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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999

 OR 

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

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TXU Gas Company(formerly known as ENSERCH Corporation)

|A Texas Corporation           |  | I.R.S. Employer Identification
|----------------------------- |  | ------------------------------
|Commission File Number 1-3183 |  | No. 75-0399066                

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ENERGY PLAZA, 1601 BRYAN STREET, DALLAS, TEXAS 75201-3411
(214) 812-4600

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Indicate
by check mark whether the registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.
YesX No

Common Stock outstanding at November 11, 1999: 451,000 shares, par value $0.01 per share.

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TABLE OF CONTENTS

|PART I. FINANCIAL INFORMATION                                                                                              |  | Page
|-------------------------------------------------------------------------------------------------------------------------- |  | ----
|Item 1. Financial Statements                                                                                               |  |     
|TXU Gas Company and Subsidiaries                                                                                           |  |     
|Condensed Statements of Consolidated Income
Three, Nine and Twelve Months Ended September 30, 1999 and 1998               |  | 3   
|Condensed Statements of Consolidated Comprehensive Income
Three, Nine and Twelve Months Ended September 30, 1999 and 1998 |  | 4   
|Condensed Statements of Consolidated Cash Flows
Nine Months Ended September 30, 1999 and 1998                             |  | 5   
|Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998                                            |  | 6   
|Notes to Condensed Consolidated Financial Statements                                                                       |  | 8   
|Independent Accountants' Report                                                                                            |  | 12  
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations                              |  | 13  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                         |  | 18  
|PART II. OTHER INFORMATION                                                                                                 |  |     
|Item 1. Legal Proceedings                                                                                                  |  | 19  
|Item 6. Exhibits and Reports on Form 8-K                                                                                   |  | 19  
|SIGNATURE                                                                                                                  |  | 20  



## 

PART I.  FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME
(Unaudited)

|                                               |  | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |   | Twelve Months Ended
September 30, |  
|---------------------------------------------- |  | -------------------------------- | --- | ------------------------------- | - | --------------------------------- | -
|
|
|OPERATING REVENUES                             |  | $                                | 952 |                                 | $ | 1,090                             |  
|                                               |  |                                  |     |                                 |   |                                   |  
|OPERATING EXPENSES                             |  |                                  |     |                                 |   |                                   |  
|Gas and electricity purchased for resale       |  |                                  | 856 |                                 |   | 982                               |  
|Operation and maintenance                      |  |                                  | 92  |                                 |   | 80                                |  
|Depreciation and other amortization            |  |                                  | 17  |                                 |   | 14                                |  
|Goodwill amortization                          |  |                                  | 5   |                                 |   | 5                                 |  
|Taxes other than income                        |  |                                  | 13  |                                 |   | 13                                |  
|                                               |  |                                  |     |                                 |   |                                   |  
|Total operating expenses                       |  |                                  | 983 |                                 |   | 1,094                             |  
|                                               |  |                                  |     |                                 |   |                                   |  
|OPERATING INCOME (LOSS)                        |  |                                  | (31 | )                               |   | (4                                | )
|OTHER INCOMENET                               |  |                                  | 10  |                                 |   |                                  |  
|                                               |  |                                  |     |                                 |   |                                   |  
|INCOME (LOSS) BEFORE INTEREST AND INCOME TAXES |  |                                  | (21 | )                               |   | (4                                | )
|INTEREST INCOME                                |  |                                  |    |                                 |   |                                  |  
|INTEREST AND OTHER CHARGES                     |  |                                  | (19 | )                               |   | (18                               | )
|                                               |  |                                  |     |                                 |   |                                   |  
|LOSS BEFORE INCOME TAXES                       |  |                                  | (40 | )                               |   | (22                               | )
|INCOME TAX BENEFIT                             |  |                                  | (14 | )                               |   | (6                                | )
|                                               |  |                                  |     |                                 |   |                                   |  
|NET LOSS                                       |  |                                  | (26 | )                               |   | (16                               | )
|PREFERRED STOCK DIVIDENDS                      |  |                                  | 1   |                                 |   | 1                                 |  
|                                               |  |                                  |     |                                 |   |                                   |  
|NET LOSS AVAILABLE FOR COMMON STOCK            |  | $                                | (27 | )                               | $ | (17                               | )
|                                               |  |                                  |     |                                 |   |                                   |  

See
Notes to Condensed Consolidated Financial Statements.

TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
(Unaudited)

|                                                                  |  | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |   | Twelve Months Ended
September 30, |  
|----------------------------------------------------------------- |  | -------------------------------- | --- | ------------------------------- | - | --------------------------------- | -
|
|
|NET LOSS                                                          |  | $                                | (26 | )                               | $ | (16                               | )
|                                                                  |  |                                  |     |                                 |   |                                   |  
|OTHER COMPREHENSIVE LOSS                                         |  |                                  |     |                                 |   |                                   |  
|Net change during period in minimum pension liability adjustments |  |                                  |    |                                 |   |                                  |  
|                                                                  |  |                                  |     |                                 |   |                                   |  
|Total                                                             |  |                                  |    |                                 |   |                                  |  
|                                                                  |  |                                  |     |                                 |   |                                   |  
|COMPREHENSIVE LOSS                                                |  | $                                | (26 | )                               | $ | (16                               | )
|                                                                  |  |                                  |     |                                 |   |                                   |  

See
Notes to Condensed Consolidated Financial Statements.



TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited)

|                                                            |  | Nine Months Ended
September 30, |     
|----------------------------------------------------------- |  | ------------------------------- | ----
|
|
|CASH FLOWSOPERATING ACTIVITIES                             |  |                                 |     
|Net loss                                                    |  | $                               | (47 
|Depreciation and amortization                               |  |                                 | 67  
|Deferred income taxes                                       |  |                                 | 2   
|Gains from the sale of assets                               |  |                                 | (10 
|Changes in operating assets and liabilities:                |  |                                 |     
|Accounts receivable                                         |  |                                 | 128 
|Inventories                                                 |  |                                 | (7  
|Accounts payable:                                           |  |                                 |     
|Parent and affiliates                                       |  |                                 | 7   
|Other                                                       |  |                                 | (66 
|Interest and taxes accrued                                  |  |                                 | (11 
|Other working capital                                       |  |                                 | 19  
|Energy marketing risk management assets and liabilitiesnet |  |                                 | (86 
|Othernet                                                   |  |                                 | (16 
|                                                            |  |                                 |     
|Cash used in operating activities                           |  |                                 | (20 
|                                                            |  |                                 |     
|CASH FLOWSFINANCING ACTIVITIES                             |  |                                 |     
|Issuances of securities:                                    |  |                                 |     
|Long-term debt                                              |  |                                 |    
|Preferred securities                                        |  |                                 |    
|Common stockparent                                         |  |                                 | 250 
|Retirements of securities:                                  |  |                                 |     
|Long-term debt                                              |  |                                 | (150
|Preferred stock                                             |  |                                 |    
|Change in notes payable:                                    |  |                                 |     
|Banks                                                       |  |                                 | (2  
|Parent                                                      |  |                                 | 1   
|Cash dividends paid                                         |  |                                 | (2  
|Debt financing expenses                                     |  |                                 |    
|                                                            |  |                                 |     
|Cash provided by financing activities                       |  |                                 | 97  
|                                                            |  |                                 |     
|CASH FLOWSINVESTING ACTIVITIES                             |  |                                 |     
|Construction expenditures                                   |  |                                 | (113
|Sale of assets                                              |  |                                 | 41  
|Other investments                                           |  |                                 | (3  
|                                                            |  |                                 |     
|Cash used in investing activities                           |  |                                 | (75 
|                                                            |  |                                 |     
|CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS         |  |                                 | 6   
|                                                            |  |                                 |     
|NET CHANGE IN CASH AND CASH EQUIVALENTS                     |  |                                 | 8   
|CASH AND CASH EQUIVALENTSBEGINNING BALANCE                 |  |                                 |    
|                                                            |  |                                 |     
|CASH AND CASH EQUIVALENTSENDING BALANCE                    |  | $                               | 8   
|                                                            |  |                                 |     

See
Notes to Condensed Consolidated Financial Statements.



TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

|                                                                                    |  | September 30,
1999
(Unaudited) |       | December 31,
1998
|----------------------------------------------------------------------------------- |  | ------------------------------ | ----- | -----------------
|
|PROPERTY, PLANT AND EQUIPMENT                                                       |  |                                |       |                  
|Gas distribution and pipeline                                                       |  | $                              | 1,335 |                  
|Other                                                                               |  |                                | 66    |                  
|                                                                                    |  |                                |       |                  
|Total                                                                               |  |                                | 1,401 |                  
|Less accumulated depreciation                                                       |  |                                | 128   |                  
|                                                                                    |  |                                |       |                  
|Net of accumulated depreciation                                                     |  |                                | 1,273 |                  
|Construction work in progress                                                       |  |                                | 53    |                  
|                                                                                    |  |                                |       |                  
|Net property, plant and equipment                                                   |  |                                | 1,326 |                  
|                                                                                    |  |                                |       |                  
|INVESTMENTS                                                                         |  |                                | 38    |                  
|                                                                                    |  |                                |       |                  
|GOODWILL (net of accumulated amortization: 1999$45; 1998$29)                      |  |                                | 813   |                  
|                                                                                    |  |                                |       |                  
|CURRENT ASSETS                                                                      |  |                                |       |                  
|Cash and cash equivalents                                                           |  |                                | 8     |                  
|Accounts receivable (net of allowance for uncollectible accounts: 1999$7; 1998$3) |  |                                | 430   |                  
|Energy marketing risk management assets                                             |  |                                | 1,163 |                  
|Inventoriesat average cost:                                                        |  |                                |       |                  
|Materials and supplies                                                              |  |                                | 13    |                  
|Gas stored underground                                                              |  |                                | 106   |                  
|Prepayments                                                                         |  |                                | 3     |                  
|Deferred income taxes                                                               |  |                                | 13    |                  
|Other current assets                                                                |  |                                | 34    |                  
|                                                                                    |  |                                |       |                  
|Total current assets                                                                |  |                                | 1,770 |                  
|                                                                                    |  |                                |       |                  
|OTHER ASSETS                                                                        |  |                                |       |                  
|Energy marketing risk management assets                                             |  |                                | 213   |                  
|Regulatory assets                                                                   |  |                                | 48    |                  
|Deferred income taxes                                                               |  |                                | 50    |                  
|Deferred debits                                                                     |  |                                | 19    |                  
|                                                                                    |  |                                |       |                  
|Total other assets                                                                  |  |                                | 330   |                  
|                                                                                    |  |                                |       |                  
|Total                                                                               |  | $                              | 4,277 |                  
|                                                                                    |  |                                |       |                  

See
Notes to Condensed Consolidated Financial Statements.

TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

|                                                                                                                                                             |  | September 30,
1999
(Unaudited) |       | December 31,
1998 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------ | ----- | ----------------- | -
|
|CAPITALIZATION                                                                                                                                               |  |                                |       |                   |  
|Common stock (par value$.01 per share):                                                                                                                     |  |                                |       |                   |  
|Authorized shares100,000,000                                                                                                                                |  |                                |       |                   |  
|Outstanding shares1999451,000 and 1998201,000                                                                                                             |  | $                              |      |                   | $
|Paid in capital                                                                                                                                              |  |                                | 1,023 |                   |  
|Deficit                                                                                                                                                      |  |                                | (80   | )                 |  
|Accumulated other comprehensive loss                                                                                                                         |  |                                | (1    | )                 |  
|                                                                                                                                                             |  |                                |       |                   |  
|Total common stock equity                                                                                                                                    |  |                                | 942   |                   |  
|Preferred stock                                                                                                                                              |  |                                | 75    |                   |  
|TXU Gas Company obligated, mandatorily redeemable, preferred securities of subsidiary trust holding solely junior subordinated debentures of TXU Gas Company |  |                                | 146   |                   |  
|Advances from parent                                                                                                                                         |  |                                | 421   |                   |  
|Long-term debt, less amounts due currently                                                                                                                   |  |                                | 551   |                   |  
|                                                                                                                                                             |  |                                |       |                   |  
|Total capitalization                                                                                                                                         |  |                                | 2,135 |                   |  
|                                                                                                                                                             |  |                                |       |                   |  
|CURRENT LIABILITIES                                                                                                                                          |  |                                |       |                   |  
|Notes payablebanks                                                                                                                                          |  |                                | 1     |                   |  
|Long-term debt due currently                                                                                                                                 |  |                                |      |                   |  
|Accounts payable:                                                                                                                                            |  |                                |       |                   |  
|Parent and affiliates                                                                                                                                        |  |                                | 34    |                   |  
|Other                                                                                                                                                        |  |                                | 417   |                   |  
|Energy marketing risk management liabilities                                                                                                                 |  |                                | 1,080 |                   |  
|Interest and taxes accrued                                                                                                                                   |  |                                | 29    |                   |  
|Other current liabilities                                                                                                                                    |  |                                | 94    |                   |  
|                                                                                                                                                             |  |                                |       |                   |  
|Total current liabilities                                                                                                                                    |  |                                | 1,655 |                   |  
|                                                                                                                                                             |  |                                |       |                   |  
|DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES                                                                                                            |  |                                |       |                   |  
|Accumulated deferred income taxes and investment tax credits                                                                                                 |  |                                | 13    |                   |  
|Pensions and other postretirement benefits                                                                                                                   |  |                                | 148   |                   |  
|Energy marketing risk management liabilities                                                                                                                 |  |                                | 188   |                   |  
|Other deferred credits and noncurrent liabilities                                                                                                            |  |                                | 138   |                   |  
|                                                                                                                                                             |  |                                |       |                   |  
|Total deferred credits and other noncurrent liabilities                                                                                                      |  |                                | 487   |                   |  
|                                                                                                                                                             |  |                                |       |                   |  
|COMMITMENTS AND CONTINGENCIES (Note 7)                                                                                                                       |  |                                |       |                   |  
|                                                                                                                                                             |  |                                |       |                   |  
|Total                                                                                                                                                        |  | $                              | 4,277 |                   | $
|                                                                                                                                                             |  |                                |       |                   |  

See
Notes to Condensed Consolidated Financial Statements.



TXU GAS COMPANY
(FORMERLY ENSERCH CORPORATION,
A WHOLLY-OWNED SUBSIDIARY OF TEXAS UTILITIES COMPANY) AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.  BUSINESS

In May 1999, Texas Utilities Company, the parent of ENSERCH Corporation (ENSERCH), began doing business as TXU Corp (TXU). On June 14, 1999,
ENSERCH's name was changed to TXU Gas Company (TXU Gas), and the names of several of its subsidiaries also were changed. TXU Gas is an integrated energy company focused on the gathering, processing,
transmission and distribution of natural gas and the marketing of natural gas and electricity.

2.  SIGNIFICANT ACCOUNTING POLICIES

Basis of PresentationThe condensed consolidated financial statements of TXU Gas and its
subsidiaries have been prepared on the same basis as those in the 1998 Annual Report on Form 10-K (1998 Form 10-K) and, in the opinion of management, all adjustments (constituting only normal
recurring accruals) necessary for a fair presentation of the results of operations and financial position have been included therein. Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to rules and regulations of the Securities and Exchange
Commission. Certain previously reported amounts have been reclassified to conform to current classifications.

All
dollar amounts in the condensed consolidated financial statements and tables in the notes, except per share amounts, are stated in millions of US dollars unless otherwise
indicated.

3.  LINES OF CREDIT

At September 30, 1999, TXU, TXU Electric Company, (formerly Texas Utilities Electric Company) (TXU Electric), a wholly-owned subsidiary of TXU, and TXU
Gas had $2.5 billion of joint US dollar-denominated lines of credit under revolving credit facility agreements (US Credit Agreements) with a group of banking institutions. The US Credit Agreements
have two facilities. Facility A provides for short-term borrowings aggregating up to $1.1 billion outstanding at any one time at variable interest rates and terminates February 25, 2000. Of
this amount, $800 million can be used for working capital and other general corporate purposes. Facility B provides for borrowings aggregating up to $1.4 billion outstanding at any one time at
variable interest rates and terminates March 2, 2003. Borrowings under this facility can be used for working capital and other general corporate purposes. The combined borrowings of TXU, TXU
Electric and TXU Gas under both facilities, excluding amounts restricted to finance the acquisition of a non-US subsidiary by TXU, are limited to an aggregate of $2.2 billion outstanding at any one
time. TXU Gas' borrowings under both facilities are limited to an aggregate of $650 million outstanding at any one time. The facilities primarily support commercial paper borrowings by TXU. At
September 30, 1999, TXU Gas had no borrowings outstanding under these lines.

4.  CAPITALIZATION

TXU Gas Obligated, Mandatorily Redeemable, Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of
TXU Gas (Trust Securities)At September 30, 1999, a statutory business trust, TXU Gas Capital I (formerly ENSERCH Capital I), established as a financing
subsidiary of TXU Gas
for the purpose of issuing Trust Securities and holding Junior Subordinated Debentures of TXU Gas, had $150 million of floating rate Trust Securities outstanding. Distributions on these Trust
Securities are payable quarterly based on an annual floating rate determined quarterly with reference to a three-month

LIBOR rate plus a margin. The only assets held by the trust are $155 million principal amount of Floating Rate Junior Subordinated Debentures Series A (Series A Debentures) of TXU Gas. The
interest on the Series A Debentures matches the distributions on the Trust Securities. The Series A Debentures will mature on July 1, 2028, and TXU Gas has the right to redeem the
Series A Debentures and cause the redemption of the Trust Securities in whole or in part on or after July 1, 2003. TXU Gas owns the common securities issued by its subsidiary trust and
has effectively issued a full and unconditional guarantee of the trust's securities.

Common StockIn February 1999, TXU Gas issued 250,000 shares of common stock to TXU for $250 million, and TXU Gas
used the proceeds to repay intercompany advances from TXU.

Long-term debtIn August 1999, TXU Gas made a scheduled principal payment of $150 million on 7% Notes due
August 1999 using an intercompany advance from TXU.

5.  DERIVATIVE INSTRUMENTS

TXU Gas enters into derivative instruments to manage market risks related to changes in interest rates and commodity prices. TXU Gas' participation in
derivative transactions, except for the energy marketing activities of TXU Energy Trading Company (formerly Enserch Energy Services, Inc. or EES), has been designated for hedging purposes and
instruments are not held or issued for trading purposes.

Interest Rate Risk ManagementAt September 30, 1999, TXU Gas had various interest rate swaps in effect, the terms
and notional amounts of which had not changed from December 31, 1998.

6.  REGULATION AND RATES

Gas Utilities Docket No. 8935TXU Lone Star Gas, a division of TXU Gas, filed an application with
the Railroad Commission of Texas (RRC) on February 25, 1999 to modify the gas cost adjustment provision of the city gate rate tariff approved in November 1997. The modification will
allow for a more accurate recovery of the gas cost approved for recovery from TXU Lone Star Gas' residential and commercial customers. Currently, cycle billing causes TXU Lone Star Gas to over- or
under-recover the allowed gas costs. The case was settled, and a Final Order recognizing the settlement was issued on August 24, 1999. The Final Order allows TXU Lone Star Gas to recover from
or return to city gate customers under- or over-recovered gas cost resulting from cycle billing in accordance with TXU Lone Star Gas' proposed methodology. This applies to under-and over-recovered gas
costs occurring over the twelve month periods ended June 1999 and June 2000. TXU Lone Star Gas was also directed to file a revised gas cost adjustment tariff with the RRC by January 15,
2000 to address the cycle billing issue and other gas cost recovery issues.

On
October 29, 1999, TXU Lone Star Pipeline, a division of TXU Gas, filed with the Railroad Commission of Texas a Statement of Intent to change the city gate rate for gas
transported for subsequent distribution to residential and commercial customers. The filing requests a general increase in revenues of approximately $20 million. Action on this request is anticipated
in the second quarter of 2000. TXU Lone Star Pipeline is unable to predict the outcome of this case.

OtherTXU Lone Star Gas has an on-going program to identify distribution systems in which its current rates are producing
inadequate returns on its investment and to seek rate relief from the

municipalities served by those systems. TXU Lone Star Gas filed and completed seventeen such rate cases since July 1998. Approved revenue increases totaled $7 million on an annual basis. TXU
Lone Star Gas currently has rate cases pending in three distribution systems in which it is seeking rate increases totaling $13.4 million on an annual basis. TXU Lone Star Gas is unable to predict the
outcome of the pending rate cases.

7.  COMMITMENTS AND CONTINGENCIES

Legal ProceedingsOn October 30, 1995, a lawsuit was filed in the Supreme Court of Western
Australia by Woodside Petroleum Ltd. and its joint venture partners against TXU Gas, a former subsidiary and others. Plaintiffs seek damages of approximately $18 million from TXU Gas based on an
indemnity arrangement and approximately $208 million from the other defendants for alleged breaches of contract and breaches of a trade practice act, all in connection with the construction of an
offshore gas and condensate drilling production platform. TXU Gas has agreed to indemnify the current owner of the former subsidiary pursuant to the provisions in the prior sales agreement. Following
a preliminary hearing, the Court, on December 4, 1997, delivered an opinion in favor of TXU Gas, the former subsidiary and the other defendants finding that the defendants are other assureds
under certain insurance policies owned by the plaintiffs and that the plaintiffs and their insurers are precluded from bringing a subrogated claim against the defendants. On April 29, 1998, the
court entered a final judgment. The plaintiffs' lawsuit was dismissed as well as the counterclaims of the defendants. The plaintiffs served their notice of appeal on May 19, 1998. The appeal
was heard by the Full Court of the Supreme Court of Western Australia beginning February 1, 1999. In March 1999, the Full Court of the Supreme Court entered a judgment dismissing the
plaintiffs' appeal. The final order has now been submitted to the court.

In
August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the United States District Court for the Northern District of Texas against EEX Corporation, formerly Enserch
Exploration, Inc. (EEX), TXU, David W. Biegler, Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The Gracy Fund sought to represent a class of certain purchasers of the common
stock of ENSERCH Corporation (now TXU Gas) and EEX based upon claims of various violations of the Securities Act of 1933 (Securities Act) and the Securities Exchange Act of 1934 (Exchange Act). Also
in August 1998, Stan C. Thorne (Thorne) filed suit in the United States District Court for the Southern District of Texas against EEX, TXU Gas, DeGolyer & Naughton, David W. Biegler,
Gary J. Junco, Fredrick S. Addy and B.K. Irani and sought to represent a certain class of purchasers of common stock of EEX. In December 1998, the United States District Court for the Northern
District of Texas issued an Order in Cause No. 3-98-CV-1808-G consolidating the Gracy Fund and the Thorne suits (the Consolidated
Action). In January 1999, the Gracy Fund et al. filed an amended class action complaint in the Consolidated Action against EEX, TXU Gas, David W. Biegler, Gary J. Junco, Thomas Hamilton, J.
Philip McCormick, Fredrick S. Addy and B.K. Irani. TXU and Erle Nye were omitted as defendants pursuant to a tolling agreement. The individual named defendants are current or former officers and/or
directors of EEX, and Mr. Biegler has been an officer and director of TXU Gas. The amended complaint alleges violations of provisions of the Securities Act and the Exchange Act. The plaintiff
in the Consolidated Action represents a class of persons acquiring stock of ENSERCH Corporation and/or EEX between August 3, 1995 and August 5, 1997, inclusive. No amount of damages has
been specified in the Consolidated Action. Defendants filed a joint motion to dismiss in

March 1999, and discovery has been stayed pending a ruling on the motion to dismiss. TXU Gas is continuing to evaluate these claims and is unable at this time to predict the outcome of this
proceeding, but intends to vigorously defend this suit.

In
July 1999, the City of Gatesville, Texas filed suit in the State District Court of Coryell County, Texas, 52nd Judicial District, against TXU Lone Star Gas, TXU Gas and
other TXU Companies, and sought to represent a class of plaintiffs consisting of approximately 490 Texas cities, towns and other municipalities to whom TXU Lone Star Gas had paid municipal franchise
fees over a period of twenty-five years. The complaint alleges that TXU Lone Star Gas concealed information from the cities regarding its revenue data, gross receipts and related charges and fees that
were subject to, but not used as a basis for determining, municipal franchise fees owed to the plaintiffs. No amount of damages has been specified in the complaint. While TXU Gas is unable to estimate
any possible loss or predict the outcome of this case, TXU Lone Star Gas believes the claims are without merit and intends to vigorously defend this suit.

GeneralTXU Gas is involved in various legal and administrative proceedings and has other contingencies, which, in the
opinion of management, should not have a material effect upon TXU Gas' financial position, results of operations or cash flows.

8.  SEGMENT INFORMATION

|                                 |  | Three Months Ended
September 30, |     | Nine Months Ended
September 30, |   | Twelve Months Ended
September 30, |  
|-------------------------------- |  | -------------------------------- | --- | ------------------------------- | - | --------------------------------- | -
|
|Trade Revenues                  |  |                                  |     |                                 |   |                                   |  
|US Gas Pipeline and Distribution |  | $                                | 146 |                                 | $ | 144                               |  
|US Energy Marketing              |  |                                  | 802 |                                 |   | 945                               |  
|Other                            |  |                                  | 4   |                                 |   | 1                                 |  
|                                 |  |                                  |     |                                 |   |                                   |  
|Consolidated                     |  | $                                | 952 |                                 | $ | 1,090                             |  
|                                 |  |                                  |     |                                 |   |                                   |  
|Affiliated Revenues             |  |                                  |     |                                 |   |                                   |  
|US Gas Pipeline and Distribution |  | $                                | 7   |                                 | $ | 5                                 |  
|US Energy Marketing              |  |                                  |    |                                 |   | 1                                 |  
|Eliminations                     |  |                                  | (7  | )                               |   | (6                                | )
|                                 |  |                                  |     |                                 |   |                                   |  
|Consolidated                     |  | $                                |    |                                 | $ |                                  |  
|                                 |  |                                  |     |                                 |   |                                   |  
|Net Income (Loss)               |  |                                  |     |                                 |   |                                   |  
|US Gas Pipeline and Distribution |  | $                                | (12 | )                               | $ | (14                               | )
|US Energy Marketing              |  |                                  | (13 | )                               |   | 4                                 |  
|Other                            |  |                                  | (1  | )                               |   | (6                                | )
|                                 |  |                                  |     |                                 |   |                                   |  
|Consolidated                     |  | $                                | (26 | )                               | $ | (16                               | )
|                                 |  |                                  |     |                                 |   |                                   |  



INDEPENDENT ACCOUNTANTS' REPORT

TXU
Gas Company:

We
have reviewed the accompanying condensed consolidated balance sheet of TXU Gas Company (formerly ENSERCH Corporation) and subsidiaries (TXU Gas) as of September 30, 1999,
and the related condensed statements of consolidated income and of comprehensive income for the three-month , nine-month and twelve-month periods ended September 30, 1999 and 1998, and of
consolidated cash flows for the nine-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of TXU Gas' management.

We
conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists
principally of applying analytical review procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit
in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express
such an opinion.

Based
on our review, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally
accepted accounting principles.

We
have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of TXU Gas as of December 31, 1998, and the related
statements of consolidated income, comprehensive income, cash flows and common stock equity for the year then ended (not presented herein); and in our report dated March 5, 1999, we expressed
an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998, is fairly
stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

DELOITTE &
TOUCHE LLP

Dallas,
Texas
November 11, 1999



## 

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

NAME CHANGE

In May 1999, Texas Utilities Company, the parent of ENSERCH Corporation (ENSERCH), began doing business as TXU Corp (TXU). On June 14, 1999,
ENSERCH's name was changed to TXU Gas Company (TXU Gas), and the names of several of its subsidiaries also were changed.

RESULTS OF OPERATIONS

For the three, nine and twelve months ended September 30, 1999, TXU Gas had a net loss of $26 million, $47 million and $48 million, respectively,
compared with a net loss of $16 million, $21 million and $19 million, respectively, for the same periods of 1998. Results for the 1999 periods were impacted by abnormally mild winter weather, higher
operation and maintenance expense and lower energy marketing margins, partially offset by third-quarter 1999 pre-tax gains from the sale of assets totaling $10 million ($6 million after-tax) recorded
in other income.

Operating
revenues for the three months ended September 30, 1999 decreased by $138 million versus the 1998 period primarily because of a $144 million reduction in energy
marketing revenues primarily due to reduced trading volumes and unusually high natural gas prices which impeded retail marketing originations. Operating revenues for the nine months ended
September 30, 1999 decreased by $245 million compared to the same period in 1998 due to a decrease in energy marketing revenues of $201 million for the reasons mentioned above and a decrease of
$40 million in gas distribution revenues attributable to abnormally mild first quarter weather. Operating revenues for the twelve months ended September 30, 1999 decreased $191 million versus
the comparable period in 1998, primarily due to a decrease of $105 million in gas distribution revenues, which were severely impacted by abnormally mild weather in the fourth quarter of 1998 and the
first quarter of 1999.

Total
operating expenses decreased by $111 million, $196 million and $133 million for the three, nine and twelve months ended September 30, 1999 versus the comparable 1998
periods. There were decreases for those periods of $126 million, $225 million and $170 million in the cost of gas and electricity purchased for resale which primarily reflect lower demand and reduced
trading volumes. Increases in operation and maintenance expenses of $12 million, $25 million and $33 million for the respective periods of 1999 compared with the corresponding 1998 periods were
primarily due to higher processing fees in the processing business resulting from higher product prices, expenses related to an early retirement program that became effective during the third quarter
of 1999, the timing of pipeline maintenance projects and costs related to developing the middle and back office infrastructure capabilities in the energy marketing operations.

For
certain financial data by segment, see Note 8 to Condensed Consolidated Financial Statements.

US Gas Pipeline and DistributionFor the three and nine months ended September 30, 1999, the US Gas Pipeline and
Distribution segment had a loss of $12 million and $3 million, respectively, compared with a loss of $14 million and $7 million, respectively, for the same periods of 1998. For the twelve-month period
ended September 30, 1999, the segment recorded a net loss of $6 million compared with net income of $7 million for the same period of 1998. The lower results in 1999 were due to abnormally
mild winter weather and higher operation and maintenance expenses. Results for the 1999 periods benefited from third-quarter pre-tax gains of $3.4 million ($2 million after-tax) from the sale of
assets. Operating revenues for the three months ended September 30, 1999 were 3% higher than in the 1998 period primarily due to an increase in the city gate rate. For the nine and twelve
months ended September 30, 1999, operating revenues were 8% and 18% less than the same periods of 1998 due to lower distribution and transportation volumes as a result of the abnormally mild
winter weather. Heating degree days for the nine- and

twelve-month periods of 1999 were 19% and 21%, respectively, less than the comparable periods of 1998. Gas purchased for resale decreased in the 1999 periods compared to the 1998 periods because of
lower demand. Operation and maintenance expenses increased by 13% for the three months ended September 30, 1999 compared to the same period in 1998 primarily as a result of higher processing
fees in the processing business associated with higher gas liquids prices, expenses related to an early retirement program that became effective during the quarter and the timing of pipeline
maintenance projects.

US Energy MarketingNet results for the US Energy Marketing segment were down by $17 million, $31 million and $18 million
for the three, nine and twelve months ended September 30, 1999 compared to the same periods in 1998. Third-quarter 1999 results were negatively impacted by lower trading volumes and margins and
unusually high natural gas prices which affected the results from retail marketing originations. Management limited trading volumes in the third quarter of 1999 because of the market conditions
present during the period. Results were also impacted by higher operating expenses, which increased by $4 million, $12 million and $14 million in the 1999 periods versus the 1998 periods primarily due
to costs related to developing middle and back office infrastructure capabilities to prepare for the opening of the Texas electricity market to competition in 2002.

TXU
Gas' effective income tax rate differs from the statutory rate primarily due to amortization of goodwill, which is not deductible for tax purposes.

FINANCIAL CONDITION

Liquidity and Capital Resources

For information concerning liquidity and capital resources, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
in TXU Gas' 1998 Annual Report on Form 10-K (1998 Form 10-K). Results for the three- and nine-month periods presented herein are not necessarily indicative of expectations for a full year's operations
because of seasonal and other factors, including variations in maintenance and other operating expense patterns. No significant changes or events which might affect the financial condition of TXU Gas
have occurred subsequent to year-end other than as disclosed in other reports of TXU Gas or included herein.

Cash
flows provided by operating activities before changes in operating assets and liabilities for the nine months ended September 30, 1999 were $12 million compared with $74
million in the same period of 1998, primarily reflecting the impact of abnormally mild winter weather on revenues. Changes in operating assets and liabilities for the nine months ended
September 30, 1999 and 1998 used cash of $32 million and $84 million, respectively. Discontinued operations provided cash of $6 million in the nine months of 1999 but required cash of $1
million in the 1998 period.

Cash
flows used in investing activities for the nine months ended September 30, 1999 were $75 million versus $109 million in the comparable period of 1998. Construction
expenditures for the nine months
of 1999 were $11 million higher than the comparable period of 1998. The sale of assets in the third quarter of 1999 provided $41 million.

The
capitalization ratios of TXU Gas as of September 30, 1999 consisted of approximately 46% long-term debt (including advances from parent), 3% preferred stock, 7% TXU Gas
obligated, mandatorily redeemable, preferred securities of subsidiary trust holding solely junior subordinated debentures of TXU Gas and 44% common stock equity.

In
February 1999, TXU Gas issued 250,000 shares of common stock to TXU for $250 million, and TXU Gas used the proceeds to repay intercompany advances from TXU.

In
August 1999, TXU Gas made a scheduled principal payment of $150 million on 7% Notes due August 1999 using an intercompany advance from TXU.

At
September 30, 1999, TXU, TXU Electric Company (formerly Texas Utilities Electric Company) (TXU Electric), a wholly-owned subsidiary of TXU, and TXU Gas had $2.5 billion of
joint US dollar-denominated lines of credit under revolving credit facility agreements (US Credit Agreements) with a group of banking institutions. The US Credit Agreements have two facilities.
Facility A provides for short-term borrowings aggregating up to $1.1 billion outstanding at any one time at variable interest rates and terminates February 25, 2000. Of this amount, $800
million can be used for working capital and other general corporate purposes. Facility B provides for borrowings aggregating up to $1.4 billion outstanding at any one time at variable interest rates
and terminates March 2, 2003. Borrowings under this facility can be used for working capital and other general corporate purposes. The combined borrowings of TXU, TXU Electric and TXU Gas under
both facilities, excluding amounts restricted to finance the acquisition of a non-US subsidiary by TXU, are limited to an aggregate of $2.2 billion outstanding at any one time. TXU Gas' borrowings
under both facilities are limited to an aggregate of $650 million outstanding at any one time. The facilities primarily support commercial paper borrowings by TXU. At September 30, 1999, TXU
Gas had no borrowings outstanding under these lines.

TXU
Gas may issue additional debt and equity securities as needed, including the possible future sale of up to $600 million aggregate principal amount of debt securities and/or
preferred securities of subsidiary trusts currently registered with the Securities and Exchange Commission for offering pursuant to Rule 415 under the Securities Act of 1933.

Risk ManagementNo material substantive changes in the exposure to or management of interest rate risk have occurred
subsequent to December 31, 1998.

Regulation and Rates

On October 29, 1999, TXU Lone Star Pipeline, a division of TXU Gas, filed with the Railroad Commission of Texas a Statement of Intent to change the city
gate rate for gas transported for subsequent distribution to residential and commercial customers. The filing requests a general increase in revenues of approximately $20 million. Action on this
request is anticipated in the second quarter of 2000. TXU Lone Star Pipeline is unable to predict the outcome of this case.

TXU
Gas has several rate requests pending or on appeal. (See Note 6 to Condensed Consolidated Financial Statements for a discussion of these items).

CHANGE IN ACCOUNTING STANDARDS

In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB Statement No. 133", which defers the implementation of SFAS No. 133 to fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative financial instruments, including derivative instruments embedded in other contracts, and hedging
activities. It requires the recognition of derivatives as either assets or liabilities in the statement of financial position and the measurement of those instruments at fair value. TXU Gas is
currently evaluating the impact the adoption of this standard will have on its statement of financial position and results of operations.

YEAR 2000 ISSUES

Overview

Year 2000 (Y2K) issues of TXU Gas are being addressed with those of its parent company, TXU. The following disclosure regarding Y2K issues of TXU's US
businesses is excerpted from TXU's Form 10-Q for the period ended September 30, 1999.

Many existing computer programs use only the last two digits to identify a year in the date field. Thus, they would not recognize a year that begins with 20 instead of 19. If not
corrected, many computer applications could fail or produce erroneous data on or about the year 2000.

TXU
began its US efforts to address Y2K issues in 1996 by focusing on information technology mainframe-based application systems (IT Corporate Applications). In early 1997, an
infrastructure project to address TXU's information technology (IT) related hardware, operating systems and desktop software was begun (IT Infrastructure). In late 1997, a project was begun to address
Y2K issues throughout TXU related to embedded systems, such as process controls for energy production and delivery, and business-unit-owned applications (Non-IT Equipment and Applications).

Applications
and equipment in each of these three major initiatives have been inventoried and categorized based on their criticality to TXU's business operations. Assessments of the
potential impact due to Y2K issues are essentially complete. This process includes the solicitation of vendor feedback, comparing information with other energy companies, and in many cases internal
verification by testing. The remediation and testing work on IT Corporate Applications is 100% complete. On September 30, 1999, the IT Infrastructure project was over 95% complete and
remediation work on embedded systems was 99.6% complete.

Readiness

The IT Corporate Applications remediation and testing activities are complete. Certification for the Y2K compliance on all mission critical business
applications was completed as scheduled. Certification of remaining applications was completed in the third quarter of 1999.

The
IT Infrastructure project involves assessing the compliance of standard computer hardware, network systems including gateways, hubs and routers, telecommunications equipment,
operating systems and IT standard software products. Equipment is brought to the appropriate model, version or release level specified by the product vendor as Y2K ready and tested in the TXU
environment using test tools
and appropriate procedures specified by documented test standards. All mission critical IT Infrastructure systems are Y2K ready. The total IT Infrastructure project is over 95% complete. The remaining
work, which primarily involves the planned replacement or retirement of 850 business PCs, is scheduled for completion by November 30, 1999.

Non-IT
Equipment and Applications involve the hardware and software products that reside in individual business units. These items include the embedded systems that are used in the
production, energy delivery, and other processes of TXU. Mission critical work for this project is complete.

TXU
has analyzed the potential impact of Y2K compliance efforts of third parties. Over 2,000 suppliers and service providers have been contacted to determine the status of their Y2K
efforts. All of the top 500 key suppliers have responded. Fifty-six of the key suppliers have been audited by TXU's procurement services organization. Each supplier has reported it will be ready for
Y2K. The more significant interdependencies relate to telecommunications and gas suppliers. On-site audits of a limited number of these significant third parties have been performed and readiness
verified.

Costs

The total costs associated with TXU's Y2K efforts for its US energy businesses are currently estimated to be approximately $40 million. These costs reflect
new, incremental costs and the reallocation of resources in pre-existing maintenance budgets. The costs related to the three major initiatives are estimated to be as follows: IT Corporate
Applications$15 million; IT Infrastructure$10 million; and Non IT-Equipment and Applications$15 million. These costs are being expensed as incurred over the


period 1996 through 2000 and a total of approximately $34 million has been expended through September 30, 1999. There can be no assurance that these estimated costs will not change as TXU's Y2K
program continues.

Strategic
initiatives were begun in two areas prior to beginning work on the Y2K issue, and the costs for these initiatives are not included in the estimate above. The energy
management system for TXU's transmission grid is being replaced. TXU's principal financial and accounting system has been replaced. Each of these projects will eliminate potential Y2K deficiencies;
however, that was not a significant consideration at the time replacement decisions were made.

Risk Issues

With respect to internal risks, TXU's current assessment of the most reasonably likely worst case scenario is that impacts on either service or financial
performance will not be materially adverse. TXU believes, based on the results of testing that has already occurred on a large portion of its production equipment with embedded systems, that if any
disruption to service occurs, it will be isolated and of short-term duration. TXU continues to collaborate with other major energy suppliers through the joint Electric Power Research Institute's
embedded systems project.

As
TXU's Y2K program proceeds, TXU will continue to assess its internal and external risks, not all of which are within its control; and it will continue to consider the most
reasonably likely worst case scenario. There can be no assurance that all material Y2K risks within TXU's control will have been adequately identified and corrected before the end of 1999. In
addition, TXU can make no assurances regarding the Y2K readiness of systems and parties outside its control or the effect on TXU if those parties are not Y2K compliant.

Contingency Plans

TXU has in place detailed emergency response and disaster recovery plans designed to ensure high reliability of service to customers. These plans are utilized
routinely for abnormal service conditions. These plans have been reviewed to identify required actions specific to the Y2K issue. Y2K contingency plans were developed and filed with the Public Utility
Commission of Texas on June 30, 1999. These Y2K contingency plans address both TXU activities and actions necessary to mitigate the impact of third party disruptions. These contingency plans
have been coordinated with those of the Electric Reliability Council of Texas and NERC. TXU will continue to refine and test these plans throughout the remainder of 1999.

FORWARD-LOOKING STATEMENTS

This report and other presentations made by TXU Gas and its subsidiaries contain forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Although TXU Gas believes that in making any such statement its expectations are based on reasonable assumptions, any such statement involves uncertainties and is
qualified in its entirety by reference to factors contained in the Forward-Looking Statements section of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
in TXU Gas' 1998 Form 10-K, as well as general industry trends; power costs and availability; changes in business strategy, development plans or vendor relationships; availability of qualified
personnel; changes in, or the failure or inability to comply with, governmental regulations, including, without limitation, environmental regulations; changes in tax laws; and access to adequate
transmission facilities to meet changing demand, among others, that could cause the actual results of TXU Gas to differ materially from those projected in such forward-looking statements.

Any
forward-looking statement speaks only as of the date on which such statement is made, and TXU Gas undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New

factors emerge from time to time, and it is not possible for TXU Gas to predict all of such factors, nor can it assess the impact of each such factor or the extent to which any factor, or combination
of factors, may cause results to differ materially from those contained in any forward-looking statement.

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required hereunder for TXU Gas is not significantly different from the information set forth in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk included in the 1998 Form 10-K and is, therefore, not presented herein.



## 

PART II.  OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

In July 1999, the City of Gatesville, Texas filed suit in the State District Court of Coryell County, Texas, 52nd Judicial District, against TXU Lone
Star Gas, TXU Gas and other TXU Companies, and sought to represent a class of plaintiffs consisting of approximately 490 Texas cities, towns and other municipalities to whom TXU Lone Star Gas had paid
municipal franchise fees over a period of twenty-five years. The complaint alleges that TXU Lone Star Gas concealed information from the cities regarding its revenue data, gross receipts and related
charges and fees that were subject to, but not used as a basis for determining, municipal franchise fees owed to the plaintiffs. No amount of damages has been specified in the complaint. While TXU Gas
is unable to estimate any possible loss or predict the outcome of this case, TXU Lone Star Gas believes the claims are without merit and intends to vigorously defend this suit.

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

|(a) |  | Exhibits filed as part of Part II are:        
|--- |  | ----------------------------------------------
|    |  | 15                                           
|    |  | 27                                           
|(b) |  | Reports on Form 8-K filed since June 30, 1999:
|    |  | None                                          



SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                        |  | TXU Gas Company
(Formerly ENSERCH Corporation)
|----------------------- |  | ----------------------------------------------
|                        |  |                                               
|                        |  | By                                            
|                        |  |                                               
|Date: November 11, 1999 |  |                                               



## QuickLinks

PART I. FINANCIAL INFORMATIONItem 1. FINANCIAL STATEMENTS

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATIONItem 1. LEGAL PROCEEDINGSItem 6. EXHIBITS AND REPORTS ON FORM 8-K