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 March 31, 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 May 14, 1998

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


<PAGE>


                                             Central Maine Power Company

                                                        INDEX




                                                                     Page No.

Part I.  Financial Information

Consolidated Statement of Earnings for the Three Months
Ended March 31, 1998 and 1997                                             1

Consolidated Balance Sheet - March 31, 1998 and December 31, 1997:
  Assets                                                                  2
  Stockholders' Investment and Liabilities                                3

Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1998 and 1997                                             4

Notes to Consolidated Financial Statements                                5

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


Part II.  Other Information                                              30



<PAGE>




                         PART I - FINANCIAL INFORMATION
Item 1.  Financial Statements
                           Central Maine Power Company
                       CONSOLIDATED STATEMENT OF EARNINGS
                                   (Unaudited)
                 (Dollars in Thousands Except Per Share Amounts)
                                                         For the Three Months
                                                            Ended March 31,
                                                            1998       1997
Electric Operating Revenues                               $248,745   $268,367
                                                           -------    -------

Operating Expenses
     Fuel used for company generation                        4,072      5,605
     Purchased power - energy                              104,295    123,937
     Purchased power - capacity                             24,376     33,140
     Other operation                                        43,773     43,749
     Maintenance                                            10,091      6,317
     Depreciation and amortization                          13,822     13,474
     Federal and state income taxes                         11,966      9,554
     Taxes other than income taxes                           7,054      6,978
                                                             -----      -----
Total Operating Expenses                                   219,449    242,754
                                                           -------    -------
Equity In Earnings Of Associated Companies                   1,591      1,900
                                                             -----      -----
Operating Income                                            30,887     27,513
                                                            ------     ------
Other Income (Expense)
     Allowance for equity funds used during construction       174        246
     Other, net                                               (741)       620
     Income taxes                                              374       (248)
                                                               ---       ----
        Total Other Income                                    (193)       618
                                                              -----       ---
Income Before Interest Charges                              30,694     28,131
                                                            ------     ------
Interest Charges
     Long-term debt                                         10,850     11,214
     Other interest                                          1,676      1,068
     Allowance for borrowed funds used during
      construction                                            (127)      (178)
                                                              ----       ----
        Total Interest Charges                              12,399     12,104
                                                            ------     ------
Net Income                                                  18,295     16,027
Dividends On Preferred Stock                                 1,897      2,208
                                                             -----      -----
Earnings Applicable To Common Stock                        $16,398   $ 13,819
                                                            ======    =======
Weighted Average Number Of Shares Of Common Stock
 Outstanding                                            32,442,752 32,442,752
Earnings Per Share Of Common Stock (Basic and Diluted)       $0.51      $0.43
Dividends Declared Per Share Of Common Stock                $0.225     $0.225


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


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



                                              Central Maine Power Company
                                               CONSOLIDATED BALANCE SHEET
                                                 (Dollars in Thousands)
                                                                                        March 31,        December 31,
                                                                                           1998              1997
                                                                                                  (Unaudited)
                                                       ASSETS
Electric Property, at original cost .....................................................   $1,683,755   $1,647,876
    Less: Accumulated Depreciation ......................................................      644,111      634,384
-----------------------------------------------------------------------------------------   ----------   ----------   
          Net electric property in service ..............................................    1,039,644    1,040,492
    Construction work in progress .......................................................       12,786       15,105
    Net nuclear fuel ....................................................................        1,157        1,157
-----------------------------------------------------------------------------------------   ----------   ----------   
          Net electric property and nuclear fuel ........................................    1,053,587    1,056,754
                                                                                                         ----------   

Investments In Associated Companies, at equity ..........................................       78,339       76,509
-----------------------------------------------------------------------------------------   ----------   ----------   
    Total Net Electric Property and Investments in Associated Companies
                                                                                             1,131,926   1,133,263
                                                                                             ----------   ---------

Current Assets
    Cash and cash equivalents ...........................................................       19,681       20,841
    Accounts receivable, less allowances for uncollectible accounts of $2,507 in
    1998 and $2,481 in 1997:
       Service - billed .................................................................       80,858       84,323
       Service - unbilled ...............................................................       41,826       46,807
       Other accounts receivable ........................................................        7,357       15,247
    Prepaid income taxes ................................................................        5,937         --
    Fuel oil inventory, at average cost .................................................        9,062        5,390
    Materials and supplies, at average cost .............................................       12,274       11,779
    Funds on deposit with trustee .......................................................          693       61,694
    Prepayments and other current assets ................................................        9,110        7,822
                                                                                            ----------   ----------  
                                                                                                                          
          Total Current Assets ..........................................................      185,510      255,191
-----------------------------------------------------------------------------------------   ----------   ----------   

Deferred Charges And Other Assets
    Recoverable costs of Seabrook 1 and abandoned projects, net .........................       82,654       84,026
    Yankee Atomic purchased-power contract ..............................................       11,897       13,056
    Connecticut Yankee purchased-power contract .........................................       35,633       36,877
    Maine Yankee purchased-power contract ...............................................      320,165      329,206
    Regulatory assets - deferred taxes ..................................................      236,632      236,632
    Deferred charges and other assets ...................................................      255,395      210,715
-----------------------------------------------------------------------------------------   ----------   ----------   
          Total Deferred Charges and Other Assets .......................................      942,376      910,512
-----------------------------------------------------------------------------------------   ----------   ----------   

               TOTAL ASSETS .............................................................   $2,259,812   $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)
                                                        March 31,   December 31,
                                                           1998         1997
                                                       (Unaudited)       

                    STOCKHOLDERS' INVESTMENTS AND LIABILITIES

Capitalization
    Common-stock investment                           $    496,328  $    487,594
    Preferred stock                                         65,571        65,571
    Redeemable preferred stock                              39,528        39,528
    Long-term obligations                                  342,316       400,923
                                                           -------       -------
       Total Capitalization                                943,743       993,616
                                                           -------       -------

Current Liabilities and Interim Financing
    Interim financing                                      228,000       238,000
    Sinking-fund requirements                               16,813         9,411
    Accounts payable                                       104,874        97,080
    Dividends payable                                        9,202         9,202
    Accrued interest                                         8,084        11,201
    Accrued income taxes                                                   3,001
    Miscellaneous current liabilities                       16,864        15,762
                                                            ------        ------
       Total Current Liabilities and Interim Financing     383,837       383,657
                                                           -------       -------

Commitments and Contingencies

Reserves and Deferred Credits
    Accumulated deferred income taxes                      370,978       350,912
    Unamortized investment tax credits                      30,166        30,533
    Yankee Atomic purchased-power contract                  11,897        13,056
    Connecticut Yankee purchased-power contract             35,633        36,877
    Maine Yankee purchased-power contract                  320,165       329,206
    Regulatory liabilities - deferred taxes                 56,852        56,852
    Other reserves and deferred credits                    106,541       104,257
                                                           -------       -------
       Total Reserves and Deferred Credits                 932,232       921,693
                                                           -------       -------

       Total Stockholders' Investment and Liabilities   $2,259,812    $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 Three Months
                                                             Ended March 31,
                                                             1998       1997

Operating Activities
Net income                                               $  18,295   $16,027
Items not requiring (providing) cash:
Depreciation                                                11,292    11,000
Amortization                                                 9,033     8,490
Deferred income taxes and investment tax credits, net       19,028    (1,280)
Allowance for equity funds used during construction           (174)     (246)
Changes in certain assets and liabilities:
Accounts receivable                                         16,336     5,767
Inventories                                                 (4,167)    2,852
Other current assets                                         1,288     1,671
Accounts payable                                             9,526     5,650
Accrued/prepaid taxes and interest                         (12,055)    7,377
Miscellaneous current liabilities                            1,102    (4,526)
Deferred energy-management costs                              (348)     (141)
Maine Yankee outage accrual                                      -     2,070
Deferred ice storm costs                                   (52,557)        -
Other, net                                                   3,405     3,747
                                                           -------   -------
Net Cash Provided by Operating Activities                   20,004    58,458
                                                            ------    ------

Investing Activities
Construction expenditures                                   (9,880)   (7,145)
Investments in associated companies                           (300)   (5,495)
Changes in accounts payable - investing activities          (1,732)   (3,587)
                                                            ------   -------
Net Cash Used by Investing Activities                      (11,912)  (16,227)
                                                            ------    ------

Financing Activities
Issuances:
Medium-term notes                                           60,000
Redemptions:
Mortgage bonds                                             (61,000)        -
Revolving credit agreement                                 (60,000)   (7,500)
Other long-term obligations                                    (50)      (50)
Funds on deposit with trustee                               61,000      (313)
Dividends:
Common stock                                                (7,305)   (7,305)
Preferred stock                                             (1,897)   (2,208)
                                                            ------    ------
Net Cash Used by Financing Activities                       (9,252)  (17,376)
                                                            -------   -------
Net Decrease (Increase) in Cash                             (1,160)   24,855
Cash and cash equivalents, beginning of period              20,841     8,307
                                                            ------   -------
Cash and cash equivalents, end of period                   $19,681   $33,162
                                                            ======    ======

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 three months ended March
31, 1998 and 1997 for interest,  net of amounts  capitalized,  amounted to $14.7
million and $13.4  million,  respectively.  Income taxes paid,  amounted to $1.5
million (net of a state tax refund of $735 thousand for years 1992 through 1994)
and $1.6 million for the three months ended March 31, 1998 and 1997. The Company
incurred no new capital lease obligations in either period.

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.  The
Company  anticipates  that adoption of this standard 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 $30.6 million as of March 31, 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 March 31, 1998 Maine Yankee
had collected approximately $211.8 million for its decommissioning obligations.

On November 6, 1997,  Maine Yankee  submitted a 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 Company expects the prudence
issue to be 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 on December 1, 1998. 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 March
31, 1998 is carrying on its  consolidated  balance sheet a regulatory  asset and
corresponding  liability  in the  amount  of $320.2  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  from the  consultant,  the Company  expects the second phase of the
report to 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
$6.8 million at March 31, 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  $35.6
million and has recorded a regulatory asset and corresponding  liability in that
amount on its consolidated  balance sheet.  The Company is currently  recovering
through rates an amount adequate to recover these expenses.

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
$11.9  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
has been  off-line  since  April  1996  due to NRC  concerns  regarding  license
requirements,  and the Company  cannot  predict  when it will return to service.
Millstone  Unit No.  3,  along  with two other  units at the same site  owned by
Northeast  Utilities,  is on the  NRC's  "watch  list" in  "Category  3,"  which
requires formal NRC action before a unit can be restarted. For a discussion of a
lawsuit and arbitration  claim filed by the Company and other minority owners of
Millstone Unit No. 3 against the operators of the unit, see "Millstone  Unit No.
3 Litigation," below.

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

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

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

The  Company  has  recorded  a  liability,   based  upon   currently   available
information,  for what it believes are the estimated  environmental  remediation
costs that the Company expects to incur for identified  waste disposal sites. In
most cases,  additional  future  environmental  cleanup costs are not reasonably
estimatable  due to a number of  factors,  including  the unknown  magnitude  of
possible  contamination,  the  appropriate  remediation  methods,  the  possible
effects  of  future  legislation  or  regulation  and the  possible  effects  of
technological  changes.  The Company  cannot  predict  the  schedule or scope of
remediation due to the regulatory  process and  involvement of  non-governmental
parties.  At March 31,  1998,  the  liability  recorded  by the  Company for its
estimated  environmental  remediation  costs  amounted  to $2.2  million,  which
management  has  determined to be the most  probable  amount within the range of
$2.2 million to $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 and  initiated an  arbitration  claim  against  Northeast  Utilities,  its
trustees, and two of its subsidiaries, alleging mismanagement of the unit by the
defendants.  The minority owners are seeking to recover their  additional  costs
resulting from such mismanagement,  including their replacement power costs. The
Company cannot predict the outcome of the litigation and arbitration.

Proposed  Federal  Income Tax  Adjustments  - On September 3, 1997,  the Company
received from the Internal  Revenue  Service  ("IRS") a Revenue  Agent's  Report
summarizing all adjustments  proposed by the IRS as a result of its audit of the
Company's  federal  income tax returns for the years 1992 through  1994,  and 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 March 31, 1998,  amounted to $14.6 million, or a
decrease  in net  income of $8.6  million,  and which  could  increase  interest
expense  approximately $475.4 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.  have signed
a joint-venture  agreement to distribute  natural gas to many Maine  communities
that are not now  served  with that fuel.  If state  regulators  approve,  a new
company  owned  equally by CMP and NYSEG  would be in a position to offer gas in
the Augusta and Bangor areas, and in other communities  including Bath,  Bethel,
Brunswick, North Windham, Rumford, and Waterville.

 3.   Regulatory and Legislative Matters

Alternative  Rate Plan -  Effective  January 1, 1995,  rate  regulation  for the
Company underwent a fundamental change with the implementation of the ARP, which
replaced traditional  regulation.  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 (1995) and indexed  annually for changes in capital  costs.  Outside that
range, profits and losses may be shared equally by the Company and ratepayers in
computing the price-cap  adjustment.  This feature  commenced with the price-cap
change of July 1, 1996,  and reflected  1995 results.  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,  a mandated  cost's  revenue  requirement  must
exceed $3  million  and have a  disproportionate  effect on the  Company  or the
electric-power industry.

Pursuant  with the annual  price-change  provision in the ARP, the MPUC approved
the following increases:

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

 Inflation Index                             2.12%         2.55%       2.92%
 Productivity Offset                        (1.00)        (1.00)       (.50)
 Qualifying Facility Offset                  (.42)            -           -
 Earnings Sharing                               -           .32           -
 Flowthrough and Mandated Items               .40         (0.61)        .01
                                            -----         ------      -----
                                             1.10%         1.26%       2.43%
                                             ====          ====        ====

On March 25, 1998, the Company  submitted its 1998 ARP compliance  filing to the
MPUC. In the filing the Company requested a rate increase of 1.78 percent, which
is equal to the standard inflation rate used under the ARP, to be effective July
11,  1998,  and  proposed a rate  reduction  of ten  percent  contingent  on the
consummation  of the Company's  planned sale of  generating  assets later 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.

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,  and is  discussed in detail under this heading
below.  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. In
general,   its  stranded  costs  reflect  the  excess  costs  of  the  Company's
purchased-power obligations over the market value of the power, and the costs of
deferred charges and other regulatory assets. 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 has initiated the  proceeding  that will determine the Company's
stranded costs,  corresponding revenue requirements and stranded-cost charges to
be charged by it when it becomes a transmission-and-distribution utility and has
scheduled  completion of the proceeding for the second half of 1998. 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 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.

The sale is subject to various  closing  conditions,  including  the approval of
state and  federal  regulatory  agencies,  which  approval  process  the Company
expects  could 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.

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.

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 current estimate of the incremental
costs of the repair  effort is within the range of $50 to $55 million,  of which
most of the expense was 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  $52 million in storm  related  costs as of
March  31,  1998.  On May 1,  1998,  President  Clinton  signed a  Congressional
appropriation bill that included $130 million in storm-damage cost reimbursement
for electric  utilities in the  northeastern  United States.  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.   Debt Financing

At the annual  meeting of the  stockholders  of the Company on May 15, 1997, the
holders of the Company's  outstanding  preferred stock consented to the issuance
of $350  million  in  principal  amount of the  Company's  Medium-Term  Notes in
addition to the $150  million in principal  amount to which they had  previously
consented.  This expansion of the Medium-Term Note program is being  implemented
to increase the Company's financing flexibility in anticipation of restructuring
and increased  competition.  As of March 31, 1998,  $103 million of  Medium-Term
Notes were outstanding.

On February 26, 1998,  the Company  called for redemption on March 30, 1998, all
of the  outstanding  $11 million  principal  amount of its General and Refunding
Mortgage  Bonds,  Series N 8.50% Due 2001, at a redemption  price equal to their
principal amount plus accrued interest to the date fixed for redemption.  On the
same day the Company also called for  redemption  on March 30, 1998,  all of the
outstanding $50 million  principal amount of its General and Refunding  Mortgage
Bonds,  Series R 7-7/8%  Due 2023,  also at a  redemption  price  equal to their
principal  amount plus accrued  interest.  The bond redemptions were funded from
the  approximately  $61.7  million on deposit with the trustee under the renewal
and  replacement  fund and  release  provisions  of the  Company's  General  and
Refunding  Mortgage  Indenture.  On February  27, 1998,  the Company  called for
redemption  on April 1,  1998,  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.



<PAGE>


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

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

Operating  revenues  in the first  quarter of 1998  totaled  $248.7  million,  a
decrease  of $19.7 from the first  quarter of 1997.  The lower  revenues  were a
result of the following:

           Ice storm                                       $ 5.3
           Warm weather                                      2.6
           Closing of paper mills                            2.4
           NUG contract expiration                           3.6
           MEPCO                                             3.7
           Other                                             2.1
                                                          ------
                                                           $19.7

Net income was $18.3  million  for the first  quarter of 1998  compared to $16.0
million  for the  corresponding  period  in  1997.  The  first  quarter  results
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 and lower demand due to warmer weather. Earnings
applicable  to common stock were $16.4  million or $0.51 per share for the first
three  months  of 1998  compared  to $13.8  million  or $0.43  per share for the
comparable period in 1997.

Service-area   sales  of   electricity   totaled   approximately   2.27  billion
kilowatt-hours  in the first  quarter of 1998,  down 7.1  percent  from the 2.44
billion kilowatt-hour level of a year ago.

               Service Area Kilowatt-hour Sales (Millions of KWHs)
                           Three Months Ended March 31,
                           1998                1997                % Change
                           ----                ----                --------
 Residential               743.2               807.9                (8.0)
 Commercial                621.0               651.7                (4.7)
 Industrial                846.0               925.6                (8.6)
 Other                      60.6                59.4                 2.0
                       ---------           ---------                ----
                         2,270.8             2,444.6                (7.1)
                         =======             =======                ====
The changes in service area kilowatt-hour sales reflect the following:

      Kilowatt-hour  sales to residential  customers decreased by 8.0 percent in
      the  first  quarter  compared  to 1997;  usage per  customer  was down 8.8
      percent for the three months ended March 31, 1998.

      Commercial sales decreased by 4.7 percent in the first quarter compared to
      1997.

      The decrease in  residential  and  commercial  sales was due  primarily to
      warmer than normal  temperatures during the first three months of 1998 and
      the  January  1998  ice  storm.  The  National  Weather  Service  recently
      announced  that the  1997/1998  winter season was the warmest in 40 years.
      The  ice  storm   resulted  in  a  loss  of  an  estimated   44.8  million
      kilowatt-hour-sales.

      Industrial  kilowatt-hour  sales  decreased  by 8.6  percent  in the first
      quarter  compared to 1997,  due  primarily  to the closure of two pulp and
      paper  mills.  This sector  accounts for  approximately  57 percent of the
      industrial sales category.

MEPCO's  electric  sales and  transmission  revenues from New England  utilities
other than the Company  amounted to $0.5  million and $4.2  million in the first
quarter 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 is 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.

Fuel used for company generation and purchased power-energy expense decreased by
$1.5  million and $19.6  million,  respectively,  compared  to 1997,  reflecting
decreased  demand due to warmer weather and the outage  associated  with the ice
storm in January 1998 and a change to a less  expensive  purchased  power energy
mix.

Purchased power-capacity expense decreased $8.8 million compared to 1997, due to
the permanent shutdown of the Maine Yankee plant, in August 1997.

Maintenance  expense  increased $3.8 million compared to 1997. This increase was
due primarily to operations  personnel working in a maintenance  capacity during
the ice storm.  Operations  expense decreased by approximately  $3.8 million but
increased costs  associated with employee  pension and benefits of $1.2 million,
general expenses and outside services of $1.4 million,  and transmission expense
of $1.0 million (which is directly  offset in  transmission  revenue) netted the
decrease to reflect a minor variance in operations expense.

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 $2.4
million as a result of higher pre-tax  earnings for the three months ended March
31, 1998, when compared to 1997.

Other Income decreased by $1.4 million in 1998 as compared to 1997 primarily due
to excess expenses over revenue associated with a non-regulated  division of the
Company,  which  also  resulted  in a decrease  in income  tax  expense on other
income.

Other interest  expense  increased  during the first quarter of 1998 compared to
1997.  The  increase  was due  primarily  to higher  levels of  borrowing on the
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  $300  thousand in the first
quarter of 1998 compared to 1997.

"Year 2000" Computer  Issues - In the next two years,  most large companies will
face a potentially  serious  information systems (computer) problem because most
software  application  and  operational  programs  written  in the past will not
properly  recognize  calendar dates beginning in the year 2000. This could force
computers  to either shut down or lead to  incorrect  calculations.  The Company
began the process of identifying the changes required to their computer programs
and hardware  during the year 1996. The majority of the necessary  modifications
to the Company's centralized financial,  customer,  and operational  information
systems are expected to be completed by the end of 1998. The Company believes it
will incur  approximately  $3.0 million of costs between now and March 31, 2000,
associated  with making the  necessary  modifications  identified to date to the
centralized  systems. As of March 31, 1998,  approximately $1.6 million of costs
have been incurred. Noncentralized systems are currently being reviewed for Year
2000  problems.  The Company is unable to predict  the costs to be incurred  for
correction of such  noncentralized  systems,  but expects the scope and schedule
for such work to be less complex than for its centralized  information  systems.
In addition, the Company 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 requested  1.78-percent  rate increase to be
effective  in July 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  $57.5  million of cash was provided  during the first  quarter of
1997 from net income before non-cash items, primarily depreciation, amortization
and deferred  income taxes.  During that period  approximately  $37.5 million of
cash was used for  fluctuations in certain assets and liabilities and from other
operating activities.

During  the first  quarter  of 1998,  dividends  paid on common  stock were $7.3
million, while preferred-stock dividends utilized $1.9 million of cash.

Investing  activities,  primarily  construction  expenditures,   utilized  $11.6
million in cash during the first quarter of 1998 for  generation,  transmission,
distribution,  and general  construction  expenditures and includes $0.3 million
the Company invested primarily in its associated companies.

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

The total of cash on deposit with the trustee  under the  Company's  General and
Refunding  Mortgage  Indenture as of December 31, 1997, was approximately  $61.7
million  and as of  March  31,  1998,  approximately  $0.7  million.  Under  the
Indenture such cash may be applied, at any time at the direction of the Company,
to the redemption of bonds  outstanding  under the Indenture at a price equal to
the principal amount of the bonds being redeemed,  without premium, plus accrued
interest to the date fixed for  redemption on the principal  amount of the bonds
being redeemed. On February 26, 1998, the Company called for redemption on March
30, 1998, all of the outstanding $11 million principal amount of its General and
Refunding  Mortgage Bonds,  Series N 8.50% Due 2001, at a redemption price equal
to  their  principal  amount  plus  accrued  interest  to  the  date  fixed  for
redemption.  On the same day the Company also called for redemption on March 30,
1998, all of the  outstanding  $50 million  principal  amount of its General and
Refunding  Mortgage Bonds,  Series R 7-7/8% Due 2023, also at a redemption price
equal to their principal amount plus accrued interest. The bond redemptions were
funded  from the  approximately  $61.7  million on deposit  with the  trustee at
December 31, 1997, under the renewal and replacement fund and release provisions
of the Indenture.  On April 30, 1998, the Company  deposited  $30.6 million with
the trustee  under those  provisions of the  Indenture,  making a total of $31.3
million  on  deposit.  Such  cash  may  also  be  withdrawn  by the  Company  by
substitution of allocated property additions or available bonds.

At the annual  meeting of the  stockholders  of the Company on May 15, 1997, the
holders of the Company's  outstanding  preferred stock consented to the issuance
of $350  million  in  principal  amount of the  Company's  Medium-Term  Notes in
addition to the $150  million in principal  amount to which they had  previously
consented.  This expansion of the Medium-Term Note program is being  implemented
to increase the Company's financing flexibility in anticipation of restructuring
and increased  competition.  On February 24, 1998, the Company issued a two-year
6.38% Medium-Term Note in the principal amount of $30 million,  and on March 20,
1998, issued 18-month 6.35% Medium-Term Notes in the aggregate  principal amount
of $30 million.  As of March 31, 1998,  $103 million of  Medium-Term  Notes were
outstanding.  On  April  28,  1998,  the  Company  issued a  six-month  6.10625%
Medium-Term  Note in the  principal  amount of $47  million,  raising  the total
outstanding  to $150  million,  which would permit the issuance of an additional
$350 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  as a  result  of
downgrading  of  the  Company's  credit  ratings.   The  amount  of  outstanding
short-term  borrowing will  fluctuate with  day-to-day  operational  needs,  the
timing of  long-term  financing,  and  market  conditions.  The  Company  had no
outstanding  notes as of March 31,  1998  under  the  364-day  revolving  credit
facility.

On March 25,  1998,  the  Company  filed an  application  with the MPUC  seeking
authorization  for the purchase by the Company of up to 11 million shares of its
outstanding  common  stock  over a  three-year  period.  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 and cannot  predict
whether or when the MPUC consent will be obtained.

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.

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 current estimate of the incremental
costs of the repair effort is within the range of $50 million to $55 million, of
which most of the expense was 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.  On May 1,
1998, President Clinton signed a Congressional  appropriation bill that included
$130 million in storm-damage cost  reimbursement  for electric  utilities in the
northeastern  United States.  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, and
reported in more  condensed  form below,  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 been incurring  substantial  costs in connection with its
38-percent  share  of  Maine  Yankee  costs,  as well as  additional  costs  for
replacement  power while the Plant has been out of  service.  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,  but the Company expects
such costs to be within a range of  approximately  $5.0  million to $5.5 million
per month during  1998,  based on current  energy and capacity  needs and market
conditions.  Under the electric utility restructuring legislation enacted by the
Maine Legislature in May 1997, the Company's  obligations to provide replacement
power  will  terminate  on March 1,  2000,  along  with its  other  power-supply
obligations.  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
current 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 $30.6 million as of March 31, 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 March 31, 1998, the balance in
the Maine Yankee  decommissioning  fund was $211.8 million. On November 6, 1997,
Maine Yankee submitted the new estimate (adjusted to $507.2 million) to the FERC
as part of a rate  case  reflecting  the  fact  that  the  Plant  was no  longer
operating and had entered the decommissioning phase. If the FERC accepts the new
estimate,  the amount of Maine Yankee's  collections for  decommissioning  would
rise from the $14.9  million  previously  allowed  by the FERC to  approximately
$36.4 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  March  31,  1998,  is  carrying  on its
consolidated  balance sheet a regulatory asset and a corresponding  liability in
the amount of $320.2 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  from  the
consultant, the Company expects the consultant's  recommendations resulting from
its extended review to call for additional disallowances, which Maine Yankee has
said it expects 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 Company expects the prudence issue to be
pursued vigorously by several  intervenors,  including among others the MPUC and
the OPA. The hearing in the FERC rate proceeding is currently scheduled to begin
on December 1, 1998.
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
other  stockholders of Maine Yankee in varying  degrees.  Bangor  Hydro-Electric
Company,  a  Maine-based  7-percent   stockholder,   cited  its  "deteriorating"
financial  condition,  suspended  its  common  stock  dividend,  and  eventually
obtained rate relief.  Maine Public Service  Company,  a 5-percent  stockholder,
cited problems in satisfying financial covenants in loan documents,  reduced its
common  stock  dividend  substantially  in early  March 1997 and  obtained  rate
relief. Northeast Utilities (20-percent stockholder through three subsidiaries),
which is also adversely affected by the substantial  additional costs associated
with the three shut-down  Millstone nuclear units and the permanently  shut-down
Connecticut Yankee unit, as well as significant regulatory issues in Connecticut
and New Hampshire,  has  implemented  an indefinite  suspension of its quarterly
common  stock  dividends.  A default  by a Maine  Yankee  stockholder  in making
payments  under its Power  Contract  or  Capital  Funds  Agreement  could have a
material  adverse  effect on Maine  Yankee,  depending  on the  magnitude of the
default. The Company cannot predict, however, what effect, if any, the financial
difficulties  being  experienced by some Maine Yankee  stockholders will have on
Maine Yankee or the Company.

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.  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                 BB+               BB                B               B+
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 has initiated the  proceeding  that will determine the Company's
stranded costs,  corresponding revenue requirements and stranded-cost charges to
be charged by it when it becomes a  transmission-and-distribution  utility,  and
has  scheduled  completion  of the  proceeding  for the second half of 1998.  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 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.



<PAGE>


Agreement for Sale of Company's Generation Assets

On April 28, 1997,  the Company  announced a plan to seek  proposals to purchase
its generating assets and, as part of an auction process, received final bids on
December 10, 1997. 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,
including $18 million for assets sold by Union Water Power Company, a subsidiary
of the Company,  to  Florida-based  FPL Group, the winning bidder in the auction
process.

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  approval  process  the Company
expects  could 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,  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.  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 an
energy marketing affiliate in the MPUC filing.

On May 1, 1998,  the MPUC  approved  the  creation of the holding  company,  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
creation of an energy marketing affiliate of the Company and related issues were
deferred earlier in the proceeding to a second phase of the proceeding.

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. On May 1, 1998, in a separate proceeding,  the MPUC also approved
the  creation  of  the  proposed   limited-liability   company  and  natural-gas
subsidiary, and associated transactions and arrangements,  subject to conditions
that the Company considers reasonable. For further discussion of the NYSEG joint
venture, see "Expansion of Lines of Business," below.

The  proposed  holding  company  formation  must  also be  approved  by  federal
regulators,  including the Securities and Exchange  Commission and the FERC, and
by the holders of the Company's  common stock and 6% Preferred  Stock,  who will
vote on the  reorganization  at the Company's  annual meeting of shareholders on
May 21, 1998.  The Company is pursuing these  approvals,  but cannot predict the
outcome.

Expansion of Lines of Business

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 credit and collections 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.

As noted above,  the Company and NYSEG have signed 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 five areas of Maine,  primarily  the  Augusta,  Bangor,
Bath-Brunswick,  Rumford  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,  after receipt of additional  regulatory
approvals,  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 March 9, 1998, the MPUC gave
preliminary  approval to the Company-NYSEG  proposal,  subject to final approval
after  submission  of  detailed  plans on  financing,  construction,  and  other
matters.  Competing applications to serve some of the areas have been filed. The
Company  cannot  predict the outcome of the MPUC  proceeding.  The Company  will
continue to evaluate  the  opportunity  to be a provider of natural gas to Maine
customers,  and the  economics  thereof,  including  monitoring  progress of the
planned pipelines, competitive considerations and relevant regulatory decisions.

FiveCom  LLC  ("FiveCom"),   a   majority-owned   subsidiary  of  the  Company's
wholly-owned   MaineCom  Services,  is  building  a  fiber-optic  cable  network
connecting  cities in New England  and plans to sell  capacity on the network to
telephone   companies,   Internet   providers,   and  other   telecommunications
businesses.  FiveCom has used transmission-line  corridors owned by the Company,
and a substantial part of the expanded network in Connecticut and  Massachusetts
will occupy  utility  corridors  of Northeast  Utilities,  which owns a minority
interest in FiveCom.  The Company's equity investment in MaineCom Services as of
March 31, 1998 was $15.6  million.  In addition,  the Company is providing up to
$30  million to  FiveCom  through a loan  arrangement  for the  development  and
construction of the expanded  network,  and for working capital,  and FiveCom is
considering  external funding.  The Company believes there is a growing need for
such a  fiber-optic  network in New England,  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 March 31, 1998, the Company had an
accrued  liability of $2.2 million for remediation  costs at various sites.  The
costs at identified  sites may be  significantly  higher if, among other things,
other potentially  responsible parties are not financially able to contribute to
these costs or identified possible outcomes change. See Note 2, "Commitments and
Contingencies."  - "Legal and Environmental  Matters" for further  discussion of
this matter.



<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 leading to a decision by the Maine Yankee
Board of Directors to permanently  shut down the Maine Yankee Plant,  as well as
electric-utility restructuring, stranded costs, and an MPUC proceeding that will
determine the Company's  stranded costs and related matters , see Item 2 of Part
I, "Management's  Discussion and Analysis of Financial  Condition and Results of
Operation"  -  "Permanent  Shutdown of Maine  Yankee  Plant" and  "Restructuring
Legislation and MPUC Proceeding," which are incorporated herein by reference.

Tax Appeal. For a discussion of the Company's appeal of two significant  federal
income tax adjustments proposed by the Internal Revenue Service ("IRS") see Note
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 5. Not applicable

Item 6. Exhibits and Reports on Form 8-K

       (a)  Exhibits. None.

       (b)Reports on Form 8-K. The Company filed the  following  reports on Form
          8-K during the first quarter of 1998 and thereafter to date:

Date of Report                                        Items Reported

January 6, 1998                                           Item 5

a)   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 to Florida-based FPL Group.

Date of Report                                        Items Reported

January 14, 1998                                          Item 5

a)   The  Company  reported  the storm  damage  due to an ice storm on January 7
     through 9, 1998.

b)   The Company  reported the status of Maine  Yankee's  standstill  agreements
     with its lender banks and its bondholders.

Date of Report                                        Items Reported

January 30, 1998                                          Item 5

a)   The Company reported its 1997 financial results.



<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: May 14, 1998   By---------------------------------------------------------
                       Michael W. Caron, Comptroller (Chief Accounting Officer)


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