10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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:   1-15467

VECTREN CORPORATION

(Exact name of registrant as specified in its charter)

INDIANA	35-2086905
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

One Vectren Square, Evansville, IN 47708

(Address of principal executive offices)

(Zip Code)

812-491-4000

(Registrant's telephone number, including area code)

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 such filing requirements for the past 90 days.  x Yes   o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x  Yes  o  No

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer x                                                                                                                  Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)                                        Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o 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.

Common Stock- Without Par Value	81,653,437	October 31, 2010
Class	Number of Shares	Date

Access to Information

Vectren Corporation makes available all SEC filings and recent annual reports free of charge through its website at www.vectren.com as soon as reasonably practicable after electronically filing or furnishing the reports to the SEC, or by request, directed to Investor Relations at the mailing address, phone number, or email address that follows:

Mailing Address: One Vectren Square Evansville, Indiana  47708 Phone Number: (812) 491-4000 Investor Relations Contact: Robert L. Goocher Treasurer and Vice President, Investor Relations rgoocher@vectren.com

Definitions

BTU:  British thermal units	MSHA:  Mine Safety and Health Administration
FASB:  Financial Accounting Standards Board	MW:  megawatts
FERC:  Federal Energy Regulatory Commission	MWh / GWh:  megawatt hours / thousands of megawatt hours (gigawatt hours)
IDEM:  Indiana Department of Environmental Management	OUCC:  Indiana Office of the Utility Consumer Counselor
IURC:  Indiana Utility Regulatory Commission	PUCO:  Public Utilities Commission of Ohio
BCF:  billions of cubic feet	USEPA:  United States Environmental Protection Agency
MISO: Midwest Independent System Operator	Throughput:  combined gas sales and gas transportation volumes

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Table of Contents

Item Number		Page Number
	PART I.  FINANCIAL INFORMATION
1	Financial Statements (Unaudited)
	Vectren Corporation and Subsidiary Companies
	Consolidated Condensed Balance Sheets	4-5
	Consolidated Condensed Statements of Income	6
	Consolidated Condensed Statements of Cash Flows	7
	Notes to Unaudited Consolidated Condensed Financial Statements	8
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
3	Quantitative and Qualitative Disclosures About Market Risk	41
4	Controls and Procedures	42
	PART II.  OTHER INFORMATION
1	Legal Proceedings	42
1A	Risk Factors	42
2	Unregistered Sales of Equity Securities and Use of Proceeds	43
6	Exhibits	43
	Signatures	44

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PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

VECTREN CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited – In millions)

	September 30,		December 31,
	2010		2009
ASSETS
Current Assets
Cash & cash equivalents	$	7.2	$	11.9
Accounts receivable - less reserves of $4.2 &           $5.2, respectively		132.5		162.4
Accrued unbilled revenues		54.7		144.7
Inventories		188.3		167.8
Recoverable fuel & natural gas costs		12.5		-
Prepayments & other current assets		111.0		95.1
Total current assets		506.2		581.9
Utility Plant
Original cost		4,737.4		4,601.4
Less:  accumulated depreciation & amortization		1,808.7		1,722.6
Net utility plant		2,928.7		2,878.8
Investments in unconsolidated affiliates		124.9		186.2
Other utility & corporate investments		32.5		33.2
Other nonutility investments		40.9		46.2
Nonutility plant - net		485.5		482.6
Goodwill - net		242.0		242.0
Regulatory assets		185.7		187.9
Other assets		33.7		33.0
TOTAL ASSETS	$	4,580.1	$	4,671.8

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

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VECTREN CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited – In millions)

	September 30,			December 31,
	2010			2009
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable	$	132.9		$	183.8
Accounts payable to affiliated companies		23.5			54.1
Refundable fuel & natural gas costs		-			22.3
Accrued liabilities		183.5			174.7
Short-term borrowings		157.3			213.5
Current maturities of long-term debt		48.2			48.0
Long-term debt subject to tender		-			51.3
Total current liabilities		545.4			747.7
Long-term Debt - Net of Current Maturities &      Debt Subject to Tender		1,590.3			1,540.5
Deferred Income Taxes & Other Liabilities
Deferred income taxes		495.0			458.7
Regulatory liabilities		331.6			322.1
Deferred credits & other liabilities		207.0			205.6
Total deferred credits & other liabilities		1,033.6			986.4
Commitments & Contingencies (Notes 11-13)
Common Shareholders' Equity
Common stock (no par value) – issued & outstanding           81.4 & 81.1, respectively		675.1			666.8
Retained earnings		742.7			737.2
Accumulated other comprehensive income (loss)		(7.0	)		(6.8	)
Total common shareholders' equity		1,410.8			1,397.2
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY	$	4,580.1		$	4,671.8

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

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VECTREN CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited – In millions, except per share data)

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2010			2009			2010			2009
OPERATING REVENUES
Gas utility	$	101.8		$	93.4		$	692.8		$	759.9
Electric utility		173.2			143.0			469.1			400.7
Nonutility		147.7			113.2			403.5			359.7
Total operating revenues		422.7			349.6			1,565.4			1,520.3
OPERATING EXPENSES
Cost of gas sold		32.4			28.0			371.7			440.6
Cost of fuel & purchased power		64.5			50.1			180.3			147.4
Cost of nonutility revenues		60.7			36.2			170.6			153.7
Other operating		137.2			129.6			398.4			377.6
Depreciation & amortization		57.6			53.9			170.6			158.3
Taxes other than income taxes		11.7			11.3			46.9			48.0
Total operating expenses		364.1			309.1			1,338.5			1,325.6
OPERATING INCOME		58.6			40.5			226.9			194.7
OTHER INCOME (EXPENSE)
Equity in earnings (losses) of unconsolidated affiliates		(8.2	)		(0.6	)		(13.9	)		(11.3	)
Other income – net		1.6			4.1			2.0			10.6
Total other income (expense)		(6.6	)		3.5			(11.9	)		(0.7	)
INTEREST EXPENSE		26.0			25.8			78.0			74.0
INCOME BEFORE INCOME TAXES		26.0			18.2			137.0			120.0
INCOME TAXES		9.6			5.8			48.7			41.5
NET INCOME	$	16.4		$	12.4		$	88.3		$	78.5
AVERAGE COMMON SHARES OUTSTANDING		81.2			80.8			81.1			80.7
DILUTED COMMON SHARES OUTSTANDING		81.4			81.1			81.3			81.0
EARNINGS PER SHARE OF COMMON STOCK:
BASIC	$	0.20		$	0.15		$	1.09		$	0.97
DILUTED	$	0.20		$	0.15		$	1.09		$	0.97
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.340		$	0.335		$	1.020		$	1.005

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

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VECTREN CORPORATION AND SUBSIDIARY COMPANIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited – In millions)

	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	88.3		$	78.5
Adjustments to reconcile net income to cash from operating activities:
Depreciation & amortization		170.6			158.3
Deferred income taxes & investment tax credits		33.9			55.2
Equity in losses of unconsolidated affiliates		13.9			11.3
Provision for uncollectible accounts		13.2			15.3
Expense portion of pension & postretirement benefit cost		6.7			7.8
Other non-cash charges - net		19.4			(1.0	)
Changes in working capital accounts:
Accounts receivable & accrued unbilled revenues		106.7			234.0
Inventories		(20.5	)		(32.0	)
Recoverable/refundable fuel & natural gas costs		(34.8	)		33.1
Prepayments & other current assets		(16.4	)		30.6
Accounts payable, including to affiliated companies		(82.9	)		(169.9	)
Accrued liabilities		15.7			(17.4	)
Unconsolidated affiliate dividends		42.7			11.3
Employer contributions to pension & postretirement plans		(12.4	)		(27.3	)
Changes in noncurrent assets		(9.8	)		(6.9	)
Changes in noncurrent liabilities		(11.9	)		(11.3	)
Net cash flows from operating activities		322.4			369.6
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from:
Dividend reinvestment plan & other common stock issuances		7.2			4.5
Long-term debt, net of issuance costs		-			311.6
Requirements for:
Dividends on common stock		(82.7	)		(81.2	)
Retirement of long-term debt		(2.1	)		(2.7	)
Net change in short-term borrowings		(56.2	)		(358.1	)
Net cash flows from financing activities		(133.8	)		(125.9	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from:
Unconsolidated affiliate distributions		0.5			-
Other collections		10.2			1.2
Requirements for:
Capital expenditures, excluding AFUDC equity		(200.9	)		(321.8	)
Unconsolidated affiliate investments		(0.2	)		(0.2	)
Other investments		(2.9	)		(0.8	)
Net cash flows from investing activities		(193.3	)		(321.6	)
Net change in cash & cash equivalents		(4.7	)		(77.9	)
Cash & cash equivalents at beginning of period		11.9			93.2
Cash & cash equivalents at end of period	$	7.2		$	15.3

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

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VECTREN CORPORATION AND SUBSIDIARY COMPANIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(UNAUDITED)

1.     Organization and Nature of Operations

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 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.  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). 
60;Vectren was incorporated under the laws of Indiana on June 10, 1999.

Indiana Gas provides energy delivery services to over 560,000 natural gas customers located in central and southern Indiana.  SIGECO provides energy delivery services to over 141,000 electric customers and approximately 110,000 gas customers located near Evansville in southwestern Indiana.  SIGECO also owns and operates electric generation assets 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 310,000 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 U tility 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.

2.     Basis of Presentation

The interim consolidated condensed financial statements included in this report have been prepared by the Company, without audit, as provided in the rules and regulations of the Securities and Exchange Commission and include a review of subsequent events through the date the financial statements were issued.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted as provided in such rules and regulations.  The information in this report reflects all adjustments which are, in the opinion of management, necessary to fairly state the interim periods presented, inclusive of adjustments that are normal and recurring in nature.  These consolidated condensed financial statements and related notes should be read in conjunction with the Company’s audited annual consolidated financial statements for the year ended December 31, 2009, filed with the Securities and Exchange Commission on February 26, 2010, on Form 10-K.  Because of the seasonal nature of the Company’s utility operations, the results shown on a quarterly basis are not necessarily indicative of annual results.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.

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3.   Comprehensive Income

Comprehensive income consists of the following:

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
(In millions)	2010			2009			2010			2009
Net income	$	16.4		$	12.4		$	88.3		$	78.5
Comprehensive income (loss) of unconsolidated affiliates		(6.3	)		3.6			(4.4	)		16.9
Cash flow hedges
Unrealized gains		4.1			-			4.3			0.1
Reclassifications to net income		-			-			-			(0.1	)
Income taxes		0.9			(1.5	)		(0.1	)		(6.8	)
Total comprehensive income	$	15.1		$	14.5		$	88.1		$	88.6

Accumulated other comprehensive income arising from unconsolidated affiliates is primarily the Company’s portion of ProLiance Holdings, LLC’s accumulated comprehensive income related to use of cash flow hedges.  (See Note 8 for more information on ProLiance.)

4.     Earnings Per Share

The Company uses the two class method to calculate earnings per share (EPS).  The two class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common shareholders.  Under the two-class method, earnings for a period are allocated between common shareholders and participating security holders based on their respective rights to receive dividends as if all undistributed book earnings for the period were distributed.  Basic EPS is computed by dividing net income attributable to only the common shareholders by the weighted-average number of common shares outstanding for the period.  Diluted EPS includes the impact of stock options and other equity based instruments to the extent the effect is dilutive. 0; The following table illustrates the basic and dilutive EPS calculations for the periods presented in these financial statements.

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(In millions, except per share data)	2010		2009		2010		2009
Numerator:
Numerator for basic EPS	$	16.4	$	12.4	$	88.3	$	78.4
Add back earnings attributable to participating securities		-		-		-		0.1
Reported net income (Numerator for Diluted EPS)	$	16.4	$	12.4	$	88.3	$	78.5
Denominator:
Weighted average common shares outstanding (Basic EPS)		81.2		80.8		81.1		80.7
Conversion of share based compensation arrangements		0.2		0.3		0.2		0.3
Adjusted weighted average shares outstanding and      assumed conversions outstanding (Diluted EPS)		81.4		81.1		81.3		81.0
Basic EPS	$	0.20	$	0.15	$	1.09	$	0.97
Diluted EPS	$	0.20	$	0.15	$	1.09	$	0.97

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For the three months and nine months ended September 30, 2010, options to purchase 308,000 and 517,800, respectively, of additional shares of the Company’s common stock were outstanding, but were not included in the computation of diluted EPS because their effect would be antidilutive, compared to 517,800 and 837,100 shares for the three and nine months ended September 30, 2009, respectively.  The exercise prices for these options ranged from $24.90 to $27.15 for the three months ended September 30, 2010 and $24.74 to $27.15 for the nine months ended September 30, 2010.  The exercise prices for these options ranged from $24.74 to $27.15 for the three months ended September 30, 2009 and $23.19 to $27.15 for the nine months ended September 30, 2009.

5.   Retirement Plans & Other Postretirement Benefits

The Company maintains three qualified defined benefit pension plans, a nonqualified supplemental executive retirement plan (SERP), and three other postretirement benefit plans.  The defined benefit pension and other postretirement benefit plans, which cover eligible full-time regular employees, are primarily noncontributory.  The postretirement health care and life insurance plans are a combination of self-insured and fully insured plans.  The Company has a Voluntary Employee Beneficiary Association (VEBA) Trust Agreement for the partial funding of postretirement health benefits for retirees and their eligible dependents and beneficiaries in one of the three plans.  Annual VEBA funding is discretionary.  The qualified pension plans and the SERP are aggregated under the heading “Pensi on Benefits.”  Other postretirement benefit plans are aggregated under the heading “Other Benefits.”

Net Periodic Benefit Costs

A summary of the components of net periodic benefit cost follows:

	Three Months Ended September 30,
	Pension Benefits						Other Benefits
(In millions)	2010			2009			2010			2009
Service cost	$	1.5		$	1.5		$	0.2		$	0.2
Interest cost		4.0			4.0			1.1			1.1
Expected return on plan assets		(4.6	)		(4.1	)		-			(0.1	)
Amortization of prior service cost		0.4			0.4			(0.2	)		(0.2	)
Amortization of transitional obligation		-			-			0.3			0.3
Amortization of actuarial loss		0.5			0.6			-			0.1
Net periodic benefit cost	$	1.8		$	2.4		$	1.4		$	1.4
	Nine Months Ended September 30,
	Pension Benefits						Other Benefits
(In millions)		2010			2009			2010			2009
Service cost	$	4.7		$	4.7		$	0.4		$	0.4
Interest cost		11.9			11.9			3.4			3.3
Expected return on plan assets		(13.8	)		(12.3	)		(0.2	)		(0.3	)
Amortization of prior service cost		1.2			1.2			(0.6	)		(0.6	)
Amortization of transitional obligation		-			-			0.9			0.9
Amortization of actuarial loss		1.5			1.7			0.3			0.3
Net periodic benefit cost	$	5.5		$	7.2		$	4.2		$	4.0

Employer Contributions to Qualified Pension Plans

Currently, the Company expects to contribute approximately $12 million to its pension plan trusts for 2010.  Through September 30, 2010, contributions of $8.8 million have been made.

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Impact of Recent Healthcare Legislation

In March 2010, the President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010.  Included among the major provisions of the law is a change in the federal income tax treatment of a subsidy received by the Company to offset the cost of providing Medicare equivalent retiree prescription drug benefits, commonly referred to as the Medicare Part D subsidy.  Prior to the change in law, the deduction for retiree drug benefits excluded the government subsidy, effectively making the subsidy tax free.  Due to the change in tax treatment, the Company recorded a $2.3 million increase in its deferred tax liabilities, during the first quarter of 2010, related to the estimated $6.1 million accrued sub sidy receivable at that date.  Like tax law changes in the past, it is expected that the impact of this change will be reflected in customer rates in the future.  As a result, the Company has recorded a $4.8 million regulatory asset related to this matter in its financial statements at September 30, 2010.

6.     Excise and Utility Receipts Taxes

Excise taxes and a portion of utility receipts taxes are included in rates charged to customers.  Accordingly, the Company records these taxes received as a component of operating revenues, which totaled $4.8 million and $4.3 million in the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, these taxes totaled $25.2 million and $26.0 million, respectively.  Expenses associated with excise and utility receipts taxes are recorded as a component of Taxes other than income taxes.

7.     Supplemental Cash Flow Information

As of September 30, 2010 and December 31, 2009, the Company has accruals related to utility and nonutility plant purchases totaling approximately $10.2 million and $12.4 million, respectively.

8.     ProLiance Holdings, LLC

ProLiance Holdings, LLC (ProLiance), a nonutility energy marketing affiliate of Vectren and Citizens Energy Group (Citizens), provides services to a broad range of municipalities, utilities, industrial operations, schools, and healthcare institutions located throughout the Midwest and Southeast United States.  ProLiance’s customers include Vectren’s Indiana utilities and nonutility gas supply operations as well as Citizens’ utilities.  ProLiance’s primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services.  Consistent with its ownership percentage, Vectren is allocated 61 percent of ProLiance’s profits and losses; however, governance and voting rights remain at 50 percent for each member; and therefore, the Company acc ounts for its investment in ProLiance using the equity method of accounting.

Summarized Financial Information

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
(In millions)	2010			2009			2010			2009
Summarized statement of income information:
Revenues	$	289.3		$	257.2		$	1,095.1		$	1,216.2
Operating income (loss)	$	(12.8	)	$	(1.1	)	$	(12.2	)	$	12.8
Charge related to Investment in Liberty Gas Storage	$	-		$	-		$	-		$	(32.7	)
ProLiance's earnings (loss)	$	(12.9	)	$	(0.8	)	$	(12.3	)	$	(18.3	)

-11-

	As of
	September 30,			December 31,
(In millions)	2010			2009
Summarized balance sheet information:
Current assets	$	336.5		$	477.6
Noncurrent assets	$	59.6		$	61.7
Current liabilities	$	209.5		$	264.5
Noncurrent liabilities	$	5.3		$	4.0
Members' equity	$	200.1		$	282.4
Accumulated other comprehensive income (loss)	$	(18.8	)	$	(11.6	)

Vectren records its 61 percent share of ProLiance’s earnings after income taxes, interest expense and cost allocations.  During the third quarter of 2010, ProLiance declared a special dividend of $50 million to its members.  The Company received its share of a special dividend paid to ProLiance’s members totaling approximately $30 million in July 2010.

Investment in Liberty Gas Storage

Liberty Gas Storage, LLC (Liberty), a joint venture between a subsidiary of ProLiance and a subsidiary of Sempra Energy (SE), is a development project for salt-cavern natural gas storage facilities.  ProLiance is the minority member with a 25 percent interest, which it accounts for using the equity method.  The project was expected to include 17 Bcf of capacity in its north facility, and an additional 17 Bcf of capacity in its south facility. In the second quarter of 2009, the joint venture, with SE as the majority member, determined the north facility was impaired due to well completion problems.  As a result, the Company recorded its share of that impairment totaling approximately $11.9 million after tax.  ProLiance’s investment in Liberty is $37.0 million at September 30, 2010.

Transactions with ProLiance

Purchases from ProLiance for resale and for injections into storage for the three months ended September 30, 2010 and 2009, totaled $78.0 and $92.1 million, respectively, and for the nine months ended September 30, 2010 and 2009, totaled $319.2 and $394.4 million.  Amounts owed to ProLiance at September 30, 2010 and December 31, 2009 for those purchases were $23.5 million and $54.1 million, respectively, and are included in Accounts payable to affiliated companies in the Consolidated Balance Sheets.  Vectren received regulatory approval on April 25, 2006, from the IURC for ProLiance to provide natural gas supply services to the Company’s Indiana utilities through March 2011.  On November 3, 2010, a settlement agreement was filed with the IURC providing for ProLiance’s continued provision of gas supply services to the Company's Indiana utilities and Citizens Gas for the period of April 1, 2011 through March 31, 2016.  The settlement has been agreed to by all of the consumer representatives that were parties to the prior settlement.  An order is anticipated by April 1, 2011.  Amounts charged by ProLiance for gas supply services are established by supply agreements with each utility.

9.     Haddington Energy Partnerships

The Company has an approximate 40 percent ownership interest in Haddington Energy Partners, LP (Haddington I) and Haddington Energy Partners II, LP (Haddington II).  These Haddington ventures have interests in two remaining mid-stream energy related investments.  Both Haddington ventures are investment companies accounted for using the equity method of accounting. 

During the second quarter of 2010, the Company recorded its share of the decline in fair value and also impaired a note receivable associated with Haddington’s investment in a liquefied natural gas facility.  In total, the charge was approximately $6.5 million, of which, $6.1 million is reflected in Equity in earnings of unconsolidated affiliates and $0.4 million is reflected in Other-net,for the nine months ended September 30, 2010.  At September 30, 2010, the Company’s remaining $3.4 million investment in the Haddington ventures is related to payments to be received associated with the sale of a compressed air storage facility sold in 2009.& #160; The Company has no further commitments to invest in either Haddington I or II.  

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10.   Financing Activities

Short Term Financing Arrangements

On September 30, 2010, new short term financing arrangements became effective for the Company’s utility and nonutility operations.  The Company lowered the level of capacity due to the reduced requirements for short-term borrowings.  The capacities of the facilities were lowered from $515 million to $350 million for the utility operations and from $255 million to $250 million for the nonutility operations.  The level of required short-term borrowings at Utility Holdings is significantly lower compared to historical trends due to the long-term financing transactions completed in 2009, lower inventory values due to lower natural gas prices, and lower natural gas inventory volumes due to exiting the merchant function in Ohio.  These new arrangements expire in September, 2013.  As reduced by borro wings currently outstanding, approximately $324 million was available for the Utility Group operations and approximately $119 million was available for the wholly owned Nonutility Group and corporate operations. 

Vectren Capital Corp. Debt Issuance

On September 9, 2010, the Company and Vectren Capital Corp. (Vectren Capital), its wholly-owned subsidiary, entered into a private placement Note Purchase Agreement (2010 Note Purchase Agreement) pursuant to which various institutional investors have agreed to purchase the following tranches of notes from Vectren Capital:  (i) $75 million 3.48% Senior Notes, Series A due 2017, and (ii) $50 million 4.53% Senior Notes, Series B due 2025.  These Senior Notes will be unconditionally guaranteed by the Company.  This financing is scheduled to close on or about December 15, 2010.

11.   Commitments & Contingencies

Corporate Guarantees

The Company issues corporate guarantees to certain vendors and customers of its wholly owned subsidiaries and unconsolidated affiliates.  These guarantees do not represent incremental consolidated obligations; rather, they represent parental guarantees of subsidiary and unconsolidated affiliate obligations in order to allow those subsidiaries and affiliates the flexibility to conduct business without posting other forms of collateral.  At September 30, 2010, corporate issued guarantees support a portion of Energy Systems Group’s (ESG) performance contracting commitments and warranty obligations described below.  In addition, the Company has approximately $73 million of other guarantees outstanding supporting other consolidated subsidiary operations, of which $48 million support non-regulated retail gas supply operations and $18 million represent letters of credit supporting other nonutility operations.  Guarantees issued and outstanding on behalf of unconsolidated affiliates approximated $3 million at September 30, 2010.  These guarantees relate primarily to arrangements between ProLiance and various natural gas pipeline operators.  The Company has not been called upon to satisfy any obligations pursuant to these parental guarantees and has accrued no significant liabilities related to these guarantees.

Performance Guarantees & Product Warranties

In the normal course of business, ESG and other wholly owned subsidiaries issue performance bonds or other forms of assurance that commit them to timely install infrastructure, operate facilities, pay vendors or subcontractors, and/or support warranty obligations.  Based on a history of meeting performance obligations and installed products operating effectively, no significant liability or cost has been recognized for the periods presented.

Specific to ESG, in its role as a general contractor in the performance contracting industry, at September 30, 2010, there are 68 open surety bonds supporting future performance.  The average face amount of these obligations is $3.4 million, and the largest obligation has a face amount of $30.4 million. These surety bonds are guaranteed by Vectren Corporation.  The maximum exposure of these obligations is less than these amounts for several factors, including the level of work already completed.  At September 30, 2010, approximately 64 percent of work was completed on projects with open surety bonds.  A significant portion of these commitments will be fulfilled within one year.  In instances where ESG operates facilities, project guarantees extend over a longer period.

In addition to its performance obligations, ESG also warrants the functionality of certain installed infrastructure generally for one year and the associated energy savings over a specified number of years.  In certain instances, these warranty obligations are also backed by Vectren Corporation.  The Company has no significant accruals for these warranty obligations as of September 30, 2010.

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Legal & Regulatory Proceedings

The Company is party to various legal proceedings, audits, and reviews by taxing authorities and other government agencies arising in the normal course of business.  In the opinion of management, there are no legal proceedings or other regulatory reviews or audits pending against the Company that are likely to have a material adverse effect on its financial position, results of operations or cash flows.

12.   Environmental Matters

Clean Air Act

The Clean Air Interstate Rule (CAIR) is an allowance cap and trade program that required reductions from coal-burning power plants for NOx emissions beginning January 1, 2009 and SO2 emissions beginning January 1, 2010, with a second phase of reductions in 2015.  On July 11, 2008, the US Court of Appeals for the District of Columbia vacated the federal CAIR regulations.  Various parties filed motions for reconsideration, and on December 23, 2008, the Court reinstated the CAIR regulations and remanded the regulations back to the USEPA for promulgation of revisions in accordance with the Court’s July 11, 2008 order.  Thus, the original version of CAIR promulgated in March of 2005 remains effective while USEPA revises it per the CourtR 17;s guidance.  SIGECO is in compliance with the current CAIR Phase I annual NOx reduction requirements in effect on January 1, 2009, and the Phase I annual SO2 reduction requirements in effect on January 1, 2010.  Utilization of the Company’s inventory of NOx and SO2  allowances may also be impacted if CAIR is further revised.  Most of these allowances were granted to the Company at zero cost; therefore, any reduction in carrying value that could result from future changes in regulations would be immaterial.

Similarly, in March of 2005, USEPA promulgated the Clean Air Mercury Rule (CAMR).  CAMR is an allowance cap and trade program requiring further reductions in mercury emissions from coal-burning power plants.  The CAMR regulations were vacated by the US Court of Appeals for the DC Circuit in July 2008.  In response to the court decision, USEPA has announced that it intends to publish proposed Maximum Achievable Control Technology standards for mercury in 2010.  It is uncertain what emission limit the USEPA is considering, and whether they will address hazardous pollutants in addition to mercury.  It is also possible that the vacatur of the CAMR regulations will lead to increased support for the passage of a multi-pollutant bill in Congress.

To comply with Indiana’s implementation plan of the Clean Air Act of 1990, the CAIR regulations, and to comply with potential future regulations of mercury and further NOx and SO2  reductions, SIGECO has IURC authority to invest in clean coal technology.  Using this authorization, SIGECO has invested approximately $411 million in pollution control equipment, including Selective Catalytic Reduction (SCR) systems, fabric filters, and an SO2 scrubber at its generating facility that is jointly owned with ALCOA (the Company’s portion is 150 MW).  Of the $411 million, $312 million was included in rate base for purposes of determining SIGECO’s new electric b ase rates that went into effect on August 15, 2007, and $99 million is currently recovered through a rider mechanism which is periodically updated for actual costs incurred including post in-service depreciation expense. As part of its recent rate proceeding, the Company has requested to also include these more recent expenditures in rate base as well.  SCR technology is the most effective method of reducing NOx emissions where high removal efficiencies are required and fabric filters control particulate matter emissions.

SIGECO’s coal fired generating fleet is 100 percent scrubbed for SO2 and 90 percent controlled for NOx.  SIGECO's investments in scrubber, SCR and fabric filter technology allows for compliance with existing regulations and should position it to comply with future reasonable mercury pollution control legislation, if and when, reductions are promulgated by USEPA.

On July 6, 2010, the USEPA issued its proposed revisions to CAIR, renamed the Transport Rule, for public comment.  The Transport Rule proposes a 71 percent reduction of SO2 over 2005 national levels and a 52 percent reduction of NOx over 2005 national levels and would further impact the utilization of currently granted SO2 and NOx allowances.  The Company is currently reviewing the sufficiency of its existing pollution control equipment in relation to the requirements proposed in the Transport Rule.

Climate Change

The U.S. House of Representatives has passed a comprehensive energy bill that includes a carbon cap and trade program in which there is a progressive cap on greenhouse gas emissions and an auctioning and subsequent trading of allowances among those that emit greenhouse gases, a federal renewable portfolio standard, and utility energy efficiency targets.  Current proposed legislation also requires local natural gas distribution companies to hold allowances for the benefit of their customers.  The U.S. Senate introduced a draft cap and trade proposal that is similar in structure to the House bill.  Numerous competing legislative proposals have also been introduced that involve carbon, energy efficiency, and renewable energy.  Comprehensive energy legislation at the federal level continues to be debate d, but there has been little progress to date.  In the absence of federal legislation, several regional initiatives throughout the United States continue moving forward.  While no climate change legislation is pending in Indiana, the state is an observer to the Midwestern Regional Greenhouse Gas Reduction Accord and the state’s legislature debated, but did not pass, a renewable energy portfolio standard in 2009.

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In advance of a federal or state renewable portfolio standard, SIGECO received regulatory approval to purchase a 3 MW landfill gas generation facility from a related entity.  The facility was purchased in 2009 and is directly interconnected to the Company’s distribution system.  In 2009, the Company also executed a long term purchase power commitment for 50 MW of wind energy.  These transactions supplement a 30 MW wind energy purchase power agreement executed in 2008.

In April of 2007, the US Supreme Court determined that greenhouse gases meet the definition of "air pollutant" under the Clean Air Act and ordered the USEPA to determine whether greenhouse gas emissions from motor vehicles cause or contribute to air pollution that may reasonably be anticipated to endanger public health or welfare. In April of 2009, the USEPA published its proposed endangerment finding for public comment.  The proposed endangerment finding concludes that carbon emissions from mobile sources pose an endangerment to public health and the environment.  The endangerment finding was finalized in December of 2009, and is the first step toward USEPA regulating carbon emissions through the existing Clean Air Act in the absence of specific carbon legislation from Congress.  Therefore, any new regulatio ns would likely also impact major stationary sources of greenhouse gases.  The USEPA has promulgated two greenhouse gas regulations that apply to SIGECO’s generating facilities.  In 2009, the USEPA finalized a mandatory greenhouse gas emissions registry which will require reporting of emissions beginning in 2011 (for the emission year 2010).  The USEPA has also recently finalized a revision to the Prevention of Significant Deterioration (PSD) and Title V permitting rules which would require facilities that emit 75,000 tons or more of greenhouse gases a year to obtain a PSD permit for new construction or a significant modification of an existing facility.

Impact of Legislative Actions & Other Initiatives is Unknown

If legislation requiring reductions in CO2 and other greenhouse gases or legislation mandating a renewable energy portfolio standard is adopted, such regulation could substantially affect both the costs and operating characteristics of the Company’s fossil fuel generating plants, nonutility coal mining operations, and natural gas distribution businesses.  Further, any legislation would likely impact the Company’s generation resource planning decisions.  At this time and in the absence of final legislation, compliance costs and other effects associated with reductions in greenhouse gas emissions or obtaining renewable energy sources remain uncertain.  The Company has gathered preliminary estimates of the costs to comply with a cap and trade approach to controlling greenhouse gas emissions.  A preliminary investigation demonstrated costs to comply would be significant, first with regard to operating expenses for the purchase of allowances, and later for capital expenditures as technology becomes available to control greenhouse gas emissions.  However, these compliance cost estimates are based on highly uncertain assumptions, including allowance prices and energy efficiency targets.  Costs to purchase allowances that cap greenhouse gas emissions or expenditures made to control emissions should be considered a cost of providing electricity, and as such, the Company believes recovery should be timely reflected in rates charged to customers.  Customer rates may also be impacted should decisions be made to reduce the level of sales to municipal and other wholesale customers in order to meet emission targets.

Ash Ponds & Coal Ash Disposal Regulations

In June 2010, the USEPA issued proposed regulations affecting the management and disposal of coal combustion products, such as ash generated by the Company’s coal-fired power plants.  The proposed rules more stringently regulate these byproducts and would likely increase the cost of operating or expanding existing ash ponds and the development of new ash ponds.  The USEPA did not offer a preferred alternative, but is taking public comment on multiple alternative regulations.  The alternatives include regulating coal combustion by-products as hazardous waste.  At this time, the majority of the Company’s ash is being beneficially reused.  The proposals offered by USEPA allow for the beneficial reuse of ash in certain circumstances. 

Environmental Remediation Efforts

In the past, Indiana Gas, SIGECO, and others operated facilities for the manufacture of gas.  Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years.  Under currently applicable environmental laws and regulations, those that owned or operated these facilities may now be required to take remedial action if certain contaminants are found above the regulatory thresholds at these sites.

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Indiana Gas identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility.  Indiana Gas completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000.  Indiana Gas submitted the remainder of the sites to the IDEM's Voluntary Remediation Program  (VRP) and is currently conducting some level of remedial activities, including groundwater monitoring at certain sites, where deemed appropriate, and will continue remedial activities at the sites as appropriate and necessary.

Indiana Gas accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites.  While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded cumulative costs that it reasonably expects to incur totaling approximately $23.1 million.  The estimated accrued costs are limited to Indiana Gas’ share of the remediation efforts.  Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which limit Indiana Gas’ costs at these 19 sites to between 20 percent and 50 percent.

With respect to insurance coverage, Indiana Gas has settled with all known insurance carriers under insurance policies in effect when these plants were in operation in an aggregate amount approximating $20.8 million.

In October 2002, SIGECO received a formal information request letter from the IDEM regarding five manufactured gas plants that it owned and/or operated and were not enrolled in the IDEM’s VRP.  In October 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP.  The remaining site is currently being addressed in the VRP by another Indiana utility.  SIGECO added those four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites.  That renewal was approved by the IDEM in February 2004.  SIGECO was also named in a lawsuit, involving another waste disposal site subject to potential environmental remediation efforts.  With respect to that lawsuit, SIG ECO settled with the plaintiff during 2010 mitigating any future claims at this site.  SIGECO has filed a declaratory judgment action against its insurance carriers seeking a judgment finding its carriers liable under the policies for coverage of further investigation and any necessary remediation costs that SIGECO may accrue under the VRP program and/or related to the site subject to the recently settled lawsuit.

SIGECO has recorded cumulative costs that it reasonably expects to incur related to these environmental matters, including the recent settlement, totaling approximately $15.8 million.  However, the total costs that may be incurred in connection with addressing all of these sites cannot be determined at this time.  With respect to insurance coverage, SIGECO has recorded approximately $12.7 million in insurance proceeds from certain of its insurance carriers under insurance policies in effect when these sites were in operation.  While negotiations are ongoing with certain carriers, settlements have been reached with some carriers and $8.2 million in proceeds have been received.  SIGECO has undertaken significant remediation efforts at two MGP sites.

The costs the Company expects to incur are estimated by management using assumptions based on actual costs incurred, the timing of expected future payments, and inflation factors, among others.  While the Company’s utilities have recorded all costs which they presently expect to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen and those costs may not be subject to PRP or insurance recovery.  As of September 30, 2010 and December 31, 2009, respectively, approximately $9.1 million and $6.5 million of accrued, but not yet spent, costs are included in Other Liabilities related to both the Indiana Gas and SIGECO sites.

13.   Rate & Regulatory Matters

Vectren South Electric Base Rate Filings

On December 11, 2009, Vectren South filed a request with the IURC to adjust its base electric rates.  The requested increase in base rates addresses capital investments, a modified electric rate design that facilitates a partnership between Vectren South and customers to pursue energy efficiency and conservation, and new energy efficiency programs to complement those currently offered for natural gas customers.  On July 30, 2010, Vectren South revised its increase requested through the filing of its rebuttal position to approximately $34 million. The request addresses the roughly $325 million spent in infrastructure construction since its last base rate increase in August 2007 that was needed to continue to provide reliable service and updates to operating costs and revenues.  The rate design proposed in the filing would break the link between small residential and commercial customers’ consumption and the utility’s margin, thereby aligning the utility’s and customers’ interests in using less energy.  The revised request assumes an overall rate of return of 7.42 percent on rate base of approximately $1.3 billion and an allowed return on equity (ROE) of 10.7 percent.  The OUCC and SIGECO Industrial Group separately filed testimony in this case, proposing an increase of approximately $11 million and $18 million, respectively.  Furthermore, the intervening parties in the case took differing views on, among other matters, the proposed rate design and the level and price of coal inventory.  A hearing on all matters in the case was held in late August 2010.  Based on the current procedural schedule, an order is likely in the first half of 2011.

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Vectren South Electric Fuel Adjustment Filings

Electric retail rates contain a fuel adjustment clause (FAC) that allows for periodic adjustment in energy to reflect changes in the cost of fuel and purchased power.  These FAC procedures involve periodic filings and IURC hearings to approve the recovery of Vectren South’s fuel and purchased power costs.

In the previous two FAC proceedings, the OUCC requested the IURC order Vectren South to renegotiate its coal contracts because they are currently above spot prices.  This request is consistent with the OUCC’s position taken in Vectren South’s base rate proceeding referred to above.  Vectren South purchases the majority of its coal from Vectren Fuels, Inc. (a nonutility wholly owned subsidiary of the Company) under coal contracts entered into in 2008.  Vectren South states in its filed position that the prices in the coal contracts were at or below the market at the time of contract execution.  Further, the Company has already engaged in some contract renegotiations to defer certain deliveries, and to eliminate some volumes in 2011, with further negotiation to come for market pricing unde r the terms of the contracts for 2012 or later deliveries.  Moreover, the IURC has already found in a number of FAC proceedings since 2008, including in its most recent FAC order dated November 4, 2010, that the costs incurred under these coal contracts are reasonable.

The OUCC also raised concerns regarding Vectren South’s generating unit “must run” policy.  Under that policy, for reliability reasons, Vectren South instructs the MISO that certain units must be dispatched regardless of current market conditions.  The OUCC is reviewing data related to Vectren South’s “must run” policy.

To allow the FAC to be approved on a timely basis, the parties agreed to the creation of a sub docket proceeding to address the specific issues noted above.  An order establishing the sub docket was issued by the IURC on July 28, 2010.  In October 2010, both parties recommended that this sub docket be dismissed.

Vectren South Electric Demand Side Management Program Filing

On August 16, 2010, Vectren South filed a petition with the IURC, seeking approval of its proposed Demand Side Management (DSM) Programs, recovery of the costs associated with these programs, recovery of lost margins as a result of implementing these programs for large customers, and recovery of performance incentives linked with specific measurement criteria on all programs.  The DSM Programs proposed are consistent with a December 9, 2009 order issued by the IURC, which, among other actions, defined long-term conservation objectives and goals of DSM programs for all Indiana electric utilities under a consistent statewide approach.  In order to meet these objectives, the IURC order divided the DSM programs into Core and Core Plus programs.  Core programs are joint programs required to be offered by all India na electric utilities to all customers, including large industrial customers.  Core Plus programs are those programs not required specifically by the IURC, but defined by each utility to meet the overall energy savings targets defined by the IURC.  The IURC’s December 9, 2009 order is currently under review as part of a commission investigation of the reasonableness of a number of orders involving Duke Energy.

In its August filing, Vectren South proposed a three-year DSM Plan that expands the current portfolio of Core and Core Plus DSM Programs in order to meet the energy savings goals established by the IURC.  Vectren South requested recovery of these program costs under a current tracking mechanism.  In addition, Vectren South proposed a performance incentive mechanism that is contingent upon the success of each of the DSM Programs in reducing energy usage to the levels defined by the IURC.  This performance incentive would also be recovered via a current tracking mechanism.  Finally, the Company proposed lost margin recovery associated with the implementation of DSM programs for large customers, and cited its decoupling proposal applicable to residential and general service customers in the pending ele ctric base rate case.  The case will be heard in early January 2011, and the Company expects an order in early 2011.

Straight Fixed Variable Rate Design Fully Implemented in Vectren Ohio’s Service Territory

On January 7, 2009, the PUCO issued a rate Order allowing for a two-phase transition to a straight fixed variable rate design.  This was fully implemented one year after implementation of new rates in February 2009.  This type of rate design places substantially all of the fixed cost recovery in the customer service charge; and, therefore, mitigates most weather risk as well as the effects of declining usage.  Starting in February 2010, nearly 90 percent of the combined residential and commercial base rate margins are recovered through the customer service charge.  The OCC has appealed this rate order to the Ohio Supreme Court.   The Ohio Supreme Court affirmed the PUCO orders authorizing straight fixed variable rate design in  two other cases. The OCC’s appeal related to the Company ’s case has not yet been decided. 

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Vectren Ohio Continues the Process to Exit the Merchant Function

The second phase of VEDO’s exit of the merchant function began on April 1, 2010.  During this phase, the Company no longer sells natural gas directly to customers.  Rather, state-certified Competitive Retail Natural Gas Suppliers, that were successful bidders in a regulatory-approved auction, sell the gas commodity to specific customers for a 12 month period at auction-determined standard pricing.  That auction was conducted on January 12, 2010, and the auction results were approved by the PUCO on January 13.  Vectren Source, the Company’s nonutility retail gas marketer, was a successful bidder on one of the six tranches of customers.  The plan approved by the PUCO requires that the Company conduct at least two auctions during this phase.  As such, the Company will conduct anot her auction in January 2011, in advance of the second 12-month term, which will commence on April 1, 2011.  Consistent with current practice, customers will continue to receive one bill for the delivery of natural gas service. 

The PUCO provided for an Exit Transition Cost rider, which allows the Company to recover costs associated with the transition process.  Exiting the merchant function should not have a material impact on Company earnings or financial condition.  It, however, has and will continue to reduce Gas utility revenues and have an equal and offsetting impact to Cost of gas sold as VEDO no longer purchases gas for resale to these customers.

MISO

The Company is a member of the MISO, a FERC approved regional transmission organization.  When the Company is a net seller of its generation, such net revenues, which totaled $6.1 million and $2.7 million for the three months ended September 30, 2010 and 2009, respectively, are included in Electric utility revenues.  For the nine months ended September 30, 2010 and 2009, such net revenues totaled $19.7 million and $15.9 million, respectively.  When the Company is a net purchaser such net purchases, which totaled $11.2 million and $9.7 million for the three months ended September 30, 2010 and 2009, respectively, are included in Cost of fuel & purchased power.  For the nine months ende d September 30, 2010 and 2009, such purchases totaled $32.7 million and $26.2 million, respectively.  Net positions are determined on an hourly basis.

The Company also receives transmission revenue from the MISO, which is included in Electric utility revenues and totaled $4.2 million and $4.4 million for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, transmission revenue from the MISO totaled $14.8 million and $11.0 million, respectively.  These revenues result from other MISO members’ use of the Company’s transmission system, as well as the recovery of the Company’s investment in certain new electric transmission projects meeting MISO’s transmission expansion plan criteria.

14.   Fair Value Measurements

The carrying values and estimated fair values of the Company's other financial instruments follow:

	September 30, 2010				December 31, 2009
(In millions)	Carrying Amount		Est. Fair Value		Carrying Amount		Est. Fair Value
Long-term debt	$	1,638.5	$	1,823.3	$	1,639.8	$	1,720.1
Short-term borrowings & notes payable		157.3		157.3		213.5		213.5
Cash & cash equivalents		7.2		7.2		11.9		11.9

For the balance sheet dates presented in these financial statements, the Company had no material assets or liabilities recorded at fair value outstanding, and no material assets or liabilities valued using Level 2 or Level 3 inputs.

Certain methods and assumptions must be used to estimate the fair value of financial instruments.  The fair value of the Company's long-term debt was estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for instruments with similar characteristics.  Because of the maturity dates and variable interest rates of short-term borrowings and cash & cash equivalents, those carrying amounts approximate fair value.  Because of the inherent difficulty of estimating interest rate and other market risks, the methods used to estimate fair value may not always be indicative of actual realizable value, and different methodologies could produce different fair value estimates at the reporting date.

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Under current regulatory treatment, call premiums on reacquisition of utility long-term debt are generally recovered in customer rates over the life of the refunding issue or over a 15-year period.  Accordingly, any reacquisition would not be expected to have a material effect on the Company's results of operations.

Because of the customized nature of notes receivable investments and lack of a readily available market, it is not practical to estimate the fair value of these financial instruments at specific dates without considerable effort and cost.  At September 30, 2010 and December 31, 2009, the fair value for these financial instruments was not estimated.  The carrying value of notes receivable, inclusive of any accrued interest and net of impairment reserves, was approximately $11.0 million at September 30, 2010 and $16.7 million at December 31, 2009.

15.   Impact of Other Newly Adopted and Newly Issued Accounting Guidance

Variable Interest Entities

In June 2009, the FASB issued new accounting guidance regarding variable interest entities (VIE’s).  This new guidance is effective for annual reporting periods beginning after November 15, 2009.  This guidance requires a qualitative analysis of which holder of a variable interest controls the VIE and if that interest holder must consolidate a VIE.  Additionally, it requires additional disclosures and an ongoing reassessment of who must consolidate a VIE.  The Company adopted this guidance on January 1, 2010. The adoption did not have any impact on the consolidated financial statements.

Fair Value Measurements & Disclosures

In January 2010, the FASB issued new accounting guidance on improving disclosures about fair market value.  This guidance amends prior disclosure requirements involving fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The guidance also clarifies existing fair value disclosures in regard to the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The guidance also amends prior disclosure requirements regarding postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of major categories of assets.  This guidance is effective for the first reporting period beginning after December 15, 2009.  The Company adopted this guidance for its 2010 reporting.  Due to the low level of items carried at fair value in the Company’s financial statements, the adoption has not had any material impact.

16.   Segment Reporting

The Company segregates its operations into three groups: 1) Utility Group, 2) Nonutility Group, and 3) Corporate and Other.

The Utility Group is comprised of Vectren Utility Holdings, Inc.’s operations, which consist of the Company’s regulated operations and other operations that provide information technology and other support services to those regulated operations.  The Company segregates its regulated operations into a Gas Utility Services operating segment and an Electric Utility Services operating segment.  The Gas Utility Services segment provides natural gas distribution and transportation services to nearly two-thirds of Indiana and to west central Ohio.  The Electric Utility Services segment provides electric distribution services primarily to southwestern Indiana, and includes the Company’s power generating and wholesale power operations.  The Company manages its regulated operations as separa ted between Energy Delivery, which includes the gas and electric transmission and distribution functions, and Power Supply, which includes the power generating and wholesale power operations.  In total, regulated operations supply natural gas and /or electricity to over one million customers.

The Nonutility Group is comprised of one operating segment that includes various subsidiaries and affiliates investing in energy marketing and services, coal mining, and energy infrastructure services, among other energy-related opportunities.

Corporate and Other includes unallocated corporate expenses such as advertising and charitable contributions, among other activities, that benefit the Company’s other operating segments.  Net income is the measure of profitability used by management for all operations.

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Information related to the Company’s business segments is summarized below:

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
(In millions)	2010			2009			2010			2009
Revenues
Utility Group
Gas Utility Services	$	101.8		$	93.4		$	692.8		$	759.9
Electric Utility Services		173.2			143.0			469.1			400.7
Other Operations		11.1			10.7			33.3			32.1
Eliminations		(10.7	)		(10.3	)		(32.1	)		(30.9	)
Total Utility Group		275.4			236.8			1,163.1			1,161.8
Nonutility Group		181.9			154.7			534.7			483.1
Eliminations		(34.6	)		(41.9	)		(132.4	)		(124.6	)
Consolidated Revenues	$	422.7		$	349.6		$	1,565.4		$	1,520.3
Profitability Measure - Net Income (Loss)
Utility Group
Gas Utility Services	$	(6.3	)	$	(9.4	)	$	32.0		$	28.4
Electric Utility Services		23.1			17.2			51.4			37.4
Other Operations		1.9			0.9			6.9			5.7
Utility Group Net Income		18.7			8.7			90.3			71.5
Nonutility Group Net Income (Loss)		(2.2	)		3.3			(1.9	)		6.8
Corporate & Other Group Net Income (Loss)		(0.1	)		0.4			(0.1	)		0.2
Consolidated Net Income	$	16.4		$	12.4		$	88.3		$	78.5

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Description of the Business

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 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.  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). 
60;Vectren was incorporated under the laws of Indiana on June 10, 1999.

Indiana Gas provides energy delivery services to over 560,000 natural gas customers located in central and southern Indiana.  SIGECO provides energy delivery services to over 141,000 electric customers and approximately 110,000 gas customers located near Evansville in southwestern Indiana.  SIGECO also owns and operates electric generation assets 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 310,000 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 U tility 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.

Executive Summary of Consolidated Results of Operations

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 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.

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 2009 annual report filed on Form 10-K.

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Summary results for the three and nine months ended September 30, 2010 and 2009 follow:

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
(In millions, except per share data)	2010			2009		2010			2009
Net income	$	16.4		$	12.4	$	88.3		$	78.5
Attributed to:
Utility Group		18.7			8.7		90.3			71.5
Nonutility Group		(2.2	)		3.3		(1.9	)		6.8
Corporate & other		(0.1	)		0.4		(0.1	)		0.2
Basic EPS	$	0.20		$	0.15	$	1.09		$	0.97
Attributed to:
Utility Group		0.22			0.11		1.11			0.89
Nonutility Group		(0.02	)		0.04		(0.02	)		0.08
Corporate & other		-			-		-			-

Results

For the three months ended September 30, 2010, net income was $16.4 million, or $0.20 per share, compared to a net income $12.4 million, or $0.15 per share for the three months ended September 30, 2009.  For the nine months ended September 30, 2010, net income was $88.3 million, or $1.09 per share, compared to net income of $78.5 million, or $0.97 per share in the nine months ended September 30, 2009.

Utility Group

In the third quarter of 2010, the Utility Group’s earnings were $18.7 million, compared to $8.7 million in 2009, an increase of $10.0 million.  Year to date, 2010 utility earnings were $90.3 million, compared to $71.5 million in 2009, an increase of $18.8 million.  The increases result from increased large customer usage and extreme summer weather that was significantly warmer than normal and the prior year.  Also, operating costs were lower in the year to date period.

During the third quarter, cooling weather was 29 percent warmer than normal and 63 percent warmer than the prior year.  In the Company’s electric territory, management estimates the margin impact of weather to be approximately $5.7 million favorable, or $3.4 million after tax, in the third quarter of 2010 compared to normal temperatures.  Compared to the prior year quarter, the margin impact is estimated to be $9.9 million, or $5.9 million after tax.  During the nine months ended September 30, 2010, management estimates the margin impact of weather to be approximately $9.9 million favorable, or $5.9 million after tax, compared to normal temperatures.  Compared to the prior year to date period, the margin impact is estimated to be $13.1 million, or $7.8 million after tax.  Management estimates the impact of weather based on an assumption of weather sensitive sales per degree day at current rates.  Amounts here reflect management’s best estimate of weather impacts on margin from the extreme 2010 summer weather.

In addition to the impacts of the extreme weather during the quarter and year to date periods, margin increased as a result of continued improvement in the economy as evidenced by increased large customer sales volumes.

Nonutility Group

The Nonutility Group’s 2010 third quarter loss was $2.2 million compared to earnings of $3.3 million in 2009.  Year to date in 2010, nonutility losses were $1.9 million compared to earnings of $6.8 million in 2009.  The 2010 year to date period was impacted by charges related to legacy investments totaling $6.9 million after tax.  The 2009 year to date period contains the $11.9 million after tax Liberty Charge (See Note 8 to the consolidated financial statements).  All other nonutility operating results decreased by approximately $13.7 million year to date in 2010 compared to 2009.  Quarter over quarter nonutility operating results decreased $5.5 million.  These quarterly and year to date decreases were driven primarily by lower results from Energy Marketing and Services, largely from ProLianc e. 

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Dividends

Dividends declared for the three months ended September 30, 2010, were $0.340 per share compared to $0.335 per share for the same period in 2009.  Dividends declared for the nine months ended September 30, 2010, were $1.020 per share compared to $1.005 per share for the same period in 2009.

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.

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, 2010 and 2009 follow:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(In millions, except per share data)	2010		2009		2010		2009
OPERATING REVENUES
Gas utility	$	101.8	$	93.4	$	692.8	$	759.9
Electric utility		173.2		143.0		469.1		400.7
Other		0.4		0.4		1.2		1.2
Total operating revenues		275.4		236.8		1,163.1		1,161.8
OPERATING EXPENSES
Cost of gas sold		32.4		28.0		371.7		440.6
Cost of fuel & purchased power		64.5		50.1		180.3		147.4
Other operating		70.5		69.9		223.3		227.9
Depreciation & amortization		47.2		45.9		140.5		134.8
Taxes other than income taxes		11.2		10.8		45.1		46.2
Total operating expenses		225.8		204.7		960.9		996.9
OPERATING INCOME		49.6		32.1		202.2		164.9
OTHER INCOME - NET		0.9		2.1		3.9		6.1
INTEREST EXPENSE		20.4		20.2		61.0		58.9
INCOME BEFORE INCOME TAXES		30.1		14.0		145.1		112.1
INCOME TAXES		11.4		5.3		54.8		40.6
NET INCOME	$	18.7	$	8.7	$	90.3	$	71.5
CONTRIBUTION TO VECTREN BASIC EPS	$	0.22	$	0.11	$	1.11	$	0.89

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Trends in Utility Operations

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 Cost of gas sold.  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 has been volatile.  In the Company’s two Indiana natural gas service territories, normal temperature adjustment (NTA) and decoupling 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.  The Ohio natural gas service territory has a straight fixed variable rate design.  This rate design, which was fully implemented in February 2010, mitigates most of the Ohio service territory’s weather risk and risk of decreasing consumption.  In all natural gas service territories, commissions have authorized bare steel and cast iron replacement programs.  SIGECO’s electric service territory has neither an NTA nor decoupling mechanisms; however, rate designs proposed in the current rate proceeding before the IURC and other related filings would limit weather risk and provide for a decoupling and/or a lost margin recovery mechanism that works in tandem with conservation initiatives. 

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.  In Indiana, gas pipeline integrity management costs, costs to fund energy efficiency programs, MISO transmission revenues and costs, unaccounted for gas, and the gas cost component of uncollectible accounts expense based on historical experience are tracked.  Certain operating costs, including depreciation, associated with operating environmental compliance equipment at electric generation facilities and regional electric transmission investments are also tracked.  In Ohio expenses such as uncollectible accounts expense, percent of income payment plan expenses, costs associated with exiting the merchant function, costs to perform service riser replacement, and unaccou nted for gas are subject to tracking mechanisms.

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 impact of the recession and general economic downturn has had and could continue to have some negative impact on sales to and usage by 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.  Deteriorating economic conditions also resulted in lower residential and commercial customer counts.  Further, resulting from the lower wholesale power prices, decreased demand for electricity and higher coal prices, 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.  Throughout 2010, the Company has experienced some improvement in economic conditions, but stability of the economy in general remains uncertain.

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

Gas Utility Margin (Gas utility revenues less Cost of gas sold)

Gas utility margin and throughput by customer type follows:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(In millions)	2010		2009		2010		2009
Gas utility revenues	$	101.8	$	93.4	$	692.8	$	759.9
Cost of gas sold		32.4		28.0		371.7		440.6
Total gas utility margin	$	69.4	$	65.4	$	321.1	$	319.3
Margin attributed to:
Residential & commercial customers	$	57.5	$	54.8	$	275.6	$	275.9
Industrial customers		10.4		9.0		36.8		33.4
Other		1.5		1.6		8.7		10.0
Total gas utility margin	$	69.4	$	65.4	$	321.1	$	319.3
Sold & transported volumes in MMDth attributed to:
Residential & commercial customers		5.9		6.3		69.4		71.5
Industrial customers		19.3		15.3		65.1		55.1
Total sold & transported volumes		25.2		21.6		134.5		126.6

Gas utility margins were $69.4 million and $321.1 million for the three and nine months ended September 30, 2010, and compared to 2009 increased $4.0 million in the quarter and $1.8 million year to date.  Management estimates a $3.3 million increase in margin during the quarter and a $2.9 million increase year to date due to the Ohio rate design change, as described below.  Large customer margin, net of the impacts of regulatory initiatives and tracked costs, increased by $1.6 million in the quarter and $3.7 million year to date due primarily to increased volumes sold.  Margin decreased $0.5 million quarter over quarter and $1.9 million year to date due to lower miscellaneous revenues and other revenues associated with lower gas costs.  The remaining decrease is primarily due to a $0.7 million decre ase in the quarter and $2.7 million decrease year date due to lower operating expenses and revenue taxes directly recovered in margin.

The rate design approved by the PUCO on January 7, 2009, and initially implemented on February 22, 2009, allowed for the phased movement toward a straight fixed variable rate design, which places substantially all of the fixed cost recovery in the customer service charge.  This rate design mitigates most weather risk as well as the effects of declining usage, similar to the company’s lost margin recovery mechanism in place in the Indiana natural gas service territories and the mechanism in place in Ohio prior to this rate order.  Starting in February 2010, nearly 90 percent of the combined residential and commercial base rate gas margins began being recovered through the customer service charge.  As a result, some margin previously recovered during the peak delivery winter months is more ratably recogni zed throughout the year.  The impact of this rate design change is increased margin of approximately $3.3 million in the quarter and $2.9 million year to date, or $1.7 million after tax, compared to the prior year periods.  The year to date impact is the amount expected for the full year period.

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Electric Utility Margin (Electric utility revenues less Cost of fuel & purchased power)

Electric utility margin and volumes sold by customer type follows:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(In millions)	2010		2009		2010		2009
Electric utility revenues	$	173.2	$	143.0	$	469.1	$	400.7
Cost of fuel & purchased power		64.5		50.1		180.3		147.4
Total electric utility margin	$	108.7	$	92.9	$	288.8	$	253.3
Margin attributed to:
Residential & commercial customers	$	73.0	$	63.5	$	188.8	$	172.5
Industrial customers		26.9		22.3		74.1		61.2
Other customers		2.0		1.5		5.1		4.3
Subtotal: retail	$	101.9	$	87.3	$	268.0	$	238.0
Wholesale power & transmission system margin		6.8		5.6		20.8		15.3
Total electric utility margin	$	108.7	$	92.9	$	288.8	$	253.3
Electric volumes sold in GWh attributed to:
Residential & commercial customers		886.9		770.0		2,315.3		2,122.1
Industrial customers		712.2		620.5		2,019.7		1,686.9
Other customers		4.9		4.5		16.0		14.1
Total retail volumes sold		1,604.0		1,395.0		4,351.0		3,823.1

Retail

Electric retail utility margins were $­­­­101.9 million and $268.0 million for the three and nine months ended September 30, 2010, and compared to 2009 increased over the prior year periods by $14.6 million and $30.0 million, respectively.  Management estimates the impact of warmer than normal weather to have increased residential and commercial margin $9.9 million in the third quarter and $13.1 million year to date compared to the prior year periods.  Management also estimates industrial margins, net of the impacts of regulatory initiatives and recovery of tracked costs, to have increased approximately $3.8 million in the quarter and $10.5 million year to date due primarily to increased volumes.  Margin among the customer classes associated with returns on pollution control investments in creased $0.7 million quarter over quarter and $3.3 million year to date, and margin associated with tracked costs such as recovery of MISO and pollution control operating expenses increased $1.1 million quarter over quarter and $3.1 million year to date.

Margin from Wholesale Electric Activities

Periodically, generation capacity is in excess of native load.  The Company markets and sells this unutilized generating and transmission capacity to optimize the return on its owned assets.  Substantially all off-system sales occur into the MISO Day Ahead and Real Time markets.

Further detail of Wholesale activity follows:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(In millions)	2010		2009		2010		2009
Off-system sales	$	2.6	$	1.2	$	6.0	$	4.3
Transmission system sales		4.2		4.4		14.8		11.0
Total wholesale margin	$	6.8	$	5.6	$	20.8	$	15.3

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For the three and nine months ended September 30, 2010, wholesale margin was $6.8 million and $20.8 million, representing an increase of $1.2 million and $5.5 million, respectively, compared to 2009.

The Company earns 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, including the reconciliation of recovery mechanisms, and other transmission system operations, totaled $4.2 million and $14.8 million for the three and nine months ended September 30, 2010, respectively, compared to $4.4 million and $11.0 million in both the three and nine months ended September 30, 2009.  During 2010, margin from off-system sales retained by the Company has increased $1.4 million in the quarter and $1.7 million year to date compared to the prior year periods.

Utility Group Operating Expenses

Other Operating

For the three and nine months ended September 30, 2010, other operating expenses were $ 70.5 million and $223.3 million, which reflect a minor increase in the quarter and a $4.6 million decrease year to date compared to 2009.  Excluding expenses recovered directly in margin, operating costs were generally flat quarter over quarter and decreased $6.5 million year to date.  The primary drivers of the year to date decrease are lower power supply operating expenses due to the timing of maintenance and outages compared to 2009 and a lower level of Indiana uncollectible accounts expense.

Depreciation & Amortization

For the three and nine months ended September 30, 2010, depreciation expense was $47.2 million and $140.5 million, which represent increases of $1.3 million and $5.7 million compared to 2009.  This increase is reflective of utility capital expenditures placed into service.

Taxes Other Than Income Taxes

For the three and nine months ended September 30, 2010, taxes other than income taxes were $11.2 million and $45.1 million, respectively, which reflect a minor increase in the quarter and a decrease of $1.1 million year over year.  The year to date decrease is primarily attributable to lower utility receipts, excise, and usage taxes that are directly offset in margin.

Other Income-Net

Other income-net reflects income of $0.9 million and $3.9 million for the three and nine months ended September 30, 2010, compared to $2.1 million and $6.1 million for the same periods in 2009. The higher earnings in 2009 reflect the partial recovery from the 2008 market declines associated with investments related to benefit plans.

Interest Expense

For the three and nine months ended September 30, 2010, interest expense was $20.4 million and $61.0 million, which represents a minor increase in the quarter and a $2.1 million increase year over year compared to 2009.  These small increases reflect the impact of long-term financing transactions completed in 2009, offset by lower interest from less debt outstanding overall.

Income Taxes

For the three and nine months ended September 30, 2010, federal and state income taxes were $11.4 million and $54.8 million, which represent increases of $6.1 million and $14.2 million compared to 2009.  The higher taxes are primarily due to increased pretax income.  The year to date increase is also reflective of a lower effective rate in 2009 due to tax adjustments recorded in 2009.

During the first quarter of 2010, the Company recorded a $2.3 million increase to its deferred tax liabilities associated with a change in the federal tax treatment of the Medicare Part D subsidy as a result of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 signed by the President as of the end of March 2010.  Like tax law changes in the past, it is expected that the impact of this change will be reflected in customer rates in the future.  As a result, the Company has recorded a $4.8 million regulatory asset related to this matter in its financial statements at September 30, 2010.

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Environmental Matters

Clean Air Act

The Clean Air Interstate Rule (CAIR) is an allowance cap and trade program that required reductions from coal-burning power plants for NOx emissions beginning January 1, 2009 and SO2 emissions beginning January 1, 2010, with a second phase of reductions in 2015.  On July 11, 2008, the US Court of Appeals for the District of Columbia vacated the federal CAIR regulations.  Various parties filed motions for reconsideration, and on December 23, 2008, the Court reinstated the CAIR regulations and remanded the regulations back to the USEPA for promulgation of revisions in accordance with the Court’s July 11, 2008 order.  Thus, the original version of CAIR promulgated in March of 2005 remains effective while USEPA revises it per the CourtR 17;s guidance.  SIGECO is in compliance with the current CAIR Phase I annual NOx reduction requirements in effect on January 1, 2009, and the Phase I annual SO2 reduction requirements in effect on January 1, 2010.  Utilization of the Company’s inventory of NOx and SO2  allowances may also be impacted if CAIR is further revised.  Most of these allowances were granted to the Company at zero cost; therefore, any reduction in carrying value that could result from future changes in regulations would be immaterial.

Similarly, in March of 2005, USEPA promulgated the Clean Air Mercury Rule (CAMR).  CAMR is an allowance cap and trade program requiring further reductions in mercury emissions from coal-burning power plants.  The CAMR regulations were vacated by the US Court of Appeals for the DC Circuit in July 2008.  In response to the court decision, USEPA has announced that it intends to publish proposed Maximum Achievable Control Technology standards for mercury in 2010.  It is uncertain what emission limit the USEPA is considering, and whether they will address hazardous pollutants in addition to mercury.  It is also possible that the vacatur of the CAMR regulations will lead to increased support for the passage of a multi-pollutant bill in Congress.

To comply with Indiana’s implementation plan of the Clean Air Act of 1990, the CAIR regulations, and to comply with potential future regulations of mercury and further NOx and SO2  reductions, SIGECO has IURC authority to invest in clean coal technology.  Using this authorization, SIGECO has invested approximately $411 million in pollution control equipment, including Selective Catalytic Reduction (SCR) systems, fabric filters, and an SO2 scrubber at its generating facility that is jointly owned with ALCOA (the Company’s portion is 150 MW).  Of the $411 million, $312 million was included in rate base for purposes of determining SIGECO’s new electric b ase rates that went into effect on August 15, 2007, and $99 million is currently recovered through a rider mechanism which is periodically updated for actual costs incurred including post in-service depreciation expense. As part of its recent rate proceeding, the Company has requested to also include these more recent expenditures in rate base as well.  SCR technology is the most effective method of reducing NOx emissions where high removal efficiencies are required and fabric filters control particulate matter emissions.

SIGECO’s coal fired generating fleet is 100 percent scrubbed for SO2 and 90 percent controlled for NOx.  SIGECO's investments in scrubber, SCR and fabric filter technology allows for compliance with existing regulations and should position it to comply with future reasonable mercury pollution control legislation, if and when, reductions are promulgated by USEPA.

On July 6, 2010, the USEPA issued its proposed revisions to CAIR, renamed the Transport Rule, for public comment.  The Transport Rule proposes a 71 percent reduction of SO2 over 2005 national levels and a 52 percent reduction of NOx over 2005 national levels and would further impact the utilization of currently granted SO2 and NOx allowances.  The Company is currently reviewing the sufficiency of its existing pollution control equipment in relation to the requirements proposed in the Transport Rule.

Climate Change

The U.S. House of Representatives has passed a comprehensive energy bill that includes a carbon cap and trade program in which there is a progressive cap on greenhouse gas emissions and an auctioning and subsequent trading of allowances among those that emit greenhouse gases, a federal renewable portfolio standard, and utility energy efficiency targets.  Current proposed legislation also requires local natural gas distribution companies to hold allowances for the benefit of their customers.  The U.S. Senate introduced a draft cap and trade proposal that is similar in structure to the House bill.  Numerous competing legislative proposals have also been introduced that involve carbon, energy efficiency, and renewable energy.  Comprehensive energy legislation at the federal level continues to be debate d, but there has been little progress to date.  In the absence of federal legislation, several regional initiatives throughout the United States continue moving forward.  While no climate change legislation is pending in Indiana, the state is an observer to the Midwestern Regional Greenhouse Gas Reduction Accord and the state’s legislature debated, but did not pass, a renewable energy portfolio standard in 2009.

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In advance of a federal or state renewable portfolio standard, SIGECO received regulatory approval to purchase a 3 MW landfill gas generation facility from a related entity.  The facility was purchased in 2009 and is directly interconnected to the Company’s distribution system.  In 2009, the Company also executed a long term purchase power commitment for 50 MW of wind energy.  These transactions supplement a 30 MW wind energy purchase power agreement executed in 2008.

In April of 2007, the US Supreme Court determined that greenhouse gases meet the definition of "air pollutant" under the Clean Air Act and ordered the USEPA to determine whether greenhouse gas emissions from motor vehicles cause or contribute to air pollution that may reasonably be anticipated to endanger public health or welfare. In April of 2009, the USEPA published its proposed endangerment finding for public comment.  The proposed endangerment finding concludes that carbon emissions from mobile sources pose an endangerment to public health and the environment.  The endangerment finding was finalized in December of 2009, and is the first step toward USEPA regulating carbon emissions through the existing Clean Air Act in the absence of specific carbon legislation from Congress.  Therefore, any new regulatio ns would likely also impact major stationary sources of greenhouse gases.  The USEPA has promulgated two greenhouse gas regulations that apply to SIGECO’s generating facilities.  In 2009, the USEPA finalized a mandatory greenhouse gas emissions registry which will require reporting of emissions beginning in 2011 (for the emission year 2010).  The USEPA has also recently finalized a revision to the Prevention of Significant Deterioration (PSD) and Title V permitting rules which would require facilities that emit 75,000 tons or more of greenhouse gases a year to obtain a PSD permit for new construction or a significant modification of an existing facility.

Impact of Legislative Actions & Other Initiatives is Unknown

If legislation requiring reductions in CO2 and other greenhouse gases or legislation mandating a renewable energy portfolio standard is adopted, such regulation could substantially affect both the costs and operating characteristics of the Company’s fossil fuel generating plants, nonutility coal mining operations, and natural gas distribution businesses.  Further, any legislation would likely impact the Company’s generation resource planning decisions.  At this time and in the absence of final legislation, compliance costs and other effects associated with reductions in greenhouse gas emissions or obtaining renewable energy sources remain uncertain.  The Company has gathered preliminary estimates of the costs to comply with a cap and trade approach to controlling greenhouse gas emissions.  A preliminary investigation demonstrated costs to comply would be significant, first with regard to operating expenses for the purchase of allowances, and later for capital expenditures as technology becomes available to control greenhouse gas emissions.  However, these compliance cost estimates are based on highly uncertain assumptions, including allowance prices and energy efficiency targets.  Costs to purchase allowances that cap greenhouse gas emissions or expenditures made to control emissions should be considered a cost of providing electricity, and as such, the Company believes recovery should be timely reflected in rates charged to customers.  Customer rates may also be impacted should decisions be made to reduce the level of sales to municipal and other wholesale customers in order to meet emission targets.

Ash Ponds & Coal Ash Disposal Regulations

In June 2010, the USEPA issued proposed regulations affecting the management and disposal of coal combustion products, such as ash generated by the Company’s coal-fired power plants.  The proposed rules more stringently regulate these byproducts and would likely increase the cost of operating or expanding existing ash ponds and the development of new ash ponds.  The USEPA did not offer a preferred alternative, but is taking public comment on multiple alternative regulations.  The alternatives include regulating coal combustion by-products as hazardous waste.  At this time, the majority of the Company’s ash is being beneficially reused.  The proposals offered by USEPA allow for the beneficial reuse of ash in certain circumstances. 

Environmental Remediation Efforts

In the past, Indiana Gas, SIGECO, and others operated facilities for the manufacture of gas.  Given the availability of natural gas transported by pipelines, these facilities have not been operated for many years.  Under currently applicable environmental laws and regulations, those that owned or operated these facilities may now be required to take remedial action if certain contaminants are found above the regulatory thresholds at these sites.

Indiana Gas identified the existence, location, and certain general characteristics of 26 gas manufacturing and storage sites for which it may have some remedial responsibility.  Indiana Gas completed a remedial investigation/feasibility study (RI/FS) at one of the sites under an agreed order between Indiana Gas and the IDEM, and a Record of Decision was issued by the IDEM in January 2000.  Indiana Gas submitted the remainder of the sites to the IDEM's Voluntary Remediation Program  (VRP) and is currently conducting some level of remedial activities, including groundwater monitoring at certain sites, where deemed appropriate, and will continue remedial activities at the sites as appropriate and necessary.

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Indiana Gas accrued the estimated costs for further investigation, remediation, groundwater monitoring, and related costs for the sites.  While the total costs that may be incurred in connection with addressing these sites cannot be determined at this time, Indiana Gas has recorded cumulative costs that it reasonably expects to incur totaling approximately $23.1 million.  The estimated accrued costs are limited to Indiana Gas’ share of the remediation efforts.  Indiana Gas has arrangements in place for 19 of the 26 sites with other potentially responsible parties (PRP), which limit Indiana Gas’ costs at these 19 sites to between 20 percent and 50 percent.

With respect to insurance coverage, Indiana Gas has settled with all known insurance carriers under insurance policies in effect when these plants were in operation in an aggregate amount approximating $20.8 million.

In October 2002, SIGECO received a formal information request letter from the IDEM regarding five manufactured gas plants that it owned and/or operated and were not enrolled in the IDEM’s VRP.  In October 2003, SIGECO filed applications to enter four of the manufactured gas plant sites in IDEM's VRP.  The remaining site is currently being addressed in the VRP by another Indiana utility.  SIGECO added those four sites into the renewal of the global Voluntary Remediation Agreement that Indiana Gas has in place with IDEM for its manufactured gas plant sites.  That renewal was approved by the IDEM in February 2004.  SIGECO was also named in a lawsuit, involving another waste disposal site subject to potential environmental remediation efforts.  With respect to that lawsuit, SIG ECO settled with the plaintiff during 2010 mitigating any future claims at this site.  SIGECO has filed a declaratory judgment action against its insurance carriers seeking a judgment finding its carriers liable under the policies for coverage of further investigation and any necessary remediation costs that SIGECO may accrue under the VRP program and/or related to the site subject to the recently settled lawsuit.

SIGECO has recorded cumulative costs that it reasonably expects to incur related to these environmental matters, including the recent settlement, totaling approximately $15.8 million.  However, the total costs that may be incurred in connection with addressing all of these sites cannot be determined at this time.  With respect to insurance coverage, SIGECO has recorded approximately $12.7 million in insurance proceeds from certain of its insurance carriers under insurance policies in effect when these sites were in operation.  While negotiations are ongoing with certain carriers, settlements have been reached with some carriers and $8.2 million in proceeds have been received.  SIGECO has undertaken significant remediation efforts at two MGP sites.

The costs the Company expects to incur are estimated by management using assumptions based on actual costs incurred, the timing of expected future payments, and inflation factors, among others.  While the Company’s utilities have recorded all costs which they presently expect to incur in connection with activities at these sites, it is possible that future events may require some level of additional remedial activities which are not presently foreseen and those costs may not be subject to PRP or insurance recovery.  As of September 30, 2010 and December 31, 2009, approximately $9.1 million and $6.5 million of accrued, but not yet spent, costs are included in Other Liabilities related to both the Indiana Gas and SIGECO sites.

Rate & Regulatory Matters

Vectren South Electric Base Rate Filings

On December 11, 2009, Vectren South filed a request with the IURC to adjust its base electric rates.  The requested increase in base rates addresses capital investments, a modified electric rate design that facilitates a partnership between Vectren South and customers to pursue energy efficiency and conservation, and new energy efficiency programs to complement those currently offered for natural gas customers.  On July 30, 2010, Vectren South revised its increase requested through the filing of its rebuttal position to approximately $34 million. The request addresses the roughly $325 million spent in infrastructure construction since its last base rate increase in August 2007 that was needed to continue to provide reliable service and updates to operating costs and revenues.  The rate design proposed in the filing would break the link between small residential and commercial customers’ consumption and the utility’s margin, thereby aligning the utility’s and customers’ interests in using less energy.  The revised request assumes an overall rate of return of 7.42 percent on rate base of approximately $1.3 billion and an allowed return on equity (ROE) of 10.7 percent.  The OUCC and SIGECO Industrial Group separately filed testimony in this case, proposing an increase of approximately $11 million and $18 million, respectively.  Furthermore, the intervening parties in the case took differing views on, among other matters, the proposed rate design and the level and price of coal inventory.  A hearing on all matters in the case was held in late August 2010.  Based on the current procedural schedule, an order is likely in the first half of 2011.

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Vectren South Electric Fuel Adjustment Filings

Electric retail rates contain a fuel adjustment clause (FAC) that allows for periodic adjustment in energy to reflect changes in the cost of fuel and purchased power.  These FAC procedures involve periodic filings and IURC hearings to approve the recovery of Vectren South’s fuel and purchased power costs.

In the previous two FAC proceedings, the OUCC requested the IURC order Vectren South to renegotiate its coal contracts because they are currently above spot prices.  This request is consistent with the OUCC’s position taken in Vectren South’s base rate proceeding referred to above.  Vectren South purchases the majority of its coal from Vectren Fuels, Inc. (a nonutility wholly owned subsidiary of the Company) under coal contracts entered into in 2008.  Vectren South states in its filed position that the prices in the coal contracts were at or below the market at the time of contract execution.  Further, the Company has already engaged in some contract renegotiations to defer certain deliveries, and to eliminate some volumes in 2011, with further negotiation to come for market pricing unde r the terms of the contracts for 2012 or later deliveries.  Moreover, the IURC has already found in a number of FAC proceedings since 2008, including in its most recent FAC order dated November 4, 2010, that the costs incurred under these coal contracts are reasonable.

The OUCC also raised concerns regarding Vectren South’s generating unit “must run” policy.  Under that policy, for reliability reasons, Vectren South instructs the MISO that certain units must be dispatched regardless of current market conditions.  The OUCC is reviewing data related to Vectren South’s “must run” policy.

To allow the FAC to be approved on a timely basis, the parties agreed to the creation of a sub docket proceeding to address the specific issues noted above.  An order establishing the sub docket was issued by the IURC on July 28, 2010.  In October 2010, both parties recommended that this sub docket be dismissed.

Vectren South Electric Demand Side Management Program Filing

On August 16, 2010, Vectren South filed a petition with the IURC, seeking approval of its proposed Demand Side Management (DSM) Programs, recovery of the costs associated with these programs, recovery of lost margins as a result of implementing these programs for large customers, and recovery of performance incentives linked with specific measurement criteria on all programs.  The DSM Programs proposed are consistent with a December 9, 2009 order issued by the IURC, which, among other actions, defined long-term conservation objectives and goals of DSM programs for all Indiana electric utilities under a consistent statewide approach.  In order to meet these objectives, the IURC order divided the DSM programs into Core and Core Plus programs.  Core programs are joint programs required to be offered by all India na electric utilities to all customers, including large industrial customers.  Core Plus programs are those programs not required specifically by the IURC, but defined by each utility to meet the overall energy savings targets defined by the IURC.  The IURC’s December 9, 2009 order is currently under review as part of a commission investigation of the reasonableness of a number of orders involving Duke Energy.

In its August filing, Vectren South proposed a three-year DSM Plan that expands the current portfolio of Core and Core Plus DSM Programs in order to meet the energy savings goals established by the IURC.  Vectren South requested recovery of these program costs under a current tracking mechanism.  In addition, Vectren South proposed a performance incentive mechanism that is contingent upon the success of each of the DSM Programs in reducing energy usage to the levels defined by the IURC.  This performance incentive would also be recovered via a current tracking mechanism.  Finally, the Company proposed lost margin recovery associated with the implementation of DSM programs for large customers, and cited its decoupling proposal applicable to residential and general service customers in the pending ele ctric base rate case.  The case will be heard in early January 2011, and the Company expects an order in early 2011.

Straight Fixed Variable Rate Design Fully Implemented in Vectren Ohio’s Service Territory

On January 7, 2009, the PUCO issued a rate Order allowing for a two-phase transition to a straight fixed variable rate design.  This was fully implemented one year after implementation of new rates in February 2009.  This type of rate design places substantially all of the fixed cost recovery in the customer service charge; and, therefore, mitigates most weather risk as well as the effects of declining usage.  Starting in February 2010, nearly 90 percent of the combined residential and commercial base rate margins are recovered through the customer service charge.  The OCC has appealed this rate order to the Ohio Supreme Court.  The Ohio Supreme Court affirmed the PUCO orders authorizing straight fixed variable rate design in two other cases. The OCC’s appeal related to the Company’s case has not yet been decided. 

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Vectren Ohio Continues the Process to Exit the Merchant Function

The second phase of VEDO’s exit of the merchant function began on April 1, 2010.  During this phase, the Company no longer sells natural gas directly to customers.  Rather, state-certified Competitive Retail Natural Gas Suppliers, that were successful bidders in a regulatory-approved auction, sell the gas commodity to specific customers for a 12 month period at auction-determined standard pricing.  That auction was conducted on January 12, 2010, and the auction results were approved by the PUCO on January 13.  Vectren Source, the Company’s nonutility retail gas marketer, was a successful bidder on one of the six tranches of customers.  The plan approved by the PUCO requires that the Company conduct at least two auctions during this phase.  As such, the Company will conduct anot her auction in January 2011, in advance of the second 12-month term, which will commence on April 1, 2011.  Consistent with current practice, customers will continue to receive one bill for the delivery of natural gas service. 

The PUCO provided for an Exit Transition Cost rider, which allows the Company to recover costs associated with the transition process.  Exiting the merchant function should not have a material impact on Company earnings or financial condition.  It, however, has and will continue to reduce Gas utility revenues and have an equal and offsetting impact to Cost of gas sold as VEDO no longer purchases gas for resale to these customers.

MISO

The Company is a member of the MISO, a FERC approved regional transmission organization.  When the Company is a net seller of its generation, such net revenues, which totaled $6.1 million and $2.7 million for the three months ended September 30, 2010 and 2009, respectively, are included in Electric utility revenues.  For the nine months ended September 30, 2010 and 2009, such net revenues totaled $19.7 million and $15.9 million, respectively.  When the Company is a net purchaser such net purchases, which totaled $11.2 million and $9.7 million for the three months ended September 30, 2010 and 2009, respectively, are included in Cost of fuel & purchased power.  For the nine months ende d September 30, 2010 and 2009, such purchases totaled $32.7 million and $26.2 million, respectively.  Net positions are determined on an hourly basis.

The Company also receives transmission revenue from the MISO which is included in Electric utility revenues and totaled $4.2 million and $4.4 million for the three months ended September 30, 2010 and 2009, respectively.  For the nine months ended September 30, 2010 and 2009, transmission revenue from the MISO totaled $14.8 million and $11.0 million, respectively.  These revenues result from other MISO members’ use of the Company’s transmission system as well as the recovery of the Company’s investment in certain new electric transmission projects meeting MISO’s transmission expansion plan criteria.

One such project currently under construction meeting these expansion plan criteria is an interstate 345 kilovolt transmission line that will connect Vectren’s A.B. Brown Generating Station to a station in Indiana owned by Duke Energy to the north and to a station in Kentucky owned by Big Rivers Electric Corporation to the south.  Throughout the project, SIGECO will recover an approximate 10 percent return, inclusive of the FERC approved equity rate of return of 12.38 percent, on capital investments through a rider mechanism which is updated annually for estimated costs to be incurred.  Of the total investment, which is expected to approximate $90 million, the Company has invested approximately $51.7 million as of September 30, 2010.  The Company expects this project to be fully oper ational in 2012.  At that time, any operating expenses, including depreciation expense, are also expected to be recovered through a FERC approved rider mechanism.  Further, the approval allows for recovery of expenditures made even in the event of unforeseen difficulties that delay or permanently halt the project.

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Results of Operations of the Nonutility Group

The Nonutility Group operates 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 and provides performance contracting and renewable energy services.  There are also other legacy businesses that have invested in energy-related opportunities and services, real estate, and leveraged leases, among other investments.  The Nonutility Group supports the Company’s regulated utilities pursuant to service contracts by providing natural gas supply services, coal, and infrastructure services.  Results reported b y individual company are net of allocated corporate expenses.  Nonutility Group earnings for the three and nine months ended September 30, 2010 and 2009 follow:

	Three Months						Nine Months
	Ended September 30,						Ended September 30,
(In millions, except per share amounts)	2010			2009			2010			2009
NET INCOME (LOSS)	$	(2.2	)	$	3.3		$	(1.9	)	$	6.8
CONTRIBUTION TO VECTREN BASIC EPS	$	(0.02	)	$	0.04		$	(0.02	)	$	0.08
NET INCOME (LOSS) ATTRIBUTED TO:
Energy Marketing & Services	$	(10.4	)	$	(4.8	)	$	(9.1	)	$	(5.9	)
Mining Operations		2.5			4.0			8.1			7.4
Energy Infrastructure Services		6.0			4.6			6.4			7.6
Other Businesses		(0.3	)		(0.5	)		(7.3	)		(2.3	)

Impact of the Recession

Despite the beginning economic recovery, the impact of the recession and general economic downturn has resulted in, and could continue to result in greater uncertainty regarding energy prices and other key factors that impact the Nonutility Group.  Economic declines have been accompanied by pressures on nonutility revenues and margins due to a decrease in demand for products and services offered by the Nonutility Group.  The impact of the recession has had, and may in some cases continue to have, some negative impact on utility industry spending for construction projects, demand for coal and natural gas, and spending on performance contracting and renewable energy expansion.  It is also possible that if a weak economy continues, there could be further reductions in the value of certain nonutility real estate and other legacy investments.

Energy Marketing & Services

Energy Marketing and Services is comprised of the Company’s gas marketing operations, energy management services, and retail gas supply operations.  Operating entities contributing to these results include ProLiance and Vectren Source.  Results from Energy Marketing and Services for the quarter ended September 30, 2010, were a loss of $10.4 million, compared to a loss of $4.8 million in 2009.  For the nine months ended September 30, 2010, losses were $9.1 million compared to a loss of $5.9 million in 2009.  The 2009 year to date results include an $11.9 million after tax charge related to an investment by ProLiance Energy, LLC in Liberty Gas Storage, LLC.

ProLiance

ProLiance, a nonutility energy marketing affiliate of Vectren and Citizens, provides services to a broad range of municipalities, utilities, industrial operations, schools, and healthcare institutions located throughout the Midwest and Southeast United States.  ProLiance’s customers include Vectren’s Indiana utilities and nonutility gas supply operations and Citizens’ utilities.  ProLiance’s primary businesses include gas marketing, gas portfolio optimization, and other portfolio and energy management services.  Consistent with its ownership percentage, Vectren is allocated 61 percent of ProLiance’s profits and losses; however, governance and voting rights remain at 50 percent for each member; and therefore, the Company accounts for its investment in ProLiance using the equity me thod of accounting.  Vectren received regulatory approval on April 25, 2006, from the IURC for ProLiance to continue to provide natural gas supply services to the Company’s Indiana utilities through March 2011.  On November 3, 2010, a settlement agreement was filed with the IURC providing for ProLiance’s continued provision of gas supply services to the Company's Indiana utilities and Citizens Gas for the period of April 1, 2011 through March 31, 2016.  The settlement has been agreed to by all of the consumer representatives that were parties to the prior settlement.  An order is anticipated by April 1, 2011.

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Vectren Energy Marketing and Services, Inc (EMS), a wholly owned subsidiary, holds the Company’s investment in ProLiance.  Within the consolidated entity, EMS is responsible for certain financing costs associated with ProLiance and is also responsible for income taxes and allocated corporate expenses related to the Company’s portion of ProLiance’s results.  During the quarter ended September 30, 2010, EMS’s results related to ProLiance, which is inclusive of ProLiance’s results recorded using the equity method of accounting, financing costs, allocated corporate expenses, and income taxes, were a loss of approximately $6.9 million compared to a loss of $1.8 million in 2009.  During the nine months ended September 30, 2010, results at EMS related to ProLiance were a loss of approxi mately $9.9 million compared to a loss of $9.8 million in 2009.  The $5.1 million  unfavorable change in the quarter reflects reduced margins associated with optimizing its transportation and storage portfolio due primarily to a reduction of firm transportation spread values between the production areas and Midwest market area.  Year over year, ProLiance’s results are $12.0 million lower primarily due to these reduced margins, but that decline is offset by the 2009 Liberty Charge, as described below.  The regional basis spread reduction impacting firm transportation values is due to a number of factors.  Those factors include recent warmer than normal weather, shifting gas flows associated with the completion of new shale gas production and related transportation infrastructure, and the continuation of reduced industrial demand.  ProLiance has structured optimization activities to remain flexible to maximize potential opportunities if market c onditions improve.  ProLiance’s storage capacity was 46 Bcf at both September 30, 2010 and December 31, 2009.

For the three and nine months ended September 30, 2010, the amounts recorded to Equity in earnings (losses) of unconsolidated affiliates related to ProLiance’s operations totaled a pretax loss of $8.2 million and a loss of $8.0 million, respectively.  For the three and nine months ended September 30, 2009, the amounts recorded to Equity in earnings (losses) of unconsolidated affiliates related to ProLiance’s operations totaled a pretax loss of $0.4 million and loss of $10.3 million, respectively.  The year to date loss from ProLiance in 2009 includes the Liberty Charge recorded during the second quarter of 2009 and described below.

Investment in Liberty Gas Storage

Liberty Gas Storage, LLC (Liberty), a joint venture between a subsidiary of ProLiance and a subsidiary of Sempra Energy (SE), is a development project for salt-cavern natural gas storage facilities.  ProLiance is the minority member with a 25 percent interest, which it accounts for using the equity method.  The project was expected to include 17 Bcf of capacity in its north facility, and an additional 17 Bcf of capacity in its south facility.  In the second quarter of 2009, the joint venture, with SE as the majority member, determined the north facility was impaired due to well completion problems.  As a result, the Company recorded its share of that impairment totaling approximately $11.9 million after tax.  In the Consolidated Statement of Income < /font>for the three and six months ended June 30, 2009, the impact associated with the Liberty Charge is an approximate $19.9 million reduction to Equity in earnings of unconsolidated affiliates and an income tax benefit reflected in Income taxes of approximately $8.0 million.  ProLiance’s investment in Liberty is $37.0 million at September 30, 2010.

Vectren Source

Vectren Source, a wholly owned subsidiary, provides natural gas and other related products and services to customers opting for choice among energy providers.  Vectren Source incurred a seasonal loss of approximately $3.5 million in the third quarter of 2010, compared to $3.0 million in 2009.  Year to date, Vectren Source has earned $0.8 million in 2010 compared to $3.9 million in 2009.  Year to date results were lower than the prior year, as expected, due to higher margins on variable priced contracts in the first quarter of 2009.  During 2009’s first quarter, revenues on variable priced sales contracts fell more slowly than gas costs. The $0.5 million decrease in the 2010 third quarter results from lower volumes sold du e to the mild September weather.  Vectren Source’s equivalent customer count at September 30, 2010 was approximately 204,000 customers, compared to 186,000 customers at September 30, 2009.  Most recently, Vectren Source was a successful bidder in the second Ohio Commission-approved auction that was conducted on January 12, 2010.  As a result of this auction, Vectren Source now sells gas commodity directly to customers in VEDO’s service territory for a twelve month period ending April 1, 2011.

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Coal Mining

Coal Mining owns mines that produce and sell coal to the Company’s utility operations and to third parties through the Company’s wholly owned subsidiary Vectren Fuels, Inc. (Vectren Fuels).  Coal Mining results were approximately $2.5 million during the third quarter of 2010, compared to $4.0 million in 2009, a decrease of $1.5 million compared to 2009.  Year to date, Coal Mining results were earnings of $8.1 million compared to $7.4 million in 2009.  The year to date increase is primarily due to lower contract mining operating costs, higher revenue per ton, and an increase in tons sold, offset by an increase in interest expense and other costs.  There has been some improvement in the current demand and supply imbalance for Illinois Basin coal in 2010.  Energy demand is returning as evidenced by some spot coal sales opportunities.  Year to date, orders for 525,000 tons of spot coal with 140,000 tons yet to be delivered in the fourth quarter of 2010, have been received.  Further, there has been some non-weather related improvement in demand for electricity; however, coal inventories remain elevated at customer locations.  Vectren Fuels continues to align its coal production closely with short-term customer needs.  Negotiations for a number of new term supply contracts with other customers are currently progressing.

Oaktown Mines

The first of two new underground mine investments, located near Vincennes, Indiana, is operational.  The second mine is currently expected to open in 2012.  However, Vectren Fuels may continue to adjust this timing as it evaluates the impacts of market conditions.  Reserves at the two mines are estimated at about 105 million tons of recoverable coal at 11,200 BTU and less than 6-pound sulfur dioxide.  The reserves at these new mines bring total coal reserves to approximately 138 million tons at September 30, 2010.  Once in production, the two new mines are capable of producing about 5 million tons of coal per year. 

Mine Safety Information

The Company, through its wholly owned subsidiary Vectren Fuels, Inc., owns coal mines and related assets located in Indiana.  The Company has retained independent third party contract mining companies to operate its coal mines.  Five Star Mining LLC ("Five Star") is the contract mining company at the Prosperity underground mine and Black Panther Mining LLC ("Black Panther") is the contract mining company at the Oaktown underground mines.  While in operation, Vigo-Cypress Creek, LLC was the contract mining company at Cypress Creek surface mine. The contract mining companies are the mine “operator”, as that term is used in both the Federal Mine Safety and Health Act of 1977 (the “Mine Act”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act  of 2010.  A ll employees at the coal mines are hired, supervised and paid by the contract mining companies.  As the mine operator, the contract mining companies make all regulatory filings required by the Mine Safety and Health Administration (“MSHA”).  In most circumstances, however, the cost of fines and penalties assessed by MSHA are contractually passed through from the contract mining company to Vectren Fuels, and the Company has paid approximately $0.4 million, during the nine months ended September 30, 2010, related to assessments issued to the mine operators.

More detailed information about the Company’s mines, including safety-related data, can be found at MSHA’s website, www.MSHA.gov.  Prosperity operates under the MSHA identification number 1202249; the Oaktown mining complex operates under the identification numbers 1202394 and 1202418; and Cypress Creek’s identification number is 1202178.  Mine safety-related data included on the MSHA website is influenced by the size of the mine, the level of activity at the mine, and the mine inspector’s judgment, among other factors. These factors can impact the comparability of information from mine to mine and time period to time period.  Given the recent incidents at coal mines of other companies, a significant increase in the frequ ency and scope of MSHA inspections continues.  In addition, both houses of Congress are considering new mine safety legislation.  The Company is currently assessing the impact such an increase in inspection activity or new laws and regulations may have on its investments.

Energy Infrastructure Services

Energy Infrastructure Services provides energy performance contracting and renewable energy services through Energy Systems Group, LLC (ESG) and underground utility infrastructure construction and repair services through Miller Pipeline Corporation (Miller).  Energy Infrastructure Services earned $6.0 million in the third quarter of 2010, compared to $4.6 million in 2009.  Year to date earnings were $6.4 million in 2010, compared to $7.6 million in 2009.

Miller Pipeline

Miller’s 2010 third quarter earnings were $3.2 million compared to $1.9 million in 2009.  The increase in earnings is due primarily to the completion of a large transmission project.  Year to date, Miller’s earnings contribution of approximately $2.2 million is consistent with earnings in 2009.  Year to date results in 2010 reflect improved third quarter performance offset by weather conditions that negatively impacted construction activities in the Mid-Atlantic and Northeast throughout much of the first quarter of 2010.  As utilities across the country continue to replace their aging natural gas and wastewater infrastructure and needs for shale gas infrastructure become more prevalent, Miller is positioned for future growth and resulting earnings.

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Energy Systems Group

ESG’s 2010 earnings were $2.8 million in the third quarter and were consistent with third quarter earnings in 2009.  ESG earned approximately $4.2 million year to date in 2010, compared to earnings of $5.4 million in 2009.  The lower year to date contribution is primarily reflective of lower earnings from renewable energy projects as year to date results in 2009 reflect the sale of a renewable energy project.  The project developed by ESG as part of its ongoing renewable energy project development strategy was a 3.2 megawatt land fill gas facility located in the company’s electric service territory.  The sale to the company’s electric utility, as a part of the utilities’ strategy to continue to build a renewable energy portfolio, was approved by the IURC.

At September 30, 2010, ESG’s backlog was $64 million, compared to $70 million at December 31, 2009.  The backlog reflects substantial work in the near term.  The national focus on a comprehensive energy strategy as evidenced by the Energy Independence and Security Act of 2007 and the American Recovery and Reinvestment Act of 2009 continues to create favorable conditions for ESG’s growth and resulting earnings.

Other Businesses

Third quarter results in both 2010 and 2009 include losses from Other nonutility businesses, which include legacy real estate and other investments.  During the nine months ended September 30, 2010, Other nonutility businesses operated at a loss of $7.3 million compared to a loss of $2.3 million in 2009.  The lower results in 2010 reflect a second quarter $4.0 million after tax charge related to a decline in the fair value of an energy-related investment originally made in 2004 by Haddington Energy Partners.  The lower results in 2010 also reflect a first quarter 2010 $2.9 million after tax charge related to the reduction in value of a note receivable recorded in 2002 related to a previously exited business.

Haddington Energy Partnerships

The Company has an approximate 40 percent ownership interest in Haddington Energy Partners, LP (Haddington I) and Haddington Energy Partners II, LP (Haddington II).  These Haddington ventures have interests in two remaining mid-stream energy related investments.  Both Haddington ventures are investment companies accounted for using the equity method of accounting. 

During the second quarter of 2010, the Company recorded its share of the decline in fair value and also impaired a note receivable associated with Haddington’s investment in a liquefied natural gas facility.  In total, the charge was approximately $6.5 million, of which, $6.1 million is reflected in Equity in earnings of unconsolidated affiliates and $0.4 million is reflected in Other-net, for the nine months ended September 30, 2010.  At September 30, 2010, the Company’s remaining $3.4 million investment in the Haddington ventures is related to payments to be received associated with the sale of a compressed air storage facility sold in 2009.  The Company has no further commitments to invest in either Haddington I or II.  

Use of Non-GAAP Performance Measures

Contribution to Vectren’s basic EPS

Per share earnings contributions of the Utility Group, Nonutility Group, and Corporate and Other are presented.  Such per share amounts are based on the earnings contribution of each group included in Vectren’s consolidated results divided by Vectren’s basic average shares outstanding during the period.  The earnings per share of the groups do not represent a direct legal interest in the assets and liabilities allocated to the groups, but rather represent a direct equity interest in Vectren Corporation's assets and liabilities as a whole.  These non-GAAP measures are used by management to evaluate the performance of individual businesses.  Accordingly management believes these measures are useful to investors in understanding each business’ contribution to consolidated earnings per share and in analyzing consolidated period to period changes.  Reconciliation s of these non-GAAP measures to their most closely related GAAP measure of consolidated earnings per share are included throughout this discussion and analysis.

The non-GAAP financial measures disclosed by the Company should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP.

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Impact of Recently Issued Accounting Guidance

Variable Interest Entities

In June 2009, the FASB issued new accounting guidance regarding variable interest entities (VIE’s).  This new guidance is effective for annual reporting periods beginning after November 15, 2009.  This guidance requires a qualitative analysis of which holder of a variable interest controls the VIE and if that interest holder must consolidate a VIE.  Additionally, it requires additional disclosures and an ongoing reassessment of who must consolidate a VIE.  The Company adopted this guidance on January 1, 2010. The adoption did not have any impact on the consolidated financial statements.

Fair Value Measurements & Disclosures

In January 2010, the FASB issued new accounting guidance on improving disclosures about fair market value.  This guidance amends prior disclosure requirements involving fair value measurements to add new requirements for disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. The guidance also clarifies existing fair value disclosures in regard to the level of disaggregation and about inputs and valuation techniques used to measure fair value.  The guidance also amends prior disclosure requirements regarding postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of major categories of assets.  This guidance is effective for the first reporting period beginning after December 15, 2009.  The Company adopted this guidance for its 2010 reporting.  Due to the low level of items carried at fair value in the Company’s financial statements, the adoption has not had any material impact.

Financial Condition

Within Vectren’s consolidated group, Utility Holdings primarily funds the short-term and long-term financing needs of the Utility Group operations, and Vectren Capital Corp (Vectren Capital) funds short-term and long-term financing needs of the Nonutility Group and corporate operations.  Vectren Corporation guarantees Vectren Capital’s debt, but does not guarantee Utility Holdings’ debt.  Vectren Capital’s long-term and short-term obligations outstanding at September 30, 2010 approximated $333 million and $131 million, respectively.  Utility Holdings’ outstanding long-term and short-term borrowing arrangements are jointly and severally guaranteed by Indiana Gas, SIGECO, and VEDO.  Utility Holdings’ long-term obligations outstanding at September 30, 2010 approximat ed $919 million.  As of September 30, 2010, Utility Holdings had approximately $26 million of short-term borrowings outstanding.  Additionally, prior to Utility Holdings’ formation, Indiana Gas and SIGECO funded their operations separately, and therefore, have long-term debt outstanding funded solely by their operations.  SIGECO will also occasionally issue tax exempt debt to fund qualifying pollution control capital expenditures.

The Company’s common stock dividends are primarily funded by utility operations.  Nonutility operations have demonstrated profitability and the ability to generate cash flows.  These cash flows are primarily reinvested in other nonutility ventures, but are also used to fund a portion of the Company’s dividends, and from time to time may be reinvested in utility operations or used for corporate expenses.

The credit ratings of the senior unsecured debt of Utility Holdings and Indiana Gas, at September 30, 2010, are A-/A3 as rated by Standard and Poor's Ratings Services (Standard and Poor’s) and Moody’s Investors Service (Moody’s), respectively.  The credit ratings of SIGECO’s secured debt, at September 30, 2010, are A/A1 as rated by Standard and Poor’s and Moody’s, respectively.  Utility Holdings’ commercial paper has a credit rating of A-2/P-2.  In September of 2010, Moody’s increased its rating on Utility Holdings’ and Indiana Gas’ senior unsecured debt from Baa1 to A3 and on SIGECO’s secured debt from A2 to A1.  The current outlook of both Standard and Poor’s and Moody’s is stable.  A security rating is not a r ecommendation to buy, sell, or hold securities.  The rating is subject to revision or withdrawal at any time, and each rating should be evaluated independently of any other rating.  Standard and Poor’s and Moody’s lowest level investment grade rating is BBB- and Baa3, respectively.

The Company’s consolidated equity capitalization objective is 45-55 percent of long-term capitalization.  This objective has varied, and will vary, depending on particular business opportunities, capital spending requirements, execution of long-term financing plans, and seasonal factors that affect the Company’s operations.  The Company’s equity component was 46 percent of long-term capitalization at both September 30, 2010 and December 31, 2009.  Long-term capitalization includes long-term debt, including current maturities and debt subject to tender, as well as common shareholders’ equity.

As of September 30, 2010, the Company was in compliance with all financial covenants.

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Available Liquidity in Current Credit Conditions

The Company’s A-/A3 investment grade credit ratings have allowed it to access the capital markets as needed. 

On September 9, 2010, the Company and Vectren Capital, its wholly-owned subsidiary, entered into a private placement Note Purchase Agreement (2010 Note Purchase Agreement) pursuant to which various institutional investors have agreed to purchase the following tranches of notes from Vectren Capital:  (i) $75 million 3.48% Senior Notes, Series A due 2017, and (ii) $50 million 4.53% Senior Notes, Series B due 2025.  These Senior Notes will be unconditionally guaranteed by the Company.  This financing is scheduled to close on or about December 15, 2010.  The proceeds from the issuance will replace a $48 million debt maturity due in December 2010 and will permanently finance some nonutility investments currently financed with short-term borrowings. 

At September 30, 2010, the Company had $600 million of short-term borrowing capacity, including $350 million for the Utility Group and $250 million for the wholly owned Nonutility Group and corporate operations.  As reduced by borrowings currently outstanding, approximately $324 million was available for the Utility Group operations and approximately $119 million was available for the wholly owned Nonutility Group and corporate operations.  Both facilities were renewed on September 30, 2010 and are available through September 2013.   

During the short-term credit facility renewal process, the Company lowered the level of capacity due to the reduced requirements for short-term borrowings.  The short-term borrowing facilities were lowered from $515 million to $350 million for the Utility Group and from $255 million to $250 million for the Nonutility Group.  The level of required short-term borrowings at Utility Holdings is significantly lower compared to historical trends due to the long-term financing transactions completed in 2009, lower inventory values due to lower natural gas prices, and lower natural gas inventory volumes due to exiting the merchant function in Ohio.  The Company has historically funded the short-term borrowing needs of Utility Holdings’ operations through the commercial paper market.  Throughout 2009 and 2010, t he Company has been able to place commercial paper without significant difficulties and expects to use the Utility Holdings short-term borrowing facility in instances where the commercial paper market is not efficient.  The liquidity provided by these current short-term borrowing arrangements, when coupled with internally-generated funds, is expected to be sufficient over the near term to fund anticipated capital expenditures, investments, and other working capital requirements. 

Investors had the one-time option to put $10 million in May 2010; however, no notice was received during the notification period and such debt has been reclassified as long-term.  Investors have the option to put $30 million to the Company in October 2011.  Debt that can be put to the Company within one year or that is supported by a credit facility that expires within one year is classified in current liabilities in Long-term debt subject to tender.  Given the low level of Utility Group borrowings, it is anticipated that only a portion of the Utility Holdings $250 million maturity due in December 2011 will require refinancing.  

As of September 30, 2010, Utility Holdings has letters of credit outstanding in support of two SIGECO tax exempt adjustable rate first mortgage bonds totaling $41.3 million.  In the unlikely event the letters of credit were called, the Company could settle with the financial institutions supporting these letters of credit with general assets or by drawing from the renewed credit line that expires in September of 2013.  Due to the long-term nature of the credit agreement, such debt is classified as long-term at September 30, 2010.

ProLiance Short-Term Borrowing Arrangements

ProLiance, a nonutility energy marketing affiliate of the Company, has separate borrowing capacity available through a syndicated credit facility.  The terms of this facility allow for $325 million of capacity, as adjusted for letters of credit and current inventory and receivable balances.  The current facility expires June 3, 2011.  This credit facility, when coupled with internally generated funds, is expected to provide sufficient liquidity to meet ProLiance's operational needs.  As of September 30, 2010, borrowings of $8.0 million were outstanding.  The current facility is not guaranteed by Vectren or Citizens. 

New Share Issues

The Company may periodically issue new common shares to satisfy the dividend reinvestment plan, stock option plan and other employee benefit plan requirements.  New issuances added additional liquidity of $7.2 million and $4.5 million in the nine months ended September 30, 2010 and 2009, respectively.  Throughout 2010, new issuances required to meet these various plan requirements are estimated to be approximately $9 million.

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Potential Uses of Liquidity

Pension & Postretirement Funding Obligations

As of December 31, 2009, asset values of the Company’s qualified pension plans were approximately 82 percent of the projected benefit obligation.  Management currently expects the qualified pension plans to require Company contributions of approximately $12 million in 2010 and a similar funding in 2011 under current market conditions.  Through September 30, 2010, $8.8 million in contributions to qualified pension plans were made.  In addition to the qualified plan funding, the Company has made payments totaling approximately $11 million associated with its other retirement and deferred compensation plans and anticipates additional payments of approximately $9 million in 2010.

Corporate Guarantees

The Company issues corporate guarantees to certain vendors and customers of its wholly owned subsidiaries and unconsolidated affiliates.  These guarantees do not represent incremental consolidated obligations; rather, they represent parental guarantees of subsidiary and unconsolidated affiliate obligations in order to allow those subsidiaries and affiliates the flexibility to conduct business without posting other forms of collateral.  At September 30, 2010, corporate issued guarantees support a portion of Energy Systems Group’s (ESG) performance contracting commitments and warranty obligations described below.  In addition, the Company has approximately $73 million of other guarantees outstanding supporting other consolidated subsidiary operations, of which $48 million support non-regulated retail gas supply operations and $18 million represent letters of credit supporting other nonutility operations.  Guarantees issued and outstanding on behalf of unconsolidated affiliates approximated $3 million at September 30, 2010.  These guarantees relate primarily to arrangements between ProLiance and various natural gas pipeline operators.  The Company has not been called upon to satisfy any obligations pursuant to these parental guarantees and has accrued no significant liabilities related to these guarantees.

Performance Guarantees & Product Warranties

In the normal course of business, ESG and other wholly owned subsidiaries issue performance bonds or other forms of assurance that commit them to timely install infrastructure, operate facilities, pay vendors or subcontractors, and/or support warranty obligations.  Based on a history of meeting performance obligations and installed products operating effectively, no significant liability or cost has been recognized for the periods presented.

Specific to ESG, in its role as a general contractor in the performance contracting industry, at September 30, 2010, there are 68 open surety bonds supporting future performance.  The average face amount of these obligations is $3.4 million, and the largest obligation has a face amount of $30.4 million. These surety bonds are guaranteed by Vectren Corporation.  The maximum exposure of these obligations is less than these amounts for several factors, including the level of work already completed.  At September 30, 2010, approximately 64 percent of work was completed on projects with open surety bonds.  A significant portion of these commitments will be fulfilled within one year.  In instances where ESG operates facilities, project guarantees extend over a longer period.

In addition to its performance obligations, ESG also warrants the functionality of certain installed infrastructure generally for one year and the associated energy savings over a specified number of years.  In certain instances, these warranty obligations are also backed by Vectren Corporation.  The Company has no significant accruals for these warranty obligations as of September 30, 2010.

Planned Capital Expenditures & Investments

Utility capital expenditures are estimated at $64 million for the remainder of 2010.  Nonutility capital expenditures and investments, principally for coal mine development and capital expenditures for the Energy Infrastructure Services businesses, are estimated at $22 million for the remainder of 2010.

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Comparison of Historical Sources & Uses of Liquidity

Operating Cash Flow

The Company's primary source of liquidity to fund working capital requirements has been cash generated from operations, which totaled $322.4 million and $369.6 million for the nine months ended September 30, 2010 and 2009, respectively.  The $47.2 million decrease in operating cash flow in 2010 compared to 2009 is primarily due to much a greater level of cash generated from working capital in 2009 offset by a special dividend from ProLiance totaling approximately $30 million and higher net income and non-cash charges in 2010.

Financing Cash Flow

Although working capital requirements are generally funded by cash flow from operations, the Company uses short-term borrowings to supplement working capital needs when accounts receivable balances are at their highest and gas storage is refilled.  Additionally, short-term borrowings are required for capital projects and investments until they are financed on a long-term basis.  Net cash flow required for financing activities was $133.8 million in 2010 and $125.9 million in 2009.  In 2010, operating cash flows have been sufficient to fund capital expenditures and dividend requirements and allow for the repayment of some short-term borrowings.  This compares to 2009 where higher capital expenditures required some funding from a long-term debt issuance.

Investing Cash Flow

Cash flow required for investing activities was $193.3 million in 2010 and $321.6 million in 2009.  Capital expenditures are the primary component of investing activities and totaled $200.9 million in 2010, compared to $321.8 million in 2009.  The decrease in capital expenditures reflects the roughly $20 million spent in 2009 associated with the January 2009 ice storm restoration projects and approximately $40 million in lower other utility capital spending in 2010 compared to 2009 as well as approximately $65 million in lower expenditures for coal mine development.

Forward-Looking Information

A “safe harbor” for forward-looking statements is provided by the Private Securities Litigation Reform Act of 1995 (Reform Act of 1995).  The Reform Act of 1995 was adopted to encourage such forward-looking statements without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement.  Certain matters described in Management’s Discussion and Analysis of Results of Operations and Financial Condition are forward-looking statements.  Such statements are based on management’s beliefs, as well as assumptions made by and information currently available to management.& #160; When used in this filing, the words “believe”, “anticipate”, “endeavor”, “estimate”, “expect”, “objective”, “projection”, “forecast”, “goal”, “likely”, and similar expressions are intended to identify forward-looking statements.  In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause the Company’s actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following:

·   Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unusual maintenance or repairs; unanticipated changes to fossil fuel costs; unanticipated changes to gas transportation and storage costs, or availability due to higher demand, shortages, transportation problems or other developments; environmental or pipeline incidents; transmission or distribution incidents; unanticipated changes to electric energy supply costs, or availability due to demand, shortages, transmission problems or other developments; or electric transmission or gas pipeline system constraints.

·   Catastrophic events such as fires, earthquakes, explosions, floods, ice storms, tornados, terrorist acts or other similar occurrences could adversely affect Vectren’s facilities, operations, financial condition and results of operations.

·   Increased competition in the energy industry, including the effects of industry restructuring and unbundling.

·   Regulatory factors such as unanticipated changes in rate-setting policies or procedures, recovery of investments and costs made under traditional regulation, and the frequency and timing of rate increases.

·   Financial, regulatory or accounting principles or policies imposed by the Financial Accounting Standards Board; the Securities and Exchange Commission; the Federal Energy Regulatory Commission; state public utility commissions; state entities which regulate electric and natural gas transmission and distribution, natural gas gathering and processing, electric power supply; and similar entities with regulatory oversight.

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·   Economic conditions including the effects of an economic downturn, inflation rates, commodity prices, and monetary fluctuations.

·   Economic conditions surrounding the impact of the  recession, which may be more prolonged and more severe than cyclical downturns, including significantly lower levels of economic activity; uncertainty regarding energy prices and the capital and commodity markets; decreases in demand for natural gas, electricity, coal, and other nonutility products and services; impacts on both gas and electric large customers; lower residential and commercial customer counts; higher operating expenses; and further reductions in the value of certain nonutility real estate and other legacy investments.

·   Increased natural gas and coal commodity prices and the potential impact on customer consumption, uncollectible accounts expense, unaccounted for gas and interest expense.

·   Changing market conditions and a variety of other factors associated with physical energy and financial trading activities including, but not limited to, price, basis, credit, liquidity, volatility, capacity, interest rate, and warranty risks.

·   Direct or indirect effects on the Company’s business, financial condition, liquidity and results of operations resulting from changes in credit ratings, changes in interest rates, and/or changes in market perceptions of the utility industry and other energy-related industries.

·   The performance of projects undertaken by the Company’s nonutility businesses and the success of efforts to invest in and develop new opportunities, including but not limited to, the Company’s coal mining, gas marketing, and energy infrastructure strategies.

·   Factors affecting coal mining operations including  MSHA guidelines and interpretations of those guidelines, as well as additional mine regulations and more frequent and broader inspections that could result from the recent  mining incidents at coal mines of other companies; geologic, equipment, and operational risks; the ability to execute and negotiate new sales contracts and resolve contract interpretations; volatile coal market prices and demand;  supplier and contract miner performance; the availability of key equipment, contract miners and commodities; availability of transportation; and the ability to access/replace coal reserves .

·   Employee or contractor workforce factors including changes in key executives, collective bargaining agreements with union employees, aging workforce issues, work stoppages, or pandemic illness.

·   Legal and regulatory delays and other obstacles associated with mergers, acquisitions and investments in joint ventures.

·   Costs, fines, penalties and other effects of legal and administrative proceedings, settlements, investigations, claims, including, but not limited to, such matters involving compliance with state and federal laws and interpretations of these laws.

·   Changes in or additions to  federal, state or local legislative requirements, such as changes in or additions to tax laws or rates, environmental laws, including laws governing greenhouse gases, mandates of sources of renewable energy, and other regulations.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of changes in actual results, changes in assumptions, or other factors affecting such statements.

ITEM 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to various business risks associated with commodity prices, interest rates, and counter-party credit.  These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program.  The Company’s risk management program includes, among other things, the use of derivatives.  The Company may also execute derivative contracts in the normal course of operations while buying and selling commodities to be used in operations and optimizing its generation assets.

The Company has in place a risk management committee that consists of senior management as well as financial and operational management.  The committee is actively involved in identifying risks as well as reviewing and authorizing risk mitigation strategies.

These risks are not significantly different from the information set forth in Item 7A Quantitative and Qualitative Disclosures About Market Risk included in the Vectren 2009 Form 10-K and is therefore not presented herein.

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ITEM 4.  CONTROLS AND PROCEDURES

Changes in Internal Controls over Financial Reporting

During the quarter ended September 30, 2010, there have been no changes to the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of September 30, 2010, the Company conducted an evaluation under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer of the effectiveness and the design and operation of the Company's disclosure controls and procedures.  Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2010, to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is:

 1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and

 2) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions

     regarding required disclosure.

PART II

ITEM 1.  LEGAL PROCEEDINGS

The Company is party to various legal proceedings and audits and reviews by taxing authorities and other government agencies arising in the normal course of business.  In the opinion of management, there are no legal proceedings or other regulatory reviews or audits pending against the Company that are likely to have a material adverse effect on its financial position, results of operations, or cash flows.  See the notes to the consolidated financial statements regarding commitments and contingencies, environmental matters, and rate and regulatory matters.  The consolidated condensed financial statements are included in Part 1 Item 1.

ITEM 1A.  RISK FACTORS

In addition to those risk factors set forth in Item 1A Risk Factors included in the Vectren 2009 Form 10-K, which are not presented herein, the Company is adding to and highlighting the following risk factor due to the recent mine incidents at coal mines of other companies.

Coal mining operations could be adversely affected by a number of factors.

The success of coal mining operations is predicated on the ability to fully access coal at two new company-owned mines; to operate owned mines in accordance with MSHA guidelines and regulations, recent interpretations of those guidelines and regulations, and any new guidelines or regulations that could result from the recent mining incidents at coal mines of other companies and to respond to more frequent and broader inspections; to negotiate and execute new sales contracts; and to manage production and production costs and other risks in response to changes in demand.  Other risks, which could adversely impact operating results, include but are not limited to:  market demand for coal; geologic, equipment, and operational risks; supplier and contract miner performance; the availability of miners, key equipment and comm odities; availability of transportation; and the ability to access/replace coal reserves.

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Periodically, the Company purchases shares from the open market to satisfy share requirements associated with the Company’s share-based compensation plans.  The following chart contains information regarding open market purchases made by the Company to satisfy share-based compensation requirements during the quarter ended September 30, 2010.

			Total Number of	Maximum Number
	Number of		Shares Purchased as	of Shares That May
	Shares	Average Price	Part of Publicly	Be Purchased Under
Period	Purchased	Paid Per Share	Announced Plans	These Plans
July 1-31	-	$                      -	-	-
August 1-31	44,790	25.56	-	-
September 1-30	1,500	24.99	-	-

ITEM 6.  EXHIBITS

Exhibits and Certifications

4.1 Note Purchase Agreement dated September 9, 2010. (Filed and designated in Form 8-K dated September 10, 2010 File No1-15467, as Exhibit 4.1)

10.1 Credit Agreement, dated as of September 30, 2010, among Vectren Utility Holdings, Inc., as borrower (“Vectren Utility”); certain subsidiaries of Vectren Utility, as guarantors; Bank of America, N.A., as administrative agent, swing line lender and a letter of credit issuer; Wells Fargo Bank, National Association, JPMorgan Chase Bank, N.A. and Union Bank, N.A., as co-syndication agents and letter of credit issuers; and the other lenders named therein. (Filed and designated in Form 8-K dated September 30, 2010 File No1-15467, as Exhibit 10.1)

10.2 Credit Agreement, dated as of September 30, 2010, among Vectren Capital, Corp., as borrower; Vectren Corporation, as guarantor; Wells Fargo Bank, National Association, as administrative agent, swing line lender and a letter of credit issuer; Bank of America, N.A., JPMorgan Chase Bank, N.A. and Union Bank, N.A., as co-syndication agents and letter of credit issuers; and the other lenders named therein. (Filed and designated in Form 8-K dated September 30, 2010 File No1-15467, as Exhibit 10.2)

10.3  First Amendment to Credit Agreement, dated as of September 30, 2010 by and among Vectren Capital Corp., Vectren Corporation, the Lenders party thereto and Wells Fargo Bank, National Association as administrative agent [First Amendment to correct a scrivener’s error in Section 7.13(i) of the above-referenced Credit Agreement.] (Filed Herewith)

31.1  Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002- Chief Executive Officer

31.2  Certification Pursuant To Section 302 of The Sarbanes-Oxley Act Of 2002- Chief Financial Officer

32     Certification Pursuant To Section 906 of The Sarbanes-Oxley Act Of 2002

101   Interactive Data File.

101.INS*    XBRL Instance Document

101.CAL*   XBRL Taxonomy Extension Calculation Linkbase

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101.LAB*   XBRL Taxonomy Extension Labels Linkbase

101.PRE*   XBRL Taxonomy Extension Presentation Linkbase

* Users of the XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q are advised in accordance with Rule 406T of Regulation S-T promulgated by the Securities and Exchange Commission that this Interactive Data File is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections. The financial information contained in the XBRL-related documents is “unaudited” and “unreviewed.”

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

	VECTREN CORPORATION
	Registrant
November 9, 2010	/s/Jerome A. Benkert, Jr.
	Jerome A. Benkert, Jr.
	Executive Vice President and Chief Financial Officer
	(Principal Financial Officer)
	/s/M. Susan Hardwick
	M. Susan Hardwick
	Vice President, Controller and Assistant Treasurer
	(Principal Accounting Officer)

EX-10.3

FIRST AMENDMENT

Reference is made to that certain Credit Agreement, dated as of September 30, 2010 (as amended and modified from time to time, the "Credit Agreement"), by and among Vectren Capital Corp., an Indiana corporation (the "Borrower"), the Guarantor, the Lenders and Wells Fargo Bank, National Association, as administrative agent (the "Administrative Agent").  Capitalized terms used herein without definition shall have the meanings ascribed to such terms in the Credit Agreement.

The parties hereto agree that a mutual error was made in drafting Section 7.13(i) of the Credit Agreement and that Section 7.13(i) of the Credit Agreement is hereby amended and restated in its entirety to read as follows:

(i)           in addition to Liens covered by (a)-(h) above, Liens securing Indebtedness not exceeding 15% of the Guarantor's Consolidated Net Worth in the aggregate outstanding at any time.

This First Amendment is a Loan Document.  All references in the Credit Agreement and the other Loan Documents to the Credit Agreement shall be deemed to refer to the Credit Agreement as amended hereby.  Except as modified hereby, all of the terms and provisions of the Credit Agreement and the other Loan Documents shall remain in full force and effect.

This First Amendment may be executed by the parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement.  Delivery of an executed counterpart by telecopy or other secure electronic format (.pdf) shall be as effective as an original.  This First Amendment shall be governed by the laws of the State of Illinois and shall become effective upon the Administrative Agent's receipt of counterparts hereof duly executed by the Required Lenders and each of the Loan Parties.

[SIGNATURE PAGES FOLLOW]

CHAR1\1187313v2

The parties hereto have caused this First Amendment to be executed as of _November 2__, 2010.

WELLS FARGO BANK, NATIONAL ASSOCIATION,

as Administrative Agent

By: /s/ Allison Newman________________________                                                      

Name:  Allison Newman

Title:  Director

VCC First Amendment

LENDERS:                                           WELLS FARGO BANK, NATIONAL ASSOCIATION,

as a Lender, Swing Line Lender and an L/C Issuer

By: /s/ Allison Newman________________________                                                 

Name:  Allison Newman

Title:  Director

BANK OF AMERICA, N.A.,

as a Lender and an L/C Issuer

By: /s/ Carlos Morales         ______________________                                                      

Name:  Carlos Morales

Title:  Vice President

JPMORGAN CHASE BANK, N.A.,

as a Lender and an L/C Issuer

By: /s/ Helen D. Davis       ________________________                                                      

Name:  Helen D. Davis

Title:  Authorized Officer

UNION BANK, N.A.,

as a Lender and an L/C Issuer

By: /s/ Susan K. Johnson      ______________________                                                      

Name:  Susan K. Johnson

Title:  Vice President

FIFTH THIRD BANK,

as a Lender

By: /s/ Jennifer Raibley___________________________                                                      

Name:  Jennifer Raibley

Title:  Vice President

U.S. BANK NATIONAL ASSOCIATION,

as a Lender

By: /s/ Shawn O'Hara____________________________                                                      

Name:  Shawn O'Hara

Title:  Managing Director

PNC BANK, NATIONAL ASSOCIATION,

as a Lender

By: /s/ Chris Johnson____________________________                                                      

Name:  Chris Johnson

Title:  Assistant Vice President

REGIONS BANK,

as a Lender

By: /s/ Eric Harvey  _____________________________                                                      

Name:  Eric Harvey

Title:  Vice President

OLD NATIONAL BANK,

as a Lender

By: /s/ Wade Jenkins _____________________________                                                      

Name:  Wade Jenkins

Title:  Vice President

INTEGRA BANK N.A.,

as a Lender

By: /s/ Chris E. Rutledge____________________________                                                      

Name:  Chris E. Rutledge

Title:  Senior Vice President

VCC First Amendment

BORROWER: VECTREN CAPITAL CORP.,

as Borrower

By: /s/ Robert L. Goocher___________________                                                                

Name:  Robert L. Goocher

Title:  Vice President, Treasurer and Asst. Secretary

GUARANTOR:                                                      VECTREN CORPORATION

By: /s/ Robert L. Goocher____________________

Name:  Robert L. Goocher

Title:  Vice President, Treasurer and Asst. Secretary

VCC First Amendment

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CHIEF EXECUTIVE OFFICER CERTIFICATION

I, Carl L. Chapman, certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of Vectren Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2010

/s/ Carl L. Chapman

Carl L. Chapman

President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

CHIEF FINANCIAL OFFICER CERTIFICATION

I, Jerome A. Benkert, Jr., certify that:

1.   I have reviewed this Quarterly Report on Form 10-Q of Vectren Corporation;

2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.   The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)   Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)   Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.   The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 9, 2010

/s/ Jerome A. Benkert, Jr.

Jerome A. Benkert, Jr.

Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

CERTIFICATION

By signing below, each of the undersigned officers hereby certifies pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his or her knowledge, (i) this report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and (ii) the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Vectren Corporation.

Signed this 9th day of November, 2010.

/s/ Jerome A. Benkert, Jr.	/s/ Carl L. Chapman
(Signature of Authorized Officer)	(Signature of Authorized Officer)
Jerome A. Benkert, Jr.	Carl L. Chapman
(Typed Name)	(Typed Name)
Executive Vice President and Chief Financial Officer	President and Chief Executive Officer
(Title)	(Title)