Fitch Ratings Downgrades Citizens Communications to 'BB'.

CHICAGO -- Fitch Ratings has downgraded and removed from Rating Watch Negative Citizens Communications Company's (Citizens) senior unsecured debt to 'BB' from 'BBB' and the rating assigned to Citizens Utilities Trust 5% company obligated mandatorily redeemable convertible preferred securities due 2036 (EPPICs) to 'BB-'. In addition, Fitch has withdrawn the 'F2' rating assigned to Citizens' commercial paper (CP) as the company has no CP outstanding, nor has plans to issue CP in the future.

The rating assigned to Electric Lightwave's $6 million of outstanding 6.05% guaranteed notes due 2004 has been downgraded to 'BB' and withdrawn, given its maturity in May 2004. The Rating Outlook is Stable. Fitch had placed Citizens on Rating Watch Negative on Dec. 11, 2003 following the company's announcement to consider strategic alternatives.

The rating action follows Citizens' July 11, 2004, announcement that it will pay a $2 per common share special dividend to shareholders in September 2004, and institute a quarterly dividend of $0.25 per common share beginning in September 2004. The new dividend program also concludes Citizens' review of financial and strategic alternatives.

Fitch believes the dividend program is a material negative change for the company from its previous strategy whereby it used free cash flow for debt reduction. Instead, Citizens intends to enhance shareholder value through the delivery of significant levels of cash flow to shareholders. Assuming the conversion of all Citizens' equity units and EPPICs, the special dividend would amount to approximately $675 million, and the ongoing cash flow requirements of the quarterly dividend would approximate $340 million annually. Debt reductions are likely to be significantly lower in the future that in recent years, given that the ongoing dividend will approximate 73% of 2004 free cash flow (as estimated by the company). Moreover, the increase in dividends comes at a time when Fitch believes Citizens' cash flows will be pressured by greater competition, and potentially significant changes to access charges and universal service funding that could be implemented over the next couple of years.

Fitch estimates Citizens' total debt/EBITDA will be approximately 4.2 times (x) at the end of 2004 and will remain above 4.0x in 2005. In Fitch's view, leverage is not expected to decline significantly in the next several years, given the expected flat performance of its wireline-only telecommunications business, and the expected high dividend payout ratio. Liquidity remains strong, with $648 million in cash at March 31, 2004, and an undrawn, $805 million, five-year credit facility that matures in October 2006.

It should be noted that if Citizens is successful in remarketing its equity units in August 2004, this will result in a cash inflow of $460 million, but also a debt component with no equity credit. Therefore leverage will increase materially following the conversion since the company has no offsetting maturities to fund until 2006.