Vectren Corporation (the Company or Vectren), an Indiana corporation, is an energy holding company headquartered in Evansville, Indiana. The Company's wholly owned subsidiary, Vectren Utility Holdings, Inc. (Utility Holdings), serves as the intermediate holding company for three operating public utilities: Indiana Gas Company, Inc. (Indiana Gas or Vectren North), Southern Indiana Gas and Electric Company (SIGECO or Vectren South), and the Ohio operations (VEDO or Vectren Ohio). Utility Holdings also has other assets that provide information technology and other services to the three utilities. Utility Holdings' consolidated operations are collectively referred to as the Utility Group. Both Vectren and Utility Holdings are holding companies as defined by the Energy Policy Act of 2005 (Energy Act). Vectren was incorporated under the laws of Indiana on June 10, 1999.

Indiana Gas provides energy delivery services to over 550,000 natural gas customers located in central and southern Indiana. SIGECO provides energy delivery services to over 140,000 electric customers and approximately 110,000 gas customers located near Evansville in southwestern Indiana. SIGECO also owns and operates electric generation to serve its electric customers and optimizes those assets in the wholesale power market. Indiana Gas and SIGECO generally do business as Vectren Energy Delivery of Indiana. The Ohio operations provide energy delivery services to approximately 312,000 natural gas customers located near Dayton in west central Ohio. The Ohio operations are owned as a tenancy in common by Vectren Energy Delivery of Ohio, Inc. (VEDO), a wholly owned subsidiary of Utility Holdings (53 percent ownership), and Indiana Gas (47 percent ownership). The Ohio operations generally do business as Vectren Energy Delivery of Ohio.

The Company, through Vectren Enterprises, Inc. (Enterprises), is involved in nonutility activities in three primary business areas: Energy Marketing and Services, Coal Mining and Energy Infrastructure Services. Energy Marketing and Services markets and supplies natural gas and provides energy management services. Coal Mining mines and sells coal. Energy Infrastructure Services provides underground construction and repair services and performance contracting and renewable energy services. Enterprises also has other legacy businesses that have invested in energy-related opportunities and services, real estate, and leveraged leases, among other investments. These operations are collectively referred to as the Nonutility Group. Enterprises supports the Company's regulated utilities pursuant to service contracts by providing natural gas supply services, coal, and infrastructure services.

The Utility Group generates revenue primarily from the delivery of natural gas and electric service to its customers. The primary source of cash flow for the Utility Group results from the collection of customer bills and the payment for goods and services procured for the delivery of gas and electric services. The activities of and revenues and cash flows generated by the Nonutility Group are closely linked to the utility industry, and the results of those operations are generally impacted by factors similar to those impacting the overall utility industry. In addition, there are other operations, referred to herein as Corporate and Other, that include unallocated corporate expenses such as advertising and charitable contributions, among other activities.

The Company has in place a disclosure committee that consists of senior management as well as financial management. The committee is actively involved in the preparation and review of the Company's SEC filings.

In this discussion and analysis, the Company analyzes contributions to consolidated earnings and earnings per share from its Utility Group and Nonutility Group separately since each operates independently requiring distinct competencies and business strategies, offers different energy and energy related products and services, and experiences different opportunities and risks. Nonutility Group operations are discussed below as primary operations and other operations. Primary nonutility operations denote areas of management's forward looking focus.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto as well as the Company's 2008 annual report filed on Form 10-K.

For the three months ended September 30, 2009, consolidated net income was $12.4 million, or $0.15 per share, compared to earnings of $23.2 million, or $0.29 per share for the three months ended September 30, 2008. For the nine months ended September 30, 2009, consolidated net income was $78.5 million, or $0.97 per share, compared to $91.9 million, or $1.18 per share for the nine months ended September 30, 2008. Excluding the impact of the 2009 second quarter charge discussed below totaling $11.9 million after tax, or $0.15 per share, related to ProLiance Holdings, LLC's (ProLiance) investment in Liberty Gas Storage, for the nine months ended September 30, 2009, there was consolidated net income of $90.4 million, or $1.12 per share.

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Second Quarter 2009 Charge Related to Liberty Gas Storage

During the second quarter of 2009, the Company recorded its share of a charge related to ProLiance's investment in Liberty Gas Storage, LLC (herein referred to as the Liberty Charge). In the Consolidated Statement of Income for the nine months ended September 30, 2009, the impact associated with the Liberty Charge is an approximate $19.9 million reduction to Equity in earnings (losses) of unconsolidated affiliates and an income tax benefit reflected in Income taxes of approximately $8.0 million. The $11.9 million net after tax, or $0.15 per share, charge recorded in the second quarter is generally consistent with previous disclosures about development issues at the Louisiana site, and there have been no significant subsequent adjustments to that charge or significant developments regarding ProLiance's investment in Liberty Gas Storage during the third quarter. More detailed information about ProLiance's investment in Liberty is included in Note 8 to the consolidated financial statements.

Consolidated Results Excluding the Liberty Charge (See Page 39, Regarding the
Use of Non-GAAP Measures)

Net income and earnings per share, excluding the Liberty Charge, in total and by
group, for the three and nine months ended September 30, 2009 and 2008 follow:



                                                      Three Months                     Nine Months
                                                   Ended September 30,             Ended September 30,
(In millions, except per share data)              2009             2008           2009             2008
Net income, excluding Liberty Charge           $     12.4       $     23.2     $     90.4       $     91.9
Attributed to: Utility Group                          8.7             13.6           71.5             80.4
               Nonutility Group, excluding
               Liberty Charge                         3.3              9.8           18.7             12.1
               Corporate & other                      0.4             (0.2 )          0.2             (0.6 )

Basic EPS, excluding the Liberty Charge        $     0.15       $     0.29     $     1.12       $     1.18
Attributed to: Utility Group                         0.11             0.17           0.89             1.04
    Nonutility Group, excluding Liberty
Charge                                               0.04             0.12           0.23             0.15
    Corporate & other                                   -                -              -            (0.01 )

For the three months ended September 30, 2009, net income was $12.4 million, or $0.15 per share, compared to earnings of $23.2 million, or $0.29 per share for the three months ended September 30, 2008. For the nine months ended September 30, 2009, net income excluding the Liberty Charge was $90.4 million, or $1.12 per share, compared to $91.9 million, or $1.18 per share for the nine months ended September 30, 2008. Year to date, earnings per share are approximately $0.04 per share lower than earnings per share in 2008 due to the increased number of common shares outstanding, resulting from the issuance of common shares in June 2008.

Utility Group

In the third quarter of 2009, the Utility Group's earnings were $8.7 million compared to earnings of $13.6 million in 2008, a decrease of $4.9 million. Year to date, utility earnings were $71.5 million, compared to earnings of $80.4 million in 2008, a decrease of $8.9 million. The decreases reflect continued trends involving lower large customer usage and lower wholesale power sales, both of which have been impacted by the recession, as well as an expected increase in depreciation expense. Management estimates third quarter cooling weather over 20 percent cooler than both normal and the prior year decreased earnings in the quarter by $3.2 million, or $0.04 per share. Management estimates the mild cooling weather decreased earnings $2.1 million, or $0.03 per share, for the nine months compared to the prior year period. Increased revenues associated with regulatory initiatives partially offset these declines.

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Nonutility Group

The Nonutility Group's earnings were $3.3 million, or $0.04 per share, in the third quarter of 2009, compared to earnings of $9.8 million, or $0.12 per share, in 2008. The decline resulted from third quarter 2008 record earnings from ProLiance, a period in which it benefited from unusually wide cash to NYMEX spreads. Year to date in 2009, Nonutility Group earnings excluding the Liberty Charge were $18.7 million, or $0.23 per share, compared to $12.1 million, or $0.15 per share, in 2008. Inclusive of the Liberty charge, 2009 year to date Nonutility Group earnings were $6.8 million.

Dividends

Dividends declared for the three months ended September 30, 2009, were $0.335 per share compared to $0.325 per share for the same period in 2008. Dividends declared for the nine months ended September 30, 2009, were $1.005 per share compared to $0.975 per share for the same period in 2008.

In October 2009, the Board of Directors approved a ฝ cent increase to the regular quarterly common stock dividend from the prior quarter to $0.340 per share payable on December 1, 2009. The increase marks the 50th consecutive year Vectren has increased annual dividends paid.

Detailed Discussion of Results of Operations

Following is a more detailed discussion of the results of operations of the Company's Utility and Nonutility operations. The detailed results of operations for these operations are presented and analyzed before the reclassification and elimination of certain intersegment transactions necessary to consolidate those results into the Company's Consolidated Statements of Income.

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Results of Operations of the Utility Group

The Utility Group is comprised of Utility Holdings' operations. The operations of the Utility Group consist of the Company's regulated operations and other operations that provide information technology and other support services to those regulated operations. Regulated operations consist of a natural gas distribution business that provides natural gas distribution and transportation services to nearly two-thirds of Indiana and to west central Ohio and an electric transmission and distribution business, which provides electric distribution services primarily to southwestern Indiana, and the Company's power generating and wholesale power operations. In total, these regulated operations supply natural gas and/or electricity to over one million customers. Utility Group operating results before certain intersegment eliminations and reclassifications for the three and nine months ended September 30, 2009 and 2008 follow:

                                             Three Months                 Nine Months
                                         Ended September 30,          Ended September 30,
(In millions, except per share data)      2009           2008          2009          2008
OPERATING REVENUES
Gas utility                            $     93.4       $ 143.9     $    759.9     $ 1,002.4
Electric utility                            143.0         147.9          400.7         402.3
Other                                         0.4           0.6            1.2           1.8
Total operating revenues                    236.8         292.4        1,161.8       1,406.5
OPERATING EXPENSES
Cost of gas sold                             28.0          80.2          440.6         686.0
Cost of fuel & purchased power               50.1          48.7          147.4         143.2
Other operating                              69.9          69.2          227.9         217.7
Depreciation & amortization                  45.9          41.6          134.8         123.2
Taxes other than income taxes                10.8          11.7           46.2          51.8
Total operating expenses                    204.7         251.4          996.9       1,221.9

OPERATING INCOME                             32.1          41.0          164.9         184.6

OTHER INCOME - NET                            2.1           0.7            6.1           4.9

INTEREST EXPENSE                             20.2          19.6           58.9          59.5

INCOME BEFORE INCOME TAXES                   14.0          22.1          112.1         130.0

INCOME TAXES                                  5.3           8.5           40.6          49.6

NET INCOME                             $      8.7       $  13.6     $     71.5     $    80.4

CONTRIBUTION TO VECTREN BASIC EPS      $     0.11       $  0.17     $     0.89     $    1.04

Utility Group Margin
Throughout this discussion, the terms Gas Utility margin and Electric Utility margin are used. Gas Utility margin is calculated as Gas utility revenues less the Cost of gas. Electric Utility margin is calculated as Electric utility revenues less Cost of fuel & purchased power. The Company believes Gas Utility and Electric Utility margins are better indicators of relative contribution than revenues since gas prices and fuel and purchased power costs can be volatile and are generally collected on a dollar-for-dollar basis from customers.

Rate Design Strategies
Sales of natural gas and electricity to residential and commercial customers are seasonal and are impacted by weather. Trends in average use among natural gas residential and commercial customers have tended to decline in recent years as more efficient appliances and furnaces are installed and the price of natural gas have been volatile. Normal temperature adjustment (NTA) and lost margin recovery mechanisms largely mitigate the effect on Gas Utility margin that would otherwise be caused by variations in volumes sold to these customers due to weather and changing consumption patterns. Indiana Gas' territory has both an NTA since 2005 and lost margin recovery since 2006. SIGECO's natural gas territory has an NTA since 2005 and lost margin recovery since 2007. The Ohio service territory had lost margin recovery since 2006. The Ohio lost margin recovery mechanism ended when new base rates went into effect in February 2009. This mechanism was replaced by a rate design, commonly referred to as a straight fixed variable rate design, which is more dependent on service charge revenues and less dependent on volumetric revenues than previous rate designs. This new rate design, which will be fully implemented in February 2010, will eventually mitigate most weather risk in Ohio. SIGECO's electric service territory has neither NTA nor lost margin recovery mechanisms.

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Tracked Operating Expenses
Margin is also impacted by the collection of state mandated taxes, which fluctuate with gas and fuel costs, as well as other tracked expenses. Expenses subject to tracking mechanisms include Ohio bad debts and percent of income payment plan expenses, costs associated with exiting the merchant function and to perform riser replacement in Ohio, Indiana gas pipeline integrity management costs, costs to fund Indiana energy efficiency programs, MISO transmission revenues and costs, as well as the gas cost component of bad debt expense based on historical experience and unaccounted for gas. Unaccounted for gas is also tracked in the Ohio service territory. Certain operating costs, including depreciation, associated with operating environmental compliance equipment and regional transmission investments are also tracked.

Recessionary Impacts
Gas and electric margin generated from sales to large customers (generally industrial and other contract customers) is primarily impacted by overall economic conditions and changes in demand for those customers' products. The recent recession has had and may continue to have some negative impact on both gas and electric large customers. This impact has included, and may continue to include, tempered growth, significant conservation measures, and increased plant closures and bankruptcies. While no one industrial customer comprises 10 percent of consolidated margin, the top five industrial electric customers comprise approximately 11 percent of electric utility margin in the nine months ended September 30, 2009, and therefore any significant decline in their collective margin could adversely impact operating results. Deteriorating economic conditions may also lead to continued lower residential and commercial customer counts. Further, resulting from the lower power prices, decreased demand for electricity, and higher coal prices associated with contracts negotiated last year, the Company's coal fired generation has been dispatched less often by the MISO. This has resulted in lower wholesale sales, more power being purchased from the MISO for native load requirements, and larger coal inventories.

Following is a discussion and analysis of margin generated from regulated utility operations.

Gas Utility Margin (Gas utility revenues less Cost of gas) Gas Utility margin and throughput by customer type follows:

                                          Three Months                 Nine Months
                                        Ended September 30,        Ended September 30,
(In millions)                          2009           2008         2009           2008
Gas utility revenues                 $    93.4       $ 143.9     $   759.9      $ 1,002.4
Cost of gas sold                          28.0          80.2         440.6          686.0
Total gas utility margin             $    65.4       $  63.7     $   319.3      $   316.4
Margin attributed to:
Residential & commercial customers   $    54.8       $  51.6     $   275.9      $   268.3
Industrial customers                       9.0           9.9          33.4           37.2
Other                                      1.6           2.2          10.0           10.9
Sold & transported volumes in MMDth attributed to:
Residential & commercial customers         6.3           6.3          71.5           76.6
Industrial customers                      15.3          18.4          55.1           67.5
Total sold & transported volumes          21.6          24.7         126.6          144.1

For the three and nine months ended September 30, 2009, gas utility margins were $65.4 million and $319.3 million, respectively, and have increased $1.7 million and $2.9 million, respectively, compared to the prior year periods. Among all customer classes, margin increases associated with regulatory initiatives including the full impact of the Vectren North base rate increase effective in February 14, 2008 and the Vectren Ohio base rate increase effective February 22, 2009, were $2.1 million quarter over quarter and $8.4 million year to date. Increases were offset by impacts of the recession. During the quarter, management estimates a $0.7 million decrease in industrial customer margin associated with lower volumes sold, and slightly lower residential and commercial customer counts decreased margin approximately $0.2 million. Year to date, management estimates $4.0 million in industrial customer margin declines and $1.2 million related to lower residential and commercial customer counts. The impact of operating costs, including revenue and usage taxes, recovered in margin was unfavorable $0.1 million quarter over quarter and unfavorable $0.9 million year over year, reflecting lower revenue taxes offset by higher pass through operating expenses. Ohio weather had minor, favorable impacts both in the quarter and year to date compared to the prior year periods totaling $0.8 million and $0.4 million, respectively. The average cost per dekatherm of gas purchased for the nine months ended September 30, 2009, was $6.03 compared to $10.14 in 2008.

Electric Utility Margin (Electric Utility revenues less Cost of fuel and purchased power)
Electric Utility margin and volumes sold by customer type follows:

                                                     Three Months                 Nine Months
                                                 Ended September 30,          Ended September 30,
(In millions)                                     2009          2008           2009          2008

Electric utility revenues                      $    143.0     $   147.9     $    400.7     $   402.3
Cost of fuel & purchased power                       50.1          48.7          147.4         143.2
Total electric utility margin                  $     92.9     $    99.2     $    253.3     $   259.1
Margin attributed to:
Residential & commercial customers             $     62.5     $    65.6     $    170.1     $   167.8
Industrial customers                                 23.3          23.0           63.6          64.5
Other customers                                       1.5           1.6            4.3           4.6
Subtotal: retail                               $     87.3     $    90.2     $    238.0     $   236.9
Wholesale power & transmission system margin   $      5.6     $     9.0     $     15.3     $    22.2

Electric volumes sold in GWh attributed to:
Residential & commercial customers                  770.0         833.8        2,122.1       2,195.6
Industrial customers                                620.5         619.0        1,686.9       1,859.5
Other customers                                       4.5           4.3           14.1          58.3
Total retail volumes sold                         1,395.0       1,457.1        3,823.1       4,113.4

Retail Margin
Electric retail utility margins were $ญญญญ87.3 million and $238.0 million for the three and nine months ended September 30, 2009, and compared to prior year periods decreased $2.9 million in the quarter and increased $1.1 million year to date. Increased margin among the customer classes associated with returns on pollution control investments totaled $1.4 million quarter over quarter and $3.2 million year to date, and margin associated with tracked costs such as recovery of MISO and pollution control operating expenses increased $1.9 million quarter over quarter and $7.4 million year to date. Management estimates weather 21 percent cooler than the prior year in the third quarter decreased residential and commercial margin $5.4 million in the third quarter and $3.6 million year to date. Year to date, management estimates the weak economy to have decreased industrial margins approximately $5.4 million, with $1.7 million of the decline occurring in the third quarter. The industrial decreases are due primarily to lower usage year to date and less peak usage in the quarter.

Wholesale Power and Transmission System Operation Margin Generation capacity is from time to time in excess of native load requirements. The Company markets and sells this unutilized generation to optimize the return on its owned assets. Substantially all margin generated from off-system sales occurs into the MISO Day Ahead and Real Time markets. The level of off-system sales is primarily affected by market conditions, the level of excess generating capacity, and electric transmission availability. MISO-related transmission system operation activity includes margin associated with others using the Company's transmission system and returns on electric transmission projects constructed by the Company in its service territory that benefit reliability throughout the region. Returns associated with these projects meeting the criteria of MISO's transmission expansion plans began in June 2008 and returns are increasing due to the level of capital invested in qualifying projects.

Further detail of Wholesale and Transmission activity follows:

                                         Three Months                 Nine Months
                                     Ended September 30,          Ended September 30,
(In millions)                          2009           2008         2009           2008
Off-system sales                   $        1.2       $ 5.5     $      4.3       $  15.8
Transmission system sales                   4.4         3.5           11.0           6.4
Total wholesale and transmission   $        5.6       $ 9.0     $     15.3       $  22.2

For the three and nine months ended September 30, 2009, wholesale margins were $5.6 million and $15.3 million, representing decreases of $3.4 million and $6.9 million, compared to 2008. Of the quarterly and year to date decreases $4.3 million and $11.5 million, respectively, relate to lower margin retained by the Company from off-system sales. The Company experienced lower wholesale power marketing margins due primarily to lower demand and wholesale prices due to the recession, coupled with increased coal costs. Year to date, off-system sales totaled 494.3 GWh in 2009, compared to 1,111.4 GWh in 2008. The base rate case effective August 17, 2007, requires that wholesale margin from off-system sales earned above or below $10.5 million be shared equally with customers as measured on a fiscal year ending in August, and results reflect the impact of that sharing. Decreases associated with off-system sales have been partially offset by margins associated with transmission system operations.

Beginning in June 2008, the Company began earning a return on electric transmission projects constructed by the Company in its service territory that meet the criteria of Midwest Independent System Operator's (MISO) transmission expansion plans. Margin associated with these projects and other transmission system operations increased $0.9 million to $4.4 million for the three months ended September 30, 2009 and for the nine months ended September 30, 2009, margin increased $4.6 million, to $11.0 million.

Utility Group Operating Expenses

Other Operating
For the three and nine months ended September 30, 2009, other operating expenses were $69.9 million and $227.9 million, which represent increases of $0.7 million and $10.2 million, compared to 2008. Approximately $1.3 million and $8.3 million of the increases result from increased costs directly recovered through utility margin. Examples of such tracked costs include Ohio bad debts, Indiana gas pipeline integrity management costs, costs to fund Indiana energy efficiency programs, and MISO transmission revenues and costs, among others. Bad debt expense associated with the Indiana service territory decreased $0.4 million in the quarter and increased $2.3 million year to date. The gas cost portion of bad debt expense in the Indiana service territory is recovered through gas cost recovery mechanisms. All other operating expenses were approximately $0.2 million lower in the quarter and $0.4 million lower year to date.

Depreciation & Amortization
For the three and nine months ended September 30, 2009, depreciation expense was $45.9 million and $134.8 million, which represents increases of $4.3 million and . . .