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 June 30, 1998
                                                

                                       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.
                                                Shares Outstanding
                  Class                        as of August 13, 1998

Common Stock, $5 Par Value                          32,442,752


<PAGE>


                                            Central Maine Power Company

                                                        INDEX


                                                                           Page
                                                                          Number

Part I.  Financial Information

Item 1 - Financial Statements
Consolidated Statement of Earnings for the Three Months
Ended June 30, 1998 and 1997                                                  1

Consolidated Statement of Earnings for the Six Months
Ended June 30, 1998 and 1997                                                  2

Consolidated Balance Sheet - June 30, 1998 and December 31, 1997:
  Assets                                                                      3
  Stockholders' Investment and Liabilities                                    4

Consolidated Statement of Cash Flows for the Six Months
Ended June 30, 1998 and 1997                                                  5

Notes to Consolidated Financial Statements                                    6

Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations                                          18

Item 3 - Quantitative and Qualitative Disclosures About Market Risk          31

Part II.  Other Information                                                  32

Signatures                                                                   34




<PAGE>






                         PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
                           Central Maine Power Company
<TABLE>
<S>                                                                      <C>             <C>  

                       CONSOLIDATED STATEMENT OF EARNINGS
                                   (Unaudited)
                 (Dollars in Thousands Except Per Share Amounts)
                                                                       For the Three Months
                                                                           Ended June 30,
                                                                        1998           1997
Electric Operating Revenues                                           $208,216        $210,074
                                                                       -------         -------

Operating Expenses
     Fuel used for company generation                                    7,909           6,921
     Purchased power - energy                                           85,469          94,837
     Purchased power - capacity                                         21,086          26,804
     Other operation                                                    49,687          49,518
     Maintenance                                                         8,563           8,306
     Depreciation and amortization                                      13,808          13,520
     Federal and state income taxes                                      1,477          (3,677)
     Taxes other than income taxes                                       5,987          7,108
                                                               
Total Operating Expenses                                               193,986         203,337
                                                                       
Equity In Earnings Of Associated Companies                                 157          2,144
                                                               
Operating Income                                                        14,387          8,881
                                                                
Other Income (Expense)
     Allowance for equity funds used during construction                   115             256
     Other, net                                                           (460)            824
     Income taxes                                                          532           (323)
                                                                
        Total Other Income                                                  187           757
                                                                
Income Before Interest Charges                                          14,574          9,638
                                                                
Interest Charges
     Long-term debt                                                     10,649          11,128
     Other interest                                                      2,351           1,233
     Allowance for borrowed funds used during construction                 (72)           (184)
                                                                
        Total Interest Charges                                          12,928          12,177
                                                                
Net Income (Loss)                                                        1,646          (2,539)
Dividends On Preferred Stock                                             1,074          2,207
                                                                
Earnings (Loss) Applicable To Common Stock                         $       572        $(4,746)
                                                                    

Weighted Average Number Of Shares Of Common Stock Outstanding       32,442,752      32,442,752
Earnings (Loss) Per Share Of Common Stock (Basic and Diluted)            $0.02          $(0.15)
Dividends Declared Per Share Of Common Stock                            $0.225          $0.225

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

<PAGE>



                           Central Maine Power Company
<TABLE>
<S>                                                                <C>             <C>   

                       CONSOLIDATED STATEMENT OF EARNINGS
                                   (Unaudited)
                 (Dollars in Thousands Except Per Share Amounts)
                                                                   For the Six Months
                                                                      Ended June 30,
                                                                  1998           1997
Electric Operating Revenues                                      $456,961        $478,441
                                                                

Operating Expenses
     Fuel used for company generation                              11,981          12,526
     Purchased power - energy                                     189,764         218,774
     Purchased power - capacity                                    45,462          59,944
     Other operation                                               93,460          93,267
     Maintenance                                                   18,654          14,623
     Depreciation and amortization                                 27,630          26,994
     Federal and state income taxes                                13,443           5,877
     Taxes other than income taxes                                 13,041          14,086
                                                                  
Total Operating Expenses                                          413,435         446,091
                                                                
Equity In Earnings Of Associated Companies                          1,748           4,044
                                                                    
Operating Income                                                   45,274          36,394
                                                                   
Other Income (Expense)
     Allowance for equity funds used during construction              289             502
     Other, net                                                    (1,201)          1,444
     Income taxes                                                     906            (571)
                                                               
        Total Other Income (Expense)                                   (6)          1,375
                                                               
Income Before Interest Charges                                     45,268          37,769
                                                                   
Interest Charges
     Long-term debt                                                21,499          22,342
     Other interest                                                 4,027           2,301
     Allowance for borrowed funds used during construction           (199)           (362)
                                                               
        Total Interest Charges                                     25,327          24,281
                                                                  
Net Income                                                         19,941          13,488
Dividends On Preferred Stock                                        2,971           4,415
                                                                  
Earnings Applicable To Common Stock                              $ 16,970       $   9,073
                                                                
Weighted Average Number Of Shares Of Common Stock Outstanding  32,442,752      32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted)              $0.52           $0.28
Dividends Declared Per Share Of Common Stock                        $0.45           $0.45


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)
                                                                           June 30,         December 31,
                                                                              1998                1997
                                                                          (Unaudited)

                                                       ASSETS
Electric Property, at original cost                                          $1,691,271          $1,674,876
    Less: Accumulated Depreciation                                              654,574             634,384
                                                                       
          Net electric property in service                                    1,036,697           1,040,492
    Construction work in progress                                                13,673              15,105
    Net nuclear fuel                                                              1,157               1,157
                                                                        
          Net electric property and nuclear fuel                              1,051,527           1,056,754
                                                                             

Investments In and Loans to Associated Companies, at equity                      94,684              76,509
                                                                        
    Total Net Electric Property and Investments in Associated Companies
                                                                              1,146,211           1,133,263
                                                                              

Current Assets
    Cash and cash equivalents                                                     2,927              20,841
    Accounts receivable, less allowances
   for uncollectible accounts of $2,812 in
    1998 and $2,400 in 1997:
       Service - billed                                                          68,368              84,323
       Service - unbilled                                                        40,108              46,807
       Other accounts receivable                                                 10,639              15,247
    Prepaid income taxes                                                          8,829                   -
    Fuel oil inventory, at average cost                                           7,066               5,390
    Materials and supplies, at average cost                                      12,626              11,779
    Funds on deposit with trustee                                                     -              61,694
    Prepayments and other current assets                                          6,283               9,110
                                                                        
          Total Current Assets                                                  156,846             255,191
                                                                        

Deferred Charges And Other Assets
    Recoverable costs of Seabrook 1 and abandoned projects, net                  81,283              84,026
    Yankee Atomic purchased-power contract                                       10,726              13,056
    Connecticut Yankee purchased-power contract                                  34,229              36,877
    Maine Yankee purchased-power contract                                       307,500             329,206
    Regulatory assets - deferred taxes                                          237,554             236,632
    Deferred charges and other assets                                           269,405             210,715
                                                                        
          Total Deferred Charges and Other Assets                               940,697             910,512
                                                                       

               TOTAL ASSETS                                                  $2,243,754          $2,298,966
                                                                              


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

<PAGE>






                           Central Maine Power Company

                           CONSOLIDATED BALANCE SHEET
                             (Dollars in Thousands)
                                                       June 30,     December 31,
                                                          1998          1997
                                                              (Unaudited)


                    STOCKHOLDERS' INVESTMENTS AND LIABILITIES

Capitalization
    Common-stock investment                            $   488,181   $   487,594
    Preferred stock                                         35,571        65,571
    Redeemable preferred stock                              27,910        39,528
    Long-term obligations                                  313,581       400,923
                                                           -------       -------
       Total Capitalization                                865,243       993,616
                                                           -------       -------

Current Liabilities and Interim Financing
    Interim financing                                      325,000       238,000
    Sinking-fund requirements                               16,850         9,411
    Accounts payable                                        69,566        97,080
    Dividends payable                                        8,379         9,202
    Accrued interest                                        10,503        11,201
    Accrued income taxes                                         -         3,001
    Miscellaneous current liabilities                       23,529        15,762
                                                            ------        ------
       Total Current Liabilities and Interim Financing     453,827       383,657
                                                           -------       -------

Commitments and Contingencies

Reserves and Deferred Credits
    Accumulated deferred income taxes                      376,492       350,912
    Unamortized investment tax credits                      29,799        30,533
    Yankee Atomic purchased-power contract                  10,726        13,056
    Connecticut Yankee purchased-power contract             34,229        36,877
    Maine Yankee purchased-power contract                  307,500       329,206
    Regulatory liabilities - deferred taxes                 56,628        56,852
    Other reserves and deferred credits                    109,310       104,257
                                                           -------       -------
       Total Reserves and Deferred Credits                 924,684       921,693
                                                           -------       -------

       Total Stockholders' Investment and Liabilities   $2,243,754    $2,298,966
                                                         =========     =========


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



<PAGE>


                                            Central Maine Power Company
                                       CONSOLIDATED STATEMENT OF CASH FLOWS
                                                    (Unaudited)
                                              (Dollars in Thousands)
                                                        For the Six Months
                                                          Ended June 30,
                                                       1998          1997
Operating Activities
Net income                                          $ 19,941          $13,488
Items not requiring (providing) cash:
    Depreciation                                      22,566           22,033
    Amortization                                      19,062           16,992
    Deferred income taxes and investment tax credit   24,676            1,752
    Allowance for equity funds used during construc     (289)            (502)
Changes in certain assets and liabilities:
    Accounts receivable                               27,262           25,676
    Inventories                                       (2,523)           4,619
    Other current assets                               2,827            3,532
    Accounts payable                                 (25,424)         (12,151)
    Accrued/prepaid taxes and interest               (12,528)            (243)
    Miscellaneous current liabilities                  7,767           (5,617)
    Deferred energy-management costs                  (1,428)            (267)
    Maine Yankee outage accrual                            -          (10,350)
    Deferred ice storm costs                         (51,323)               -
    Restructuring of purchased power contracts       (22,500)               -
    Other, net                                         5,954            5,019
                                                    --------          -------
Net Cash Provided by Operating Activities             14,040           63,981
                                                     -------           ------

Investing Activities
Construction expenditures                            (21,059)         (18,028)
Investments in and loans to associated companies     (18,120)          (5,205)
Changes in accounts payable - investing activities    (2,090)          (2,176)
                                                    ---------         -------
Net Cash Used by Investing Activities                (41,269)         (25,409)
                                                     -------           ------

Financing Activities
Issuances:
    Revolving credit agreement                        18,500           12,500
    Medium-term notes                                117,000          (10,000)
Redemptions:
    Preferred stock                                  (41,618)               -
    Medium-term notes                                (10,000)               -
    Mortgage bonds                                  (117,283)               -
Other long-term obligations                             (575)            (545)
Funds on deposit with trustee                         61,694           (2,182)
Dividends:
    Common stock                                     (14,609)         (14,609)
    Preferred stock                                   (3,794)          (4,415)
                                                    --------          -------
Net Cash Used by Financing Activities                  9,315          (19,251)
                                                     -------           ------
Net Decrease (Increase) in Cash                      (17,914)          19,321
Cash and cash equivalents, beginning of period        20,841            8,307
                                                      ------          -------
Cash and cash equivalents, end of period           $   2,927          $27,628
                                                    ========           ======

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, 1997 ("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.

     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 six months ended June
     30, 1998 and 1997 for  interest,  net of amounts  capitalized,  amounted to
     $24.0 million and $22.7 million,  respectively.  Income taxes paid amounted
     to $2.6 million and $7.2 million for the six months ended June 30, 1998 and
     1997.  The  Company  incurred no new capital  lease  obligations  in either
     period.

     Stock-Based  Compensation - The Company  accounts for employee  stock-based
     compensation in accordance with Statement of Financial Accounting Standards
     (SFAS) No. 123, "Accounting for Stock-Based  Compensation".  This statement
     establishes  financial  accounting and reporting  standards for stock-based
     employee  compensation  plans, such as stock purchase plans, stock options,
     restricted stock, and stock appreciation  rights. The statement defines the
     methods of  determining  the fair  value of  stock-based  compensation  and
     recommends  the  recognition  of  compensation  expense for book  purposes.
     However,  the statement allows entities to continue to measure compensation
     expense in accordance with the prior authoritative literature,  APB No. 25,
     "Accounting for Stock Issued to Employees", but requires that pro forma net
     income  and  earnings  per  share be  disclosed  for each year for which an
     income  statement  is presented  as if SFAS No. 123 had been  applied.  The
     Company has not elected to adopt the expense recognition provisions of SFAS
     No. 123. Under the Company's  Long-Term  Incentive Plan, stock options were
     granted in the second  quarter of 1998 with an exercise  price equal to the
     fair  market  value  on  the  date  of the  grant;  therefore,  no  expense
     recognition  is required.  Contingently  issuable  performance  shares were
     granted  in 1997 and  1998.  Both  have a  three-year  cycle  and are being
     accrued accordingly.

                                                   1977        1998

      Options granted                                 -      253,925
      Performance Shares*                        64,762       70,204

      *Accrue over a 3-year cycle.

     Earnings per Share - In February 1997, the Financial  Accounting  Standards
     Board ("FASB") issued Statement of Financial  Accounting Standards ("SFAS")
     No. 128,  "Earnings  per Share".  This  statement,  which is effective  for
     financial  statements  issued for periods  ending after  December 15, 1997,
     including interim periods,  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.

     Stock options and  performance  shares  granted to date under the Company's
     long-term incentive plan resulted in potential incremental shares of common
     stock outstanding for purposes of computing both basic and diluted earnings
     per share for the three and six months ended June 30, 1998 and 1997.  These
     incremental  shares were not material in the periods  presented and did not
     cause diluted earnings per share to differ from basic earnings per share.

     Impact of New Accounting Standards - 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.  In  June  1998,  the  FASB  issued  SFAS  No.  133,
     Accounting for Derivatives and Hedging Activities. The new standard applies
     to all entities and is  effective  for all fiscal  quarters of fiscal years
     beginning  after  June 15,  1999,  with  earlier  adoption  encouraged.  It
     requires companies to record derivatives on the balance sheet at their fair
     value  depending  on  the  intended  use  of the  derivative.  The  Company
     anticipates  that adoption of these  standards  will not have a significant
     impact on its financial statements.

 2.   Commitments and Contingencies

     Maine  Yankee  Atomic  Power  Company  - On August  6,  1997,  the Board of
     Directors of Maine Yankee voted to  permanently  cease power  operations at
     its nuclear generating plant at Wiscasset, Maine (the "Plant") and to begin
     decommissioning  the Plant.  The Plant  experienced a number of operational
     and regulatory problems, including being included on the Nuclear Regulatory
     Commission's  ("NRC") Watch List,  and had been shut down since December 6,
     1996. The decision to close the Plant  permanently 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 it.
     The  Plant's  operating  license  from the NRC was  scheduled  to expire on
     October  21,  2008.  For a detailed  discussion  of the  background  of the
     permanent  shutdown,  see the Company's  Annual Report on Form 10-K for the
     year ended December 31, 1997.

     The Company's 38-percent ownership interest in Maine Yankee's common equity
     amounted to $31.4 million as of June 30, 1998, 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 $380.6  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 $508.2  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 June 30, 1998, Maine Yankee had collected approximately
     $214.1 million for its decommissioning obligations.

     On November 6, 1997, Maine Yankee submitted its new estimate to the FERC as
     part of a rate  proceeding  reflecting the fact that the Plant is no longer
     operating  and  has  entered  the  decommissioning  phase.  Under  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.  Overall  operations  and  maintenance
     expenses have been reduced,  however, due to workforce reductions and other
     results of the permanent shutdown.  On January 14, 1998, the FERC issued an
     order  accepting  for filing the rates  associated  with the amended  Power
     Contracts,  made them effective  January 15, 1998,  subject to refund,  and
     ordered  that a  public  hearing  be  held  on the  prudence  of the  Plant
     shut-down decision and on the proposed rate amendments.  The prudence issue
     is being contested  vigorously by several  intervenors,  including the MPUC
     and the Maine Office of the Public  Advocate.  The hearing in the FERC rate
     proceeding  is currently  scheduled to begin in the first  quarter of 1999.
     The Company cannot predict the outcome of the proceeding.

     On September 1, 1997, Maine Yankee 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 in 1997 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 by the FERC in its opinion relating to the
     decommissioning  of the Yankee Atomic Electric  Company  ("Yankee  Atomic")
     nuclear  plant,  the  Company  believes  that  it is  entitled  to  recover
     substantially  all of its share of such costs from its  customers and as of
     June 30, 1998, is carrying on its  consolidated  balance sheet a regulatory
     asset and corresponding liability in the amount of $307.5 million, which is
     the $353 million  discussed  above net of the Company's  post-September  1,
     1997 cost-of-service payments to Maine Yankee.

     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. Among the report's  conclusions were that Maine Yankee's decision
     in December  1996 to proceed with the steps  necessary to restart the Plant
     was  "imprudent"  and that Maine  Yankee's May 27, 1997  decision to reduce
     restart  expenses  while  exploring  a  possible  sale  of  the  Plant  was
     "inappropriate",  and that the 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  shutdown
     decision and of the operation of the Plant prior to shutdown, and announced
     that it had directed its  consultant  to extend its review to include those
     areas.  Based on preliminary  indications,  the Company  expects the second
     phase of the report would recommend additional  disallowances.  The Company
     does  not  know how the MPUC  plans  to use the  consultant's  report,  but
     believes  the  report's  negative  conclusions  are  unfounded  and  may be
     contradictory.

     On April 7, 1998,  Maine Yankee refunded all of its mortgage bonds and bank
     debt by means of a three-year revolving credit facility and a term loan due
     in 2006.  The new debt  obligations  are secured by a security  interest in
     Maine Yankee's rights in its Power  Contracts,  Additional  Power Contracts
     and Capital Funds Agreements with its Sponsors (the "Assigned  Agreements")
     and its  rights to  certain  expected  third-party  payments,  and  contain
     restrictions  on the  payment  of  common-stock  dividends  based  on Maine
     Yankee's cash position and a debt-service  coverage  test. In addition,  in
     connection  with  the  refinancing  each  of the  Sponsors,  including  the
     Company,  affirmed its obligations under the Assigned Agreements and agreed
     not to take the position that the permanent shutdown of the Plant gave rise
     to any right to terminate or reduce payments under the Assigned Agreements.

     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
     plant. The Company has a 6-percent  equity interest in Connecticut  Yankee,
     totaling  approximately  $6.0  million  at June  30,  1998.  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  $34.2  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.

     Yankee Atomic. In 1993 the FERC approved a settlement  agreement  regarding
     recovery of decommissioning costs and plant investment, and all issues with
     respect to the  prudence of the  decision to  discontinue  operation of the
     Yankee Atomic plant. The Company  estimates its remaining share of the cost
     of Yankee  Atomic's  continued  compliance  with  regulatory  requirements,
     recovery of its plant investment, decommissioning and closing the plant, to
     be  approximately  $10.7  million.  This  estimate has been recorded by the
     Company as a  regulatory  asset and a liability  on the  Company's  balance
     sheet. As part of the MPUC's decision in the Company's 1993 base-rate case,
     the Company's  current share of costs related to the deactivation of Yankee
     Atomic is being recovered through rates.

     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 was off-line from April 1996 to July 1998 due to NRC concerns
     regarding  license  requirements.   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.

     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.  The Company
     cannot predict the schedule or scope of  remediation  due to the regulatory
     process and involvement of non-governmental  parties. At June 30, 1998, the
     liability   recorded  by  the  Company  for  its  estimated   environmental
     remediation costs amounted to $2.6 million, which management has determined
     to be the most  probable  amount  within the range of $2.6  million to $8.0
     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.

     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 against Northeast Utilities and its trustees,  and initiated
     an   arbitration   claim   against  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 on September  12,  1997,  the Company  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 Alternative Rate Plan ("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 June 30, 1998,  amounted to $16.0 million, or a decrease in
     net income of $9.5  million,  and which  could  increase  interest  expense
     approximately  $453,000  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 would be 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 as a result the potential interest has not been accrued.  On
     December 10, 1997,  the Company  filed a petition in the United  States Tax
     Court contesting the entire amount of the  deficiencies.  The Company plans
     to seek review of the asserted  deficiencies  by an IRS Appeals  Officer to
     determine  whether all or part of the dispute can be resolved in advance of
     a court  determination.  Absent such a  resolution,  the  Company  plans to
     pursue vigorously the Tax Court litigation, but cannot predict the result.

     Joint  Venture  - The  Company  and New York  State  Electric  & Gas  Corp.
     ("NYSEG") have entered into a joint-venture agreement to distribute natural
     gas to many Maine  communities  that are not now served with that fuel.  On
     July 24, 1998,  the MPUC  authorized  the  provision of such service by the
     joint venture.  If a further Securities and Exchange Commission approval is
     obtained  and  sufficient   customer  interest  is  expressed  to  make  it
     economically feasible, a new company owned equally by the Company and NYSEG
     would be in a position to offer gas in the Augusta and Bangor areas, and in
     other communities including Bath, Bethel, Brunswick,  Windham, Rumford, and
     Waterville

 3.   Regulatory and Legislative Matters

     Alternative  Rate Plan - On January 1, 1995, the Company's ARP was put into
     effect.  Instead of rate changes  based on the level of costs  incurred and
     capital  investments,  the ARP  provides  for one annual  adjustment  of an
     inflation-based  cap on  each of the  Company's  rates,  with  no  separate
     reconciliation  and recovery of fuel and  purchased-power  costs. Under the
     ARP,  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 MPUC confirmed in its order approving the
     ARP that the ARP is intended to comply with the  provisions of Statement of
     Financial  Accounting  Standards  No. 71,  "Accounting  for the  Effects of
     Certain  Types of  Regulation."  As a result,  the Company will continue to
     apply the provisions of SFAS No. 71 to its accounting  transactions and its
     future financial statements. See "Meeting the Requirements of SFAS No. 71,"
     below.

     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,  and includes fuel and
     purchased power cost that 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.

     A specified standard inflation index is the basis for each annual price-cap
     change.  The  inflation  index is  reduced  by the sum of two  productivity
     factors,  a general  productivity  offset of 1.0%  (0.5% for  1995),  and a
     second  formula-based  offset that started in 1996  intended to reflect the
     limited effect of inflation on the Company's  purchased-power  costs during
     the proposed five-year initial term of the ARP.

     The sharing  mechanism  may adjust the  subsequent  year's  July  price-cap
     change in the event the Company's earnings are outside a range of 350 basis
     points above or below the Company's  allowed return on equity  (starting at
     the 10.55%  allowed  return in 1995) and  indexed  annually  for changes in
     capital  costs.  Outside  that range,  profits  and losses  could be shared
     equally  by the  Company  and its  customers  in  computing  the  price-cap
     adjustment.  This feature  commenced  with the price-cap  change of July 1,
     1996.  The ROE used for earnings  sharing was increased to 11.5%  effective
     with the July 1999 price change.

     The ARP also  provides  for  partial  flow-through  to  ratepayers  of cost
     savings from non-utility  generator  contract  buy-outs and  restructuring,
     recovery of  energy-management  costs,  and penalties for failure to attain
     customer-service  and  energy-efficiency  targets.  The ARP also  generally
     defines   mandated   costs  that  would  be   recoverable  by  the  Company
     notwithstanding  the index-based price cap. To receive such treatment,  the
     annual  revenue  requirement  related  to a  mandated  cost must  exceed $3
     million  and  have  a  disproportionate   effect  on  the  Company  or  the
     electric-power industry.

     On May 13, 1998, the Company submitted its final 1998 ARP compliance filing
     to the MPUC.  In  keeping  with its  pledge of  limiting  increases  to the
     inflation  index,  the  Company  voluntarily  limited its request to 1.78%,
     which was the  inflation  rate for 1997  under the ARP.  The  Company  also
     proposed a rate reduction of ten percent  contingent on the consummation of
     the  Company's  planned  sale of  generating  assets late in the year.  The
     filing also contained  information on the costs of restoring service to the
     Company's  customers after the January ice storm, as required by an earlier
     MPUC order allowing the Company to defer those costs. Subsequent to the May
     13 filing,  the Company  stipulated,  and the MPUC  subsequently  approved,
     effective July 11, 1998, a 1.33% increase. The amount of the increase could
     change,  based on the outcome of the pending FERC proceeding related to the
     permanent shutdown of the Maine Yankee plant. Depending on FERC's decision,
     the price increase  could  increase or decrease,  ranging from a ceiling of
     1.78% to a floor of 0.22%.

     The  components of the last three ARP price  increase  approved by the MPUC
     are as follows:

                                            1998         1997         1996
                                            ----         ----         ----

 Inflation Index                            1.78%         2.12%        2.55%
 Productivity Offset                       (1.00)        (1.00)       (1.00)
 Qualifying Facility Offset                 (.29)         (.42)          -
 Earnings Sharing                           1.12            -           .32
 Flowthrough and Mandated Items             (.28)          .40         (.61)
                                            ----         -----         -----
                                            1.33%         1.10%        1.26%
                                            ====          ====         ====

     Industry  Restructuring  and  Strandable  Costs  -  Legislation  that  will
     restructure  the  electric-utility  industry in Maine by March 1, 2000, was
     enacted by the Maine  Legislature in May 1997. A departure from traditional
     regulation,  however,  could  have a  substantial  impact  on the  value of
     utility  assets and on the ability of electric  utilities 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.  The major  portion of the Company's  strandable  costs is related to
     above-market  costs  of  purchased-power   obligations   arising  from  the
     Company's long-term,  noncancelable  contracts for the purchase of capacity
     and energy from non-utility  generators  ("NUGs"),  and deferred regulatory
     assets. There is a high degree of uncertainty that surrounds  stranded-cost
     estimates,  resulting  from having to rely on projections  and  assumptions
     about future conditions,  including,  among others, estimates of the future
     market for power.

     Restructuring   Legislation   and  MPUC   Proceeding   -  The  1997   Maine
     restructuring  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.  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.  The MPUC is  conducting  the  proceeding  that  will  determine  the
     Company's  stranded costs and  corresponding  revenue  requirements and has
     scheduled  completion of the  proceeding  for the first quarter of 1999. On
     December 5, 1997,  the Company  filed direct  testimony  in the  proceeding
     estimating      its     future      revenue      requirements      as     a
     transmission-and-distribution  utility  and  providing  an  estimate of its
     strandable   costs.   The  Company   estimated  its  strandable   costs  at
     approximately  $1.3 billion.  On February 10, 1998, the Company reduced its
     estimate of  strandable  costs to $0.8  billion to reflect the  anticipated
     sale of its generating assets later in the year. The Company cannot predict
     the results of the MPUC proceeding.

     Recovery of nuclear-plant decommissioning costs as required by federal law,
     rule or order, will be funded through transmission-and-distribution utility
     rates and charges. 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 any  substantial  inaccuracies  in the year 2003 and at least every
     three years thereafter.

     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. On June
     30,  1998,  the MPUC  approved the  creation of such an  affiliated  energy
     provider,  subject to certain  conditions  designed to eliminate any market
     advantage  the new  company  might gain  through its  affiliation  with the
     Company

     Agreement for Sale of Company's Generation Assets - On January 6, 1998, the
     Company  announced  that  it  had  reached  agreement  to  sell  all of its
     hydro-fossil and biomass power plants with a combined  generating  capacity
     of 1,185 megawatts for $846 million in cash to Florida-based FPL Group. The
     related  book  value for these  assets is  approximately  $221  million  at
     December 31, 1997. In addition,  as part of its  agreement  with FPL Group,
     the Company entered into energy buy-back agreements to assist in fulfilling
     its obligation to supply its customers with power until March 1, 2000.

     The Company's  interests in the power  entitlements  from  approximately 50
     power-purchase   agreements  with   non-utility   generators   representing
     approximately  488 megawatts,  its 2.5-percent  interest in the Millstone 3
     nuclear  generating  unit  in  Waterford,   Connecticut,  its  3.59-percent
     interest in the output of the Vermont  Yankee nuclear  generating  plant in
     Vernon, Vermont, and its entitlement in the NEPOOL Phase II interconnection
     with Hydro-Quebec all attracted insufficient interest to be included in the
     present  sale.  The Company will  continue to seek buyers for those assets.
     The  Company  did not offer  for sale its  interests  in the  Maine  Yankee
     (Wiscasset,  Maine),  Connecticut Yankee, (Haddam,  Connecticut) and Yankee
     Atomic (Rowe, Massachusetts) nuclear generating plants, all of which are in
     the process of being decommissioned.

     Substantially all of the generating assets included in the sale are subject
     to the lien of the Company's General and Refunding Mortgage Indenture dated
     as of April 15, 1976 (the "Indenture"). Therefore, substantially all of the
     proceeds  from sale must be deposited  with the trustee under the Indenture
     at the closing of the sale to free the  generating  assets from the lien of
     the  Indenture.  Proceeds  on deposit  with the  trustee may be used by the
     Company to redeem or  repurchase  bonds  under the terms of the  Indenture,
     including  the  possible  discharge  of the  Indenture.  In  addition,  the
     proceeds could provide the flexibility to redeem or repurchase  outstanding
     equity securities.  The Company must also provide for payment of applicable
     taxes  resulting  from the sale.  The  manner  and  timing of the  ultimate
     application  of the sale proceeds after closing are in any event subject to
     various factors,  including  Indenture  provisions,  market  conditions and
     terms of outstanding securities.

     The bid value in excess of the  remaining  investment  in the power  plants
     will reduce the Company's stranded costs and other costs, which could lower
     the amount that would  otherwise be collected from customers by nearly half
     a billion dollars.  However,  the Company will incur incremental costs as a
     result of the power buy-back  arrangements  in excess of the pre-sale costs
     of capacity and energy from the plants being sold,  which will  effectively
     lower the amount of sale  proceeds  available to reduce  stranded and other
     costs.

     The sale is subject to various closing  conditions,  including the approval
     of state and federal  regulatory  agencies,  which the  Company  expects to
     extend  into the last  quarter  of 1998,  and is  subject  to  consents  or
     covenant  waivers from  certain of the  Company's  lenders.  The Company is
     pursuing the  necessary  regulatory  approvals,  consents and waivers,  but
     cannot predict whether or in what form they will be obtained.

     Storm  Damage to  Company's  System - On January 7 through 9, 1998,  an ice
     storm of  unprecedented  breadth and severity struck the Company's  service
     territory, causing power outages for approximately 280,000 of the Company's
     528,000  customers,  and  substantial  widespread  damage to the  Company's
     transmission and distribution system. To restore its electrical system, the
     Company supplemented its own crews with utility and tree-service crews from
     throughout  the  northeastern  United  States  and  the  Canadian  maritime
     provinces,  with assistance from the Maine national guard.  The incremental
     costs of the repair effort totaled approximately $51 million, most of which
     is labor-related.

     On January 15, 1998,  the MPUC issued an Order (the  "Order")  allowing the
     Company to defer on its books the incremental  non-capital costs associated
     with the  Company's  efforts to restore  service in  response to the damage
     resulting from the storm.  The Order  requires the Company,  as part of its
     annual filing under its ARP, to file  information  on the amounts  deferred
     under the Order and to  submit a  proposal  as to how the costs  associated
     with the Order  should be  recovered  under the ARP.  In the ARP filing the
     Company stated that once the final cost of the storm was determined and the
     status of federal assistance was finalized the Company would propose a plan
     for  recovery  of its costs.  Based on the MPUC  order,  potential  federal
     assistance   and/or   collection   in  rates,   the  Company  has  deferred
     approximately  $51 million in  storm-related  costs as of June 30, 1998. On
     May 1, 1998,  President Clinton signed a Congressional  appropriation  bill
     that included $130 million in storm-damage cost  reimbursement for electric
     utilities The Company cannot predict what portion of its ice  storm-related
     costs it will  recover  from the  Congressional  appropriation  or from its
     customers.

     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 1997 legislation enacted in Maine providing for 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.  Future regulatory
     rules or other  circumstances  could cause the  application of FAS 71 to be
     discontinued,  which could  result in a non-cash  write-off  of  previously
     established regulatory assets.

 4.   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.  During the second
     quarter,  the Company issued variable rate  medium-term  notes totaling $57
     million in  principal  amount.  Notes in the amount of $10 million  matured
     during the quarter.  As of June 30, 1998, $150 million of medium-term notes
     were outstanding.

     On April 1, 1998,  the  Company  redeemed  all of the  outstanding  300,000
     shares of its Preferred  Stock 7-7/8% Series at a redemption  price of $100
     per share. No accrued  dividends were paid on the preferred stock since the
     redemption date was a regular dividend payment date. On April 15, 1998, the
     Company paid at maturity its $25 million principal amount of Series U 7.54%
     Bonds.

     On April 30, 1998,  the Company  deposited  $30.6  million with the trustee
     under the  provisions  of the  Company's  General  and  Refunding  Mortgage
     Indenture making a total of $31.3 million then on deposit.  Utilizing these
     funds  on June  15,  1998,  the  Company  redeemed  $31.3  million,  of the
     outstanding  $75 million  principal  amount of its Series P 7.66% Bonds due
     2000, at a redemption price of par value plus accrued interest.  On June 8,
     1998, the Company  repurchased through a tender offer 116,175 shares of its
     7.99%  Preferred  Stock  ($100 par value) for a purchase  price of $108 per
     share.

 5.   Purchase Power Contract

     On April 3, 1998, the Company agreed to buy out a  power-purchase  contract
     with the owner of a  non-utility  generator  who had operated a 20-megawatt
     wood-fired  generator  associated  with a paper mill that was being closed.
     The Company paid the owner  approximately $22.5 million on May 1, 1998, and
     expects  to save  approximately  $3.5  million  per  year to the end of the
     contract's term in mid-2004.


 6.   Fiber Optic Network

     The Company, largely through its wholly-owned subsidiary MaineCom Services,
     owns 38.5  percent of the common  stock of Northeast  Optic  Network,  Inc.
     ("NEON"),  the  successor  of  FiveCom,  Inc.,  and  is a  facilities-based
     provider  of   technologically   advanced,   high-bandwidth,   fiber  optic
     transmission capacity for communications carriers on local loop, inter-city
     and  interstate  facilities.  NEON is currently  expanding  its fiber optic
     network to encompass over 900 route miles, or more than 60,000 fiber miles,
     in  New  England  and  New  York,   utilizing  primarily   electric-utility
     rights-of-way,  including  some of the Company's in Maine and some owned by
     Northeast   Utilities,   another  substantial  minority   stockholder,   in
     Connecticut, Massachusetts and New Hampshire. As of June 30, 1998, NEON had
     completed  construction of  approximately  295 route miles, or 19,500 fiber
     miles, of its planned system and is currently engineering, constructing, or
     acquiring  additional  routes  with a goal of creating a  continuous  fiber
     optic link between New York City and Portland,  Maine, with access into and
     around Boston and numerous other major service areas in the Northeast.

     On August 5, 1998, NEON completed initial public offerings of $54.0 million
     of common stock and $180.0  million of senior  notes,  and the Company,  as
     part of the  common-stock  offering,  sold  some of its  shares in NEON for
     proceeds of  approximately  $3.4  million.  In  addition,  with some of the
     proceeds of the offering NEON repaid  approximately $18 million the Company
     had advanced  under an earlier  construction  loan  agreement.  The Company
     believes  there is a growing  need for such a fiber  optic  network  in the
     Northeast  and that  NEON's  outside  financing  will  provide  substantial
     assistance in completing  construction  of the network,  but cannot predict
     the results of this venture.



<PAGE>


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

Note RE Forward-Looking Statement
This  Report  on  Form  10-Q  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 industry  restructuring,
including the ongoing state and federal activities; the results of the Company's
planned sale of its  generating  assets;  the  Company's  ability to recover its
costs resulting from the January 1998 ice storms;  future  economic  conditions;
earnings-retention   and   dividend-payout   policies;   developments   in   the
legislative,  regulatory,  and  competitive  environments  in which the  Company
operates,  including  regulatory  treatment  of stranded  costs;  the  Company's
investment in unregulated businesses;  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
Net income was $1.6 million for the second quarter of 1998 compared to a loss of
$2.5 million for the corresponding  period in 1997.  Year-to-date net income was
$19.9 million  versus $13.5  million for the 1997 period.  The 1998 results have
benefited from reduced operating costs for the Company's 38-percent share of the
Maine  Yankee  Plant and lower fuel costs due to the  expiration  of a high-cost
contract for non-utility  energy.  Earnings applicable to common stock were $0.6
million or $0.02 per share for the second  quarter of 1998 compared to a loss of
$4.7 million or $0.15 per share for the comparable period in 1997.  Year-to-date
earnings  applicable  to common  stock were $17.0  million or $0.52 per share in
1998 and $9.1 million or $0.28 per share in 1997.

Service-area   sales  of   electricity   totaled   approximately   2.19  billion
kilowatt-hours  in the  second  quarter  of 1998,  down  slightly  from the 2.23
billion kilowatt-hour level of a year ago.



<PAGE>


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


                               Service Area Kilowatt-hour Sales (Millions of KWHs)
                                              Period Ended June 30,

                                 Three                                           Six
                                 Months                                        Months
                            1998           1997        % Change          1998            1997         % Change
                            ----           ----        --------          ----            ----         --------

Residential                 648.1          657.1          (1.4)%        1,391.3          1,465.0        (5.0)%
Commercial                  615.5          585.2           5.2          1,236.5          1,236.9         0.0
Industrial                  868.2          931.6          (6.8)         1,714.2          1,857.2        (7.7)
Other                        57.2           52.4           9.1            117.8            111.8         5.3
                        ---------      ---------                       --------         --------
                          2,189.0        2,226.3          (1.7)%        4,459.8          4,670.9        (4.5)%
                          =======        =======                        =======          =======
</TABLE>


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

     Kilowatt-hour  sales to residential  customers  decreased by 1.4 percent in
     the second  quarter and decreased by 5.0 percent for the  six-month  period
     compared to 1997.  The decrease in  residential  sales was due primarily to
     mild temperatures during the first six months of 1998, largely in the first
     quarter, and the loss of sales due to the January 1998 ice storm. Usage per
     customer was down 5.9 percent for the six months ended June 30, 1998.

     Commercial  kilowatt-hour  sales  increased  by 5.2  percent  in the second
     quarter,  bringing  the  year-to-date  June 30, 1998 sales in line with the
     June 30, 1997 sales.  The increase was due primarily to increased demand in
     the retail and service sectors.

     Industrial  kilowatt-hour  sales  decreased  by 6.8  percent  in the second
     quarter and by 7.7 percent for the six months ended June 30, 1998, compared
     to 1997.  This was due primarily to the closing of two pulp and paper mills
     and the  expiration  of a buy/sell  contract  with a third paper mill.  The
     pulp-and-paper   sector  accounts  for  approximately  56  percent  of  the
     industrial sales category.

MEPCO's  electric  sales and  transmission  revenues from New England  utilities
other than the Company  amounted to $0.6  million and $4.3 million in the second
quarters of 1998 and 1997,  respectively.  In the earlier  period MEPCO recorded
revenue and expense for power sales and purchases on behalf of other  utilities,
as  well as the  related  transmission  revenues,  whereas  in  1998 it  started
recording only the transmission revenues. Under new transmission rules in effect
the sellers and purchasers of the power  transmitted by MEPCO deal directly with
each other and MEPCO provides only the transmission service.

Purchased  power-energy  expense  decreased by $9.4 million and $29.0 million in
the first  three and six months,  respectively,  of 1998  compared to 1997.  The
decrease  is due  primarily  to  the  expiration  of a  contract  with  a  major
non-utility generator in October of 1997.

Purchased power-capacity expense decreased $5.7 million and $14.5 million in the
first three and six months,  respectively,  of 1998 compared to 1997, due to the
permanent shutdown of the Maine Yankee plant in August 1997.

Maintenance  expense  increased  $4.0  million for the six months ended June 30,
1998 compared to 1997. This increase was due primarily to the first quarter,  in
which  operations  personnel  worked in a  maintenance  capacity  during the ice
storm. The corresponding  decrease to operations expense was offset by increases
in pension and benefits,  general expense and outside services, and transmission
expense in the first quarter of 1998.

Federal and state income taxes fluctuate with the level of pre-tax  earnings and
the regulatory  treatment of taxes by the MPUC.  This expense  increased by $5.2
million and $7.6 million for the three and six-month  period ended June 30, 1998
compared  to 1997,  as a result of higher  pre-tax  earnings  for the six months
ended June 30, 1998, when compared to 1997.

Property taxes  decreased by $1.1 million in the second quarter of 1998 compared
to 1997  due to a  refund  from the town of  Yarmouth  based  on  previous  over
assessments of property values.

Equity in Earnings of  Associated  Companies  decreased  by $2.3  million in the
first half of 1998 compared to 1997,  primarily due to losses  recognized due to
start-up  costs  of  Northeast   Optic  Network,   Inc.,  a   telecommunications
subsidiary. See "Expansion of Lines of Business" below for further discussion.

Other Income  decreased by $2.6 million in the first half of 1998 as compared to
1997,  primarily  due  to  excess  expenses  over  revenues  associated  with  a
non-regulated  division  of the  Company.  As a result  there was a decrease  in
income tax expense on other income.

Other interest  expense  increased by $1.7 million during the first half of 1998
compared to 1997.  The increase was due  primarily to higher levels of borrowing
on the bank revolving credit facility to meet working capital needs.

In July 1997,  the Company  redeemed $14 million of its 8 7/8% Series  Preferred
Stock at par, under the mandatory and optional  sinking-fund  provisions of that
series.  This reduced dividends by approximately $621 thousand in the first half
of 1998  compared to 1997.  On April 1, 1998 the Company  redeemed  all of its 7
7/8% Preferred Stock ($30 million),  reducing  dividends by  approximately  $591
thousand in the second quarter of 1998 compared to 1997. On June 8, 1998,  $11.6
million  par  value of the  outstanding  7.99%  Preferred  Stock  was  redeemed,
reducing  dividends by approximately $232 thousand in the second quarter of 1998
compared to 1997. On July 1, 1998, the Company  redeemed the final $7 million of
its 8 7/8 Preferred Stock under the mandatory sinking-fund provision.

"Year 2000" Computer Issues
As the year 2000  approaches,  most large  companies  are  facing 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  review and  assessment  of
non-centralized  systems and equipment  should be completed during third quarter
of  1998.  Some  additional   remediation   work  has  been  identified  in  the
non-centralized  areas.  The Company believes it will incur  approximately  $3.4
million of costs associated with making the necessary  modifications  identified
to date to both the  centralized  and  non-centralized  systems.  As of June 30,
1998,  approximately  $2.0  million of costs have been  incurred.  Although  the
Company has requested compliance information from all vendors and suppliers,  it
cannot predict the extent of its  vulnerability to third parties'  noncompliance
and their failure to remediate year 2000 issues.

Liquidity and Capital Resources
Increases in the Company's  retail rates are limited by the Company's ARP. For a
discussion of the ARP, including a 1.33-percent rate increase effective July 11,
1998,  and the  possibility of a ten-percent  rate  reduction  contingent on the
consummation  of the Company's  planned sale of  generating  assets later in the
year, see Note 3,  "Regulatory  and  Legislative  Matters" -  "Alternative  Rate
Plan."

Approximately  $86.0 million of cash was provided  during the first half of 1998
from net income before non-cash items, primarily depreciation,  amortization and
deferred income taxes.  During that period  approximately  $71.9 million of cash
was used for  fluctuations  in  certain  assets and  liabilities  and from other
operating activities.



Investing  activities,  primarily  construction  expenditures,   utilized  $23.2
million  in cash  during the first  half of 1998 for  generation,  transmission,
distribution, and general construction expenditures in addition to $18.1 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.

During  the first  half of 1998,  dividends  paid on  common  stock  were  $14.6
million, while preferred-stock dividends utilized $3.8 million of cash.

On April 30, 1998,  the Company  deposited  $30.6 million with the trustee under
the provisions of its General and Refunding Mortgage  Indenture,  making a total
of $31.3 million on deposit.  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.  On June 15,
1998,  the  Company  redeemed  $31.3  million  of the  outstanding  $75  million
principal  amount of its Series P 7.66% Bonds due 2000,  at a  redemption  price
equal to their  principal  amount plus accrued  interest.  Such cash may also be
withdrawn  by the Company by  substitution  of allocated  property  additions or
available bonds.

On April 1, 1998, the Company redeemed all of the outstanding  300,000 shares of
its Preferred  Stock 7 7/8% Series at a redemption  price of $100 per share.  No
accrued dividends were paid on the preferred stock since the redemption date was
a regular  dividend payment date. On April 15, 1998 the Company paid at maturity
its $25 million  principal  amount of Series U 7.54% Bonds.  On June 8, 1998 the
Company repurchased through a tender offer 116,175 shares of its 7.99% Preferred
Stock ($100 par value) for a purchase  price of $108 per share and on July 1 the
Company  redeemed the last $7 million of its 8 7/8% Preferred  Stock through the
mandatory  sinking fund. On August 15, 1998, the Company's  Series S 6.03% Bonds
($60 million principal amount) will mature.

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 was  implemented to
increase the Company's  financing  flexibility in anticipation of  restructuring
and  increased  competition.  During the second  quarter,  the  Company on May 1
issued a one-year  medium-term note in the principal  amount of $47 million,  on
June 18 a one-year  medium-term note in the principal amount of $10 million,  on
July 28 a one-year  medium-term  note in the principal amount of $10 million and
on  August  12, a  one-year  medium-term  note in the  principal  amount  of $10
million.  This,  after  reflecting  maturities of $10 million,  raises the total
outstanding  to $170  million  as of August 13,  1998,  which  would  permit the
issuance of an additional $330 million of such notes under the program.

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  based upon of the
Company's past 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 $78.5 million in outstanding
notes as of June 30, 1998 under the credit facilities.

On August 5, 1998, the MPUC approved the Company's application to purchase up to
11 million shares of its outstanding common stock over a three-year period, with
a  limitation  of three  million  shares  that may be  repurchased  prior to the
closing of the sale of the Company's  generating assets. The amount of any stock
purchases  and their timing will depend on the need for equity in the  Company's
capital  structure,  investment  opportunities  and  other  considerations.  The
Company has not yet adopted a formal stock-purchase plan.

On April 3, 1998, the Company agreed to buy out a  power-purchase  contract with
the owner of a non-utility  generator who had operated a 20-megawatt  wood-fired
generator  associated with a paper mill that was being closed.  The Company paid
the owner  approximately  $22.5  million  on May 1,  1998,  and  expects to save
approximately  $3.5  million  per  year  to the  end of the  contract's  term in
mid-2004.

Effective  July 28, 1998,  the Company  replaced a purchased  power contract for
energy  from a  wood-fired  plant  in  Stratton,  Maine.  The old  contract  was
terminated and a new agreement for 45 megawatts at lower rates was entered into,
which is  estimated  to save the Company  over $28 million in net present  value
over the contract's term through August 2009.

Storm Damage to Company's System - On January 7 through 9, 1998, an ice storm of
unprecedented  breadth and  severity  struck the  Company's  service  territory,
causing  power  outages  for  approximately  280,000  of the  Company's  528,000
customers,  and substantial  widespread damage to the Company's transmission and
distribution  system. To restore its electrical system, the Company supplemented
its  own  crews  with  utility  and  tree-service   crews  from  throughout  the
northeastern United States and the Canadian maritime provinces,  with assistance
from the Maine national  guard.  The Company's  incremental  costs of the repair
effort totaled approximately $51 million, most of which is labor-related.

On January 15, 1998, the MPUC issued an Order (the "Order") allowing the Company
to defer on its books the  incremental  non-capital  costs  associated  with the
Company's  efforts to restore  service in response to the damage  resulting from
the storm.  The Order  requires the Company,  as part of its annual filing under
the ARP,  to file  information  on the amounts  deferred  under the Order and to
submit a  proposal  as to how the  costs  associated  with the  Order  should be
recovered  under the ARP.  In the ARP filing the  Company  stated  that once the
final cost of the storm was determined and the status of federal  assistance was
finalized the Company  would propose a plan for recovery of its costs.  Based on
the MPUC order,  potential  federal  assistance  and/or collection in rates, the
Company has deferred approximately $51 million in storm related costs as of June
30, 1998. On May 1, 1998, President Clinton signed a Congressional appropriation
bill that included $130 million in storm-damage cost  reimbursement for electric
utilities.  The Company  cannot  predict what  portion of its ice  storm-related
costs  it  will  recover  from  the  Congressional  appropriation  or  from  its
customers.

Permanent Shutdown of Maine Yankee Plant
On August 6, 1997,  the Board of Directors of Maine Yankee voted to  permanently
cease power operations at its nuclear generating plant at Wiscasset,  Maine (the
"Plant") and to begin  decommissioning  the Plant.  As reported in detail in the
Company's  Annual Report on Form 10-K for the year ended  December 31, 1997, the
Plant had  experienced a number of operational  and regulatory  problems and has
been  shut  down  since  December  6,  1996.  The  decision  to close  the Plant
permanently  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 it. The Plant's operating license from the NRC
was scheduled to expire on October 21, 2008.

Recent Operating  History - The Plant provided  reliable and low-cost power from
the time it commenced  operations in late 1972 to 1995. Beginning in early 1995,
however,   Maine  Yankee   encountered   various   operational   and  regulatory
difficulties  with the  Plant.  In 1995,  the Plant was shut down for almost the
entire  year to  repair  a large  number  of steam  generator  tubes  that  were
exhibiting defects.  Shortly before the Plant was to go back on-line in December
1995,  a group with a history of  opposing  nuclear  power  released an undated,
unsigned,  anonymous  letter  alleging  that  in 1988  Yankee  Atomic  (then  an
affiliated  consultant of Maine Yankee) and Maine Yankee had used the results of
a faulty  computer  code as a basis to apply to the NRC for an  increase  in the
Plant's power output. In response to the allegation, on January 3, 1996, the NRC
issued a  Confirmatory  Order  that  restricted  the Plant to 90  percent of its
licensed thermal operation level, which restriction was still in effect when the
Plant was permanently shut down.

As a result of the controversy associated with the allegations,  the NRC, at the
request of the  Governor of Maine,  conducted an  intensive  Independent  Safety
Assessment  ("ISA") of the Plant in the  summer and fall of 1996.  On October 7,
1996,  the NRC issued its ISA report,  which found that while the Plant had been
operated safely and could continue to operate, there were weaknesses that needed
to be addressed,  which would require  substantial  additional spending by Maine
Yankee.  On  December  10,  1996,  Maine  Yankee  responded  to the ISA  report,
acknowledged  many of the  weaknesses,  and committed to revising its operations
and procedures to address the NRC's criticisms.

Another  result  of the  controversy  associated  with  the  allegations  was an
investigation  of Maine Yankee  initiated by the NRC's Office of  Investigations
("OI"),  which, in turn, referred certain issues to the United States Department
of Justice ("DOJ") for possible criminal prosecution. Subsequently, on September
27, 1997, the DOJ, through the United States Attorney for Maine,  announced that
its review had  revealed  insufficient  grounds for  criminal  prosecution.  The
Company believes that the OI investigation,  however, could ultimately result in
the imposition of civil penalties,  including fines, on Maine Yankee and expects
resolution of outstanding NRC enforcement action in 1998.

In 1996 the Plant was generally in operation at the  90-percent  level from late
January to early  December,  except for a  two-month  outage  from  mid-July  to
mid-September.  The Plant was shut down again on  December  6, 1996,  to address
several  concerns,  and has not operated  since then.  The  precipitating  event
causing  the  shutdown  was the need to evaluate  and  resolve  cable-separation
compliance  issues,  and on December  18,  1996,  the NRC issued a  Confirmatory
Action Letter  requiring the Plant to remain shut down until Maine Yankee's plan
for resolving the cable-separation issues was accepted by the NRC. Subsequently,
Maine Yankee uncovered additional issues, including among others the possibility
of  having  to   replace   defective   fuel   assemblies,   address   additional
cable-separation  issues,  and  determine  the  condition  of the Plant's  steam
generators, which contributed to further operational uncertainty. On January 29,
1997, the Plant was placed on the NRC's Watch List, and on January 30, 1997, the
NRC issued a supplemental Confirmatory Action Letter requiring the resolution of
additional concerns before the Plant could be restarted.

In December 1996 Maine Yankee  requested  proposals from several  utilities with
large and  successful  nuclear  programs  to  provide  a  management  team,  and
ultimately  contracted with Entergy Nuclear,  Inc., effective February 13, 1997,
for management  services that included  providing a new president and regulatory
compliance  officer.  The  Entergy-provided  management  team made  progress  in
addressing  technical  issues,  but  a  number  of  operational  and  regulatory
uncertainties  remained. On May 27, 1997, the Board of Directors of Maine Yankee
voted to minimize  spending while preserving the options of restarting the Plant
or  conveying   ownership   interests  to  a  third  party.  After  unsuccessful
negotiations  with  one  prospective  purchaser,  Maine  Yankee  found  no other
interest in purchasing the Plant and, based on its economic analysis, closed the
Plant permanently.

As required by the NRC, on August 7, 1997,  Maine  Yankee  certified  to the NRC
that the Plant had  permanently  ceased  operations and that all fuel assemblies
had been  permanently  removed from the Plant's  reactor  vessel.  On August 27,
1997, Maine Yankee filed the required  Post-Shutdown  Activities Report with the
NRC, describing its planned post-shutdown activities and a proposed schedule.

Costs - The  Company  has  incurred  substantial  costs in  connection  with its
38-percent  share  of  Maine  Yankee  costs.  In 1997  such  costs  amounted  to
approximately  $132.3  million  for the  Company:  $72.8  million  due to  basic
operations and maintenance  costs,  $54.0 million due to replacement power costs
and  $5.5  million   associated  with   incremental   costs  of  operations  and
maintenance.  The Maine Yankee Board's decision to close the Plant mitigated the
costs the Company would otherwise have incurred  through a phasing down of Maine
Yankee's operations and maintenance costs, with substantial  reductions in Maine
Yankee's workforce having been implemented and further reductions  planned,  but
did not reduce the need to buy  replacement  energy and  capacity.  The  Company
expects  its  share of  Maine  Yankee  operations  and  maintenance  costs to be
approximately  $48  million  in 1998,  based on  information  provided  by Maine
Yankee.  The amount of costs for replacement energy and capacity varies based on
the  Company's  power  requirements  and  market  conditions.  The impact of the
nuclear-related  costs  on the  Company  was the  major  obstacle  to  achieving
satisfactory  results in 1997,  despite the  approximately $75 million in annual
Maine  Yankee-related  costs  embedded  in the  determination  of the  Company's
required  revenues for  ratemaking  purposes and despite  success in controlling
other operating costs.

The Company's  38-percent  ownership  interest in Maine  Yankee's  common equity
amounted to $31.4 million as of June 30, 1998,  and under Maine  Yankee's  Power
Contracts and Additional  Power  Contracts,  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 $380.6 million, based on a 1997 study
by an  independent  engineering  consultant,  plus  estimated  costs of  interim
spent-fuel  storage of $127.6  million,  for an  estimated  total cost of $508.2
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.  On June 30, 1998,  the balance in
the Maine Yankee  decommissioning  fund was $214.1 million. On November 6, 1997,
Maine Yankee submitted the new estimate (adjusted to $507.2 million) to the FERC
as part of its rate  case  reflecting  the fact  that the  Plant  was no  longer
operating  and had  entered  the  decommission-ing  phase.  If the FERC  finally
accepts the new estimate as filed, the amount of Maine Yankee's  collections for
decommissioning would rise from the $14.9 million previously allowed by the FERC
to approximately $36.4 million per year.

On September 1, 1997,  Maine Yankee 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.  The legislation  enacted in Maine in 1997
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  by the FERC in its opinion
relating to the  decommissioning of the Yankee Atomic nuclear plant, the Company
believes that it is entitled to recover  substantially  all of its share of such
costs  from  its  customers  and  as of  June  30,  1998,  is  carrying  on  its
consolidated  balance sheet a regulatory asset and a corresponding  liability in
the amount of $307.5 million,  which is the $353 million  discussed above net of
the Company's post-September 1, 1997 cost-of-service payments to Maine Yankee.

Management  Audit - 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 shutdown  decision and of the
operation of the Plant prior to shutdown, and announced that it had directed its
consultant to extend its review to include those areas. The Company 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
under the ARP has requested only price  increases that were below the applicable
rate of inflation. The Company 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.  The MPUC
subsequently stayed its investigation pending the outcome of Maine Yankee's FERC
rate case, in which the MPUC and the Maine Office of the Public Advocate ("OPA")
are actively  participating,  while indicating that the MPUC's  consultant would
continue its extended  review.  Based on  preliminary  indications,  the Company
expects the  consultant's  recommendations  resulting  from its extended  review
would call for  additional  disallowances,  which Maine Yankee has said it would
expect to contest vigorously.

Maine Yankee Debt  Restructuring and FERC Rate Proceeding - Maine Yankee entered
into  agreements  in  August  1997 with the  holders  of its  outstanding  First
Mortgage Bonds and its lender banks (the  "Standstill  Agreements")  under which
the bondholders and banks agreed that they would not assert that the August 1997
voluntary permanent shutdown of the Plant constituted a covenant violation under
Maine Yankee's First Mortgage Indenture or its two bank credit agreements. Maine
Yankee's  rate filing with the FERC  requested an effective  date of January 15,
1998, for the amendments to Maine Yankee's Power Contracts and Additional  Power
Contracts,  which revise Maine Yankee's  wholesale rates and clarify and confirm
the  obligations of Maine  Yankee's  sponsors to continue to pay their shares of
Maine Yankee's costs during the decommissioning period.

On  January  14,  1998,  the FERC  issued an "Order  Accepting  for  Filing  and
Suspending Power Sales Contract Amendment,  and Establishing Hearing Procedures"
(the "FERC  Order") in which the FERC  accepted for filing the rates  associated
with the amended  Power  Contracts  and made them  effective  January 15,  1998,
subject to  refund.  The FERC also  granted  intervention  requests,  denied the
request of an  intervenor  group to summarily  dismiss  part of the filing,  and
ordered that a public hearing be held  concerning the prudence of Maine Yankee's
decision to shut down the Plant and on the justness and  reasonableness of Maine
Yankee's  proposed  rate  amendments.   The  prudence  issue  is  being  pursued
vigorously by several  intervenors,  including the MPUC and the OPA. The hearing
in the FERC rate proceeding is currently scheduled to begin in the first quarter
of 1999. The Company cannot predict the outcome of the FERC proceeding.

On January 15, 1998, Maine Yankee,  its bondholders and lender banks revised the
Standstill  Agreements  and extended  their term to April 15, 1998.  On April 7,
1998,  Maine Yankee refunded all of its mortgage bonds and bank debt by means of
a  three-year  revolving  credit  facility  with two major  banks,  which may be
extended by agreement  of the  parties,  and a $48 million term loan due in 2006
from  a  major  institutional   investor,  and  discharged  its  First  Mortgage
Indenture.  The banks' revolving credit  commitments are scheduled to be reduced
through planned  prepayments,  structured to conform to Maine Yankee's projected
cash  flows,  in two  decrements  from their  initial  level of $80 million to a
working-capital level of $20 million on March 31, 2000. The new debt obligations
are  secured  by a  security  interest  in Maine  Yankee's  rights  in its Power
Contracts,  Additional  Power  Contracts and Capital Funds  Agreements  with its
Sponsors  (the  "Assigned  Agreements")  and  its  rights  to  certain  expected
third-party  payments,  and contain  restrictions on the payment of common-stock
dividends,  based on Maine  Yankee's cash position and a  debt-service  coverage
test. In addition,  in  connection  with the  refinancing  each of the Sponsors,
including the Company,  affirmed its obligations  under the Assigned  Agreements
and agreed not to take the  position  that the  permanent  shutdown of the Plant
gave  rise to any  right to  terminate  or reduce  payments  under the  Assigned
Agreements.

Other  Maine  Yankee  Shareholders  -  Higher  nuclear-related  costs  are  also
affecting  the  financial  condition  of other  stockholders  of Maine Yankee in
varying  degrees.  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.  The
Company  cannot  predict,  however,  what  effect,  if any,  the  financial  and
regulatory difficulties being experienced by some Maine Yankee stockholders will
have on Maine Yankee or the Company.

Rating Agency Actions
On February 20, 1998,  Duff & Phelps Credit Rating Co.  ("D&P")  reaffirmed  and
placed on Rating Watch - Up the debt ratings of the Company. On January 6, 1998,
Standard & Poor's Corp.  ("S&P")  placed the Company's  credit ratings on Credit
Watch with positive  implications.  Also on January 6, 1998,  Moody's  Investors
Service  ("Moody's")  confirmed the Company's senior secured debt rating,  while
also  revising the rating  outlook to stable from  negative.  The credit  rating
agencies'  actions  were  in  response  to  the  Company's  announcement  of its
agreement  to sell its  generation  assets to FPL Group,  Inc.  and its plan for
divestiture.  On May 26, 1998, S&P upgraded its rating,  citing  improvements in
the   Company's   business   risk  profile,   and   expectations   of  financial
strengthening.  The current  ratings  assigned the  Company's  securities by the
three major securities-rating agencies are shown below:

                   Mortgage         Unsecured        Commercial       Preferred
                     Bonds            Notes             Paper           Stock

S&P                 BBB+              BB+               A3              BB+
Moody's             Baa3              Ba1               P3              ba1
D&P                 BBB-              BB+               D3              BB

Restructuring Legislation and MPUC Proceeding
The 1997 Maine restructuring  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.  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. The MPUC is conducting the proceeding that will determine
the Company's  stranded costs and corresponding  revenue  requirements,  and has
scheduled  completion  of the  proceeding  for the  first  quarter  of 1999.  On
December  5,  1997,  the  Company  filed  direct  testimony  in  the  proceeding
estimating its future revenue  requirements  as a  transmission-and-distribution
utility  and  providing  an estimate of its  strandable  costs,  which are to be
defined  by the  MPUC  later  in  the  proceeding.  The  Company  estimated  its
strandable  costs at  approximately  $1.3 billion and explained the  assumptions
underlying the estimate.  On February 10, 1998, the Company reduced its estimate
of  strandable  costs to $0.8  billion to reflect  the  anticipated  sale of its
generating  assets later in the year.  The Company cannot predict the results of
the MPUC proceeding.

Recovery of nuclear-plant decommissioning costs as required by federal law, rule
or order, will be funded through transmission-and-distribution utility rates and
charges. 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 any substantial  inaccuracies in
the year 2003 and at least every three years thereafter.

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. On June 30, 1998,  the MPUC approved the
creation of such an affiliated  energy provider,  subject to certain  conditions
designed to eliminate  any market  advantage  the new company might gain through
its affiliation with the Company


Agreement for Sale of Company's Generation Assets
On January 6, 1998, the Company  announced that it had reached agreement to sell
all of its  hydro-fossil  and biomass  power  plants with a combined  generating
capacity of 1,185 megawatts for $846 million in cash to Florida-based FPL Group.
The  related  book  value for these  assets is  approximately  $221  million  at
December 31, 1997.  In addition,  as part of its agreement  with FPL Group,  the
Company  entered into energy  buy-back  agreements to assist in  fulfilling  its
obligation to supply its customers with power until March 1, 2000.

The  Company's  interests  in  the  power  entitlements  from  approximately  50
power-purchase agreements with non-utility generators representing approximately
488  megawatts,  its  2.5-percent  interest in the Millstone  Unit No. 3 nuclear
generating  unit in Waterford,  Connecticut,  its  3.59-percent  interest in the
output of the Vermont Yankee nuclear  generating plant in Vernon,  Vermont,  and
its entitlement in the NEPOOL Phase II  interconnection  with  Hydro-Quebec  all
attracted  insufficient interest to be included in the present sale. The Company
will  continue  to seek buyers for those  assets.  The Company did not offer for
sale its interests in the Maine Yankee  (Wiscasset,  Maine),  Connecticut Yankee
(Haddam, Connecticut) and Yankee Atomic (Rowe, Massachusetts) nuclear generating
plants, all of which are in the process of being decommissioned. In addition, as
part of its agreement with FPL Group,  the Company  entered into energy buy-back
agreements to assist in fulfilling  its  obligation to supply its customers with
power until March 1, 2000.

Substantially  all of the generating  assets included in the sale are subject to
the lien of the Company's General and Refunding  Mortgage  Indenture dated as of
April 15, 1976 (the "Indenture").  Therefore,  substantially all of the proceeds
from sale must be deposited  with the trustee under the Indenture at the closing
of the  sale to free the  generating  assets  from  the  lien of the  Indenture.
Proceeds  on deposit  with the  trustee  may be used by the Company to redeem or
repurchase  bonds  under  the terms of the  Indenture,  including  the  possible
discharge  of the  Indenture.  In  addition,  the  proceeds  could  provide  the
flexibility to redeem or repurchase  outstanding equity securities.  The Company
must also provide for payment of applicable  taxes  resulting from the sale. The
manner and timing of the ultimate application of the sale proceeds after closing
are in any event subject to various  factors,  including  Indenture  provisions,
market conditions and terms of outstanding securities.

The bid value in excess of the  remaining  investment  in the power  plants will
reduce the  Company's  stranded  costs and other  costs,  which  could lower the
amount that would otherwise be collected from customers by nearly half a billion
dollars.  However,  the Company will incur  incremental costs as a result of the
power  buy-back  arrangements  in excess of the  pre-sale  costs of capacity and
energy from the plants being sold,  which will  effectively  lower the amount of
sale proceeds available to reduce stranded and other costs. The Company believes
that the reduction in stranded and other costs could permit a reduction in rates
for the Company's customers.

The sale is subject to various  closing  conditions,  including  the approval of
state and federal regulatory agencies,  which the Company expects to extend into
the last  quarter of 1998,  and is subject to consents or covenant  waivers from
certain  of the  Company's  lenders.  The  Company  is  pursuing  the  necessary
regulatory  approvals,  consents and waivers,  but cannot predict  whether or in
what form they will be obtained.

The Company  believes that  consummation of the asset sale described above would
constitute significant progress in resolving some of the uncertainties regarding
the  effects  of  electric-utility   industry  restructuring  on  the  Company's
investors;  however,  significant  risks and uncertainties  would remain.  These
include,  in addition to those enumerated  above under "Note Re  Forward-Looking
Statements," but are not limited to: (1) the possibility that a state or federal
regulatory  agency will impose  adverse  conditions on its approval of the asset
sale;  (2) the  possibility  that  new  state  or  federal  legislation  will be
implemented   that  will  increase  the  risks  to  such  investors  from  those
contemplated  by current  legislation;  and (3) the  possibility of legislative,
regulatory or judicial decisions that would reduce the ability of the Company to
recover its stranded costs from that contemplated by existing law.

Proposed Formation of Holding Company
To prepare further for the restructured  electric utility industry  contemplated
by the  legislation,  on December 8, 1997, the Company filed an application with
the MPUC for  authorization  to  create a holding  company  that  would  have as
subsidiaries  the  Company   (ultimately  as  a  transmission  and  distribution
utility),  the Company's existing  non-utility  subsidiaries and other entities.
The Company  believes  that a holding  company  structure  will  facilitate  the
Company's  transition  to a  partially  deregulated  electricity  market that is
scheduled to open access to electricity for Maine  consumers  beginning on March
1, 2000.  Since  competing as an electric  energy  provider in that market as of
that  date will  require  the  creation  of an energy  company  that is  legally
separate  from the Company,  the Company  also  proposed the creation of such an
energy marketing affiliate in the MPUC filing.

On May 1, 1998,  the MPUC  approved the  creation of the holding  company (to be
called "CMP Group,  Inc."),  the conversion and exchange of all the  outstanding
shares  of the  Company's  common  stock  into an equal  number of shares of the
holding   company's   common  stock,  the  transfer  of  the  stock  of  certain
wholly-owned non-utility subsidiaries of the Company to the holding company, and
other related requests of the Company necessary to carry out the reorganization.
The MPUC granted the approvals  subject to several  conditions  that the Company
believes are reasonable.  The Company's shareholders approved the reorganization
on May 21, 1998.  On June 30, 1998 the MPUC  approved the creation of the energy
marketing  affiliate  of the Company and resolved  related  issues that had been
deferred earlier in the proceeding. The FERC approved the reorganization on July
16, 1998,  the  Connecticut  Department of Public  Utility  Control on August 5,
1998,  and the SEC on August 12, 1998,  which was the last  regulatory  approval
required prior to implementation of the reorganization by the Company.

The Company's application to the MPUC also requested approval of the creation of
a limited  liability  company in which a proposed new  subsidiary of the holding
company would hold a fifty percent  membership  interest to  participate  in the
natural gas  distribution  business in Maine,  with the remaining  fifty percent
interest  being held by New York State Electric & Gas  Corporation  ("NYSEG") or
its affiliate. For further discussion of the NYSEG joint venture, see "Expansion
of Lines of Business," below.

Expansion of Lines of Business
General - The Company is preparing  for  competition  by expanding  its business
opportunities  through  subsidiaries that capitalize on core  competencies.  One
subsidiary,  MaineCom  Services,  arranges  fiber-optic  data  service  for bulk
carriers,  offering  support for cable television or  "super-cellular"  personal
communication  vendors,  and  providing  other   telecommunications   consulting
services. TeleSmart is a wholly-owned accounts receivable management subsidiary.
Another wholly-owned subsidiary, CMP International Consultants, provides utility
consulting  (domestic and  international)  and  research,  and  engineering  and
environmental services. The 100-percent owned Union Water Power Company provides
management  of rivers  and  recreational  facilities,  locating  of  underground
utility  facilities  and  infrared   photography,   real  estate  brokerage  and
management,   modular  housing,   and  utility  construction   services.   These
subsidiaries,  which the  Company  plans to  transfer  to the  proposed  holding
company,  often utilize skills of former Company employees and regularly compete
for business  with other  companies.  In addition,  a division of the Company is
focusing on retail competition by developing  effective marketing techniques and
energy-efficient services and products.

Natural  Gas   Distribution  -  The  Company  and  NYSEG  have  entered  into  a
joint-venture  agreement  to  distribute  natural  gas at retail  in many  Maine
communities  that are not currently served with that fuel. The Company and NYSEG
propose to offer  natural-gas  service in several areas of Maine,  primarily the
Augusta, Bangor,  Bath-Brunswick,  Bethel, Windham and Waterville areas. None of
the 60 towns in those areas currently has a natural-gas  distribution  system in
place.  The gas  would be drawn  from two new  gas-pipeline  projects  now under
development by unrelated parties that would carry Canadian gas through Maine and
into  the  regional  energy  market  using  substantial   portions  of  electric
transmission-line  corridors  owned by the Company  and MEPCO  under  agreements
entered into on March 16, 1998. On July 24, 1998, the MPUC  authorized the joint
venture to serve the areas it had applied to serve.  The new company  would face
competition from a new gas utility affiliated with Bangor Hydro-Electric Company
in the Bangor area and in the Bath-Brunswick area, from an existing gas utility,
Northern Utilities, Inc., which has been serving other areas of Maine, including
the  Portland  and   Lewiston-Auburn   areas.  The  Company  is  evaluating  the
opportunity  to be a  provider  of  natural  gas to  Maine  customers,  and  the
economics thereof,  including  monitoring  progress of the planned pipelines and
competitive considerations.

Fiber Optic Network - The Company,  largely through its wholly-owned  subsidiary
MaineCom  Services,  owns 38.5 percent of the common  stock of  Northeast  Optic
Network,   Inc.   ("NEON"),   the   successor  of  FiveCom,   Inc.,   and  is  a
facilities-based  provider of technologically  advanced,  high-bandwidth,  fiber
optic  transmission   capacity  for  communications   carriers  on  local  loop,
inter-city  and  interstate  facilities.  NEON is currently  expanding its fiber
optic  network to  encompass  over 900 route  miles,  or more than 60,000  fiber
miles,  in New  England  and  New  York,  utilizing  primarily  electric-utility
rights-of-way,  including  some of the  Company's  in Maine  and  some  owned by
Northeast Utilities,  another substantial minority stockholder,  in Connecticut,
Massachusetts  and New  Hampshire.  As of June  30,  1998,  NEON  had  completed
construction  of  approximately  295 route miles,  or 19,500 fiber miles, of its
planned  system  and  is  currently  engineering,   constructing,  or  acquiring
additional  routes with a goal of creating a continuous fiber optic link between
New York City and  Portland,  Maine,  with  access  into and  around  Boston and
numerous other major service areas in the Northeast.

On August 5, 1998, NEON completed  initial public  offerings of $54.0 million of
common stock and $180.0 million of senior notes, and the Company, as part of the
common-stock  offering,  sold  some  of its  shares  in  NEON  for  proceeds  of
approximately  $3.4  million.  In  addition,  with some of the  proceeds  of the
offering NEON repaid approximately $18 million the Company had advanced under an
earlier  construction  loan agreement.  The Company  believes there is a growing
need for such a fiber optic  network in the  Northeast  and that NEON's  outside
financing will provide substantial assistance in completing  construction of the
network, but cannot predict the results of this venture.

Environmental Matters
The Company assesses  compliance with laws and regulations  related to hazardous
substance  remediation on an ongoing basis. At June 30, 1998, the Company had an
accrued  liability of $2.6 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 2, "Commitments and
Contingencies."  - "Legal and Environmental  Matters" for further  discussion of
this matter.

Item 3: Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to interest  rate risk  through the use of fixed rate and
variable rate debt and preferred securities as sources of capital.



<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 defendants  moved to dismiss the suit for failure of the plaintiff to make a
pre-suit demand on the Company's  board of directors,  as required by Maine law,
and on February 18, 1998, the suit was dismissed.  On April 2, 1998, the Company
received such a demand from the plaintiff,  which is under  consideration by the
board. The Company believes the plaintiff's claim is without merit.

Regulatory Matters - For a discussion of certain significant  regulatory matters
affecting the Company,  including those related to the permanent shutdown of the
Maine  Yankee  Plant,  as  well  as  electric-utility   restructuring,  an  MPUC
proceeding that will determine the Company's stranded costs and related matters,
and the proposed reorganization of the Company into a holding-company structure,
see  Item 2 of  Part I,  "Management's  Discussion  and  Analysis  of  Financial
Condition  and Results of  Operation"  -  "Permanent  Shutdown  of Maine  Yankee
Plant", "Restructuring Legislation and MPUC Proceeding," and "Proposed Formation
of Holding Company," 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 see Note 2,
"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 3. Not applicable

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

The annual meeting of the  stockholders of the Company was held on May 21, 1998.
Proxies for the meeting  were  solicited  pursuant  to  Regulation  14 under the
Securities  Exchange Act of 1934. There was no solicitation in opposition to the
management's nominees as listed in the proxy statement, and all of such nominees
were elected.



<PAGE>


Three  matters  were  voted  on at the  meeting.  One  was the  election  of two
directors to Class II of the Company's Board of Directors for a three-year term.
Both nominees were elected, with the following vote tabulations:

Duane D. Fitzgerald
       Votes for -                                  2,661,833
       Votes withheld                                  79,321

David M. Jagger
       Votes for -                                  2,663,269
       Votes withheld                                  77,885

The two other matters voted on at the meeting were:

1.  Approval  of  the   appointment  of  Coopers  &  Lybrand   L.L.P.,   Boston,
Massachusetts  (now  PricewaterhouseCoopers  LLP), as the Company's auditors for
the  year  1998.  The  appointment   was  approved,   with  the  following  vote
tabulations:

       Votes for -                                   2,712,519
       Against -                                         9,415
       Abstentions -                                    19,160

2. A Company  proposal to approve an Agreement  and Plan of Merger  reorganizing
the Company into a holding company  structure.  The proposal was approved,  with
the following vote tabulations:

       Votes for -                                   2,238,529
       Against -                                        41,747
       Abstentions -                                    32,125
       Broker nonvotes -                               428,693

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 no reports on Form 8-K during
         the second quarter of 1998 and thereafter to date.




<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: August 13, 1998      By
                                  /s/Michael W. Caron
                                  ------------------------------------------
                                  Michael W. Caron, Comptroller (Chief 
                                  Accounting Officer)


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