<PAGE>

================================================================================

                      UNITED STATES SECURITIES AND EXCHANGE
                                   COMMISSION

                             Washington, D.C. 20549
                    --------------------------------------

                                    FORM 10-K

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

               For the Fiscal Year Ended December 31, 2002

                                     --OR--

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

               Exact Name of Registrant as Specified in
                its Charter; State of Incorporation;
Commission    Address of Principal Executive Offices;     I.R.S. Employer
File Number       and Telephone Number                   Identification No.
-----------   -----------------------------------------  -----------------
1-3183                TXU Gas Company                        75-0399066
                   A Texas Corporation
             Energy Plaza, 1601 Bryan Street
                  Dallas, TX 75201-3411
                     (214) 812-4600

Securities registered pursuant to Section 12(b) of the Act:

                                                      Name of Each Exchange on
    Title of Each Class                                    Which Registered
    ------------------                                ------------------------

Depositary shares, Series F, each representing        New York Stock Exchange
1/40 share of the Adjustable Rate Cumulative
Preferred Stock, Series F,liquidation preference
$1,000 per share

Securities registered pursuant to Section 12(g) of the Act:    None
                 ----------------------------------------

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. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act).
Yes [ ] No [X]

Aggregate market value of TXU Gas Company Common Stock held by non-affiliates:
  None

Common Stock outstanding at March 24, 2003: 451,000 shares, par value $0.01
 per share.
              ----------------------------------------

           DOCUMENTS INCORPORATED BY REFERENCE - None
             ----------------------------------------
================================================================================
<PAGE>
                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

                                                                                                          Page
                                                                                                          ----
                                                       PART I
<S>                                                                                                          <C>
Items 1. and 2.  BUSINESS AND PROPERTIES
            BUSINESS AND PROPERTIES...............................................................           1
            COMPETITIVE STRATEGY..................................................................           1
            DESCRIPTION OF OPERATIONS.............................................................           2
            ENVIRONMENTAL MATTERS.................................................................           5

Item 3.     LEGAL PROCEEDINGS.....................................................................           5

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................................           6

                                                      PART II

Item 5.     MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS...................................................................           7

Item 6.     SELECTED FINANCIAL DATA...............................................................           7

Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS...................................................           7

Item 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES
            ABOUT MARKET RISK.....................................................................           7

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................................           7

Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
            ACCOUNTING AND FINANCIAL DISCLOSURE...................................................           7

                                                      PART III

Item 10.    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT........................................           8

Item 11.    EXECUTIVE COMPENSATION................................................................          10

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT                                                                                      21

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................................          21

                                                      PART IV

Item 14.    CONTROLS AND PROCEDURES...............................................................          22
Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
            FORM 8-K..............................................................................          22
</TABLE>

APPENDIX A - Financial Information
APPENDIX B - TXU Gas Company Exhibits for 2002 Form 10-K

Periodic reports on Form 10-K and Form 10-Q and current reports on Form 8-K that
contain financial information of TXU Gas Company are made available to the
public, free of charge, on the TXU Corp. website at http://www.txucorp.com,
shortly after they have been filed with the Securities and Exchange Commission.
TXU Gas Company will provide copies of current reports not posted on the website
upon request.

                                        i
<PAGE>
                                     PART I

Items 1. & 2.     BUSINESS AND PROPERTIES

                             BUSINESS AND PROPERTIES
                             -----------------------

         TXU Gas Company (TXU Gas), a Texas corporation, is a largely regulated
business engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas, and also provides
energy asset management services. TXU Gas is a wholly-owned subsidiary of TXU
Corp.

         Prior to the restructuring of TXU Corp. and its United States (US)
subsidiaries in connection with the opening of the Texas electricity market to
competition, effective January 1, 2002, TXU Gas was also engaged in certain risk
management and energy trading activities and the retail sale of natural gas to
large commercial and industrial customers in various competitive markets in the
US. As a part of that restructuring, TXU Gas transferred those operations to TXU
Energy Company LLC (TXU Energy), a wholly-owned indirect subsidiary of TXU Corp.
Accordingly, the transferred operations have been reflected as discontinued
operations in the statements of consolidated income and cash flows of TXU Gas.

         Business of TXU Gas

         At December 31, 2002, TXU Gas had 1,400 full-time employees. TXU Gas
and its subsidiaries possess all necessary franchises, licenses and certificates
to enable them to conduct their respective businesses.

         TXU Gas conducts its operations through the following divisions and
subsidiaries:
          o   TXU Gas Distribution
          o   TXU Lone Star Pipeline
          o   Oncor Utility Solutions

Operating Segments

         With the transfers of businesses to TXU Energy on January 1, 2002, TXU
Gas is an integrated business with no separate reportable segments.

                              COMPETITIVE STRATEGY
                              --------------------
         As legislative, regulatory, economic and technological changes occur,
the energy and utility industries are faced with increasing pressure to become
more competitive while adhering to regulatory requirements. A number of
variables, including price, reliability of service, the cost of energy
alternatives, new technologies and governmental regulations, affect the level of
competition.

         TXU Gas aggressively manages its operating costs and capital
expenditures through streamlined business processes and is developing and
implementing strategies to improve return on assets and to maximize value
through new marketing programs.

                                       1
<PAGE>

                            DESCRIPTION OF OPERATIONS
                            ------------------------

GENERAL

         TXU Gas Distribution -- TXU Gas Distribution, a division of TXU Gas,
provides service through over 26,000 miles of distribution mains. Through these
facilities, it purchases, distributes and sells natural gas to over 1.4 million
residential, commercial and industrial customers in approximately 550 cities and
towns, including the 11-county Dallas-Fort Worth Metroplex. TXU Gas Distribution
also transports natural gas to end users within its distribution system as
market opportunities allow. The distribution service rates that TXU Gas
Distribution charges its residential and commercial customers are generally
established by the municipal governments of the cities and towns served, with
the Railroad Commission of Texas (RRC) having appellate, or in some instances,
primary jurisdiction. The majority of TXU Gas Distribution's residential and
commercial gas customers use natural gas for heating, and their needs are
directly affected by the mildness or severity of the heating season. Weather
adjustments, which allow rates to be adjusted to reflect warmer or colder than
normal weather during the winter months, currently exist in 311 cities served by
TXU Gas Distribution. TXU Gas Distribution has replaced weather normalization
clauses with a new rate design that provides a similar level of revenue
stabilization in 124 cities.

         Gas Distribution Peaking -- TXU Gas Distribution estimates its peak-day
availability of natural gas supply from its long-term contracts, short-term
contracts and withdrawals from underground storage to be in excess of 2.2
billion cubic feet (Bcf). Daily purchases on the spot market raise this
availability level to meet additional peak-day needs.

         TXU Gas Distribution's peak-day demand in 2002 was on March 2, when
sales to its customers reached approximately 2.1 Bcf. During 2002 the average
daily demand of TXU Gas Distribution's residential and commercial customers was
0.4 Bcf.

         Estimates of natural gas supplies and reserves are not necessarily
indicative of TXU Gas Distribution's ability to meet current or anticipated
market demands or immediate delivery requirements because of factors such as the
physical limitations of gathering, storage and transmission systems, the
duration and severity of cold weather, the availability of gas reserves from its
suppliers, the ability to purchase additional supplies on a short-term basis and
actions by federal and state regulatory authorities.

         Certain service contracts include the right to curtail gas deliveries
up to 100% according to a priority plan. Curtailment rights provide TXU Gas
Distribution flexibility to meet the human-needs requirements of its customers
on a firm basis. Priority allocations imposed by federal and state regulatory
agencies, as well as other factors beyond the control of TXU Gas Distribution,
may affect its ability to meet the demands of its customers.

         Gas Supply -- TXU Gas Distribution's natural gas supply consists of
contracts for the purchase of specific reserves, contracts not related to
specific reserves or fields, and natural gas in storage. The total planned
annual natural gas supply as of January 1, 2003 is 148 Bcf, which is
approximately seven percent less than TXU Gas Distribution's actual supply
during 2002. TXU Gas Distribution has approximately 18 Bcf committed under
contracts with specific reserves, 31 Bcf in working gas in storage and 50 Bcf
committed under gas supply contracts not related to specific reserves or fields.
In 2002, TXU Gas Distribution's natural gas requirements were purchased from
approximately 93 independent producers, marketers and pipeline companies.

         TXU Gas Distribution manages its storage working gas inventory and
storage deliverability along with other purchased gas to meet its peak-day
requirements. TXU Gas Distribution utilizes the services of five natural gas
storage fields owned by TXU Lone Star Pipeline, all of which are located in
Texas. These fields have an optimal working gas capacity of more than 39 Bcf and
a storage withdrawal deliverability of up to 1.2 Bcf per day. A sixth natural
gas storage field currently is being depleted for possible retirement.

         TXU Gas Distribution buys natural gas under long-term and short-term
intrastate contracts, many of which require minimum purchases of gas. The
estimated natural gas demand, which assumes normal weather conditions,
significantly exceeds the minimum purchase obligations of these contracts for
the year 2003 and thereafter.

                                       2
<PAGE>

         The TXU Gas Distribution supply program is designed to contract for new
supplies of natural gas and to recontract targeted expiring sources. In addition
to being heavily concentrated in the established natural gas-producing areas of
central, northern and eastern Texas, TXU Lone Star Pipeline's intrastate
pipeline system also extends into or near the major producing areas of the Texas
Gulf Coast and the Delaware and Val Verde Basins of West Texas. Nine basins
located in Texas are estimated to contain a substantial portion of the nation's
remaining onshore natural gas reserves. TXU Lone Star Pipeline's pipeline system
provides access to all of these basins. TXU Lone Star Pipeline is well situated
to receive large volumes into its system at the major hubs, such as Katy and
Waha, as well as from storage facilities where TXU Gas Distribution maintains
high delivery capabilities.

         TXU Lone Star Pipeline -- TXU Lone Star Pipeline, a division of TXU
Gas, owns and operates interconnected natural gas transmission lines, five
underground storage reservoirs, 20 compressor stations and related properties,
all within Texas. TXU Lone Star Pipeline also owns a sixth underground storage
reservoir that is currently being depleted for possible retirement. With a
system consisting of approximately 6,800 miles of transmission and gathering
pipelines in Texas, TXU Lone Star Pipeline is one of the largest pipelines in
the US. Through these facilities, it transports natural gas to distribution
systems of TXU Gas Distribution and other distribution companies, electric
generation plants, end use industrial customers and through-system shippers.
Rates for the services provided by TXU Lone Star Pipeline are subject to review
by the RRC.

         Oncor Utility Solutions -- Oncor Utility Solutions (North America)
Company and Oncor Utility Solutions (Texas) Company (collectively, "Utility
Solutions"), both wholly-owned subsidiaries of TXU Gas, were launched in late
2001 to provide unregulated utility asset management services for cooperatives
and municipally-owned and investor-owned utilities throughout North America.
Electric, gas, water and wastewater utilities may choose from Utility Solutions'
menu of services ranging from a complete turnkey solution to selected services
such as work management, resource management, strategic planning, design,
maintenance and construction. Utility Solutions leverages TXU Corp.'s existing
economies of scale, asset management processes, technologies and personnel to
deliver cost savings and reliability improvements to client network systems.

         Facilities -- The gas transmission and distribution lines of TXU Gas
Distribution and TXU Lone Star Pipeline have been constructed over lands of
others pursuant to easements or along public highways, streets and rights-of-way
as permitted by law.

COMPETITION

         Customer sensitivity to energy prices and the availability of
competitively priced natural gas in the unregulated markets continue to cause
competition in the electric generation and industrial user markets. Natural gas
faces varying degrees of competition from electricity, coal, natural gas
liquids, oil and other refined products throughout TXU Gas Distribution's
service territory. Pipeline systems of other companies, both intrastate and
interstate, extend into or through the areas in which TXU Gas Distribution's
markets are located, creating competition from other sellers of natural gas. As
developments in the energy industry point to a continuation of these competitive
pressures, TXU Gas Distribution intends to maintain its focus on customer
service and the creation of new services for its customers in order to remain
its customers' supplier of choice.

         TXU Lone Star Pipeline is the sole transporter of natural gas to TXU
Gas Distribution's distribution systems. TXU Lone Star Pipeline competes with
other pipelines in Texas to transport natural gas to new and existing industrial
and power generation facilities as well as off-system markets. These businesses
are highly competitive.

         Open Access - Transmission -- TXU Lone Star Pipeline has been an open
access transporter under Section 311 of the Natural Gas Policy Act of 1978
(NGPA) on its intrastate transmission facilities since July 1988. Such
transportation is performed pursuant to Section 311(a)(2) of the NGPA and is
subject to an exemption from the jurisdiction of the FERC under the Natural Gas
Act, pursuant to Section 601 of the NGPA.

                                       3
<PAGE>

         Customers -- There are no individually significant customers upon which
TXU Gas' business or results of operations are highly dependent.

REGULATION AND RATES

         Gas Distribution and TXU Lone Star Pipeline are wholly intrastate in
character and perform distribution utility operations and pipeline
transportation services, respectively, in the State of Texas subject to
regulation by municipalities in Texas and the RRC. The RRC regulates the charge
for the transportation of natural gas by TXU Lone Star Pipeline to TXU Gas
Distribution's distribution systems for sale to TXU Gas Distribution's
residential and commercial customers. TXU Lone Star Pipeline owns no
certificated interstate transmission facilities subject to the jurisdiction of
the FERC under the Natural Gas Act, has no sales for resale under the rate
jurisdiction of the FERC and does not perform any transportation service that is
subject to FERC jurisdiction under the Natural Gas Act.

         The city gate rate for the cost of gas TXU Gas Distribution ultimately
delivers to residential and commercial customers is established by the RRC and
provides for full recovery of the actual cost of gas delivered, including
out-of-period costs such as gas purchase contract settlement costs. The
distribution service rates TXU Gas Distribution charges its residential and
commercial customers are generally established by the municipal governments of
the cities and towns served, with the RRC having appellate, or in some
instances, primary jurisdiction.

         TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During 2002, rate cases were filed in
147 cities. The status of these cases is as follows: settlements were reached
with 73 of these cities for annual increases aggregating $9 million; rate cases
were withdrawn from 23 cities; and 51 cities declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the RRC. A settlement was reached for $7.5
million. These settlements adjusted other aspects of the TXU Gas tariffs. The
total annual favorable impact of the 2002 rate settlements and associated tariff
adjustments is approximately $22 million.

         In July 2001 and August 2001, TXU Gas filed two cases, a gas cost
review and a gas cost reconciliation, covering the period between November 1997
and June 2001, seeking to recover $29 million of under-recovered gas costs. On
August 6, 2002, a settlement was approved by the RRC authorizing TXU Gas to
recover $18 million of this amount, which has been recovered through a
surcharge, while $11 million in under-recovered gas costs remains pending.

         On August 30, 2002, TXU Gas filed the city gate gas cost reconciliation
for the twelve-month period ended June 30, 2002 with the RRC. During this
period, TXU Gas over-recovered its gas cost by $24 million, which is being
refunded from October 2002 through June 2003. The refund has no material impact
on the net income of TXU Gas.

         TXU Gas Distribution sells to industrial customers under standard rate
schedules that permit automatic adjustment on a monthly basis for the full
amount of increases or decreases in the cost of natural gas. Transportation
services to industrial and electricity generation customers are provided under
both standard tariffs and competitively negotiated contracts.



                                       4
<PAGE>

                              ENVIRONMENTAL MATTERS
                              ---------------------

         TXU Gas is subject to various federal, state and local regulations
dealing with air and water quality and related environmental matters.

         Air - Under the Texas Clean Air Act, the Texas Commission on
Environmental Quality (TCEQ) has jurisdiction over the permissible level of air
contaminant emissions from, and permitting requirements for, gas delivery
facilities located within the State of Texas. In addition, the new source
performance standards of the Environmental Protection Agency (EPA) promulgated
under the Federal Clean Air Act, as amended (Clean Air Act), which have also
been adopted by the TCEQ, are also applicable. TXU Gas' facilities operate in
compliance with applicable regulations, permits and emission standards
promulgated pursuant to these acts.

         In 2001, the Texas Clean Air Act was amended to require that
"grandfathered" facilities apply for permits. TXU Gas anticipates that the
permits can be obtained for its "grandfathered" facilities without significant
effects on the costs for operating these facilities.

         Water - The TCEQ, the EPA and the RRC have jurisdiction over water
discharges (including storm water) from TXU Gas' facilities. TXU Gas' facilities
are presently in compliance with applicable state and federal requirements
relating to discharge of pollutants into the water. TXU Gas holds all required
waste water permits from the TCEQ and the RRC for facilities in operation and
has applied for or obtained necessary permits for facilities under construction.
TXU Gas believes it can satisfy the requirements necessary to obtain any
required permits or renewals. Recent changes to federal rules pertaining to
spill prevention, control and countermeasure plans for oil-filled electrical
equipment and bulk storage facilities for oil will require updating of certain
plans and facilities. TXU Gas is unable to predict at this time the impact of
these changes.

         Other - Treatment, storage and disposal of solid and hazardous waste
are regulated at the state level under the Texas Solid Waste Disposal Act (Texas
Act) and at the federal level under the Resource Conservation and Recovery Act
of 1976, as amended, (RCRA) and the Toxic Substances Control Act (TSCA). The EPA
has issued regulations under the RCRA and TSCA, and the TCEQ and the RRC have
issued regulations under the Texas Act applicable to TXU Gas' facilities. TXU
Gas has obtained or applied for such permits as are required by such
regulations.

  Item 3. LEGAL PROCEEDINGS

         In September 1999, Quinque Operating Company (Quinque) filed suit in
the State District Court of Stevens County, Kansas against over 200 gas pipeline
companies, including TXU Gas (named in the litigation as ENSERCH Corporation).
The suit was removed to federal court; however, a motion to remand the case back
to Kansas State District Court was granted in January 2001, and the case is now
pending in Stevens County, Kansas. The plaintiffs amended their petition to join
TXU Fuel Company (TXU Fuel), a subsidiary of TXU Energy, as a defendant in this
litigation. Quinque has dismissed its claims and a new lead plaintiff has filed
an amended petition in which the plaintiffs seek to represent a class consisting
of all similarly situated gas producers, overriding royalty owners, working
interest owners and state taxing authorities either from whom defendants had
purchased natural gas or who received economic benefit from the sale of such gas
since January 1, 1974. No class has been certified. The petition alleges that
the defendants have mismeasured both the volume and heat content of natural gas
delivered into their pipelines resulting in underpayments to plaintiffs. No
amount of damages has been specified in the petition with respect to TXU Gas or
TXU Fuel. While TXU Gas and TXU Fuel are unable to estimate any possible loss or
predict the outcome of this case, TXU Gas and TXU Fuel believe these claims are
without merit and intend to vigorously defend this suit.

         On November 21, 2000, the City of Denton, Texas and other Texas cities
filed suit in the 134th Judicial District Court of Dallas County, Texas against
TXU Gas, TXU US Holdings Company (US Holdings) and TXU Corp. The petition
alleges claims for breach of contract and other claims related to the
defendants' alleged exclusion of certain revenues from the cities' franchise fee
base. All of the plaintiff cities have now executed a settlement agreement to
settle this suit, and, on March 11, 2003, the district court entered a final

                                       5
<PAGE>

order dismissing this lawsuit. Such resolution will not have a material effect
on TXU Gas' financial position, results of operations or cash flows.

         General -- In addition to the above, TXU Gas and its subsidiaries are
involved in various other legal and administrative proceedings the ultimate
resolution of which, in the opinion of management, are not expected to have a
material effect on their financial position, results of operations or cash
flows.

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.


                                       6
<PAGE>

                                     PART II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

           Not applicable. All of TXU Gas' common stock is owned by TXU Corp.

Item 6.    SELECTED FINANCIAL DATA

           The information required hereunder for TXU Gas is set forth under
           Selected Financial Data included in Appendix A to this report.

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

           The information required hereunder for TXU Gas is set forth under
           Management's Discussion and Analysis of Financial Condition and
           Results of Operations included in Appendix A to this report.

Item 7a.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

           The information required hereunder for TXU Gas is set forth under
           Management's Discussion and Analysis of Financial Condition and
           Results of Operations included in Appendix A to this report.

Item 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

           The information required hereunder for TXU Gas is set forth under
           Statement of Responsibility, Independent Auditors' Report, Statements
           of Consolidated Income, Statements of Consolidated Comprehensive
           Income, Statements of Consolidated Cash Flows, Consolidated Balance
           Sheets, Statements of Consolidated Shareholder's Equity and Notes to
           Financial Statements included in Appendix A of this report.

Item 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
           FINANCIAL DISCLOSURE

           None.

                                       7
<PAGE>
                                    PART III

Item 10.   DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         Identification of Directors, business experience and other
directorships:
<TABLE>
<CAPTION>

                                Other Positions and     Date First Elected as
                               Offices Presently Held          Director            Present Principal Occupation or
                                    With TXU Gas            (Current Term             Employment and Principal
                               (Current Term Expires           Expires            Business (Preceding Five Years),
  Name of Director     Age          In May 2003)             in May 2003)                Other Directorships
 ------------------------------------------------------ -----------------------  ---------------------------------------
<S>                   <C>         <C>                     <C>                    <C>
T. L. Baker           57          Vice Chairman           January 1, 2002        Executive  Vice  President  of  TXU
                                                                                   Corp.  and Vice Chairman of Oncor
                                                                                   and  TXU  Gas;   prior   thereto,
                                                                                   President  of Oncor  and TXU Gas;
                                                                                   prior  thereto,  President of TXU
                                                                                   Electric Company;  prior thereto,
                                                                                   President  of  Electric   Service
                                                                                   Division    of    TXU    Electric
                                                                                   Company,   TXU  Gas  Distribution
                                                                                   Division  of  TXU  Gas  (TXU  Gas
                                                                                   Distribution)   and  TXU   SESCO;
                                                                                   other directorship: Oncor.

Michael J.            48              None               February 16, 1996       Executive  Vice  President  of  TXU
McNally                                                                            Corp.;  prior thereto,  Executive
                                                                                   Vice    President    and    Chief
                                                                                   Financial  Officer  of TXU  Corp.
                                                                                   and Executive  Vice  President of
                                                                                   US        Holdings;         other
                                                                                   directorships:     Oncor,     TXU
                                                                                   Energy,   US  Holdings   and  TXU
                                                                                   Europe Limited.

Erle Nye              65         Chairman of the        September 17, 1982       Chairman  of the  Board  and  Chief
                                 Board and Chief                                   Executive  of TXU  Corp.,  Oncor,
                                    Executive                                      TXU   Energy,   TXU  Gas  and  US
                                                                                   Holdings;   other  directorships:
                                                                                   TXU Corp.,  Oncor, TXU Energy, US
                                                                                   Holdings and TXU Europe Limited.

Eric H. Peterson      42                None              November 1, 2002       Executive    Vice   President   and
                                                                                   General  Counsel  of  TXU  Corp.;
                                                                                   prior   thereto,    Senior   Vice
                                                                                   President and General  Counsel of
                                                                                   DTE   Energy;    prior   thereto,
                                                                                   Partner   in  the  law   firm  of
                                                                                   Worsham,  Forsythe &  Wooldridge;
                                                                                   other  directorships:  Oncor, TXU
                                                                                   Energy and  US Holdings.

R. A. Wooldridge      65              None                August 5, 1997         Partner  in the law firm of  Hunton
                                                                                   &         Williams;         other
                                                                                   directorships:     Oncor,     TXU
                                                                                   Energy,   US  Holdings   and  TXU
                                                                                   Europe Limited.
</TABLE>

Directors of TXU Gas receive no compensation in their capacity as Directors.


                                       8
<PAGE>
<TABLE>
<CAPTION>

     Identification of Executive Officers and business experience:


                                 Positions and Offices     Date First Elected to
                                     Presently Held           Present Offices
                                 (Current Term Expires     (Current Term Expires          Business Experience
  Name of Officer      Age            in May 2003)              in May 2003)             (Preceding Five Years)
-------------------- --------    -----------------------   ----------------------- --------------------------------------
<S>                    <C>       <C>                          <C>                  <C>
Erle Nye               65        Chairman of the Board        January 1, 1998      Chairman  of the  Board  and Chief
                                  and Chief Executive                                Executive  of TXU Corp.,  Oncor,
                                                                                     TXU Energy, TXU Gas and US
                                                                                     Holdings.

T. L. Baker            57            Vice Chairman            November 4, 2002     Executive  Vice  President  of TXU
                                                                                     Corp.   and  Vice   Chairman  of
                                                                                     Oncor   and   TXU   Gas;   prior
                                                                                     thereto,  President of Oncor and
                                                                                     TXU    Gas;    prior    thereto,
                                                                                     President    of   TXU   Electric
                                                                                     Company;      prior     thereto,
                                                                                     President  of  Electric  Service
                                                                                     Division    of   TXU    Electric
                                                                                     Company,  TXU  Gas  Distribution
                                                                                     and TXU SESCO.

Michael T. McCall      45              President               March 26, 2003      President   of  TXU   Gas;   prior
                                                                                     thereto,  Vice  President of TXU
                                                                                     Business     Services;     prior
                                                                                     thereto;     Director,    Public
                                                                                     Policy,      Texas     Utilities
                                                                                     Services.

Scott R. Longhurst     35        Senior Vice President         August 1, 2002      Senior  Vice  President  of  Oncor
                                                                                     and  TXU  Gas;   prior  thereto,
                                                                                     Vice   President   -   Corporate
                                                                                     Financial    Planning   of   TXU
                                                                                     Business    Services    Company;
                                                                                     prior  thereto,  Vice  President
                                                                                     of   Finance   of   TXU   Europe
                                                                                     Limited;  prior  thereto,  Chief
                                                                                     Financial  Officer  of Shell Oil
                                                                                     Products   Joint  Venture  Saudi
                                                                                     Arabia.
</TABLE>

There is no family relationship between any of the above-named Directors and
Executive Officers.


                                       9
<PAGE>

Item 11.   EXECUTIVE COMPENSATION

     TXU Gas (the Company) and its affiliates have paid or awarded compensation
during the last three calendar years to the executive officers named in the
Summary Compensation Table for services in all capacities. Amounts reported in
the Table as Bonus and LTIP Payouts for any calendar year reflect the
performance of the individual and TXU Corp. in prior periods. Accordingly,
amounts reported as Bonus in 2002 reflect performance in 2001 and amounts
reported as LTIP Payouts in 2002 reflect performance for the three years ended
in March 2002. Information relating to compensation provided in 2003 based on
performance in 2002 is contained in the footnotes to the Table and in the
Organization and Compensation Committee Report which follows the footnotes.
<TABLE>
<CAPTION>

                                         SUMMARY COMPENSATION TABLE
                                           Annual Compensation                  Long-Term Compensation
                                   ------------------------------------  --------------------------------------
                                                                                 Awards              Payouts
                                                                         ------------------------  ------------
                                                              Other      Restricted   Securities                All Other
                                                             Annual      Stock        Underlying      LTIP       Compen-
        Name and                    Salary      Bonus      Compen-sation   Awards      Options/      Payouts      sation
   Principal Position      Year       ($)      ($) (5)       ($) (6)      ($) (7)      SARs (#)      ($) (8)     ($) (9)
-------------------------- ------  ---------- ----------   ------------  -----------  -----------  ------------ -----------
<S>                        <C>     <C>        <C>             <C>         <C>           <C>        <C>          <C>
Erle Nye, (1) (10) ....    2002    1,037,500  1,950,000        ---        236,250        ---       4,286,400    299,985
  Chairman of the Board    2001      964,583    475,000        ---        694,375        ---         519,747    222,658
  and Chief Executive of   2000      950,000    380,000        ---        593,750        ---         399,793    218,101
  the Company


T. L. Baker (2) (10)...    2002      495,000    500,000        ---        112,500        ---       1,109,770    119,960
  Vice Chairman of the     2001      449,167    125,000        ---        230,750        ---         111,800     89,374
  Company                  2000      399,167    125,000        ---        219,500        ---          93,968     84,152


H. Dan Farell  (3) (10)    2002      323,333    180,000                    73,125        ---         349,638     64,258
  President of the         2001      304,583     80,500        ---        151,375        ---          61,290     47,455
  Company                  2000      279,583     70,000     (44,181)      135,250        ---           4,901     45,160

Scott R. Longhurst (4)     2002      185,194    128,290     170,875          ---          ---           ---       1,845
  (10)                     2001      155,916     42,225        ---           ---          ---           ---         ---
  Senior Vice President    2000       87,669      ---          ---           ---         ---            ---         ---
  of the Company
</TABLE>

---------------

(1)       Compensation amounts represent compensation paid by TXU Corp.

(2)       Mr. Baker was elected Vice Chairman of TXU Gas effective November 4,
          2002.  Compensation amounts represent compensation paid by Oncor.

(3)       Mr. Farell was elected President,  TXU Gas effective November 4,
          2002.  Compensation amounts represent compensation paid by Oncor.

(4)       Mr. Longhurst was appointed and subsequently elected Senior Vice
          President, TXU Gas effective August 1, 2002. Compensation amounts
          represent compensation paid by TXU Europe and, beginning November 1,
          2002, TXU Business Services.

(5)       Amounts reported as Bonus in the Summary Compensation Table are
          attributable principally to the named executive officers'
          participation in the TXU Annual Incentive Plan (AIP). Amounts reported
          for 2002 resulted from performance in 2001; no AIP awards for 2002
          performance were provided in 2003 to any officers. Under the current
          terms of the AIP, target incentive awards ranging from 20% to 75% of
          base salary, and a maximum award of 100% of base salary, are
          established. The percentage of the target or maximum actually awarded,
          if any, is dependent upon the attainment of performance measurement
          criteria established in advance by TXU Corp.'s Organization and
          Compensation Committee (Committee), as well as the Committee's
          evaluation of the participant's and TXU Corp.'s performance. Amounts
          reported for Mr. Nye as Bonus also include amounts provided in his
          employment contract as discussed in footnote (10) and an additional
          bonus of $750,000 awarded in February 2002 in recognition of his
          contributions to TXU Corp.'s performance in 2001.

                                       10
<PAGE>
(6)       The amount reported for Mr. Longhurst as Other Annual Compensation
          consists of certain benefits provided by the Company under the
          standard expatriate policy in connection with his extended assignment
          in the United States. The amount reported represents housing,
          relocation expenses, taxes associated with such benefits paid on Mr.
          Longhurst's behalf, and certain other benefits.

(7)       Amounts reported as Restricted Stock Awards in the Summary
          Compensation Table are attributable to the named officer's
          participation in the Deferred and Incentive Compensation Plan (DICP).
          Participants in the DICP may defer a percentage of their base salary
          not to exceed a maximum percentage determined by the Committee for
          each plan year and in any event not to exceed 15% of the participant's
          base salary. Salary deferred under the DICP is included in amounts
          reported as Salary in the Summary Compensation Table. TXU Corp. makes
          a matching award (Matching Award) equal to 150% of the participant's
          deferred salary. Prior to 2002, one-half of any AIP award (Incentive
          Award) was deferred and invested under the DICP. Matching Awards are
          subject to forfeiture under certain circumstances. Under the DICP, a
          trustee purchases TXU Corp. common stock with an amount of cash equal
          to each participant's deferred salary and Matching Award, and accounts
          are established for each participant containing performance units
          (Units) equal to such number of common shares. DICP investments,
          including reinvested dividends, are restricted to TXU Corp. common
          stock, and the value of each unit credited to participants' accounts
          equals the value of a share of TXU Corp. common stock and is at risk
          based on the performance of the stock. On the expiration of the five
          year maturity period, the value of the participant's maturing accounts
          are paid in cash based upon the then current value of the Units;
          provided, however, that in no event will a participant's account be
          deemed to have a cash value which is less than the sum of such
          participant's deferral together with 6% per annum interest compounded
          annually. Participants may elect to defer amounts that would otherwise
          mature under the DICP, under and subject to the provisions of the
          Salary Deferral Program (SDP) as discussed in footnote (9). The
          maturity period is waived if the participant dies or becomes totally
          and permanently disabled and may be extended under certain
          circumstances.

         Matching Awards that have been made under the DICP are included under
         Restricted Stock Awards in the Summary Compensation Table. As a result
         of these awards, undistributed Matching Awards and Incentive Awards
         made in prior years under DICP provisions that are no longer effective
         and dividends reinvested thereon, the number and market value at
         December 31, 2002 of such Units (each of which is equal to one share of
         common stock) held in the DICP accounts for Messrs. Nye, Baker and
         Farell were 61,832 ($1,155,022), 19,607 ($366,259) and 12,886
         ($240,710), respectively.

(8)      Amounts reported as LTIP Payouts in the Summary Compensation Table are
         attributable to the vesting and distribution of performance-based
         restricted stock awards under the Long-Term Incentive Compensation Plan
         (LTICP) and the distribution during the year of earnings on salaries
         previously deferred under the DICP.

         The LTICP is a comprehensive, stock-based incentive compensation plan
         providing for common stock-based awards, including performance-based
         restricted stock. Outstanding awards, as of December 31, 2002, of
         performance-based restricted stock to the named executive officers may
         vest at the end of a three-year performance period and provide for an
         ultimate distribution of from 0% to 200% of the number of the shares
         initially awarded, based on TXU Corp.'s total return to shareholders
         over such three-year period compared to the total returns provided by
         the companies comprising the Standard & Poor's Electric Utilities
         Index. Dividends on restricted shares are reinvested in TXU Corp.
         common stock and are paid in cash upon release of the restricted
         shares. Under the terms of the LTICP, the maximum amount of any award
         that may be paid in any one year to any of the named executive officers
         is the fair market value of 100,000 shares of TXU Corp.'s common stock
         determined as of the first day of such calendar year. The portion of
         any award that, based on such limitation, cannot be fully paid in any
         year is deferred until a subsequent year when it can be paid. For 2002,
         based on TXU Corp. achieving the 5th highest total return to
         shareholders of the returns provided by the companies comprising the
         Standard & Poor's Electric Utilities Index over the three-year period
         ending March 31, 2002, Messrs. Nye, Baker and Farell each received 200%
         of the restricted shares awarded in May of 1999, which stock was valued
         at $4,286,400, $1,071,600 and $321,480, respectively.

                                       11
<PAGE>
         Amounts reported also include earnings distributed during the year on
         salaries previously deferred under the DICP for Messrs. Baker and
         Farell of $38,170 and $28,158, respectively.

         As a result of restricted stock awards under the LTICP, and reinvested
         dividends thereon, the number of shares of restricted stock and the
         market value of such shares at December 31, 2002 held for Messrs. Nye,
         Baker, Farell and Longhurst were 376,431 ($7,031,731), 68,207
         ($1,274,107), 21,582 ($403,152) and 8,637 ($161,339), respectively.

         As noted, salaries deferred under the DICP are included in amounts
         reported as Salary in the Summary Compensation Table. Amounts shown in
         the table below represent the number of shares purchased under the DICP
         with those deferred salaries for 2002 and the number of shares awarded
         under the LTICP.


             LONG-TERM INCENTIVE PLANS - AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

                              Deferred and Incentive
                             Compensation Plan (DICP)            Long-Term Incentive Compensation Plan (LTICP)
                            ---------------------------  --------------------------------------------------------------
                      Number of     Performance                     Performance
                       Shares,       Or Other       Number of        or Other
                      Units or     Period Until   Shares, Units    Period Until     Estimated Future Payouts
                        Other       Maturation      or Other       Maturation or    -------------------------
       Name           Rights (#)     Or Payout     Rights (#)         Payout        Minimum (#)    Maximum (#)
--------------------  -----------  -------------- -------------- ---------------- -----------------------------
<S>                    <C>            <C>           <C>               <C>                <C>        <C>

Erle Nye..........     2,877          5 Years       150,000           3 Years            0           300,000

T. L. Baker.......     1,370          5 Years        40,000           3 Years            0           80,000

H. Dan Farell.....       891          5 Years         8,000           3 Years            0           16,000

Scott R. Longhurst         0          5 Years         5,000           3 Years            0           10,000
</TABLE>

(9)      Amounts reported as All Other Compensation in the Summary Compensation
         Table are attributable to the named executive officer's participation
         in certain plans and as otherwise described in this footnote.

         Under the TXU Thrift Plan (Thrift Plan) all eligible employees of TXU
         Corp. and any of its participating subsidiaries may invest a portion of
         their regular salary or wages in common stock of TXU Corp., or in a
         variety of selected mutual funds. Under the Thrift Plan, TXU Corp.
         matches a portion of an employee's contributions. Currently, TXU
         Corp.'s matching contribution is 75% of the first 6% of the employee's
         contribution for employees covered under the traditional defined
         benefit component of the TXU Retirement Plan, and 100% of the first 6%
         of the employee's contribution for employees covered under the cash
         balance component of the TXU Retirement Plan. All matching
         contributions are invested in common stock of TXU Corp. The amounts
         reported under All Other Compensation in the Summary Compensation Table
         include these matching amounts which, for Messrs. Nye, Baker, Farell
         and Longhurst were $12,000, $9,000, $9,000 and $1,845, respectively,
         during 2002.

         Under the Salary Deferral Program (SDP) each employee of TXU Corp. and
         its participating subsidiaries whose annual salary is equal to or
         greater than an amount established under the SDP ($106,030 for the
         program year beginning January 1, 2002) may elect to defer up to 50% of
         annual base salary, and/or up to 100% of any bonus or incentive award
         and certain maturing DICP awards, for a period of seven years, for a
         period ending with the retirement of such employee, or for a
         combination thereof. TXU Corp. makes a matching award, subject to
         forfeiture under certain circumstances, equal to 100% of up to the
         first 8% of salary deferred under the SDP; provided that employees who
         first become eligible to participate in the SDP on or after January 1,
         2002, who are also eligible, or become eligible, to participate in the
         DICP, are not eligible to receive any SDP matching award. Salaries and
         bonuses deferred under the SDP are included in amounts reported under
         Salary and Bonus, respectively, in the Summary Compensation Table.

                                       12
<PAGE>
         Deferrals are credited with earnings or losses based on the performance
         of investment alternatives under the SDP selected by each participant.
         At the end of the applicable maturity period, the trustee for the SDP
         distributes the deferrals and the applicable earnings in cash as a lump
         sum or in annual installments. TXU Corp. is financing the retirement
         option portion of the SDP through the purchase of corporate-owned life
         insurance on the lives of participants. The proceeds from such
         insurance are expected to allow TXU Corp. to fully recover the cost of
         the retirement option. During 2002, matching awards, which are included
         under All Other Compensation in the Summary Compensation Table, were
         made for Messrs. Nye, Baker and Farell in the amounts of $103,000,
         $49,200 and $32,233, respectively.

         Under the TXU Split-Dollar Life Insurance Program (Insurance Program)
         split-dollar life insurance policies are purchased for eligible
         corporate officers of TXU Corp. and its participating subsidiaries. The
         death benefit of the participants' insurance policies are equal to two,
         three or four times their annual Insurance Program compensation
         depending on their category. Individuals who first became eligible to
         participate in the Insurance Program after October 15, 1996, vest in
         the policies issued under the Insurance Program over a six year period.
         TXU Corp. pays the premiums for the policies and has received a
         collateral assignment of the policies equal in value to the sum of all
         of its insurance premium payments. Although the Insurance Program is
         terminable at any time, it is designed so that if it is continued, TXU
         Corp. will fully recover all of the insurance premium payments it has
         made either upon the death of the participant or, if the assumptions
         made as to policy yield are realized, upon the later of 15 years of
         participation or the participant's attainment of age 65. During 2002,
         the economic benefit derived by Messrs. Nye, Baker and Farell from the
         term insurance coverage provided and the interest foregone on the
         remainder of the insurance premiums paid by the Company amounted to
         $184,985, $61,760 and $23,025, respectively.

(10)     TXU Corp. has entered into employment  agreements with Messrs.  Nye,
         Baker,  and Longhurst as hereinafter  described in this footnote.

         Effective June 1, 2002, TXU Corp. entered into a new employment
         agreement with Mr. Nye, which supersedes his previous employment
         agreement. The new agreement provides for an initial term expiring May
         31, 2005, and a secondary term expiring May 31, 2007. During the
         initial term, Mr. Nye will continue to serve as TXU Corp.'s Chairman of
         the Board and Chief Executive until such time as his successor is
         elected at which time Mr. Nye may continue as TXU Corp.'s Chairman of
         the Board and/or in such other executive position as he and TXU Corp.
         may mutually agree upon. During the secondary term, Mr. Nye will
         continue as an employee of TXU Corp. or, with TXU Corp.'s approval, he
         may retire and serve TXU Corp. in a consulting capacity through the
         expiration of the secondary term. Mr. Nye will, during the initial
         term, be entitled to a minimum annual base salary of $1,050,000,
         eligibility for an annual bonus under the terms of the AIP, and minimum
         annual restricted stock awards of 40,000 shares under the LTICP. The
         agreement also provides for a special one-time bonus of $1,000,000 in
         consideration for his entering into the new agreement. Such bonus is
         payable in equal annual installments over a five year period. During
         the secondary term, Mr. Nye will be entitled to an annual base salary
         equal to 75% of his base salary prior to expiration of the initial term
         and eligibility for a prorated bonus under the terms of the AIP for the
         2005 AIP plan year. The agreement also provides Mr. Nye with certain
         benefits following his retirement, including administrative support,
         annual medical examinations and financial planning services. The
         agreement also reconfirms TXU Corp.'s prior agreement to fund the
         retirement benefit to which Mr. Nye will be entitled under TXU Corp.'s
         supplemental retirement plan. Additionally, the agreement entitles Mr.
         Nye to certain severance benefits in the event he dies, becomes
         disabled, is terminated without cause or resigns or retires with TXU
         Corp.'s approval during the term of the agreement, including the base
         salary and annual incentive awards he would have received; continued
         payment of the remaining special bonus annual installment payments; a
         payment in lieu of foregone and forfeited incentive compensation; and
         health care benefits. The agreement also provides for compensation and
         benefits under certain circumstances following a change-in-control of
         TXU Corp. during the initial term, including a payment equal to the
         greater of three times his annualized base salary and target bonus or
         the total base salary and bonus he would have received for the
         remainder of the term of the agreement; any unpaid portion of the
         special bonus; a payment in lieu of foregone and forfeited incentive
         compensation; health care benefits; and a tax gross-up payment to
         offset any excise tax which may result from such change-in-control
         payments.

                                       13
<PAGE>
         TXU Corp. entered into an employment agreement with Mr. Baker effective
         July 1, 2000. The agreement, as amended, provides for the continued
         service by Mr. Baker through June 30, 2004 (Term). Under the terms of
         the agreement, Mr. Baker will, during the Term, be entitled to a
         minimum annual base salary of $420,000, eligibility for an annual bonus
         under the terms of the AIP, and minimum restricted stock awards of
         12,000 shares under the LTICP. The agreement entitles Mr. Baker to
         certain severance benefits in the event he is terminated without cause
         during the Term, including a payment equal to the greater of his
         annualized base salary and target bonus, or the total amount of base
         salary and target bonuses he would have received for the remainder of
         the Term; a payment in lieu of foregone and forfeited incentive
         compensation; and health care benefits. The agreement also provides for
         compensation and benefits under certain circumstances following a
         change-in-control of TXU Corp. during the Term, including a payment
         equal to three times his annualized base salary and target bonus; a
         payment in lieu of foregone and forfeited incentive compensation;
         health care benefits and a tax gross-up payment to offset any excise
         tax which may result from such change-in-control payments.

         The Company entered into an employment agreement with Mr. Longhurst
         effective November 1, 2002. The agreement provides for the continued
         service by Mr. Longhurst through July 31, 2005 (Term). Under the terms
         of the agreement, Mr. Longhurst will, during the Term, be entitled to
         an initial annual base salary of $205,000, eligibility for an annual
         bonus under the terms of the AIP, a retention bonus payment equal to
         $20,000 if Mr. Longhurst continues his employment through the end of
         the Term, and eligibility for consideration for awards under the LTICP.
         The agreement also provides for certain benefits associated with Mr.
         Longhurst's transition from international assignment status to his
         employment status with the Company, including housing, relocation and
         transportation assistance, immigration assistance and tax preparation
         assistance. The agreement entitles Mr. Longhurst to certain severance
         benefits in the event he is terminated without cause during the Term,
         including a payment equal to the base salary and target bonuses he
         would have received for the remainder of the Term; the retention bonus
         payment; a payment in lieu of certain international assignment
         transition benefits provided for in the agreement; and relocation to
         the U.K. for Mr. Longhurst and his family.

         TXU Corp. and its participating subsidiaries maintain retirement plans
(Retirement Plan), which are qualified under applicable provisions of the
Internal Revenue Code of 1986, as amended (Code). The Retirement Plan contains
both a traditional defined benefit component and a cash balance component.
Annual retirement benefits under the traditional defined benefit component,
which applied during 2002 to each of the named officers other than Mr. Nye and
Mr. Longhurst, are computed as follows: for each year of accredited service up
to a total of 40 years, 1.3% of the first $7,800, plus 1.5% of the excess over
$7,800, of the participant's average annual earnings during his or her three
years of highest earnings. The Retirement Plan also contains a cash balance
component, which covers all employees who first become eligible to participate
in the Retirement Plan on or after January 1, 2002, and employees previously
covered under the traditional defined benefit component who, during a one-time
election period in 2001 (and for certain employees covered by collective
bargaining agreements, during other specifically negotiated election periods)
elected to convert the actuarial equivalent of their accrued traditional defined
benefit to the cash balance plan component. Mr. Nye elected to convert to the
cash balance plan during the 2001 election period. Under the cash balance
component, hypothetical accounts are established for participants and credited
with monthly contribution credits equal to a percentage of the participant's
compensation (3.5%, 4.5%, 5.5% or 6.5% depending on the participant's combined
age and years of accredited service) and interest credits based on the average
yield of the 30-year Treasury bond for the 12 months ending November 30 of the
prior year. Amounts reported under Salary for the named executive officers in
the Summary Compensation Table approximate earnings as defined under the
traditional defined benefit component of the Retirement Plan without regard to
any limitations imposed by the Code. Benefits paid under the traditional defined
benefit component of the Retirement Plan are not subject to any reduction for
Social Security payments but are limited by provisions of the Code. Based on
benefits accrued under the cash balance component of the Retirement Plan as of
December 31, 2002, the estimated annual benefit payable to Mr. Nye under such
component at normal retirement age is $1,138,269. Mr. Longhurst was covered by
the Electricity Supply Pension Scheme, in which TXU Europe participates, through
October 31, 2002. As of December 31, 2002, years of accredited service under the
Retirement Plan for Messrs. Nye, Baker, Farell and Longhurst were 40, 32, 28 and
0, respectively.

                                       14
<PAGE>
<TABLE>
<CAPTION>
                             TXU PENSION PLAN TABLE

                                Years of Service
                      ------------------------------------------------------------------------------------------
    Remuneration            20               25                 30                 35                  40
  ------------------  --------------  ----------------  ------------------  -----------------  -----------------
     <S>                   <C>               <C>                 <C>                <C>                <C>
     $ 50,000              $ 14,688          $ 18,360            $ 22,032           $ 25,704           $ 29,376
      100,000                29,688            37,110              44,532             51,954             59,376
      200,000                59,688            74,610              89,532            104,454            119,376
      400,000               119,688           149,610             179,532            209,454            239,376
      800,000               239,688           299,610             359,532            419,454            479,376
    1,000,000               299,688           374,610             449,532            524,454            599,376
    1,400,000               419,688           524,610             629,532            734,454            839,376
    1,800,000               539,688           674,610             809,532            944,454          1,079,376
    2,000,000               599,688           749,610             899,532          1,049,454          1,199,376
</TABLE>

         TXU Corp.'s supplemental retirement plan (Supplemental Plan) provides
for the payment of retirement benefits, which would otherwise be limited by the
Code or the definition of earnings in the Retirement Plan, as well as retirement
compensation not payable under the Retirement Plan which TXU Corp. or its
participating subsidiaries are obligated to pay. Under the Supplemental Plan,
retirement benefits are calculated in accordance with the same formula used
under the qualified plan, except that, with respect to calculating the portion
of the Supplemental Plan benefit attributable to service under the defined
benefit component of the Retirement Plan, earnings also include AIP awards (for
2002, 100% of the AIP award, and for 2001 and 2000, 50% of the AIP awards, are
reported under Bonus for the named officers in the Summary Compensation Table).
The table set forth above illustrates the total annual benefit payable at
retirement under the Retirement Plan inclusive of benefits payable under the
Supplemental Plan, prior to any reduction for earlier-than-normal or a
contingent beneficiary option which may be selected by participants.

                                       15
<PAGE>

The following report and performance graph are presented herein for information
purposes only. This information is not required to be included herein and shall
not be deemed to form a part of this report to be "filed" with the Securities
and Exchange Commission. The report set forth hereinafter is the report of the
Organization and Compensation Committee of the Board of Directors of TXU Corp.
and is illustrative of the methodology utilized in establishing the compensation
of executive officers of TXU Gas. References in the report to the "Company" are
references to TXU Corp. and references to "this proxy statement" are references
to TXU Corp.'s proxy statement in connection with TXU Corp.'s 2003 annual
meeting of shareholders.


                 ORGANIZATION AND COMPENSATION COMMITTEE REPORT
                            ON EXECUTIVE COMPENSATION

         The Organization and Compensation Committee of the Board of Directors
(Committee) is responsible for reviewing and establishing the compensation of
the executive officers of the Company. The Committee consists of directors of
the Company who are not employees or former employees of the Company and is
chaired by J. E. Oesterreicher. The Committee has directed the preparation of
this report and has approved its content and submission to the shareholders.

         As a matter of policy, the Committee believes that levels of executive
compensation should be based upon an evaluation of the performance of the
Company and its officers generally, as well as in comparison to persons with
comparable responsibilities in similar business enterprises. Compensation plans
should align executive compensation with returns to shareholders with due
consideration accorded to balancing both long-term and short-term objectives.
The overall compensation program should provide for an appropriate and
competitive balance between base salaries and performance-based annual and
long-term incentives. The Committee has determined that, as a matter of policy
to be implemented over time, the base salaries of the officers will be
established around the median, or 50th percentile, of the base salaries provided
by comparable energy companies, or other relevant market, and that opportunities
for total direct compensation (defined as the sum of base salaries, annual
incentives and long-term incentives) to reach the 75th percentile, or above, of
such market or markets will be provided through annual and long-term
performance-based incentive compensation plans. Such compensation principles and
practices have allowed, and should continue to allow, the Company to attract,
retain and motivate its key executives.

         In furtherance of these policies, nationally recognized compensation
consultants have been retained to assist the Committee in its periodic reviews
of compensation and benefits provided to officers. The consultants' evaluations
include comparisons to comparable utilities and energy companies as well as to
general industry with respect both to the level and composition of officers'
compensation.

         The compensation of the officers of the Company consists principally of
base salaries, the opportunity to earn an incentive award under the Annual
Incentive Plan (AIP), awards of performance-based restricted shares under the
Long-Term Incentive Compensation Plan (Long-Term Plan) and the opportunity to
participate in the Deferred and Incentive Compensation Plan (DICP). Awards under
the AIP are directly related to annual performance as evaluated by the
Committee. The ultimate value of any awards of performance-based restricted
shares, if any, under the Long-Term Plan, as well as the value of future
payments under the DICP are directly related to the future performance of the
Company's common stock. It is anticipated that performance-based incentive
awards under the AIP and the Long-Term Plan, will, in future years, continue to
constitute a substantial percentage of the officers' total compensation.

         The AIP, which was first approved by the shareholders in 1995 and
reapproved in 2000, is administered by the Committee and provides an objective
framework within which annual performance can be evaluated by the Committee.
Depending on the results of such performance evaluations, and the attainment of
the per share net income goals established in advance, the Committee may provide
annual incentive compensation awards to eligible officers. As amended in 2001
with respect to awards provided in 2002 and thereafter, the evaluation of each
individual participant's performance may be based upon the attainment of a
combination of corporate, group, business unit, function and/or individual
objectives. The Company's annual performance is evaluated based upon its total
return to shareholders, return on invested capital and earnings growth, as well
as other measures such as competitiveness, service quality and employee safety.
The combination of individual and Company results, together with the Committee's
evaluation of the competitive level of compensation which is appropriate for
such results, determines the amount, if any, actually awarded. Awards under the
AIP constitute the principal annual incentive component of officers'
compensation.

                                       16
<PAGE>
         The Long-Term Plan, which was first approved by the shareholders in
1997 and reapproved as amended in 2002, is also administered by the Committee
and is a comprehensive stock-based incentive compensation plan under which all
awards are made in, or based on the value of, the Company's common stock. The
Long-Term Plan provides that, in the discretion of the Committee, awards may be
in the form of stock options, stock appreciation rights, performance and/or
restricted stock or stock units or in any other stock-based form. The purpose of
the Long-Term Plan is to provide performance-related incentives linked to
long-term performance goals. Such performance goals may be based on individual
performance and/or may include criteria such as absolute or relative levels of
total shareholder return, revenues, sales, net income or net worth of the
Company, any of its subsidiaries, business units or other areas, all as the
Committee may determine. Awards under the Long-Term Plan provided to the
officers of the Company have been almost exclusively in the form of
performance-based restricted stock as more fully described hereinafter. Awards
under the Long-Term Plan constitute the principal long-term component of
officers' compensation.

         In establishing levels of executive compensation, the Committee has
reviewed various performance and compensation data, including the performance
measures under the AIP and the reports of its compensation consultant.
Information was also gathered from industry sources and other published and
private materials which provided a basis for comparing comparable electric and
gas utilities and other survey groups representing a large variety of business
organizations. Included in the data considered were the comparative returns
provided by the largest electric and gas utilities as represented by the returns
of the Standard & Poor's Electric Utilities Index which are reflected in the
graph on page 21. Compensation amounts were established by the Committee based
upon its consideration of the above comparative data and its subjective
evaluation of Company and individual performance at levels consistent with the
Committee's policy relating to total direct compensation.

         Since its last report to shareholders which was published in the proxy
statement for 2002, the Committee has considered officers' compensation matters
at several meetings including those held in February and May of 2002 and in
February of 2003. The results of Committee actions taken in February and May of
2002 are included in the Summary Compensation Table on page 9 of this proxy
statement. Generally speaking, the actions taken at those meetings in 2002
reflected the Company's exemplary performance in 2001 (total return of 12.2%,
the 2nd highest of the 10 largest utilities in the United States) and for the
three years ended in March 2002 (total return of 57.9%, the 5th highest of the
28 companies comprising the Standard & Poor's Electric Utilities Index). Actions
taken at its meeting in February 2003 reflect the Company's recent business
reversals and include freezing executive officers' salaries and not providing
any AIP awards for 2002 performance. Moreover, it is anticipated that awards of
performance-based restricted stock under the Long-Term Plan which were provided
in May 2000 will be forfeited as a result of recent performance, and that awards
provided in 2001 and 2002 may also be completely or partially forfeited
depending on returns during the remainder of the relevant performance periods.

         With respect to the base salaries of the officers, at its meeting in
February of 2002, the Committee authorized certain increases in salaries,
including the Chief Executive's. Those increases were intended to reflect
competitive market comparisons and to establish base salaries around the median
of such markets. Increases provided in February 2002 are reflected in the
Summary Compensation Table. As noted earlier, at its meeting in February 2003
the Committee decided not to increase the base pay of any of the executive
officers.

         AIP awards provided by the Committee in February 2002 were based upon
the Company's strong performance in 2001 and are reflected in the Summary
Compensation Table. Based upon the Company's performance in 2002, including its
failure to achieve the earnings per share targets established in advance, the
Committee, at its meeting in February 2003, determined not to provide AIP awards
to any officers for 2002 performance. Discretionary cash bonuses were provided
to a limited number of officers in February 2003 as the result of superior
performance in certain business activities and other individual circumstances.

         At its meetings in February 2002 and February 2003, the Committee
provided awards of performance-based restricted shares under the Long-Term Plan
to certain officers, including the Chief Executive. Information relating to

                                       17
<PAGE>

awards made to the named executive officers in 2002 is contained in the Table on
page 11 of this proxy statement. The ultimate value of all of the awards, if
any, will be determined by the Company's total return to shareholders over
selected performance periods compared to the total returns for those periods of
the companies comprising the Standard & Poor's Electric Utilities Index.
Depending upon the Company's relative total return for such periods, the
officers may earn from 0% to 200% of the original award, and their compensation
is, thereby, directly related to shareholder value. All of the awards
contemplate that 200% of the original award will be provided if the Company's
total return is in the 81st percentile or above of the returns of the companies
comprising the Standard & Poor's Electric Utilities Index and that such
percentage of the original award will be reduced as the Company's return
compared to the returns provided by the companies in the Index declines so that
0% of the original award will be provided if the Company's return is in the 40th
percentile or below of returns provided by the companies comprising the Index.
These awards, and any awards that may be made in the future, are based upon the
Committee's evaluation of the appropriate level of long-term compensation
consistent with its policy relating to total direct compensation.

         Additionally, with respect to the Long-Term Plan, the Committee, at its
meeting in May 2002, considered the performance-based restricted stock awards
provided to certain officers in May 1999. Based upon its review and comparison
of the Company's total return to the returns provided by the companies
comprising the Standard & Poor's Electric Utilities Index, the Committee
determined that the Company's performance during the three-year performance
period ending in March 2002 permitted the payment of 200% of such 1999 awards.
As noted earlier, during the three-year performance period ending in March 2002,
the Company's total return of 57.9% was the 5th highest (85th percentile) of the
28 companies comprising the index at that time. Payments of these awards were
made in the form of the Company's stock and cash, and, for Messrs. Nye, Gibbs,
Dickie and McNally and Ms. Curry, the value of such cash and stock at the date
of distribution is included in the LTIP Payouts column of the Summary
Compensation Table on page 9 of this proxy statement.

         With respect to the compensation of the Chief Executive, in February
2002 the Committee increased Mr. Nye's base salary as Chief Executive to an
annual rate of $1,050,000 representing a $75,000 or 7.6% increase over the
amount established for Mr. Nye in May of 2001. Based upon the Committee's
evaluation of individual and Company performance in 2001, including the
Company's total return of 12.2% which was the second highest of the 10 largest
utilities in the United States, the Committee provided Mr. Nye with an AIP award
of $1,000,000 and a special bonus award of $750,000 compared to the prior year's
AIP award of $950,000. The Committee also awarded 150,000 shares of
performance-based restricted stock to Mr. Nye. Under the terms of his award, Mr.
Nye can earn from 0% to 200% of the original award, depending on the Company's
total return to shareholders over a three-year period (April 1, 2002 through
March 31, 2005) compared to the total return provided by the companies
comprising the Standard & Poor's Electric Utilities Index. In addition, as
previously noted in this report and based upon the Company's total return of
57.9% for the three years ended in March of 2002, the Committee in May of 2002
approved the payment of 200% of the 1999 performance-based restricted stock
awards under the Long-Term Plan, which for Mr. Nye was 80,000 shares.

         Actions taken by the Committee in 2003 with respect to the Chief
Executive's compensation reflect the Company's recent business reversals. In
February 2003, the Committee established Mr. Nye's base salary at an annual rate
of $1,050,000, which is the same rate as established in 2002. In recognition of
the Company's cost reduction efforts, Mr. Nye has voluntarily reduced his base
salary to a rate of $950,000 for one year. As noted earlier, the Committee did
not provide AIP awards to any executive officers, including Mr. Nye, in 2003
based on 2002 performance. Additionally, in 2003 the Committee provided awards
of performance-based restricted stock to Mr. Nye, the ultimate value of which
will be determined by the Company's performance over two-year and three-year
performance periods. Under the terms of his awards, Mr. Nye can earn from 0% to
200% of the original awards depending, with respect to 80,000 shares, on the
Company's total return to shareholders over a two-year period (April 1, 2003
through March 31, 2005) and, with respect to 80,000 shares, on the Company's
total return to shareholders over a three-year period (April 1, 2003 through
March 31, 2006) compared to the total returns provided for the respective
periods by the companies comprising the Standard & Poor's Electric Utilities
Index. The level of compensation established for the Chief Executive in 2002 and
in 2003 was based upon the Committee's subjective evaluation of the information
contained in this report consistent with the Committee's policy relating to
total compensation.

                                       18
<PAGE>
         As previously reported, the Company has entered into employment
agreements, as approved by the Committee, with certain officers, including the
Chief Executive. Mr. Nye's prior employment agreement was superceded, effective
June 1, 2002, by a new agreement which was approved in May 2002. The terms of
employment agreements with the named executive officers are described in
Footnote 6 to the Summary Compensation Table on pages 12, 13 and 14 of this
proxy statement.

         Certain of the Company's business units have developed separate annual
incentive compensation plans. Those plans focus on the results achieved by those
individual business units and the compensation opportunities provided by those
plans are considered to be competitive in the markets in which those units
compete. Generally, officers may not participate in both the traditional
incentive compensation plans as discussed herein and the business unit plans.
None of the named executive officers participate in the individual business unit
plans.

         In discharging its responsibilities with respect to establishing
officers' compensation, the Committee normally considers such matters at its
February and May meetings. Although Company management may be present during
Committee discussions of officers' compensation, Committee decisions with
respect to the compensation of the Chief Executive are reached in private
session without the presence of any member of Company management.

         Section 162(m) of the Code limits the deductibility of compensation
which a publicly traded corporation provides to its most highly compensated
officers. As a general policy, the Company does not intend to provide
compensation which is not deductible for federal income tax purposes. Awards
under the AIP and the Long-Term Plan are expected to be fully deductible. The
DICP and the Salary Deferral Program have been amended to require the deferral
of distributions of maturing amounts until the time when such amounts would be
deductible. A portion of the special bonus amounts provided to Mr. Nye in 2002
are not expected to be deductible but such amounts are not material.

         Shareholder comments to the Committee are welcomed and should be
addressed to the Secretary of the Company at the Company's offices.

                      Organization and Compensation Committee

  J. E. Oesterreicher, Chair           Jack E. Little
  Derek C. Bonham                      Margaret N. Maxey
  William M. Griffin                   Charles R. Perry (retired February 2003)
  Kerney Laday                         Herbert H. Richardson



                                       19
<PAGE>

                                PERFORMANCE GRAPH

         The following graph compares the performance of TXU Corp.'s common
stock to the S&P 500 Index and S&P Electric Utilities Index for the last five
years. The graph assumes the investment of $100 at December 31, 1997 and that
all dividends were reinvested. The amount of the investment at the end of each
year is shown in the graph and in the table which follows.

                            Cumulative Total Returns
                        for the Five Years Ended 12/31/02




         Line graph inserted here that shows Cumulative Total Returns in dollars
by years 1997-2002.



<TABLE>
<CAPTION>

                                              ----------- ---------- ------------ ----------- ----------- ----------
<S>                                                 <C>        <C>         <C>          <C>         <C>        <C>
                                                    1997       1998         1999        2000        2001       2002
--------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
TXU Corp................................             100        118           96         128         143         59
--------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
S&P 500 Index...........................             100        129          156         141         125         97
--------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
S&P Electric Utilities Index............             100        115           93         143         131        112
--------------------------------------------- ----------- ---------- ------------ ----------- ----------- ----------
</TABLE>

                                       20
<PAGE>

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                 AND RELATED STOCKHOLDER MATTERS

Security ownership of certain beneficial owners at March 17, 2003:
<TABLE>
<CAPTION>
                                                                 Amount and Nature
                                   Name and Address                of Beneficial
       Title of Class            of Beneficial Owner                 Ownership              Percent of Class
    ----------------------     -------------------------       -----------------------     -------------------
        <S>                           <C>                          <C>                           <C>
        Common stock,                 TXU Corp.                    451,000 shares                100.0%
      $0.01 par value,               Energy Plaza                 sole voting and
         of TXU Gas               1601 Bryan Street               investment power
                                 Dallas, Texas 75201
</TABLE>

Security ownership of management at March 17, 2003:

        The following lists the common stock of TXU Corp. owned by the Directors
and Executive Officers of TXU Gas. The named individuals have sole voting and
investment power for the shares of common stock reported. Ownership of such
common stock by the Directors and Executive Officers, individually and as a
group, constituted less than 1% of the outstanding shares at March 17, 2003.
None of the named individuals own any of the preferred stock of TXU Gas or the
preferred securities of any subsidiaries of TXU Gas.
<TABLE>
<CAPTION>
                                                                     Number of Shares
                                       ---------------------------------------------------------------------------

                 Name                      Beneficially Owned         Deferred Plan (1)                    Total
                 ----                      ------------------         -----------------                    -----
<S>                                              <C>                        <C>                           <C>

 T. L. Baker.......................              91,588                      28,104                       119,692
 H. Dan Farell ....................              28,006                      18,784                        46,790
 Scott R. Longhurst................               8,896                           0                         8,896
 Michael J. McNally................             127,344                      33,734                       161,078
 Erle Nye..........................             420,366                      87,792                       508,158
 Eric H. Peterson..................              26,443                           0                        26,443
 R. A. Wooldridge..................               9,576                           0                         9,576
 All Directors and Executive
   Officers as a group (7).........             712,219                     168,414                       880,633
</TABLE>

-----------------

(1)     Share units held in deferred compensation accounts under the Deferred
        and Incentive Compensation Plan. Although this plan allows such units to
        be paid only in the form of cash, investments in such units create
        essentially the same investment stake in the performance of TXU Corp.'s
        common stock as do investments in actual shares of common stock.

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Robert A. Wooldridge, a Director of TXU Gas, is a partner of Hunton &
Williams, which provides legal services to TXU Gas.

                                       21
<PAGE>

                                     PART IV

Item 14. CONTROLS AND PROCEDURES

         An evaluation was performed under the supervision and with the
participation of TXU Gas' management, including the principal executive officer
and principal financial officer, of the effectiveness of the design and
operation of the disclosure controls and procedures in effect within 90 days of
the filing date of this annual report. Based on the evaluation performed, TXU
Gas' management, including the principal executive officer and principal
financial officer, concluded that the disclosure controls and procedures were
effective.

         There have been no significant changes in TXU Gas' internal controls or
in other factors that could significantly affect these controls subsequent to
the evaluation referenced above.

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents filed as part of the report:

    Financial Statements (included in Appendix A to this report):
<TABLE>
<CAPTION>

                                Item                                                                     Page
                                ----                                                                     ----

           <S>                                                                                            <C>
           Selected Financial Data...................................................................      A-2
           Management's Discussion and Analysis of Financial Condition
                and Results of Operations............................................................      A-3
           Statement of Responsibility...............................................................     A-16
           Independent Auditors' Report..............................................................     A-17
           Statements of Consolidated Income and Comprehensive Income for each of the
                three years in the period ended December 31, 2002....................................     A-18
           Statements of Consolidated Cash Flows for each of the three years in the period
                ended December 31, 2002..............................................................     A-19
           Consolidated Balance Sheets, December 31, 2002 and 2001...................................     A-20
           Statements of Consolidated Shareholder's Equity for each of the three years in the
                period ended December 31, 2002.......................................................     A-21
           Notes to Financial Statements.............................................................     A-22
</TABLE>
         The consolidated financial statement schedules are omitted because of
the absence of the conditions under which they are required or because the
required information is included in the consolidated financial statements or
notes thereto.

(b)      Reports on Form 8-K:

         Reports on Form 8-K filed since September 30, 2002, are as follows:

         Date                     Item Reported
         ----                     -------------

         November 5, 2002    Item 2. Disposition of Assets
                             Item 7. Financial Statements and Exhibits
         December 17, 2002   Item 5. Other Events and Regulation FD Disclosure

(c) Exhibits: Included in Appendix B to this report.


                                       22
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, TXU Gas Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                               TXU GAS COMPANY


Date:   March 28, 2003           By:        /s/  ERLE NYE
                                ------------------------------------
                                (Erle Nye, Chairman of the Board and
                                           Chief Executive)


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of TXU Gas
Company and in the capacities and on the date indicated.
<TABLE>
<CAPTION>

                         Signature                                   Title                              Date
                         ---------                                   -----                              ----
<S>                      <C>                                <C>                                  <C>

/s/                      ERLE NYE                           Principal Executive                  March 28, 2003
----------------------------------------------------------- Officer and Director
   (Erle Nye, Chairman of the Board and Chief Executive)


/s/                   SCOTT LONGHURST                       Principal Financial                   March 28,2003
.......----------------------------------------------------- Officer
         (Scott Longhurst, Senior Vice President)

/s/                   BIGGS C. PORTER                       Principal Accounting Officer          March 28, 2003
-----------------------------------------------------------
             (Biggs C. Porter, Vice President)

/s/                     T. L. BAKER                         Director                              March 28, 2003
-----------------------------------------------------------
                       (T. L. Baker)

/s/                 MICHAEL J. McNALLY                      Director                              March 28, 2003
-----------------------------------------------------------
                   (Michael J. McNally)

/s/                  ERIC H. PETERSON                       Director                               March 28, 2003
------------------------------------------------------------
                    (Eric H. Peterson)

/s/                ROBERT A. WOOLDRIDGE                     Director                               March 28, 2003
-------------------------------------------------------------
                  (Robert A. Wooldridge)
</TABLE>

                                       23
<PAGE>

                                 TXU GAS COMPANY
                              CERTIFICATION OF CEO


     I, Erle Nye, Chairman of the Board and Chief Executive of TXU Gas Company,
certify that:

1.   I have reviewed this annual report on Form 10-K of TXU Gas Company;

2.   Based on my knowledge, this annual 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 annual report;

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

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

       a. designed such disclosure controls and procedures 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 annual report
          is being prepared;

      b.  evaluated the effectiveness of the registrant's disclosure
          controls and procedures as of a date within 90 days prior to the
          filing date of this annual report (the "Evaluation Date"); and

      c.  presented in this annual report our conclusions about the
          effectiveness of the disclosure controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

      a.  all significant deficiencies in the design or operation of
          internal controls which could adversely affect the registrant's
          ability to record, process, summarize and report financial data and
          have identified for the registrant's auditors any material weaknesses
          in internal controls; and

      b.  any fraud, whether or not material, that involves management
          or other employees who have a significant role in the registrant's
          internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: March 28, 2003                /s/ Erle Nye
                              ----------------------------------------------
                              Signature: Erle Nye
                             Title: Chairman of the Board and Chief Executive


                                       24
<PAGE>

                                 TXU GAS COMPANY
                              CERTIFICATION OF PFO


     I, Scott Longhurst, Principal Financial Officer of TXU Gas Company, certify
that:

1.   I have reviewed this annual report on Form 10-K of TXU Gas Company;

2.   Based on my knowledge, this annual 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 annual report;

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

4.   The registrant's other certifying officers and I are responsible for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a. designed such disclosure controls and procedures 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 annual report
        is being prepared;

     b. evaluated the effectiveness of the registrant's disclosure
        controls and procedures as of a date within 90 days prior to the
        filing date of this annual report (the "Evaluation Date"); and

     c. presented in this annual report our conclusions about the
        effectiveness of the disclosure controls and procedures based on our
        evaluation as of the Evaluation Date;

5.   The registrant's other certifying officers and I have disclosed, based on
     our most recent evaluation, to the registrant's auditors and the audit
     committee of registrant's board of directors (or persons performing the
     equivalent function):

     a. all significant deficiencies in the design or operation of
        internal controls which could adversely affect the registrant's
        ability to record, process, summarize and report financial data and
        have identified for the registrant's auditors any material weaknesses
        in internal controls; and

     b. any fraud, whether or not material, that involves management
        or other employees who have a significant role in the registrant's
        internal controls; and

6.   The registrant's other certifying officers and I have indicated in this
     annual report whether or not there were significant changes in internal
     controls or in other factors that could significantly affect internal
     controls subsequent to the date of our most recent evaluation, including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: March 28, 2003           /s/ Scott Longhurst
                           ------------------------------
                           Signature: Scott Longhurst
                           Title: Principal Financial Officer


                                       25
<PAGE>
<TABLE>
<CAPTION>

                                                                                                     Appendix A


TXU GAS COMPANY AND SUBSIDIARIES

INDEX TO FINANCIAL INFORMATION
December 31, 2002

                                                                                                          Page

<S>                                                                                                        <C>
Selected Financial Data.....................................................................               A-2

Management's Discussion and Analysis of Financial Condition and Results of Operations.......               A-3

Statement of Responsibility.................................................................              A-16

Independent Auditors' Report................................................................              A-17

Financial Statements:

     Statements of Consolidated Income and Comprehensive Income.............................              A-18

     Statements of Consolidated Cash Flows..................................................              A-19

     Consolidated Balance Sheets............................................................              A-20

     Statements of Consolidated Shareholder's Equity........................................              A-21

     Notes to Financial Statements..........................................................              A-22

</TABLE>


                                      A-1
<PAGE>


                        TXU GAS COMPANY AND SUBSIDIARIES
                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                                                                    Year Ended
                                                                   December 31,
                                                   -----------------------------------------------------------------
                                                     2002         2001          2000          1999        1998
                                                    ------       ------        ------        -------   -----------
                                                          (millions of dollars, except volumes and ratios)

<S>                                                  <C>          <C>           <C>          <C>          <C>
Total assets-- end of year.........................  $2,289       $4,543        $5,658       $ 3,433      $3,957
                                                     ======       ======        ======       =======      ======

Capitalization-- end of year
  Long-term debt, less amounts due currently.......   $ 426        $ 553        $  757       $   551      $  551
  TXU Gas Company obligated, mandatorily
   redeemable, preferred securities of
   subsidiary trust holding solely junior
   subordinated debentures of TXU Gas
   Company (trust securities).....................      147          147           147           147         146
  Preferred stock.................................       75           75            75            75          75
  Common stock equity.............................      753          985           949           965         741
                                                     ------       ------        ------       -------      ------
     Total........................................   $1,401       $1,760        $1,928       $ 1,738      $1,513
                                                     ======       ======        ======       =======      ======
Capitalization ratios-- end of year
  Long-term debt..................................     30.4%        31.4%         39.3%         31.7%       36.4%
  Trust securities................................     10.5          8.3           7.6           8.5         9.6
  Preferred stock.................................      5.4          4.3           3.9           4.3         5.0
  Common stock equity.............................     53.7         56.0          49.2          55.5        49.0
                                                     ------       ------        ------       -------      ------
     Total........................................    100.0%       100.0%        100.0%        100.0%      100.0%
                                                     ======       ======        ======       =======      ======

Operating revenues of continuing operations
  Gas distribution:
    Residential...................................    $ 563       $  710         $ 616        $   402      $  437
    Commercial....................................      291          387           318            212         225
    Industrial and electric generation............       20           47            28             20          20
                                                     ------       ------         -----        -------      ------
     Total gas distribution.......................      874        1,144           962            634         682
  Pipeline transportation.........................       59           48            57             57          58
  Other revenues, net of intercompany
    eliminations..................................       48           37            88            177         115
                                                     ------       ------         -----        -------      ------
     Total operating revenues of continuing
       operations.................................    $ 981       $1,229        $1,107        $   868      $  855
                                                     ======       ======        ======        =======      ======

Income (loss) from continuing operations..........    $  11        $   1         $  66        $     8      $  (29)
                                                     ======        =====         =====        =======      ======

Ratio of income (loss)from continuing
  operations to fixed charges.....................     1.26         1.12          2.43           1.08        0.52
Ratio of income (loss)from continuing
  operations to combined fixed charges and
  preferred dividends.............................     1.15         0.76          2.25           1.04        0.49

</TABLE>

With the transfer of certain businesses to TXU Energy Company LLC on January 1,
2002 (see Note 1 to Financial Statements), the gas distribution, gas pipeline
and asset management services businesses constitute TXU Gas Company's continuing
operations.

Certain previously reported financial and operating statistics have
been reclassified to conform to current classifications.

                                      A-2
<PAGE>

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS


BUSINESS AND DISPOSITIONS

         TXU Gas Company (TXU Gas), a Texas corporation, is a largely regulated
business engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas, and also provides
energy asset management services. TXU Gas is a wholly-owned subsidiary of TXU
Corp.

         Divisions and subsidiaries of TXU Gas include TXU Gas Distribution, a
retail gas distribution company serving over 1.4 million residential, commercial
and industrial customers through over 26,000 miles of distribution mains, TXU
Lone Star Pipeline, which operates approximately 6,800 miles of transmission and
gathering pipeline in Texas, and Oncor Utility Solutions which offers utility
asset management services to cooperatives and municipally-owned and
investor-owned utilities in North America.

         Prior to the restructuring of TXU Corp. and its United States (US)
subsidiaries in connection with the opening of the Texas electricity market to
competition, effective January 1, 2002, TXU Gas was also engaged in certain risk
management and energy trading activities and the retail sale of natural gas to
large commercial and industrial customers in various competitive markets in the
US. As a part of that restructuring, TXU Gas transferred those operations to TXU
Energy Company LLC (TXU Energy), a wholly-owned indirect subsidiary of TXU Corp.
Accordingly, the transferred operations have been reflected as discontinued
operations in the statements of consolidated income and cash flows of TXU Gas.

         In May 2000, TXU Gas sold substantially all of the assets of its
natural gas processing subsidiary for $105 million, resulting in a pre-tax gain
of $53 million ($34 million after-tax), which is reported in other income in the
statement of income.

CRITICAL ACCOUNTING POLICIES

         All dollar amounts in Management's Discussion and Analysis of Financial
Condition and Results of Operations and the tables therein are stated in
millions of US dollars unless otherwise indicated.

         TXU Gas' significant accounting policies are detailed in Note 2 to
Financial Statements. TXU Gas follows accounting principles generally accepted
in the United States of America. In applying these accounting policies in the
preparation of TXU Gas' consolidated financial statements, management is
required to make estimates and assumptions about future events that affect the
reporting and disclosure of assets and liabilities at the balance sheet dates
and revenue and expense during the periods covered. The following is a summary
of certain critical accounting policies of TXU Gas that are impacted by
judgments and uncertainties and for which different amounts might be reported
under a different set of conditions or using different assumptions.

         Revenue recognition - TXU Gas records gas distribution revenues as
natural gas is provided to retail customers on the basis of periodic cycle meter
readings and includes an estimated accrual for the value of gas provided from
the meter reading date to the end of the period. Such accruals are based on
estimated daily consumption, which is derived using historical customer profiles
adjusted for weather and other measurable factors affecting consumption. Gas
pipeline transportation revenues are recognized as services are provided to
customers based on estimated volumes subsequently confirmed by meter readings.
Revenues include adjustments under regulatory mechanisms to recover or refund
the cost of natural gas purchased for distribution to retail customers that is
above or below the level included in billed distribution rates.

         Regulatory assets and liabilities - The financial statements of TXU Gas
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effect of Certain Types of Regulation." The assumptions and
judgments used by regulatory authorities continue to have an impact on the

                                      A-3
<PAGE>

recovery of costs, the rate earned on invested capital and the timing and amount
of assets to be recovered by rates. (See Note 11 to Financial Statements.)

         Depreciation of Property, Plant and Equipment - The depreciable lives
of pipeline and distribution systems are based on management's
estimates/determinations of the systems' economically useful lives as approved
by regulatory authorities. To the extent that the actual lives differ from these
estimates, there would be an impact on the amount of depreciation expense
recognized in the financial statements.

         Goodwill and Intangible Assets -- TXU Gas evaluates goodwill for
impairment at least annually in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." TXU
Gas has performed impairment tests for reporting units reflected in results of
operations from continuing operations, and no goodwill impairment charges were
recorded.

         TXU Gas primarily uses discounted cash flow analyses to test for
goodwill impairment. Such analyses require a significant number of estimates and
assumptions regarding future earnings, working capital requirements, capital
expenditures, discount rate, terminal year growth factor and other modeling
factors.

         Defined Benefit Pension Plans and Other Postretirement Benefit Plans --
TXU Gas is a participating employer in the TXU Retirement Plan (Retirement
Plan), a defined benefit pension plan sponsored by TXU Corp. TXU Gas also
participates with TXU Corp. and certain other affiliated subsidiaries of TXU
Corp. to offer certain health care and life insurance benefits to eligible
employees and their eligible dependents upon the retirement of such employees
from TXU Corp. Reported costs of providing non-contributory defined pension
benefits and other postretirement benefits (see Note 9 to Financial Statements
for further discussion of those costs) are dependent upon numerous factors,
assumptions and estimates.

         For example, these costs are impacted by actual employee demographics
(including age, compensation levels and employment periods), the level of
contributions made to the plan, and earnings on plan assets. The Retirement
Plan's assets are primarily made up of equity and fixed income investments.
Changes made to the provisions of the plan may also impact current and future
pension costs. Fluctuations in actual equity market returns as well as changes
in general interest rates may result in increased or decreased pension costs in
future periods. Pension costs may also be significantly affected by changes in
key actuarial assumptions, including anticipated rates of return on plan assets
and the discount rates used in determining the projected benefit obligation and
pension costs.

         In accordance with SFAS 87, "Employers' Accounting for Pensions,"
changes in pension obligations associated with these factors may not be
immediately recognized as pension costs on the income statement, but generally
are recognized in future years over the remaining average service period of plan
participants. As such, significant portions of pension costs recorded in any
period may not reflect the actual level of cash benefits provided to plan
participants.

         As of December 31, 2002, key assumptions of the Retirement Plan and
other postretirement benefit plans were revised, including decreasing the
expected return on plan assets from 9% to 8.5% and decreasing the assumed
discount rate from 7.5% to 6.75%. In selecting assumed discount rates, TXU Corp.
considered fixed income security yield rates for AA rated portfolios as reported
by Moody's. In selecting an assumed rate of return on plan assets, TXU Corp.
considered past performance and economic forecasts for the types of investments
held by the plan. The market value of the Retirement Plan assets has been
affected by sharp declines in equity markets since the first quarter of 2000.
The Retirement Plan asset values have declined $151 million and $49 million in
2002 and 2001, respectively. The projected benefit obligation has increased by
$165 million as a result of the change in the discount rate. Further, based on
the current assumptions and available information, in 2003 funding requirements
for TXU Gas are expected to increase approximately $2 million and pension
expense is expected to increase, as a result of the changed assumptions above
and other actions, a total of approximately $6 million over 2002 amounts.
Pension cost and cash funding requirements could increase in future years.

         As a result of the Retirement Plan asset return experience, at December
31, 2002, TXU Gas was required to recognize its portion of an additional minimum
liability as prescribed by SFAS 87, "Employers' Accounting for Pensions," and
SFAS 132, "Employers' Disclosures about Pensions and Postretirement Benefits."
The liability, which amounted to $25 million ($16 million after-tax) for TXU
Gas, was recorded as a reduction to shareholder's equity through a charge to
Other Comprehensive Income, and did not affect net income for 2002. The charge

                                      A-4
<PAGE>

to Other Comprehensive Income will be reversed in future periods to the extent
fair value of trust assets exceeds the accumulated benefit obligation.

         The amounts provided above for funding requirements, pension expense
and minimum liability adjustment mentioned above, represent allocations of the
TXU Corp. Retirement Plan to TXU Gas.


RESULTS OF OPERATIONS

Selected Statistical and Financial Data
<TABLE>
<CAPTION>

                                                                              Year Ended December 31,
                                                                    ----------------------------------------
                                                                        2002            2001            2000
                                                                     --------        --------        -------
<S>                                                                       <C>            <C>              <C>
SALES VOLUMES
   Gas distribution (billion cubic feet -- Bcf):
       Residential.......................................                  86              84              83
       Commercial........................................                  53              53              51
       Industrial and electric generation................                   5               7               4
                                                                     --------        --------        --------
          Total gas distribution.........................                 144             144             138
                                                                     ========        ========        ========

   Pipeline transportation (Bcf).........................                 437             386             462
                                                                     ========        ========        ========

OPERATING REVENUES
   Gas distribution:
       Residential.......................................            $    563        $    710        $    616
       Commercial........................................                 291             387             318
       Industrial and electric generation................                  20              47              28
                                                                     --------        --------        --------
          Total gas distribution.........................                 874           1,144             962
   Pipeline transportation...............................                  59              48              57
   Other revenues, net of intercompany eliminations......                  48              37              88
                                                                     --------        --------        --------
          Total operating revenues.......................            $    981        $  1,229        $  1,107
                                                                     ========        ========        ========

GAS DISTRIBUTION CUSTOMERS
   (end of year - in thousands)..........................               1,470           1,447           1,438

HEATING DEGREE DAYS (% of normal)........................                 102%             98%             95%

</TABLE>

2002 compared to 2001
---------------------

         TXU Gas' operating revenues decreased $248 million, or 20%, to $981
million in 2002. The decline was driven by lower revenues of $270 million in the
distribution business, reflecting lower gas costs partially offset by $22
million in higher base distribution service rates. Distribution volumes were
even with the prior year.

         Gross margin (operating revenue less gas purchased for resale) rose $8
million, or 2%, to $473 million in 2002. The increase was driven by higher base
distribution service rates. Rates billed to customers include base distribution
service rates and costs of gas delivered.

         Operation and maintenance expense increased $2 million, or 1%, to $257
million in 2002. The increase reflects $5 million in increased employee benefit
costs, $3 million in claim settlements, $3 million in developmental expenses in
the asset management services business, and other cost increases totaling $1
million, partially offset by reduced bad debt expense of $10 million, reflecting
the lower cost of gas billed to customers.

         Depreciation and other amortization, other than goodwill, rose $3
million, or 5%, to $68 million in 2002. The increase reflected higher
depreciation of distribution system assets of $5 million due to normal growth
and system improvements, partially offset by lower regulatory asset amortization
of $2 million.

         Goodwill amortization of $9 million in 2001 ceased in 2002, reflecting
the discontinuance of goodwill amortization pursuant to the adoption of SFAS No.
142.

         Taxes other than income decreased $19 million, or 20%, to $76 million
in 2002. The decline was driven by lower gross receipts taxes, reflecting lower
revenues due to the decline in gas costs from high weather-related levels in
late 2000.

                                      A-5
<PAGE>

         Other income decreased $16 million to $10 million in 2002. The 2002
period includes $5 million in gains on disposition of property and $2 million in
earnings from investments in unconsolidated subsidiaries. The 2001 period
includes $18 million from a favorable settlement of legal proceedings related to
a gas purchase contract and $4 million in gains on disposition of property.

         There was no interest income in 2002 compared with $9 million in 2001.
Interest income in 2001 related to under-collected gas costs, reflecting high
gas costs during the winter of 2000/2001.

         Interest expense and other charges decreased $2 million, or 3%, to $63
million in 2002. The decrease is primarily due to lower average interest rates
on advances from affiliates.

         The effective income tax rate was 35.3% in 2002 and 87.5% in 2001, with
the difference primarily due to the cessation of non-deductible goodwill
amortization.

         Income from continuing operations before extraordinary loss rose $10
million to $11 million in 2002. The increase was driven by lower taxes other
than income, the cessation of goodwill amortization and the gross margin growth,
partially offset by the declines in other income and interest income. Net
pension and post-retirement benefit costs reduced net income by $10 million in
2002 and $7 million in 2001.

         There was no income or loss from discontinued operations in 2002,
compared to income of $28 million in 2001, reflecting the transfer of those
operations to TXU Energy effective January 1, 2002.

         An extraordinary loss of $23 million (net of tax benefit of $12
million) was recorded in 2002 related to the early extinguishment of debt. On
October 15, 2002, TXU Gas exercised its right to redeem $200 million aggregate
principal amount of Putable Asset Term Securities (PATS), which would have
matured on October 15, 2012, for a cash premium of $35 million.

         Net loss applicable to common stock was $16 million in 2002 compared
with income of $25 million in 2001, a change of $41 million. As discussed above,
growth in income from continuing operations of $10 million in 2002 was more than
offset by the absence of income from discontinued operations ($28 million in
2001) and the extraordinary loss of $23 million.

2001 compared to 2000
---------------------

         The following discussion excludes the operating results from the gas
processing business sold in May 2000, consisting of operating revenues of $54
million, gross margin of $42 million, operation and maintenance expense of $35
million, depreciation and amortization expense of $1 million and taxes other
than income of $1 million. These amounts are for the 2000 period through the
sale date.

         TXU Gas' operating revenues increased $176 million, or 17%, to $1.2
billion in 2001. This increase reflected higher gas distribution prices
resulting from higher gas costs and base distribution service rates, as well as
4% growth in distribution volumes. The higher costs and volumes reflected the
colder winter weather in the first quarter of 2001.

         Gross margin (operating revenue less energy purchased for resale)
increased $4 million, or 1%, to $465 million in 2001. Improved margin from
increased gas volumes distributed due to the colder winter weather was partially
offset by gas costs adjustments that are unrecoverable under regulatory
mechanisms.

         Operation and maintenance expense increased $34 million, or 15%, to
$255 million in 2001. The gas distribution business had increases in several
expense categories, including bad debts and increased maintenance costs for
system reliability. The increased bad debt expense reflected higher billings to
customers due to higher gas costs.

         Depreciation and amortization, other than goodwill, rose $5 million, or
8%, to $65 million in 2001 due primarily to normal growth as well as
improvements to the distribution system.

                                      A-6
<PAGE>

         Taxes other than income rose $33 million, or 53%, to $95 million in
2001. This increase reflected higher gross receipts taxes due largely to the
weather-related rise in natural gas costs and revenues in late 2000 and early
2001.

         Other income decreased to $26 million in 2001 from $61 million in 2000.
Other income in 2001 included $18 million from the favorable settlement of legal
proceedings related to a gas purchase contract. Other income in 2000 included
$53 million from the sale of the gas processing business.

         Other deductions in 2001 were $3 million, compared with none in the
prior year, reflecting losses on asset disposals.

         Interest income rose $6 million to $9 million in 2001, reflecting
interest on under-recovered gas costs as allowed under regulation.

         Interest expense and other charges decreased $7 million, or 10%, to $65
million in 2001. This change is due primarily to lower average interest rates on
advances from affiliates.

         The effective tax rate excluding non-deductible goodwill amortization
of $9 million in both years was 41.2% in 2001 and 34.8% in 2000. There were no
other material changes or adjustments impacting the effective rate comparison.

         Income from continuing operations before extraordinary loss was $1
million in 2001 compared to $66 million in 2000. Excluding a $53 million ($34
million after-tax) gain on the May 2000 sale of the gas processing business and
its related net income of $6 million, income from continuing operations declined
$25 million. These results were driven by the higher operation and maintenance
expenses and taxes other than income, partially offset by the favorable
settlement of legal proceedings (reported in other income).

         Income from discontinued operations was $28 million in 2001 compared
with a loss of $79 million in 2000. The improvement was driven by favorable
energy trading results, partially offset by higher expenses associated with
expanding the business in preparation for the opening of the Texas electricity
market to competition.

         Net income applicable to common stock for 2001 was $25 million compared
with a net loss of $17 million for 2000. Improved results in discontinued
operations were partially offset by the decline in continuing operations.

Other Comprehensive Income
--------------------------

         Minimum pension liability adjustments reported in other comprehensive
income for 2002 and 2001 are losses of $25 million ($16 million after-tax) and
$1 million, respectively, with no adjustments in 2000. The minimum pension
liability represents the difference between the excess of the accumulated
benefit obligation over the pension plans' assets and the liability reflected in
the balance sheet. Further, based on the current assumptions and available
information, funding requirements in 2003 related to the pension plans are
expected to increase by $2 million, and pension expense is expected to increase
approximately $6 million over the 2002 amounts. See discussion under "Defined
Benefit Pension Plans and Other Postretirement Benefit Plans."

         TXU Gas adopted SFAS No. 133 effective January 1, 2001 and recorded a
$3 million ($2 million after-tax) credit to other comprehensive income at
transition to reflect the fair value of derivative financial instruments
designated as cash flow hedges. TXU Gas has historically used, and will continue
to use, financial instruments that are effective in hedging future cash flow
volatility in interest rates. The amounts included in other comprehensive income
are expected to be used in the future to offset the impact of interest rate
changes on related payments. Amounts in other comprehensive income include the
value of interest rate cash flow hedges, based on current market conditions. The
effects of the hedges will be recorded in the statement of income as the hedged
transactions are actually settled.

         During 2002 and 2001, changes in the fair value of derivative financial
instruments effective as cash flow hedges reflected losses of $3 ($2 million
after-tax) and $9 million ($6 million after-tax), respectively. These losses

                                      A-7
<PAGE>
were due to decreases in the fair value of interest rate hedges because of lower
interest rates. During 2002, interest rate hedge losses reclassified from other
comprehensive income to earnings were $5 million ($3 million after-tax), with
none in 2001.

         In 2001, the discontinued operations entered into commodity-related
cash flow hedge transactions. The effect of changes in fair value of these
hedges of $25 million ($16 million after-tax) is reflected in other
comprehensive income of discontinued operations.

FINANCIAL CONDITION

Liquidity and Capital Resources

         Cash flows provided by operating activities for 2002 were $134 million
compared to $140 million and $56 million for 2001 and 2000, respectively. The
decrease from 2001 to 2002 reflected lower income tax refunds largely offset by
the favorable effect on working capital of the collection in 2002 of a
settlement of legal proceedings related to a gas purchase contract. The increase
from 2000 to 2001 of $84 million reflected the effects of the temporary rise in
natural gas prices and demand in late 2000 on unbilled gas costs and gas
imbalances with wholesale customers, the recovery of which occurred in 2001.

         Cash flows used in financing activities in 2002 were $28 million,
primarily reflecting the retirement of $200 million of PATS and the associated
premium of $35 million, partially offset by advances from TXU Corp. of $219
million. Cash flows used in financing activities in 2001 were $183 million,
primarily reflecting repayment of advances to TXU Corp. Cash flows from
financing activities in 2000 reflected the issuance of $200 million of PATS and
advances from TXU Corp.

         Cash flows used in investing activities for 2002 totaled $94 million.
This compares to $179 million and $27 million used for investing activities in
2001 and 2000, respectively. The decrease in capital spending in 2002 of $82
million to $108 million reflects higher expenditures in 2001 for improvements in
system reliability. These expenditures accounted for the increase in capital
spending in 2001 of $64 million to $190 million. Capital expenditures are
estimated at $113 million for 2003. The disposition of the gas processing
business provided $105 million in cash in 2000.

         Discontinued operations used cash of $11 million in 2002, provided $219
million in 2001 and used $250 million in 2000. Cash provided in 2001 primarily
reflected the return of cash deposits for trading margin requirements that were
met with letters of credit. Cash used in 2000 primarily reflected the posting of
these deposits.

         On October 15, 2002, TXU Gas exercised its right to redeem $200 million
aggregate principal amount of PATS that would have matured on October 15, 2012
for a cash premium of $35 million ($23 million after-tax). TXU Gas used cash
advances from TXU Corp. and cash on hand to fund the redemption of the PATS.

         On January 1, 2003, TXU Gas redeemed, at par value, $125 million
principal amount 6 1/4% Notes, which were due on that date. TXU Gas used cash
advances from TXU Corp. and cash on hand to fund the redemption of these notes.

         Total capitalization at December 31, 2002 of $1.4 billion consisted of
approximately 30.4% long-term debt less amounts due currently, 10.5% trust
securities, 5.4% preferred stock, and 53.7% common stock equity.

         TXU Gas is not a borrower under any TXU Corp. credit agreements. TXU
Gas will meet its short-term liquidity needs through advances from TXU Corp. and
affiliated companies. TXU Gas had short-term advances from TXU Corp. of $110
million and $248 million as of December 31, 2002 and December 31, 2001,
respectively.

         TXU Gas has entered into two interest rate swap agreements with respect
to the TXU Gas Capital I trust securities, with notional principal amounts of
$100 million and $50 million, that effectively fix the rate at 6.629% and at
6.444%, respectively, per annum to July 1, 2003.

                                      A-8
<PAGE>
         TXU Gas buys natural gas under long-term and short-term intrastate
contracts in order to assure reliable supply to its customers. Many of these
contracts require minimum volumes ("take-or-pay") of gas purchases. At December
31, 2002, TXU Gas' commitments to purchase natural gas under long-term contracts
have market-based pricing mechanisms and no fixed price commitments. On the
basis of TXU Gas' current expectations of demand from its customers as compared
with its take-or-pay obligations under such purchase contracts, management does
not consider it likely that any material payments will become due from TXU Gas
for gas not taken.

Financing Arrangements

         Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary, which sells undivided interests in accounts receivable it purchases
to financial institutions. As of December 31, 2002, the facility includes TXU
Energy (through certain subsidiaries), Oncor and TXU Gas as qualified
originators of accounts receivable under the program. TXU Receivables Company
may sell up to an aggregate of $600 million in undivided interests in the
receivables purchased from the originators under the program. As of December 31,
2002, TXU Gas had sold $115 million face amount of receivables to TXU
Receivables Company under the program in exchange for cash of $37 million and
$77 million in subordinated notes, with $1 million of losses on sales for the
year ended December 31, 2002 that principally represent the interest costs on
the underlying financing. These losses approximated 5% of the cash proceeds from
the sale of undivided interests in accounts receivable on an annualized basis.

         Upon termination, cash flows to the originators would be delayed as
collections of sold receivables would be used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services Company, a subsidiary of TXU
Corp., services the purchased receivables and is paid a market based servicing
fee by TXU Receivables Company. The subordinated notes receivable from TXU
Receivables Company represent TXU Corp.'s subsidiaries' retained interests in
the transferred receivables and are recorded at book value, net of allowances
for bad debts, which approximates fair value due to the short-term nature of the
subordinated notes, and are included in accounts receivable in the balance
sheet.

         In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables that are
31-90 days past due into the program.

         Contingencies Related to Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:

     1)  the credit rating for the long-term senior debt securities of all
         originators and the parent guarantor, if any, declines below BBB- by
         S&P or Baa3 by Moody's; or
     2)  the delinquency ratio (delinquent for 31 days) for the sold
         receivables, the default ratio (delinquent for 91 days or deemed
         uncollectible), the dilution ratio (reductions for discounts, disputes
         and other allowances) or the days collection outstanding ratio exceed
         stated thresholds.

         The delinquency and dilution ratios exceeded the relevant thresholds at
various times during 2002 and in January 2003, but waivers were granted. These
ratios were affected by issues impacting TXU Energy related to the transition of
the Texas electricity market to competition. The resolution of these issues, as
well as the implementation of new rules by the Public Utility Commission of
Texas, is expected to bring the ratios in consistent compliance with the
program.

         Issuance of Debt and Equity -- TXU Gas may issue and sell additional
debt and equity securities which are currently registered with the Securities
and Exchange Commission for offering pursuant to Rule 415 under the Securities
Act of 1933. This includes the possible future offering of up to an aggregate of
$400 million of debt securities and/or preferred securities of subsidiary
trusts.

                                      A-9
<PAGE>

         During 2002, $360 million of advances from TXU Corp. were converted to
 paid-in capital.

        Credit Ratings of TXU Corp. and TXU Gas

        The current credit ratings for TXU Corp. and TXU Gas are presented
 below:

                               TXU Corp.      TXU Gas
                               ---------      -------
                                (Senior       (Senior
                              Unsecured)    Unsecured)
Standard & Poor's......          BBB-          BBB
Moody's................          Ba1           Baa3
Fitch .................          BBB-          BBB-


         Moody's currently maintains a negative outlook for TXU Corp. and TXU
Gas. Fitch currently maintains a stable outlook for both entities. Standard &
Poor's currently maintains a negative outlook for both entities.

         These ratings are investment grade except for Moody's rating of TXU
Corp.'s senior unsecured debt, which is one notch below investment grade.

         A rating reflects only the view of a rating agency and it is not a
recommendation to buy, sell or hold securities. Any rating can be revised upward
or downward at any time by a rating agency if such rating agency decides that
circumstances warrant such a change.

         Credit Rating and Cross Default Provisions -- Certain of TXU Gas'
financing arrangements contain provisions that are specifically affected by
changes in credit ratings and also include cross-default provisions. The
material provisions are described below.

         Credit Rating Provisions --Under the accounts receivable program, all
originators (currently TXU Energy through certain subsidiaries, Oncor and TXU
Gas), are required to maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating (or
supply a parent guarantee with a similar rating). A downgrade below the required
ratings for an originator would prevent that originator from selling its
accounts receivable under the program. If all originators are downgraded so that
there are no eligible originators, the facility would terminate. Upon
termination, cash flows to the originators would be delayed as collections of
sold receivables were used to repurchase the undivided interests of the
financial institutions instead of purchasing new receivables. The level of cash
flows would normalize in approximately 16 to 31 days.


         Cross Default Provisions -- Certain financing arrangements of TXU Gas
and its subsidiaries contain provisions that would result in an event of default
if there is a failure under other financing arrangements to meet payment terms
or to observe other covenants that would result in an acceleration of payments
due. Such provisions are referred to as "cross default" provisions. Most
agreements have a cure period of up to 30 days from the occurrence of the
specified event during which the company is allowed to rectify or correct the
situation before it becomes an event of default.

         The accounts receivable program described above contains a cross
default provision with a threshold of $50 million applicable to each of the
originators under the program. TXU Receivables Company and TXU Business Services
Company each have a cross default threshold of $50 thousand. If either an
originator, TXU Business Services Company or TXU Receivables Company defaults on
indebtedness of the applicable threshold, the facility could terminate.


         A default by TXU Gas or any of its material subsidiaries on
indebtedness of $25 million or more would result in a cross-default under the
TXU Gas senior notes due 2004 and 2005 ($300 million) and two interest rate swap
agreements entered into in connection with TXU Gas' floating rate mandatorily
redeemable preferred securities (see Note 6). In the event of default on the
swap agreements, a cash settlement of $4 million (as of December 31, 2002) for
the out-of-the money position would be required.

                                      A-10
<PAGE>

         See Notes 5 and 12 to Financial Statements for the cash obligations of
TXU Gas for long-term debt and operating leases, respectively.

         Guarantees -- In 1992, a discontinued engineering and construction
business of TXU Gas completed construction of a plant, the performance of
which is warranted by TXU Gas for a period ending no later than 2008.  The
maximum contingent liability under the guarantee is $92 million.  No claims
have been asserted under the guarantee and none are anticipated.

Quantitative and Qualitative Disclosure about Market Risk

         Market risk is the risk that TXU Gas may experience a loss in value as
a result of changes in market conditions such as interest rates, which TXU Gas
is exposed to in the ordinary course of business. TXU Gas enters into financial
instruments such as interest rate swaps to manage interest rate risks related to
indebtedness.

         Commodity Price Risk Management -- As a result of continued regulation,
TXU Gas Distribution has minimal exposure to energy price risk.


                                      A-11
<PAGE>

         Interest Rate Risk -- The table below provides information concerning
TXU Gas' financial instruments as of December 31, 2002 and 2001 that are
sensitive to changes in interest rates, which include debt obligations, interest
rate swaps and trust securities. TXU Gas has entered into interest rate swaps
under which it has agreed to exchange the difference between fixed-rate and
variable-rate interest amounts calculated with reference to specified notional
principal amounts at dates that coincide with interest payments. For trust
securities, the table presents cash flows based on December 31, 2002 book value
and the related weighted average rate by expected redemption date. The weighted
average rate is based on the rate in effect at the reporting date. The effects
of unamortized premiums and discounts on long-term debt are excluded from the
table. See Note 5 to Financial Statements for a discussion of changes in debt
obligations.

<TABLE>
<CAPTION>

                                             Expected Maturity Date
                                        ------------------------------------------------
                                                                                               2002              2001
                                                                                            -------------     ------------
                                                                                    There-             Fair            Fair
                                         2003      2004     2005     2006    2007    after    Total    Value    Total  Value
                                         ----      ----     ----     -----   ----   ------    -----   ------    -----  -----
                                                                      (Millions of Dollars)
<S>                                     <C>      <C>       <C>         <C>     <C>   <C>    <C>       <C>      <C>     <C>
Long-term Debt
  (including current maturities)
         Fixed Rate (millions of
           dollars)                     $ 125    $  150    $ 150       --     --    $ 125   $  550     $ 558   $ 750    $762
         Average interest rate......     6.25%     6.38%    7.13%      --     --     6.56%    6.59%       --    6.84%     --

Trust Securities
   TXU Gas Company obligated,
      mandatorily redeemable,
      preferred securities of
      subsidiary trust holding
      solely junior subordinated
      debentures of TXU Gas Company
         Variable rate............                                                  $ 147   $  147     $ 150   $ 147     $150
         Average interest rate....                                                   3.16%    3.16%       --    3.79%      --

Interest Rate Swaps
   (notional amounts)
   Variable to Fixed (millions of      $ 150        --       --      --       --      --    $  150     $  (4)  $ 150     $ (6)
       dollars)
      Pay rate...................       6.57%       --       --      --       --      --      6.57%       --    6.57%      --
      Receive rate...............       3.16%       --       --      --       --      --      3.16%       --    3.79%      --
</TABLE>


         Concentration of Credit Risk -- TXU Gas' gross exposure to credit risk
as of December 31, 2002 was $118 million, after reserves of $3 million,
primarily representing trade accounts receivable associated with the sale of
natural gas to residential and commercial customers. TXU Gas had no exposure to
any one customer that represented greater than 10% of TXU Gas' trade accounts
receivable at December 31, 2002. The risk of material loss from non-performance
of these customers is unlikely based upon historical experience. Reserves for
uncollectible accounts receivable are established for the potential loss from
non-payment by these customers based on historical experience and market or
operational conditions.

Regulation and Rates

         TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During 2002, rate cases were filed in
147 cities. The status of these cases is as follows: settlements were reached
with 73 of these cities for annual increases aggregating $9 million; rate cases
were withdrawn from 23 cities; and 51 cities declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the Railroad Commission of Texas (RRC). A
settlement was reached for $7.5 million. These settlements adjusted other
aspects of the TXU Gas tariffs. The total annual favorable impact of the 2002
rate settlements and associated tariff adjustments is approximately $22 million.

                                      A-12
<PAGE>

         In July 2001 and August 2001, TXU Gas filed two cases, a gas cost
review and a gas cost reconciliation, covering the period between November 1997
and June 2001, seeking to recover $29 million of under-recovered gas costs. On
August 6, 2002, a settlement was approved by the RRC authorizing TXU Gas to
recover $18 million of this amount, which has been recovered through a
surcharge, while $11 million in under-recovered gas costs remains pending.

         On August 30, 2002, TXU Gas filed the city gate gas cost reconciliation
for the twelve-month period ended June 30, 2002 with the RRC. During this
period, TXU Gas over-recovered its gas cost by $24 million, which is being
refunded from October 2002 through June 2003. The refund has no material impact
on the net income of TXU Gas.


RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

         The following risk factors are being presented in consideration of
industry practice with respect to disclosure of such information in filings
under the Securities Exchange Act of 1934, as amended.

         Some important factors, in addition to others specifically addressed in
this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, that could have a material impact on TXU Gas' operations, financial
results and financial condition, and could cause TXU Gas' actual results or
outcomes to differ materially from forward-looking statements (see
"Forward-Looking Statements" below), include:

         TXU Gas' businesses operate in changing market environments influenced
by various legislative and regulatory initiatives. TXU Gas will need to adapt to
these changes.

         As a result of the energy crisis in California during the summer of
2001, the recent volatility of natural gas prices in North America, the
bankruptcy filing by Enron Corporation, recently discovered accounting
irregularities of public companies, and investigations by governmental
authorities into energy trading activities, companies in regulated and
non-regulated utility businesses have been under a generally increased amount of
public and regulatory scrutiny. Recently discovered accounting irregularities at
certain companies in the industry have caused regulators and legislators to
review current accounting practices and financial disclosures. The capital
markets and ratings agencies also have increased their level of scrutiny.
Additionally, allegations against various energy trading companies of "round
trip" or "wash" transactions, which involve the simultaneous buying and selling
of the same amount of power at the same price and provide no true economic
benefit, may have a negative effect on the industry. TXU Gas believes that it is
complying with all applicable laws, but it is difficult or impossible to predict
or control what effect these events may have on TXU Gas' financial condition or
access to the capital markets. Additionally, it is unclear what laws or
regulations may develop, and TXU Gas cannot predict the ultimate impact of any
future changes in accounting regulations or practices in general with respect to
public companies, the energy industry or its operations specifically.

         TXU Gas is subject to changes in laws or regulations, changing
governmental policies and regulatory actions, including those of the Railroad
Commission of Texas, with respect to matters including, but not limited to,
operation and construction of pipeline transmission facilities, acquisition,
disposal, depreciation and amortization of regulated assets and facilities,
recovery of purchased gas costs, and return on invested capital.

         TXU Gas' businesses are subject to cost-of-service regulation. This
regulatory treatment does not provide any assurance as to achievement of
earnings levels.

         TXU Gas relies on access to financial markets or advances from
affiliates as a significant source of liquidity for capital requirements not
satisfied by operating cash flows. The inability to raise capital on favorable
terms, particularly during times of uncertainty in the financial markets, could
impact TXU Gas' ability to sustain and grow its businesses, which are capital
intensive, and would likely increase its capital costs. Further, concerns on the
part of counterparties regarding TXU Gas' liquidity and credit could limit its
ability to enter into larger and longer-dated transactions.

                                      A-13
<PAGE>

         TXU Gas uses derivative financial instruments, such as interest rate
swaps, and may use other instruments, such as options, futures and forwards, to
manage risks. TXU Gas could recognize financial losses as a result of volatility
in the market values of these contracts, or if a counterparty fails to perform.
TXU Gas' inability or failure to effectively hedge its assets or positions
against changes in commodity prices, interest rates, counterparty credit risk or
other risk measures could result in greater volatility of and/or declines in
future financial results.

         The operation of gas transportation facilities involves many risks,
including breakdown or failure of equipment, pipelines, lack of sufficient
capital to maintain the facilities, or the impact of unusual or adverse weather
conditions or other natural events, as well as the risk of performance below
expected levels of output or efficiency. This could result in lost revenues
and/or increased expenses. Insurance, warranties or performance guarantees may
not cover any or all of the lost revenues or increased expenses. In addition to
these risks, breakdown or failure of a TXU Gas operating facility may prevent
the facility from performing under applicable sales agreements which, in certain
situations, could result in termination of those agreements or incurring a
liability for liquidated damages.

         Natural disasters, war, terrorist acts and other catastrophic events
may impact TXU Gas' operations in unpredictable ways, including disruption of
natural gas supply and delivery activities, declines in customer demand and
instability in the financial markets.

         TXU Gas is subject to extensive federal, state and local environmental
statutes, rules and regulations relating to air quality, water quality, waste
management, natural resources and health and safety. There are capital,
operating and other costs associated with compliance with these environmental
statutes, rules and regulations, and those costs could increase in the future.

         TXU Gas' ability to successfully and timely complete capital
improvements to existing facilities or other capital projects is contingent upon
many variables and subject to substantial risks. Should any such efforts be
unsuccessful, TXU Gas could be subject to additional costs and/or the write off
of its investment in the project or improvement.

         TXU Gas is subject to costs and other effects of legal and
administrative proceedings, settlements, investigations and claims.

         TXU Gas is subject to the effects of new, or changes in, income tax
rates or policies and increases in taxes related to property, plant and
equipment and gross receipts and other taxes. Further, TXU Gas is subject to
audit and reversal of its tax positions by the Internal Revenue Service and
state taxing authorities.

         TXU Gas' ability to obtain insurance, and the cost of and coverage
provided by such insurance, could be affected by events outside its control.

         TXU Gas is subject to employee workforce factors, including loss or
retirement of key executives and availability of qualified personnel.

         The issues and associated risks and uncertainties described above are
not the only ones TXU Gas may face. Additional issues may arise or become
material as the energy industry evolves. The risks and uncertainties associated
with these additional issues could impair TXU Gas' businesses in the future.
Reference is made to the discussion under Liquidity and Capital Resources.

                                      A-14
<PAGE>

FORWARD-LOOKING STATEMENTS

         This report and other presentations made by TXU Gas 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 the risks discussed above under "Risk Factors that May Affect Future Results"
and the following important factors, among others, that could cause the actual
results of TXU Gas to differ materially from those projected in such
forward-looking statements: (i) prevailing governmental policies and regulatory
actions, including those of the RRC, particularly with respect to allowed rates
of return, industry, market and rate structure, purchased natural gas and
investment recovery, acquisitions and disposal of assets and facilities,
operation and construction of distribution and pipeline facilities, present or
prospective wholesale and retail competition, changes in tax laws and policies
and changes in and compliance with environmental and safety laws and policies,
(ii) general industry trends, (iii) weather conditions and other natural
phenomena, and acts of sabotage, wars or terrorist activities, (iv)
unanticipated population growth or decline, and changes in market demand and
demographic patterns, (v) competition for retail and wholesale customers, (vi)
pricing and transportation of natural gas and other commodities, (vii)
unanticipated changes in interest rates, commodity prices, or rates of
inflation, (viii) unanticipated changes in operating expenses, liquidity needs
and capital expenditures, (ix) commercial bank market and capital market
conditions, (x) competition for new energy development opportunities, (xi) legal
and administrative proceedings and settlements, (xii) inability of the various
counterparties to meet their obligations with respect to TXU Gas' financial
instruments, (xiii) changes in technology used and services offered by TXU Gas,
and (xiv) significant changes in TXU Gas' relationship with its employees and
the potential adverse effects if labor disputes or grievances were to occur (xv)
gas costs and availability, (xvi) changes in business strategy development plans
or vendor relationships (xvii) availability of qualified personnel, (xviii)
implementation of new accounting standards, (xix) global financial and credit
market conditions, and credit rating agency actions and (xx) access to adequate
transmission facilities to meet changing demands.

         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 actual
results to differ materially from those contained in any forward-looking
statement.

                                      A-15
<PAGE>

                          TXU GAS COMPANY AND SUBSIDIARIES
                              STATEMENT OF RESPONSIBILITY

         The management of TXU Gas Company (TXU Gas) is responsible for the
preparation, integrity and objectivity of the consolidated financial statements
of TXU Gas and its subsidiaries and other information included in this report.
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. As
appropriate, the statements include amounts based on informed estimates and
judgments of management.

         The management of TXU Gas is responsible for establishing and
maintaining a system of internal control, which includes the internal controls
and procedures for financial reporting, that is designed to provide reasonable
assurance, on a cost-effective basis, that assets are safeguarded, transactions
are executed in accordance with management's authorization and financial records
are reliable for preparing consolidated financial statements. Management
believes that the system of control provides reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements
are prevented or would be detected within a timely period. Key elements in this
system include the effective communication of established written policies and
procedures, selection and training of qualified personnel and organizational
arrangements that provide an appropriate division of responsibility. This system
of control is augmented by an ongoing internal audit program designed to
evaluate its adequacy and effectiveness. Management considers the
recommendations of the internal auditors and independent auditors concerning TXU
Gas' system of internal control and takes appropriate actions which are
cost-effective in the circumstances. Management believes that, as of December
31, 2002, TXU Gas' system of internal control was adequate to accomplish the
objectives discussed herein.

         The independent auditing firm of Deloitte & Touche LLP is engaged to
audit, in accordance with auditing standards generally accepted in the United
States of America, the consolidated financial statements of TXU Gas and its
subsidiaries and to issue their report thereon.
<TABLE>
<CAPTION>
<S>                                                                      <C>

                 /s/ ERLE NYE                                      /s/ T. L. BAKER
-------------------------------------------------  ---------------------------------------------
         Erle Nye, Chairman of the Board                  T. L. Baker, Vice Chairman and Oncor
               and Chief Executive                                 Group President


              /s/ MICHAEL T. MCCALL                               /s/ SCOTT LONGHURST
-------------------------------------------------  ---------------------------------------------
 Michael T. McCall, President of TXU Gas Company        Scott Longhurst, Senior Vice President
                                                            and Principal Financial Officer


               /s/ BIGGS C. PORTER
-------------------------------------------------
       Biggs C. Porter, Vice President and
          Principal Accounting Officer

</TABLE>


                                      A-16
<PAGE>


INDEPENDENT AUDITORS' REPORT



TXU Gas Company:


We have audited the accompanying consolidated balance sheets of TXU Gas Company
(TXU Gas) and subsidiaries as of December 31, 2002 and 2001, and the related
statements of consolidated income, comprehensive income, cash flows and
shareholder's equity for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of TXU Gas'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of TXU Gas and subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America.

As discussed in Note 2 to the Financial Statements, TXU Gas changed its method
of accounting for goodwill amortization in 2002 in connection with the adoption
of Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets.



/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
February 14, 2003



                                      A-17
<PAGE>
                        TXU GAS COMPANY AND SUBSIDIARIES
                        STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
                                                                                   Year Ended
                                                                                  December 31,
                                                                       --------------------------------
                                                                          2002         2001         2000
                                                                        -------      -------      ------
                                                                               Millions of Dollars
<S>                                                                    <C>          <C>          <C>
Operating revenues..............................................       $   981      $  1,229     $  1,107
                                                                       -------      --------     --------
Operating expenses:
  Gas purchased for resale......................................           508           764          604
  Operation and maintenance.....................................           257           255          256
  Depreciation and amortization, other than goodwill............            68            65           61
  Goodwill amortization.........................................            --             9            9
  Taxes other than income.......................................            76            95           63
                                                                       -------      --------     --------
     Total operating expenses...................................           909         1,188          993
                                                                       -------      --------     --------

Operating income................................................            72            41          114

Other income....................................................            10            26           61

Other deductions................................................             2             3           --

Interest income.................................................            --             9            3

Interest expense and other charges..............................            63            65           72
                                                                       -------      --------     --------
Income from continuing operations before income taxes and
  extraordinary loss............................................            17             8          106

Income tax expense..............................................             6             7           40
                                                                       -------      --------     --------
Income from continuing operations before extraordinary loss.....            11             1           66

Income (loss) from discontinued operations, net of tax effect...            --            28          (79)

Extraordinary loss, net of tax effect...........................           (23)           --           --
                                                                       -------      --------     --------
Net income (loss)...............................................           (12)           29          (13)

Preferred stock dividends.......................................             4             4            4
                                                                       -------      --------     --------
Net income (loss) applicable to common stock....................       $   (16)     $     25     $    (17)
                                                                       =======      ========     ========
</TABLE>
                              STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
<S>                                                                    <C>          <C>          <C>
Income from continuing operations...............................       $    11      $      1     $     66
Other comprehensive income (loss) from continuing operations
  Net change during period, net of tax effect:
     Minimum pension liability adjustments (net of tax benefit
       of $9 million and $--)...................................           (16)           (1)          --
     Cash flow hedges (SFAS No. 133):
       Cumulative  transition  adjustment as of January 1, 2001
       (net of tax expense of $1)...............................            --             2           --
       Net change in fair value of derivatives (net of tax
          benefit of $1 and $3).................................            (2)           (6)          --
       Amounts realized in earnings (net of tax expense of $2)..             3            --           --
                                                                       -------      --------     --------
          Total.................................................           (15)           (5)          --
                                                                       -------      --------     --------
Comprehensive income (loss) from continuing operations..........            (4)           (4)          66
                                                                       -------      --------     --------
Income (loss) from discontinued operations......................            --            28          (79)
Other comprehensive income from discontinued
  operations - net change in fair value of cash
  flow hedges (net of tax expense of $9)........................            --            16           --
                                                                       -------      --------     --------
Comprehensive income (loss) from discontinued operations........            --            44          (79)
                                                                       -------      --------     --------
Extraordinary loss, net of tax benefit of $12...................           (23)           --           --
                                                                       -------      --------     --------

Consolidated comprehensive income (loss)........................       $   (27)     $     40     $    (13)
                                                                       =======      ========     ========
</TABLE>
See Notes to Financial Statements.
                                      A-18
<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                      STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
                                                                                        Year Ended
                                                                                       December 31,
                                                                           -----------------------------------
                                                                            2002           2001           2000
                                                                           ------         -------        -----
                                                                                    Millions of Dollars

<S>                                                                        <C>           <C>             <C>
Cash flows-- operating activities
  Income from continuing operations before extraordinary loss......        $   11         $     1        $    66
  Adjustments to reconcile income from continuing operations
     to cash provided by operating activities:
     Depreciation and amortization.................................            74              80             75
     Deferred income taxes - net...................................            22              75             37
     Gains from sale of assets.....................................            (5)             (4)           (55)
     Equity in earnings of affiliates and joint ventures...........            (2)             --             --
     Under-recovered fuel costs....................................            (8)            (14)           (44)
     Changes in operating assets and liabilities:
        Accounts receivable (including affiliates).................            23             212           (160)
        Inventories................................................            (2)            (30)            17
        Accounts payable (including affiliates)....................            46            (169)           168
        Interest and taxes accrued.................................            (3)             (8)           (22)
        Other operating assets ....................................           (21)             18            (94)
        Other operating liabilities................................            (1)            (21)            68
                                                                           ------         -------        -------
         Cash provided by operating activities of continuing
           operations..............................................           134             140             56
                                                                           ------         -------        -------
Cash flows-- financing activities
  Issuance of long-term debt.......................................            --              --            200
  Retirements of long-term debt....................................          (200)             --             --
  Change in advances from affiliates...............................           219            (180)            24
  Cash dividends paid..............................................            (4)             (3)            (4)
  Redemption premiums, restricted cash and other...................           (43)             --             (1)
  Consideration for callholder's option............................            --              --              7
                                                                           ------         -------        -------
        Cash provided by (used in) financing activities
          of continuing operations.................................           (28)           (183)           226
                                                                           ------         --------       -------

Cash flows-- investing activities
  Capital expenditures.............................................          (108)           (190)          (126)
  Proceeds from sale of assets.....................................            --               5            105
  Other investments................................................            14               6             (6)
                                                                           ------         -------        -------
        Cash used in investing activities of continuing operations.           (94)           (179)           (27)
                                                                           ------         -------        -------

Cash provided by (used in) continuing operations...................            12            (222)           255
                                                                           ------         --------       -------

Cash provided by (used in) discontinued operations -
  Businesses transferred to affiliate..............................            --             219           (279)
  Engineering and construction businesses sold.....................           (11)             --             29
                                                                           ------         -------        -------
        Cash provided by (used in) discontinued operations.........           (11)            219           (250)
                                                                           ------         -------        --------

Net change in cash and cash equivalents............................             1              (3)             5

Cash and cash equivalents-- beginning balance......................             3               6              1
                                                                           ------         -------        -------

Cash and cash equivalents-- ending balance.........................        $    4         $     3        $     6
                                                                           ======         =======        =======
</TABLE>

See Notes to Financial Statements.


                                      A-19
<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                                     December 31,
                                                                                               -----------------------
                                                                                                2002              2001
                                                                                               -------          ------
                                                                                                  Millions of Dollars
                                          ASSETS
<S>                                                                                           <C>              <C>
Current assets:
   Cash and cash equivalents......................................................             $     4          $     3
   Accounts receivable - trade....................................................                 118              129
   Inventories....................................................................                 125              123
   Other current assets...........................................................                  28               23
                                                                                               -------          -------
       Total current assets.......................................................                 275              278

Investments:
   Restricted cash................................................................                   8               --
   Other investments..............................................................                  29               34
Property, plant and equipment - net...............................................               1,520            1,485
Goodwill..........................................................................                 305              305
Regulatory assets.................................................................                 142              121
Other noncurrent assets...........................................................                  10               11
Assets - discontinued operations (Note 3).........................................                  --            2,309
                                                                                               -------          -------

         Total assets.............................................................             $ 2,289          $ 4,543
                                                                                               =======          =======

                           LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities:
   Advances from affiliates.......................................................             $   110          $   248
   Long-term debt due currently...................................................                 125              200
   Accounts payable - trade.......................................................                 125               79
   Accrued taxes..................................................................                  21               21
   Other current liabilities......................................................                  66               75
                                                                                               -------          -------
       Total current liabilities..................................................                 447              623

Accumulated deferred income taxes and investment tax credits......................                 193              183
Cash flow hedges and other derivative liabilities.................................                   4                6
Other noncurrent liabilities and deferred credits.................................                 244              223
Long-term debt, less amounts due currently........................................                 426              553
Liabilities - discontinued operations (Note 3)....................................                  --            1,748

Mandatorily redeemable, preferred securities of subsidiary trust
   holding solely junior subordinated debentures of TXU Gas Company...............                 147              147

Contingencies (Note 12)

Shareholder's equity..............................................................                 828            1,060
                                                                                               -------          -------

         Total liabilities and shareholder's equity...............................             $ 2,289          $ 4,543
                                                                                               =======          =======
</TABLE>

See Notes to Financial Statements.

                                      A-20
<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                 STATEMENTS OF CONSOLIDATED SHAREHOLDER'S EQUITY

<TABLE>
<CAPTION>

                                                                                          Year Ended
                                                                                          December 31,
                                                                                 ---------------------------
                                                                                  2002       2001       2000
                                                                                 ------    -------     -----
                                                                                       Millions of Dollars
<S>                                                                              <C>      <C>         <C>
Preferred stock
  Balance at end of year...........................................              $  75     $  75       $   75
                                                                                 -----     -----       ------

Common stock -- par value $.01 per share - authorized 100 million shares:
  Balance at beginning of year.....................................                 --         --          --
     Issuance of common stock to parent............................                 --         --          --
                                                                                 -----     ------      ------
  Balance at end of each year (outstanding shares:  451,000).......                 --         --          --
                                                                                 -----     ------      ------

Paid-in capital
  Balance at beginning of year.....................................              1,009      1,013       1,016
     Businesses transferred to affiliate...........................               (545)        --          --
     Conversion of advances to paid-in capital.....................                360         --          --
     Preferred dividends declared..................................                 (4)        (4)         (4)
     Other.........................................................                 --         --           1
                                                                                 -----     ------      ------
  Balance at end of year...........................................                820      1,009       1,013
                                                                                 -----     ------      ------

Deficit
  Balance at beginning of year.....................................                (35)       (64)        (51)
     Net income (loss).............................................                (12)        29         (13)
                                                                                 -----     ------      ------
  Balance at end of year...........................................                (47)       (35)        (64)
                                                                                 -----     ------      ------

Accumulated other comprehensive income (loss)
 Minimum pension liability adjustments:
     Balance at beginning of year..................................                 (1)        --          --
        Change during the year.....................................                (16)        (1)         --
                                                                                 -----     ------      ------
     Balance at end of year........................................                (17)        (1)         --
                                                                                 -----     ------      ------

  Cash flow hedges (SFAS No. 133):
     Balance at beginning of year..................................                 12         --          --
        Change during the year from continuing operations..........                  1         (4)         --
        Change during the year from businesses transferred to
          affiliate................................................                (16)        16          --
                                                                                 ------    ------      ------
     Balance at end of year........................................                 (3)        12          --
                                                                                 -----     ------      ------

Total common stock equity..........................................                753        985         949
                                                                                 -----     ------      ------

Shareholder's equity...............................................              $ 828     $1,060      $1,024
                                                                                 =====     ======      ======
</TABLE>

See Notes to Financial Statements.

                                      A-21
<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS

1.       BUSINESS AND DISPOSITIONS

         TXU Gas Company (TXU Gas), a Texas corporation, is a largely regulated
business engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas, and also provides
energy asset management services. TXU Gas is a wholly-owned subsidiary of TXU
Corp.

         Divisions and subsidiaries of TXU Gas' include TXU Gas Distribution, a
retail gas distribution company serving over 1.4 million residential, commercial
and industrial customers through over 26,000 miles of distribution mains, TXU
Lone Star Pipeline, which operates approximately 6,800 miles of transmission and
gathering pipeline in Texas, and Oncor Utility Solutions which offers utility
asset management services to cooperatives and municipally-owned and
investor-owned utilities North America.

         Prior to the restructuring of TXU Corp. and its United States (US)
subsidiaries in connection with the opening of the Texas electricity market to
competition, effective January 1, 2002, TXU Gas was also engaged in certain risk
management and energy trading activities and the retail sale of natural gas to
large commercial and industrial customers in various competitive markets in the
US. As a part of that restructuring, TXU Gas transferred those operations to TXU
Energy Company LLC (TXU Energy), a wholly-owned indirect subsidiary of TXU Corp.
Accordingly, the transferred operations have been reflected as discontinued
operations in the statements of consolidated income and cash flows of TXU Gas.

         Operating Segments -- With the transfers of businesses to TXU Energy on
January 1, 2002, TXU Gas is an integrated business with no separate reportable
segments.

         Dispositions -- In May 2000, TXU Gas sold substantially all of the
assets of its natural gas processing subsidiary for $105 million, resulting in a
gain of $53 million ($34 million after-tax), reported in other income in the
statement of income.

2.       SIGNIFICANT ACCOUNTING POLICIES

         Basis of Presentation -- The consolidated financial statements of TXU
Gas and its subsidiaries have been prepared in accordance with accounting
principles generally accepted in the United States of America and, except for
the adoption of Statement of Financial Accounting Standards (SFAS) No.142
"Goodwill and Other Intangible Assets" discussed below, on the same basis as the
audited financial statements included in its 2001 Form 10-K. All intercompany
items and transactions have been eliminated in consolidation. Investments in
businesses over which TXU Gas does not maintain effective control are generally
accounted for under the equity method, and the assets and liabilities of such
investees are, therefore, not reflected in the consolidated financial
statements. The only significant unconsolidated entity is the company
established to purchase accounts receivable (see Note 4). In the opinion of
management, all other adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of the results of operations and financial
position have been included therein. Certain previously reported amounts have
been reclassified to conform to current classifications. All dollar amounts in
the financial statements and tables in the notes are stated in millions of US
dollars unless otherwise indicated.

         Use of Estimates -- The preparation of TXU Gas' financial statements
requires management to make estimates and assumptions about future events that
affect the reporting and disclosure of assets and liabilities at the balance
sheet dates and the reported amounts of revenue and expense. In the event
estimates and/or assumptions prove to be different from actual amounts,
adjustments are made in subsequent periods to reflect more current information.
No material adjustments, other than those disclosed elsewhere herein, were made
to previous estimates during the current year.

                                      A-22
<PAGE>

         Financial Instruments -- TXU Gas utilizes derivative financial
instruments such as interest rate swaps in order to manage its exposure to
changes in interest rates. TXU Gas generally designates these derivatives as
cash flow hedges.

         SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities" requires the recognition of derivatives in the balance sheet, the
measurement of those instruments at fair value and the recognition in earnings
of changes in the fair value of derivatives. SFAS No. 133 provides exceptions to
this accounting if (a) the derivative is deemed to represent a transaction in
the normal course of purchasing from a supplier and selling to a customer, or
(b) the derivative is deemed to be a cash flow or fair value hedge. In
accounting for cash flow hedges, derivative assets and liabilities are recorded
on the balance sheet at fair value with an offset in other comprehensive income.
Any hedge ineffectiveness is recorded in earnings. Amounts are reclassified from
other comprehensive income to earnings as the underlying transactions occur and
realized gains and losses are recognized in earnings. As of December 31, 2002,
TXU Gas has no fair value hedges.

         TXU Gas documents designated debt-related hedging relationships,
including the strategy and objectives for entering into such hedge transactions
and the related specific firm commitments or forecasted transactions.
Effectiveness is assessed based on changes in cash flows of the hedges as
compared to changes in cash flows of the hedged items.

         Revenue Recognition -- TXU Gas records gas distribution revenues as
natural gas is provided to retail customers on the basis of periodic cycle meter
readings and includes an estimated accrual for the value of gas provided from
the meter reading date to the end of the period. Such accruals are based on
estimated daily consumption, which is derived using historical customer profiles
adjusted for weather and other measurable factors affecting consumption. Gas
pipeline transportation revenues are recognized as services are provided to
customers based on estimated volumes subsequently confirmed by meter readings.
Revenues include adjustments under regulatory mechanisms to recover or refund
the cost of natural gas purchased for distribution to retail customers that is
above or below the level included in billed distribution rates.

         Regulatory Assets and Liabilities -- TXU Gas' regulated operations,
which represent a substantial majority of its business, are subject to the
accounting requirements prescribed by the National Association of Regulatory
Utility Commissioners. The financial statements of TXU Gas reflect regulatory
assets and liabilities under cost-based regulation in accordance with SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation."

         Goodwill and Intangible Assets -- Goodwill represents the excess of the
purchase price paid over the estimated fair value of the assets acquired and
liabilities assumed for each company acquired and was amortized over a range of
20 to 40 years.

         SFAS No. 142 became effective for TXU Gas on January 1, 2002. SFAS No.
142 required, among other things, the allocation of goodwill to reporting units
based upon the current fair value of the reporting units, and the discontinuance
of goodwill amortization. The amortization of TXU Gas' goodwill from continuing
operations ($9 million in 2001 and 2000) ceased effective January 1, 2002.

         In addition, SFAS No. 142 required completion of a transitional
goodwill impairment test within six months from the date of adoption. It
established a new method of testing goodwill for impairment on an annual basis,
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. TXU Gas
completed the transitional impairment test in the second quarter of 2002, the
results of which indicated no impairment of goodwill at that time. No impairment
resulted from the additional evaluation performed as of October 1, which has
been selected as the annual impairment test date.

         The balance sheet of TXU Gas at December 31, 2001 included $773 million
of goodwill, net of amortization, arising from TXU Corp.'s 1997 acquisition of
ENSERCH Corporation (renamed TXU Gas Company). In connection with the transfer
of certain businesses to TXU Energy, as described in Note 1, $468 million of
that goodwill was allocated to these discontinued businesses and is reflected in
the December 31, 2002 balance sheet of TXU Energy. The remaining amount of
goodwill associated with the ENSERCH acquisition was allocated to the continuing
business of TXU Gas. There were no changes to amounts recorded as goodwill
during 2002 other than the transfer discussed above.

                                      A-23
<PAGE>

         At December 31, 2002 and 2001, goodwill of $305 million was stated net
of accumulated amortization of $37 million.

         The table below reflects what reported income from continuing
operations, income from discontinued operations and net income would have been
in the 2001 and 2000 periods, excluding goodwill amortization expense recognized
in those periods, compared to the 2002 period.
<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                                ---------------------------------------
                                                                                   2002         2001           2000
                                                                                   ----         ----           ----

<S>                                                                                 <C>           <C>            <C>
    Reported income from continuing operations before extraordinary loss.....       $ 11          $  1           $ 66
    Add back: goodwill amortization..........................................         --             9              9
                                                                                    ----          ----           ----
    Adjusted income from continuing operations before extraordinary loss.....       $ 11          $ 10           $ 75
                                                                                    ====          ====           ====

    Reported income (loss) from discontinued operations, net of tax..........       $ --          $ 28           $(79)
    Add back: goodwill amortization..........................................         --            13             13
                                                                                    ----          ----           ----
    Adjusted income (loss) from discontinued operations, net of tax..........       $ --          $ 41           $(66)
                                                                                    ====          ====           ====

    Reported net income (loss)...............................................       $(12)         $ 29           $(13)
    Add back: goodwill amortization..........................................         --            22             22
                                                                                    ----          ----           ----
    Adjusted net income......................................................       $(12)         $ 51           $  9
                                                                                   =====          ====           ====
</TABLE>

     SFAS No. 142 also requires additional disclosures regarding intangible
assets (other than goodwill):
<TABLE>
<CAPTION>
                                                As of December 31,2002               As of December 31, 2001
                                           ---------------------------------     --------------------------------
                                             Gross                                Gross
                                             Carrying Accumulated                 Carrying  Accumulated
                                             Amount   Amortization     Net        Amount    Amortization      Net
                                             ------   ------------   -------      --------  ------------      ---
<S>                                           <C>        <C>           <C>         <C>           <C>         <C>
Amortized intangible assets
    Capitalized software..............        $ 26       $ 11          $ 15        $   22        $   8       $  14
    Land easements....................          15          8             7            15            8           7
                                            ------     ------        ------        ------        -----       -----
          Total.......................        $ 41       $ 19          $ 22        $   37        $  16       $  21
                                            ======     ======        ======        ======        =====       =====
</TABLE>

         Amortized intangible asset balances are classified as property, plant
and equipment in the balance sheet. TXU Gas has no intangible assets, other than
goodwill, that are not amortized.

         Aggregate TXU Gas amortization expense for intangible assets, excluding
goodwill, for the years ended December 31, 2002, 2001 and 2000 was $3 million,
$4 million and $3 million, respectively; estimated amounts for the next five
years are as follows:

                                                                  Amortization
   Year                                                              Expense
   ----                                                              -------

   2003........................................................      $  4
   2004........................................................         4
   2005........................................................         3
   2006........................................................         2
   2007........................................................         2

         Property, Plant and Equipment -- The cost of additions to gas utility
property includes labor and materials, applicable overhead and payroll-related
costs and an allowance for funds used during construction.

         Valuation of Long-lived Assets -- TXU Gas evaluates the carrying value
of long-lived assets to be held and used when events and circumstances warrant
such a review. The carrying value of long-lived assets would be considered
impaired when the projected undiscounted cash flows are less than the carrying
value. In that event, a loss would be recognized based on the amount by which

                                      A-24
<PAGE>

the carrying value exceeds the fair value. Fair value is determined primarily by
available market valuations or, if applicable, discounted cash flows. (See
Changes in Accounting Standards below.)

         Depreciation of Property, Plant and Equipment -- The pipeline and
distribution systems are depreciated by the straight line method over the
estimated useful life of the asset, approximately 30 to 40 years from original
acquisition.

         TXU Gas capitalizes computer software costs in accordance with American
Institute of Certified Public Accountants Statement of Position 98-1;
"Accounting for the Cost of Computer Software Developed or Obtained for Internal
Use". These costs are being amortized over periods ranging from three to ten
years.

         Taxes Other Than Income -- Gross receipts taxes reported in taxes other
than income are generally not a "pass through" item such as sales and excise
taxes. Gross receipts taxes are assessed to TXU Gas by state and local
governmental bodies, based on revenues, as a cost of doing business. TXU Gas
records gross receipts tax as an expense. Rates charged to customers by TXU Gas
are intended to recover the taxes, but TXU Gas is not acting as an agent to
collect the taxes from customers.

         Income Taxes -- TXU Gas is included in the consolidated federal income
tax return of TXU Corp. and its subsidiary companies. TXU Gas uses the separate
return method to compute its income tax provision. Because of the alternative
minimum tax (AMT), differences may arise between the consolidated federal income
tax liability of TXU Corp. and the aggregated separate tax liability of the
group members. In instances where this occurs, the difference is allocated
pro-rata to those companies that generated AMT on a separate company basis.
Investment tax credits are amortized to income over the estimated service lives
of the properties. Deferred income taxes are provided for temporary differences
between the book and tax basis of assets and liabilities. Certain provisions of
SFAS No. 109, "Accounting for Income Taxes", provide that regulated enterprises
are permitted to recognize the expense associated with deferred taxes as
regulatory tax assets or tax liabilities if it is probable that such amounts
will be recovered from, or returned to, customers in future rates.

          Gains/Losses on Extinguishment of Debt-- Gains and losses on
reacquired debt are recognized in the statement of income as incurred in
accordance with SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt." (See Changes in Accounting Standards below.)

         Cash Equivalents -- For purposes of reporting cash and cash
equivalents, temporary cash investments purchased with a remaining maturity of
three months or less are considered to be cash equivalents.

         Changes in Accounting Standards - SFAS No. 143, "Accounting for Asset
Retirement Obligations", became effective on January 1, 2003. SFAS No. 143
requires entities to record the fair value of a legal liability for an asset
retirement obligation in the period in which it is incurred. When a new
liability is recorded beginning in 2003, the entity will capitalize the net
present value of the liability by increasing the carrying amount of the related
long-lived asset. The liability is accreted each period, and the capitalized
cost is depreciated over the useful life of the related asset. The impact of
adopting SFAS No. 143 is expected to be immaterial to TXU Gas' earnings and
financial condition.

         SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," became effective January 1, 2002. SFAS No. 144 establishes a single
accounting model, based on the framework established in SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," for long-lived assets to be disposed of by sale, resolves
significant implementation issues related to SFAS No. 121 and establishes new
rules for reporting of discontinued operations.

         SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical Corrections," was issued in
April 2002 and became effective on January 1, 2003. One of the provisions of
this statement is the rescission of SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." Any gain or loss on the early extinguishment of debt
that was classified as an extraordinary item in prior periods in accordance with
SFAS No. 4 will be reclassified if it does not meet the criteria of an
extraordinary item as defined by Accounting Principles Board Opinion 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions."

                                      A-25
<PAGE>

         SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities," was issued in June 2002 and became effective on January 1, 2003.
SFAS No. 146 requires that a liability for costs associated with an exit or
disposal activity be recognized only when the liability is incurred and measured
initially at fair value.

         Financial Accounting Standards Board Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others - an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FIN No. 34" was issued in
November 2002 and became effective for disclosures made in December 31, 2002
financial statements. The interpretation requires expanded disclosures of
guarantees. In addition, the interpretation requires recording the fair market
value of guarantees upon issuance or modification after January 1, 2003.

         FIN No. 46, "Consolidation of Variable Interest Entities" was issued in
January 2003. FIN No. 46 provides guidance related to identifying variable
interest entities and determining whether such entities should be consolidated.
This guidance will be effective for the quarter ending September 30, 2003.

         For standards not yet adopted or implemented, TXU Gas is evaluating the
potential impact on its financial position and results of operations.

3.       DISCONTINUED OPERATIONS

         As a result of the deregulation of the electricity markets in Texas,
effective January 1, 2002, TXU Corp. restructured the operations of its US
subsidiaries, including those of TXU Gas. As a part of that restructuring,
ownership of operations involved in certain risk management and energy trading
activities as well as an unregulated commercial and industrial retail gas supply
business was transferred to TXU Energy.

         Accordingly, these businesses have been reported as discontinued
operations in the statements of consolidated income and cash flows of TXU Gas.
The results of operations of these discontinued businesses were as follows:

                                                      Year Ended December 31,
                                                      -----------------------
                                                        2001           2000
                                                        -----          ----

     Revenues.........................................  $ 271         $ 112
     Operating income (loss)..........................  $  69         $(108)
     Income (loss) after-tax from discontinued
       operations.....................................  $  28         $ (79)


     Cash provided by (used in) operating activities..  $  24         $(380)
     Cash provided by financing activities............    236           152
     Cash used by investing activities................    (41)          (51)
                                                        -----         -----
          Cash provided by (used in)discontinued
            operations................................  $ 219         $(279)
                                                        =====         =====
                                      A-26
<PAGE>


         The net investment in these businesses included in the TXU Gas balance
sheet as of December 31, 2001 consisted of the following:

                                                           Year Ended
                                                         December 31, 2001
                                                         -----------------
   Current Assets
      Accounts receivable................................      $  542
      Accounts receivable from affiliated companies......          14
      Commodity contract assets..........................         743
      Other .............................................          62
   Long-term assets
      Goodwill (net of accumulated amortization of $56)..         468
      Commodity contract assets..........................         360
        Other............................................         120
                                                               ------
                  Total assets...........................       2,309
                                                               ------
   Current liabilities
      Accounts payable...................................        (426)
      Accounts payable to affiliated companies...........         (41)
      Commodity contract liabilities.....................        (602)
      Other current liabilities..........................         (28)
   Non-current liabilities
      Commodity contract liabilities.....................        (229)
      Advances from TXU Corp.............................        (383)
      Other..............................................         (39)
                                                               ------
              Total liabilities..........................      (1,748)
                                                               ------
Net Investment..........................................       $  561
                                                               ======

         Certain reclassifications of balances related to the discontinued
business, primarily related to the allocation of goodwill (see Note 2), have
been incorporated.

         In June 2002, the Emerging Issues Task Force (EITF) reached a consensus
on certain aspects of Issue No. 02-3, "Accounting for Contracts Involved in
Energy Trading and Risk Management Activities," regarding the presentation of
trading activities in the statement of income. The new rules were effective on
July 1, 2002, and required that all trading contracts (as defined by EITF Issue
98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management
Activities"), whether or not physically settled, be recorded net upon
settlement, rather than gross as a sale and cost of sale. The former energy
trading business of TXU Gas had historically recorded financial contracts net,
but had recorded those contracts that provide for physical delivery gross upon
settlement. TXU Gas' continuing operations are not impacted by this change, but
the revenues related to the discontinued business presented above have been
reclassified to conform to this new reporting requirement. The table below
summarizes the impact of the new reporting requirements on the former energy
trading business of TXU Gas' operating revenues and cost of energy sold.
Transactions affected by the new reporting requirements represent contracts that
provided for physical delivery but were settled financially without delivery, as
well as contracts physically settled but classified as trading activities. The
new reporting requirements had no impact on the business' gross margin, net
income or cash flows.
<TABLE>
<CAPTION>

                                                                      Year Ended December 31,
                                                                      -----------------------
                                                                          2001          2000
                                                                          ----          ----


<S>                                                                      <C>        <C>
  Operating revenues of discontinued operations as previously reported.. $ 5,430    $ 5,430
  Cost of energy sold netted with revenues..............................   5,159      5,318
                                                                          ------     ------
  Operating revenues of discontinued operations after reclassification..   $ 271      $ 112
                                                                          ======      =====
</TABLE>

         Discontinued Operations Prior to the Merger of ENSERCH and TXU Corp. --
At December 31, 2002, ENSERCH Corporation's former businesses that were
discontinued prior to the merger transaction in 1997 had assets of $16 million
and liabilities of $52 million. Management believes that adequate provision for
uncollectible claims and accounts receivable, income tax matters and expenses
for wind-up of discontinued exploration and production, engineering and
construction and environmental businesses has been made.

                                      A-27
<PAGE>

         The resolution of certain matters and the evaluation of remaining
contingencies resulted in income of $1 million and $6 million ($4 million
after-tax) for 2002 and 2000, respectively, reported in other income in the
income statement. In addition, the statement of cash flows for 2002 and 2000
includes $(11) million and $29 million of cash provided by (used in)
discontinued operations.

4.       FINANCING ARRANGEMENTS

         At December 31, 2002 and 2001, advances from TXU Corp. totaled $110
million and $248 million, respectively. The average interest rates on these
short-term borrowings at December 31, 2002 and 2001 were 2.63% and 3.08%,
respectively. TXU Gas expects to meet its short-term liquidity needs through
advances from TXU Corp. and affiliates.


         Sale of Receivables -- Certain subsidiaries of TXU Corp. sell trade
accounts receivable to TXU Receivables Company, a wholly-owned bankruptcy remote
subsidiary, which sells undivided interests in accounts receivable it purchases
to financial institutions. As of December 31, 2002, TXU Energy (through certain
subsidiaries), Oncor and TXU Gas are qualified originators of accounts
receivable under the program. TXU Receivables Company may sell up to an
aggregate of $600 million in undivided interests in the receivables purchased
from the originators under the program. As of December 31, 2002, TXU Gas had
sold $115 million face amount of receivables to TXU Receivables Company under
the program in exchange for cash of $37 million and $77 million in subordinated
notes, with $1 million of losses on sales for the year ended December 31, 2002
that principally represent the interest costs on the underlying financing. These
losses approximated 5% of the cash proceeds from the sale of undivided interests
in accounts receivable on an annualized basis.


         Upon termination, cash flows to the originators would be delayed as
collections of sold receivables were used by TXU Receivables Company to
repurchase the undivided interests of the financial institutions instead of
purchasing new receivables. The level of cash flows would normalize in
approximately 16 to 31 days. TXU Business Services, a subsidiary of TXU Corp.,
services the purchased receivables and is paid a market based servicing fee by
TXU Receivables Company. The subordinated notes receivable from TXU Receivables
Company represent TXU Gas' retained interests in the transferred receivables and
are recorded at book value, net of allowances for bad debts, which approximates
fair value due to the short-term nature of the subordinated notes, and are
included in accounts receivable in the balance sheet.


         In October 2002, the program was amended to extend the program to July
2003, to provide for reserve requirement adjustments as the quality of the
portfolio changes and to provide for adjustments to reduce receivables in the
program by the related amounts of customer deposits held by originators. In
February 2003, the program was further amended to allow receivables that are
31-90 days past due into the program.

                                      A-28
<PAGE>

         Contingencies Related to Receivables Program -- Although TXU
Receivables Company expects to be able to pay its subordinated notes from the
collections of purchased receivables, these notes are subordinated to the
undivided interests of the financial institutions in those receivables, and
collections might not be sufficient to pay the subordinated notes. The program
may be terminated if either of the following events occurs:

               1)   the credit rating for the long-term senior debt securities
                    of all originators and the parent guarantor, if any,
                    declines below BBB- by Standard & Poor's (S&P) or Baa3 by
                    Moody's; or
               2)   the delinquency ratio (delinquent for 31 days) for the
                    sold receivables, the default ratio (delinquent for 91
                    days or deemed uncollectible), the dilution ratio
                    (reductions for discounts, disputes and other allowances)
                    or the days collection outstanding ratio exceeds stated
                    thresholds.



         The delinquency and dilution ratios exceeded the relevant thresholds at
various times during 2002 and in January 2003, but waivers were granted. These
ratios were affected by issues impacting TXU Energy related to the transition of
the Texas electricity market to competition. The resolution of these issues, as
well as the implementation of new rules by the Public Utility Commission of
Texas, is expected to bring the ratios in consistent compliance with the
program.



         Under the receivables sale program, all originators are required to
maintain a `BBB-' (S&P) and a `Baa3' (Moody's) rating or better (or supply a
parent guarantee with a similar rating). A downgrade below the required ratings
for an originator would prevent that originator from selling its accounts
receivables under the program. If all originators are downgraded so that there
are no eligible originators, the facility would terminate.



         The accounts receivable program also contains a cross default provision
with a threshold of $50 million applicable to each of the originators under the
program. TXU Receivables Company and TXU Business Services Company each have a
cross default threshold of $50 thousand. If either an originator, TXU Business
Services Company or TXU Receivables Company defaults on indebtedness of the
applicable threshold, the facility could terminate.

                                      A-29
<PAGE>


5.       LONG-TERM DEBT

         Long-term debt of TXU Gas consisted of the following:
<TABLE>
<CAPTION>
                                                                                                 December 31,
                                                                                             --------------------
                                                                                              2002           2001
                                                                                              ----           ----

    <S>                                                                                       <C>             <C>
    7.625% Fixed Putable Asset Term Securities (a)...................................        $ --            $ 200
    6.250% Fixed Notes due January 1, 2003 (b) ......................................          125             125
    6.375% Fixed Notes due February 1, 2004..........................................          150             150
    7.125% Fixed Notes due June 15, 2005.............................................          150             150
    6.564% Fixed Remarketed Reset Notes due January 1, 2008 (c)......................          125             125
    Unamortized premium and discount.................................................            1               3
                                                                                               ---            ----
       Total .......................................................................           551             753
                                                                                               ---            ----
    Less amounts due currently.......................................................          125(b)          200 (a)
                                                                                               ---            ----
    Long-term debt, less amounts due currently.......................................         $426            $553
                                                                                              ====            ====

</TABLE>

(a) These securities were redeemed October 15, 2002.
(b) These securities were redeemed January 1, 2003.
(c) In July 1998, the interest rate was reset to a fixed rate of 6.564% payable
    until the reset date of January 1, 2005.

         Extraordinary Items and Debt Redemption -- On October 15, 2002, TXU Gas
exercised its right to redeem $200 million aggregate principal amount of Putable
Asset Term Securities (PATS) that would have matured on October 15, 2012 for a
cash premium of $35 million ($23 million net of tax). TXU Gas used cash advances
from TXU Corp. and cash on hand to fund the redemption of the PATS.

         On January 1, 2003, TXU Gas redeemed, at par value, $125 million
principal amount 6 1/4% Notes, which were due on that date. TXU Gas used cash
advances from TXU Corp. and cash on hand to fund the redemption of these notes.


6.       TXU GAS OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
         SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF
         TXU GAS (TRUST SECURITIES)

         At December 31, 2002 and 2001, TXU Gas Capital I, a consolidated
statutory business trust, had $147 million of floating rate mandatorily
redeemable preferred 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. 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. At December 31, 2002, TXU Gas
had two interest rate swap agreements with respect to floating rate trust
securities of TXU Gas Capital I, with notional principal amounts of $100 million
and $50 million, respectively, that effectively fixed the rate at 6.629% and
6.444%, respectively, per annum to July 1, 2003.


                                      A-30
<PAGE>


7.       PREFERRED STOCK

         At December 31, 2002, TXU Gas had 2,000,000 authorized shares of
preferred stock with 75,000 shares of Series F stock outstanding. The Series F
stock has a stated value of $1,000 per share and is redeemable at stated value.
The Series F stock is the underlying preferred stock for depositary shares that
were issued to the public. Each depositary share represents one-fortieth of a
share, at $25 stated value per depositary share, of the preferred stock. Holders
are entitled to the stated value per share upon involuntary liquidation.
Dividend rates are determined quarterly, in advance, based on 87% of the
"Applicable Rate" (highest of the three-month US Treasury bill rate, the US
Treasury ten-year constant maturity rate and either the US Treasury twenty-year
or thirty-year constant maturity rate, as defined) with a minimum rate of 4.50%
and a maximum rate of 10.50%. At December 31, 2002, the Series F stock bore the
annual dividend minimum rate of 4.50%. Dividends declared on the Series F stock
were approximately $4 million in 2002, 2001 and 2000 ($47.48, $48.155 and
$53.549 per share, respectively).

8.       INCOME TAXES

         The components of income tax expense (benefit) related to continuing
operations are as follows:
                                                  Year Ended
                                                  December 31,
                                         ------------------------------
                                            2002      2001         2000
                                          -------   -------      ------


    Current-- Federal...................  $   (16)   $   (68)   $     3
    Deferred-- Federal..................       22         75         37
                                          -------    -------    -------

         Total..........................  $     6    $     7    $    40
                                          =======    =======    =======

         Reconciliation of income tax expense computed at the federal statutory
rate to income tax reported:


                                                        Year Ended
                                                        December 31,
                                             -------------------------------
                                               2002         2001       2000
                                              ------       ------     -----

Income from continuing operations
  before income taxes.......................  $   17      $    8      $  106
                                              ======      ======      ======

Income tax expense at the US federal
  statutory rate of 35%.....................  $    6      $    3      $   37
Amortization of goodwill....................      --           3           3
Other - net.................................      --           1          --
                                              ------      ------      ------
         Income tax expense.................  $    6      $    7      $   40
                                              ======      ======      ======


                                      A-31
<PAGE>


         The components of TXU Gas' deferred tax assets and deferred tax
liabilities are as follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                               -----------------------------------------------------------------
                                                            2002                                2001
                                               -------------------------------     -----------------------------
                                               Total     Current    Noncurrent     Total     Current   Noncurrent
                                               -----     -------    ----------     -----     -------   ----------
<S>                                             <C>      <C>         <C>         <C>        <C>         <C>
Deferred tax assets:

Net operating loss and other tax credit
  carryforwards.........................       $ 102      $  15       $   87      $  93      $  14      $   79
Retirement and other employee benefit
  obligations...........................          53          1           52         55          1          54
Accruals and allowances.................           3          -            3          3          -           3
Other...................................          28          1           27         19          5          14
                                                ----        ---         ----      -----      -----      ------
    Total...............................         186         17          169        170         20         150
                                                ----        ---         ----      -----      -----      ------

Deferred tax liabilities and unamortized
  investment tax credits:

Property-related differences............         296          -          296        277          -         277
Software development....................           2          -            2          1          -           1
Other...................................          61          -           61         52          -          52
Unamortized investment tax credits......           3          -            3          3          -           3
                                               -----        ---         ----      -----      -----      ------
   Total................................         362          -          362        333         --         333
                                               -----        ---         ----      -----      -----      ------

Net deferred tax asset (liability)....         $(176)      $ 17        $(193)     $(163)     $  20      $ (183)
                                               ======      ====        =====      =====      =====      ======
</TABLE>

         At December 31, 2002, domestic net operating loss (NOL) carryforwards
total $209 million and alternative minimum tax-credit carryforwards total $30
million. The tax benefits of these carryforwards of $102 million, as shown
above, are available to offset future US federal income tax obligations. TXU Gas
expects to fully utilize all of such carryforwards. The NOL carryforwards expire
as follows: $7 million in 2008, $10 million in 2009, $53 million in 2010, $119
million in 2011 and $20 million in 2012. TXU Gas utilized no NOL carryforwards
in 2002.

         TXU Corp.'s income tax returns are subject to examination by applicable
tax authorities. The Internal Revenue Service is currently examining the tax
years ended 1993 through 1997 for certain of TXU Corp.'s subsidiaries and 1994
through 1996 for other subsidiaries. In management's opinion, an adequate
provision has been made for any future taxes that may be owed as a result of any
examination. To the extent that adjustments to income tax accounts of acquired
businesses for periods prior to their acquisition are required as a result of an
examination, the adjustment will be added to or deducted from goodwill.


                                      A-32
<PAGE>


9.       RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS

         TXU Gas is a participating employer in the TXU Retirement Plan
(Retirement Plan), a defined benefit pension plan sponsored by TXU Corp. The
Retirement Plan is a qualified pension plan under Section 401(a) of the Internal
Revenue Code of 1986, as amended (Code), and is subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended (ERISA). Employees
are eligible to participate in the Retirement Plan upon their completion of one
year of service and the attainment of age 21. All benefits are funded by the
participating employers. The Retirement Plan provides benefits to participants
under one of two formulas: (i) a cash balance formula under which participants
earn monthly contribution credits based on their compensation and years of
service, plus monthly interest credits, or (ii) a traditional defined benefit
formula based on years of service and the average earnings of the three years of
highest earnings.

         All eligible employees hired after January 1, 2002 participate under
the cash balance formula. Certain employees who, prior to January 1, 2002,
participated under the traditional defined benefit formula, continue their
participation under that formula. Under the cash balance formula, future
increases in earnings will not apply to prior service costs. It is TXU Corp.'s
policy to fund the plans on a current basis to the extent deductible under
existing federal tax regulations. Such contributions, when made, are intended to
provide not only for benefits attributed to service to date, but also those
expected to be earned in the future.


         The allocated net periodic pension cost applicable to TXU Gas was $1
million for 2002 and 2001 and none for 2000. Estimated accrued pension cost
applicable to TXU Gas as of December 31, 2002 and 2001 was $70 million and $48
million, respectively. Contributions were $6 million, $4 million and $3 million
in 2002, 2001 and 2000, respectively. The amounts provided represent allocations
of the TXU Corp. Retirement Plan to TXU Gas. As of December 31, 2002, a minimum
pension liability of $26 million ($17 million after-tax) had been allocated to
TXU Gas.

         In addition, TXU Gas' employees are eligible to participate in a
qualified savings plan, the TXU Thrift Plan (Thrift Plan). This plan is a
participant-directed defined contribution profit sharing plan qualified under
Section 401(a) of the Code, and is subject to the provisions of ERISA. The
Thrift Plan includes an employee stock ownership component. Under the terms of
the Thrift Plan, as amended effective January 1, 2002, employees who do not earn
more than the IRS threshold compensation limit used to determine highly
compensated employees may contribute, through pre-tax salary deferrals and/or
after-tax payroll deductions, the maximum amount of their regular salary or
wages permitted under law. Employees who earn more than such threshold may
contribute from 1% to 16% of their regular salary or wages. Employer matching
contributions are also made in an amount equal to 100% of the first 6% of
employee contributions for employees who are covered under the cash balance
formula of the Retirement Plan, and 75% of the first 6% of employee
contributions for employees who are covered under the traditional defined
benefit formula of the Retirement Plan. Employer matching contributions are
invested in TXU Corp. common stock. Employer contributions to the Thrift Plan,
including cash and TXU Corp. common stock, aggregated $30 million for 2002, $16
million for 2001 and $15 million in 2000. TXU Gas' portion of such contributions
was $2 million in 2002, and nominal in 2001 and 2000.

         In addition to the Retirement Plan and the Thrift Plan, TXU Gas
participates with TXU Corp. and certain other affiliated subsidiaries of TXU
Corp. to offer certain health care and life insurance benefits to eligible
employees and their eligible dependents upon the retirement of such employees.
For employees retiring on or after January 1, 2002, the retiree contributions
required for such coverage vary based on a formula depending on the retiree's
age and years of service. The estimated net periodic postretirement benefits
cost other than pensions applicable to TXU Gas was $13 million for 2002 and $9
million for 2001 and 2000. Contributions paid by TXU Gas to fund postretirement
benefits other than pensions were $12 million, $11 million and $8 million in
2002, 2001 and 2000, respectively.


                                      A-33
<PAGE>


10.      FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts and related estimated fair values of TXU Gas'
significant financial instruments were as follows:
<TABLE>
<CAPTION>
                                                                                December 31,
                                                              --------------------------------------------------
                                                                      2002                        2001
                                                              ----------------------       ----------------------
                                                                            Estimated                   Estimated
                                                                Carrying       Fair          Carrying      Fair
                                                                Amount        Value          Amount       Value
                                                                --------    ---------        --------   ---------
<S>                                                             <C>          <C>            <C>          <C>
  Long-term debt (including current maturities)(a)......        $  551       $  558         $  753       $  762
  TXU Gas obligated, mandatorily redeemable, preferred
    securities of subsidiary trust holding solely
    junior subordinated debentures of TXU Gas (b).......           147          150            147          150

</TABLE>
Estimated fair value: (a) variable-rate debt - approximates carrying amount,
exchange traded debt - quoted market prices, and other debt - discounted value
using rates for debt with similar characteristics and, (b) quoted market prices.

         With the implementation of SFAS No. 133 on January 1, 2001, financial
instruments that are derivatives are now recorded on the balance sheet at fair
value.


         The carrying amounts for financial assets classified as current assets
and the carrying amounts for financial liabilities classified as current
liabilities approximate fair value due to the short maturity of such
instruments. The fair values of other financial instruments for which carrying
amounts and fair values have not been presented are not materially different
from their related carrying amounts. The carrying amount of investments and
advances from affiliates approximates the fair value.

11.      REGULATIONS AND RATES

         The city gate rate for the cost of gas TXU Gas Distribution ultimately
delivers to residential and commercial customers is established by the Railroad
Commission of Texas (RRC) and provides for full recovery of the actual cost of
gas delivered, including out-of-period costs such as gas purchase contract
settlement costs. The distribution service rates TXU Gas Distribution charges
its residential and commercial customers are generally established by the
municipal governments of the cities and towns served, with the RRC having
appellate, or in some instances, primary jurisdiction.

         TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. During 2002, rate cases were filed in
147 cities. The status of these cases is as follows: settlements were reached
with 73 of these cities for annual increases aggregating $9 million; rate cases
were withdrawn from 23 cities; and 51 cities declined settlement offers and
passed ordinances denying the rate increases. On July 15, 2002, TXU Gas filed an
appeal of these cities' actions with the RRC. A settlement was reached for $7.5
million. These settlements adjusted other aspects of the TXU Gas tariffs. The
total annual favorable impact of the 2002 rate settlements and associated tariff
adjustments is approximately $22 million.

         In July 2001 and August 2001, TXU Gas filed two cases, a gas cost
review and a gas cost reconciliation, covering the period between November 1997
and June 2001, seeking to recover $29 million of under-recovered gas costs. On
August 6, 2002, a settlement was approved by the RRC authorizing TXU Gas to
recover $18 million of this amount, which has been recovered through a
surcharge, while $11 million in under-recovered gas costs remains pending.

         On August 30, 2002, TXU Gas filed the city gate gas cost reconciliation
for the twelve-month period ended June 30, 2002 with the RRC. During this
period, TXU Gas over-recovered its gas cost by $24 million, which is being
refunded from October 2002 through June 2003. The refund has no material impact
on the net income of TXU Gas.


                                      A-34
<PAGE>


12.      COMMITMENTS AND CONTINGENCIES

         Legal Proceedings -- In September 1999, Quinque Operating Company
(Quinque) filed suit in the State District Court of Stevens County, Kansas
against over 200 gas pipeline companies, including TXU Gas (named in the
litigation as ENSERCH Corporation). The suit was removed to federal court;
however, a motion to remand the case back to Kansas State District Court was
granted in January 2001, and the case is now pending in Stevens County, Kansas.
The plaintiffs amended their petition to join TXU Fuel Company (TXU Fuel), a
subsidiary of TXU Energy, as a defendant in this litigation. Quinque has
dismissed its claims and a new lead plaintiff has filed an amended petition in
which the plaintiffs seek to represent a class consisting of all similarly
situated gas producers, overriding royalty owners, working interest owners and
state taxing authorities either from whom defendants had purchased natural gas
or who received economic benefit from the sale of such gas since January 1,
1974. No class has been certified. The petition alleges that the defendants have
mismeasured both the volume and heat content of natural gas delivered into their
pipelines resulting in underpayments to plaintiffs. No amount of damages has
been specified in the petition with respect to TXU Gas or TXU Fuel. While TXU
Gas and TXU Fuel are unable to estimate any possible loss or predict the outcome
of this case, TXU Gas and TXU Fuel believe these claims are without merit and
intend to vigorously defend this suit.

         On November 21, 2000, the City of Denton, Texas and other Texas cities
filed suit in the 134th Judicial District Court of Dallas County, Texas against
TXU Gas, TXU US Holdings Company (US Holdings) and TXU Corp. The petition
alleged claims for breach of contract and other claims related to the
defendants' alleged exclusion of certain revenues from the cities' franchise fee
base. All of the plaintiff cities have now executed a settlement agreement to
settle this suit.  Such resolution will not have a material effect
on TXU Gas' financial position, results of operations or cash flows.

         General -- In addition to the above, TXU Gas and its subsidiaries are
involved in various other legal and administrative proceedings the ultimate
resolution of which, in the opinion of each, are not expected to have a material
effect on their financial position, results of operations or cash flows.

         Leases -- Rental expenses for continuing operations incurred under all
operating leases aggregated $4 million in 2002 and 2001 and $3 million for 2000.
As of January 1, 2002, TXU Gas has future operating lease commitments totaling
less than $1 million.

         Gas Purchase Contracts - TXU Gas buys natural gas under long-term and
short-term intrastate contracts in order to assure reliable supply to its
customers. Many of these contracts require minimum volumes ("take-or-pay") of
gas purchases. At December 31, 2002, TXU Gas commitments to purchase natural gas
under long-term contracts have market-based pricing mechanisms and no fixed
price commitments. On the basis of TXU Gas' current expectations of demand from
its customers as compared with its take-or-pay obligations under such purchase
contracts, management does not consider it likely that any material payments
will become due from TXU Gas Distribution for gas not taken.

         Guarantees -- In 1992, a discontinued engineering and construction
business of TXU Gas completed construction of a plant, the performance of which
is warranted by TXU Gas for a period ending no later than 2008.  The maximum
contingent liability under the guarantee is $92 million.  No claims have been
asserted under the guarantee and none are anticipated.

13.      SUPPLEMENTARY FINANCIAL INFORMATION

         Credit Risk -- Credit risk relates to the risk of loss associated with
non-performance by counterparties. TXU Gas maintains credit risk policies with
regard to its counterparties to minimize overall credit risk. These policies
require an evaluation of a potential counterparty's financial condition, credit
rating, and other quantitative and qualitative credit criteria and specify
authorized risk mitigation tools. TXU Gas has standardized documented processes
for monitoring and managing its credit exposure, including methodologies to
analyze counterparties' financial strength, measurement of current and potential
future credit exposures and standardized contract language. This evaluation
results in establishing credit limits prior to entering into an agreement with a
counterparty that creates credit exposure to TXU Gas. Additionally, TXU Gas has
established controls to determine and monitor the appropriateness of these
limits on an ongoing basis. Any prospective material adverse change in the

                                      A-35
<PAGE>

financial condition of a counterparty or downgrade of its credit quality will
result in the reassessment of the credit limit with that counterparty. This
process can result in the subsequent reduction of the credit limit or a request
for additional financial assurances.

         Concentration of Credit Risk -- TXU Gas' gross exposure to credit risk
as of December 31, 2002 was $118 million, after reserves of $3 million,
primarily representing trade accounts receivable associated with the sale of
natural gas to residential and commercial customers. TXU Gas had no exposure to
any one customer that represented greater than 10% of TXU Gas' trade accounts
receivable at December 31, 2002. The risk of material loss from non-performance
of these customers is unlikely based upon historical experience. Reserves for
uncollectible accounts receivable are established for the potential loss from
non-payment by these customers based on historical experience and market or
operational conditions.

         Accounts Receivable--At December 31, 2002 and 2001, accounts receivable
are stated net of allowance for uncollectible accounts of $3 million and $5
million, respectively. During 2002, bad debt expense was $4 million and account
write-offs were $6 million.

         Accounts receivable included $27 million and $39 million of unbilled
revenues at December 31, 2002 and 2001, respectively.

         Regulatory Assets --
                                                        December 31,
                                                     -----------------
                                                     2002         2001
                                                     ----         ----
Under-collected gas costs........................    $  49        $  41
Distribution safety compliance costs.............       43           37
Rate case costs..................................       12            2
Other regulatory assets..........................       38           41
                                                    ------       ------
    Regulatory assets............................   $  142       $  121
                                                    ======       ======

       Included in regulatory assets are assets of $57 million at December 31,
2002 and $74 million at December 31, 2001 that were not earning a return. The
regulatory assets have an average remaining recovery period of approximately
15 years.

    Interest Expense and Related Charges --
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                      -------------------------
                                                                      2002       2001       2000
                                                                      ----       ----       ----
<S>                                                                  <C>        <C>      <C>
    Interest ..................................................      $  55      $  58    $    62
    Distributions on TXU Gas obligated, mandatorily
     redeemable, preferred securities of subsidiary trust
     holding solely junior subordinated debentures of TXU Gas..         10         10         10
    Amortization of debt issuance expense and premiums.........         (2)        (3)        --
                                                                     -----      -----     ------
            Total interest expense and other charges ..........      $  63      $  65     $   72
                                                                     =====      =====     ======
</TABLE>


                                      A-36
<PAGE>
         Other Income and Deductions --
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                  ------------------------------
                                                                     2002       2001       2000
                                                                   -------    -------    -------
          <S>                                                      <C>        <C>        <C>
          Other income
             Gain on sale of properties and business (in 2000)     $     5    $     4    $    55
             Settlement of legal proceedings related to a
               gas purchase contract..........................          --         18         --
             Equity in earnings of unconsolidated subsidiaries           2         --         --
             Discontinued engineering and construction business
              activity........................................           1         --          6
             Other............................................           2          4         --
                                                                   -------    -------    -------
               Total other income.............................     $    10    $    26    $    61
                                                                   =======    =======    =======
          Other deductions
             Loss on sale of properties.......................     $    --    $     2    $    --
             Other............................................           2          1         --
                                                                   -------    -------    -------
               Total other deductions.........................     $     2    $     3    $    --
                                                                   =======    =======    =======
</TABLE>
          Inventories by major category--
<TABLE>
<CAPTION>
                                                                           December 31,
                                                                   -------------------------
                                                                      2002              2001
                                                                     -------           -----
<S>                                                                <C>               <C>
          Materials and supplies, at cost....................      $     7           $     6
          Gas stored underground, primarily at weighted
            average cost.....................................          118               117
                                                                   -------           -------
              Total inventories..............................      $   125           $   123
                                                                   =======           =======
</TABLE>
           Investments --
<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                              -------------------
                                                                               2002          2001
                                                                               ----          ----
           <S>                                                                   <C>           <C>
           Assets related to certain employee benefit plans..............         21            24
           Other.........................................................          8            10
                                                                              ------        ------
             Total investments...........................................     $   29        $   34
                                                                              ======        ======
</TABLE>
           Property, Plant and Equipment--
<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                             ------------------------
                                                                               2002              2001
                                                                             -------             -----
          <S>                                                                <C>               <C>
          Gas distribution...............................                    $ 1,294           $ 1,209
          Gas pipeline...................................                        488               469
          Other..........................................                         27                26
                                                                             -------           -------
             Total.......................................                      1,809             1,704
          Less accumulated depreciation..................                        333               265
                                                                             -------           -------
             Net of accumulated depreciation.............                      1,476             1,439
          Construction work in progress..................                         44                46
                                                                             -------           -------
             Net property, plant and equipment...........                    $ 1,520           $ 1,485
                                                                             =======           =======
</TABLE>
         Derivative Financial Instruments and Hedging Activities - The terms of
TXU Gas' interest rate swap agreements that have been designated as cash flow
hedges match the terms of the underlying hedged indebtedness. As a result, TXU
Gas experienced no hedge ineffectiveness during 2002.

         As of December 31, 2002, it is expected that $3 million of after-tax
net losses accumulated in other comprehensive income will be reclassified into
earnings during the next twelve months. This amount represents the projected
value of the hedges over the next twelve months relative to what would be
recorded if the hedge transactions had not been established. The amount expected
to be reclassified is not a forecasted loss incremental to normal operations,
but rather it demonstrates the extent to which the volatility in earnings (which
would otherwise exist) is mitigated through the use of cash flow hedges.

                                      A-37
<PAGE>

         Non-cash Transactions - At January 1, 2002, $545 million and $16
million were recorded as non-cash charges to paid-in capital and other
comprehensive income, respectively, to reflect the transfer of businesses to TXU
Energy (see Note 3). During 2002, $360 million of advances from TXU Corp. were
converted to paid-in capital.

         Affiliated Transactions -- The following represent significant
affiliate transactions of TXU Gas:

  o   Average daily short-term advances from affiliates during 2002 were $140
      million, and interest expense incurred on the advances was $4 million.
      The weighted average interest rate for 2002 was 3.0%.
  o   TXU Business Services Company, a subsidiary of TXU Corp., charges TXU
      Gas for certain financial, accounting, information technology,
      environmental, procurement and personnel services and other
      administrative services at cost. For 2002, 2001 and 2000, these costs
      totaled $50 million, $57 million and $47 million, respectively, and are
      reported in operation and maintenance expenses.
  o   Oncor Electric Delivery Company and TXU Energy, indirect subsidiaries
      of TXU Corp., charge TXU Gas for customer and administrative services.
      For 2002, 2001 and 2000, these charges totaled $57 million, $43 million
      and $72 million, respectively, and are reported in operation and
      maintenance expenses.
  o   TXU Gas had revenues of $12 million,  $16 million and $20 million from
      the sale and transportation of gas to other TXU Corp. subsidiaries for
      2002, 2001 and 2000, respectively.

      Cash Payments -- The schedule below details TXU Gas' supplemental cash
flow information:
<TABLE>
<CAPTION>

                                                                                   Year Ended
                                                                                  December 31,
                                                              ----------------------------------------------
                                                                  2002              2001              2000
                                                                 ------            ------            -----
   <S>                                                         <C>               <C>              <C>
   Cash payments (refunds):
   Interest costs (net of amounts capitalized).                $    67           $    79           $    76
                                                               =======           =======           =======
   Income taxes-- net..........................                $   (26)          $   (74)          $   (48)
                                                               ========          ========          ========
</TABLE>

         Quarterly Results (Unaudited) -- The results of operations by quarters
are summarized below. In the opinion of TXU Gas, all other adjustments
(consisting of normal recurring accruals) necessary for a fair statement of such
amounts have been made. Quarterly results are not necessarily indicative of
expectations for a full year's operations because of seasonal and other factors.
<TABLE>
<CAPTION>

                                                                                Quarter Ended
                                                              -------------------------------------------------
                                                              March 31     June 30  September 30    December 31
                                                             ---------    --------  ------------    -----------

<S>                                                           <C>         <C>          <C>             <C>
2002:
Revenues of continuing operations........................     $  344      $  160       $   137         $   340
Operating income (loss) of continuing operations.........         67         (26)           (8)             39
Income (loss)from continuing operations, before
 extraordinary loss......................................         31         (23)          (16)             19
Extraordinary loss, net of tax effect....................         --          --            --             (23)
Net income (loss) applicable to common stock.............         30         (24)          (17)             (5)

2001:
Revenues of continuing operations........................     $  684      $  171       $   120         $   254
Operating income (loss) of continuing operations.........         82         (41)          (31)             31
Income (loss)from continuing operations..................         43         (35)          (28)             21
Income (loss) from discontinued operations, net of tax
 effect..................................................          2           1            (5)             30
Net income (loss) applicable to common stock.............         44         (35)          (34)             50
</TABLE>

                                      A-38
<PAGE>
<TABLE>
<CAPTION>

                                                                                                        Appendix B
                       TXU GAS EXHIBITS FOR 2002 FORM 10-K


                Previously Filed*
                -----------------
                    With File            As
 Exhibits           Number            Exhibit
---------          --------           -------
<S>               <C>                    <C>          <C>   <C>
2                 1-12833                2            --    Master Separation Agreement by and among Oncor, TXU
                  Form 8-K                                  Generation Holdings Company LLC, TXU Merger Energy Trading
                  (filed January 1,                         Company LP, TXU SESCO Company, TXU SESCO Energy Services
                  2002)                                     Company, TXU Energy Retail Company LP and TXU US Holdings,
                                                            dated as of December 14, 2001.

3(a)              1-3183                 3.1          --    Restated Articles of Incorporation; Articles of Amendment
                  Form                                      thereto, dated May 10, 1988 and November 15, 1996;
                  10-K                                      Statement of Resolution Establishing Adjustable Rate
                  (1996)                                    Cumulative Preferred Stock, Series F.

3(b)              1-3183                 3.1          --    Articles of Amendment, effective June 14, 1999, to Restated
                  Form 10-Q                                 Articles of Incorporation.
                  (Quarter ended June
                  30, 1999)

3(c)              1-3183                 3.2          --    Restated Bylaws.
                  Form 10-Q
                  (Quarter ended June
                  30, 1999)

4(a)                                                  --    Agreement to furnish certain debt instruments.

4(b)              1-12833                4(kk)        --    Indenture (For Unsecured Debt Securities), dated as of
                  Form 10-K                                 January 1, 1998, between TXU Gas and The Bank of New York.
                  (1997)

4(c)              1-12833                4(mm)        --    Officer's Certificate establishing the TXU
                  Form 10-K                                 Gas Remarketed Reset Notes due January 1, 2008.
                  (1997)

4(d)              33-45688               4.2          --    Indenture, dated February 15, 1992, between TXU Gas and The
                                                            First National Bank of Chicago.

4(e)              1-12833                4(qq)        --    TXU Gas 6-3/8% Note due 2004, dated February 1, 1994.
                  Form 10-K
                  (1997)

4(f)              1-12833                4(rr)        --    TXU Gas 7-1/8% Note due 2005, dated June 6, 1995.
                  Form 10-K
                  (1997)

4(g)              1-12833                4(a)         --    Remarketing Agreement, dated as of January 30, 1998 and
                  Form 8-K                                  form of Remarketing Agreement Supplement with respect to
                  (filed August 28,                         TXU Gas Remarketed Reset Notes.
                  1998)

4(h)              1-12833                4(b)         --    Indenture, (For Unsecured Subordinated Debt Securities),
                  Form 8-K                                  dated as of June 1, 1998, between TXU Gas and The Bank of
                  (filed August 28,                         New York, as Trustee.
                  1998)
</TABLE>

                                      B-1
<PAGE>
<TABLE>
<CAPTION>
                  Previously Filed*
                -----------------
                    With File            As
 Exhibits           Number            Exhibit
---------          --------           -------
<S>               <C>                    <C>          <C>   <C>
4(i)              1-12833                4(c)         --    Officer's Certificate, dated as of July 2, 1998,
                  Form 8-K                                  establishing the terms of the TXU Gas Floating Rate Junior
                  (filed August 28,                         Subordinated Debentures, issued in connection with the
                  1998)                                     preferred securities TXU Gas Capital I (formerly ENSERCH
                                                            Capital I).

4(j)              1-12833                4(d)         --    Amended and Restated Trust Agreement, dated as of July 2,
                  Form 8-K                                  1998, between TXU Gas, as Depositor, and The Bank of New
                  (filed August 28,                         York, The Bank of New York (Delaware), and the
                  1998)                                     Administrative trustees for TXU Gas Capital I.

4(k)              1-12833                4(e)         --    Guarantee Agreement with respect to TXU Gas Capital I,
                  Form 8-K                                  dated as of July 2, 1998, between TXU Gas, as Guarantor,
                  (filed August 28,                         and The Bank of New York, as Trustee.
                  1998)

4(l)              1-12833                4(f)         --    Agreement as to Expenses and Liabilities, dated as of July
                  Form 8-K                                  1, 1998, between TXU Gas and TXU Gas Capital I.
                  (filed August 28,
                  1998)
12                                                    --    Computation of Ratio of Earnings to Fixed Charges, and to
                                                            Fixed Charges and Preferred Dividends.

21                                                    --    Subsidiaries of TXU Gas.

23                                                    --    Consent of Deloitte & Touche LLP, Independent Auditors for
                                                            TXU Gas.

99(a)                                                 --    Chief Executive Officer Certification

99(b)                                                 --    Chief Financial Officer Certification

</TABLE>

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*        Incorporated herein by reference.





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