<PAGE>

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

                      UNITED STATES SECURITIES AND EXCHANGE
                                   COMMISSION

                             Washington, D.C. 20549

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

                                    FORM 10-K

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

                   For the Fiscal Year Ended December 31, 2001

                                     --OR--

          ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

                         SECURITIES EXCHANGE ACT OF 1934

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

<TABLE>
<CAPTION>
Commission                Exact Name of Registrant as Specified in its Charter; State of Incorporation; I.R.S. Employer
File Number                     Address of Principal Executive Offices; and Telephone Number            Identification No.
-----------               ----------------------------------------------------------------------------- ------------------

<S>                       <C>                                                                           <C>
1-3183                                TXU Gas Company                                                     75-0399066
                                      A Texas Corporation
                                      Energy Plaza, 1601 Bryan Street
                                      Dallas, TX 75201-3411
                                      (214) 812-4600
</TABLE>

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

<TABLE>
<CAPTION>
                                                                                Name of Each Exchange on
                        Title of Each Class                                          Which Registered
                        -------------------                                     ------------------------

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

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 [/] 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. [/ ]

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

Common Stock outstanding at March 20, 2002: 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 ..................................................................          2
            CONTINUING OPERATIONS - GAS PIPELINE, GAS DISTRIBUTION AND
                 ASSET MANAGEMENT SERVICES ........................................................          4
            ENVIRONMENTAL MATTERS .................................................................          7

Item 3.     LEGAL PROCEEDINGS .....................................................................          8

Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................................          8

                                                      PART II

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

            STOCKHOLDER MATTERS ...................................................................          9

Item 6.     SELECTED FINANCIAL DATA ...............................................................          9

Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL

            CONDITION AND RESULTS OF OPERATIONS ...................................................          9

Item 7a.    QUANTITATIVE AND QUALITATIVE DISCLOSURES

            ABOUT MARKET RISK .....................................................................          9

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...........................................          9

Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

            ACCOUNTING AND FINANCIAL DISCLOSURE ...................................................          9

                                                      PART III

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

Item 11.    EXECUTIVE COMPENSATION ................................................................         12

Item 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT ............................................................................         25

Item 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................................         25

                                                      PART IV

Item 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
            FORM 8-K ..............................................................................         26

APPENDIX A - Financial Information
APPENDIX B - TXU Gas Exhibits For 2001 Form 10-K
</TABLE>

                                       i

<PAGE>

                                     PART I

Items 1. & 2.     BUSINESS AND PROPERTIES

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

         TXU Gas Company (TXU Gas), a Texas corporation, is an integrated
company engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas and, until January
1, 2002, was engaged in wholesale energy trading of natural gas and electricity
throughout the United States (US) and parts of Canada and retail sales of
natural gas to large commercial/industrial customers. TXU Gas is a wholly-owned
subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a global energy
services company that engages in electricity generation, wholesale energy
trading, retail energy marketing, energy delivery, other energy-related services
and, through a joint venture, telecommunications services.

         Business Restructuring - Legislation was passed during the 1999 session
of the Texas Legislature that restructures the electric utility industry in
Texas (1999 Restructuring Legislation). Among other matters, the 1999
Restructuring Legislation provides that by January 1, 2002, each electric
utility was required to separate (unbundle) its business into the following:
power generation operations, a retail electric provider (REP) and a transmission
and distribution (T&D) company or separate T&D companies. As a result, TXU Corp.
restructured certain of its businesses effective January 1, 2002.

         In connection with the 1999 Restructuring Legislation, TXU Corp.'s
subsidiary, TXU US Holdings Company, (formerly TXU Electric Company) (US
Holdings), transferred its power generation operations and retail customers to a
new subsidiary, TXU Energy Company LLC (TXU Energy) and its T&D operations to
another new subsidiary, Oncor Electric Delivery Company. In addition, as of
January 1, 2002, TXU Energy acquired the energy trading business and the
unregulated commercial/industrial retail gas supply operation of TXU Gas, among
other operations of TXU Corp.

         The diagrams below summarize the principal legal entities of the US gas
and electric operations of TXU Corp. and their relationships before and after
the restructuring. The entities are identified by the names given them in this
report.

<TABLE>
<S>                                                  <C>
            Before Restructuring                                            After Restructuring

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

                TXU Corp.                                                         TXU Corp.

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



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

                          TXU Electric
   TXU Gas                 Company                                      TXU Gas            US Holdings (a)

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


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

   TXU Energy
     Trading                                                               --------------     -------------------
     Company
-----------------                                                                                Oncor Electric
                                                                              TXU Energy        Delivery Company

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

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

                                                        TXU Generation        TXU Energy        TXU Energy
                                                       Holdings Company        Trading        Retail Company
                                                             LLC              Company LP            LP

                                                     -------------------   --------------     ----------------
</TABLE>

(a)      Formerly TXU Electric Company

         The energy trading business and the unregulated commercial/industrial
retail gas supply operations acquired by TXU Energy are presented herein as a
discontinued operation.


                                       1

<PAGE>

         At December 31, 2001, TXU Gas, excluding the energy trading business
and the unregulated commercial/industrial retail gas supply operations, had
1,452 full-time employees. TXU Gas and its subsidiaries possess all necessary
franchises, licenses and certificates to enable them to conduct their respective
businesses.

Business of TXU Gas

         TXU Gas conducts its major business operations through the following
divisions and subsidiaries:

         TXU Lone Star Pipeline, a partially rate-regulated division of TXU Gas,
owns and operates interconnected natural gas transmission lines, six underground
storage reservoirs, 23 compressor stations and related properties, all within
Texas. With a system consisting of approximately 7,200 miles of transmission and
gathering pipelines in Texas, TXU Lone Star Pipeline is one of the largest
intrastate pipelines in the US. Through these facilities, it transports natural
gas to TXU Gas' distribution division, TXU Gas Distribution, and other
customers. Rates for the services provided to TXU Gas Distribution are regulated
by the Railroad Commission of Texas (RRC), while rates for services to other
customers are generally established by competitively negotiated contracts. The
natural gas transmission and distribution lines of TXU Lone Star Pipeline and
TXU Gas Distribution have been constructed over lands of others pursuant to
easements or along public highways and streets as permitted by law.

         TXU Gas Distribution provides service through over 25,900 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 540 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 established by the municipal governments of the cities
and towns served, with the RRC having appellate jurisdiction. The majority of
TXU Gas Distribution's residential, commercial and industrial gas customers use
natural gas for heating, and their needs are directly affected by the mildness
or severity of the heating season. Weather normalization adjustments, which
allow rates to be adjusted to reflect warmer or colder than normal weather
during the winter months, have been approved by the various cities served by TXU
Gas Distribution. TXU Gas Distribution has filed applications to terminate these
adjustments, but cannot predict the outcome of these proceedings. Sales to
electric generation customers are affected by the mildness or severity of both
cooling and heating seasons.

         In August 2001, TXU Gas formed two new wholly-owned subsidiaries
(the Oncor Utility Solutions companies) that offer unregulated utility asset
management services for cooperatives, municipally owned and investor-owned
utilities in Texas and throughout the rest of North America.

         TXU Gas owns a four-building office complex in Dallas, containing
approximately 435,000 square feet of space that is occupied by TXU Gas and
certain of its affiliates.

                              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.

         In order to remain competitive, TXU Gas aggressively manages its
operating costs and capital expenditures through streamlined business processes
and is developing and implementing strategies to address an increasingly
competitive environment. These strategies include initiatives to improve return
on assets and to maximize value through new marketing programs.



                                       2

<PAGE>


                               OPERATING SEGMENTS
                               ------------------

         With the transfers of businesses to TXU Energy on January 1, 2002, TXU
Gas has one continuing business with no separate reportable segments:

         Gas Pipeline, Gas Distribution and Asset Management Services -
integrated operations involving the purchase, transmission, distribution and
sale of natural gas in Texas and asset management services in Texas and the rest
of North America (primarily TXU Lone Star Pipeline, TXU Gas Distribution and the
Oncor Utility Solutions companies);

         Accordingly, the energy trading business and the unregulated
commercial/industrial retail gas supply operations have been reflected as
discontinued operations in the statements of consolidated income and cash flows
of TXU Gas, and the related consolidated financial statements for prior periods
have been restated.



                                       3

<PAGE>

          GAS PIPELINE, GAS DISTRIBUTION AND ASSET MANAGEMENT SERVICES
                             (Continuing Operations)

GENERAL

Operating Statistics

<TABLE>
<CAPTION>
                                                                                    Year Ended
                                                                                   December 31,
                                                                     ----------------------------------------
                                                                        2001            2000            1999
                                                                     --------        --------        -------
<S>                                                                  <C>             <C>             <C>
SALES VOLUMES
   Gas distribution (billion cubic feet -- Bcf):
       Residential .............................................           84              83              68
       Commercial ..............................................           53              51              45
       Industrial and electric generation ......................            7               4               4
                                                                     --------        --------        --------
          Total gas distribution ...............................          144             138             117
                                                                     ========        ========        ========

   Pipeline transportation (Bcf) ...............................          546             601             551

OPERATING REVENUES (millions of dollars)
   Gas distribution:
       Residential .............................................     $    691        $    616        $    402
       Commercial ..............................................          372             318             212
       Industrial and electric generation ......................           47              28              20
                                                                     --------        --------        --------
          Total gas distribution ...............................        1,110             962             634
   Pipeline transportation .....................................          114             123             116
   Other revenues, net of intercompany eliminations ............            5              22             118
                                                                     --------        --------        --------
          Total operating revenues .............................     $  1,229        $  1,107        $    868
                                                                     ========        ========        ========


GAS DISTRIBUTION CUSTOMERS
   (end of year - in thousands) ................................        1,447           1,438           1,407

HEATING DEGREE DAYS (% of normal) ..............................           98%             95%             70%
</TABLE>

         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 Bcf.
Daily spot contracts raise this availability level to meet additional peak-day
needs.

         During 2001, the average daily demand of TXU Gas Distribution's
residential and commercial customers was 0.4 Bcf. TXU Gas Distribution's
peak-day demand in 2001 was on January 2, when the arithmetic-mean temperature
was 27 degrees Fahrenheit and sales to its customers reached 1.9 Bcf.

         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
natural gas supply as of January 1, 2002 is 148 Bcf, which is approximately
equal to TXU Gas Distribution's supply during 2001. TXU Gas Distribution has
approximately 28 Bcf committed under contracts with specific reserves, 29 Bcf in
working gas in storage and 38 Bcf committed under gas supply contracts not
related to specific reserves or fields. In 2001, TXU Gas Distribution's natural
gas requirements were purchased from approximately 89 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 a maximum working gas capacity of more than 37 Bcf and
a storage withdrawal deliverability of up to 1.2 Bcf per day. A sixth natural
gas storage field is currently being depleted for possible abandonment.

         TXU Gas Distribution has historically maintained a contractual right to
curtail individual load, which is designed to achieve the highest load factor
possible in the use of the pipeline system while ensuring continuous and
uninterrupted service to residential and commercial customers. Under the
program, industrial customers negotiate their own rates and relative priorities
of service. Interruptible service contracts include the right to curtail natural
gas


                                       4

<PAGE>

deliveries up to 100% according to a priority plan. The last sales curtailment
for TXU Gas Distribution occurred in 1990 and lasted only 30 hours.

         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 and transmission systems, the duration and
severity of cold weather, the availability of natural gas reserves from its
suppliers, the ability to purchase additional supplies on a short-term basis and
actions by federal and state regulatory authorities. Curtailment rights provide
TXU Gas Distribution flexibility to meet the human-needs requirements of its
customers on a firm basis. Priority allocations and price limitations 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.

         TXU Gas Distribution buys natural gas under long-term and short-term
intrastate contracts in order to ensure reliable supply to its customers. Many
of these contracts require minimum purchases of natural gas. The estimated
natural gas demand, which assumes normal weather conditions, significantly
exceeds the minimum purchase obligations of these contracts for the year 2002
and thereafter.

         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.

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 to off-system markets. These
businesses are highly competitive.

         Open Access -- 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 Federal Energy Regulatory Commission
(FERC) under the Natural Gas Act, pursuant to Section 601 of the NGPA.

         Customers -- There are no individually significant customers upon which
the gas pipeline and gas distribution business or results of operations are
highly dependent.

REGULATION AND RATES

         TXU 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


                                       5

<PAGE>

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 natural 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 natural gas
delivered, including out-of-period costs such as natural gas purchase contract
settlement costs. The distribution service rates TXU Gas Distribution charges
its residential and commercial customers are established by the municipal
governments of the cities and towns served, with the RRC having appellate
jurisdiction.

         TXU Gas Distribution employs a continuing program of rate review for
all classes of customers in its regulatory jurisdictions. Rate relief amounting
to $26.8 million in annualized revenue increases, exclusive of changes in
natural gas costs, was granted in 2001 in addition to $19.8 million granted in
2000 and $7.5 million granted in 1999. On March 1, 2002, TXU Gas Distribution
filed new rate proceedings for the Dallas Distribution System and for the North
Texas Metroplex Distribution System. These two filings, encompassing 111 cities
in the Dallas-Fort Worth Metroplex, seek additional revenues of approximately
$53 million over present rate revenues. TXU Gas cannot predict the outcome of
these proceedings.

         Weather normalization adjustment clauses have been approved by the
various cities served by TXU Gas Distribution. These clauses allow rates to be
adjusted to reflect the impact of warmer or colder than normal weather during
the winter months. TXU Gas has filed applications to terminate these
adjustments. TXU Gas cannot predict the outcome of these proceedings.

         TXU Gas Distribution's sales to industrial customers are provided under
rates reflected in standard rate schedules and contracts. Transportation
services to industrial and electric generation customers are provided under
competitively negotiated contracts. Industrial customers also have standard rate
schedules for transportation services. Regulatory authorities in Texas have
jurisdiction to revise, review and regulate rates to industrial and electric
generation customers but, historically, have not actively exercised this
jurisdiction because of the existing competitive market. Sales contracts with
these customers permit automatic adjustment on a monthly basis for the full
amount of increases or decreases in the cost of natural gas.

         TXU Gas Distribution has filed a 36 month gas cost prudence review
covering the period of November 1, 1997 through October 30, 2000 with the RRC.
This filing, made on July 16, 2001, was assigned GUD 9233. TXU Gas believes it
has under-recovered its gas costs by $9 million during this period, which amount
is carried as an asset. This proceeding has been abated pending resolution of
GUD 9246 (see below).

         TXU Gas Distribution has filed a city gate rate cost reconciliation
covering the period of July 1, 2000 to June 30, 2001 with the RRC. This filing,
made on August 31, 2001, was assigned GUD 9246. TXU Gas believes it has
under-recovered its gas costs by $22.3 million during this period, which amount
does not include the $9 million at issue in GUD 9233. This amount is carried as
an asset.

                                       6

<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 Natural Resource
Conservation Commission (TNRCC) 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 TNRCC, are also applicable. In 1999, EPA promulgated
National Emission Standards for Hazardous Air Pollutants that apply to certain
TXU Gas facilities. The TNRCC has not yet been delegated the authority to
enforce these standards. Any additional capital expenditures, as well as any
increased operating costs associated with these new requirements, are expected
to be recoverable through rates, as similar costs have been recovered in the
past. The TNRCC has issued Title V Operating Permits, required by the Clean Air
Act, for all facilities to which this requirement applies. TXU Gas believes that
operating costs that will be incurred under operating permits, new permit fee
structures, capital expenditures associated with equipment modifications to
reduce emissions and any expenditures on monitoring equipment, in the aggregate,
will not have a material effect on TXU Gas' financial position, results of
operations or cash flows.

         In 2001, the Texas Clean Air Act was amended to require that
"grandfathered" facilities apply for permits. Implementing regulations have not
been finalized; however, 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 TNRCC, 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 TNRCC 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.


                                       7

<PAGE>

Item 3.  LEGAL PROCEEDINGS

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

         In September 1999, Quinque Operating Company (Quinque) filed suit in
the State District Court of Stevens County, Kansas against over 200 gas
companies, including TXU Gas (named in the litigation as ENSERCH). 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.

         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, should not have a material effect
upon their financial position, results of operations or cash flows.

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

         Not Applicable.





                                       8

<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 Shareholders' 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.



                                       9

<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, 2002)           in May, 2002)                 Other Directorships
 -------------------- ------- ------------------------- -----------------------  ---------------------------------------

<S>                   <C>     <C>                          <C>                   <C>
T. L. Baker             56            President            January 1, 2002       President of Oncor  Electric  Delivery
                                                                                   and   TXU   Gas;    prior   thereto,
                                                                                   President  of  TXU  Electric;  prior
                                                                                   thereto,     President,     Electric
                                                                                   Service  Division  of TXU  Electric,
                                                                                   TXU Gas  Distribution and TXU SESCO;
                                                                                   prior   thereto,    Executive   Vice
                                                                                   President  of  TXU  Electric;  prior
                                                                                   thereto,  Senior Vice  President  of
                                                                                   TXU Electric;  other  directorships:
                                                                                   Oncor Electric Delivery.

H. Jarrell Gibbs        64             None                 May 12, 2000         President   of   TXU   Corp.   and  US
                                                                                   Holdings;    prior   thereto,   Vice
                                                                                   Chairman  of the  Board of TXU Corp.
                                                                                   and   TXU   Gas;    prior   thereto,
                                                                                   President  of  TXU  Electric;  other
                                                                                   directorships:     Oncor    Electric
                                                                                   Delivery,  TXU  Energy,  US Holdings
                                                                                   and TXU Europe Limited.

Michael J. McNally      47             None              February 16, 1996       Executive  Vice  President  and  Chief
                                                                                   Financial  Officer of TXU Corp.  and
                                                                                   Executive   Vice   President  of  US
                                                                                   Holdings; prior thereto,  President,
                                                                                   Transmission    Division    of   TXU
                                                                                   Electric;    other    directorships:
                                                                                   Oncor   Electric    Delivery,    TXU
                                                                                   Energy,  US Holdings  and TXU Europe
                                                                                   Limited.

Erle Nye                64    Chairman of the Board      September 17, 1982      Chairman   of  the   Board  and  Chief
                               and Chief Executive                                 Executive   of  TXU   Corp.,   Oncor
                                                                                   Electric  Delivery,  TXU Energy, TXU
                                                                                   Gas and US Holdings;  prior thereto,
                                                                                   President and Chief Executive of TXU
                                                                                   Corp.  and Chairman of the Board and
                                                                                   Chief  Executive  of  TXU  Electric;
                                                                                   other   directorships:   TXU  Corp.,
                                                                                   Oncor Electric Delivery, TXU Energy,
                                                                                   US Holdings and TXU Europe Limited.

R. A. Wooldridge        64             None                August 5, 1997        Partner  in the law  firm of  Hunton &
                                                                                   Williams;    other    directorships:
                                                                                   Oncor   Electric    Delivery,    TXU
                                                                                   Energy,  US Holdings  and TXU Europe
                                                                                   Limited.
</TABLE>

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



                                       10

<PAGE>

     Identification of Executive Officers and business experience:

<TABLE>
<CAPTION>
                                                          Date First Elected
                                   Positions and          to Present Offices
                               Offices Presently Held       (Current Term
                               (Current Term Expires          Expires                       Business Experience
  Name of Officer       Age         In May, 2002)           in May, 2002)                  (Preceding Five Years)
 -------------------- ------- ------------------------- -----------------------  -----------------------------------------

<S>                   <C>     <C>                       <C>                      <C>
Erle Nye               64        Chairman of the Board        January 1, 1998      Chairman   of  the   Board   and  Chief
                                  and Chief Executive                                Executive   of   TXU   Corp.,   Oncor
                                                                                     Electric  Delivery,  TXU Energy,  TXU
                                                                                     Gas and US Holdings;  prior  thereto,
                                                                                     President and Chief  Executive of TXU
                                                                                     Corp.  and  Chairman of the Board and
                                                                                     Chief Executive of TXU Electric.

T. L. Baker            56              President                May 12, 2000       President  of Oncor  Electric  Delivery
                                                                                     and   TXU   Gas;    prior    thereto,
                                                                                     President  of  TXU  Electric;   prior
                                                                                     thereto, President,  Electric Service
                                                                                     Division  of TXU  Electric,  TXU  Gas
                                                                                     Distribution  and  TXU  SESCO;  prior
                                                                                     thereto,  Executive Vice President of
                                                                                     TXU Electric;  prior thereto,  Senior
                                                                                     Vice President of TXU Electric.

M. S. Greene           56         President, TXU Lone        November 11, 1999     President,  TXU Lone Star  Pipeline and
                                     Star Pipeline                                   Transmission    Division   of   Oncor
                                                                                     Electric  Delivery;   prior  thereto,
                                                                                     Executive  Vice President of TXU Fuel
                                                                                     and TXU Mining.

H. Dan Farell          52          President, TXU Gas           May 12, 2000       President,   Distribution  Division  of
                                      Distribution                                   TXU    Gas   and    Oncor    Electric
                                                                                     Delivery;  prior  thereto,  Executive
                                                                                     Vice  President of TXU Electric,  TXU
                                                                                     Gas Distribution and TXU SESCO; prior
                                                                                     thereto, Chairman of the Board of TXU
                                                                                     Electricity   Limited  and   Managing
                                                                                     Director of TXU Australia.
</TABLE>

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



                                       11

<PAGE>

Item 11.   EXECUTIVE COMPENSATION

     TXU Gas and its affiliates have paid or awarded compensation during the
last three calendar years to the following Executive Officers for services in
all capacities:

<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     Compensation     Awards       Options/      Payouts      sation
   Principal Position           Year      ($)     ($) (8)      ($) (9)       ($) (10)      SARs (#)      ($) (11)    ($) (12)
--------------------------      ------  --------  ---------  ------------    ----------  -------------  ----------- ------------

<S>                             <C>     <C>       <C>        <C>             <C>         <C>            <C>         <C>
Erle Nye, (1) (13) ...........  2001    964,583    475,000       ---         694,375         ---         519,747      222,658
  Chairman of the Board         2000    950,000    380,000       ---         593,750         ---         399,793      218,101
  and Chief Executive of        1999    908,333    475,000       ---         688,750         ---          61,016      184,892
  the Company

David W. Biegler, (2) (14) ...  2001    650,000    162,500       ---         308,750         ---         155,015       97,406
  Group President of            2000    650,000    162,500       ---         308,750         ---               0       96,924
  the Company                   1999    641,667    164,000       ---         310,250         ---               0       81,509

H Jarrell Gibbs,(3) (13) .....  2001    567,500    175,000      ---          305,500         ---         138,921      116,786
  Vice Chairman of              2000    537,500    150,000       81,559      273,750         ---          94,668      112,735
  the Company                   1999    511,667    156,000      257,308      273,000         ---          24,969       94,140

VJ Horgan, (4) (13) ..........  2001    461,667    150,000      ---                0         ---               0      989,149
  President of TXU              2000    142,500          0      ---                0         ---               0       49,076
  Energy Trading                1999          0          0      ---                0         ---               0            0

T. L. Baker, (5) (13) ........  2001    449,167    125,000      ---          230,750         ---         111,800       89,374
  President of                  2000    399,167    125,000      ---          219,500         ---          93,968       84,152
  the Company                   1999    355,833    116,000      ---          199,250         ---          23,467       71,675

M. S. Greene,  (6) (13) ......  2001    311,667     81,500      ---          153,500         ---          18,659       62,710
  President, TXU Lone           2000    283,333     75,000      ---          142,500         ---           6,021       59,487
  Star Pipeline                 1999    255,833     63,500      ---          122,000         ---          18,304       51,454

H. Dan Farell,  (7) ..........  2001    304,583     80,500      ---          151,375         ---          61,290       47,455
  President, TXU Gas            2000    279,583     70,000     (44,181)      135,250         ---           4,901       45,160
  Distribution                  1999    258,750     60,500      680          120,125         ---          15,394       39,347
</TABLE>


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

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

(2)      Mr. Biegler was elected Group President of TXU Gas effective May 12,
         2000 and served in that capacity through May 11, 2001. Compensation
         amounts represent compensation paid by TXU Corp.

(3)      Mr. Gibbs served as Vice Chairman through May 11, 2001. Compensation
         amounts represent compensation paid by TXU Business Services.

(4)      Compensation amounts represent compensation paid by TXU Energy Trading.

(5)      Mr. Baker was elected President of TXU Gas effective May 12, 2000.
         Compensation amounts represent compensation paid by TXU Electric.

(6)      Mr. Greene was elected President of TXU Lone Star Pipeline effective
         November 11, 1999. Compensation amounts represent compensation paid by
         TXU Lone Star Pipeline.

(7)      Mr. Farell was elected President, TXU Gas Distribution effective May
         12, 2000. Compensation amounts represent compensation paid by TXU
         Electric.




                                       12

<PAGE>

(8)      Amounts reported as Bonus in the Summary Compensation Table are
         attributable to the named officer's participation in the TXU Annual
         Incentive Plan (AIP) with the exception of Ms. Hogan's bonus, which was
         paid under an annual incentive program established by TXU Energy
         Trading. Eligible officers of TXU Corp. and its participating
         subsidiaries with a title of Vice President or above participate in the
         AIP. Under the terms of the AIP as in effect for awards provided in
         2001 and before, target incentive awards ranging from 40% 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 per share net income goals
         established in advance by the TXU Corp. Organization and Compensation
         Committee (Committee), as well as the Committee's evaluation of the
         participant's and TXU Corp.'s performance. One-half of each award is
         paid in cash and reflected as Bonus in the Summary Compensation Table,
         and the remainder of the award is deferred and invested under the TXU
         Deferred and Incentive Compensation Plan (DICP) discussed in footnote
         (10). The AIP was amended with respect to awards to be provided
         beginning in 2002 so as to establish target incentive awards ranging
         from 20% to 75% of base salary, while retaining a maximum award of 100%
         of base salary, and to provide for the payment of the entire award, if
         any, in cash.

(9)      The amounts reported for Mr. Gibbs as Other Annual Compensation consist
         of certain benefits provided by TXU Corp. under its standard expatriate
         policy in connection with an extended assignment in the United Kingdom
         during 1999 and 2000. The amount for 2000 represents income taxes
         associated with such benefits paid on Mr. Gibbs' behalf. The amount for
         1999 includes approximately $128,000 for housing during the assignment,
         United Kingdom income taxes paid on Mr. Gibbs' behalf and certain other
         benefits.

         The amounts reported for Mr. Farell as Other Annual Compensation
         consist of certain benefits provided under the standard TXU expatriate
         policy in connection with an extended assignment in Australia during
         1999. The amount for 2000 represents the utilization of foreign tax
         credit carry forwards resulting from income taxes associated with such
         benefits paid on Mr. Farell's behalf in prior years. The amount for
         1999 represents income taxes associated with benefits paid on Mr.
         Farell's behalf.

(10)     Amounts reported as Restricted Stock Awards in the Summary Compensation
         Table are attributable to the named officer's participation in the
         DICP. Elected corporate officers of TXU Corp. and its participating
         subsidiaries with the title of Vice President or above are eligible to
         participate in the 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. In addition,
         one-half of any AIP award (Incentive Award) is deferred and invested
         under the DICP. Concurrently with the change in the AIP providing for
         payment of the full amount of AIP awards in cash beginning in 2002, the
         DICP was amended to eliminate future Incentive Awards. Matching Awards
         and Incentive 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, Matching Award and Incentive 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. On the expiration of the
         applicable maturity period (three years for Incentive Awards and five
         years for deferred salary and Matching Awards), 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 deferred salary together with 6% per
         annum interest compounded annually. Beginning in 2002, 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), discussed in footnote (12), provided that any such deferral
         election must be made at least 12 months prior to the date that the
         amount would otherwise mature under the DICP. The maturity period is
         waived if the participant dies or becomes totally and permanently
         disabled and may be extended under certain circumstances.

         Incentive Awards and Matching Awards that have been made under the DICP
         are included under Restricted Stock Awards in the Summary Compensation
         Table for each of the last three years. As a result of these awards,
         undistributed Incentive Awards and Matching Awards made under the DICP
         in prior years, and


                                       13

<PAGE>

         dividends reinvested thereon, the number and market value at December
         31, 2001 of such Units (each of which is equal to one share of common
         stock) held in the DICP accounts for Messrs. Nye, Biegler, Gibbs,
         Baker, Greene and Farell were 67,721 ($3,193,045), 29,445 ($1,388,332),
         29,308 ($1,381,872), 22,345 ($1,053,567), 14,930 ($703,950) and 14,467
         ($682,119), respectively.

(11)     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 discretionary grants of common stock-based awards,
         including performance-based restricted stock. Outstanding awards of
         performance-based restricted stock to the named executive officers 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 shares
         initially awarded, based on TXU Corp.'s total return to shareholders
         over the three year period compared to the total return provided by the
         companies comprising the Standard & Poor's Electric Utility 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. Based on TXU Corp.'s total
         return to shareholders over the three year period ending March 31, 2001
         compared to the returns provided by the companies comprising the
         Standard & Poor's Electric Utility Index, Messrs. Nye, Biegler, Gibbs,
         Baker and Farell each received 50% of the restricted shares awarded in
         May of 1998, which stock was valued at $487,190, $155,015, $110,725,
         $88,580 and $44,290, respectively.

         Amounts reported also include earnings distributed during the year on
         salaries previously deferred under the DICP for Messrs. Nye, Gibbs,
         Baker, Greene and Farell of $32,557, $28,196, $23,220, $18,659 and
         $17,000, 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, 2001 held for Messrs. Nye,
         Biegler and Gibbs, Ms. Horgan, and Messrs. Baker, Greene and Farell
         were 256,714 ($12,104,065), 27,702 ($1,306,149), 43,640 ($2,057,626),
         30,351 ($1,431,050), 37,065 ($1,747,615), 16,135 ($760,765) and 16,135
         ($760,765), 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 these deferred salaries for 2001 and the number of shares awarded
         under the LTICP:



                                       14

<PAGE>

             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 ...........        4,449         5 Years        125,000           3 Years            0            250,000

David W. Biegler ...        2,966         5 Years          5,000           3 Years            0             10,000

H. Jarrell Gibbs ...        2,647         5 Years         15,000           3 Years            0             30,000

VJ Horgan ..........            0           ---           17,000           3 Years            0             34,000

T. L. Baker ........        2,145         5 Years         12,000           3 Years            0             24,000

M. S. Greene .......        1,460         5 Years          7,000           3 Years            0             14,000

H. Dan Farell ......        1,437         5 Years          7,000           3 Years            0             14,000
</TABLE>

(12)     Amounts reported as All Other Compensation in the Summary Compensation
         Table are attributable to the named 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 up to 16% 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. For plan years
         beginning prior to January 1, 2002, the matching contribution was an
         amount equal to 40%, 50% or 60% (depending on the employee's length of
         service) of the first 6% of such employee's contributions. Beginning
         January 1, 2002, the Thrift Plan was amended to increase the matching
         contribution to 75% (regardless of the employee's length of service) 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% (regardless of the employee's length of service) 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, Biegler and
         Gibbs, Ms. Horgan, and Messrs. Baker, Greene and Farell were $6,120,
         $6,120, $5,100, $4,080, $6,120, $6,120 and $6,120, respectively, during
         2001.

         Under the 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 ($103,960 for the program year beginning
         April 1, 2001) may elect to defer up to 50% of annual base salary,
         and/or up to 100% of any bonus or incentive award, for a period of
         seven years, for a period ending with the retirement of such employee,
         or for a combination thereof. Beginning in 2002, participants may also
         elect to defer amounts that would otherwise mature under the DICP,
         under and subject to the provisions of the SDP, provided that any such
         deferral election must be made at least 12 months prior to the date
         that the amount would otherwise mature under the DICP. 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 such
         SDP matching award. Salary and bonuses deferred under the SDP are
         included in amounts reported under Salary and Bonus, respectively, in
         the Summary Compensation Table. 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. The distribution is in a lump sum if the
         applicable maturity period is seven years. If the retirement option is
         elected, for distributions beginning prior to 2002, the distribution is
         in twenty annual installments, and for distributions beginning in 2002
         and thereafter, the distribution is made in a number of annual
         installments selected in advance by the participant from 1 to 10 years
         or 15 years or 20 years. 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


                                       15

<PAGE>


         of the retirement option. During 2001, matching awards, which are
         included under All Other Compensation in the Summary Compensation
         Table, were made for Messrs. Nye, Biegler, Gibbs, Baker, Greene and
         Farell in the amounts of $77,167, $52,000, $45,400, $35,933, $31,167
         and $24,367, respectively.

         Under the TXU Split-Dollar Life Insurance Program (Insurance Program),
         split-dollar life insurance policies are purchased for elected
         corporate officers of TXU Corp. and its participating subsidiaries with
         a title of Vice President or above, with a death benefit equal to four
         times their annual Insurance Program compensation. The Insurance
         Program was amended, effective January 1, 2002, such that eligibility
         for the Insurance Program will be further limited and the death benefit
         of participants' insurance policies will be equal to two, three or four
         times their annual Insurance Program compensation depending on the
         officer category of the participant and the date the participant first
         became eligible for the Insurance Program. New participants 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 2001,
         the economic benefit derived by Messrs. Nye, Biegler, Gibbs, Baker,
         Greene and Farell from the term insurance coverage provided and the
         interest foregone on the remainder of the insurance premiums paid by
         TXU Corp. amounted to $139,371, $39,286, $66,286, $47,320, $25,423, and
         $16,968, respectively.

         An amount of $985,069 is included in the All Other Compensation column
         of the Summary Compensation Table for Ms. Horgan for 2001 representing
         the payment of certain deferred compensation provided for in her
         employment agreement with TXU Energy Trading, discussed in footnote
         (13).

(13)     TXU Corp. has entered into employment agreements with. Messrs. Nye and
         Gibbs, Ms. Horgan and Messrs. Baker and Greene as hereinafter described
         in this footnote.

         Effective June 1, 2000, TXU Corp. entered into an employment agreement
         with Mr. Nye. The agreement provides for Mr. Nye's continued service,
         through June 1, 2004 (Term), as TXU Corp.'s Chairman of the Board and
         Chief Executive. Under the terms of the agreement, Mr. Nye will, during
         the Term, be entitled to a minimum annual base salary of $950,000,
         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 the funding of the retirement benefit to
         which Mr. Nye will be entitled under TXU Corp.'s supplemental
         retirement plan in an amount determined in accordance with the standard
         formula under such plan. Additionally, the agreement entitles Mr. Nye
         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 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; 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.

         TXU Corp. entered into an employment agreement with Mr. Gibbs effective
         June 1, 2001. The employment agreement provides for the continued
         service by Mr. Gibbs through May 31, 2003 (Term). Under the terms of
         the agreement, Mr. Gibbs will, during the Term, be entitled to a
         minimum annual base salary of $580,000, eligibility for an annual bonus
         under the terms of the AIP, and minimum annual restricted stock awards
         of 15,000 shares under the LTICP. Additionally, the agreement entitles
         Mr. Gibbs 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 circumstance following a
         change-in-control of TXU Corp. during the Term, including a payment
         equal to two times his annualized base salary and target bonus; a
         payment in


                                       16

<PAGE>

         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.

         TXU Energy Trading entered into an employment agreement with Ms. Horgan
         effective September 1, 2000. The employment agreement provides for the
         continued service by Ms. Horgan through August 31, 2005 (Term). Under
         the terms of the agreement, Ms. Horgan is entitled to an initial
         annualized base salary of $450,000 and annual and long-term incentive
         opportunities. The agreement also provided for an initial award of
         12,000 shares of restricted stock which was made under the LTICP, and
         certain deferred compensation based on the value of TXU common stock,
         payable over a four year period. Additionally, the agreement entitles
         Ms. Horgan to certain severance benefits in the event she is terminated
         without cause, or resigns with good reason, during the Term (including
         such a termination or resignation following a change-in-control of TXU
         Corp.). Such severance benefits include a payment equal to two times
         her annualized base salary and target bonus, and a payment in lieu of
         forfeited incentive and deferred compensation.

         TXU Corp. entered into an employment agreement with Mr. Baker effective
         July 1, 2000. The employment agreement provides for the continued
         service by Mr. Baker through June 30, 2003 (Term). In May 2001, the
         agreement was amended to extend the Term to June 30, 2004. 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. Additionally, 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 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.

         TXU Corp. entered into an employment agreement with Mr. Greene
         effective July 1, 2000. The employment agreement provides for the
         continued service by Mr. Greene through June 30, 2003 (Term). In May
         2001, the agreement was amended to extend the Term to June 30, 2004.
         Under the terms of the agreement, Mr. Greene will, during the Term, be
         entitled to a minimum annual base salary of $300,000, eligibility for
         an annual bonus under the terms of the AIP, and minimum restricted
         stock awards of 5,000 shares under the LTICP. Additionally, the
         agreement entitles Mr. Greene 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 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.

(14)     Mr. Biegler retired effective December 31, 2001, and in connection with
         his retirement, entered into an agreement with TXU Corp. which
         provides, among other things, for the payment of certain supplemental
         retirement compensation over his life and the life of his spouse, and
         the waiver of the forfeiture provisions contained in his outstanding
         restricted stock award agreements.

         As a part of the acquisition of ENSERCH Corporation (renamed TXU Gas),
options to purchase the common stock of TXU Gas, which had been granted to
various employees of TXU Gas, were converted into options to acquire common
shares of TXU Corp. The table below shows, for each of the named officers, the
information specified with respect to exercised, exercisable and unexercisable
options under all existing stock option plans, converted into shares of TXU
Corp.'s common stock into which such options became exercisable at the time of
the TXU Gas acquisition.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR


                                       17

<PAGE>

<TABLE>
<CAPTION>
                                                        Number Of Securities              Value of Unexercised
                                                       Underlying Unexercised                 In-the-Money
                           Shares                            Options at                        Options at
                          Acquired                        December 31, 2001                 December 31, 2001
                             on          Value                   (#)                               ($)
                          Exercise      Realized   -----------------------------     -------------------------------
         Name                (#)           ($)     Exercisable     Unexercisable      Exercisable     Unexercisable
------------------------ ------------   ---------  -------------  ---------------    --------------  ---------------
<S>                      <C>            <C>        <C>             <C>               <C>             <C>
Erle Nye                      0            0                  0          0                       0          0
David W. Biegler           82,298       1,575,457        47,480          0               1,151,171          0
H. Jarrell Gibbs              0            0                  0          0                       0          0
VJ Horgan                     0            0                  0          0                       0          0
T. L. Baker                   0            0                  0          0                       0          0
M. S. Greene                  0            0                  0          0                       0          0
H. Dan Farell                 0            0                  0          0                       0          0
</TABLE>

         TXU Corp. and its subsidiaries maintain retirement plans (TXU
Retirement Plan), which are qualified under applicable provisions of the
Internal Revenue Code of 1986, as amended (Code). Annual retirement benefits
under the traditional defined benefit component of the TXU Retirement Plan,
which applied during 2001 to each of the named officers, other than Ms. Horgan,
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 TXU Retirement Plan also contains a cash balance component, which,
prior to January 1, 2002, covered only employees of certain designated business
units, including TXU Energy Trading. Under the cash balance component, which
applies to Ms. Horgan, hypothetical accounts are established for participants
and credited with monthly contribution credits equal to a percentage of the
participant's compensation (prior to January 1, 2002, 2.30%, 3.15%, 3.80%,
4.60%, 5.55% or 6.75% depending on years of accredited service) and interest
credits based on the average yield of the 30-year Treasury bond rate for the 12
months ending November 30 of the prior year. During 2001, employees, other than
employees subject to collective bargaining requirements, who were participating
under the traditional defined benefit component of the TXU Retirement Plan were
given a one-time irrevocable election to continue their participation under such
traditional defined benefit component, or to convert to a new cash balance
component effective January 1, 2002. Individuals who were participating in the
original cash balance component during 2001 began participating in this new cash
balance component effective January 1, 2002. The new cash balance component
modified the monthly contribution credit rate 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 service). As of January 1, 2002, the
benefit of employees who chose to convert to the new cash balance component was
the actuarial equivalent of their accrued benefit under the traditional defined
benefit component. All employees who begin their participation in the TXU
Retirement Plan on or after January 1, 2002, will participate under the new cash
balance component. 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 TXU Retirement Plan without
regard to any limitations imposed by the Code. Benefits paid under the
traditional defined benefit component of the TXU 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 TXU
Retirement Plan as of December 31, 2001, the estimated annual benefit payable to
Ms. Horgan under such component at normal retirement age is $1,451. As of
December 31, 2001, years of accredited service under the TXU Retirement Plan for
Messrs. Nye, Biegler and Gibbs, Ms. Horgan and Messrs. Baker, Greene and Farell
were 39, 4, 39, 0, 31, 31 and 27, respectively.


                                       18

<PAGE>

                             TXU PENSION PLAN TABLE

<TABLE>
<CAPTION>
                                                        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>

     Before the TXU Gas acquisition, Mr. Biegler earned retirement benefits
under the Retirement and Death Benefit Program of 1969 of ENSERCH Corporation
and Participating Subsidiary Companies (ENSERCH Retirement Plan) which was
merged into, and became a part of, the TXU Retirement Plan effective December
31, 1997. In connection with this plan merger, the TXU Retirement Plan was
amended to provide that the retirement benefit of certain TXU Gas employees will
equal the sum of (1) their accrued benefit under the ENSERCH Retirement Plan
through the last pay period of 1997 and (2) their accrued benefit under the TXU
Retirement Plan beginning with the first pay period of 1998; provided that the
aggregate retirement benefit earned under the traditional defined benefit
component of the plans can be no less than the retirement benefit which would
have been earned had all service under the traditional defined benefit component
been under the ENSERCH Retirement Plan. Mr. Biegler, whose employment with TXU
Corp. began August 5, 1997, is treated in a similar manner. Amounts reported for
Mr. Biegler under Salary and Bonus in the Summary Compensation Table approximate
earnings as defined by the ENSERCH Retirement Plan without regard to any
limitations imposed by the Code. Benefits paid under the ENSERCH Retirement Plan
are not subject to any reduction for Social Security payments but are limited by
provisions of the Code. As of Mr. Biegler's retirement date of December 31,
2001, he had 29 years of accredited service under the ENSERCH Retirement Plan
and, as previously noted, 4 years of accredited service under the TXU Retirement
Plan.

                           ENSERCH PENSION PLAN TABLE

<TABLE>
<CAPTION>
                                                        Years of Service
                       -----------------------------------------------------------------------------------------------
  Remuneration             20             25               30               35               40               45
------------------     -----------     ----------      -----------      ------------     ------------     ------------

<S>                    <C>             <C>             <C>              <C>              <C>              <C>
     $ 50,000            $ 12,500       $ 15,625         $ 18,750          $ 21,875         $ 23,125         $ 24,375
      100,000              29,418         36,773           44,127            51,482           54,982           56,482
      200,000              64,418         80,523           96,627           112,732          117,732          122,732
      400,000             134,418        168,023          201,627           235,232          245,232          255,232
      800,000             274,418        343,023          411,627           480,232          500,232          520,232
    1,000,000             344,418        430,523          516,627           602,732          627,732          652,732
    1,400,000             484,418        605,523          726,627           847,732          882,732          917,732
    1,800,000             624,418        780,523          936,627         1,092,732        1,137,732        1,182,732
    2,000,000             694,418        868,023        1,041,627         1,215,232        1,265,232        1,315,232
</TABLE>

     TXU Corp.'s supplemental retirement plans (Supplemental Plan) provide for
the payment of retirement benefits, which would otherwise be limited by the
Code, or the definition of earnings in the TXU Retirement Plan or the ENSERCH
Retirement Plan, as applicable. Under the Supplemental Plan, retirement benefits
are calculated in accordance with the same formula used under the applicable
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 TXU Retirement Plan, earnings also include AIP awards (50% of
the AIP award is reported under Bonus for the named officers in the Summary
Compensation Table). The tables set forth above illustrate the total annual
benefit payable




                                       19

<PAGE>

at retirement under the TXU Retirement Plan and the ENSERCH Retirement Plan,
respectively, 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.

     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
2002 annual meeting of shareholders.


                                       20

<PAGE>

                 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 all of the
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 other large 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 the largest 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 performances as evaluated by the
Committee. The ultimate value of any awards of performance-based restricted
shares 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.

         During 2001, a comprehensive review of compensation and benefits
provided to officers and other employees was completed. The purpose of the
review which was conducted with the assistance of independent compensation and
benefit consultants, was to assure that the Company's compensation and benefit
plans continue to be appropriately competitive in the markets in which the
Company and its subsidiaries operate. Recommendations arising from the review
were considered by the Committee and the Board of Directors, and generally are
being implemented. Changes in benefits related principally to employees in the
United States and included adoption of a cash balance retirement formula,
increases in the Company match under the employee savings plan, implementation
of flexible health and welfare benefits and limitations on the Company's
contributions towards the cost of post-retirement medical benefits for persons
who retire in the future. Changes in officers' compensation plans are more fully
described elsewhere in this report and proxy statement, and generally are
intended to facilitate the inclusion of Company and subsidiary officers in a
common framework of annual and long-term incentive opportunities.

         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. In 2001 the
evaluation of each individual participant's performance was based on the
attainment of individual and business unit objectives. As amended in 2001 with
respect to awards that may be provided in 2002 and thereafter, the evaluation of
each individual participant's performance may be based upon the attainment of a


                                       21

<PAGE>

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 including 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.
The AIP was also amended in 2001 to provide for the participation of certain
officers of subsidiaries and to provide for the payment of awards in cash
thereby eliminating the requirement that the receipt of 50% of such awards be
deferred.

         The Long-Term Plan, which was first approved by the shareholders in
1997 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 all
been 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.

         As required by Section 162(m) of the Internal Revenue Code relating to
the deductibility of compensation, the Long-Term Plan, as amended to increase
the maximum aggregate number of shares that may be issued pursuant to awards
under the Plan, is being submitted for reapproval by the shareholders. Detailed
information concerning this proposal is contained on pages 23 through 26 of this
proxy statement. The reapproval is being requested so as to comply with the
Internal Revenue Code and to increase the number of shares that may be awarded
under the plan. The Committee believes that the Long-Term Plan is an important
and appropriate component of officers' compensation and recommends that the
shareholders vote in favor of reapproval.

         In establishing levels of executive compensation at its May 2001
meeting, the Committee reviewed various performance and compensation data,
including the performance measures under the AIP and the report of its
compensation consultant. Information was also gathered from industry sources and
other published and private materials which provided a basis for comparing the
largest 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 Utility Index which
are reflected in the graph on page 20. 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.

         At its meeting in May 2001, the Committee provided awards of
performance-based restricted shares under the Long-Term Plan to certain
officers, including the Chief Executive. Information relating to awards made to
the named executive officers is contained in the Table on page 10 of this proxy
statement. The ultimate value of those awards, if any, will be determined by the
Company's total return to shareholders over a three year period compared to the
total return for that period of the companies comprising the Standard & Poor's
Electric Utility Index. Depending upon the Company's relative total return for
such period, the officers may earn from 0% to 200% of the original award, and
their compensation is, thereby, directly related to shareholder value. Awards
granted in May 2001 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 Utility 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 2001, considered the performance-based restricted stock awards
provided to certain officers in May of 1998. 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 Utility Index, the Committee
determined that the Company's performance during the three year performance
period ending in March of 2001 permitted the payment of 50% of such 1998 awards.
Payments of



                                       22

<PAGE>

these awards were made in the form of the Company's stock and cash, and, for
Messrs. Nye, Biegler, Gibbs and McNally, the value of the stock at the date of
distribution is included in the LTIP Payouts column of the Summary Compensation
Table on page 8 of this proxy statement.

         Certain of the Company's business units have developed separate annual
and long-term 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 officers participate in the individual business
unit plans.

         As previously reported, the Committee recommended, and the Board
subsequently approved, employment contracts with certain officers including the
Chief Executive. Such agreements with Messrs. Nye, Dickie and McNally, as well
as the agreement entered into with Mr. Gibbs in June 2001, are described in
footnote 6 on pages 12 and 13 of the proxy statement.

         In May 2001 the Committee increased Mr. Nye's base salary as Chief
Executive to an annual rate of $975,000 representing a $25,000 or 2.6% increase
over the amount established for Mr. Nye in May of 2000. Based upon the
Committee's evaluation of individual and Company performance, as called for by
the AIP, the Committee provided Mr. Nye with an AIP award of $950,000 compared
to the prior year's award of $760,000. The Committee also awarded 125,000 shares
of performance-based restricted stock to Mr. Nye. Under the terms of the award,
Mr. Nye can earn from 0% to 200% of the award, depending on the Company's total
return to shareholders over a three-year period (April 1, 2001 through March 31,
2004) compared to the total return provided by the companies comprising the
Standard & Poor's Electric Utility Index. This level of compensation was
established based upon the Committee's subjective evaluation of the information
described in this report. In addition, as previously noted in this report, the
Committee approved the payment of 50% of the 1998 performance-based restricted
stock awards under the Long-Term Plan, which for Mr. Nye was 11,000 shares.

         In discharging its responsibilities with respect to establishing
officers' compensation, the Committee has normally considered such matters at
its May meetings including its May 2001 meeting. Beginning in 2002, the
Committee is expected to consider officers' compensation matters at its February
meetings and to report to the shareholders on these matters in the following
years' proxy statement. 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 in 1996 and subsequent years have been, and are expected to
continue to be, fully deductible. Awards under the Long-Term Plan are expected
to be fully deductible, and the DICP and the Salary Deferral Program have been
amended to require the deferral of distributions of amounts maturing in years
subsequent to 1995 until the time when such amounts would be deductible.

         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
        Kerney Laday                                 Herbert H. Richardson


                                       23

<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 Utility Index for the last five years. The
graph assumes the investment of $100 at December 31, 1996 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 12/31/01

                                  [LINE GRAPH]


<TABLE>
<CAPTION>
                                              ----------------------------------------------------------------------
                                                    1996       1997         1998        1999        2000       2001
--------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>        <C>          <C>         <C>         <C>        <C>
TXU Corp. ..................................         100        108          128         103         138        155
--------------------------------------------------------------------------------------------------------------------
S&P 500 Index ..............................         100        133          171         208         189        166
--------------------------------------------------------------------------------------------------------------------
S&P Electric Utility Index .................         100        126          146         118         180        166
--------------------------------------------------------------------------------------------------------------------
</TABLE>



                                       24

<PAGE>

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security ownership of certain beneficial owners at February 20, 2002:

<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 February 20, 2002:

        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 February 20, 2002.
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 .........................            86,350                     30,969                       117,319

David W. Biegler ....................            79,601 (2)                 40,682                       120,283

H. Dan Farell .......................            30,005                     20,577                        50,582

H. Jarrell Gibbs ....................            77,607                     40,712                       118,319

M. S. Greene ........................            28,265                     21,176                        49,441

VJ Horgan ...........................            47,754                          0                        47,754

Michael J. McNally ..................           118,200                     36,489                       154,689

Erle Nye ............................           449,812                     90,194                       540,006

R. A. Wooldridge ....................             8,446                          0                         8,446

All Directors and Executive
  Officers as a group (9) ...........           926,040                    280,799                     1,206,839
</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.

(2)     Shares reported include 31,653 shares subject to stock options
        exercisable within sixty days.

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.


                                       25

<PAGE>

                                     PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   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-14
           Independent Auditors' Report ..............................................................    A-15
           Statements of Consolidated Income and Comprehensive Income for each of the
                three years in the period ended December 31, 2001 ....................................    A-16
           Statements of Consolidated Cash Flows for each of the three years in the period
                ended December 31, 2001 ..............................................................    A-17
           Consolidated Balance Sheets, December 31, 2001 and 2000 ...................................    A-18
           Statements of Consolidated Shareholders' Equity for each of the three years in the
                period ended December 31, 2001 .......................................................    A-19
           Notes to Financial Statements .............................................................    A-20
</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, 2001, are as follows:

         Date of Report             Item Reported
         --------------             -------------

         January 16, 2002           Item 2. Disposition or Acquisition of
                                    Assets.
                                    Item 5. Other Events and Regulation FD
                                    Disclosure.
                                    Item 7. Financial Statements and Exhibits.

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



                                       26

<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

<TABLE>
<S>                                                         <C>                                  <C>
Date:   March 20, 2002                                       By:              /s/    ERLE NYE
                                                                      ------------------------------------
                                                                     (Erle Nye, Chairman of the Board and
                                                                               Chief Executive)
</TABLE>

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

/s/                   KIRK R. OLIVER                        Principal Financial
----------------------------------------------------------- Officer
             (Kirk R. Oliver, Vice President)

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

/s/                     T. L. BAKER                         Director
-----------------------------------------------------------
                       (T. L. Baker)

/s/                  H. JARRELL GIBBS                       Director                             March 20, 2002
-----------------------------------------------------------
                    (H. Jarrell Gibbs)

/s/                 MICHAEL J. McNALLY                      Director
-----------------------------------------------------------
                   (Michael J. McNally)

/s/                ROBERT A. WOOLDRIDGE                     Director
-----------------------------------------------------------
                  (Robert A. Wooldridge)
</TABLE>

                                       27

<PAGE>

<TABLE>
<CAPTION>
                                                                                               Appendix A

TXU GAS COMPANY AND SUBSIDIARIES

INDEX TO FINANCIAL INFORMATION
December 31, 2001

                                                                                                  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-14

Independent Auditors' Report...............................................................       A-15

Financial Statements:

Statements of Consolidated Income and Comprehensive Income.................................       A-16

Statements of Consolidated Cash Flows......................................................       A-17

Consolidated Balance Sheets................................................................       A-18

Statements of Consolidated Shareholders' Equity............................................       A-19

Notes to Financial Statements..............................................................       A-20
</TABLE>




                                       A-1

<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES

                             SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                                                                     Predecessor
                                                                                                                     -----------
                                                                                                     Period from     Period from
                                                                    Year Ended                       Acquisition     January 1,
                                                                   December 31,                        Date to        1997 to
                                                    ------------------------------------------------- December 31,   Acquisition
                                                     2001         2000          1999          1998       1997           Date
                                                    ------       ------        ------        -------  ------------    -------
                                                                 (Millions of Dollars, except volumes and ratios)

<S>                                                 <C>          <C>           <C>           <C>           <C>
Total assets -- end of year................         $4,548       $5,658        $3,433        $ 3,957       $ 3,240
                                                    ======       ======        ======        =======       =======
Capitalization-- end of year
   Long-term debt, less amounts due currently       $  553       $  757        $  551        $   551       $   647
   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            146            --
   Preferred stock.........................             75           75            75             75           175
   Common stock equity.....................            985          949           965            741           762
                                                    ------       ------        ------        -------       -------
        Total..............................         $1,760       $1,928        $1,738        $ 1,513       $ 1,584
                                                    ======       ======        ======        =======       =======

Capitalization ratios-- end of year
   Long-term debt..........................           31.4%        39.3%         31.7%        36.4%         40.8%
   Trust securities........................            8.3          7.6           8.5          9.6          --
   Preferred stock.........................            4.3          3.9           4.3          5.0          11.1
   Common stock equity.....................           56.0         49.2          55.5         49.0          48.1
                                                    ------       ------        ------       ------        ------
        Total..............................          100.0%       100.0%        100.0%       100.0%        100.0%
                                                    ======       ======        ======       ======        ======
Sales volumes

   Gas distribution (billion cubic feet -- Bcf):

      Residential..........................             84           83            68             77            33           53
      Commercial...........................             53           51            45             49            21           33
      Industrial and electric generation...              7            4             4              4             3            7
                                                    ------       ------        ------        -------       -------      -------
        Total gas distribution.............            144          138           117            130            57           93
                                                    ======       ======        ======        =======       =======      =======

   Pipeline transportation (Bcf)...........            546          601           551            599           255          362

Operating revenues of continuing operations
   Gas distribution

      Residential..........................         $  691       $  616        $  402        $   437       $   206      $   335
      Commercial...........................            372          318           212            225           109          178
      Industrial and electric generation...             47           28            20             20            15           38
                                                    ------       ------        ------        -------       -------      -------
        Total gas distribution.............          1,110          962           634            682           330          551
   Pipeline transportation.................            114          123           116            121            57           77
   Other revenues, net of intercompany
      eliminations.........................              5           22           118             52            29           26
                                                    ------       ------        ------        -------       -------      -------
        Total operating revenues of continuing
          operations.......................         $1,229       $1,107        $  868        $   855       $   416      $   654
                                                    ======       ======        ======        =======       =======      =======

Income (loss) from continuing operations...         $  (12)      $   53        $    8        $   (29)      $     5      $    (5)
                                                    ======       ======        ======        =======       =======      =======

Ratio of income (loss) from continuing
   operations to fixed charges.............           0.92         2.12          1.08           0.52          1.30         0.88
Ratio of income (loss) from continuing
   operations to combined fixed charges
    and preferred dividends................           0.90         1.96          1.04           0.49          1.00         0.76
</TABLE>


         On August 5, 1997 (Acquisition Date), TXU Corp. completed the
acquisition of ENSERCH Corporation, which was accounted for as a purchase.
ENSERCH Corporation was primarily engaged in the natural gas business. Purchase
accounting adjustments, including goodwill, were pushed down and are reflected
in the financial statements of TXU Gas Company and its subsidiaries. Financial
information of Predecessor for all periods prior to the Acquisition Date
reflects the results of Enserch Exploration, Inc. and Lone Star Energy Plant
Operations, Inc. as well as engineering and construction and environmental
businesses, as discontinued operations.

         With the transfer of the businesses to TXU Energy Company LLC on
January 1, 2002, the gas pipeline operations, gas distribution operations and
asset management services will 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 an integrated
company engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas and, until January
1, 2002, was engaged in energy trading and marketing of natural gas and
electricity throughout the United States (US) and parts of Canada. TXU Gas is a
wholly-owned subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a global
energy services company that engages in electricity generation, wholesale energy
trading, retail energy marketing, energy delivery, other energy-related services
and, through a joint venture, telecommunications services.

         Divisions and subsidiaries of TXU Gas' continuing operations include
TXU Gas Distribution, a gas distribution company in Texas, serving over 1.4
million customers and providing service through over 25,900 miles of
distribution mains; TXU Lone Star Pipeline which has approximately 7,200 miles
of transmission and gathering pipeline in Texas. In August 2001, TXU Gas formed
Oncor Utility Solutions (Texas) Company and Oncor Utility Solutions (North
America) Company, which are wholly-owned subsidiary companies of TXU Gas that
offer unregulated utility asset management services for cooperatives and
municipally owned and investor-owned utilities in Texas and throughout the rest
of North America.

         As a result of the deregulation of the electricity markets in Texas,
effective January 1, 2002, TXU Corp. realigned the operations of its
subsidiaries including those of TXU Gas. As a part of that realignment, TXU Gas
transferred its energy trading and unregulated commercial/industrial retail gas
supply operations to TXU Energy Company LLC (TXU Energy), a wholly-owned
subsidiary of TXU US Holdings Company, (formerly TXU Electric Company) (US
Holdings). See Note 1 to Financial Statements. Accordingly, the transferred
operations have been reflected as discontinued operations in the statements of
consolidated income and cash flows of TXU Gas and the related consolidated
financial statements for prior periods have been restated. TXU Gas' continuing
operations are those of its gas pipeline, gas distribution and asset management
services businesses.

         Included in the balance sheet of TXU Gas at December 31, 2001 is $773
million of goodwill, net of amortization, arising from TXU Corp.'s 1997
acquisition of TXU Gas, formerly ENSERCH Corporation. The energy trading
business including the unregulated commercial/industrial retail gas supply
operations transferred to TXU Energy were originally part of TXU Gas. As part of
its implementation of Statement of Financial Accounting Standards (SFAS) No.
142, TXU Corp. is in the process of determining its reporting units as defined
by SFAS No. 142, the fair value of those reporting units and the allocation of
goodwill to those reporting units. TXU Corp. and TXU Gas are in the process of
determining the amount of goodwill to be transferred to reporting units upon the
adoption of SFAS No. 142. TXU Gas' goodwill is subject to allocation to TXU
Energy in 2002. See Changes in Accounting Standards below.

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



                                       A-3

<PAGE>

         Critical Accounting Policies
         ----------------------------

         TXU Gas' accounting policies are detailed in Note 2 to Financial
Statements. TXU Gas follows accounting principles generally accepted in the
United States of America (US GAAP). In applying these accounting policies in the
preparation of TXU Gas' 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 the reported
amounts of revenue and expense during the periods. The following is a summary of
certain critical accounting policies of TXU Gas which 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 revenues for gas pipeline and
         -------------------
asset management services when services are provided to customers. Gas
distribution sales revenues are recognized when services are provided to
customers on the basis of periodic cycle meter readings and include an estimated
accrual for the value of gas provided from the meter reading date to the end of
the period. Gas distribution revenues include billings under approved rates and
adjustments under various mechanisms to recover or refund the cost of natural
gas purchased that is above or below the level included in base rates.

         Regulatory assets and liabilities - The financial statements of TXU Gas
         ---------------------------------
reflect regulatory assets and liabilities under cost-based rate regulation in
accordance with 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 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 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.


                                       A-4

<PAGE>

RESULTS OF OPERATIONS

OVERVIEW

         The discussion of results of operations below reflects the restatement
of historical financial information to present TXU Gas' energy trading and
unregulated commercial/industrial retail gas supply businesses as discontinued
operations.

<TABLE>
<CAPTION>
Continuing Operations - Gas Pipeline, Gas Distribution and Asset Management Services
------------------------------------------------------------------------------------

                                                                 2001         2000         1999
                                                                ------       ------       -----
<S>                                                             <C>          <C>          <C>
       Gas distribution volumes (billion cubic feet - Bcf)         144          138          117
       Pipeline transportation volumes (Bcf)..............         546          601          551
       Heating degree days (% of normal)..................          98%          95%          70%
</TABLE>


2001 versus 2000
----------------

         The following discussion excludes the operating results from the gas
processing business sold in May 2000, including operating revenues of $54
million, gross margin of $42 million, operation and maintenance expense of $35
million, other operating expenses of $2 million and operating income of
$5 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 for 2001. This increase reflects higher gas distribution prices
resulting from higher gas costs and revenue enhancement activities and higher
volumes, primarily as a result of 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 for 2001. Improved margin from
increased gas volumes distributed due to the colder winter weather and moderate
customer growth was partially offset by gas costs adjustments that are
unrecoverable under regulatory mechanisms.

         Operation and maintenance expense increased $39 million, or 18%, to
$260 million in 2001. The gas distribution business had increases in several
expense categories, including bad debts and increased maintenance costs for
system reliability.

         Other operating expenses increased $38 million, or 26%, to $182 million
for 2001. The increase primarily reflects higher gross receipts taxes.

         The increase in gross receipts taxes and bad debts was due largely to
the rise in natural gas costs and related revenue in late 2000 and early 2001.

         Operating income decreased $73 million, or 76%, to $23 million for 2001
as the increase in operation and maintenance expense and other operating
expenses more than offset the increase in gross margin.

         Other income-net increased from income of $8 million in 2000 to $28
million in 2001, largely reflecting $18 million for the favorable settlement of
a gas purchase contract and a $3 million gain on the sale of assets in 2001.

         Net interest expense decreased $12 million, or 17%, to $57 million in
2001 due largely to lower intercompany interest rates.

         Income tax expense was $6 million for 2001 compared to $40 million for
2000. The effective tax rate reflects non-deductible goodwill amortization of
$22 million in both years.

         TXU Gas had a loss from continuing operations of $12 million for 2001
compared with income of $53 million in 2000. Excluding a $53 million ($34
million after-tax) gain on the May 2000 sale of the gas processing



                                       A-5

<PAGE>

business and its related net income of $6 million, continuing operations had net
income of $13 million in 2000. These results were driven by the higher operating
expenses and the weak gross margin performance.

         Income from discontinued energy trading and unregulated
commercial/industrial retail gas supply operations was $41 million in 2001
compared with a loss of $66 million in 2000. The improvement was driven by
favorable trading results, partially offset by higher operation and maintenance
expense associated with expanding the business.

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

2000 versus 1999
----------------

         Operating revenues increased by $239 million, or 28%, to $1.1 billion
for 2000. This increase was driven by gas distribution operations and reflects
the revenue effect of the rise in prices for natural gas experienced in 2000 and
increased demand for natural gas due to colder winter weather and base business
growth. The growth in revenues was partially offset by the absence of the gas
processing business.

         Gross margin decreased by $8 million, or 2%, to $503 million in 2000.
The absence of the margin contributed by the gas processing business was only
partially offset by improved margins in the gas distribution business driven by
the increased demand for natural gas.

         Operation and maintenance expense decreased by $46 million, or 15%, to
$256 million in 2000, primarily as a result of the sale of the gas processing
business in mid-2000.

         Other operating expenses increased by $5 million, or 4%, to $146
million in 2000, largely due to an increase in taxes other than income resulting
from increased revenues subject to state and local gross receipts taxes.

         Other income-net was $61 million in 2000 compared with $12 million in
1999 and included the $53 million ($34 million after-tax) gain on the sale of
the gas processing business in 2000 and $8 million in gains on sale of assets in
1999.

         Net interest expense decreased $5 million, or 7%, to $69 million in
2000 primarily reflecting the use of proceeds from the sale of gas processing
assets to reduce intercompany loans.

         Income tax expense was $40 million in 2000 compared to a tax benefit of
$2 million in 1999. The effective tax rate reflects non-deductible goodwill
amortization of approximately $22 million in both years. Due to a change in
Internal Revenue Service regulations, TXU Gas expects to fully utilize all
domestic net operating loss carryforwards. Accordingly, the previously
established valuation allowance of $10 million was eliminated in 1999.

         Income from continuing operations was $53 million in 2000 compared with
$8 million in 1999. Results in 2000 included the gain on the sale of the gas
processing business. Operating results for 2000 also reflected increased margin
for gas distribution operations due to significantly increased volumes
distributed in response to colder winter weather.

         Discontinued operations had a net loss of $66 million in 2000 compared
with a net loss of $26 million in 1999. The greater loss reflected an increase
in operation and maintenance expense including costs associated with moving the
operations from Houston to Dallas and costs to grow the business, decreased
trading margin and an increase in net interest expense.

         Net loss applicable to common stock was $17 million in 2000 compared
with a net loss of $22 million in 1999. As discussed above, the gain on sale of
the gas processing business and the benefits of volume growth in continuing
operations were partially offset by the increased net loss from discontinued
operations.

Comprehensive Income
--------------------

                                       A-6

<PAGE>

         TXU Gas adopted SFAS No. 133 effective January 1, 2001 and recognized
$1.6 million after-tax as an increase to other comprehensive income of
continuing operations to reflect the cumulative fair value of cash-flow-hedge
derivatives at transition. The change in other comprehensive income from cash
flow hedges is related to the change in fair value of interest rate swaps.

         TXU Gas has historically used, and will continue to use, derivatives to
offset future cash flow volatility in interest rates. The fair value of
derivatives that are effective as cash-flow hedges is recorded as a derivative
asset or liability, with an offset in other comprehensive income.

         The balance sheet value of these derivative assets or liabilities can
change significantly from quarter to quarter based on changes in market
expectations of economic events, such as the recent drop in US interest rates.
The fair value of these cash-flow hedge derivatives is determined each quarter
based on actual and forecasted interest rates. Consistent with the above, the
effect of changes in fair value of effective hedges is reflected in the
derivative asset or liability and in other comprehensive income.

         The amounts included within other comprehensive income reflect the
value of the cash-flow hedges, based on current market conditions, to be used in
the future to offset the impact on related payments of expected changes in
variable rates or prices. Consistent with hedge accounting prior to SFAS No.
133, the effects of the hedge will be recorded in the statement of income as the
related transaction is actually settled.

         In 2001, the discontinued energy trading operations entered into cash
flow hedge transactions related to forecasted sales of electricity. The balance
sheet value of these derivative assets or liabilities can change significantly
from quarter to quarter based on changes in market expectations of economic
events, such as the recent drop in electricity and natural gas prices.
Consistent with the above, the effect of changes in fair value of effective
hedges of $16 million after-tax is reflected in the derivative asset or
liability of discontinued operations and in other comprehensive income of
discontinued operations.

FINANCIAL CONDITION

Liquidity and Capital Resources

         Cash flows provided by operating activities for 2001 were $140 million
compared to $56 million and $245 million for 2000 and 1999, respectively. The
increase from 2000 to 2001 of $84 million, or 150%, 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. The decline in operating cash flows in 2000 of $189 million,
or 77% was primarily due to the same reason.

         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 Putable
Asset Term Securities and advances from TXU Corp. Cash flows from financing
activities in 1999 reflected the issuance of $250 million in common stock to TXU
Corp. and the repayment of $150 million in long-term debt.



                                       A-7

<PAGE>

         Cash flows used in investing activities for 2001 totaled $179 million.
This compares to $27 million and $102 million used for investing activities in
2000 and 1999, respectively. The increase in capital expenditures of $64
million, or 51% in 2001 was for improvements to system reliability. The
disposition of the gas processing business provided $105 million in 2000 while
the sale of assets in 1999 provided $48 million.

         Discontinued operations provided cash of $213 million in 2001 compared
with using $238 million in 2000 and $196 million in 1999. These changes
reflected cash deposits for increased trading margin requirements in 2000, and
then, a change in 2001 whereby margin requirements are met with letters of
credit.

         Capital expenditures for TXU Gas are estimated at $108 million for
2002.

         In October 2000, TXU Gas issued $200 million aggregate principal amount
of Putable Asset Term Securities due October 15, 2012. The securities have a
fixed rate of 7-5/8% from the date of issuance through October 14, 2002. TXU Gas
assigned to a third party the right to call the securities. On October 15, 2002,
the securities will be either mandatorily tendered to and purchased by the
callholder or mandatorily redeemed by TXU Gas. If the callholder chooses to
purchase the securities, TXU Gas may elect to have the securities remarketed for
a period of up to one year, in which case the callholder must purchase the
securities at the end of the period. If the callholder exercises its right to
call the securities on October 15, 2002, or at the end of the period if
applicable, the securities will be remarketed at a fixed rate for a ten year
period. If the callholder does not purchase the securities on October 15, 2002,
TXU Gas will be required to redeem all of the securities for 100% of the
aggregate principal amount outstanding plus accrued interest, if any.

         Total capitalization at December 31, 2001 was $1.8 billion, down 9%
from year-end 2000. The capitalization ratios of TXU Gas at December 31, 2001
consisted of approximately 31.4% long-term debt less amounts due currently, 8.3%
trust securities, 4.3% preferred stock, and 56.0% common stock equity.

         Interest rate swaps effectively fixed the rate on $100 million of the
TXU Gas Capital I trust securities at 6.629% and at 6.444% on the remaining $50
million of the trust securities to July 1, 2003.

         TXU Gas may issue additional debt and equity securities as needed,
including the possible future sale of up to $400 million of debt securities
and/or preferred securities of subsidiary trusts that are currently registered
with the Securities and Exchange Commission for offering pursuant to Rule 415
under the Securities Act of 1933.

         At December 31, 2001, TXU Corp., US Holdings and TXU Gas had joint US
dollar-denominated lines of credit under revolving credit facility agreements
(US Credit Agreements) with a group of banking institutions. At December 31,
2001, TXU Gas had no borrowings outstanding under these facilities. Letters of
credit outstanding under the US Credit Agreements were $113 million for TXU Gas
as of December 31, 2001. In connection with the extension of the US Credit
Agreements in February 2002, the facilities were amended to remove TXU Gas as a
borrower. TXU Gas will meet its short-term liquidity needs through advances from
TXU Corp.

         Prior to January 1, 2002, TXU Gas and US Holdings sold certain customer
accounts receivable to a wholly-owned bankruptcy remote unconsolidated
subsidiary of TXU Gas (TXU Receivables Company) which sells undivided interests
in accounts receivable it purchases to financial institutions. As of January 1,
2002, the program was amended to terminate US Holdings' participation and to add
TXU Energy Retail Company LP, TXU SESCO Energy Services Company and Oncor
Electric Delivery Company as qualified originators of accounts receivable under
the program. As of December 31, 2001, TXU Gas had sold $111 million face amount
of receivables to TXU Receivables Company under the program in exchange for cash
of $60 million and $50.6 million in subordinated notes, with $.4 million
representing the costs of the program since inception in August 2001. Annualized
costs of the program approximated 3.7% of the cash proceeds from the receivable
sales. An additional $4.2 million of cash related to the receivables sold as of
December 31, 2001 was received subsequent to year-end, bringing the total cash
received for those receivables to $64.2 million and reducing the notes by $4.2
million. TXU Receivables Company funded the cash paid through sales of undivided
interests in the purchased receivables to financial institutions. TXU
Receivables Company purchases the receivables at a discount that is adjusted
periodically to reflect any changes in the credit risk profile of the
receivables, the costs of the program and other factors. The subordinated notes
receivable from TXU Receivables Company are included in accounts receivable in
the consolidated balance sheet.

                                       A-8

<PAGE>

         If the program terminates, cash flow to the originators would
temporarily stop until the undivided interests of the financial institutions
were repurchased. The level of cash flows would normalize in approximately 16 to
31 days. 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
               both any originator and its parent guarantor, if any, declines
               below BBB- by Standard and Poor's or Baa3 by Moody's; or

          2)   the delinquency ratio (delinquent for 31 days) for the sold
               receivables exceeds 15% for any month, the default ratio
               (delinquent for 91 days or deemed uncollectible) exceeds 5% for
               any month, or the dilution ratio (reductions for discounts,
               disputes and other allowances) exceeds 1% for any month.

The delinquency ratio and the dilution ratio exceeded the relevant thresholds at
various times during 2001, but the events were waived and the program was not
terminated.

         TXU Gas Distribution 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 purchases ("take-or-pay") of gas. TXU Gas
Distribution continually evaluates its position relative to asserted and
unasserted claims, above-market prices or future commitments. At December 31,
2001, TXU Gas Distribution had fixed price commitments under long-term natural
gas contracts estimated at $20.2 million for 2002, $1.4 million for 2003, an
insignificant amount in 2004 and no obligations thereafter.

Quantitative and Qualitative Disclosure about Market Risk

         TXU Gas enters into derivative instruments, including swaps and other
contractual commitments for non-trading purposes to manage market risks related
to changes in interest rates and commodity prices.

Non-Trading

         Energy Price Risk Management -- As a result of continued regulation,
TXU Gas Distribution has minimal exposure to energy price risk; therefore, its
use of derivative instruments is limited.



                                       A-9

<PAGE>

         Interest Rate Risk -- The table below provides information concerning
TXU Gas' financial instruments as of December 31, 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 generally coincide with interest payments. For trust
securities, the table presents cash flows based on December 31, 2001 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.

<TABLE>
<CAPTION>
                                                                         Expected Maturity Date
                                             ---------------------------------------------------------------------------------
                                                                                                    2001              2000
                                                                                                -------------     -----------
                                                                                      There-             Fair            Fair
                                             2002    2003     2004     2005    2006    after    Total    Value    Total  Value
                                             ----    ----     ----     -----   ----   ------    -----   ------    -----  -----
                                                                          (Millions of Dollars)

<S>                                        <C>      <C>     <C>       <C>             <C>     <C>       <C>       <C>      <C>
Long-term Debt
   (including current maturities)
         Fixed Rate (millions of dollars)  $ 200    $ 125   $ 150     $ 150      --   $ 128   $  753    $  762    $ 757    $ 755
      Average interest rate......           7.63%    6.25%   6.38%     7.13%     --    6.56%    6.84%       --     6.81%      --

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..              --      --      --       --       --    3.79%    3.79%       --     8.17%      --

Interest Rate Swaps
   (notional amounts)
   Variable to Fixed (millions of dollars)     --   $ 150      --       --       --      --   $  150     $  (6)   $ 150    $   2
      Pay rate...................              --    6.57%     --       --       --      --     6.57%       --     6.57%      --
      Receive rate...............              --    3.95%     --       --       --      --     3.79%       --     8.17%      --
</TABLE>




                                       A-10

<PAGE>

Trading

         Since the acquisition of the energy trading business by TXU Energy, TXU
Gas no longer engages in energy trading.

Regulation and Rates

         TXU 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 Railroad Commission of Texas
(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 consumers. TXU Lone Star
Pipeline owns no certificated interstate transmission facilities subject to the
jurisdiction of the Federal Energy Regulatory Commission (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.

         Although the price of natural gas fluctuated in 2001, 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 natural gas delivered, including out-of-period
costs such as natural gas purchase contract settlement costs. The distribution
service rates TXU Gas Distribution charges its residential and commercial
customers are established by the municipal governments of the cities and towns
served, with the RRC having appellate jurisdiction.

         TXU Gas Distribution employs a continuing program of rate review for
all classes of customers in its regulatory jurisdictions. Rate relief amounting
to $26.8 million in annualized revenue increases, exclusive of changes in gas
costs, was granted in 2001 in addition to $19.8 million granted in 2000 and $7.5
million granted in 1999. On March 1, 2002, TXU Gas Distribution filed new rate
proceedings for the Dallas Distribution System and for the North Texas Metroplex
Distribution System. These two filings, encompassing 111 cities in the Dallas -
Forth Worth Metroplex, seek additional revenues of approximately $53 million
over present rate revenues. TXU Gas cannot predict the outcome of these
proceedings. Weather normalization adjustment clauses have been approved by the
various cities served by TXU Gas Distribution. These clauses allow rates to be
adjusted to reflect the impact of warmer or colder than normal weather during
the winter months. TXU Gas has filed applications to terminate these
adjustments. TXU Gas cannot predict the outcome of these proceedings.

         TXU Gas Distribution has filed a 36 month gas cost prudence review
covering the period of November 1, 1997 through October 30, 2000 with the RRC.
This filing, made on July 16, 2001, was assigned GUD 9233. TXU Gas believes it
has under-recovered its gas costs by $9 million during this period, which amount
is carried as an asset. This proceeding has been abated pending resolution of
GUD 9246 (see below).

         TXU Gas Distribution has filed a city gate rate cost reconciliation
covering the period of July 1, 2000 to June 30, 2001 with the RRC. This filing,
made on August 31, 2001, was assigned GUD 9246. TXU Gas believes it has
under-recovered its gas costs by $22.3 million during this period, which amount
does not include the $9 million at issue in GUD 9233. This amount is carried as
an asset.


                                       A-11

<PAGE>

CHANGES IN ACCOUNTING STANDARDS

         On January 1, 2001, TXU Gas adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138. (See Note 2 to Financial Statements.)

         SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", became effective for TXU Gas for
transfers on or after April 1, 2001. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires additional disclosures in its financial statements.
These disclosures have been incorporated in the accompanying financial
statements.

         SFAS No. 141, "Business Combinations", became effective for TXU Gas on
July 1, 2001. SFAS No. 141 requires the use of the purchase method of accounting
for business combinations initiated and completed after June 30, 2001 and
eliminates the use of the pooling-of-interests method.

         SFAS No. 142, "Goodwill and Other Intangible Assets", became effective
for TXU Gas on January 1, 2002. SFAS No. 142 requires, 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' existing goodwill (approximately $22 million annually)
ceased effective January 1, 2002.

         In addition, SFAS No. 142 requires completion of a transitional
goodwill impairment test within six months from the date of adoption. It
establishes 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. Any goodwill
impairment loss during the transition period will be recognized as the
cumulative effect of a change in accounting principle. Subsequent impairments
will be recorded in operations.

         As part of its implementation effort to adopt SFAS No. 142, TXU Corp.
is in the process of determining its reporting units as defined by SFAS No. 142,
the fair value of those reporting units and the allocation of goodwill to those
reporting units.

         SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Gas on January 1, 2003. Among other matters, SFAS No. 143
requires the recognition of a fair value liability for any retirement obligation
associated with long-lived assets. The offset to any liability recorded is added
to the previously recorded asset and the additional amount is depreciated over
the same period as the long-lived asset for which the retirement obligation is
established.

         SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for TXU Gas on 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 and resolves significant implementation issues related to SFAS No. 121.

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



                                       A-12

<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 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, acquisitions and disposal of assets and
facilities, operation and construction of plant 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) weather conditions and other natural phenomena, (iii) unanticipated
population growth or decline, and changes in market demand and demographic
patterns, (iv) competition for retail and wholesale customers, (v) pricing and
transportation of natural gas and other commodities, (vi) unanticipated changes
in interest rates or rates of inflation, (vii) unanticipated changes in
operating expenses and capital expenditures, (viii) commercial bank market and
capital market conditions, (ix) competition for new energy development
opportunities, (x) legal and administrative proceedings and settlements, (xi)
inability of various counterparties to meet their obligations with respect to
TXU Gas' financial instruments, (xii) changes in technology used and services
offered by TXU Gas, and (xiii) significant changes in TXU Gas' relationship with
its employees and the potential adverse effects if labor disputes or grievances
were to occur.

         Any forward-looking statement speaks only as of the date on which such
statement is made, and TXU Gas undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for TXU Gas
to predict all of such factors, nor can it assess the impact of each such factor
or the extent to which any factor, or combination of factors, may cause results
to differ materially from those contained in any forward-looking statement.



                                       A-13

<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 has established and maintains a system of
internal control 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's system of
internal control and takes appropriate actions which are cost-effective in the
circumstances. Management believes that, as of December 31, 2001, TXU Gas's
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>
<S>                                                             <C>
                     /s/ ERLE NYE                                                /s/ T. L. BAKER
   ----------------------------------------------------           ---------------------------------------------
          Erle Nye, Chairman of the Board and                                      T. L. Baker,
                    Chief Executive                                             Group President

                   /s/ H. DAN FARELL                                            /s/ M. S. GREENE
   ----------------------------------------------------           ---------------------------------------------
              H. Dan Farell, Distribution                                M. S. Greene, Pipeline Services
                  Division President                                           Division President

                   /s/ V. J. HORGAN                                            /s/ KIRK R. OLIVER
   ----------------------------------------------------           ---------------------------------------------
           V. J. Horgan, TXU Energy Trading                            Kirk R. Oliver, Vice President and
                       President                                           Principal Financial Officer


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



                                       A-14

<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, 2001 and 2000, and the related
statements of consolidated income, comprehensive income, cash flows and
shareholders' equity for each of the three years in the period ended December
31, 2001. 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, 2001 and 2000, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States of
America.

Deloitte & Touche LLP

Dallas, Texas
January 31, 2002



                                       A-15

<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                        STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>

                                                                                   Year Ended
                                                                                  December 31,
                                                                       --------------------------------
                                                                         2001         2000         1999
                                                                       -------      -------      ------
                                                                               Millions of Dollars

<S>                                                                    <C>          <C>          <C>
Operating revenues........................................             $ 1,229      $  1,107     $    868
                                                                       -------      --------     --------
 Operating expenses
   Energy purchased for resale............................                 764           604          357
   Operation and maintenance..............................                 260           256          302
   Depreciation and other amortization....................                  65            61           61
   Goodwill amortization..................................                  22            22           21
   Taxes other than income................................                  95            63           59
                                                                       -------      --------     --------
     Total operating expenses.............................               1,206         1,006          800
                                                                       -------      --------     --------

Operating income..........................................                  23           101           68

Other income-- net........................................                  28            61           12
                                                                       -------      --------     --------

Income from continuing operations before interest,
   other charges and income taxes.........................                  51           162           80

Interest income...........................................                  18            12            1

Interest expense and other charges........................                  75            81           75
                                                                       -------      --------     --------

Income (loss) from continuing operations before income taxes                (6)           93            6

Income tax expense (benefit)..............................                   6            40           (2)
                                                                       -------      --------     --------

Income (loss) from continuing operations .................                 (12)           53            8

Income (loss) from discontinued operations, net of tax....                  41           (66)         (26)
                                                                       -------      --------     --------

Net income (loss).........................................                  29           (13)         (18)

Preferred stock dividends.................................                   4             4            4
                                                                       -------      --------     --------

Net income (loss) applicable to common stock..............             $    25      $    (17)    $    (22)
                                                                       =======      ========     ========
</TABLE>




<TABLE>
<CAPTION>
                              STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME

<S>                                                                    <C>          <C>          <C>
Income (loss) from continuing operations..................             $   (12)     $     53     $      8
                                                                       -------      --------     --------

Other comprehensive income (loss) from continuing operations
  Net change during period, net of tax effect:
     Minimum pension liability adjustments................                  (1)           --            1
     Cash flow hedges:
         Cumulative transition adjustment as of January 1, 2001              2            --           --
         Net change in fair value of derivatives..........                  (6)           --           --
                                                                       -------      --------     --------
           Total..........................................                  (5)           --            1
                                                                       -------      --------     --------

Comprehensive income (loss) from continuing operations....                 (17)           53            9
                                                                       -------      --------     --------

Income (loss) from discontinued operations................                  41           (66)         (26)
Other comprehensive income from discontinued
  operations - net change in fair value of cash
  flow hedges, net of tax effect..........................                  16            --           --
                                                                       -------      --------     --------
Comprehensive income (loss) from discontinued operations..                  57           (66)         (26)
                                                                       -------      --------     --------

Comprehensive income (loss)...............................             $    40      $    (13)    $    (17)
                                                                       =======      ========     ========
</TABLE>

See Notes to Financial Statements.


                                       A-16

<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                      STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
                                                                                        Year Ended
                                                                                       December 31,
                                                                           -----------------------------------
                                                                            2001           2000           1999
                                                                           ------         -------        -----
                                                                                    Millions of Dollars

<S>                                                                        <C>            <C>            <C>
Cash flows-- operating activities
  Income (loss) from continuing operations......................           $  (12)        $    53        $     8
  Adjustments to reconcile income (loss) from continuing operations
     to cash provided by operating activities:
     Depreciation and amortization..............................               93              88             85
     Deferred income taxes - net................................               75              37             20
     Gains from sale of assets..................................               (4)            (53)           (13)
     Other non-cash charges.....................................              (18)             --             --
     Changes in operating assets and liabilities:
        Accounts receivable.....................................              212            (160)           150
        Inventories.............................................              (30)             17              7
        Accounts payable:
          Parent and affiliates.................................               21             (18)             8
          Trade.................................................             (190)            186            (15)
        Interest and taxes accrued..............................               (8)            (22)            29
        Other - net ............................................                1             (72)           (34)
                                                                           ------         -------        -------
          Cash provided by operating activities of continuing
operations......................................................              140              56            245
                                                                           ------         -------        -------
Cash flows -- financing activities
Issuance of securities:
     Long-term debt.............................................               --             200             --
     Common stock...............................................               --              --            250
  Retirements of securities:
     Long-term debt.............................................               --              --           (150)
  Change in short-term debt:
     Banks - notes payable......................................               --              --              1
     Parent - advances..........................................             (180)             24            (39)
  Cash dividends paid...........................................               (3)             (4)            (3)
  Debt financing expenses.......................................               --              (1)            --
  Consideration for callholder's option.........................               --               7             --
                                                                           ------         -------        -------
        Cash provided by (used in) financing activities of
          continuing operations                                              (183)            226             59
                                                                           ------         -------        -------

Cash flows-- investing activities
  Capital expenditures..........................................             (190)           (126)        (152)
  Proceeds from sale of assets..................................                5             105           48
  Other investments.............................................                6              (6)           2
                                                                           ------         -------       ------
        Cash used in investing activities of continuing operations           (179)            (27)        (102)
                                                                           ------         -------       ------

Cash provided by (used in) continuing operations................             (222)            255          202
                                                                           ------         -------       ------

Cash provided by (used in) discontinued operations -
  Energy trading................................................              213            (267)        (201)
  Engineering and construction..................................               --              29            5
                                                                           ------         -------       ------
        Cash provided by (used in) discontinued operations......              213            (238)        (196)
                                                                           -------        -------       ------

Net change in cash and cash equivalents.........................               (9)             17            6

Cash and cash equivalents-- beginning balance...................               23               6           --
                                                                           ------         -------       ------

Cash and cash equivalents-- ending balance......................           $   14         $    23       $    6
                                                                           ======         =======       ======
</TABLE>

See Notes to Financial Statements.

                                       A-17

<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                                     December 31,
                                                                                               -----------------------
                                                                                                2001              2000
                                                                                               -------          ------
                                                                                                  Millions of Dollars

                                          ASSETS

<S>                                                                                            <C>              <C>
Current assets:
   Cash and cash equivalents......................................................             $    14          $    23
   Accounts receivable............................................................                 660            1,164
   Inventories - at average cost..................................................                 150               85
   Margin deposits................................................................                   4              231
   Energy trading assets..........................................................                 743            1,412
   Other current assets...........................................................                  98              125
                                                                                               -------          -------
       Total current assets.......................................................               1,669            3,040

Investments.......................................................................                  40               43
Property, plant and equipment - net...............................................               1,573            1,417
Goodwill..........................................................................                 773              788
Regulatory assets.................................................................                  79               69
Energy trading assets.............................................................                 366              287
Derivative assets.................................................................                  31               --
Deferred debits and other assets..................................................                  17               14
                                                                                               -------          -------

         Total assets.............................................................             $ 4,548          $ 5,658
                                                                                               =======          =======

                           LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
   Notes payable - banks..........................................................             $    --          $     1
   Advances from TXU Corp.........................................................                 631              575
   Long-term debt due currently...................................................                 200               --
   Accounts payable:
     Parent and affiliates........................................................                  39               18
     Trade........................................................................                 499            1,018
   Energy trading liabilities.....................................................                 602            1,396
   Taxes accrued..................................................................                  22               15
   Other current liabilities......................................................                 102               82
                                                                                               -------          -------
       Total current liabilities..................................................               2,095            3,105

Accumulated deferred income taxes and investment tax credits......................                 207              103
Energy trading liabilities........................................................                 229              276
Derivative liabilities............................................................                   8               --
Other deferred credits and noncurrent liabilities.................................                 249              246
Long-term debt, less amounts due currently........................................                 553              757

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

Contingencies (Note 12)...........................................................

Shareholders' equity (See page A-19)..............................................               1,060            1,024
                                                                                               -------          -------

         Total liabilities and shareholders' equity...............................             $ 4,548          $ 5,658
                                                                                               =======          =======
</TABLE>


See Notes to Financial Statements.


                                       A-18

<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                           Year Ended
                                                                                          December 31,
                                                                                 ---------------------------
                                                                                  2001       2000       1999
                                                                                 ------    -------     -----
                                                                                       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
        (1999 - 250,000 shares)....................................                 --         --          --
                                                                                 -----     ------      ------
  Balance at end of year (outstanding shares:  451,000; 451,000;
     451,000)......................................................                 --         --          --
                                                                                 -----     ------      ------
Paid in capital
  Balance at beginning of year.....................................              1,013      1,016         775
     Issuance of common stock......................................                 --         --         250
     Dividends declared............................................                 (4)        (4)         (4)
     Other.........................................................                 --          1          (5)
                                                                                 -----     ------      ------
  Balance at end of year...........................................              1,009      1,013       1,016
                                                                                 -----     ------      ------

Deficit
  Balance at beginning of year.....................................                (64)       (51)        (33)
     Net income (loss).............................................                 29        (13)        (18)
                                                                                 -----     ------      ------
  Balance at end of year...........................................                (35)       (64)        (51)
                                                                                 -----     ------      ------

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

  Cash flow hedges (SFAS No. 133):
     Balance at beginning of year..................................                 --         --          --
        Change during the year from continuing operations..........                 (4)        --          --
        Change during the year from discontinued operations........                 16         --          --
                                                                                 -----     ------      ------
     Balance at end of year........................................                 12         --          --
                                                                                 -----     ------      ------

Total common stock equity..........................................                985        949         965
                                                                                 -----     ------      ------

Shareholders' equity...............................................              $1,060    $1,024      $1,040
                                                                                 ======    ======      ======
</TABLE>


See Notes to Financial Statements.



                                       A-19

<PAGE>

                        TXU GAS COMPANY AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS



1.       BUSINESS AND DISPOSITIONS

         TXU Gas Company (TXU Gas), a Texas corporation, is an integrated
company engaged in the purchase, transmission, distribution and sale of natural
gas in the north-central, eastern and western parts of Texas and, until January
1, 2002, was engaged in wholesale energy trading of natural gas and electricity
throughout the United States (US) and parts of Canada and retail sales of
natural gas to large commercial/industrial customers. TXU Gas is a wholly-owned
subsidiary of TXU Corp., a Texas corporation. TXU Corp. is a global energy
services company that engages in electricity generation, wholesale energy
trading, retail energy marketing, energy delivery, other energy-related services
and, through a joint venture, telecommunications services.

         Divisions and subsidiaries of TXU Gas' continuing operations include
TXU Gas Distribution, a gas distribution company in Texas, serving over 1.4
million customers and providing service through over 25,900 miles of
distribution mains and TXU Lone Star Pipeline which has approximately 7,200
miles of transmission and gathering pipeline in Texas. In August 2001, TXU Gas
formed Oncor Utility Solutions (Texas) Company and Oncor Utility Solutions
(North America) Company, which are wholly-owned subsidiary companies of TXU Gas
that offer unregulated utility asset management services for cooperatives and
municipally owned and investor-owned utilities in Texas and throughout the rest
of North America.

         Business Restructuring - Legislation was passed during the 1999 session
of the Texas Legislature that restructures the electric utility industry in
Texas (1999 Restructuring Legislation). Among other matters, the 1999
Restructuring Legislation provides that by January 1, 2002, each electric
utility was required to separate (unbundle) its business into the following:
power generation operations, a retail electric provider (REP) and a transmission
and distribution (T&D) company or separate T&D companies. As a result, TXU Corp.
restructured certain of its businesses effective January 1, 2002.

         In connection with the 1999 Restructuring Legislation, TXU Corp.'s
subsidiary, TXU US Holdings Company, (formerly TXU Electric Company) (US
Holdings), transferred its power generation operations and retail customers to a
new subsidiary, TXU Energy Company LLC (TXU Energy) and its T&D operations to
another new subsidiary, Oncor Electric Delivery Company. In addition, as of
January 1, 2002, TXU Energy acquired the energy trading business and the
unregulated commercial/industrial retail gas supply operation of TXU Gas, among
other operations of TXU Corp.

           As a result of the business restructuring, the energy trading
business and the unregulated commercial/industrial retail gas supply operations
have been reflected as discontinued operations in the statements of consolidated
income and cash flows of TXU Gas, and the related consolidated financial
statements for prior periods have been restated accordingly. TXU Gas' continuing
gas pipeline, gas distribution and asset management services operations are
managed as one integrated business with no reportable segments.



                                       A-20

<PAGE>

2.       SIGNIFICANT ACCOUNTING POLICIES

         Consolidation -- The consolidated financial statements include the
accounts of TXU Gas and its majority owned subsidiaries, including its business
trust discussed in Note 5, and are prepared in conformity with accounting
principles generally accepted in the United States of America. All intercompany
items and transactions have been eliminated in consolidation. The only
significant unconsolidated entity is the company established to purchase
accounts receivable. See Note 13. Certain previously reported amounts have been
reclassified to conform to current classifications. All dollar amounts in the
financial statements and notes to financial statements are stated in millions of
US dollars unless otherwise indicated.

         Use of Estimates -- The preparation of TXU Gas' consolidated 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.

         System of Accounts and Other Policies -- TXU Gas Distribution and TXU
Lone Star Pipeline are subject to the accounting requirements prescribed by the
National Association of Regulatory Utility Commissioners. TXU Gas applies the
principles of Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" to its cost-based
regulated operations.

         Property, Plant and Equipment -- Gas utility plant is stated at
original cost. The cost of property additions to gas utility plant includes
labor and materials, applicable overhead and payroll-related costs. Other
property is stated at cost.

         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.

         Goodwill -- Goodwill represents the excess of the purchase price paid
over the estimated fair value of the assets acquired and liabilities assumed
and, prior to January 1, 2002, was being amortized over 40 years. Goodwill
amortization ceased after December 31, 2001, and goodwill is now subject to an
impairment-based review procedure.

         Included in the balance sheet of TXU Gas at December 31, 2001 is $773
million of goodwill, net of amortization, arising from TXU Corp.'s 1997
acquisition of ENSERCH Corporation (renamed TXU Gas). The energy trading
business and the unregulated commercial/industrial retail gas supply operations
transferred to TXU Energy were originally part of ENSERCH Corporation. TXU Gas'
goodwill is subject to allocation to TXU Energy in 2002 upon completion of the
determination by TXU Corp. of its reporting units as discussed below under
Changes in Accounting Standards.

         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
the carrying value exceeds the fair market value. Fair market value is
determined primarily by available market valuations or, if applicable,
discounted cash flows. See Changes in Accounting Standards below for a
discussion of changes in valuation criteria for long-lived assets effective
January 1, 2002.

         Derivative Instruments -- See Changes in Accounting Standards below for
the change in accounting for derivatives that became effective January 1, 2001.
TXU Gas may use derivative instruments for hedging purposes in non-trading
activities. The impact of changes in the market value of derivative instruments
effective as accounting hedges would be recognized in earnings upon completion
of the related transactions. Ineffectiveness is recorded in earnings as
incurred. TXU Gas utilizes derivative instruments (i.e., interest rate swaps,
etc.) in its Treasury operations in accordance with authorized interest rate
policies in order to manage its exposure to changes in interest rates.



                                       A-21

<PAGE>

         Revenues -- Revenues are recognized when services are provided to
customers. TXU Gas Distribution records revenues on the basis of periodic cycle
meter readings and includes an estimated accrual for the natural gas delivered
from the meter reading dates to the end of the month. Revenues include billings
under approved rates and adjustments under various mechanisms to recover or
refund the cost of natural gas purchased, as well as other recoverable costs,
that are above or below the level included in base rates. (See Note 11 for
discussion of Regulations and Rates.)

         Income Taxes -- TXU Gas is included in the consolidated federal income
tax return of TXU Corp. and subsidiary companies, and federal income taxes are
allocated to its subsidiaries by TXU Corp. based upon their respective taxable
income or loss. 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.

         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. 133, "Accounting for
Derivative Instruments and Hedging Activities", as extended by SFAS No. 137 and
amended by SFAS No. 138, became effective for TXU Gas on January 1, 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires the recognition of
derivatives in the balance sheet and the measurement of those instruments at
fair value.

         In accordance with the transition provisions of SFAS No. 133, TXU Gas
recorded, as of January 1, 2001, a cumulative effect of $1.6 million after-tax
as an increase to other comprehensive income to recognize the fair value of all
derivatives effective as cash-flow hedging instruments. For the period from
transition to December 31, 2001, none of this cumulative transition adjustment
has been reclassified into earnings.

         As of December 31, 2001, it is expected that $2.9 million of the $4
million of after-tax net losses now included in the net gains/losses from
derivative instruments from continuing operations that are 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 entered into. The amount expected to be reclassified is not a
forecasted loss incremental to normal operations, but rather it demonstrates the
extent to which volatility in earnings (which would otherwise exist) is
mitigated through the use of cash flow hedges.

         SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", became effective for TXU Gas for
transfers on or after April 1, 2001. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires additional disclosures which have been incorporated in
the financial statements. The adoption of SFAS No. 140 did not affect reported
results.

         SFAS No. 141, "Business Combinations", became effective for TXU Gas on
July 1, 2001. SFAS No. 141 requires the use of the purchase method of accounting
for business combinations initiated and completed after June 30, 2001 and
eliminates the use of the pooling-of-interests method.

         SFAS No. 142, "Goodwill and Other Intangible Assets", became effective
for TXU Gas on January 1, 2002. SFAS No. 142 requires, 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' existing goodwill (approximately $22 million annually)
ceased effective January 1, 2002.

         In addition, SFAS No. 142 requires completion of a transitional
goodwill impairment test within six months from the date of adoption. It
establishes 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. Any goodwill
impairment loss during the transition period will be recognized as the
cumulative effect of a change in accounting principle. Subsequent impairments
will be recorded in operations.

         As part of its implementation effort to adopt SFAS No. 142, TXU Corp.
is in the process of determining its reporting units as defined by SFAS No. 142,
the fair value of those reporting units and the allocation of goodwill to



                                       A-22

<PAGE>

those reporting units.

         SFAS No. 143, "Accounting for Asset Retirement Obligations", will be
effective for TXU Gas on January 1, 2003. Among other matters, SFAS No. 143
requires the recognition of a fair value liability for any retirement obligation
associated with long-lived assets. The offset to any liability recorded is added
to the previously recorded asset and the additional amount is depreciated over
the same period as the long-lived asset for which the retirement obligation is
established.

         SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", became effective for TXU Gas on 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 and resolves significant implementation issues related to SFAS No. 121.

         For standards not yet adopted, 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. realigned the operations of its US
subsidiaries, including those of TXU Gas. As a part of that realignment,
ownership of the wholesale energy trading and unregulated commercial/industrial
retail gas supply businesses was transferred to TXU Energy.

         Accordingly, these operations, which comprised the energy trading
segment of TXU Gas, have been reflected as discontinued operations in the
statements of consolidated income and cash flows of TXU Gas and the related
consolidated financial statements for prior periods have been restated. The
results of operations of these discontinued businesses were as follows:

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                               -------------------------------------------
                                                                 2001              2000             1999
                                                               -------           -------           -------
<S>                                                            <C>               <C>               <C>
Revenues..................................................     $ 5,430           $ 5,430           $ 2,991
Operating income (loss)...................................     $    82           $   (95)          $   (42)
Income (loss) after-tax from discontinued operations           $    41           $   (66)          $   (26)

Cash provided by (used in)
   operating activities...................................     $    18           $  (368)          $  (199)
Cash provided by financing activities.....................         236               152                 -
Cash used by investing activities.........................         (41)              (51)               (2)
                                                               -------           -------           -------
     Cash provided by (used in) discontinued operations...     $   213          $   (267)          $  (201)
                                                               =======           =======           =======
</TABLE>



                                       A-23

<PAGE>

         The assets of these discontinued businesses included in the TXU Gas
balance sheet as of December 31, 2001 and 2000 consisted of the following:

<TABLE>
<CAPTION>
                                                                      Year Ended
                                                                      December 31,
                                                                ------------------------
                                                                  2001             2000
                                                                -------          -------
<S>                                                            <C>               <C>
   Current Assets
      Accounts receivable.........................             $   542           $   863
      Energy trading assets......................                  743             1,412
      Other ......................................                  62               259
   Long-term assets
      Energy trading assets.......................                 366               287
      Other.......................................                 123                64
   Current liabilities
      Accounts payable............................                (425)             (756)
      Energy trading liabilities..................                (602)           (1,396)
      Other current liabilities...................                 (30)                1
   Non-current liabilities
      Energy trading liabilities..................                (229)             (276)
      Advances from TXU Corp......................                (387)             (152)
   Other..........................................                 (38)              (24)
                                                               -------           -------
   Net investment and advances....................             $   125           $   282
                                                               =======           =======
</TABLE>

         Discontinued Operations Prior to the Merger of TXU Gas and TXU Corp. --
At December 31, 2001, ENSERCH Corporation's former businesses that were
discontinued prior to the merger transaction in 1997 had assets of $19 million
and liabilities of $58 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.

4.       BORROWINGS AND LINES OF CREDIT

         At December 31, 2001, advances from TXU Corp. totaled $631 million,
including $244 million for continuing operations. Interest on the advances
accrues at a rate equal to the weighted average commercial paper rate. Weighted
average interest rates on advances were 4.64% and 6.61% at December 31, 2001 and
2000, respectively.



                                       A-24

<PAGE>

         At December 31, 2001, TXU Corp., US Holdings and TXU Gas had joint US
dollar-denominated lines of credit under revolving credit facility agreements
(US Credit Agreements) with a group of banking institutions. At December 31,
2001, TXU Gas had no borrowings outstanding under these facilities. Letters of
credit outstanding under the US Credit Agreements were $113 million for TXU Gas
as of December 31, 2001. In connection with the extension of the US Credit
Agreements in February 2002, the facilities were amended to remove TXU Gas as a
borrower. TXU Gas will meet its short-term liquidity needs through advances from
TXU Corp.

<TABLE>
<CAPTION>
                                                                                   December 31,
                                                                               --------------------
                                                                                2001           2000
                                                                               -------        -----
<S>                                                                            <C>            <C>
Long-term Debt:
   6.25% Notes due 2003..............................................          $  125         $  125
   6 3/8% Notes due 2004.............................................             150            150
   7 1/8% Notes due 2005.............................................             150            150
   6.564% Remarketed Reset Notes due 2008 (a)........................             125            125
   7 5/8% Putable Asset Term Securities due 2012 (b).................             200            200
Unamortized premium and discount and fair value adjustments..........               3              7
                                                                               ------         ------
   Total.............................................................             753            757
Less amounts due currently...........................................             200 (b)         --
                                                                               ------         ------
   Long-term debt, less amounts due currently........................          $  553         $  757
                                                                               ======         ======

<CAPTION>
                                       2002          2003         2004          2005           2006
                                       -----         -----        -----         -----          ----
<S>                                    <C>           <C>          <C>           <C>            <C>
Maturities (for next 5 years)....      $200          $125         $150          $150           $ --
</TABLE>


(a)  In July 1998, the interest rate was reset to a fixed rate of 6.56% payable
     until the reset date of January 1, 2005.

(b)  On October 17, 2000, TXU Gas issued $200 million aggregate principal amount
     of Putable Asset Term Securities due October 15, 2012. The securities have
     a fixed rate of 7-5/8% from the date of issuance through October 14, 2002.
     TXU Gas also assigned to a third party the right to call the securities. On
     October 15, 2002, the securities will be either mandatorily tendered to and
     purchased by the callholder or, if not purchased by the callholder,
     mandatorily redeemed by TXU Gas. If the callholder chooses to purchase the
     securities, TXU Gas may elect to have the securities remarketed for a
     period of up to one year, in which case the callholder must purchase the
     securities at the end of the period. If the callholder exercises its right
     to call the securities on October 15, 2002, or at the end of the period if
     applicable, the securities will be remarketed at a fixed rate for a ten
     year period. If the callholder does not purchase the securities on October
     15, 2002, TXU Gas will be required to redeem all of the securities for 100%
     of the aggregate principal amount outstanding plus accrued interest, if
     any.

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

         At December 31, 2001, a consolidated statutory business trust, TXU Gas
Capital I, 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, 2001, 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-25

<PAGE>

6.       PREFERRED STOCK

         At December 31, 2001, 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 ($25 stated value per depositary share). 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, 2001, the Series F stock bore an annual dividend rate of
4.6719%. Dividends declared on the Series F stock were $4 million in 2001, 2000
and 1999 ($48.155, $53.549 and $49.829 per share, respectively).

7.       INCOME TAXES

         The components of the provision (benefit) for income taxes of
continuing operations are as follows:

<TABLE>
<CAPTION>

                                                               Year Ended
                                                              December 31,
                                                      ------------------------------
                                                        2001      2000         1999
                                                      -------    -------      ------
<S>                                                   <C>        <C>         <C>
Current -- Federal....................                $   (69)    $     3    $   (22)
Deferred -- Federal...................                     75          37         20
                                                      -------     -------    -------

        Total.........................                $     6     $    40    $    (2)
                                                      =======     =======    =======
</TABLE>


         Reconciliation of income taxes (benefit) computed at the federal
statutory rate to income tax expense (benefit):

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                                 December 31,
                                                       ------------------------------
                                                        2001        2000        1999
                                                       ------      ------      ------
<S>                                                    <C>         <C>         <C>
Income (loss) from continuing operations
  before income taxes...........................       $   (6)     $   93      $    6
                                                       ======      ======      ======

Income taxes  (benefit) at the US federal  statutory
rate of 35%.....................................       $   (2)     $   33      $    2
Reversal of valuation allowance.................           --          --         (10)
Amortization of goodwill........................            7           7           7
Other-- net.....................................            1          --          (1)
                                                       ------      ------      ------

         Income tax expense (benefit)...........       $    6      $   40      $   (2)
                                                       ======      ======      ======
</TABLE>


                                       A-26

<PAGE>


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

<TABLE>
<CAPTION>
                                                                             December 31,
                                                 ------------------------------------------------------------------
                                                            2001                                2000
                                                 -----------------------------  -----------------------------------
                                                  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      $ 118      $  15      $ 103
Retirement and other employee benefit
 obligations ...............................         57         1        56         60       --           60
Accruals and allowances ....................          9         4         5          3          1          2
Other ......................................         24         5        19         19         13          6
                                                  -----     -----     -----      -----      -----      -----

        Total ..............................        192        25       167        200         29        171
                                                  -----     -----     -----      -----      -----      -----

Deferred tax liabilities and unamortized
 investment tax credits:

Property related differences ...............        275      --         275        248       --          248
Software development .......................         30      --          30         12       --           12
Other ......................................         66      --          66         11       --           11
Unamortized investment tax credits .........          3      --           3          3       --            3
                                                  -----     -----     -----      -----      -----      -----

        Total ..............................        374      --         374        274       --          274
                                                  -----     -----     -----      -----      -----      -----

Net deferred tax asset (liability) .........      $(182)    $  25     $(207)     $ (74)     $  29      $(103)
                                                  =====     =====     =====      =====      =====      =====
</TABLE>


         At December 31, 2001, domestic net operating loss (NOL) carryforwards
total $229 million and alternative minimum tax-credit carryforwards total $22
million. The tax benefits of these carryforwards of $102 million, as shown
above, are available to offset future US federal income tax obligations. Due to
a 1999 change in Internal Revenue Service (IRS) Regulations, TXU Gas expects to
fully utilize all of such NOLs. Accordingly, a previously recorded deferred tax
asset valuation allowance of $10 million was eliminated in 1999. TXU Gas
utilized $42 million of NOL carryforwards in 2001.

         Separately, the TXU Gas consolidated income tax returns have been
audited and settled with the IRS through the year 1992. The IRS is currently
auditing the years 1993 through 1997. To the extent that adjustments to income
tax accounts for periods prior to the merger are required as a result of an IRS
audit, the adjustments will be added to or deducted from goodwill.



                                       A-27

<PAGE>

8.       RETIREMENT PLAN AND OTHER POSTRETIREMENT BENEFITS

         Most TXU Gas employees are covered by various defined benefit pension
plans which provide benefits based on years of service and average earnings. The
TXU Retirement Plan (Retirement Plan) is 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). Eligible employees 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 a combination of their age 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.

         In addition, most US employees of TXU Corp. 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, a specified amount of compensation ranging from 1%
to 20%. Employees who earn more than such threshold may contribute from 1% to
16% of their compensation. 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. Contributions to the
Thrift Plan aggregated $16 million for 2001 and $15 million for 2000 and 1999.

         During 1999, certain TXU Gas employees were offered and accepted early
retirement and settlement options resulting in curtailment losses and settlement
gains. As a portion of these costs are recoverable through rates, effects of the
early retirement options applicable to regulated business were recorded as
regulatory assets.


                                       A-28

<PAGE>

         The following tables provide information for TXU Gas' participation in
TXU Corp.'s plan, using actuarial allocations for 2001.

<TABLE>
<CAPTION>
                                                                          Year Ended
                                                                         December 31,
                                                                   --------------------------
                                                                    2001     2000       1999
                                                                    ----    -------    ------

<S>                                                                <C>      <C>        <C>
Weighted-average assumptions:
Discount rate.............................................         7.50%     8.00%       8.25%
Expected return on plan assets............................         9.00%     9.00%       9.00%
Rate of compensation increase.............................         4.30%     4.30%       4.30%

  Components of net pension costs:
Service cost..............................................         $  3      $  2        $   2
Interest cost.............................................           26        26           24
Expected return on assets.................................          (28)      (27)         (25)
Amortization of net gain..................................           --        (1)          --
Recognized termination benefits loss......................           --        --            3
                                                                   ----      ----        -----
     Net periodic pension cost............................         $  1      $ --        $   4
                                                                   ====      ====        =====

Change in pension obligation:
Pension obligation at beginning of year ..................         $336      $319
     Service cost.........................................            3         2
     Interest cost........................................           26        26
     Plan amendments......................................            3         4
     Actuarial loss.......................................           35         7
     Benefits paid........................................          (16)      (22)
                                                                   ----      ----
Pension obligation at end of year.........................         $387      $336
                                                                   ====      ====

Change in plan assets:
Fair value of assets at beginning of year.................         $308      $318
     Actual return on assets..............................           (8)        8
     Employer contributions...............................            4         3
     Benefits paid........................................          (16)      (21)
                                                                   ----      ----
Fair value of assets at end of year.......................         $288      $308
                                                                   ====      ====

Funded status:
Pension obligation........................................         $(387)    $(336)
Fair value of assets......................................          288       308
Unrecognized prior service cost...........................            2        (2)
Unrecognized net (gain)/loss..............................           45       (26)
                                                                   ----      ----
Accrued pension costs.....................................         $(52)     $(56)
                                                                   ====      ====
</TABLE>


                                       A-29

<PAGE>

         The following table provides information for the TXU Corp. defined
benefit pension plan in which TXU Gas and certain other subsidiaries of TXU
Corp. participate:


<TABLE>
<CAPTION>
                                                                                                  Year Ended
                                                                                                 December 31,
                                                                                             -------------------
                                                                                              2001         2000
                                                                                             ------       ------

<S>                                                                                          <C>          <C>
Weighted-average assumptions:
Discount rate................................................................                 7.50%        8.00%
Expected return on plan assets...............................................                 9.00%        9.00%
Rate of compensation increase................................................                 4.30%        4.30%

Components of net pension costs:
Service cost.................................................................                 $  15        $  12
Interest cost................................................................                    51           47
Expected return on assets....................................................                   (57)         (52)
Amortization of net (gain)/loss..............................................                     1           (1)
                                                                                              -----        -----
   Net periodic pension cost.................................................                 $  10        $   6
                                                                                              =====        =====

Change in pension obligation:
Pension obligation at beginning of year .....................................                 $ 640        $ 572
   Service cost .............................................................                    15           12
   Interest cost.............................................................                    51           47
   Plan amendments...........................................................                     5            6
   Actuarial loss ...........................................................                    51           36
   Benefits paid ............................................................                   (25)         (33)
                                                                                              -----        -----
Pension obligation at end of year ...........................................                 $ 737        $ 640
                                                                                              =====        =====

Change in plan assets:
Fair value of assets at beginning of year ...................................                 $ 662        $ 655
   Actual return on assets ..................................................                   (19)          17
   Employer contributions ...................................................                    35           20
   Benefits paid ............................................................                   (23)         (30)
                                                                                              -----        -----
Fair value of assets at end of year .........................................                 $ 655        $ 662
                                                                                              =====        =====

Funded status:
Pension obligation...........................................................                 $(737)       $(640)
Fair value of assets.........................................................                   655          662
Unrecognized net transition asset............................................                    (1)          (1)
Unrecognized prior service cost .............................................                     7            3
Unrecognized net (gain)/loss.................................................                    47          (79)
                                                                                              -----        -----
Accrued pension costs........................................................                 $ (29)       $ (55)
                                                                                              =====        =====
</TABLE>


                                       A-30

<PAGE>

         Postretirement Benefits Other Than Pensions -- In addition to the
retirement plans, TXU Gas offers certain health care and life insurance benefits
to substantially all of its employees and their eligible dependents upon the
retirement of such employees from TXU Gas. 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 following
tables provide information for TXU Gas' participation in TXU Corp.'s plan, using
actuarial allocations for 2001.

<TABLE>
<CAPTION>
                                                                                   Year Ended
                                                                                  December 31,
                                                                    -------------------------------------
                                                                       2001           2000          1999
                                                                    --------       ---------      ------

<S>                                                                  <C>            <C>             <C>
Weighted-average assumptions:
Discount rate............................................              7.50%           8.00%       8.25%
Expected return on plan assets...........................              7.85%           7.99%       8.50%

Components of net periodic postretirement benefit costs:
Service cost.............................................            $     2        $     1     $     2
Interest cost............................................                  8              7           7
Expected return on assets................................                 (2)            --          --
Amortization of unrecognized prior service cost..........                  1              1           1
Recognized curtailment loss..............................                 --             --           1
                                                                     -------        -------     -------
    Net periodic postretirement benefit cost.............            $     9        $     9     $    11
                                                                     =======        =======     =======

Change in postretirement benefit obligation:
Benefit obligation at beginning of year .................            $    99        $    92
    Service cost.........................................                  2              1
    Interest cost........................................                  8              7
    Participant contributions............................                  2              1
    Plan amendments......................................                  9             --
    Actuarial loss.......................................                 29              8
    Benefits paid........................................                (14)           (10)
                                                                     -------        -------
Benefit obligation at end of year........................            $   135        $    99
                                                                     =======        =======

Change in plan assets:
Fair value of assets at beginning of year................            $     6        $     2
    Actual return on assets..............................                 (1)            --
    Employer contributions...............................                 11              8
    Participant contributions............................                  1             --
    Benefits paid........................................                (12)            (4)
                                                                     -------        -------
Fair value of assets at end of year......................            $     5        $     6
                                                                     =======        =======

Funded status:
Benefit obligation.......................................            $  (135)       $   (99)
Fair value of assets.....................................                  5              6
Unrecognized prior service cost..........................                 22             14
Unrecognized net (gain)/loss.............................                 19            (13)
                                                                     -------        -------
Accrued postretirement benefit cost......................            $   (89)       $   (92)
                                                                     =======        =======
</TABLE>




                                       A-31

<PAGE>


         The expected increase in costs of future benefits covered by the
postretirement benefit plans is projected using a health care cost trend rate
for pre-65 liabilities of 10% for 2002 decreasing by 1% each year until the
ultimate rate of 5% is reached in 2007. For post-65 liabilities the rate is 11%
for 2002 decreasing by 1% each year until the ultimate rate of 5% is reached in
2008. A one percentage point increase in the assumed health care cost trend rate
in each future year would increase the accumulated postretirement benefit
obligation at December 31, 2001 by approximately $12 million and other
postretirement benefits cost for 2001 by approximately $1 million. A one
percentage point decrease in the assumed health care cost trend rate would
decrease the accumulated postretirement benefit obligation at December 31, 2001
by approximately $10 million and other postretirement benefits cost for 2001 by
approximately $1 million.

         The following table provides information for the TXU Corp.
postretirement benefit plan in which TXU Gas and certain other subsidiaries of
TXU Corp. participate:




<TABLE>
<CAPTION>
                                                                                                Year Ended
                                                                                               December 31,
                                                                                          ---------------------
                                                                                            2001           2000
                                                                                          ------         ------

<S>                                                                                     <C>            <C>
Weighted-average assumptions:
Discount rate...............................................................                7.50%          8.00%
Expected return on plan assets..............................................                8.34%          8.49%

Components of net periodic postretirement benefit costs:
Service cost................................................................              $    8         $    8
Interest cost...............................................................                  19             17
Expected return on assets...................................................                  (5)            (4)
Amortization of unrecognized net transition obligation......................                   1              1
Amortization of unrecognized prior service cost.............................                   2              1
                                                                                          ------         ------
  Net periodic postretirement benefit cost..................................              $   25         $   23
                                                                                          ======         ======

Change in postretirement benefit obligation:
Benefit obligation at beginning of year ....................................              $  245         $  214
    Service cost ...........................................................                   8              8
    Interest cost...........................................................                  19             17
    Participant contributions...............................................                   5              4
    Plan amendments.........................................................                   5             --
    Actuarial loss .........................................................                  72             18
    Benefits paid ..........................................................                 (24)           (16)
                                                                                          ------         ------
  Benefit obligation at end of year.........................................              $  330         $  245
                                                                                          ======         ======

Change in plan assets:
Fair value of assets at beginning of year...................................              $   53         $   40
  Actual return on plan assets..............................................                  (7)             3
  Employer contributions....................................................                  23             16
  Participant contributions.................................................                   4              3
  Benefits paid.............................................................                 (21)            (9)
                                                                                          ------         ------
Fair value of assets at end of year.........................................              $   52         $   53
                                                                                          ======         ======

Funded status:
Benefit obligation..........................................................              $ (330)        $ (245)
Fair value of assets........................................................                  52             53
Unrecognized transition obligation..........................................                   8             15
Unrecognized prior service cost.............................................                  23             15
Unrecognized net loss.......................................................                  99             15
                                                                                          ------         ------
Accrued postretirement benefit cost.........................................              $ (148)        $ (147)
                                                                                          ======         ======
</TABLE>



                                       A-32

<PAGE>

9.       DERIVATIVE INSTRUMENTS

         With the transfer of the energy trading businesses effective January 1,
2002, TXU Gas enters into derivative instruments only for non-trading purposes.
TXU Gas enters into interest rate swaps to manage exposures to the cash flow
risk inherent in variable rate securities. The terms of each swap and the
underlying hedged security are in Note 5. As a result of continued regulation,
TXU Gas Distribution has minimal exposure to energy price risk, therefore, its
use of derivative instruments is limited.

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,
                                                                  --------------------------------------------------
                                                                           2001                        2000
                                                                  ----------------------       ---------------------
                                                                               Estimated                   Estimated
                                                                  Carrying       Fair          Carrying      Fair
                                                                   Amount        Value          Amount       Value
                                                                  --------      -------        --------     -------
<S>                                                               <C>           <C>            <C>          <C>
On-balance sheet liabilities:
    Long-term debt (including current maturities) (a)..........    $ (753)      $ (762)        $ (757)      $ (755)
    TXU Gas obligated, mandatorily redeemable, preferred
      securities of subsidiary trust holding solely
      junior subordinated debentures of TXU
      Gas (b)........................................ .........      (147)        (150)          (147)        (150)
    Interest rate swaps (c)....................................        (6)          (6)            --           --

Off-balance sheet assets (liabilities):
    Interest rate swaps (c)....................................        --           --             --            2
</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; (b) quoted market prices; (c)
fair values for interest rate swaps are based either on quotes or the cost to
terminate the agreements.

         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 parent approximates the fair value.


                                       A-33

<PAGE>
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 established by the municipal
governments of the cities and towns served, with the RRC having appellate
jurisdiction. The rate TXU Lone Star Pipeline charges to TXU Gas Distribution
for transportation and storage of gas ultimately consumed by residential and
commercial customers is established by the RRC.

         TXU Gas Distribution employs a continuing program of rate review for
all classes of customers in its regulatory jurisdictions. Rate relief amounting
to $26.8 million in annualized revenue increases, exclusive of changes in gas
costs, was granted in 2001 in addition to $19.8 million granted in 2000 and $7.5
million granted in 1999. On March 1, 2002, TXU Gas Distribution filed new rate
proceedings for the Dallas Distribution System and for the North Texas Metroplex
Distribution System. These two filings encompassing 111 cities in the Dallas -
Fort Worth Metroplex, seek additional revenues of approximately $53 million over
present rate revenues. TXU Gas cannot predict the outcome of these proceedings.
Weather normalization adjustment clauses have been approved by the various
cities served by TXU Gas Distribution. These clauses allow rates to be adjusted
to reflect the impact of warmer or colder than normal weather during the winter
months. TXU Gas has filed applications to terminate these adjustments. TXU Gas
cannot predict the outcome of these proceedings.

         TXU Gas Distribution has filed a 36 month gas cost prudence review
covering the period of November 1, 1997 through October 30, 2000 with the RRC.
This filing, made on July 16, 2001, was assigned GUD 9233. TXU Gas believes it
has under-recovered its gas costs by $9 million during this period, which amount
is carried as an asset. This proceeding has been abated pending resolution of
GUD 9246 (see below).

         TXU Gas Distribution has filed a city gate rate cost reconciliation
covering the period of July 1, 2000 to June 30, 2001 with the RRC. This filing,
made on August 31, 2001, was assigned GUD 9246. TXU Gas believes it has
under-recovered its gas costs by $22.3 million during this period, which amount
does not include the $9 million at issue in GUD 9233. This amount is carried as
an asset.

12.      COMMITMENTS AND CONTINGENCIES

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

         In September 1999, Quinque Operating Company (Quinque) filed suit in
the State District Court of Stevens County, Kansas against over 200 gas
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



                                       A-34

<PAGE>

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.

         Environmental Matters -- TXU Gas is subject to federal, state and local
environmental laws and regulations that regulate the discharge of materials into
the environment. Environmental expenditures are expensed or capitalized
depending on their future economic benefit. The level of future expenditures for
environmental matters, including costs of obtaining operating permits, equipment
monitoring and modifications under the Federal Clean Air Act, as amended, and
cleanup obligations, cannot be fully ascertained until the regulations that
implement the applicable laws have been approved and adopted. It is management's
opinion that all such costs, when finally determined, will not have a material
effect on the consolidated financial position, results of operations or cash
flows of TXU Gas.

         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, should not have a material effect
upon their financial position, results of operations or cash flows.

         Leases -- Rental expenses for continuing operations incurred under all
operating leases aggregated $4 million in 2001, $3 million for 2000 and $2
million for 1999. As of January 1, 2002, TXU Gas has future operating lease
commitments totaling less than $1 million.

         Gas Purchase Contracts - TXU Gas Distribution 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 purchases
("take-or-pay") of gas. TXU Gas Distribution continually evaluates its position
relative to asserted and unasserted claims, above-market prices or future
commitments. At December 31, 2001, TXU Gas Distribution had fixed price
commitments under long-term natural gas purchase contracts estimated at $22
million through 2010. 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.

13.      SUPPLEMENTARY FINANCIAL INFORMATION

         Credit Risk -- Credit risk relates to the risk of loss that TXU Gas
would incur as a result of non-performance by customers and other
counterparties. TXU Gas maintains credit risk policies with regard to its
counterparties to minimize overall credit risk. These policies include an
evaluation of a potential counterparty's financial condition, credit rating, and
other credit criteria and risk mitigation tools as deemed appropriate, including
but not limited to use of standardized agreements that allow for netting of
positive and negative exposures associated with a single counterparty. This
evaluation results in establishing credit limits or collateral requirements
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
material adverse change in the financial condition of a counterparty or
downgrade of its credit quality will result in the reassessment of the credit
limit with that counterparty. This could result in a reduction of the credit
limit or request for additional financial assurances.

         Concentration of Credit Risk --TXU Gas' exposure to credit risk for
continuing operations represents trade accounts receivable and, as of December
31, 2001 was $128 million, after reserves of $5 million. TXU Gas had no exposure
to any one customer that represented greater than 5% of the gross fair value of
TXU Gas' trade accounts receivable and derivative assets at December 31, 2001.


                                       A-35

<PAGE>
         Prior to January 1, 2002, TXU Gas and US Holdings sold certain customer
accounts receivable to a wholly-owned bankruptcy remote unconsolidated
subsidiary of TXU Gas (TXU Receivables Company) which sells undivided interests
in accounts receivable it purchases to financial institutions. As of January 1,
2002, the program was amended to terminate US Holdings' participation and to add
TXU Energy Retail Company LP, TXU SESCO Energy Services Company and Oncor
Electric Delivery Company 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, 2001, TXU Gas had sold $111 million face amount
of receivables to TXU Receivables Company under the program in exchange for cash
of $60 million and $50.6 million in subordinated notes, with $.4 million
representing costs of the program since inception in August 2001. Annualized
costs of the program approximated 3.7% of the cash proceeds from the receivables
sales. As of December 31, 2000, TXU Gas had received cash of $100 million for
receivables sold under a prior facility. The subordinated notes receivable from
TXU Receivables Company are included in accounts receivable in the consolidated
balance sheet.

         Accounts Receivable--At December 31, 2001 and 2000 accounts receivable
are stated net of uncollectible accounts of $20 million and $17 million,
respectively.

   Inventories by major category--

<TABLE>
<CAPTION>
                                                                         December 31,
                                                                  --------------------------
                                                                   2001                2000
                                                                  -------             -----

<S>                                                               <C>               <C>
Materials and supplies.........................                   $     7           $     5
Emissions credits..............................                        14                --
Gas stored underground.........................                       129                80
                                                                  -------           -------
   Total inventories...........................                   $   150           $    85
                                                                  =======           =======
</TABLE>



Property, Plant and Equipment--



<TABLE>
<CAPTION>
                                                                         December 31,
                                                                  --------------------------
                                                                   2001                2000
                                                                  -------             -----

<S>                                                               <C>               <C>
Gas distribution and pipeline..................                   $ 1,678           $ 1,510
Other..........................................                        97                25
                                                                  -------           -------
   Total.......................................                     1,775             1,535
Less accumulated depreciation..................                       271               205
                                                                  -------           -------
   Net of accumulated depreciation.............                     1,504             1,330
Construction work in progress..................                        69                87
                                                                  -------           -------
   Net property, plant and equipment...........                   $ 1,573           $ 1,417
                                                                  =======           =======
</TABLE>

         Goodwill--At December 31, 2001 and 2000 goodwill is stated net of
accumulated amortization of $93 million and $72 million, respectively.

         Affiliated Transactions -- TXU Gas has transactions with TXU Corp. and
affiliates. The following amounts are for TXU Gas' continuing operations.
Interest expense related to borrowing from TXU Corp. was $14 million, $27
million and $19 million for 2001, 2000 and 1999, respectively. TXU Business
Services Company billed TXU Gas $57 million, $47 million and $53 million for
2001, 2000 and 1999, respectively for financial, accounting, information
technology, environmental, procurement and personnel services and other
administrative services at cost. Also, TXU Gas was billed $43 million, $72
million and $92 million for 2001, 2000 and 1999, respectively, by US Holdings
primarily for employee services and expenses at cost. TXU Gas had revenues of
$16 million, $20 million and $15 million from the sale and transportation of gas
to other TXU Corp. subsidiaries during the respective periods.


                                       A-36

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

<TABLE>
<CAPTION>
                                                                                   Year Ended
                                                                                  December 31,
                                                               -------------------------------------------
                                                                 2001              2000              1999
                                                               -------           -------           -------

<S>                                                            <C>               <C>               <C>
   Cash payments (refunds):
   Interest costs (net of amounts capitalized).                $    93           $    78           $    79
                                                               =======           =======           =======
   Income taxes -- net.........................                $   (78)          $   (47)          $   (91)
                                                               =======           =======           =======
</TABLE>


         Quarterly Results (Unaudited) -- The results of operations by quarters
are summarized below. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation have been
made. The presentation below reflects the operations of the energy trading and
unregulated commercial/industrial retail gas supply businesses as discontinued
operations and all previously reported periods have been restated.

<TABLE>
<CAPTION>
                                                                                Quarter Ended
                                                             --------------------------------------------------
                                                              March 31     June 30   September 30    December 31
                                                             ----------   ---------  ------------    -----------

<S>                                                           <C>         <C>          <C>             <C>
2001:

Revenues of continuing operations.....................        $  684      $  171       $   121         $   253
Operating income (loss) of continuing operations......            79         (45)          (36)             25
Income (loss) from continuing operations..............            40         (39)          (30)             17
Income (loss) from discontinued operations............             5           5            (3)             34
Net income (loss) applicable to common stock..........            44         (35)          (34)             50


2000:

Revenues of continuing operations.....................        $  332      $  157       $   149         $   469
Operating income (loss) of continuing operations......            70         (13)            2              42
Income (loss) from continuing operations..............            32          13           (10)             18
Income (loss) from discontinued operations............            (5)         (7)          (19)            (35)
Net income (loss) applicable to common stock..........            26           5           (30)            (18)
</TABLE>



                                       A-37

<PAGE>

                                                                      Appendix B

                       TXU GAS EXHIBITS FOR 2001 FORM 10-K

<TABLE>
<CAPTION>
                       Previously Filed*
                ---------------------------------
                       With
                       File              As
   Exhibits           Number           Exhibit
   --------           ------           -------

<S>             <C>                     <C>      <C>   <C>
    2(a)        333-12391               2(a)     --    Amended and Restated  Agreement  and Plan of Merger,  dated
                                                       as of April 13, 1996,  among Texas Utilities  Company,  TXU
                                                       Gas  (formerly  known  as  ENSERCH   Corporation)  and  TUC
                                                       Holding Company.

    2(b)        333-12391                        --    Form of  Agreement  and  Plan of  Distribution  included  as
                                                       Exhibit A to the Plan of Merger  attached  as Annex I to TXU
                                                       Gas' Proxy Statement dated September 23, 1996.

    2(c)        1-12833                 2        --    Master  Separation  Agreement  by and  among  TXU  Electric
                Form 8-K                               Delivery Company,  TXU Generation Holdings Company LLC, TXU
                (filed January 1,                      Merger Energy Trading  Company LP, TXU SESCO  Company,  TXU
                2002)                                  SESCO Energy  Services  Company,  TXU Energy Retail Company
                                                       LP and TXU US Holdings  Company,  dated as of December  14,
                                                       2001

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

    3(b)        1-3183 Form 10-Q        3.2      --    Bylaws, as restated August 1, 1999, of TXU Gas.
                (Quarter ended
                June 30, 1999)

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

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

    4(c)        1-12833                 4(ll)    --    Officer's  Certificate  establishing  the  TXU  Gas 6  1/4%
                Form 10-K                              Series A Notes due January 1, 2003.
                (1997)

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

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

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

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

                                       B-1

<PAGE>

<TABLE>
<CAPTION>
                       Previously Filed*
                ---------------------------------
                       With
                       File              As
   Exhibits           Number           Exhibit
   --------           ------           -------

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

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

    4(k)        1-12833 Form 8-K        4(c)     --    Officer's   Certificate,   dated   as  of  July  2,   1998,
                (filed August 28,                      establishing  the terms of the TXU Gas Floating Rate Junior
                1998)                                  Subordinated  Debentures,  issued  in  connection  with the
                                                       preferred securities TXU
                                                       Gas Capital I (formerly
                                                       ENSERCH Capital I).

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

    4(n)        1-12833 Form 8-K        4(f)     --    Agreement as to Expenses and  Liabilities,  dated as of July
                (filed August 28,                      1, 1998, between TXU Gas and TXU Gas Capital I.
                1998)

    4(o)        1-3183 Form 10-Q        4        --    Officer's   certificate  dated  as  of  October  17,  2000,
                (Quarter ended                         establishing  the terms of the TXU Gas  Putable  Asset Term
                September 30, 2000)                    Securities.

    10(a)       333-12391                        --    Form of Tax Allocation  Agreement  included as Exhibit B to
                                                       the  Plan of  Merger  attached  as  Annex I  to the TXU Gas
                                                       Proxy Statement dated September 23, 1996.

    10(b)       333-12391                        --    Form of Tax  Assurance  Agreement  included as Exhibit C to
                                                       the  Plan of  Merger  attached  as  Annex I  to the TXU Gas
                                                       Proxy Statement dated September 23, 1996.

    12                                           --    Computation of Ratio of Earnings to Fixed  Charges,  and to
                                                       Fixed Charges and Preferred Dividends.

    21                                           --    Subsidiaries of the Corporation.

    23                                           --    Consent of Deloitte & Touche LLP,  Independent Auditors for
                                                       TXU Gas.
</TABLE>

---------------
* Incorporated herein by reference.

                                                        B-2