UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q

(Mark One)

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

                For the quarterly period ended September 30, 1997

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 1-5139

                           CENTRAL MAINE POWER COMPANY
             (Exact name of registrant as specified in its charter)

                        Incorporated in Maine 01-0042740
                (State or other jurisdiction of (I.R.S. Employer
               incorporation or organization) (Identification No.)

                      83 Edison Drive, Augusta, Maine 04336
               (Address of principal executive offices) (Zip Code)

                                  207-623-3521
               (Registrant's telephone number including area code)


                (Former name,  former address and former fiscal year, if changed
since last report.)

      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 the
filing requirements for at least the past 90 days.

                                    Yes X No
      Indicate the number of shares  outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.

          Class                                            Shares Outstanding
                                                         as of October 31, 1997
Common Stock, $5 Par Value                                     32,442,752


<PAGE>


                           Central Maine Power Company

                                      INDEX

                                                                        Page No.

Part I. Financial Information

Consolidated Statement of Earnings for the Three Months
Ended September 30, 1997 and 1996                                              1

Consolidated Statement of Earnings for the Nine Months
Ended September 30, 1997, and 1996                                             2

Consolidated Balance Sheet - September 30, 1997 and December 31, 1996:
     Assets                                                                    3
     Stockholders' Investment and Liabilities                                  4

Consolidated Statement of Cash Flows for the Nine Months
Ended September 30, 1997 and 1996                                              5

Notes to Consolidated Financial Statements                                     6

Management's Discussion and Analysis of Financial
Condition and Results of Operations                                           16

Part II. Other Information                                                    26



<PAGE>



                         PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
                           Central Maine Power Company
                       CONSOLIDATED STATEMENT OF EARNINGS
                                   (Unaudited)
                 (Dollars in Thousands Except Per Share Amounts)
<TABLE>
<S>                                                       <C>             <C>
                                                              For the Three Months
                                                               Ended September 30,
                                                             1997               1996
       
ELECTRIC OPERATING REVENUES                               $    226,134    $    228,987
                                                          ------------    ------------

OPERATING EXPENSES
    Fuel Used for Company Generation                            10,105           5,177
    Purchased Power
      Energy                                                   100,656         101,892
      Capacity                                                  29,300          28,471
    Other Operation                                             51,634          49,073
    Maintenance                                                  8,721           9,760
    Depreciation and Amortization                               13,536          13,287
    Federal and State Income Taxes                              (1,382)          1,790
    Taxes Other Than Income Taxes                                7,210           6,910
                                                          ------------    ------------
         Total Operating Expenses                              219,780         216,360
                                                          ------------    ------------
EQUITY IN EARNINGS OF ASSOCIATED COMPANIES                       1,040           2,040
                                                          ------------    ------------
OPERATING INCOME                                                 7,394          14,667
                                                          ------------    ------------
OTHER INCOME (EXPENSE)
    Allowance for Equity Funds Used During Construction            309             232
    Other, Net                                                     252           1,218
    Income Taxes Applicable to Other Income (Expense)             (183)           (446)
                                                          ------------    ------------
         Total Other Income (Expense)                              378           1,004
                                                          ------------    ------------
INCOME BEFORE INTEREST CHARGES                                   7,772          15,671
                                                          ------------    ------------
INTEREST CHARGES
Long-Term Debt                                                  10,930          11,530
Other Interest                                                   2,892             926
Allowance for Borrowed Funds Used During Construction             (205)           (177)
                                                          ------------    ------------
Total Interest Charges                                          13,617          12,279
                                                          ------------    ------------
NET INCOME (LOSS)                                               (5,845)          3,392
DIVIDENDS ON PREFERRED STOCK                                     1,897           2,207
                                                          ------------    ------------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK                $     (7,742)   $      1,185
                                                          ============    ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
                                                            32,442,752      32,442,752

EARNINGS (LOSS) PER SHARE OF COMMON STOCK                 $      (0.24)   $       0.04

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK              $      0.225    $      0.225

The accompanying notes are an integral part of these financial statements.
</TABLE>


<PAGE>

<TABLE>
<S>                                                         <C>             <C>         

                           Central Maine Power Company
                       CONSOLIDATED STATEMENT OF EARNINGS
                                   (Unaudited)
                 (Dollars in Thousands Except Per Share Amounts)
                                                                For the Nine Months
                                                                Ended September 30,
                                                              1997               1996
ELECTRIC OPERATING REVENUES                                 $    704,575    $    719,484
                                                            ------------    ------------
OPERATING EXPENSES
    Fuel Used for Company Generation                              22,631          12,657
    Purchased Power
      Energy                                                     319,430         314,873
      Capacity                                                    89,244          77,524
    Other Operation                                              144,901         131,767
    Maintenance                                                   23,344          25,282
    Depreciation and Amortization                                 40,530          41,306
    Federal and State Income Taxes                                 4,495          25,726
    Taxes Other Than Income Taxes                                 21,296          20,725
                                                            ------------    ------------
         Total Operating Expenses                                665,871         649,860
                                                            ------------    ------------
EQUITY IN EARNINGS OF ASSOCIATED COMPANIES                         5,084           5,139
                                                            ------------    ------------
OPERATING INCOME                                                  43,788          74,763
                                                            ------------    ------------
OTHER INCOME (EXPENSE)
    Allowance for Equity Funds Used During Construction              811             616
    Other, Net                                                     1,696           4,558
    Income Taxes Applicable to Other Income (Expense)               (754)         (1,651)
                                                            ------------    ------------
         Total Other Income (Expense)                              1,753           3,523
                                                            ------------    ------------
INCOME BEFORE INTEREST CHARGES                                    45,541          78,286
                                                            ------------    ------------
INTEREST CHARGES
    Long-Term Debt                                                33,272          35,544
    Other Interest                                                 5,193           2,874
    Allowance for Borrowed Funds Used During Construction           (567)           (477)
                                                            ------------    ------------
         Total Interest Charges                                   37,898          37,941
                                                            ------------    ------------
NET INCOME                                                         7,643          40,345
DIVIDENDS ON PREFERRED STOCK                                       6,312           7,244
                                                            ------------    ------------
EARNINGS APPLICABLE TO COMMON STOCK                         $      1,331    $     33,101
                                                            ============    ============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
                                                              32,442,752      32,442,752

EARNINGS PER SHARE OF COMMON STOCK                          $       0.04    $       1.02

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK                $      0.675    $      0.675
</TABLE>



The accompanying notes are an integral part of these financial statements.


<PAGE>
<TABLE>
<S>                                                         <C>             <C>         


                           Central Maine Power Company
                           CONSOLIDATED BALANCE SHEET
                             (Dollars in Thousands)
                                                                                      Sept. 30,          Dec. 31,
                                                                                        1997               1996
                                                                                     (Unaudited)
                                     ASSETS
ELECTRIC PROPERTY, at Original Cost                                                   $1,658,496         $1,644,434
     Less:   Accumulated Depreciation                                                    626,152            598,415
                                                                                     -----------        -----------
             Electric Property in Service                                              1,032,344          1,046,019
     Construction Work in Progress                                                        24,846             20,007
     Net Nuclear Fuel                                                                      1,157              1,157
                                                                                   -------------      -------------
             Net Electric Property and Nuclear Fuel                                    1,058,347          1,067,183
                                                                                       ---------          ---------

INVESTMENTS IN ASSOCIATED COMPANIES, at Equity                                            76,148             67,809
                                                                                    ------------       ------------
             Net Electric Property, Net Nuclear Fuel and Investments in
             Associated Companies                                                      1,134,495          1,134,992
                                                                                       ---------          ---------

CURRENT ASSETS
     Cash and Temporary Cash Investments                                                  12,693              8,307
     Accounts Receivable, Less Allowance for Uncollectible Accounts of $2,450
     in 1997 and $4,177 in 1996
             Service  -  Billed                                                           70,018             84,396
                      -  Unbilled                                                         37,987             45,721
             Other Accounts Receivable                                                    11,447             17,517
     Prepaid Income Taxes                                                                  3,254                264
     Inventories, at Average Cost
         Fuel Oil                                                                          3,130              9,256
         Materials and Supplies                                                           11,803             12,172
     Funds on Deposit With Trustee                                                        61,694             59,512
     Prepayments and Other Current Assets                                                 14,451              9,500
                                                                                    ------------      -------------

             Total Current Assets                                                        226,477            246,645
                                                                                     -----------        -----------

DEFERRED CHARGES AND OTHER ASSETS
     Recoverable Costs of Seabrook 1 and Abandoned Projects, Net                          85,398             89,551
     Regulatory Assets-Deferred Taxes                                                    241,248            239,291
     Yankee Atomic Purchase Power Contract                                                12,794             16,463
     Connecticut Yankee Purchase Power Contract                                           38,587             45,769
     Maine Yankee Purchase Power Contract                                                345,075                  -
     Other Deferred Charges and Other Assets                                             214,007            238,203
                                                                                     -----------        -----------
     Deferred Charges and Other Assets, Net                                              937,109            629,277
                                                                                     -----------        -----------

             TOTAL ASSETS                                                             $2,298,081         $2,010,914
                                                                                       =========          =========

The accompanying notes are an integral part of these financial statements.

</TABLE>

<PAGE>

<TABLE>
<S>                                                            <C>          <C>       

                           Central Maine Power Company
                           CONSOLIDATED BALANCE SHEET
                             (Dollars in Thousands)
                                                               Sept. 30,      Dec. 31,
                                                                  1997         1996
                                                                      (Unaudited)
                    STOCKHOLDERS' INVESTMENT AND LIABILITIES
CAPITALIZATION
     Common Stock Investment                                   $  491,011   $  511,578
     Preferred Stock                                               65,571       65,571
     Redeemable Preferred Stock                                    39,528       53,528
     Long-Term Obligations                                        476,397      587,987
                                                               ----------   ----------
           Total Capitalization                                 1,072,507    1,218,664
                                                               ----------   ----------

CURRENT LIABILITIES AND INTERIM FINANCING
     Interim Financing                                            153,000       32,500
     Sinking-Fund Requirements                                     16,210        9,375
     Accounts Payable                                              80,551       93,197
     Dividends Payable                                              9,202        9,512
     Accrued Interest                                               9,423       11,610
     Miscellaneous Current Liabilities                             11,059       21,342
                                                               ----------   ----------
           Total Current Liabilities and Interim Financing        279,445      177,536
                                                               ----------   ----------

COMMITMENTS AND CONTINGENCIES

RESERVES AND DEFERRED CREDITS
     Accumulated Deferred Income Taxes                            362,633      357,994
     Unamortized Investment Tax Credits                            30,901       31,988
     Regulatory Liabilities-Deferred Taxes                         53,026       52,616
     Yankee Atomic Purchased Power Contract                        12,794       16,463
     Connecticut Yankee Purchased Power Contract                   38,587       45,769
     Maine Yankee Purchase Power Contract                         345,075         --
     Other Reserves and Deferred Credits                          103,113      109,884
                                                               ----------   ----------
           Total Reserves and Deferred Credits                    946,129      614,714
                                                               ----------   ----------

              TOTAL STOCKHOLDERS' INVESTMENT AND LIABILITIES   $2,298,081   $2,010,914

</TABLE>







The accompanying notes are an integral part of these financial statements.



<PAGE>


<TABLE>
<S>                                                            <C>          <C>       

                           Central Maine Power Company
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                       (Unaudited) (Dollars in Thousands)
                                    (Note 1)
                                                                  For the Nine Months
                                                                  Ended September 30,
                                                                   1997          1996
CASH FROM OPERATIONS
     Net Income                                                  $   7,643    $  40,345
     Items Not Requiring (Not Providing) Cash:
         Depreciation                                               33,078       32,978
         Amortization                                               25,631       26,597
         Deferred Income Taxes and Investment Tax Credits, Net         871        4,524
         Allowance for Equity Funds Used During Construction          (811)        (616)
     Changes in Certain Assets and Liabilities:
         Accounts Receivable                                        28,182       26,120
         Accrued Income Taxes                                       (2,990)      (4,628)
         Other Current Assets                                       (4,951)      (4,531)
         Inventories                                                 6,495         (235)
         Accounts Payable                                           (7,991)     (27,792)
         Accrued Interest                                           (2,187)      (3,032)
         Miscellaneous Current Liabilities                         (10,283)       3,512
     Deferred Energy-Management Costs                                 (497)      (3,497)
     Maine Yankee Outage Accrual                                   (10,350)       6,210
     Purchased-Power Contracts                                        --            (75)
     Other, Net                                                      9,621        4,480
                                                                 ---------    ---------
               Net Cash Provided By Operating Activities            71,461      100,360
                                                                 ---------    ---------

INVESTING ACTIVITIES
         Construction Expenditures                                 (29,690)     (31,217)
         Changes in Accounts Payable - Investing Activities         (4,655)        (869)
         Investments in Associated Companies                        (4,915)     (12,026)
                                                                 ---------    ---------
               Net Cash Used by Investing Activities               (39,260)     (44,112)
                                                                 ---------    ---------

FINANCING ACTIVITIES
     Issuances:
         Medium-Term Notes                                          10,000
         Short Term Revolving Credit Agreement                      42,500
     Redemptions:
         Preferred Stock                                           (14,000)     (14,000)
         Mortgage Bonds                                            (11,500)
         Medium Term Notes                                         (25,000)     (29,000)
         Other Long-Term Obligations, net                             (595)        (860)
     Dividends:
         Common Stock                                              (21,915)     (21,916)
         Preferred Stock                                            (6,623)      (7,556)
     Funds on Deposit With Trustee                                  (2,182)     (29,669)
                                                                 ---------    ---------
               Net Cash Used by Financing Activities               (27,815)    (104,501)
                                                                 ---------    ---------
               Net Increase (Decrease) In Cash                       4,386      (48,253)
     CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                  8,307       57,677
                                                                 ---------    ---------
     CASH AND CASH EQUIVALENTS, END OF PERIOD                    $  12,693    $   9,424
                                                                 =========    =========

</TABLE>

The accompanying notes are an integral part of these financial statements.


<PAGE>


                           Central Maine Power Company

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Summary of Significant Accounting Policies

Certain  information  in footnote  disclosures  normally  included in  financial
statements prepared in accordance with generally accepted accounting  principles
has been  condensed  or  omitted  in this  Form 10-Q  pursuant  to the rules and
regulations of the Securities and Exchange Commission.  However, the disclosures
herein  should be read with the  Annual  Report on Form 10-K for the year  ended
December  31,  1996 ("Form  10-K"),  and are  adequate  to make the  information
presented herein not misleading.

The  consolidated  financial  statements  include the accounts of Central  Maine
Power  Company  (the  "Company")  and  its 78  percent-owned  subsidiary,  Maine
Electric Power Company, Inc. ("MEPCO"). The Company accounts for its investments
in associated companies not subject to consolidation using the equity method.

The Company's  significant  accounting policies are contained in Note 1 of Notes
to  Consolidated  Financial  Statements in the Company's  Form 10-K. For interim
accounting  periods the policies are the same. The interim financial  statements
reflect all adjustments that are, in the opinion of management,  necessary for a
fair  statement  of  results  for  the  interim  periods  presented.   All  such
adjustments are of a normal recurring nature.

The adoption of the Alternative  Rate Plan ("ARP"),  effective  January 1, 1995,
eliminated the reconcilable  fuel clause used under  traditional  rate-of-return
regulation  to account for and collect fuel and  purchased-power  energy  costs.
Fuel  revenues  are now  recorded as they are billed  rather than  deferred  and
reflected  in  revenues  over  time  periods  established  by the  Maine  Public
Utilities  Commission  ("MPUC").  The elimination of the fuel-clause  results in
higher revenues in the winter months.

For purposes of the  statement of cash flows,  the Company  considers all highly
liquid  instruments  purchased  having  maturities of three months or less to be
cash equivalents.

Supplemental  Cash  Flow  Disclosure  - Cash  paid  for the  nine  months  ended
September 30, 1997 and 1996 for interest,  net of amounts capitalized,  amounted
to $37.6  million and $38.4  million,  respectively.  Income taxes paid,  net of
amounts refunded, amounted to $7.4 million and $27.5 million for the nine months
ended  September  30, 1997 and 1996.  The Company  incurred no new capital lease
obligations in either period.

Nuclear Plant  Shutdown Costs - When a nuclear plant is shut down and the amount
of future liabilities is determined,  the resulting  liability is established on
the  Company  books with an  offsetting  Regulatory  Asset if the payment of the
liability is provided for in rates.  The  liability is  subsequently  reduced as
costs are paid,  which is  generally  over the  remaining  life of the plant but
could be another period based upon Federal Energy Regulatory Commission ("FERC")
determination.


 2.   Impact of New Accounting Standards

In February  1997, the Financial  Accounting  Standards  Board  ("FASB")  issued
Statement of Financial  Accounting  Standard  ("SFAS")  No. 128,  "Earnings  per
Share."  This  statement,  which is  effective  for fiscal  years  ending  after
December 15, 1997, establishes simplified standards for computing and presenting
earnings per share ("EPS").  It requires dual  presentation of basic and diluted
EPS on the face of the  income  statement  for  entities  with  complex  capital
structures  and disclosure of the  calculation  of each EPS amount.  The Company
anticipates that adoption of the standard will not have a significant  impact on
its reported EPS.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
This  statement,  which is also  effective  for  fiscal  years  beginning  after
December  15,  1997,  establishes  standards  for the  reporting  and display of
comprehensive income and its components (revenues,  expenses,  gains and losses)
in a full set of general-purpose  financial statements.  The Company anticipates
that  adoption  of the  standard  will  not  have a  significant  impact  on its
financial statements.

 3.   Commitments and Contingencies

The Company has  ownership  interests in five nuclear  generating  plants in New
England.  The largest is a 38-percent  equity  interest in Maine  Yankee  Atomic
Power Company ("Maine Yankee"),  which, as discussed below, has permanently shut
down its plant located in Wiscasset,  Maine. In addition, the Company owns a 9.5
percent equity interest in Yankee Atomic  Electric  Company  ("Yankee  Atomic"),
which has permanently  shut down its plant located in Rowe,  Massachusetts,  a 6
percent equity interest in Connecticut Yankee Atomic Power Company ("Connecticut
Yankee"),  discussed below, which has permanently shut down its plant in Haddam,
Connecticut,  and a 4 percent  equity  interest in Vermont  Yankee Nuclear Power
Corporation  ("Vermont  Yankee"),  which  owns an  operating  plant  in  Vernon,
Vermont. In addition, pursuant to a joint ownership agreement, the Company has a
2.5  percent  direct  ownership   interest  in  the  Millstone  3  nuclear  unit
("Millstone  3")  in  Waterford,   Connecticut,  which  has  been  off-line  for
regulatory reasons since March 31, 1996.

Maine Yankee  Atomic Power Company - As  previously  reported,  the Maine Yankee
nuclear  generating  plant at  Wiscasset,  Maine  (the  "Plant")  was shut  down
December  6, 1996,  and was  expected to remain  off-line at least until  August
1997.  However, on May 27, 1997, the Board of Directors of Maine Yankee voted to
reduce  maintenance-and-repair  spending at the Plant and  announced  that Maine
Yankee  was  considering  permanent  closure  based  on  economic  concerns  and
uncertainty  about operation of the Plant;  and on the same day the Maine Yankee
Board  indicated  that it had also  been  exploring  a sale of the Plant to PECO
Energy  Company  ("PECO").  On August 6, 1997,  the Board of  Directors of Maine
Yankee voted to  permanently  cease power  operations at the Plant and begin the
process of  decommissioning  the Plant. The formal vote followed an announcement
by the Maine Yankee Board on August 1, 1997,  that Maine Yankee and PECO,  after
months of  negotiations,  had been  unable to arrive at "a  mutually  beneficial
framework for  agreement"  on a sale of the Plant to PECO.  The decision to shut
down the  Plant  was  based on an  economic  analysis  of the  costs,  risks and
uncertainties  associated with operating the Plant compared to those  associated
with closing and  decommissioning  the Plant.  For a detailed  discussion of the
background of the permanent  shutdown,  including  events leading to the Plant's
being placed on the "watch list" by the Nuclear  Regulatory  Commission  ("NRC")
and other significant regulatory and operational issues, management changes, and
investigations  of Maine Yankee by the NRC and the United  States  Department of
Justice,  see the  Company's  Annual  Report  on Form  10-K for the  year  ended
December 31, 1996, its Quarterly  Reports on Form 10-Q for the quarterly periods
ended March 31, 1997 and June 30, 1997, and its Current Report on Form 8-K dated
September 2, 1997.

The Company's  38-percent  ownership  interest in Maine  Yankee's  common equity
amounted to $29.0 million as of September 30, 1997, and under its Power Contract
and Additional  Power Contract with Maine Yankee the Company is responsible  for
38 percent of the costs of decommissioning the Plant. Maine Yankee's most recent
estimate of the cost of decommissioning is $380.4 million, based on a 1997 study
by an  independent  engineering  consultant,  plus  estimated  costs of  interim
spent-fuel storage of $127.6 million, for a total estimated cost of $508 million
(in 1997  dollars).  The  previous  estimate  for  decommissioning,  by the same
consultant,   was  $316.6   million  (in  1993   dollars),   which  resulted  in
approximately  $14.9  million  being  collected  annually  from  Maine  Yankee's
sponsors  pursuant to a 1994 FERC rate order.  Through  September 30, 1997 Maine
Yankee  had  collected  approximately  $194.4  million  for its  decommissioning
obligations.

On November 5, 1997, Maine Yankee submitted the new cost estimate to the FERC as
part of a rate case  reflecting  the fact that the Plant is no longer  operating
and has entered the decommissioning phase. If the FERC accepts the new estimate,
the amount of Maine Yankee's collections for decommissioning would rise from the
$14.9 million  previously  allowed by the FERC to approximately  $36 million per
year. The Company  expects several  interested  parties to intervene in the FERC
proceeding,  including  state  regulators,  and cannot predict the result of the
FERC case.

As of  September  1,  1997,  Maine  Yankee has  estimated  the sum of the future
payments  for  the  closing,  decommissioning  and  recovery  of  the  remaining
investment  in Maine  Yankee  to be  approximately  $930  million,  of which the
Company's  38-percent  share would be  approximately  $353 million.  Legislation
enacted  in Maine this year  calling  for  restructuring  the  electric  utility
industry provides for recovery of  decommissioning  costs, to the extent allowed
by    federal     regulation     through    the    rates    charged    by    the
transmission-and-distribution companies. Based on the legislation and regulatory
precedent  established  with Yankee  Atomic,  which was similarly shut down, the
Company believes that it is entitled to recover  substantially  all of its share
of such costs from its customers  and therefore has recorded a regulatory  asset
and liability in the amount of $345 million on its  consolidated  balance sheet,
which is the $353 million  discussed above net of the September  cost-of-service
payment to Maine Yankee.  The Company's current annual revenues include recovery
of  approximately  $75 million in Maine Yankee costs  predicated on an operating
Maine Yankee Plant.

On  September  2, 1997,  the MPUC  released  the report of a  consultant  it had
retained to perform a management audit of Maine Yankee for the period January 1,
1994 to  June  30,  1997.  The  report  contained  both  positive  and  negative
conclusions, the latter including: that Maine Yankee's decision in December 1996
to proceed with the steps necessary to restart the Plant was  "imprudent";  that
Maine Yankee's May 27, 1997 decision to reduce restart  expenses while exploring
a  possible  sale of the Plant was  "inappropriate,"  based on the  consultant's
finding that a more  objective and  comprehensive  competitive  analysis at that
time "might have indicated a benefit for restarting"  the Plant;  and that those
decisions  resulted in Maine Yankee  incurring  $95.9 million in  "unreasonable"
costs. On October 24, 1997, the MPUC issued a Notice of Investigation initiating
an  investigation  of the prudence of the Maine Yankee shutdown  decision and of
the operation of Maine Yankee prior to the shutdown,  and announced  that it had
directed its consultant to extend its review to include those areas. The Company
does not know how the MPUC plans to use the consultant's  report or any negative
conclusions of its investigation, but believes the report's negative conclusions
are unfounded and may be contradictory.  The Company has been charging its share
of the Maine Yankee  expenses to income and  believes it would have  substantial
constitutional  and  jurisdictional  grounds to challenge  any effort in an MPUC
proceeding to alter  wholesale Maine Yankee rates made effective by the FERC. On
November  7,  1997,  Maine  Yankee  initiated  a  legal  challenge  to the  MPUC
investigation  in the  Maine  Supreme  Judicial  Court  alleging  that  such  an
investigation  falls  exclusively  within the jurisdiction of the FERC, and that
the MPUC's  investigation is therefore  barred on  constitutional  grounds.  The
Company filed a similar legal challenge on the same day.

The Company has been  incurring  substantial  costs as its  38-percent  share of
Maine Yankee costs, as well as additional  costs for replacement  power with the
Plant out of service.  For the nine months ended  September  30, 1997 such costs
amounted to  approximately  $102.3  million for the Company,  as follows:  $50.7
million  due to basic  operations  and  maintenance  costs,  $39.2  million  for
replacement  power costs and $12.4 million  associated with incremental costs of
operations and maintenance. The Maine Yankee Board's decision to close the Plant
should  mitigate the costs the Company would  otherwise  incur in 1997 through a
phasing down of Maine Yankee's  operations  and  maintenance  costs,  with Maine
Yankee's  workforce having been reduced from  approximately 475 to 239 employees
as of October  31,  1997,  but it will not  reduce  the need to buy  replacement
energy and capacity.  The amount of cost for  replacement  power and energy will
vary  during  the year  based on the  Company's  power  requirements  and market
conditions,  but the  Company  expects  such  costs  to be  within  a  range  of
approximately  $5.0 million to $6.0  million per month  during the  remainder of
1997,  based on current energy and capacity needs and market  conditions.  Under
the electric-utility  restructuring legislation enacted by the Maine Legislature
in May 1997 the Company's obligation to provide replacement power will terminate
on March 1, 2000, with its other power-supply  obligations.  In the interim, the
previously reported termination of a major non-utility generator contract should
result in savings to the Company at an annual rate of approximately  $25 million
commencing November 1, 1997.

The impact of the nuclear-related  costs on the Company will be a major obstacle
to achieving satisfactory results in 1997, despite the approximately $75 million
in annual Maine  Yankee-related  costs imbedded in the current  determination of
the Company's  required revenues for ratemaking  purposes and despite success in
controlling  other operating costs. The higher costs incurred to date associated
with nuclear plant  investments and the costs  anticipated to replace energy and
capacity  needs  for the  remainder  of the year,  as a result of the  permanent
shutdown of the Maine Yankee Plant, will reduce current year earnings to a level
that will trigger the  low-earnings  bandwidth  provision of the Company's  ARP.
That provision is activated if actual  earnings for 1997 are outside a bandwidth
of 350 basis points above or below a 10.68-percent  rate-of-return  allowance. A
return below the low end of the range  provides for additional  revenue  through
rates equal to one-half the difference  between the actual earned rate of return
and the  7.18-percent  (10.68 minus 350 basis points) low end of the  bandwidth.
While the Company  believes the  mechanism  will be triggered in 1997, it cannot
predict the amount of additional  revenues that may  ultimately  result.  In any
case,  under the ARP the  Company  would not be likely to start to  receive  any
additional  revenues before July 1, 1998. In addition,  the Company has affirmed
its  public  statements  that it would  strive  to limit its  electricity  price
increases  under  the ARP to a level at or below the rate of  inflation  through
1999, the last year of the term of the ARP, in order to attain its goal of price
stability.  The Company  believes  stable prices are essential to its ability to
retain and promote electricity sales.

Maine Yankee has entered  into  agreements  with the holders of its  outstanding
First Mortgage Bonds and its lender banks under which the  bondholders and banks
agreed  that they  would not assert  that the  voluntary  shutdown  of the Plant
constituted a covenant violation under the Company's First Mortgage Indenture or
its two bank credit agreements and agreed to continue to maintain Maine Yankee's
level of bank  borrowings at $67 million,  out of aggregate  commitments  of $85
million,  which Maine Yankee considers  adequate for its foreseeable  needs. The
agreements,  as extended in October 1997,  terminate  January 15, 1998, by which
date Maine  Yankee  must  reach  agreement  on  restructured  debt  arrangements
reflecting its  decommissioning  status.  At the same time, Maine Yankee and its
sponsors,  including  the  Company,  extended  their  agreement  to amend  Maine
Yankee's Power Contracts and Additional Power Contracts, effective upon approval
by the FERC, to clarify and confirm the sponsors' obligations to continue to pay
their shares of Maine Yankee's costs during the decommissioning  process.  Maine
Yankee  filed  the  contract  amendments  with  the  FERC as  part  of its  rate
proceeding requesting an effective date of January 15, 1998.

Higher nuclear-related costs are affecting other stockholders of Maine Yankee in
varying  degrees.   Bangor  Hydro-Electric   Company,  a  Maine-based  7-percent
stockholder,  has cited its "deteriorating"  financial condition,  suspended its
common-stock  dividend,  and is  pursuing  rate  relief.  Maine  Public  Service
Company,  a  5-percent  stockholder,  cited  problems  in  satisfying  financial
covenants in loan documents and reduced its common-stock dividend  substantially
in early March 1997.  Northeast  Utilities  (20-percent  stock ownership through
three subsidiaries),  which is adversely affected by the substantial  additional
costs  associated  with the  three  shut-down  Millstone  nuclear  units and the
permanently shut-down Connecticut Yankee unit, as well as an unfavorable utility
deregulation  plan in New Hampshire  currently under appeal,  has implemented an
indefinite suspension of its quarterly  common-stock  dividends.  A default by a
Maine Yankee  stockholder in making payments under its Power Contract or Capital
Funds Agreement could have a material adverse effect on Maine Yankee,  depending
on the  magnitude of the  default,  and would  constitute a default  under Maine
Yankee's bond indenture and its two major credit  agreements unless cured within
applicable  grace periods by the defaulting  stockholder or other  stockholders.
The  Company  cannot  predict,  however,  what  effect,  if any,  the  financial
difficulties  being  experienced by some Maine Yankee  stockholders will have on
Maine Yankee or the Company.

Connecticut  Yankee - On December 4, 1996, the Board of Directors of Connecticut
Yankee  Atomic Power  Company  voted to  permanently  shut down the  Connecticut
Yankee plant, for economic reasons,  and to decommission the unit, which had not
operated  since July of 1996.  The Company has a  6-percent  equity  interest in
Connecticut Yankee,  totaling  approximately $7.0 million at September 30, 1997.
The Company  incurred  replacement  power costs of  approximately  $3.6  million
during  the nine  months  ended  September  30,  1997.  Based on cost  estimates
provided by Connecticut  Yankee the Company  determined its share of the cost of
Connecticut Yankee's continued compliance with regulatory requirements, recovery
of  its  plant  investments,   decommissioning  and  closing  the  plant  to  be
approximately   $38.6   million  and  has  recorded  a   regulatory   asset  and
corresponding  liability in that amount on its  consolidated  balance sheet. The
Company is  currently  recovering  through  rates an amount  adequate to recover
these expenses.

Millstone Unit No. 3 - The Company has a 2.5 percent direct  ownership  interest
in Millstone Unit No. 3, which is operated by Northeast Utilities. This facility
has been  off-line  since  April  1996  due to NRC  concerns  regarding  license
requirements  and the  Company  cannot  predict  when it will return to service.
Millstone  Unit No.  3,  along  with two other  units at the same site  owned by
Northeast  Utilities,  is on the  NRC's  "watch  list" in  "Category  3,"  which
requires formal NRC action before a unit can be restarted.  The Company incurred
replacement  power costs related to Millstone Unit No. 3 of  approximately  $3.6
million  during the nine months ended  September 30, 1997. For a discussion of a
lawsuit and arbitration  claim filed by the Company and other minority owners of
Millstone Unit No. 3 against the operators of the unit, see "Millstone  Unit No.
3 Litigation," below.

Legal and  Environmental  Matters - The  Company  is subject  to  regulation  by
federal  and  state  authorities  with  respect  to air and water  quality,  the
handling and disposal of toxic  substances  and hazardous and solid wastes,  and
the handling and use of chemical products.  Electric utility companies generally
use or generate in their  operations a range of potentially  hazardous  products
and by-products that are the focus of such regulation. The Company believes that
its  current  practices  and  operations  are in  compliance  with all  existing
environmental  laws except for such  non-compliance as would not have a material
adverse  effect on the Company's  financial  position.  The Company  reviews its
overall compliance and measures the liability  quarterly by assessing a range of
reasonably  likely  costs for each  identified  site using  currently  available
information,   including  existing   technology,   presently  enacted  laws  and
regulations,  experience  gained at similar  sites,  and the  probable  level of
involvement and financial  condition of other potentially  responsible  parties.
These estimates include costs for site  investigations,  remediation,  operation
and maintenance, monitoring and site closure.

New and changing environmental requirements could hinder the construction and/or
modification  of  generating   units,   transmission  and  distribution   lines,
substations and other facilities, and could raise operating costs significantly.
As a result, the Company may incur significant  additional  environmental costs,
greater  than  amounts   reserved,   in  connection   with  the  generation  and
transmission  of  electricity  and the storage,  transportation  and disposal of
by-products and wastes. The Company may also encounter  significantly  increased
costs to remedy the  environmental  effects of prior waste handling  activities.
The cumulative  long-term cost impact of  increasingly  stringent  environmental
requirements cannot accurately be estimated.

On October 10, 1996,  the American  Institute  of Certified  Public  Accountants
issued  Statement  of Position  96-1,  "Environmental  Remediation  Liabilities"
("SOP").  The  principal  objective of the SOP is to improve the manner in which
existing authoritative  accounting literature is applied by entities to specific
situations of recognizing,  measuring and disclosing  environmental  remediation
liabilities.  The SOP became  effective  January 1, 1997. This SOP has not had a
material impact on the company's financial position or results of operations.

The  Company  has  recorded  a  liability,   based  upon   currently   available
information,  for what it believes are the estimated  environmental  remediation
costs that the Company expects to incur for identified  waste disposal sites. In
most cases,  additional  future  environmental  cleanup costs are not reasonably
estimatable  due to a number of  factors,  including  the unknown  magnitude  of
possible  contamination,  the  appropriate  remediation  methods,  the  possible
effects  of  future  legislation  or  regulation  and the  possible  effects  of
technological  changes.  At September 30, 1997,  the  liability  recorded by the
Company  for its  estimated  environmental  remediation  costs  amounted to $2.2
million,  which  management has determined to be the most probable amount within
the  range of $2.2  million  to $10  million.  Such  costs  may be higher if the
Company is found to be  responsible  for cleanup  costs at  additional  sites or
identifiable possible outcomes change.

As  discussed in Note 4 of Notes to  Consolidated  Financial  Statements  in the
Company's  Form 10-K, in connection  with one such  proceeding,  the Company has
been named a PRP and has been  incurring  costs to determine  the best method of
cleaning up an Augusta,  Maine,  site  formerly  owned by a salvage  company and
identified  by  the   Environmental   Protection   Agency  as  containing   soil
contaminated by polychlorinated biphenyls from equipment originally owned by the
Company. The Company believes its share of the remaining costs of the cleanup of
that site could total approximately $1.0 million to $2.3 million.  This estimate
is  net  of an  agreed  partial  insurance  recovery  and a  1993  court-ordered
contribution  of 41  percent  from  Westinghouse  Electric  Corp.,  but does not
reflect any possible contributions from other insurance carriers the Company has
sued or from other parties.  The Company has recorded an estimated  liability of
$1.0 million for that site,  which is included in the total $2.2 million reserve
discussed above, and an equal regulatory  asset,  reflecting an accounting order
to defer such costs and the anticipated  ratemaking  recovery of such costs when
ultimately paid. In addition,  the Company has deferred,  as a regulatory asset,
$8.6 million of costs  incurred in connection  with that site through  September
30, 1997.

Millstone  Unit No. 3  Litigation  - On August 7, 1997,  the  Company  and other
minority  owners of Millstone  Unit No. 3 filed suit in  Massachusetts  Superior
Court and  initiated an  arbitration  claim  against  Northeast  Utilities,  its
trustees, and two of its subsidiaries, alleging mismanagement of the unit by the
defendants.  The minority owners are seeking to recover their  additional  costs
resulting from such mismanagement,  including their replacement power costs. The
Company cannot predict the outcome of the litigation and arbitration.

Proposed  Federal  Income Tax  Adjustments  - On September 3, 1997,  the Company
received from the Internal  Revenue  Service  ("IRS") a Revenue  Agent's  Report
summarizing all adjustments  proposed by the IRS as a result of its audit of the
Company's  federal  income tax returns for the years 1992 through 1994,  and the
Company  has  received  a  notice  of   deficiency   relating  to  the  proposed
disallowances.  There are two significant  disallowances among those proposed by
the  IRS.  The  first  is a  disallowance  of  the  Company's  write-off  of the
under-collected  balance of fuel and  purchased-power  costs and the unrecovered
balance of its unbilled Electric Revenue Adjustment Mechanism ("ERAM") revenues,
both as of December 31, 1994, which were charged to income in 1994 in connection
with the  adoption  of the ARP  effective  January  1, 1995.  The  second  major
adjustment would disallow the Company's 1994 deduction of the cost of the buyout
of the Fairfield Energy Venture purchased-power contract by the Company in 1994.
The  aggregate  tax  impact,  including  both  federal and state  taxes,  of the
unresolved  issues amounts to  approximately  $39.0 million,  over 90 percent of
which  is  associated   with  the  two  major   disallowances.   The  two  major
disallowances  relate  largely  to the  timing of the  deductions  and would not
affect income except for the cumulative interest impact which, through September
30,  1997,  amounted  to $11.7  million,  or a  decrease  in net  income of $7.0
million, and which is expected to increase interest expense approximately $433.3
thousand  per month until  either the tax  deficiency  is paid or the issues are
resolved in favor of the  Company,  in which case no interest is due. If the IRS
were to prevail,  the Company  believes the  deductions  would be amortized over
periods of up to twenty,  post-1994,  tax years.  The Company  believes  its tax
treatment  of the  unresolved  issues  was proper  and  intends  to contest  the
proposed adjustments vigorously,  and as a result the potential interest has not
been accrued.  The Company cannot predict the results of its planned appeals. In
addition,  the Company  incurred  $1.1 million of income tax expense  related to
settlements  of uncontested  items in connection  with the 1992-1994 IRS audits,
and amended return adjustments for 1995 and 1996.

 4.   Regulatory and Legislative Matters

Alternative  Rate Plan - The MPUC approved the Company's  Alternative  Rate Plan
("ARP")  effective  January  1,  1995.  Please  refer  to  Note  3 of  Notes  to
Consolidated  Financial  Statements  included in the Company's Form 10-K for the
year ended December 31, 1996 for a detailed description. The ARP was established
in  response  to an order by the MPUC to  develop a  five-year  plan  containing
price-cap,  profit-sharing, and pricing-flexibility components. Although the ARP
is a major reform,  the MPUC is continuing to regulate the Company's  operations
and prices, provide for continued recovery of deferred costs and specify a range
for its rate of return.

The Company  believes,  as stated in the MPUC's order  approving  the ARP,  that
operation under the ARP continues to meet the criteria of Statement of Financial
Accounting  Standards  No. 71,  "Accounting  for the Effects of Certain Types of
Regulation" ("SFAS No. 71"). In its order, the MPUC reaffirmed the applicability
of  previous  accounting  orders  allowing  the  Company to  reflect  amounts as
deferred charges and regulatory  assets. As a result,  the Company will continue
to apply the provisions of SFAS No. 71 to its accounting transactions and in its
future  financial  statements.  See "Meeting the  Requirements  of SFAS No. 71",
below, in this Note 4.

The ARP contains a mechanism  that provides  price-caps on the Company's  retail
rates to increase  annually on July 1,  commencing July 1, 1995, by a percentage
combining (1) a price index, (2) a productivity offset, (3) a sharing mechanism,
and (4)  flow-through  items and mandated costs. The price cap applies to all of
the Company's  retail rates,  including the Company's  fuel-and-purchased  power
cost, which previously had been treated separately.  Under the ARP, fuel expense
is no longer subject to reconciliation or specific rate recovery, but is subject
to the annual indexed price-cap changes.

The Company believes the ARP provides the benefits of needed pricing flexibility
to set  prices  between  defined  floor  and  ceiling  levels  in three  service
categories (1) existing customer classes,  (2) new customer classes for optional
targeted services, and (3) special-rate contracts. The Company believes that the
added  flexibility is positioning it more favorably to meet the competition from
other energy sources that has eroded  segments of its customer base.  Some price
adjustments  can be  implemented  upon  30-days'  notice by the  Company,  while
certain  others are  subject to  expedited  review by the MPUC.  The Company has
utilized this feature in providing new rates to  approximately  25,000 customers
representing  approximately  40  percent  of annual  kilowatt-hour  sales and 27
percent of  service-area  revenues.  These  reductions  in rates were offered to
customers after  consideration of associated NUG cost  reductions,  savings from
further NUG consolidations and other general cost reductions.

The ARP also contains  provisions to protect the Company and ratepayers  against
unforeseen adverse results from its operation.  These include review by the MPUC
if the Company's  actual return on equity falls  outside a designated  range,  a
mid-period  review  of  the  ARP  by  the  MPUC  in  1997  (including   possible
modification  or  termination),  and a  "final"  review  by the  MPUC in 1999 to
determine  whether or with what changes the ARP should  continue after 1999. The
Company's 1997 compliance filing and mid-period review filing submitted in March
1997 proposed no significant  change to the ARP. On June 25, the MPUC approved a
partial  stipulation  which allowed a 1.1% increase in price caps effective July
1, 1997, made minor modifications in the parameters for pricing flexibility, and
increased the midpoint return on equity for the earnings sharing  calculation to
11.5% for 1998. No other significant changes were made to the ARP as a result of
the 1997 review.

While the ARP provides the Company with an expanded  opportunity  to be rewarded
for  efficiency,  it also  presents the risk of reduced rates of return if costs
rise  unexpectedly,  like those that have resulted  from the recent  outages and
shutdown of the Maine Yankee plant, or if revenues from sales decline or are not
adequate  to  fund  costs.  The  Company  believes  the  ARP  continues  to be a
competitive advantage for the Company.

Restructuring  Legislation  and  Divestiture  of Generation  Assets - On May 29,
1997,  the  Governor  of Maine  signed  into  law a bill  enacted  by the  Maine
Legislature  that will  restructure  the electric  utility  industry in Maine by
March 1, 2000. The principal restructuring provisions of the legislation provide
for  customers  to have direct  retail  access to  generation  services  and for
deregulation of competitive electricity providers commencing March 1, 2000, with
transmission-and-distribution  companies continuing to be regulated by the MPUC.
By that date,  subject to  possible  extensions  of time  granted by the MPUC to
improve  the sale  value of  generation  assets,  investor-owned  utilities  are
required  to  divest  all  generation  assets  and  generation-related  business
activities,  with two major exceptions: (1) non-utility generator contracts with
qualifying facilities and contracts with demand-side  management or conservation
providers,  brokers or hosts;  and (2)  ownership  interests  in  nuclear  power
plants.  However,  the MPUC can require  the  Company to divest its  interest in
Maine Yankee on or after January 1, 2009.  The Company has submitted its plan to
divest its generation assets to the MPUC, as required by the legislation, and is
proceeding  on a  schedule  calling  for  a  purchase-and-sale  agreement  to be
executed with the successful  bidder or bidders in the first quarter of 1998 and
a closing in September  1998. The bill also requires  investor-owned  utilities,
after  February 28,  2000,  to sell their rights to the capacity and energy from
all  generation  assets,  including the  purchased-power  contracts that had not
previously  been  divested  pursuant  to the  legislation,  with  certain  minor
exceptions.  The  undepreciated  book value for the Company's  generation  plant
assets at December 31, 1996 was approximately $502 million.

Meeting the Requirements of SFAS No. 71

The Company  continues  to meet the  requirements  of SFAS No. 71. The  standard
provides  specialized  accounting  for  regulated  enterprises,  which  requires
recognition of "regulatory"  assets and liabilities  that enterprises in general
could not record.  Examples of regulatory  assets include  deferred income taxes
associated with  previously  flowed through items,  NUG buyout costs,  losses on
abandoned plants,  deferral of postemployment  benefit costs, and losses on debt
refinancing.  If an entity no longer meets the requirements of SFAS No. 71, then
regulatory assets and liabilities must be written off.

The ARP provides  incentive-based  rates intended to recover the cost of service
plus a rate of return on the Company's investment together with a sharing of the
costs or earnings between ratepayers and the shareholders should the earnings be
less  than or  exceed  a  target  rate  of  return.  The  Company  has  received
recognition  from the MPUC  that the  rates  implemented  as a result of the ARP
continue to provide specific recovery of costs deferred in prior periods.

The recent legislation  enacted in Maine associated with industry  restructuring
specifically  addressed the issue of cost recovery of regulatory assets stranded
as a result of industry  restructuring.  Specifically,  the legislation requires
the MPUC, when retail access begins,  to provide a "reasonable  opportunity" for
the    recovery    of    stranded    costs    through    the    rates   of   the
transmission-and-distribution  company,  comparable to the utility's opportunity
to recover stranded costs before the  implementation  of retail access under the
legislation.  As  provided  for in EITF 97-4,  "Deregulation  of the  Pricing of
Electricity,"  the Company will continue to record regulatory assets in a manner
consistent  with SFAS No. 71 as long as future  recovery is  probable  since the
Maine  legislation   provides  the  opportunity  to  recover  regulatory  assets
including  stranded costs through the rates of the transmission and distribution
company.  The Company  anticipates that once a detailed plan for deregulation of
generation  is  known,  the  application  of  SFAS  No.  71 to  the  unregulated
generation  segment  will no longer  apply and the  Company  will be required to
discontinue  SFAS No. 71 for any remaining  generation  segment of its business.
The Company further anticipates,  based on current generally accepted accounting
principles,   that  SFAS  No.  71  will  continue  to  apply  to  the  regulated
distribution and transmission segments of its business.

 5.   Debt Financing

At the annual  meeting of the  stockholders  of the Company on May 15, 1997, the
holders of the Company's  outstanding  preferred stock consented to the issuance
of $350  million  in  principal  amount of the  Company's  Medium-Term  Notes in
addition to the $150  million in principal  amount to which they had  previously
consented.  This expansion of the Medium-Term Note program is being  implemented
to increase the Company's financing flexibility in anticipation of restructuring
and increased competition.  As of September 30, 1997, $43 million of Medium-Term
Notes  were  outstanding  which,  under the terms of the  program,  will  permit
issuance of an additional  $457 million of such notes.  The Company also had $50
million  outstanding as of September 30, 1997 under the 364-day revolving credit
facility with a group of banks.



<PAGE>


Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations

This discussion  contains forecast  information items that are  "forward-looking
statements" as defined in the Private Securities  Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties which could cause
actual results to differ materially from those projected.  Readers are cautioned
not to place undue  reliance on these  forward-looking  statements,  which speak
only as of the date hereof.  The Company  undertakes  no obligation to republish
revised forward-looking  statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of  unanticipated  events.  Readers are
also urged to carefully review and consider the various  disclosures made by the
Company which attempt to advise interested parties of the facts which affect the
Company's business.

Factors  that could cause actual  results to differ  materially  include,  among
other matters,  the permanent  closure and  decommissioning  of the Maine Yankee
nuclear generating plant and resulting regulatory proceedings;  the actual costs
of decommissioning the Maine Yankee plant; outages at the other generating units
in which the Company holds interests; electric utility restructuring,  including
the  ongoing  state  and  federal   activities;   future  economic   conditions;
earnings-retention   and   dividend-payout   policies;   developments   in   the
legislative,  regulatory,  and  competitive  environments  in which the  Company
operates;  and other  circumstances that could affect  anticipated  revenues and
costs, such as unscheduled  maintenance or repair requirements at nuclear plants
and other facilities, and compliance with laws and regulations.

Operating Results

The third quarter of 1997  generated a net loss of $5.8 million  compared to net
income of $3.4 million for the  corresponding  period in 1996.  Year-to-date net
income was $7.6  million  versus  $40.3  million for the 1996  period.  The loss
applicable  to common  stock was $7.7  million  or $0.24 per share for the third
quarter of 1997  compared to earnings of $1.2 million or $0.04 per share for the
comparable period in 1996. Year-to-date earnings applicable to common stock were
$1.3  million  or $0.04 per share and $33.1  million or $1.02 per share in 1996.
Net  income  for the third  quarter of 1997 was  significantly  impacted  ($12.0
million) by increases in repair costs and replacement-power expenses relating to
the Maine Yankee plant and other New England  nuclear units in which the Company
holds interests.  The costs associated with replacement  power will continue and
are expected to be in the range of $6.0 million to $7.0 million per month in the
near term. Additionally,  a $1.1 million impact to net income occurred due to an
increase in income tax expense based on partial  Internal  Revenue Service audit
settlements for the years 1992 - 1994 and amended return  adjustments  filed for
1995 and 1996.  Partially  offsetting the replacement  power costs in the future
are  expected  reductions  in Maine  Yankee  operations  and  maintenance  costs
associated with the phase-in of the permanent closure of that facility.

Operating revenues in the third quarter of 1997 totaled $226 million, a decrease
of 1.3  percent  from $229  million  in the  third  quarter  of 1996.  Operating
revenues  decreased  by $14.9 or 2.1 percent to $705  million in the  nine-month
period ended September 30, 1997. The decline in revenues is a consequence of the
continuing  outage of Maine Yankee and other nuclear  generating  units in which
the Company  holds  interests,  since energy  produced or  purchased  from other
Company  sources was used to satisfy  service  territory needs and, as a result,
significantly  less was  available  for sales  outside  the  service  territory.
Compared to the  nine-month  period ended  September  30, 1996,  non-territorial
sales  were  down $32  million.  In  contrast,  Industrial  sales  increased  by
approximately  $11.0  million or 6 percent  compared  to the nine  months  ended
September  30,  1996,  due to the paper  industry  rebounding  from weak  market
conditions  in  1996  and  a  facility  expansion  by  an  electrical  machinery
manufacturer.

Service-area  sales for the third  quarter of 1997  totaled  approximately  2.35
billion  kilowatt-hours,  down 0.3  percent  from  the  third  quarter  of 1996.
Service-area  sales of  electricity  for the first nine  months of 1997  totaled
approximately  7.02  billion  kilowatt-hours,  for an  increase  of 1.0  percent
compared to the first nine months of 1996.

<TABLE>
<S>                                                            <C>          <C>       
               Service Area Kilowatt-hour Sales (Millions of KWHs)
                           Period Ended September 30,
                                    Three Months                                      Nine Months
                        1997            1996          % Change           1997            1996           % Change
                        ----            ----          --------           ----            ----           --------
Residential               651.5           657.2           (0.9)%         2,116.5         2,139.8           (1.1)%
Commercial                660.3           651.9            1.3           1,897.2         1,886.3            0.6
Industrial                983.9           993.4           (1.0)          2,841.2         2,763.9            2.8
Other                      52.7            54.1           (2.6)            164.4           161.4            1.9
                      ---------       ---------                         --------        --------
                        2,348.4         2,356.6           (0.3)          7,019.3         6,951.4            1.0
                        =======         =======                          =======         =======
</TABLE>

The changes in service area kilowatt-hour sales reflect the following:

      Kilowatt-hour  sales to residential  customers decreased by 0.9 percent in
      the third  quarter and  decreased by 1.1 percent for the nine months ended
      September  30, 1997  compared  to 1996;  usage per  customer  was down 2.1
      percent for the nine months ended September 30, 1997. Warmer  temperatures
      during  the first  quarter of 1997  versus the first  quarter of 1996 were
      primarily  responsible for the nine-month  overall decrease in residential
      sales.

      Commercial  sales  increased  by 1.3 percent in the third  quarter and 0.6
      percent for the nine months ended  September 30, 1997 as compared to 1996.
      The increase in the third quarter was due primarily to strong sales in the
      retail  trade and service  sectors.  The  increase was offset by decreased
      sales to Maine Yankee as compared to the third quarter of 1996.

      Industrial  kilowatt-hour  sales  decreased  by 1.0  percent  in the third
      quarter due primarily to no excess power being available for sale. The 2.8
      percent  increase for the nine months ended September 30, 1997 compared to
      1996 is due  primarily  to an increase in the paper  industry,  rebounding
      from weak market conditions in 1996, and the expansion of facilities by an
      electrical machinery manufacturer.

MEPCO's  electrical sales and transmission  revenues from New England  utilities
other than the Company amounted to $1.0 and $4.3 million in the third quarter of
1997 and 1996, respectively.  The totals for the nine months ended September 30,
1997  and  1996  were  $9.5  million  and $8.4  million,  respectively.  Under a
Participation  Agreement  that  terminated  July 9, 1996,  all of MEPCO's costs,
including a return on invested capital, were paid by the participating utilities
("Participants"),  which included the Company and most of the larger New England
electric companies. The level of MEPCO's revenues and expenses changes depending
upon the  level of  energy  purchases.  Effective  July 9,  1996,  MEPCO and the
Company  filed with FERC under  FERC  Order 888 for new tariff  rates.  Refer to
"Open-Access  Transmission  Service  Rule" below for further  discussion of this
matter.

Purchased  Power-Energy  expense  increased  $4.6  million  compared  to 1996,
reflecting  increased  replacement  power cost due to the Maine Yankee and other
nuclear-plant outages which continued through the entire nine months of 1997.

Purchased  Power-Capacity  expense  increased  $11.7  million  compared to 1996,
principally due to the Maine Yankee outage  throughout the entire nine months of
1997 and increased maintenance expense prior to the permanent shutdown.

Other operation  expense  increased by approximately  $13.1 million for the nine
months ended  September 30, 1997 compared to 1996. The increase is due primarily
to a  reversal  in 1996  of a  reserve  established  in  1995  and  the  expense
recognition of post-retirement  benefits being collected in rates under the ARP.
Previously   post-retirement   benefits  were  deferred  for  future   recovery.
Maintenance expense decreased by $1.9 million through September primarily due to
decreased storm activity in 1997 versus 1996.

Federal and state income taxes fluctuate with the level of pre-tax  earnings and
the regulatory  treatment of taxes by the MPUC. This expense  decreased by $21.2
million  as a result  of  lower  pre-tax  earnings  for the  nine  months  ended
September  30, 1997,  when  compared to 1996.  In the third quarter of 1997 $1.1
million of  expense  was  incurred  as a result of a partial  audit  settlement,
relating to 1992 through 1994, and amended tax returns filed for 1995 and 1996.

Interest on long-term debt and other interest expense decreased during the third
quarter and year to date 1997  compared to 1996.  The decrease  reflects a lower
level of Medium-Term Notes outstanding than in the first nine months of 1996.

"Year 2000" Computer  Issues - In the next  two-and-one-half  years,  most large
companies will face a potentially serious information systems (computer) problem
because most software  application and operational  programs written in the past
will not properly  recognize  calendar  dates  beginning in the year 2000.  This
could force computers to either shut down or lead to incorrect calculations. The
Company began the process of identifying the changes  required to their computer
programs  and  hardware  during the year 1996.  The  majority  of the  necessary
modifications to the Company's centralized financial,  customer, and operational
information systems are expected to be completed by the end of 1998. The Company
believes it will incur approximately $3.0 million of costs between now and March
31, 2000, associated with making the necessary modifications  identified to date
to the centralized systems.  Noncentralized systems are currently being reviewed
for Year  2000  problems.  The  Company  is unable  to  predict  the costs to be
incurred for correction of such  noncentralized  systems,  but expects the scope
and  schedule  for  such  work  to be less  complex  than  for  its  centralized
information systems.

Liquidity and Capital Resources

Approximately $66.4 million of cash was provided during the first nine months of
1997  from  net  income  before  non-cash  items,   primarily  depreciation  and
amortization.  During  that  period,  approximately  $5.0  million  of cash  was
generated from  fluctuations  in certain assets and  liabilities  and from other
operating activities.

During the first nine months of 1997,  dividends paid on common stock were $21.9
million, while preferred-stock dividends utilized $6.6 million of cash.

Investing  activities,  primarily  construction  expenditures,   utilized  $39.3
million  in  cash  during  the  first  nine  months  of  1997  for   generation,
transmission,  distribution,  and general construction expenditures and includes
$4.9 million the Company invested primarily in its associated companies.

In order to  accommodate  existing and future  loads on its electric  system the
Company is engaged in a continuing construction program. The Company's plans for
improvements and expansions,  its load forecast and its power-supply sources are
under a process of continuing review.  Actual  construction  expenditures depend
upon the availability of capital and other resources, load forecasts, the timing
of its  divestiture  of its  generating  assets,  customer  growth  and  general
business conditions. The ultimate nature, timing and amount of financing for the
Company's total construction programs, refinancing and energy-management capital
requirements  will be  determined  in light of market  conditions,  earnings and
other relevant factors.

The total of cash on deposit with the trustee  under the  Company's  General and
Refunding Mortgage  Indenture as of September 30, 1997, was approximately  $61.7
million.  Under  the  Indenture  such  cash may be  applied,  at any time at the
direction of the  Company,  to the  redemption  of bonds  outstanding  under the
Indenture at a price equal to the principal  amount of the bonds being redeemed,
without  premium,  plus accrued interest to the date fixed for redemption on the
principal amount of the bonds being redeemed. Such cash may also be withdrawn by
the Company by substitution of allocated property additions or available bonds.

At the annual  meeting of the  stockholders  of the Company on May 15, 1997, the
holders of the Company's  outstanding  preferred stock consented to the issuance
of $350  million  in  principal  amount of the  Company's  Medium-Term  Notes in
addition to the $150  million in principal  amount to which they had  previously
consented.  This expansion of the Medium-Term Note program is being  implemented
to increase the Company's financing flexibility in anticipation of restructuring
and increased competition.  As of September 30, 1997, $43 million of Medium-Term
Notes  were  outstanding  which,  under the terms of the  program,  will  permit
issuance of an additional $457 million of such notes.

To support its short-term capital requirements, on October 23, 1996, the Company
entered  into  a  $125  million  Credit  Agreement  with  several  banks,   with
BankBoston, N.A., and The Bank of New York acting as agents for the lenders. The
arrangement has two credit facilities:  a $75 million,  364-day revolving credit
facility that currently  matures on October 21, 1998, and a $50-million,  3-year
revolving  credit  facility  that  matures  on October  22,  1999.  Both  credit
facilities  require annual fees on the total credit lines. The fees are based on
the Company's credit ratings and allow for various  borrowing  options including
LIBOR-priced,  base-rate-priced  and  competitive-bid-priced  loans.  Access  to
commercial  paper  markets  has been  substantially  precluded,  as a result  of
downgrading  of  the  Company's  credit  ratings.   The  amount  of  outstanding
short-term  borrowing will  fluctuate with  day-to-day  operational  needs,  the
timing of  long-term  financing,  and market  conditions.  The  Company  had $50
million  outstanding as of September 30, 1997 under the 364-day revolving credit
facility.


Rating Agency Actions

On May 1, 1997,  Moody's Investor  Service  announced that it had downgraded the
Company's credit ratings.  The ratings  downgraded  were:  General and Refunding
Mortgage Bonds to "Baa3" from "Baa2";  unsecured  medium-term  notes,  unsecured
pollution-control  revenues bonds, and counterparty rating to "Ba1" from "Baa3";
and preferred  stock to "ba1" from "baa3." The Company's  short-term  rating for
commercial  paper was also downgraded to "Prime-3" from "Prime-2."  Moody's said
the  downgrades  reflected  "adverse  financial  pressures  linked to  prolonged
nuclear  plant  outages,  especially  at the  Maine  Yankee  plant  as  well  as
uncertainty  surrounding  the  timing and extent of  recovery  of the  Company's
sizable potential stranded costs."

Industry Restructuring and Strandable Costs

As discussed in the Management's  Discussion and Analysis of Financial Condition
and  Results  of  Operations  included  in the  Company's  1996 Form  10-K,  the
enactment by Congress of the Energy Policy Act of 1992  accelerated  planning by
electric  utilities,   including  the  Company,  for  a  transition  to  a  more
competitive  industry.  Significant  legislative and regulatory  steps have been
taken toward  competition  in  generation  and  non-discriminatory  transmission
access as discussed  below. A departure from  traditional  regulation,  however,
could have  substantial  impacts on the value of utility  assets and on electric
utilities'  abilities to recover  their costs through  rates.  In the absence of
full recovery,  utilities would find their  above-market costs to be "stranded,"
or unrecoverable, in the new competitive setting.

The Company has substantial  exposure to cost stranding relative to its size. In
its January 1996 filing, the Company estimated its net-present-value  strandable
costs  could be  approximately  $2 billion as of  January 1, 1996.  These  costs
represented  the excess costs of  purchased-power  obligations and the Company's
own  generating  costs  over the  market  value of the  power,  and the costs of
deferred charges and other regulatory  assets. Of the $2 billion,  approximately
$1.3 billion was related to above-market  costs of  purchased-power  obligations
arising largely from the Company's  long-term,  noncancelable  contracts for the
purchase of capacity and energy from non-utility generators,  approximately $200
million was related to estimated  net  above-market  cost of the  Company's  own
generation,  and the remaining  $500 million was related to deferred  regulatory
assets.

The MPUC also provided estimates of strandable costs for the Company, which they
found to be within a wide range of a negative  $445  million to a positive  $965
million.  These estimates were prepared using assumptions that differ from those
used by the Company,  particularly a starting date for measurement of January 1,
2000 versus the  measurement  starting  date of January 1, 1996  utilized by the
Company.  The MPUC  concluded  that there is a high degree of  uncertainty  that
surrounds stranded costs estimates, resulting from having to rely on projections
and  assumptions  about future  conditions.  Given the inherent  uncertainty and
volatility of these projections,  the Company believes that an annual estimation
of stranded costs could serve to prevent  significant  over or  under-collection
beginning in the year 2000.  For a discussion  of an MPUC  proceeding  that will
determine the Company's stranded costs, see "Restructuring Legislation", below.

Estimated  strandable  costs are highly  dependent  on  estimates  of the future
market for power. Higher market rates lower stranded cost exposure,  while lower
market rates increase it. In addition to market-related impacts, any estimate of
the ultimate level of strandable costs depends on state and federal regulations,
the extent, timing and form that competition for electric service will take; the
ongoing  level of the  Company's  costs of  operations;  regional  and  national
economic  conditions;  growth of the Company's sales; timing of any changes that
may occur from state and federal initiatives on restructuring; and the extent to
which  regulatory  policies  and  proceedings  ultimately  address  recovery  of
strandable costs.

The  estimated  market rate for power is based on  anticipated  regional  market
conditions  and future costs of  producing  power.  The present  value of future
purchased-power  obligations  and the Company's  generating  costs  reflects the
underlying costs of those sources of generation in place today,  with reductions
for contract expirations and continuing depreciation.  Deferred regulatory asset
totals  include the  current  uncollected  balances  and  existing  amortization
schedules for purchased-power  contract  restructuring and buyouts negotiated by
the Company to lessen the impact of these obligations,  energy management costs,
financing  costs,  and  other  regulatory  promises.  The  Company  expects  its
strandable-cost  exposure  to  decline  over time as the  market  price of power
increases,    NUG   contracts   expire,   and   regulatory   assets,   including
decommissioning at nuclear power plants, are recovered.

Restructuring Legislation

On May 29,  1997,  the  Governor of Maine  signed into law a bill enacted by the
Maine  Legislature  that will restructure the electric utility industry in Maine
by March 1, 2000. With respect to the ability of the Company to recover stranded
costs, the legislation  requires the MPUC, when retail access begins, to provide
a "reasonable  opportunity"  to recover  stranded costs through the rates of the
transmission-and-distribution  company,  comparable to the utility's opportunity
to recover stranded costs before the  implementation  of retail access under the
legislation.  Stranded  costs are  defined  as the  legitimate,  verifiable  and
unmitigatable costs made unrecoverable as a result of the restructuring required
by the  legislation  and  would be  determined  by the MPUC as  provided  in the
legislation.   The  MPUC  must  conduct  separate  adjudicatory  proceedings  to
determine  the  stranded  costs for each utility and the  corresponding  revenue
requirements and  stranded-cost  charges to be charged by each  transmission and
distribution  utility.  Those proceedings must be completed by July 1, 1999. The
MPUC has initiated the  proceeding  that will  determine the Company's  stranded
costs,  corresponding  revenue  requirements  and  stranded-cost  charges  to be
charged by it when it becomes a  transmission-and-distribution  utility  and has
scheduled completion of the proceeding for the second half of 1998.

In addition,  the legislation  requires utilities to use all reasonable means to
reduce their potential  stranded costs and to maximize the value from generation
assets and contracts. The MPUC must consider a utility's efforts to mitigate its
stranded  costs in  determining  the  amount of the  utility's  stranded  costs.
Stranded costs and the related rates charged to customers will be  prospectively
adjusted as necessary to correct  substantial  inaccuracies in the year 2003 and
at least every three years thereafter.

The principal restructuring  provisions of the legislation provide for customers
to have direct  retail  access to generation  services and for  deregulation  of
competitive  electricity providers,  commencing March 1, 2000, with transmission
and distribution companies continuing to be regulated by the MPUC. By that date,
subject to possible  extensions  of time granted by the MPUC to improve the sale
value of generation assets,  investor-owned utilities are required to divest all
generation assets and  generation-related  business  activities,  with two major
exceptions:  (1) non-utility  generator contracts with qualifying facilities and
contracts with  demand-side  management or  conservation  providers,  brokers or
hosts, and (2) ownership  interests in nuclear power plants.  However,  the MPUC
can require the Company to divest its  interest  in Maine  Yankee  Atomic  Power
Company on or after  January 1, 2009.  The  Company  has  submitted  its plan to
divest its generation  assets to the MPUC as required by the  legislation and is
proceeding  with its previously  reported plan to sell its generation  assets in
1998. See  "Divestiture  of Generation  Assets,"  below.  The bill also requires
investor-owned  utilities,  after February 28, 2000, to sell their rights to the
capacity and energy from all generation  assets,  including the  purchased-power
contracts that had not  previously  been divested  pursuant to the  legislation,
with certain minor exceptions.

Upon the  commencement  of retail  access on March 1, 2000,  the  Company,  as a
transmission and distribution  utility, will be prohibited from selling electric
energy  to  retail  customers.  Any  competitive  electricity  provider  that is
affiliated  with the Company  would be allowed to sell  electricity  outside the
Company's  service  territory  without  limitation as to amount,  but within the
Company's service territory the affiliate would be limited to providing not more
than 33 percent of the total  kilowatt-hours  sold within the Company's  service
territory, as determined by the MPUC.

Other features of the legislation include the following:

      (a) After the effective date of the legislation, if an entity purchases 10
percent or more of the stock of a distribution  utility,  including the Company,
the purchasing  entity and any related  entity would be prohibited  from selling
generation service to any retail customer in Maine.
      (b)  The  legislation   encourages  the  generation  of  electricity  from
renewable  resources  by  requiring  competitive  providers,  as a condition  of
licensing,  to  demonstrate  to the MPUC that no less than 30  percent  of their
portfolios  of supply  sources for retail  sales in Maine are  accounted  for by
renewable resources.
      (c) The  legislation  requires  the  MPUC to  ensure  that  standard-offer
service is available to all consumers,  but any competitive  provider affiliated
with the Company  would be limited to  providing  such service for only up to 20
percent of the electric load in the Company's service territory.
      (d) Beginning  March 1, 2002, or, by MPUC rule, as early as March 1, 2000,
the providing of billing and metering services will be subject to competition.
      (e) A customer who  significantly  reduces or  eliminates  consumption  of
electricity  due to  self-generation,  conversion  to an  alternative  fuel,  or
demand-side  management  may not be assessed an exit fee or re-entry  fee in any
form  for  such   reduction   or   elimination   of   consumption   or  for  the
re-establishment of service with a transmission-and-distribution utility.
      (f)  Finally,   the  legislation  provides  for  programs  for  low-income
assistance,   energy   conservation,   research  and  development  on  renewable
resources,  assistance  for  utility  employees  laid  off  as a  result  of the
legislation, and recovery of nuclear-plant  decommissioning costs "[a]s required
by federal law, rule or order", all funded through transmission-and-distribution
utility rates and charges.

The  Company has stated that it supports  the  legislation  ultimately  enacted,
which reflects  protracted  negotiations  and  compromises  among the interested
constituencies  and is  evaluating  means of  mitigating  its  strandable  costs
through the financing of stranded assets.  The Company believes,  however,  that
some of the limitations  imposed on  transmission-and-distribution  utilities in
the  legislation  are  unnecessary  and   inappropriate   in  the   contemplated
competitive environment.

Environmental Matters

The Company  assesses on an ongoing basis,  compliance with laws and regulations
related to hazardous substance  remediation.  At September 30, 1997, the Company
had an accrued liability of $2.2 million for remediation costs at various sites.
The costs at  identified  sites may be  significantly  higher  if,  among  other
things,  other  potentially  responsible  parties  are not  financially  able to
contribute to these costs or identified  possible  outcomes change.  See Note 3,
"Commitments and Contingencies." - "Legal and Environmental Matters" for further
discussion of this matter.

Divestiture of Generation Assets

On April 28, 1997,  the Company  announced a plan to seek  proposals to purchase
its generation assets, including interests in nuclear plants and rights to power
under NUG contracts.  The Company  believes that current  market  conditions may
offer  advantages  to  seeking  proposals  before  divestiture  is  required  by
legislation.  Several other  utilities,  including New England  Electric  System
("NEES") in Massachusetts, are in the process of divestiture of their generation
assets with a large  number of  prospective  purchasers  expressing  interest in
acquiring the  facilities.  On August 6, 1997, NEES announced that it had agreed
to sell its non-nuclear  generating business to an affiliate of PG&E Corp. (U.S.
Generating Company).

In early June, the Company, working with its investment advisors,  developed and
contacted a group of approximately  150 potential  bidders that were believed to
be interested in the Company's  generation  assets and financially  qualified to
bid.  Non-binding  bids were  submitted to the Company in early  September  and,
based on those bids, the Company began a process of working with a smaller group
of qualified  buyers. On November 3, 1997, the Company sent bid documents to the
selected qualified buyers and requested final binding bids by December 10, 1997.
Upon  receipt of such bids the Company will  evaluate  the bids and  negotiate a
definitive  purchase-and-sale  agreement with the successful  bidder or bidders.
The  consummation  of a sale  will  extend  into  late  1998 and is  subject  to
regulatory  approvals and contractual  consents.  The Company does not intend to
sell its  generation  assets  if terms  satisfactory  to the  Company  cannot be
arranged.  The Company cannot predict whether such a sale will occur, whether it
will receive  satisfactory  proposals,  or whether the  necessary  approvals and
consents will be obtained.

Other Activities

On July 21, 1997 the Company and New York State Electric and Gas Corp.  signed a
memorandum of  understanding  that could lead to formation of a new  natural-gas
distribution  company to serve Maine  customers.  The Company has asked the MPUC
for permission to offer natural-gas  distribution  service to Maine customers in
areas  not  currently  served  by a  natural-gas  provider.  Various  regulatory
approvals  would be required before the Company or a jointly owned company could
operate a new gas distribution service.



Open-Access Transmission Service Rule

On April 24, 1996, the Federal Energy Regulatory  Commission (FERC) issued Order
No.  888,  which  requires  all public  utilities  that own,  control or operate
facilities used for transmitting  electric energy in interstate commerce to file
open access non-discriminatory  transmission tariffs that offer both load-based,
network and contract-based,  point-to-point service, including ancillary service
to   eligible   customers   containing   minimum   terms   and   conditions   of
non-discriminatory  service. This service must be comparable to the service they
provide  themselves at the wholesale  level; in fact,  these utilities must take
wholesale  transmission service they provide themselves under the filed tariffs.
The  order  also  permits  public  utilities  and  transmitting   utilities  the
opportunity to recover  legitimate,  prudent and verifiable  wholesale  stranded
costs  associated  with  providing  open access and certain  other  transmission
services.   It  further  requires  public  utilities  to  functionally  separate
transmission from generation marketing functions and communications.  The intent
of this order is to promote the transition of the electric  utility  industry to
open competition.  Order No. 888 also clarifies  federal and state  jurisdiction
over transmission in interstate commerce and local distribution and provides for
deference of certain issues to state recommendations.

On July 9, 1996, the Company and MEPCO submitted  compliance filings to meet the
new   pro   forma   tariff   non-price   minimum   terms   and   conditions   of
non-discriminatory  transmission. Since July 9, 1996, the Company and MEPCO have
been  transmitting  energy  pursuant to their filed tariffs,  subject to refund.
FERC subsequently issued Order No.
888-A, which generally reaffirmed Order No. 888 and clarified certain terms.

Also on April 24,  1996,  FERC  issued  Order No.  889,  which  requires  public
utilities  to   functionally   separate  their  wholesale  power  marketing  and
transmission   operation   functions  and  to  obtain  information  about  their
transmission  system for their own wholesale power  transactions in the same way
their  competitors  do through  the Open  Access  Same-time  Information  System
("OASIS").  The rule also  prescribed  standards  of conduct and  protocols  for
obtaining  the  information.  The  standards  of conduct are designed to prevent
employees of a public  utility  engaged in marketing  functions  from  obtaining
preferential  information.  The  Company  participated  in  efforts to develop a
regional  OASIS,  which was  operational  January  3,  1997.  FERC  subsequently
approved a New England Power Pool-wide Open Access Tariff, subject to refund and
issuance of further  orders.  The Company also  participated in revising the New
England Power Pool Agreement.

On April 23, 1997, a  representative  of Kennebunk  Light and Power District and
Fox Islands  Electric  Cooperative,  two  wholesale  customers  of the  Company,
notified the Company that the two customers were terminating  their power supply
contracts with the Company,  effective May 1, 1999,  and would begin  purchasing
power from another  supplier on that date. The two customers  currently  account
for less than 0.5 percent of the Company's annual revenues.

Impact of New Accounting Standards

In  February  1997,  FASB  issued  SFAS No.  128,  "Earnings  per  Share."  This
statement,  which is effective  for fiscal years  beginning  after  December 15,
1997, establishes simplified standards for computing and presenting earnings per
share  ("EPS").  It requires dual  presentation  of basic and diluted EPS on the
face of the income  statement for entities with complex  capital  structures and
disclosure of the calculation of each EPS amount.  The Company  anticipates that
adoption of the standard will not have a significant impact on reported EPS.

In June 1997, the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income."
This statement, which is effective for fiscal years beginning after December 15,
1997,  establishes  standards  for the  reporting  and display of  comprehensive
income and its components (revenues,  expenses,  gains and losses) in a full set
of general-purpose  financial statements.  The Company anticipates that adoption
of the standard will not have a significant impact on its financial statements.




<PAGE>


                           PART II - OTHER INFORMATION
Item 1. Legal Proceedings

Shareholder  Suit.  On  September  25,  1997,  a lawsuit was filed in the United
States  District  Court for the  Southern  District  of New York by a New Jersey
resident claiming to be a shareholder of the Company against the current members
of the Company's Board of Directors, including the President and Chief Executive
Officer of the Company,  and three former  directors.  The complaint  contains a
derivative  claim that the  defendants  recklessly  mismanaged the oversight and
operation of the Maine Yankee Plant and an individual  claim that the defendants
failed to make timely and adequate disclosures of information in connection with
issues  surrounding  the Plant.  The complaint does not seek damages against the
Company,  but  requests  that the  defendants  disgorge  the  compensation  they
received  during the period of alleged  mismanagement,  pay to the Company costs
incurred allegedly as a result of the claimed actions,  and cause the Company to
take steps to prevent such actions.

The Board and the Company believe the complaint is without merit. The Board will
contest the complaint.

Regulatory Matters.  For a discussion of certain significant  regulatory matters
affecting the Company, including those leading to a decision by the Maine Yankee
Board  of  Directors  to   permanently   shut  down  the  Maine  Yankee   Plant,
electric-utility restructuring, and stranded costs, including an MPUC proceeding
that will determine the Company's  stranded costs and an MPUC  investigation  of
the prudence of the Maine Yankee shutdown decision and related matters, see Note
2,  "Commitments  and  Contingencies" - "Maine Yankee Atomic Power Company," and
Item 2 of Part I, "Management's  Discussion and Analysis of Financial  Condition
and Results of Operation" - "Industry Restructuring and Strandable Costs," which
are incorporated herein by reference.

Tax Appeal.  For a discussion  of the Company's  appeal of two  significant
federal income tax adjustments  proposed by the Internal Revenue Service ("IRS")
see Note 3,  "Commitments  and  Contingencies"  - "Proposed  Federal  Income Tax
Adjustments."

Environmental   Matters.   For  a  discussion  of  administrative  and  judicial
proceedings concerning cleanup of hazardous waste sites see Note 2, "Commitments
and  Contingencies,"  "Legal and  Environmental  Matters," which is incorporated
herein by reference.

Item 2. Through Item 5. Not applicable

Item 6. Exhibits and Reports on Form 8-K

       (a)  Exhibits. None.

       (b)Reports on Form 8-K. The Company filed the  following  reports on Form
          8-K during the third quarter of 1997 and thereafter to date:

Date of Report                                   Items Reported

August 1, 1997                                       Item 5

 a)  The Board of Directors of Maine  Yankee  voted to  permanently  cease power
     operations at the Plant and begin the process of decommissioning the Plant.

Date of Report                                   Items Reported

September 2, 1997                                    Item 5

 a)  The MPUC  released the report of a consultant  it had retained to perform a
     management audit of Maine Yankee for the period January 1, 1994 to June 30,
     1997.

 b)  The Company received from the IRS a Revenue Agent's Report  summarizing all
     adjustments  proposed by the IRS as a result of its audit of the  Company's
     federal income tax returns for the years 1992 through 1994.



<PAGE>


                                   Signatures

Pursuant  to the  requirements  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.

                                        CENTRAL MAINE POWER COMPANY
                                               (Registrant)


Date: November 14, 1997                    By
                                                  ----------------------------
                                                  Michael W. Caron, Comptroller
                                                  (Chief Accounting Officer)


                                           By
                                                  ----------------------------
                                                  David E. Marsh, Chief 
                                                  Financial Officer (Principal
                                                  Financial Officer and duly 
                                                  authorized officer)