller uses in both the Business  and Seller's  electric or
communications  businesses,  the  material  items of  which  are  identified  in
Schedule 2.2 hereto and any contracts or agreements regarding the procurement of
goods  or  services  by  Seller  for  use  in  its  electric  or  communications
businesses;


                                       15

<PAGE>

     (b) cash and cash equivalents  (including checks) in transit, in hand or in
bank  accounts,  other  than  petty  cash held  locally  for the  benefit of the
Business;

     (c)  the  rights  of  Seller  and its  Affiliates  to the  names  "Citizens
Communications Company",  "Citizens Utilities", "CZN" or "Citizens" or any other
trade names,  trademarks,  service marks,  corporate names, corporate symbols or
logos or any part, derivative or combination thereof (the "Citizens Marks");

     (d) the stock  record and minute books of Seller,  duplicate  copies of all
books and records  transferred to Buyer, all records prepared in connection with
the sale of the  Business  (including  bids  received  from  third  parties  and
analyses  relating to the Business and all  original  documents  relating to the
Revenue Bonds  (provided that copies of such  documents  relating to the Revenue
Bonds have been furnished to Buyer);

     (e) assets  disposed of by Seller  after the date of this  Agreement to the
extent such dispositions are not prohibited by this Agreement;

     (f) except in the case of causes of action against third parties (including
indemnification  and  contribution)  relating to an  Environmental  Condition or
Regulated  Substance or arising under  Environmental  Laws and not relating to a
Retained Liability,  the rights of Seller in and to any causes of action against
third parties (including  indemnification and contribution) relating to any Real
Property or Tangible Personal Property,  Permits,  Environmental Permits, Taxes,
Real Property Leases or the Assigned Agreements, if any, and not relating to the
Assumed  Liabilities,  including any claims for refunds,  prepayments,  offsets,
recoupment, insurance proceeds (subject to Section 6.13(c)), condemnation awards
(subject  to Section  6.13(b)),  judgments  and the like,  whether  received  as
payment or credit against future liabilities,  relating specifically to the Real
Property or any  improvements  thereon and  relating to any period  prior to the
Closing Date;

     (g) all  personnel  records of Seller and its  Affiliates  relating  to the
Transferred  Employees other than Transferred Employee Records or other records,
the  disclosure  of which is required by law or legal or  regulatory  process or
subpoena;

     (h) any and all of Seller's  rights and  interests in any contract  that is
not an Assigned Agreement or that is an intercompany  transaction between Seller
and an Affiliate of Seller and all accounts owing by and among Seller and any of
its  Affiliates,  whether or not any such  intercompany  transaction  or account
relates  to  the  provision  of  goods  and  services,   payment   arrangements,
intercompany charges or balances, or the like;

     (i) except to the extent  set forth in  Section  3.4,  rights to refunds of
Taxes  payable with respect to the  Business,  the Assets,  or any other assets,
properties or operations of Seller or any Affiliate thereof;

     (j) all deferred tax assets or collectibles;

     (k) any insurance  policy,  bond, letter of credit or similar item, and any
cash surrender value in regard thereto;


                                       16

<PAGE>

     (l) except as otherwise set forth in Section 6.12,  assets  attributable to
or related to a Benefit Plan; and

     (m) all other assets listed in Schedule 2.2 hereto.

     2.3  Assumed  Liabilities.  On the  Closing  Date,  Buyer or the  UniSource
Designee  acquiring  the  Assets  shall  deliver to Seller  the  Assignment  and
Assumption  Agreement  pursuant to which Buyer or such UniSource  Designee shall
assume  and  agree to  discharge  when  due,  without  recourse  to  Seller,  in
accordance  with the respective  terms and subject to the respective  conditions
thereof,  all of the Assumed Liabilities.  All of the following  liabilities and
obligations  of Seller or Buyer which  relate to, or arise by virtue of Seller's
or Buyer's  ownership of the Assets or  operation  of the  Business  (other than
Excluded Liabilities) are referred to collectively as the "Assumed Liabilities":

     (a) all  liabilities and obligations of Seller or Buyer arising on or after
the Closing Date under the Assigned  Agreements,  the Real Property Leases,  and
the  Transferable  Permits  in  accordance  with the terms  thereof,  including,
without limitation,  the Assigned Agreements entered into by Seller (i) prior to
the date hereof and (ii) after the date hereof consistent with the terms of this
Agreement,  except in each case to the extent such  liabilities and obligations,
but for a breach or  default  by Seller,  would  have been  paid,  performed  or
otherwise  discharged  on or prior  to the  Closing  Date and are not  otherwise
included  among the items  causing  an  adjustment  to the Base  Purchase  Price
contemplated  in  Section  3.3 or to the  extent  the same arise out of any such
breach or  default  or out of any  event  which  after  the  giving of notice or
passage of time or both would constitute a default by Seller;

     (b) all liabilities  and obligations of Seller for accounts  payable to the
extent included among the items causing an adjustment to the Base Purchase Price
contemplated in Section 3.3;

     (c) all  liabilities  and  obligations  associated  with the  Assets or the
Business in respect of Taxes for which  Buyer is liable  pursuant to Section 3.4
or 6.10(a) hereof;

     (d) all  liabilities and obligations of Seller or Buyer with respect to the
Transferred  Employees  incurred on or after the Closing Date for which Buyer is
responsible pursuant to Section 6.12;

     (e) all  liabilities,  responsibilities  and obligations of Seller or Buyer
arising  under  Environmental  Laws or relating to  Environmental  Conditions or
Regulated Substances (including common law liabilities relating to Environmental
Conditions and Regulated Substances), whether such liability,  responsibility or
obligation  is known or unknown,  contingent  or accrued as of the Closing Date,
including  but not  limited  to:  (i) costs of  compliance  (including  capital,
operating  and other costs)  relating to any  violation or alleged  violation of
Environmental  Laws  occurring  prior  to, on or after the  Closing  Date,  with
respect  to the  ownership  of the Assets or  operation  of the  Business;  (ii)
property damage or natural resource damage (whether such damages were manifested
before or after the Closing  Date)  arising  from  Environmental  Conditions  or
Releases of Regulated  Substances  at, on, in, under,  adjacent to, or migrating
from any Assets prior to, on or after the Closing  Date;  (iii) any  Remediation
(whether or not such Remediation  commenced before the Closing Date or commences
after the Closing Date) of Environmental Conditions or Regulated Substances that
are present or have been Released  prior to, on or after the Closing  Date,  at,
on, in, adjacent to or migrating from the Assets; (iv) any violations or alleged
violations  of  Environmental  Laws  occurring on or after the Closing Date with
respect to the  ownership of any Assets or operation  of the  Business;  (v) any
bodily injury or loss of life arising from Environmental  Conditions or Releases
of Regulated  Substances  at, on, in, under,  adjacent to or migrating  from any
Asset on or after  the  Closing  Date;  (vi) any  bodily  injury,  loss of life,
property   damage,   or  natural  resource  damage  arising  from  the  storage,
transportation,  treatment,  disposal,  discharge,  recycling or Release, at any
Off-Site  Location,  or arising from the arrangement for such activities,  on or
after the Closing Date, of Regulated Substances generated in connection with the
ownership  of the  Assets  or the  operation  of the  Business;  and  (vii)  any
Remediation of any  Environmental  Condition or Release of Regulated  Substances
arising  from  the  storage,  transportation,  treatment,  disposal,  discharge,
recycling or Release, at any Off-Site Location,  or arising from the arrangement
for such  activities,  on or after the Closing  Date,  of  Regulated  Substances
generated in connection with the ownership or operation of the Assets; provided,
that  nothing set forth in this  Section 2.3 shall  require  Buyer to assume any
liabilities,  responsibilities  or  obligations  that are expressly  excluded in
Section 2.4;


                                       17

<PAGE>

     (f) any Tax that may be imposed by any federal,  state or local  government
on the ownership, sale (except as otherwise provided in Section 3.4 or 6.10(a)),
operation  of the  Business or use of the Assets on or after the  Closing  Date,
except for any Income Taxes attributable to the income of Seller;

     (g) all liabilities and obligations of Seller or Buyer arising on and after
the Closing Date under those Orders  specifically  relating to the Assets or the
Business issued by or entered into with any Governmental Authority and listed in
Schedule 2.3(g) or imposed on Buyer in any Required Regulatory Approval;

     (h)  customer  advances,   customer  deposits  and  construction  advances,
unperformed   service   obligations,   Easement  relocation   obligations,   and
engineering  and  construction  required  to  complete  scheduled  construction,
construction work in progress,  and other capital expenditure  projects, in each
case directly  related to the Business and  outstanding  on or arising after the
Closing Date; and

     (i) actions and proceedings  based on conduct,  actions,  circumstances  or
conditions  arising or  occurring  on or after the  Closing  Date,  actions  and
proceedings  described in Schedule 2.3(i),  actions and proceedings arising from
or directly related to any other Assumed Liability, and generic or industry-wide
actions and  proceedings  outstanding on or arising on or after the Closing Date
that are applicable to the Business.

     2.4 Excluded Liabilities. Notwithstanding anything to the contrary in this
Agreement, Buyer shall not assume or be obligated to pay, perform or otherwise
discharge the following liabilities or obligations of Seller (collectively, the
"Excluded Liabilities"):

     (a) any  liabilities  or  obligations  of Seller in respect of any Excluded
Assets or other assets of Seller that are not Assets;


                                       18

<PAGE>

     (b) any  liabilities or obligations  with respect to Taxes  attributable to
Seller's  ownership,  or use of the  Assets or  operation  of the  Business  for
taxable periods, or portions thereof, ending before the Closing Date, except for
Taxes for which Buyer is liable pursuant to Section 3.4 or 6.10(a) hereof;

     (c) any  liabilities  or  obligations  of Seller  accruing under any of the
Assigned  Agreements  prior to the Closing Date or any liability,  other than an
Assumed  Liability,  underlying  a  Permitted  Encumbrance,  in each case to the
extent not included  among the items  causing an adjustment to the Base Purchase
Price contemplated in Section 3.3;

     (d) any and all asserted or unasserted  liabilities or obligations to third
parties  (including  employees)  for injuries or damages,  whether  arising from
tortious  conduct or  otherwise,  or similar  causes of action  relating  to the
Assets or the Business arising during or attributable to the period prior to the
Closing Date, other than such that relate to liabilities or obligations  assumed
by Buyer;

     (e) any  fines,  penalties  and  associated  costs  for  defending  related
enforcement  actions,  resulting  from any  violation  or alleged  violation  of
Environmental  Laws with respect to the ownership of the Assets or the operation
of the Business occurring prior to the Closing Date;

     (f) any payment  obligations of Seller pursuant to the Assigned  Agreements
for goods delivered or services  rendered prior to the Closing Date,  including,
but not limited to, rental  payments  pursuant to the Real Property  Leases,  in
each case to the extent not included  among the items  causing an  adjustment to
the Base Purchase Price contemplated in Section 3.3;

     (g) any  liabilities,  responsibilities  and  obligations of Seller arising
under  Environmental  Laws or relating to Environmental  Conditions or Regulated
Substances   (including   common  law  liabilities   relating  to  Environmental
Conditions and Regulated Substances), whether such liability,  responsibility or
obligation was known or unknown, contingent or accrued, which relates to (i) any
bodily injury,  loss of life, property damage or natural resource damage arising
from the storage,  transportation,  treatment, disposal, discharge, recycling or
Release of Regulated  Substances  generated in connection  with the ownership of
the Assets or the operation of the Business at any Off-Site Location, or arising
from the arrangement for such activities, prior to the Closing Date; or (ii) any
Remediation  of  any  Environmental  Condition  or  Regulated  Substance  at any
Off-Site  Location,  arising  from  the  storage,   transportation,   treatment,
disposal,  discharge,  recycling or Release of Regulated Substances generated in
connection  with the ownership of the Assets or the operation of the Business at
such Off-Site  Location,  or arising from the arrangement  for such  activities,
prior to the  Closing  Date;  provided,  that for  purposes  of this  paragraph,
"Off-Site Location" does not include any location to which Regulated  Substances
disposed of or Released at the site of any Asset may have migrated;

     (h) any  liability  to third  parties  (including  employees)  for personal
injury  or  loss  of  life,  to the  extent  caused  (or  allegedly  caused)  by
Environmental  Conditions  or the Release of  Regulated  Substances  at, on, in,
under, or adjacent to, or migrating from, the Assets prior to the Closing;


                                       19

<PAGE>


     (i) subject to Section 6.12, any liabilities or obligations of Seller,  any
Seller  Subsidiary or any ERISA Affiliate of Seller relating to any Benefit Plan
including but not limited to any such liability (i) relating to benefits payable
under  any  Benefit  Plan;  (ii)  relating  to  the  Pension  Benefit   Guaranty
Corporation  under Title IV of ERISA;  (iii) relating to a multi-employer  plan;
(iv) with  respect to  non-compliance  with the notice and benefit  continuation
requirements of COBRA; (v) with respect to any  noncompliance  with ERISA or any
other  applicable  laws;  or (vi) with respect to any suit,  proceeding or claim
which is brought  against Seller,  Buyer,  any Benefit Plan, or any fiduciary or
former fiduciary of any such Benefit Plan;

     (j) subject to Section 6.12, any  liabilities  or obligations  arising from
facts or  circumstances  prior to the Closing Date relating to the employment or
termination of employment, including discrimination,  wrongful discharge, unfair
labor  practices,  or  constructive  termination  by Seller  of any  individual,
attributable  to any actions or  inactions  by Seller  prior to the Closing Date
other than  actions or  inactions  taken at the written  direction  of Buyer (it
being  understood and agreed that Buyer shall have no liability for action taken
by Seller pursuant to Section 6.12 except as expressly provided therein);

     (k) subject to Section 6.12, any obligations of Seller for wages, overtime,
employment taxes,  severance pay, transition payments in respect of compensation
or similar  benefits  accruing or arising prior to the Closing under any term or
provision of any contract,  plan, instrument or agreement relating to any of the
employees of Seller;

     (l) all  obligations  of Seller with  respect to the Revenue  Bonds and any
other indebtedness for money borrowed by Seller (including items due to Seller's
Affiliates) other than payment  obligations arising on or after the Closing Date
under any  equipment  lease of the kind listed in Schedule  4.11(a) or under any
line  extension  contracts  or  similar  construction  arrangements,   it  being
understood and agreed that such leases,  contracts and similar  arrangements  do
not create indebtedness for money borrowed; and

     (m) all obligations and liabilities included in Seller's "other current and
accrued liabilities" account; and

     (n) any liability of Seller arising out of a breach by Seller or any of its
Affiliates of any of their  respective  obligations  under this Agreement or the
Ancillary Agreements.

     2.5 Control of Litigation.

     (a) The  Parties  agree and  acknowledge  that,  from and after the Closing
Date,  Seller shall be entitled  exclusively  to control,  defend and settle any
litigation,  administrative or regulatory  proceeding,  and any investigation or
Remediation activity (including without limitation any environmental  mitigation
or  Remediation  activities),   arising  out  of  or  related  to  any  Excluded
Liabilities,  and Buyer agrees to cooperate fully in connection therewith and in
connection therewith,  shall comply with the provisions of Section 6.2, provided
that, in no event shall  Seller's  exercise of its rights under this Section 2.5
(i)  unreasonably  interfere with Buyer's  conduct or operation of the Business,
(ii) place any environmental liens or deed restrictions on the Real Property, or
(iii)  cause  Buyer to be  responsible  for  maintaining  any  institutional  or
engineering controls that may be part of a Remediation activity.


                                       20

<PAGE>

     (b) The  Parties  agree and  acknowledge  that,  from and after the Closing
Date,  Buyer shall be  entitled  exclusively  to control,  defend and settle any
litigation,  administrative or regulatory  proceeding,  and any investigation or
Remediation activity (including without limitation any environmental  mitigation
or  Remediation   activities),   arising  out  of  or  related  to  any  Assumed
Liabilities, and Seller agrees to cooperate fully in connection therewith and in
connection therewith, shall comply with the provisions of Section 6.2.

                                   ARTICLE III

                                   THE CLOSING

     3.1  Closing.  Upon  the  terms  and  subject  to the  satisfaction  of the
conditions in Article VII of this Agreement,  each of (i) the sale,  assignment,
conveyance,  transfer  and  delivery of the Assets to Buyer by Seller,  (ii) the
payment of the Purchase  Price to Seller by Buyer,  (iii) the  assumption of the
Assumed  Liabilities by Buyer, and (iv) the consummation of the other respective
obligations of the Parties  contemplated  by this Agreement to be consummated on
the Closing  Date shall take place at a closing (the  "Closing"),  to be held at
the  offices  of Seller in  Phoenix,  Arizona,  or another  mutually  acceptable
location, at 9:00 a.m. local time on the Closing Date.

     3.2 Closing Payment.  Upon the terms and subject to the satisfaction of the
conditions contained in this Agreement,  in consideration of the aforesaid sale,
assignment,  assumption,  conveyance, transfer and delivery of the Assets, Buyer
will pay or cause to be paid to Seller at the  Closing  an  aggregate  amount in
U.S. dollars of one hundred  thirty-eight  million dollars  ($138,000,000)  (the
"Base Purchase Price") plus or minus any adjustments  pursuant to the provisions
of this  Agreement  (the  "Purchase  Price"),  by wire  transfer of  immediately
available funds denominated in U.S. dollars or by such other means as are agreed
upon by Seller and Buyer.

     3.3 Adjustment to Base Purchase Price.

          (a) Subject to Section 3.3(b), at the Closing, the Base Purchase Price
     shall be  adjusted  to  account  for the items  set  forth in this  Section
     3.3(a):

               (i) the Base  Purchase  Price shall be  decreased  by six million
          dollars ($6,000,000) if the Closing occurs on or before July 28, 2003;

               (ii) [intentionally omitted]

               (iii) the Base Purchase Price shall be increased by three million
          dollars  ($3,000,000)  in the event the Closing occurs after the first
          anniversary of the date hereof;

               (iv) the Base Purchase  Price shall be increased by the aggregate
          amount of all accounts  receivable  and earned but  unbilled  revenues
          (other than any amounts  that are due from any of Seller's  Affiliates
          or that otherwise are Excluded Assets) attributable to the Business as
          of day immediately  preceding the Closing Date net of Seller's reserve
          for allowance for bad debt (as  reflected in Seller's  written  policy
          for allowance for bad debt as of the date hereof);


                                       21

<PAGE>

               (v) the Base  Purchase  Price shall be  decreased by all accounts
          payable  attributable  to  the  Business  as of  the  day  immediately
          preceding  the  Closing  Date (other  than any  liability  included in
          Seller's "other current and accrued liabilities" account,  which shall
          be an Excluded Liability or that otherwise is an Excluded Liability);

               (vi) the  Base  Purchase  price  shall  be  decreased  by (A) the
          aggregate amount of customer  advances for construction  times 25% and
          (B) the  aggregate  amount of customer  deposits,  in each case to the
          extent relating to the Business  outstanding as of the day immediately
          preceding  the  Closing  Date  (other  than any  amounts due to any of
          Seller's Affiliates or that otherwise is an Excluded Liability);

               (vii) the Base  Purchase  Price shall  increased by the aggregate
          amount of Inventories recorded on Seller's books and records as of day
          immediately preceding the Closing Date;

               (viii) the Base  Purchase  Price shall be adjusted to account for
          the net balance  payable to or by Seller,  if any, for items  prorated
          pursuant to Section  3.4,  other than the items  addressed  in Section
          3.4(a);

               (ix) the Base  Purchase  Price shall be increased or decreased if
          and   to  the   extent   required   by   Sections   6.3(c),   6.12(b),
          6.12(d)(iii)(D) and 6.13;

               (x) the Base  Purchase  Price will be increased by the  aggregate
          amount of all (i) Approved  Capital  Expenditures  that are accrued by
          Seller  between  the  date of this  Agreement  and  the  Closing  Date
          (including  expenditures recorded in the Construction Work in Progress
          account  of the  Business  as of the  day  immediately  preceding  the
          Closing Date and relating to the Approved Capital Expenditures),  (ii)
          without duplication,  expenditures to purchase materials, supplies and
          other  capital items that are dedicated to, but as of Closing have not
          been used in, the  construction or improvement of the property,  plant
          or equipment and relating to the Approved  Capital  Expenditures)  and
          (iii) without duplication,  other expenditures recorded as an asset of
          the Business as of the day immediately  preceding the Closing Date and
          relating to such Approved Capital Expenditures; and

               (xi) The Base  Purchase  Price shall be increased or decreased by
          the amount of the Seller's  Purchased Gas Adjustment  account  balance
          outstanding on the day immediately preceding the Closing Date.

          (b) At least ten (10),  but no more than thirty (30) days prior to the
     Closing  Date,  Seller  shall  prepare  and  deliver to Buyer an  estimated
     closing statement (the "Estimated Closing  Statement") that shall set forth
     Seller's best estimate of the  estimated  adjustments  to the Base Purchase
     Price required by Section 3.3(a) (regardless of whether notice of such Base
     Purchase Price  adjustments  have been previously  delivered to Buyer) (the
     "Estimated Adjustment").  Within five (5) days following the delivery of an
     Estimated  Closing  Statement  to Buyer,  Buyer may object in good faith to
     such  Estimated  Closing  Payment  in  writing.  In the  event  of any such
     objection,  the  Parties  shall  attempt to resolve  their  differences  by
     negotiation. If the Parties are unable to do so before three (3) days prior
     to the Closing Date,  then (i) the full amount of the Estimated  Adjustment
     shall  be made  at the  Closing  if the  amount  in  dispute  is less  than
     $1,000,000,  or (ii) the  undisputed  portion of the  Estimated  Adjustment
     shall be made at the  Closing if the amount in  dispute  is  $1,000,000  or
     more. The disputed  portions shall be paid as a Post-Closing  Adjustment if
     and to the extent required by Section 3.3(d).


                                       22

<PAGE>

          (c) Within sixty (60) days  following the Closing  Date,  Seller shall
     prepare and deliver to Buyer a final  closing  statement  setting forth the
     final  adjustments  to the Base Purchase  Price  required by Section 3.3(a)
     (the "Proposed Post-Closing Adjustment").  All calculations of the Proposed
     Post-Closing  Adjustments  shall be  prepared  using  the  same  accounting
     principles,  policies  and  methods  as  Seller  has  historically  used in
     connection  with the  calculation  of the items  reflected on such Proposed
     Post-Closing Adjustments.

          (d) Within  thirty  (30) days  following  the  delivery  of a Proposed
     Post-Closing  Adjustment  to  Buyer,  Buyer  may  object  to such  Proposed
     Post-Closing  Adjustment in writing.  Seller agrees to cooperate with Buyer
     to provide Buyer and Buyer's  Representatives  information  used to prepare
     the Proposed Post-Closing  Adjustments and information relating thereto. If
     Buyer  objects to a Proposed  Post-Closing  Adjustment,  the Parties  shall
     attempt to resolve such dispute by negotiation.  If such Parties are unable
     to resolve such dispute  within  thirty (30) days of any such  objection by
     Buyer,  the Parties shall appoint an Independent  Accounting Firm. The fees
     and expenses of such Independent Accounting Firm shall be allocated between
     Buyer and Seller so that Seller's  share of such fees and expenses shall be
     in the same proportion that the aggregate amount of such remaining disputed
     amounts so submitted by Buyer to such auditor that is successfully disputed
     by Buyer (as finally  determined by such auditor) bears to the total amount
     of such remaining  disputed  amounts so submitted by Buyer to such auditor.
     The  Independent  Accounting  Firm shall review such Proposed  Post-Closing
     Adjustment  and determine the  appropriate  adjustment to the Base Purchase
     Price,  if any,  within thirty (30) days of such  appointment.  The Parties
     agree to cooperate with the Independent Accounting Firm and provide it with
     such  information  as it  reasonably  requests  to  enable  it to make such
     determination.  The finding of such  Independent  Accounting  Firm shall be
     binding on the Parties  hereto.  Upon  determination  by  agreement  of the
     Parties or by binding  determination of the Independent  Accounting Firm of
     the appropriate  adjustment to the Base Purchase Price (in either case, the
     "Post-Closing  Adjustment"),  if such Post-Closing  Adjustment results in a
     change to the Base Purchase  Price,  the Party owing the  difference  shall
     deliver such difference to the Party owed such amount no later than two (2)
     Business Days after the determination of such Post Closing  Adjustment,  in
     immediately  available funds or in any other manner as reasonably requested
     by the Party  owed such  amount,  plus  interest  at 6.0% per annum on such
     determined  amount from the Closing Date to (but not including) the date of
     payment.

          (e) If at any time following the Closing Date Buyer  actually  returns
     to  customers  greater  than  thirty-five  percent  (35%) of the  aggregate
     customer  advances for construction  directly  relating to the Business and
     outstanding  as of the Closing Date  ("Advances"),  Seller shall  reimburse
     Buyer for all amounts  returned  to  customers  to the extent said  returns
     exceed twenty-five percent (25%) of Advances. Buyer may, at any time within
     seven  (7)  years  from the  Closing  Date,  provide  notice to Seller of a
     reimbursement  claim under this Section 3.3(e),  which notice shall include
     reasonable documentary  substantiation of returns to customers of Advances.
     In the event Seller agrees with said  determination,  it shall promptly pay
     such   reimbursement   to  Buyer.   In  the  event  Seller   disputes  said
     determination,  it shall initiate the dispute  resolution  procedures  with
     regard to the Post-Closing Adjustment, as provided in Section 3.3(d), which
     shall be binding on the Parties.


                                       23

<PAGE>

     3.4  Prorations.  Buyer and  Seller  agree  that all of the items  normally
prorated,  including  those  listed  below  (but not  including  Income  Taxes),
relating to the Business and operation of the Assets shall be prorated as of the
Closing Date,  with Seller liable for such items to the extent such items relate
to any time period prior to the Closing Date, and Buyer liable for such items to
the  extent  such items  relate to  periods  commencing  with the  Closing  Date
(measured  in the same  units used to compute  the item in  question,  otherwise
measured by calendar  days).  The Base Purchase  Price shall be increased to the
extent  Buyer will  benefit  financially  due to Seller's  payment  prior to the
Closing  Date of the portion of any such item  allocable  to Buyer,  and (except
with  respect to the items  addressed in clause (a) below) shall be decreased to
the extent Seller will benefit  financially  due to Buyer's  payment on or after
the Closing Date of the portion of any such item allocable to Seller.  The items
subject to proration include the following:

     (a)  Subject  to  Section  6.10(b),  personal  property,  real  estate  and
occupancy  Taxes,  assessments and other charges,  if any, on or with respect to
the Business and operation of the Assets;

     (b) rent,  Taxes (other than Income  Taxes) and all other items  (including
prepaid  services or goods not included in Inventories)  payable by or to Seller
under any of the Assigned  Agreements  to the extent not included in the account
payables of the Business  outstanding  as of the day  immediately  preceding the
Closing Date;

     (c) any permit, license,  registration,  compliance assurance fees or other
fees with respect to any Transferable Permit or other Asset;

     (d) sewer  rents and charges for water,  telephone,  electricity  and other
utilities with respect to the Assets;

     (e) rent and Taxes payable by or to Seller under the Real  Property  Leases
assigned  to Buyer to the extent not  included  in the  account  payables of the
Business outstanding as of the day immediately preceding the Closing Date;

     (f) deposits made by Seller to the extent transferred to Buyer;

     (g) prepaid expenses paid by Seller to the extent transferred to Buyer; and

     (h) petty cash held  locally for the benefit of the  Business to the extent
transferred to Buyer.

     3.5 Deliveries by Seller. At the Closing,  Seller will deliver, or cause to
be delivered, the following to Buyer:


                                       24

<PAGE>

     (a) The Bill of Sale, duly executed by Seller;

     (b)  Copies of any and all  consents,  waivers  or  approvals  obtained  or
required   to  be   obtained   by  Seller   from   Government   Authorities   or
non-governmental  Persons  with  respect to the  transfer of the Assets,  or the
consummation of the transactions contemplated by this Agreement;

     (c) One or more Special Warranty Deeds conveying title to the Real Property
to Buyer, duly executed and acknowledged by Seller and in recordable form;

     (d) An opinion  from  Seller's  general  counsel,  dated the Closing  Date,
substantially  in the form of  Exhibit D  attached  hereto,  and  opinions  from
Seller's Bond  Counsel,  dated the Closing  Date,  substantially  in the form of
Exhibit E attached hereto;

     (e) The Assignment and Assumption Agreement, duly executed by Seller;

     (f) A FIRPTA Affidavit, duly executed by Seller;

     (g) Copies, certified by the Secretary or Assistant Secretary of Seller, of
corporate  resolutions  authorizing the execution and delivery of this Agreement
and all of the agreements and instruments to be executed and delivered by Seller
in connection  herewith,  and the consummation of the transactions  contemplated
hereby;

     (h) A  certificate  of the  Secretary  or  Assistant  Secretary  of  Seller
identifying  the name and title and bearing the  signatures  of the  officers of
Seller authorized to execute and deliver this Agreement and the other agreements
and instruments contemplated hereby;

     (i)  Certificate  of Good  Standing  with respect to Seller,  issued by the
Secretary of State of the State of Delaware;

     (j) To the extent  available,  originals of all Assigned  Agreements,  Real
Property Leases and Transferable Permits and, if not available, true and correct
copies thereof  (delivery of the foregoing  documents will be deemed made in the
case of any such  documents  then located at any of the offices  included in the
Assets,  but  only to the  extent  that  Seller  delivers  to  Buyer a  schedule
generally  identifying each such office and the general  categories of documents
located in each such office);

     (k) All such other  instruments  of  assignment,  transfer or conveyance as
shall,  in the  reasonable  opinion of Buyer and its  counsel,  be  necessary to
transfer  the  Assets to Buyer,  in  accordance  with this  Agreement  and where
necessary or desirable in recordable form;

     (l) Such other  agreements,  documents,  instruments  and  writings  as are
required to be delivered  by Seller at or prior to the Closing Date  pursuant to
this  Agreement  or  otherwise  reasonably  requested  by  Buyer  in  connection
herewith; and

     (m) A certificate  dated the Closing Date  executed by Seller's  President,
Public Services  Sector,  to the effect that, to such officer's  Knowledge,  the
conditions set forth in Sections 7.1(e) and (f) have been satisfied by Seller.


                                       25

<PAGE>

     3.6 Deliveries by Buyer. At the Closing, Buyer will deliver, or cause to be
delivered, the following:

     (a) The  Purchase  Price,  as  adjusted  pursuant  to Section  3.3, by wire
transfer  of  immediately   available  funds  denominated  in  U.S.  dollars  in
accordance with Seller's  instructions or by such other means as are agreed upon
by Seller and Buyer;

     (b) The Assignment and Assumption Agreement, duly executed by Buyer;

     (c) All such other  instruments of transfer or assumption as shall,  in the
reasonable  opinion  of  Seller  and its  counsel,  be  necessary  for the sale,
conveyance,  assignment  and transfer of the Assets to, or the assumption of the
Assumed Liabilities by, Buyer in accordance with this Agreement;

     (d) Copies,  certified by the Secretary or Assistant Secretary of Buyer, of
resolutions  authorizing the execution and delivery of this Agreement and all of
the  agreements  and  instruments  to be executed and  delivered by the Buyer in
connection  herewith,  and the  consummation  of the  transactions  contemplated
hereby;

     (e) A  certificate  of the  Secretary  or  Assistant  Secretary  of  Buyer,
identifying  the name and title and bearing the  signatures  of the  officers of
Buyer  authorized to execute and deliver this Agreement and the other agreements
and instruments contemplated hereby;

     (f) An opinion  from  Buyer's  general  counsel,  dated the  Closing  Date,
substantially in the form of Exhibit F attached hereto;

     (g) Certified copies of any and all consents, waivers or approvals obtained
or  required  to  be  obtained   by  Buyer  from   Government   Authorities   or
non-governmental  Persons  with  respect  to the  transfer  of the Assets or the
consummation of the transactions contemplated by this Agreement;

     (h) Such other  agreements,  documents,  instruments  and  writings  as are
required to be delivered  by Buyer at or prior to the Closing  Date  pursuant to
this  Agreement  or  otherwise  reasonably  requested  by Seller  in  connection
herewith;

     (i)  Certificate  of Good  Standing  with  respect to Buyer,  issued by the
Secretary of State of Arizona; and

     (j) A  certificate  dated  the  Closing  Date  executed  by  Buyer's  Chief
Financial  Officer  to  the  effect  that,  to  such  officer's  knowledge,  the
conditions  set forth in Sections  7.2(e),  (f) and (g) have been  satisfied  by
Buyer.

     3.7 Work in Progress. The Parties agree to work together before the Closing
Date to effect on the Closing Date an orderly transition with respect to work in
progress.


                                       26

<PAGE>

                                   ARTICLE IV

              REPRESENTATIONS, WARRANTIES AND DISCLAIMERS OF SELLER

     Seller hereby represents and warrants to Buyer as follows:

     4.1   Incorporation;   Qualification.   Seller   is  a   corporation   duly
incorporated,  validly existing and in good standing under the laws of the State
of Delaware and has all requisite  corporate  power and authority to own, lease,
and operate its material  assets and  properties and to carry on its business as
is now being  conducted.  Seller is duly  qualified  to do business as a foreign
corporation and is in good standing under the laws of each jurisdiction in which
its  business,  as now being  conducted,  shall  require it to be so  qualified,
except  where the failure to be so  qualified  would not have a Seller  Material
Adverse Effect.

     4.2 Authority. Seller has full corporate power and authority to execute and
deliver this Agreement and each of the Ancillary Agreements to which Seller is a
signatory and to consummate the transactions contemplated hereby or thereby. The
execution  and delivery by Seller of this  Agreement  and each of the  Ancillary
Agreements to which Seller is a signatory and the  consummation by Seller of the
transactions  contemplated  hereby  and  thereby  have  been  duly  and  validly
authorized by all necessary  corporate action required on the part of Seller and
this Agreement has been duly and validly executed and delivered by Seller.  Each
of this  Agreement and the  Ancillary  Agreements to which Seller is a signatory
constitutes  the legal,  valid and  binding  agreement  of  Seller,  enforceable
against  Seller  in  accordance  with its  terms,  except as may be  limited  by
applicable  bankruptcy,   insolvency,  fraudulent  conveyance,   reorganization,
moratorium  or other  similar  laws  affecting  or  relating to  enforcement  of
creditors'  rights  generally and general  principles of equity  (regardless  of
whether enforcement is considered in a proceeding at law or in equity).

     4.3 Consents and Approvals; No Violation.

     (a) Except as set forth in Schedule 4.3(a), neither the execution, delivery
and performance of this Agreement nor the execution, delivery and performance of
the  Ancillary  Agreements  by Seller  will (i)  conflict  with or result in any
breach of any provision of the Certificate of Incorporation or Bylaws of Seller,
(ii) result in a default (or give rise to any right of termination, cancellation
or acceleration)  under any of the terms,  conditions or provisions of any note,
bond, mortgage,  indenture, material agreement or other instrument or obligation
to which  Seller is a party or by which it, or any of the  Assets  may be bound,
except  for  such   defaults  (or  rights  of   termination,   cancellation   or
acceleration)  as to which  requisite  waivers or consents have been obtained or
that would not,  individually  or in the aggregate,  result in a Seller Material
Adverse  Effect  or an  Asset  Material  Adverse  Effect;  or (iii)  subject  to
obtaining the Seller Required Regulatory Approvals, constitute violations of any
law,  regulation,   order,  judgment  or  decree  applicable  to  Seller,  which
violations,  individually or in the aggregate, would result in a Seller Material
Adverse Effect or an Asset Material Adverse Effect.

     (b) Except as set forth in  Schedule  4.3(b)  (the  filings  and  approvals
referred  to in  Schedule  4.3(b) are  collectively  referred  to as the "Seller
Required  Regulatory  Approvals"),  no consent or approval of,  filing with,  or
notice to,  any  Governmental  Authority  is  necessary  for the  execution  and
delivery  of this  Agreement  and the  Ancillary  Agreements  by  Seller  or the
consummation  by Seller of the  transactions  contemplated  hereby and  thereby,
other  than  those the  failure  to obtain  which  would not  result in a Seller
Material  Adverse  Effect  or an Asset  Material  Adverse  Effect  and would not
otherwise result in a material violation of law by Buyer.


                                       27

<PAGE>

     4.4 Insurance.  Schedule 4.4 lists, as of the date of this  Agreement,  all
material policies of fire,  liability,  workers' compensation and other forms of
insurance (if any) owned or held by, or on behalf of, Seller with respect to the
Assets and the Business. Except as set forth in such Schedule, all such policies
are in full force and effect,  all premiums  with respect  thereto  covering all
periods  up to and  including  the  date  hereof  have  been  paid  (other  than
retroactive  premiums  which  may be  payable  with  respect  to  auto,  general
liability  and  workers'  compensation  insurance  policies),  and no  notice of
cancellation  or  termination  has been received with respect to any such policy
which was not replaced on substantially  similar terms prior to the date of such
cancellation.  Except as described in Schedule 4.4,  within the thirty-six  (36)
months  preceding  the date of this  Agreement,  Seller has not been refused any
insurance  with respect to the Assets or the Business nor has its coverage  been
limited by any insurance  carrier to which it has applied for any such insurance
or with which it has carried insurance during the last twelve (12) months.

     4.5  Real  Property  Leases.  Schedule  4.5  lists,  as of the date of this
Agreement,  all material real property  leases under which Seller is a lessee or
lessor and which  relate to the  Assets,  including  a  separate  listing of all
leases of office space used by Seller in the conduct of the Business  (the "Real
Property  Leases").  Seller  will  deliver to Buyer true,  correct and  complete
copies of each of the Real Property Leases in accordance with Section 6.20.

     4.6  Environmental  Matters.  Seller has heretofore  delivered to Buyer all
environmental  reports and all  environmental  site assessments  relating to the
Assets that have been identified by Seller after diligent inquiry, which reports
have been  identified  in  schedules  delivered to Buyer on or prior to the date
hereof ("Environmental Reports").  Except as disclosed in Schedule 4.6 or in the
Environmental Reports:

     (a) Seller holds, and is in substantial  compliance with, all Environmental
Permits  that are  required  for Seller to conduct the  Business and operate the
Assets, and Seller is otherwise in compliance with applicable Environmental Laws
with  respect to the  Business  and  operation  of the  Assets,  except for such
failures to hold or comply with required Environmental Permits, or such failures
to  be  in  compliance  with  applicable   Environmental  Laws,  as  would  not,
individually or in the aggregate, result in an Asset Material Adverse Effect;

     (b) Seller has not received  (i) any written  request for  information,  or
been notified that it is a potentially  responsible  party,  under CERCLA or any
similar state law with respect to any of the Real Property,  or (ii) any written
notification  from a  Governmental  Authority with respect to pending or ongoing
investigations or enforcement actions related to alleged or potential violations
of any applicable Environmental Law with respect to any of the Real Property;

     (c) Seller has not entered  into or agreed to any  consent  decree or order
relating to the Assets, and is not subject to any outstanding judgment,  decree,
or  judicial  order  relating to  compliance  with any  Environmental  Law or to
Remediation of Regulated  Substances under any Environmental Law relating to the
Assets; and


                                       28

<PAGE>

     (d) To Seller's Knowledge,  no Release of Regulated Substances has occurred
at, from, in, on, or under the Real Property,  and, except as legally permitted,
no Regulated  Substances  are present in, on,  about or migrating  from the Real
Property, in each case that would give rise to an Environmental Claim related to
the Assets for which  Remediation  would  reasonably be required,  except in any
such case to the extent that any such Release or Environmental  Claim would not,
individually or in the aggregate,  result in an Environmental Claim in excess of
$500,000.

     4.7  Labor  Matters.  Schedule  4.7 sets  forth the  collective  bargaining
agreements,  and  amendments  thereto,  to which Seller is a party in connection
with the  Business.  Seller has  previously  delivered to Buyer true and correct
copies of all such collective bargaining agreements and amendments thereto. With
respect  to the  Assets  and the  Business,  except to the  extent  set forth in
Schedule  4.7 and except for such matters as would not,  individually  or in the
aggregate,  result  in an  Asset  Material  Adverse  Effect,  (a)  Seller  is in
compliance  with  all  applicable  laws  respecting  employment  and  employment
practices,  occupational safety and health, plant closing,  mass layoffs,  terms
and  conditions of employment  and wages and hours;  (b) Seller has not received
any written notice of any unfair labor practice complaint against Seller pending
before the National Labor Relations Board; (c) no arbitration proceeding arising
out of or under any collective  bargaining  agreement is pending against Seller;
and (d) Seller  has not  experienced  any work  stoppage  within the  three-year
period  prior to the date hereof and to  Seller's  Knowledge  none is  currently
threatened.

     4.8 Benefit Plans: ERISA.

     (a) Schedule 4.8 lists all material Benefit Plans. True and complete copies
of all such Benefit Plans have been made available to the Buyer.

     (b) No liability  under Title IV or Section 302 of ERISA has been  incurred
by Seller or any ERISA  Affiliate of Seller that has not been satisfied in full,
and no  condition  exists that  presents a material  risk to Seller or any ERISA
Affiliate of Seller of incurring any such  liability,  other than  liability for
premiums due to the Pension Benefit  Guaranty  Corporation  (which premiums have
been paid when due).  Insofar as the  representation  made in this  Section  4.8
applies to  Sections  4064,  4069 or 4204 of Title IV of ERISA,  it is made with
respect to any employee benefit plan, program,  agreement or arrangement subject
to Title IV of ERISA to which Seller or any ERISA  Affiliate of Seller made,  or
was required to make,  contributions  during the five (5)-year  period ending on
the last day of the most recent plan year ended prior to the Closing Date.

     (c) Except as expressly provided in this Agreement, the consummation of the
transactions  contemplated  by this  Agreement  will  not,  either  alone  or in
combination  with another event,  (i) entitle any current or former  employee or
officer  of  Seller  or  any  ERISA   Affiliate  of  Seller  to  severance  pay,
unemployment  compensation or any other payment,  or (ii) accelerate the time of
payment or vesting, or increase the amount of compensation due any such employee
or officer.


                                       29

<PAGE>

     (d) There has been no material  failure of any of the Benefit Plans that is
a group health plan (as defined in Section  5000(b)(1)  of the Code) to meet the
requirements  of  Section  4980B(f)  of the Code  with  respect  to a  qualified
beneficiary (as defined in Section 4980B(g) of the Code). Neither the Seller nor
any ERISA Affiliate of Seller has  contributed to a  nonconforming  group health
plan (as  defined in  Section  5000(c)  of the Code) and no ERISA  Affiliate  of
Seller  has  incurred a tax under  Section  5000(e) of the Code that is or could
become a liability of Buyer.

     (e) There are no pending, or to Seller's Knowledge, threatened claims by or
on behalf of any Benefit Plans, by any employee or beneficiary covered under any
such Benefit  Plans,  or otherwise  involving any such Benefit Plans (other than
routine claims for benefits).

     4.9 Real Property. Schedule 4.9 contains a description of the Real Property
included  in the  Assets.  True  and  correct  copies  of any  current  surveys,
abstracts,  title  commitments  and title  opinions  identified  by Seller after
diligent  inquiry  to be in  Seller's  possession  and  all  policies  of  title
insurance  currently in force and identified by Seller after diligent inquiry to
be in the possession of Seller with respect to the Real Property have heretofore
been made available to Buyer.

     4.10  Condemnation.  Except as set forth in Schedule  4.10,  Seller has not
received any written notices of and otherwise has no Knowledge of any pending or
threatened  proceedings or actions by any  Governmental  Authority to condemn or
take by power of eminent domain all or any part of the Assets.

     4.11 Assigned Agreements.

     (a)  Schedule  4.11(a)  lists  each  Assigned  Agreement  (other  than Real
Property   Leases,   line   extension   agreements   and  similar   construction
arrangements,   railroad  crossing  agreements  and  similar  arrangements,  and
Easements  held by Seller) which is material to the  Business,  other than those
(i) that are listed or  described  on another  Schedule,  (ii) that  provide for
annual  payments by Seller after the date hereof of less than  $100,000 or (iii)
that, when aggregated with all other Assigned  Agreements not listed on Schedule
4.5 or  4.11(a),  provide for  payments by Seller  after the date hereof of less
than $500,000 in the aggregate.  Schedule 4.11(a) also lists each agreement that
is material to the Assets or the Business that may expire or that Seller expects
to  terminate  prior to the  Closing  Date other than any  agreement  that is an
Excluded Asset.

     (b) Except as disclosed in Schedule 4.11(b), each Assigned Agreement listed
on Schedule 4.5 or 4.11(a)  constitutes a legal, valid and binding obligation of
Seller and, to Seller's Knowledge, constitutes a valid and binding obligation of
the other parties  thereto,  and may be transferred to the Buyer as contemplated
by this  Agreement  without  the consent of the other  parties  thereto and will
continue in full force and effect thereafter,  unless in such case the impact of
such lack of  legality,  validity or binding  nature,  or inability to transfer,
would not, individually or in the aggregate, result in an Asset Material Adverse
Effect.

     (c)  Except  as set  forth in  Schedule  4.11(c),  there is not,  under the
Assigned  Agreements  listed on Schedule  4.5 or  4.11(a),  any default or event
which,  with notice or lapse of time or both,  would constitute a default on the
part of the Seller or to Seller's  Knowledge,  any of the other parties thereto,
except such events of default and other events which would not,  individually or
in the aggregate, result in an Asset Material Adverse Effect.


                                       30

<PAGE>

     4.12 Legal  Proceedings.  Except as set forth in Schedule 4.12, there is no
action or  proceeding  pending or, to  Seller's  Knowledge,  threatened  against
Seller before any court,  arbitrator  or  Governmental  Authority,  which would,
individually  or in the aggregate,  reasonably be expected to result in a Seller
Material Adverse Effect or an Asset Material Adverse Effect. Except as set forth
in  Schedule  4.12 Seller is not  subject to any  outstanding  Order that would,
individually or in the aggregate,  result in a Seller Material Adverse Effect or
an Asset Material Adverse Effect.

     4.13 Permits.  Seller has all Permits  (other than  Environmental  Permits,
which are  addressed  in Section  4.6 hereof)  necessary  to own and operate the
Assets except where the failure to have such Permits would not,  individually or
in the aggregate,  create a Seller Material  Adverse Effect or an Asset Material
Adverse  Effect.  Except as disclosed on Schedule 4.13,  Seller has not received
any written  notification  that it is in violation of any such  Permits,  except
notifications of violations  which would not,  individually or in the aggregate,
result in a Seller Material  Adverse Effect or an Asset Material Adverse Effect.
Seller is in compliance with all Permits except where such non-compliance  would
not,  individually  or in the  aggregate,  result in a Seller  Material  Adverse
Effect or an Asset Material Adverse Effect.

     4.14 Taxes.

     (a)  Seller  has  filed or  caused  to be filed  all Tax  Returns  that are
required to be filed by it with respect to any Tax  relating to the Assets,  and
has paid or caused  to be paid all  Taxes  that  have  become  due as  indicated
thereon,  except where such Tax is being  contested in good faith by appropriate
proceedings, or where the failure to so file or pay would not result in a Seller
Material Adverse Effect or an Asset Material Adverse Effect. Seller has complied
in all  material  respects  with all  applicable  laws,  rules  and  regulations
relating to withholding Taxes relating to Transferred Employees. All Tax Returns
relating to the Assets are true,  correct and complete in all material respects.
There are no liens for Taxes upon the Assets  except for liens for Taxes not yet
due and Permitted Encumbrances.

     (b)  Except as set forth in  Schedule  4.14,  no  notice of  deficiency  or
assessment  has  been  received  from  any  taxing  authority  with  respect  to
liabilities  for Taxes of Seller in respect of the  Assets,  which have not been
fully paid or finally settled, and any such deficiency shown in Schedule 4.14 is
being contested in good faith through appropriate proceedings.

     (c)  Except  as set  forth  in  Schedule  4.14,  there  are no  outstanding
agreements or waivers  extending the applicable  statutory periods of limitation
for Taxes  associated  with the Assets that will be binding upon Buyer after the
Closing.

     (d) Except as set forth on  Schedule  4.14,  none of the Assets is property
that is required to be treated as being  owned by any other  person  pursuant to
the so-called safe harbor lease provisions of former Section 168(f) of the Code,
and none of the  Assets is  "tax-exempt  use"  property  within  the  meaning of
Section 168(h) of the Code.


                                       31

<PAGE>

     (e) Schedule 4.14 sets forth the taxing  jurisdictions in which Seller owns
assets or conducts business that require a notification to a taxing authority of
the  transactions  contemplated by this  Agreement,  if the failure to make such
notification,  or obtain Tax clearance  certificates  in  connection  therewith,
would  either  require  Buyer to withhold  any portion of the  consideration  or
subject Buyer to any liability for any Taxes of Seller.

     4.15  Intellectual  Property.  The Citizens Marks and the software licenses
and related contracts  described in Schedules 2.2 and 4.11(a)  constitute all of
the material  Intellectual  Property necessary for the operation and maintenance
of the Assets or the conduct of the  Business,  each of which Seller  either has
all right,  title and interest in or valid and binding  rights under contract to
use in connection  with the operation of the Assets and the Business.  Except as
disclosed  in Schedule  4.15,  (a) Seller is not, nor has it received any notice
that it is, in  default  (or with the giving of notice or lapse of time or both,
would be in default),  under any contract to use such Intellectual Property, and
(b) to Seller's Knowledge,  such Intellectual Property is not being infringed by
any other Person.  Except as disclosed in Schedule 4.15, Seller has not received
notice that it is infringing  any  Intellectual  Property of any other Person in
connection with the Assets or the Business, and Seller, to its Knowledge, is not
infringing any Intellectual Property of any other Person which,  individually or
in the aggregate, would have an Asset Material Adverse Effect.

     4.16  Capital  Expenditures.  Seller has  heretofore  delivered  to Buyer a
schedule of all Capital Expenditures that, as of the date of this Agreement, are
planned by Seller from the date hereof  through  December 31, 2003 (the "Capital
Expenditures Schedule").

     4.17  Compliance  With Laws.  Seller is in compliance  with all  applicable
laws,  rules and  regulations  with  respect to its  ownership of the Assets and
operation of the Business  except  where the failure to be in  compliance  would
not,  individually  or in the  aggregate,  result in a Seller  Material  Adverse
Effect or an Asset Material Adverse Effect.

     4.18 Title.  Seller has, and will have as of the Closing Date,  good, valid
and indefeasible title to the Real Property and the other Assets purported to be
owned  by  Seller,   free  and  clear  of  all  Encumbrances   except  Permitted
Encumbrances.

     4.19 DISCLAIMERS.  EXCEPT FOR THE  REPRESENTATIONS AND WARRANTIES SET FORTH
IN THIS  ARTICLE IV, THE ASSETS ARE  TRANSFERRED  "AS IS,  WHERE IS", AND SELLER
EXPRESSLY  DISCLAIMS  ANY  REPRESENTATIONS  OR WARRANTIES OF ANY KIND OR NATURE,
EXPRESS OR IMPLIED,  AS TO  LIABILITIES,  OPERATIONS  OF THE ASSETS,  CONDITION,
VALUE OR QUALITY OF THE ASSETS OR THE PROSPECTS (FINANCIAL AND OTHERWISE), RISKS
AND  OTHER  INCIDENTS  OF THE  ASSETS  AND  SELLER  SPECIFICALLY  DISCLAIMS  ANY
REPRESENTATION OR WARRANTY OF MERCHANTABILITY, USAGE, SUITABILITY OR FITNESS FOR
ANY PARTICULAR PURPOSE WITH RESPECT TO THE ASSETS, OR ANY PART THEREOF, OR AS TO
THE WORKMANSHIP  THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN,  WHETHER LATENT
OR PATENT, OR COMPLIANCE WITH ENVIRONMENTAL  REQUIREMENTS,  OR THE APPLICABILITY
OF ANY GOVERNMENTAL REQUIREMENTS, INCLUDING BUT NOT LIMITED TO ANY ENVIRONMENTAL
LAWS, OR WHETHER SELLER POSSESSES  SUFFICIENT REAL PROPERTY OR PERSONAL PROPERTY
TO OPERATE THE ASSETS.  EXCEPT AS OTHERWISE  EXPRESSLY  PROVIDED HEREIN,  SELLER
FURTHER  SPECIFICALLY  DISCLAIMS ANY  REPRESENTATION  OR WARRANTY  REGARDING THE
ABSENCE OF HAZARDOUS  SUBSTANCES  OR LIABILITY  OR POTENTIAL  LIABILITY  ARISING
UNDER ENVIRONMENTAL LAWS WITH RESPECT TO THE ASSETS.


                                       32

<PAGE>

     4.20 Financial  Statements.  Schedule 4.20 sets forth the unaudited balance
sheet for the  Business as of December  31, 2001 (the  "Balance  Sheet") and the
unaudited  statement of income of the Business for the twelve-month period ended
December 31, 2001  (collectively,  the  "Financial  Statements").  Except as set
forth in Schedule 4.20, the Financial Statements have been prepared on a pre-tax
basis in  accordance,  in all  material  respects,  with GAAP applied on a basis
consistent  with prior periods except for the omission of full footnotes to such
Financial  Statements.  Except as set forth in Schedule  4.20, the Balance Sheet
presents fairly in all material respects the financial condition of the Business
as of its date and the income  statement  included in the  Financial  Statements
presents  fairly in all  material  respects  the  results of  operations  of the
Business for the periods covered  thereby.  The books and records of Seller from
which the  Financial  Statements  were derived were complete and accurate in all
material respects at the time of such preparation.

     4.21 SEC Filings; Financial Statements.

     (a)  Seller  has  filed,  or caused to be filed,  all  forms,  reports  and
documents required to be filed by Seller with the SEC since January 1, 2001, and
has  heretofore  delivered or made available to Buyer in the form filed with the
SEC, together with any amendments  thereto,  its (i) Annual Reports on Form 10-K
for the fiscal year ended December 31, 2000 and 2001, (ii) Quarterly  Reports on
Form 10-Q for the fiscal quarter ended March 31 and June 30, 2002, and (iii) all
other  reports or  registration  statements  filed by Seller  with the SEC since
January 1, 2001 (collectively, the "Seller SEC Reports"). The Seller SEC Reports
were  prepared   substantially  in  accordance  with  the  requirements  of  the
Securities Act of 1933, as amended,  or the Securities  Exchange Act of 1934, as
amended,  as the case may be, and the rules and  regulations  promulgated  under
each of such  respective  acts,  and did not at the time they were filed contain
any  untrue  statement  of a  material  fact or omit to  state a  material  fact
required  to be stated  therein  or  necessary  in order to make the  statements
therein,  in the light of the  circumstances  under  which they were  made,  not
misleading.

     (b) The financial  statements,  including all related notes and  schedules,
contained  in the Seller SEC  Reports (or  incorporated  by  reference  therein)
fairly  present  the  consolidated  financial  position  of  Seller  as  at  the
respective  dates thereof and the  consolidated  results of operations  and cash
flows of Seller for the periods  indicated in accordance  with GAAP applied on a
consistent  basis  throughout  the  periods  involved  (except  for  changes  in
accounting principles disclosed in the notes thereto) and subject in the case of
interim financial statements to normal year-end adjustments.

     4.22 Sufficiency of Assets. The Assets and the Excluded Assets are the only
assets  owned,  used,  or held for use by Seller in, or in  connection  with, or
otherwise  necessary  for, the conduct of the  Business as presently  conducted,
except for such  assets the  failure to own,  use, or hold for use, as would not
have an Asset Material Adverse Effect or a Material Adverse Effect for Buyer.


                                       33

<PAGE>

                                   ARTICLE V

                     REPRESENTATIONS AND WARRANTIES OF BUYER

     Buyer represents and warrants to Seller as follows:

     5.1 Organization.  Buyer is an Arizona corporation, duly organized, validly
existing and in good  standing  under the laws of the state of its  organization
and has all requisite  corporate  power and authority to own,  lease and operate
its  properties  and to carry on its  business  as is now being  conducted. 

     5.2 Authority.  Buyer has full corporate power and authority to execute and
deliver this Agreement and each of the Ancillary  Agreements to which Buyer is a
signatory and to consummate the  transactions  contemplated  hereby and thereby.
The  execution  and  delivery  by  Buyer  of this  Agreement  and the  Ancillary
Agreements  to which Buyer is a signatory and the  consummation  by Buyer of the
transactions  contemplated  hereby  and  thereby  have  been  duly  and  validly
authorized by all necessary  corporate  action required on the part of Buyer and
this Agreement and the Ancillary  Agreements have been duly and validly executed
and delivered by Buyer.  Each of this Agreement and the Ancillary  Agreements to
which Buyer is a signatory, constitute the legal, valid and binding agreement of
Buyer,  enforceable against Buyer in accordance with its terms, except as may be
limited  by  applicable  bankruptcy,  insolvency,   reorganization,   fraudulent
conveyance,   moratorium  or  other  similar  laws   affecting  or  relating  to
enforcement  of creditors'  rights  generally  and general  principles of equity
(regardless  of whether  enforcement  is considered in a proceeding at law or in
equity).

     5.3 Consents and Approvals; No Violation.

     (a) Except as set forth in Schedule 5.3(a), neither the execution, delivery
and  performance  of this  Agreement  by Buyer nor the  execution,  delivery and
performance  of the Ancillary  Agreements by Buyer or any of its  Affiliates nor
the  consummation by Buyer of the transactions  contemplated  hereby and thereby
will (i) conflict  with or result in any breach of any provision of the Articles
of Incorporation or Bylaws (or other similar  governing  documents) of Buyer, or
any of its Affiliates, or (ii) result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage,  indenture,  material agreement or other
instrument or  obligation to which Buyer or any of its  Affiliates is a party or
by which any of their respective  assets may be bound,  except for such defaults
(or rights of termination,  cancellation or  acceleration) as to which requisite
waivers or consents  have been obtained or which would not,  individually  or in
the  aggregate,  have a Buyer  Material  Adverse  Effect  or  (iii)  subject  to
obtaining the Buyer Required Regulatory Approvals,  constitute violations of any
law,  regulation,   order,   judgment  or  decree  applicable  to  Buyer,  which
violations,  individually or in the aggregate,  would result in a Buyer Material
Adverse Effect.


                                       34

<PAGE>

     (b) Except as set forth in  Schedule  5.3(b)  (the  filings  and  approvals
referred to in such Schedule are collectively referred to as the "Buyer Required
Regulatory  Approvals"),  no consent or approval of,  filing with, or notice to,
any  Governmental  Authority is necessary for Buyer's  execution and delivery of
this Agreement and the Ancillary  Agreements or the consummation by Buyer of the
transactions   contemplated  hereby  and  thereby,  other  than  such  consents,
approvals,  filings or notices,  which,  if not  obtained or made,  will not (i)
prevent  Buyer from  performing  its  obligations  under this  Agreement and the
Ancillary Agreements or (ii) result in a Buyer Material Adverse Effect.

     5.4  Availability  of Funds.  Buyer  acknowledges  and  agrees  that on the
Closing Date, it will have sufficient funds to pay the Purchase Price under this
Agreement and the Arizona Electric Purchase Agreement (including sufficient cash
to  fund  the  equity  portions  thereof)  and  to  timely  perform  all  of its
obligations under this Agreement, the Ancillary Agreements, and Arizona Electric
Purchase Agreement.  Tucson Electric Power Company has the ability to contribute
cash as equity to a  wholly-owned  subsidiary  which  constitutes a "Utility" or
"Public  Utility"  subject to the receipt of required  approvals under Title 14,
Chapter 2, Article 8 (Public Utility Holding Companies and Affiliated Interests)
of the Arizona  Administrative  Code. As of September 30, 2002,  Tucson Electric
Power Company held cash in the amount of approximately $65,000,000.

     5.5 SEC Filings; Financial Statements.

     (a)  UniSource  has filed,  or caused to be filed,  all forms,  reports and
documents  required to be filed by UniSource with the SEC since January 1, 2001,
and has heretofore  delivered or made available to Seller in the form filed with
the SEC,  together with any amendments  thereto,  its (i) Annual Reports on Form
10-K for the fiscal  year  ended  December  31,  2000 and 2001,  (ii)  Quarterly
Reports on Form 10-Q for the fiscal  quarter  ended March 31 and June 30,  2002,
and (iii) all other reports or registration  statements  filed by UniSource with
the SEC since January 1, 2001 (collectively,  the "UniSource SEC Reports").  The
UniSource  SEC  Reports  were  prepared  substantially  in  accordance  with the
requirements  of the  Securities  Act of 1933,  as  amended,  or the  Securities
Exchange  Act of  1934,  as  amended,  as the  case may be,  and the  rules  and
regulations  promulgated  under each of such respective acts, and did not at the
time they were filed contain any untrue  statement of a material fact or omit to
state a material  fact  required to be stated  therein or  necessary in order to
make the statements  therein, in the light of the circumstances under which they
were made, not misleading.

     (b) The financial  statements,  including all related notes and  schedules,
contained in the UniSource SEC Reports (or  incorporated  by reference  therein)
fairly  present  the  consolidated  financial  position of  UniSource  as at the
respective  dates thereof and the  consolidated  results of operations  and cash
flows of UniSource for the periods  indicated in accordance with GAAP applied on
a  consistent  basis  throughout  the  periods  involved  (except for changes in
accounting principles disclosed in the notes thereto) and subject in the case of
interim financial statements to normal year-end adjustments.

     5.6 Legal  Proceedings.  Except as set forth in Schedule 5.6, (a) there are
no actions or proceedings  pending or, to Buyer's knowledge  threatened  against
Buyer or any of its  Affiliates  before any court or arbitrator or  Governmental
Authority,  which,  individually  or in the  aggregate,  would result in a Buyer
Material  Adverse  Effect,  and (b) neither  Buyer nor any of its  Affiliates is
subject  to  any  outstanding  Orders,  which  would,  individually  or  in  the
aggregate, result in a Buyer Material Adverse Effect.


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<PAGE>

     5.7 No Knowledge of Seller's  Breach.  Buyer has no knowledge of any breach
by Seller of any  representation or warranty of Seller or of any other condition
or  circumstance  that would  excuse  Buyer from its timely  performance  of its
obligations   hereunder.   Buyer  shall  notify  promptly  Seller  if  any  such
information comes to Buyer's attention prior to the Closing.

     5.8  Qualified  Buyer.  Buyer  is  qualified  to  obtain  any  Permits  and
Environmental  Permits  necessary  for Buyer to own and operate the Assets as of
the Closing.

     5.9 Inspections. Buyer is knowledgeable about the Business as engaged in by
Seller  and of the  usual  and  customary  practices  of  companies  engaged  in
businesses  similar  to the  Business  and has had  access  to the  Assets,  the
officers  and  employees of Seller,  and the books,  records and files of Seller
relating to the Business and the Assets.  Buyer  acknowledges and agrees that it
has, prior to its execution of this  Agreement,  (i) reviewed the  Environmental
Reports  and (ii) had an  opportunity  to  conduct  Inspections  of the  Assets,
including  the Real  Property.  Subject to Sections  6.2,  6.3 and  7.1(g),  and
without waiving  Seller's  representations  and warranties in Section 4.6, Buyer
acknowledges  that it is satisfied with such review and  Inspections to date and
(ii) Buyer  acknowledges  and agrees  that past,  present,  and future  physical
characteristics  and Environmental  Conditions may not have been revealed by its
Inspections and the  investigations of the Assets contained in the Environmental
Reports.  In making its decision to execute this Agreement,  and to purchase the
Assets,  Buyer has relied on and will  continue  to rely upon the results of its
Inspections,   the  Environmental  Reports  and  Seller's   representations  and
warranties   in  Section   4.6.   Buyer   acknowledges   and  agrees   that  the
representations  and  warranties  set  forth  in  Article  IV of this  Agreement
constitute  the sole and exclusive  representations  and warranties of Seller to
Buyer  in  connection  with  the  transactions  contemplated  hereby  and by the
Ancillary Agreements, and there are no representations,  warranties,  covenants,
understandings or agreements,  oral or written,  in relation thereto between the
Parties  other  than those  incorporated  herein,  including  Section  6.3,  and
therein.  Except for the representations  and warranties  expressly set forth in
Article IV of this Agreement, Buyer disclaims reliance on any representations or
warranties,  either  express  or  implied,  by or on  behalf  of  Seller  or its
Affiliates or Representatives. Without limiting the generality of the foregoing,
Buyer acknowledges and agrees that, except as provided in Section 4.6, there are
no  representations  or warranties  of Seller with respect to the  Environmental
Condition of the Assets,  compliance with  Environmental  Laws and Environmental
Permits of the  presence  or  Releases of  hazardous  material in the  fixtures,
soils,  groundwater,  surface water or air on, under or about or emanating  from
any of the Assets.

     5.10 WARN Act.  Buyer  does not  intend to engage in a "Plant  Closing"  or
"Mass Layoff" as such terms are defined in the WARN Act within sixty days of the
Closing Date.


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ARTICLE VI

                            COVENANTS OF THE PARTIES

     6.1 Conduct of Business and Operation of Assets.

     (a) Except as described in Schedule  6.1(a),  as required by an  applicable
law  or by  any  Governmental  Authority,  as  expressly  contemplated  by  this
Agreement or to the extent Buyer otherwise consents in writing (such consent not
to be unreasonably withheld),  during the period from the date of this Agreement
to the Closing Date,  Seller shall (i) operate the Assets in the ordinary course
of business consistent with its past practices and Good Utility Practices,  (ii)
use all  Commercially  Reasonable  Efforts to preserve  intact the Assets in all
material respects,  and endeavor to preserve the goodwill and relationships with
customers, suppliers and others having business dealings with it, (iii) maintain
insurance  described  in Section  4.4 (or  replacements  thereto  providing  for
substantially  the same  coverage),  and (iv)  comply with all  applicable  laws
relating to the Assets,  including without  limitation,  all Environmental Laws,
except  where the  failure to so comply  would not  result in an Asset  Material
Adverse  Effect.  Seller  agrees to incur Capital  Expenditures  in the ordinary
course in respect of (A) growth of the customer base (see, e.g., items under the
heading  "Growth" in the Capital  Expenditures  Schedule) and (B) maintenance of
the Assets and  replacement  activities  (see,  e.g.,  items  under the  heading
"Replacement" in the Capital Expenditures Schedule).  Buyer agrees that Seller's
deferral of Capital  Expenditures in respect of network growth (see, e.g., items
under the heading  "Infrastructure" in the Capital Expenditures  Schedule) shall
not be deemed to be inconsistent with or to violate Good Utility Practices.

     (b) Without  limiting  the  generality  of Section  6.1(a)  and,  except as
contemplated  in this  Agreement  or as  described  in  Schedule  6.1(a),  or as
required under  applicable law or by any  Governmental  Authority,  prior to the
Closing Date, without the prior written consent of Buyer (such consent not to be
unreasonably withheld), Seller shall not:

          (i) Make any material change in the levels of Inventories  customarily
     maintained by Seller with respect to the Business, other than changes which
     are consistent with Good Utility Practices;

          (ii) Sell, lease (as lessor),  encumber, pledge, transfer or otherwise
     dispose of, any Asset (except for Inventories used, consumed or replaced in
     the ordinary course of business consistent with past practices of Seller or
     with Good  Utility  Practices)  other than to encumber  any such Asset with
     Permitted Encumbrances;

          (iii) Modify, amend or voluntarily terminate,  prior to the respective
     expiration  date of any of the Assigned  Agreements or Real Property Leases
     or any of the Permits or Environmental  Permits with respect to such Assets
     in any material respect, other than (A) in the ordinary course of business,
     to the extent  consistent with the past practices of Seller or Good Utility
     Practices,  (B) with cause, to the extent consistent with past practices of
     Seller or Good Utility  Practices,  or (C) as may be required in connection
     with  transferring  Seller's  rights  or  obligations  thereunder  to Buyer
     pursuant to this Agreement;


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<PAGE>

          (iv) Except as otherwise  provided  herein,  enter into any commitment
     for the purchase, sale, or transportation of fuel for the Business having a
     term  greater than six months and not  terminable  on or before the Closing
     Date either (A)  automatically,  or (B) by option of Seller (or,  after the
     Closing,  by Buyer) in its sole discretion,  if the aggregate payment under
     such commitment for fuel and all other outstanding commitments for fuel for
     the Business not previously approved by Buyer would exceed $1,000,000;

          (v) Except as  otherwise  provided  herein,  enter into any  contract,
     agreement,  commitment or  arrangement  for the Business that  individually
     exceeds  $250,000  or in the  aggregate  exceeds  $1,000,000  unless  it is
     terminable by Seller (or, after the Closing Date, by Buyer) without penalty
     or premium upon no more than sixty (60) days notice;

          (vi) Exc