10-Q

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                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

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

                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000

                                     - OR -

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

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

                          Commission File Number 1-3183

                                 TXU GAS COMPANY

A Texas Corporation                               I.R.S. Employer Identification
                                                               No. 75-0399066

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No _____

COMMON STOCK OUTSTANDING AT AUGUST 8, 2000: 451,000 shares, par value $0.01 per
share.

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TABLE OF CONTENTS




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

PART I. FINANCIAL INFORMATION                                                        PAGE
                                                                                     ----
                                                                               

            ITEM 1. FINANCIAL STATEMENTS

                Condensed Statements of Consolidated Operations --
                Three and Six Months Ended June 30, 2000 and 1999 .............         3

                Condensed Statements of Consolidated Cash Flows --
                Six Months Ended June 30, 2000 and 1999 .......................         4

                Condensed Consolidated Balance Sheets --
                June 30, 2000 and December 31, 1999 ...........................         5

                Notes to Financial Statements .................................         7

                Independent Accountants' Report ...............................        10

            ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                    AND RESULTS OF OPERATIONS .................................        11

            ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                    RISK ......................................................        14

PART II. OTHER INFORMATION

            ITEM 1. LEGAL PROCEEDINGS .........................................        14

            ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..........................        15

SIGNATURES ....................................................................        16











                                       2



                          PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                        TXU GAS COMPANY AND SUBSIDIARIES
                 CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
                                   (UNAUDITED)



                                                                    THREE MONTHS ENDED               SIX MONTHS ENDED
                                                                         JUNE 30,                        JUNE 30,
                                                                   --------------------            --------------------
                                                                   2000            1999            2000            1999
                                                                   ----            ----            ----            ----
                                                                                    MILLIONS OF DOLLARS
                                                                                                      

OPERATING REVENUES .......................................         $1,338            $690          $2,688          $1,786

 OPERATING EXPENSES
   Energy purchased for resale ...........................          1,230             588           2,387           1,512
   Operation and maintenance .............................             88              91             182             184
   Depreciation and other amortization....................             16              17              32              32
   Goodwill amortization .................................              5               5              11              11
   Taxes other than income ...............................             20              19              35              36
                                                                  -------         -------         -------         -------
     Total operating expenses ............................          1,359             720           2,647           1,775
                                                                  -------         -------         -------         -------

OPERATING INCOME (LOSS) ..................................            (21)            (30)             41              11

OTHER INCOME (DEDUCTIONS) - NET ..........................             52              --              52              (1)
                                                                  -------         -------         -------         -------

INCOME (LOSS) BEFORE INTEREST, OTHER
   CHARGES AND INCOME TAXES ..............................             31             (30)             93              10

INTEREST INCOME ..........................................             --               1              --               1

INTEREST EXPENSE AND OTHER
   CHARGES ...............................................            (19)            (18)            (37)            (38)
                                                                  -------         -------         -------         -------

INCOME (LOSS) BEFORE INCOME
   TAXES .................................................             12             (47)             56             (27)

INCOME TAX EXPENSE (BENEFIT) .............................              5             (14)             23              (6)
                                                                  -------         -------         -------         -------

NET INCOME (LOSS) ........................................              7             (33)             33             (21)

PREFERRED STOCK DIVIDENDS ................................              1               1               2               2
                                                                  -------         -------         -------         -------

NET INCOME (LOSS) APPLICABLE TO
   COMMON STOCK ..........................................         $    6            $(34)         $   31          $  (23)
                                                                  =======         =======         =======         =======




See Notes to Financial Statements.



                                       3



                        TXU GAS COMPANY AND SUBSIDIARIES
                 CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
                                   (UNAUDITED)



                                                                                              SIX MONTHS ENDED
                                                                                                   JUNE 30
                                                                                            ---------------------
                                                                                            2000             1999
                                                                                            ----             ----
                                                                                             MILLIONS OF DOLLARS
                                                                                                    

CASH FLOWS - OPERATING ACTIVITIES
    Net income (loss) ..............................................................        $  33         $ (21)
    Adjustments to reconcile net income (loss) to cash used in operating activities:
        Depreciation and amortization ..............................................           45            45
        Deferred income taxes - net ................................................           13            11
        Gain from the sale of assets ...............................................          (53)           --
        Changes in operating assets and liabilities:
           Accounts receivable .....................................................         (257)          293
           Inventories .............................................................          (11)           11
           Accounts payable:
              Parent and affiliates ................................................          (22)           (9)
              Other ................................................................          286          (249)
           Interest and taxes accrued ..............................................          (49)           (8)
           Other working capital ...................................................          (29)           23
           Energy marketing risk management assets and liabilities - net ...........           18           (76)
           Other - net .............................................................           --           (25)
                                                                                            -----         -----
              Cash used in operating activities ....................................          (26)           (5)
                                                                                            -----         -----

CASH FLOWS - FINANCING ACTIVITIES
    Issuance of common stock .......................................................           --           250
    Change in notes payable:
        Banks ......................................................................           --             3
        Parent .....................................................................           (3)         (177)
    Cash dividends paid ............................................................           (2)           (1)
                                                                                            -----         -----
              Cash provided by (used in) financing activities ......................           (5)           75
                                                                                            -----         -----

CASH FLOWS - INVESTING ACTIVITIES
    Construction expenditures ......................................................          (64)          (71)
    Proceeds from sale of assets ...................................................          105            --
    Other investments ..............................................................           (2)           --
                                                                                            -----         -----
              Cash provided by (used in) investing activities ......................           39           (71)
                                                                                            -----         -----

CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS .................................          (11)            7
                                                                                            -----         -----

NET CHANGE IN CASH AND CASH EQUIVALENTS ............................................           (3)            6

CASH AND CASH EQUIVALENTS - BEGINNING BALANCE ......................................            6            --
                                                                                            -----         -----

CASH AND CASH EQUIVALENTS - ENDING BALANCE .........................................        $   3         $   6
                                                                                            =====         =====



See Notes to Financial Statements.












                                       4



                        TXU GAS COMPANY AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                                     ASSETS



                                                                            JUNE 30,
                                                                             2000      DECEMBER 31,
                                                                          (UNAUDITED)     1999
                                                                          ----------    ----------
                                                                            MILLIONS OF DOLLARS
                                                                                 
PROPERTY, PLANT AND EQUIPMENT
   Gas distribution and pipeline ...................................        $1,436        $1,378
   Other ...........................................................            26            68
                                                                            ------        ------
        Total ......................................................         1,462         1,446
   Less accumulated depreciation ...................................           175           142
                                                                            ------        ------
        Net of accumulated depreciation ............................         1,287         1,304
   Construction work in progress ...................................            51            47
                                                                            ------        ------
        Net property, plant and equipment ..........................         1,338         1,351
                                                                            ------        ------

INVESTMENTS ........................................................            39            38
                                                                            ------        ------

GOODWILL (net of accumulated amortization: 2000 - $61; 1999 - $50) .           798           809
                                                                            ------        ------

CURRENT ASSETS
   Cash and cash equivalents .......................................             3             6
   Accounts receivable (net of allowance for uncollectible accounts:
      2000 - $7; 1999 - $8) ........................................           648           391
   Energy marketing risk management assets .........................         1,141           581
   Inventories - at average cost:
      Materials and supplies .......................................            11            12
      Gas stored underground .......................................           102            93
   Deferred income taxes ...........................................            27            29
   Other current assets ............................................            61            16
                                                                            ------        ------
        Total current assets .......................................         1,993         1,128
                                                                            ------        ------

OTHER ASSETS

   Energy marketing risk management assets .........................           139            27
   Regulatory assets ...............................................            49            45
   Deferred income taxes ...........................................            10            19
   Deferred debits .................................................             8            16
                                                                            ------        ------
        Total other assets .........................................           206           107
                                                                            ------        ------

        Total ......................................................        $4,374        $3,433
                                                                            ======        ======


  See Notes to Financial Statements.

                                                           5


                        TXU GAS COMPANY AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS

                         CAPITALIZATION AND LIABILITIES



                                                                                   JUNE 30,
                                                                                    2000         DECEMBER 31,
                                                                                 (UNAUDITED)        1999
                                                                                 -----------     -----------
                                                                                     MILLIONS OF DOLLARS

                                                                                           
CAPITALIZATION
  Common stock (par value - $.01 per share):
     Authorized shares - 100,000,000
     Outstanding shares - 451,000 .........................................       $    --        $    --
  Paid in capital .........................................................         1,014          1,016
  Deficit .................................................................           (18)           (51)
                                                                                   ------         ------
       Total common stock equity ..........................................           996            965
  Preferred stock .........................................................            75             75
  TXU Gas Company obligated, mandatorily redeemable, preferred securities
     of subsidiary trust holding solely junior subordinated debentures of
     TXU Gas Company ......................................................           147            147
  Advances from parent ....................................................           396            385
  Long-term debt, less amounts due currently ..............................           551            551
                                                                                   ------         ------
       Total capitalization ...............................................         2,165          2,123
                                                                                   ------         ------

CURRENT LIABILITIES
  Notes payable - banks ...................................................             1              1
  Accounts payable:
     Parent and affiliates ................................................            14             36
     Other ................................................................           566            280
  Energy marketing risk management liabilities ............................         1,076            525
  Interest and taxes accrued ..............................................            34             86
  Other current liabilities ...............................................            83             80
                                                                                   ------         ------
       Total current liabilities ..........................................         1,774          1,008
                                                                                   ------         ------

DEFERRED CREDITS AND OTHER NONCURRENT LIABILITIES
  Accumulated deferred income taxes and investment tax credits ............            13             13
  Pensions and other postretirement benefits ..............................           150            153
  Energy marketing risk management liabilities ............................           151             12
  Other deferred credits and noncurrent liabilities .......................           121            124
                                                                                   ------         ------
       Total deferred credits and other noncurrent liabilities ............           435            302
                                                                                   ------         ------

CONTINGENCIES (Note 5)

       Total ..............................................................        $4,374         $3,433
                                                                                   ======         ======


See Notes to Financial Statements.

                                                              6



                        TXU GAS COMPANY AND SUBSIDIARIES
                          NOTES TO FINANCIAL STATEMENTS

1.       BUSINESS

         TXU Gas Company (TXU Gas) is an integrated natural gas company engaged
in the purchase, transmission and distribution of natural gas and energy
marketing. TXU Gas is a wholly-owned subsidiary of TXU Corp., a Texas
corporation. TXU Corp. is a holding company that, through its subsidiaries, is
engaged in the generation, purchase, transmission, distribution and sale of
electricity; the purchase, transmission and distribution of natural gas; energy
services; and telecommunications and other businesses primarily in the United
States (US), Europe and Australia.

         TXU Gas recently sold or is selling certain assets that no longer align
with its long-term strategy. 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).

2.       SIGNIFICANT ACCOUNTING POLICIES

         BASIS OF PRESENTATION - The condensed consolidated financial statements
of TXU Gas and its subsidiaries have been prepared on the same basis as those in
its 1999 Form 10-K and, in the opinion of management, all adjustments
(constituting only normal recurring accruals) necessary for a fair presentation
of the results of operations and financial position have been included therein.
Certain information and footnote disclosures normally included in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain previously reported amounts have been reclassified to conform to current
classifications. All dollar amounts in the condensed consolidated financial
statements and tables in the notes are stated in millions of dollars unless
otherwise indicated.

         There were no items impacting comprehensive income for the periods
reported; therefore, comprehensive income is the same as net income.

3.       CAPITALIZATION

         TXU GAS OBLIGATED, MANDATORILY REDEEMABLE, PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF TXU GAS (TRUST
SECURITIES) - At June 30, 2000, a statutory business trust, TXU Gas Capital I,
had $147 million of floating rate Trust Securities outstanding. Distributions on
these Trust Securities are payable quarterly at 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 June 30, 2000, 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.

                                        7



4.       REGULATION AND RATES

         TXU Gas employs a continuing program of rate review for all classes of
customers in its regulatory jurisdictions. Rate relief amounting to about $1
million in annualized revenue increases, exclusive of changes in gas costs, has
been granted in 2000 in addition to about $7.5 million granted in 1999. Rate
cases supporting $9 million in annualized revenue increases were pending in 39
cities as of June 30, 2000. Additionally, an appeal to the Railroad Commission
of Texas (RRC) of actions taken by three cities in the Dallas Distribution
System seeks to recover $9 million in annualized revenue deficiencies. A
decision on this matter is expected in the fourth quarter of 2000. Additional
rate cases have been filed subsequent to June 30, 2000 seeking to recover $8
million in revenue deficiencies.

         In October 1999, TXU Lone Star Pipeline filed with the RRC a Statement
of Intent to change the city gate rate for gas transported for subsequent
distribution to residential and commercial customers. The filing requested a
general increase in annual revenues of approximately $20 million. In June 2000,
the RRC issued a final ruling on TXU Lone Star Pipeline's requested gate rate
increase that denied the increase and results in a $1.5 million reduction in the
city gate rate, but granted certain changes to its tariff structure between
demand and commodity rates which should stabilize its revenues. On July 12,
2000, TXU Lone Star Pipeline filed with the RRC a motion for rehearing
concerning its final ruling. TXU Lone Star Pipeline is unable to predict the
outcome of the motion for rehearing.

5.       CONTINGENCIES

         In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the
United States District Court for the Northern District of Texas against EEX
Corporation (EEX), formerly Enserch Exploration, Inc., TXU Corp., David W.
Biegler, Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The
Gracy Fund sought to represent a class of certain purchasers of the common stock
of ENSERCH Corporation (now TXU Gas) and EEX based upon claims of various
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. Also in August 1998, Stan C. Thorne (Thorne) filed suit in the United
States District Court for the Southern District of Texas against EEX, TXU Gas,
DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S. Addy and B.
K. Irani and sought to represent a certain class of purchasers of common stock
of EEX. In December 1998, the United States District Court for the Northern
District of Texas issued an Order consolidating the Gracy Fund and the Thorne
suits (Consolidated Action). In January 1999, the Gracy Fund ET AL. filed an
amended class action complaint in the Consolidated Action against EEX, TXU Gas,
David W. Biegler, Gary J. Junco, Thomas Hamilton, J. Philip McCormick, Fredrick
S. Addy and B. K. Irani. TXU Corp. and Erle Nye were omitted as defendants
pursuant to a tolling agreement. The individual named defendants are current or
former officers and/or directors of EEX, and Mr. Biegler has been an officer and
director of TXU Gas. The amended complaint alleges violations of provisions of
the Securities Act and the Exchange Act. The plaintiff in the Consolidated
Action represents a class of persons acquiring stock of ENSERCH Corporation
and/or EEX between August 3, 1995 and August 5, 1997, inclusive. The parties to
the Consolidated Action entered into an agreement that TXU Gas expects to form
the basis of the settlement of this litigation, subject to the completion of
confirmatory discovery by the plaintiffs and approval of the Court. The terms of
this agreement required TXU Gas to pay $5 million into escrow.

         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 whom TXU Gas Distribution had paid municipal franchise fees
over a period of twenty-five years. 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.

                                       8



         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 and TXU Energy Trading Company, a wholly-owned
subsidiary (TXU Energy Trading). Quinque and the other named plaintiffs sought
to represent a class of plaintiffs 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. The
complaint 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 complaint. While
TXU Gas and TXU Energy Trading are unable to estimate any possible loss or
predict the outcome of this case, TXU Gas and TXU Energy Trading believe these
claims are without merit and intend to vigorously defend this suit.

         FINANCIAL GUARANTEES - TXU Gas and/or its subsidiaries are the
guarantor on various commitments and obligations of others in an aggregate
amount of $9 million at June 30, 2000. TXU Gas is exposed to loss in the event
of nonperformance by other parties. However, TXU Gas does not anticipate
nonperformance by the counterparties.

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

6.       SEGMENT INFORMATION

         TXU Gas has two reportable operating segments:

         (1) GAS PIPELINE AND DISTRIBUTION - operations involving the purchase,
transmission and distribution of natural gas in Texas; and

         (2) ENERGY MARKETING - operations involving the purchasing and selling
of natural gas and electricity and providing risk management services for the
energy industry throughout the US and parts of Canada.



                                                                        THREE MONTHS ENDED             SIX MONTHS ENDED
                                                                             JUNE 30,                      JUNE 30,
                                                                       -------------------         ----------------------
                                                                        2000          1999           2000           1999
                                                                       ------         ----         -------        -------
                                                                                                      
TRADE REVENUES --
    Gas Pipeline and Distribution..............................        $  154         $145         $  481         $  438
    Energy Marketing ..........................................         1,184          543          2,207          1,345
    Other......................................................            --            2             --              3
                                                                       ------         ----         ------         ------
         Consolidated .........................................        $1,338         $690         $2,688         $1,786
                                                                       ======         ====         ======         ======

AFFILIATED REVENUES --
    Gas Pipeline and Distribution .............................        $    3         $  5         $    8         $   10
    Energy Marketing ..........................................            (1)           1             (2)             1
    Eliminations...............................................            (2)          (6)            (6)           (11)
                                                                       ------         ----         ------         ------
         Consolidated .........................................        $   --         $ --         $   --         $   --
                                                                       ======         ====         ======         ======

NET INCOME (LOSS) --
    Gas Pipeline and Distribution .............................        $   19         $(17)        $   57         $    9
    Energy Marketing ..........................................            (7)          (9)           (12)           (16)
    Other.....................................................             (5)          (7)           (12)           (14)
                                                                       ------         ----         ------         ------
         Consolidated .........................................        $    7         $(33)        $   33         $  (21)
                                                                       ======         ====         ======         ======

                                                             9



INDEPENDENT ACCOUNTANTS' REPORT

TXU Gas Company:

We have reviewed the accompanying condensed consolidated balance sheet of TXU
Gas Company and subsidiaries (TXU Gas) as of June 30, 2000, and the related
condensed statements of consolidated operations for the three-month and
six-month periods ended June 30, 2000 and 1999, and the condensed statements of
consolidated cash flows for the six-month periods ended June 30, 2000 and 1999.
These financial statements are the responsibility of TXU Gas management.

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

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

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of TXU
Gas as of December 31, 1999, and the related statements of consolidated
operations, comprehensive loss, cash flows and common stock equity for the year
then ended (not presented herein); and in our report dated February 16, 2000, we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of December 31, 1999, is fairly stated in all
material respects in relation to the consolidated balance sheet from which it
has been derived.

DELOITTE & TOUCHE  LLP

Dallas, Texas
August 7, 2000

                                        10




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

BUSINESS

         TXU Gas Company (TXU Gas) recently sold or is selling certain assets
that no longer align with its long-term strategy. 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).

         Although the price of natural gas has increased significantly in 2000,
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 and provides for full recovery of the actual cost of gas
delivered.

RESULTS OF OPERATIONS

OVERVIEW

THREE MONTHS ENDED JUNE 30, 2000

         For the three months ended June 30, 2000, TXU Gas had net income of $7
million compared with a net loss of $33 million for the three months ended June
30, 1999. Results for the second quarter of 2000 reflect the $34 million
after-tax gain related to the sale of substantially all of the gas processing
assets and improved gas distribution and energy marketing results.

         Operating revenues for the second quarter of 2000 increased by $648
million and energy purchased for resale increased by $642 million from the 1999
period as a result of trading activities in the Energy Marketing segment.
Trading revenues and energy purchased for resale costs reflect somewhat higher
volumes, but the increases were primarily the result of a significant increase
in the price for natural gas over the prior-year period. Higher operation and
maintenance expenses in the Energy Marketing segment were more than offset by
cost reductions for gas distribution and other corporate operation and
maintenance expenses, reduced gas processing expenses following the sale and
favorable resolution of several outstanding claims. The effective income tax
rate for both periods was affected by non-deductible amortization of goodwill.

SIX MONTHS ENDED JUNE 30, 2000

         For the six months ended June 30, 2000, TXU Gas had net income of $33
million compared to a net loss of $21 million for the six months ended June 30,
1999. The better results for the first six months of 2000 were attributable to
the $34 million gain on the sale of the processing assets as well as improved
gas distribution and energy marketing results.

         Operating revenues for the first six months of 2000 increased by $902
million and energy purchased for resale increased by $875 million from the 1999
period as a result of trading activities in the Energy Marketing segment.
Trading revenues and energy purchased for resale costs increased for the same
reasons mentioned above for the second quarter. Higher operation and maintenance
expenses in the Energy Marketing segment were more than offset by cost
reductions for gas distribution and other corporate operation and maintenance
expenses and the favorable resolution of several outstanding claims. The
effective income tax rate for both periods was affected by non-deductible
amortization of goodwill.

                                       11


SEGMENTS

         Revenues and net income by operating segment are shown in Note 6 to the
Financial Statements.

GAS PIPELINE AND DISTRIBUTION

SEGMENT HIGHLIGHTS



                                                             THREE MONTHS ENDED         SIX MONTHS ENDED
                                                                   JUNE 30,                JUNE 30,
                                                             ------------------         ----------------
                                                             2000          1999          2000       1999
                                                             ----          ----          ----       ----
                                                                                        
Gas distribution:
    Sales volumes (billion cubic feet - Bcf).........          19            17            68         69
    Margin (millions) ...............................        $ 57          $ 56          $179       $169
Pipeline transportation:
    Transportation volumes (Bcf) ....................         133           131           274        271
    Revenues (millions) .............................        $ 24          $ 24          $ 59       $ 62
Heating degree days (% of normal) ...................          79%           53%           64%        73%


         For the three months ended June 30, 2000, the Gas Pipeline and
Distribution segment had net income of $19 million compared with a net loss of
$17 million for the three months ended June 30, 1999. Improved results for the
2000 period were due to the $34 million after-tax gain related to the sale of
the processing assets and cost reductions in gas distribution operations.

         For the six months ended June 30, 2000, the segment had net income of
$57 million compared with net income of $9 million for the comparable 1999
six-month period. Results for the 2000 six-month period reflect the gain on sale
of gas processing assets, improved margins and cost reductions in gas
distribution operations and higher gas processing margins.

ENERGY MARKETING

SEGMENT HIGHLIGHTS



                                                      THREE MONTHS ENDED    SIX MONTHS ENDED
                                                            JUNE 30,            JUNE 30,
                                                      ------------------    ----------------
                                                       2000         1999      2000      1999
                                                       ----         ----      ----      ----
                                                                            
Trading and marketing volumes:
     Gas (Bcf).................................         306          241       626       592
     Electric (gigawatt-hours-GWh).............       6,836          773    10,540     1,830


         The Energy Marketing segment had a net loss of $7 million for three
months ended June 30, 2000 compared with a net loss of $9 million for the three
months ended June 30, 1999. The improvement in results was primarily due to
improved margins which more than offset increased operation and maintenance
expenses. Energy Marketing segment margins increased from $1 million in the 1999
period to $21 million in the 2000 period while operation and maintenance
expenses increased from $14 million in the 1999 period to $28 million in the
2000 period. The increase in operation and maintenance expenses reflects costs
of developing infrastructure capabilities in preparation for the opening of the
Texas electricity market to competition in 2002 and severance and other costs in
connection with the relocation of energy trading operations to Dallas.

         For the six months ended June 30, 2000, the segment had a net loss of
$12 million, reflecting improvement from the net loss of $16 million for the
prior six-month period. Energy Marketing segment margins increased from $6
million in the 1999 period to $30 million in the 2000 period. Operation and
maintenance expenses increased from $28 million in the 1999 period to $44
million in the 2000 period for the reasons discussed above.

                                                           12



FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

         Cash flows provided by operating activities before changes in operating
assets and liabilities for the six months ended June 30, 2000 were $38 million
compared with $35 million for the same period last year. Changes in operating
assets and liabilities required $64 million for the first six months of 2000
compared with $40 million for the same period in 1999.

         Cash flows of $5 million were used in financing activities in the first
six months of 2000 compared with cash flows provided by financing activities of
$75 million for the first six months of 1999.

         Cash flows provided by investing activities for the six months ended
June 30, 2000 were $39 million compared with cash flows used of $71 million for
the six months ended June 30, 1999. The sale of substantially all of TXU Gas'
natural gas processing assets provided $105 million in the second quarter of
2000. Construction expenditures were $64 million and $71 million for the first
six months of 2000 and 1999, respectively.

         Cash flows required by discontinued operations were $11 million in the
first six months of 2000 compared with cash flows provided of $7 million during
the first six months of 1999.

         No other substantive changes to financing arrangements have occurred
subsequent to December 31, 1999. Early redemptions of preferred stock, long-term
debt and trust securities may occur from time to time in amounts presently
undetermined.

REGULATION AND RATES

         Although TXU Gas cannot predict future regulatory or legislative
actions or any changes in economic and securities market conditions, no changes
are expected in trends or commitments, other than those discussed in the 1999
Form 10-K and this Form 10-Q, which might significantly alter its financial
position, results of operations or cash flows. See Note 4 to Financial
Statements.

CHANGES IN ACCOUNTING STANDARDS

         Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as extended and amended, is
effective for TXU Gas beginning 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 as either assets or liabilities in
the statement of financial position and the measurement of those instruments at
fair value. TXU Gas is currently evaluating the impact the adoption of this
standard will have on its financial position and results of operations.

                                       13




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 factors contained in the Forward-Looking Statements section of Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations in TXU Gas' 1999 Form 10-K, as well as general industry trends; power
costs and availability; changes in business strategy, development plans or
vendor relationships; availability of qualified personnel; changes in, or the
failure or inability to comply with, governmental regulations, including,
without limitation, environmental regulations; changes in tax laws; and access
to adequate transmission facilities to meet changing demand, among others, that
could cause the actual results of TXU Gas to differ materially from those
projected in such forward-looking statements.

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

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The information required hereunder is not significantly different from
the information set forth in Item 7A. Quantitative and Qualitative Disclosures
About Market Risk included in TXU Gas' 1999 Form 10-K and is, therefore, not
presented herein.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         In August 1998, the Gracy Fund, L.P. (Gracy Fund) filed suit in the
United States District Court for the Northern District of Texas against EEX
Corporation (EEX), formerly Enserch Exploration, Inc., TXU Corp., David W.
Biegler, Gary J. Junco, Erle Nye, Thomas Hamilton and J. Phillip McCormick. The
Gracy Fund sought to represent a class of certain purchasers of the common stock
of ENSERCH Corporation (now TXU Gas) and EEX based upon claims of various
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934. Also in August 1998, Stan C. Thorne (Thorne) filed suit in the United
States District Court for the Southern District of Texas against EEX, TXU Gas,
DeGolyer & MacNaughton, David W. Biegler, Gary J. Junco, Fredrick S. Addy and B.
K. Irani and sought to represent a certain class of purchasers of common stock
of EEX. In December 1998, the United States District Court for the Northern
District of Texas issued an Order consolidating the Gracy Fund and the Thorne
suits (Consolidated Action). In January 1999, the Gracy Fund ET AL. filed an
amended class action complaint in the Consolidated Action against EEX, TXU Gas,
David W. Biegler, Gary J. Junco, Thomas Hamilton, J. Philip McCormick, Fredrick
S. Addy and B. K. Irani. TXU Corp. and Erle Nye were omitted as defendants
pursuant to a tolling agreement. The individual named defendants are current or
former officers and/or directors of EEX, and Mr. Biegler has been an officer and
director of TXU Gas. The amended complaint alleges violations of provisions of
the Securities Act and the Exchange Act. The plaintiff in the Consolidated
Action represents a class of persons acquiring stock of ENSERCH Corporation
and/or EEX between August 3, 1995 and August 5, 1997, inclusive. The parties to
the Consolidated Action entered into an agreement that TXU Gas expects to form
the basis of the settlement of this litigation, subject to the completion of
confirmatory discovery by the plaintiffs and approval of the Court. The terms of
this agreement required TXU Gas to pay $5 million into escrow.

                                       14



ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

    (a) Exhibits filed as a part of Part II are:

      15  Letter from independent accountants as to unaudited interim financial
          information

      27  Financial Data Schedules

      99  Condensed Statements of Consolidated Operations - Twelve Months Ended
          June 30, 2000 and 1999

    (b)   Reports on Form 8-K filed since March 31, 2000:

          None




                                       15





                                   SIGNATURES

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

                                                  TXU GAS COMPANY

                                                  By  /s/ Jerry W. Pinkerton
                                                    --------------------------
                                                        Jerry W. Pinkerton
                                                         Vice President,
                                                   Principal Accounting Officer



                                        By        /s/ Gaylene M. McMahon
                                                    --------------------------
                                                        Gaylene M. McMahon
                                                            Controller

Date:  August 10, 2000



                                       16

EX-15

                                                                     EXHIBIT 15

TXU Gas Company:

We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited interim
condensed consolidated financial information of TXU Gas Company and
subsidiaries (TXU Gas) for the periods ended June 30, 2000 and 1999, as
indicated in our report dated August 7, 2000; because we did not perform an
audit, we expressed no opinion on that information.

We are aware that our report referred to above, which is included in TXU Gas'
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, is
incorporated by reference in Registration Statements No. 333-85769,
333-85769-01, 333-85769-02, 333-85769-03 and 333-43811 on Form S-3, and
Registration Statement No. 333-43811-01 on Post-Effective Amendment No. 1 to
Form S-3, of TXU Gas.

We also are aware that the aforementioned report, pursuant to Rule 436(c)
under the Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or a report
prepared or certified by an accountant within the meaning of Sections 7 and
11 of that Act.




DELOITTE & TOUCHE LLP

Dallas, Texas
August 9, 2000

EX-27

 


<ARTICLE> UT
<MULTIPLIER> 1,000,000

                             
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-END>                               JUN-30-2000
<BOOK-VALUE>                                  PER-BOOK
<TOTAL-NET-UTILITY-PLANT>                        1,338
<OTHER-PROPERTY-AND-INVEST>                        837
<TOTAL-CURRENT-ASSETS>                           1,993
<TOTAL-DEFERRED-CHARGES>                            18
<OTHER-ASSETS>                                     188
<TOTAL-ASSETS>                                   4,374
<COMMON>                                             0
<CAPITAL-SURPLUS-PAID-IN>                        1,014
<RETAINED-EARNINGS>                               (18)
<TOTAL-COMMON-STOCKHOLDERS-EQ>                     996
<PREFERRED-MANDATORY>                              147
<PREFERRED>                                         75
<LONG-TERM-DEBT-NET>                               947
<SHORT-TERM-NOTES>                                   1
<LONG-TERM-NOTES-PAYABLE>                            0
<COMMERCIAL-PAPER-OBLIGATIONS>                       0
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<CAPITAL-LEASE-OBLIGATIONS>                          0
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<OTHER-ITEMS-CAPITAL-AND-LIAB>                   2,208
<TOT-CAPITALIZATION-AND-LIAB>                    4,374
<GROSS-OPERATING-REVENUE>                        1,338
<INCOME-TAX-EXPENSE>                                 5
<OTHER-OPERATING-EXPENSES>                       1,359
<TOTAL-OPERATING-EXPENSES>                       1,359
<OPERATING-INCOME-LOSS>                           (21)
<OTHER-INCOME-NET>                                  52
<INCOME-BEFORE-INTEREST-EXPEN>                      31
<TOTAL-INTEREST-EXPENSE>                            19
<NET-INCOME>                                         7
<PREFERRED-STOCK-DIVIDENDS>                          1
<EARNINGS-AVAILABLE-FOR-COMM>                        6
<COMMON-STOCK-DIVIDENDS>                             0
<TOTAL-INTEREST-ON-BONDS>                            0
<CASH-FLOW-OPERATIONS>                            (26)
<EPS-BASIC>                                       0.00
<EPS-DILUTED>                                     0.00


 

EX-99

                                                                      EXHIBIT 99

                        TXU GAS COMPANY AND SUBSIDIARIES
                 CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS

                                   (UNAUDITED)



                                                                             TWELVE MONTHS ENDED
                                                                                  JUNE 30,
                                                                          -----------------------
                                                                             2000            1999
                                                                             ----            ----

                                                                                    
OPERATING REVENUES ...............................................         $4,737          $3,931
                                                                          -------         -------

 OPERATING EXPENSES
    Energy purchased for resale ..................................          4,182           3,404
    Operation and maintenance ....................................            355             358
    Depreciation and other amortization...........................             63              60
    Goodwill amortization ........................................             21              21
    Taxes other than income ......................................             60              64
                                                                          -------         -------

        Total operating expenses .................................          4,681           3,907
                                                                          -------         -------

OPERATING INCOME .................................................             56              24

OTHER INCOME (DEDUCTIONS) - NET ..................................             69               3
                                                                          -------         -------

INCOME BEFORE INTEREST, OTHER
    CHARGES AND INCOME TAXES .....................................            125              27

INTEREST INCOME ..................................................             --               1

INTEREST EXPENSE AND OTHER CHARGES ...............................            (76)            (77)
                                                                          -------         -------

INCOME (LOSS) BEFORE INCOME TAXES ................................             49             (49)

INCOME TAX EXPENSE (BENEFIT) .....................................             13             (11)
                                                                          -------         -------

NET INCOME (LOSS) ................................................             36             (38)

PREFERRED STOCK DIVIDENDS ........................................              4               4
                                                                          -------         -------

NET INCOME (LOSS) APPLICABLE TO
   COMMON STOCK ..................................................         $   32          $  (42)
                                                                          =======         =======