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PART I

This annual report on Form 20-F ( "Annual Report") contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Some of these forward-looking statements include forward-looking phrases such as "anticipates", "believes", "could", "estimates", "expects", "foresees", "intends", "may", "should" or "will continue", or similar expressions or the negatives thereof or other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions. These statements also include descriptions in connection with, among other things:

• our ability to remain as a going concern and remain solvent;
• the renegotiation of our tariffs with the Argentine government;
• anticipated revenues, capital expenditures, future cash flows and financing requirements;
• the economic and political developments in Argentina (including the effects of the devaluation of the Argentine Peso and restrictions on payments abroad);
• the effect of inflation and currency volatility on our financial condition and results of operations;
• the implementation of our business strategy;
• descriptions of new services and anticipated demand for services and other changes in rates and tariff regulations and charges for gas services;
• descriptions of the expected effects of our competitive strategies; and
• the impact of actions taken by our competitors and other third parties, including courts and other governmental authorities.

Such statements reflect our current views regarding future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements that forward-looking statements may express or imply, including:

• the economic and political instability of Argentina;
• the Argentine government's insolvency;
• changes in inflation;
• the devaluation and volatility of the Argentine Peso;
• changes in financial and natural gas regulation;
• revocation of our License (as defined below) to provide gas services;
• our ability to successfully restructure our indebtedness or refinance our financial obligations when they become due; and
• the outcome of pending legal claims against us.

Some of these factors are discussed in more detail in our Annual Report, including under Item 3: "Key Information-Risk Factors", Item 4: "Information on the Company" and Item 5: "Operating and Financial Review and Prospects". If one or more of these risks or uncertainties affects future events and circumstances, or if underlying assumptions do not materialize, actual results may vary materially from those described in our Annual Report as anticipated, believed, estimated or expected. We have no plans to update any industry information or forward-looking statements set out in our Annual Report and have no obligation to update any such statements.

Our audited financial statements as of December 31, 2003 and 2002 and for the fiscal years ended December 31, 2003, 2002 and 2001 and the notes thereto ( "Annual Financial Statements") are set forth in Item 18 of our Annual Report. Our Annual Financial Statements are presented in Pesos and are prepared in accordance with generally accepted accounting principles used in Argentina ("Argentine GAAP"). Significant differences exist between Argentine GAAP and generally accepted accounting principles used in the United States ("U.S. GAAP") which might be material to the financial information contained herein. Such differences involve methods of measuring the amounts shown in our Annual Financial Statements as well as additional disclosures required by U.S. GAAP and Regulation S-X of the Securities and Exchange Commission. See Notes 17 and 18 to our Annual Financial Statements contained in Item 18 of our Annual Report for a description of the principal differences between Argentine GAAP and U.S. GAAP as they relate to us and a reconciliation to U.S. GAAP of our net (loss) income and shareholders' equity.

Under Argentine GAAP financial statements are to be restated for the effects of inflation as of September 30, 2003. In addition, Argentine GAAP requires the recognition of deferred income tax assets and liabilities on a discounted basis. As indicated in Notes 3.3 and 3.4.(e) to our Annual Financial Statements, we have discontinued the restatement of financial statements into constant currency as from March 1, 2003 and have recorded deferred income tax assets and liabilities on a non-discounted basis as required by resolutions issued by the Comisión Nacional de Valores ("CNV"). Accordingly, our independent auditors, Price Waterhouse & Co., Buenos Aires, Argentina issued a qualified report on our Annual Financial Statements stating that the application of the CNV resolutions represent a departure from generally accepted accounting principles in Argentina.

Our Annual Financial Statements have been prepared assuming that we will continue as a going concern. Our independent auditors, Price Waterhouse & Co., Buenos Aires, Argentina, issued a report on our financial statements as of and for the year ended December 31, 2003 stating that we were negatively impacted by the deterioration of the Argentine economy, the Argentine government's adoption of various economic measures, including the violation of the contractually-agreed license to provide natural gas services (the "License") and the devaluation of the Argentine Peso, circumstances that led us to announce on March 25, 2002 the suspension of payment on our financial debt. In their opinion, these circumstances raise substantial doubt about our ability to continue as a going concern. Our financial statements as of and for the year ended December 31, 2003 do not include any adjustments that might result from the outcome of this uncertainty. See Item 3: "Key Information-Risk Factors-Risks Related to Us."

In our Annual Report, references to "U.S.$", "U.S. Dollars" and "Dollars" are to United States Dollars and references to "Ps.", "Pesos" or "$" are to Argentine pesos. References to "Euros" are to the currency of the European Economic and Monetary Union. Percentages and some currency amounts in our Annual Report were rounded for ease of presentation.

In our Annual Report, references to "billions" are to thousands of millions. References to "CM" are to cubic meters, to "MCM" are to thousands of cubic meters, to "MMCM" are to millions of cubic meters and to "BCM" are to billions of cubic meters. References to "CF" are to cubic feet, to "MCF" are to thousands of cubic feet, to "MMCF" are to millions of cubic feet and to "BCF" are to billions of cubic feet. One cubic meter equals 35.3145 cubic feet. References to "BTU" are to British thermal units and to "MMBTU" are to millions of British thermal units. A BTU is the amount of heat needed to increase the temperature of one pound of water by one degree Fahrenheit (252 calories). Although BTU is a calorific measurement and does not correspond exactly to volume measurements, in calculating our gas purchase requirements we estimate that one cubic foot (0.03 CM) of gas provides one thousand BTUs. References to "km" are to kilometers.

Unless otherwise indicated, our balance sheets and statements of operations use the exchange rate as of each relevant date or period-end quoted by Banco de la Nación Argentina ("Banco Nación"). In the case of U.S. Dollars, the Banco Nación quotes for such exchange rates were Ps.1.00 per U.S.$1.00 until December 23, 2001. From December 24, 2001 to January 10, 2002, the exchange market was officially suspended. On January 10, 2002, the Argentine government established a dual exchange rate system. The exchange rate in the free market began to float for the first time since April 1991. On January 10, 2002, the free market rate was Ps.1.70 per U.S.$1.00 while the official market rate was Ps.1.40 per U.S.$1.00. On February 8, 2002, the Argentine government repealed the dual exchange rate and since February 11, 2002, Argentina has had one freely floating exchange rate for all transactions. As of December 31, 2003, the only exchange market available was the free market and the quotation was Ps.2.935 per U.S.$1.00 and as of June 23, 2004, the exchange rate was Ps. 2.9430 per U.S. $1.00. The reader should not construe the translation of currency amounts in our Annual Report to be representations that the Peso amounts actually represent U.S. Dollar amounts or that any person could convert the Peso amounts into U.S. Dollars at the rate indicated or at any other exchange rate. See Item 3: "Key Information-Exchange Rate Information" for information regarding exchange rates.

This Annual Report is incorporated by reference and forms part of our Solicitation Statement dated November 7, 2002.

You should carefully consider the risks described below, in addition to the other information set forth in our Annual Report, including our Annual Financial Statements.

We are an Argentine sociedad anónima and substantially all of our operations, facilities, and customers are located in Argentina. Accordingly, our financial condition and results of operations depend to a significant extent on macroeconomic and political conditions prevailing from time to time in Argentina.

The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth and high and variable levels of inflation and currency devaluation. For example, in 1988, 1989 and 1990, the annual inflation rates were approximately 338%, 4,924% and 1,344%, respectively, based on the Argentine consumer price index, and approximately 432%, 5,386% and 798%, respectively, based on the Argentine wholesale price index. As a result of inflationary pressures, the Argentine currency had been devalued repeatedly during the 1960s, 1970s and 1980s, and macroeconomic instability led to broad fluctuations in the real exchange rate between the Argentine currency and the U.S. Dollar. In an attempt to address these pressures, the Argentine government during this period implemented various plans and utilized a number of exchange rate systems.

Prior to December 1989, the Argentine foreign exchange market was subject to exchange controls. In April 1991, the Argentine government launched a plan aimed at controlling inflation and restructuring the economy by enacting Law No. 23,928 and its Regulatory Decree No. 529/91, known as the Convertibility Law. The Convertibility Law fixed the exchange rate at one Peso per U.S. Dollar and required that Banco Central de la República Argentina (the "Central Bank") maintain reserves in gold, foreign currency and certain foreign-currency denominated Argentine government bonds at least equal to the monetary base. Following the enactment of the Convertibility Law, inflation declined steadily and the economy experienced growth through most of the period from 1991 through 1997. In the fourth quarter of 1998, however, the Argentine economy entered into a recession that caused the gross domestic product ("GDP") to decrease by 3.4% in 1999, 0.8% in 2000, 4.4% in 2001, and 10.9% in 2002. Beginning in the second half of 2001, Argentina's recession worsened significantly, precipitating the political and economic crisis described in greater detail below.

Beginning in December 2001, the Argentine government implemented a number of monetary and foreign exchange control measures that included restrictions on the free disposition of funds deposited with banks and on the transfer of funds abroad without prior approval by the Central Bank, certain of which are still in effect. On December 6, 2001, the Argentine government suspended payment on certain of Argentina's foreign debt. On January 6, 2002, the Argentine Congress enacted the Public Emergency Law, which introduced dramatic changes to Argentina's economic model and amended the currency board that had pegged, statutorily, the Peso at parity with the U.S. Dollar since the enactment of the Convertibility Law in 1991. The Public Emergency Law empowered the Argentine government to implement, among other things, additional monetary, financial and foreign exchange measures to overcome the economic crisis in the short term, such as setting the exchange rate between the Peso and foreign currencies. Since the appointment on January 1, 2002 of a new administration by the Argentine Congress, the Argentine government has implemented measures, whether by executive order, Central Bank regulation or legislation passed by the Argentine Congress, attempting to address the effects of amending the Convertibility Law, recover access to financial markets, reduce government spending, restore liquidity to the financial system, reduce unemployment and generally stimulate the economy.

As detailed below, Argentina has experienced a severe recession and a political and economic crisis, and the abandonment of Dollar-Peso parity has led to significant devaluation of the Peso against major international currencies. Argentine government measures concerning the economy, including measures related to inflation, interest rates, foreign exchange controls, renegotiations of public utility tariffs, pesification and freezing of public utility tariffs and taxes, have had and could continue to have a material adverse effect on private sector entities, including us. In addition, the general economic situation in Argentina, including high unemployment, material decreases in incomes or other factors may lead the executive, legislative or judicial branches of the Argentine government to issue decrees, adopt laws or issue injunctions, respectively, requiring gas distribution companies (including us) to end, either temporarily or on a longer-term basis, their practice of terminating service for nonpayment as presently authorized by the regulatory framework under which they operate. Any such action could have a material adverse effect on our income and could also jeopardize our continued existence. Although economic indicators of the Argentine economy stabilized in 2003, including an increase in gross domestic product of 8.7% in 2003, we cannot assure you that future economic, financial, political and social developments in Argentina, over which we have no control, will not further adversely affect our business, financial condition or results of operations or our ability to make payments of principal and/or interest on our outstanding indebtedness. The macroeconomic situation in Argentina and the actions taken by the Argentine government pursuant to the Public Emergency Law will continue to affect us.

In the fourth quarter of 1998, the Argentine economy entered into a recession that caused the GDP to decrease by 3.4% in 1999. Following his election in October 1999, President Fernando De la Rúa was confronted with the challenges of dealing with Argentina's enduring economic recession and obtaining political consensus on critical issues related to the economy, public sector spending, legal reforms and social programs. The De la Rúa administration failed to address adequately the growing public sector deficit, both at the federal and at the provincial level. GDP contracted by 4.4% in 2001 and 10.9% in 2002 but grew 8.7% in 2003, according to the Argentine Ministry of Economy. The unemployment rate increased from an estimated 15.4% in May 2000 to 16.4% in May 2001 and 18.3% in October 2001 but decreased to 14.5% in December 2003. As tax revenues dropped as a result of the recession, the public sector relied increasingly on financing from local and, to a lesser extent, foreign banks, effectively limiting the ability of private sector companies to obtain bank financing. As the public sector's creditworthiness deteriorated, interest rates increased dramatically, bringing the economy to a virtual standstill. The lack of confidence in the country's economic future and its ability to sustain the Peso's parity with the U.S. Dollar led to massive withdrawals of bank deposits. Despite assurances to the contrary, on December 1, 2001, the Argentine government effectively froze bank deposits and introduced foreign exchange controls to restrict capital outflows. The measures were perceived as further paralyzing the economy for the benefit of the banking sector and caused a substantial increase in social unrest as well as sporadic incidents of violence. On December 21, 2001, after declaring a state of emergency and suspending civil liberties, President De la Rúa resigned in the midst of an escalating political, social and economic crisis.

On January 1, 2002, following the resignation of interim President Rodríguez Saá only one week after his appointment, the Argentine Congress elected Eduardo Duhalde, a Peronist senator who had lost the presidential election to President De la Rúa in 1999, as President to serve until December, 2003, the end of the remaining term of former President De la Rúa. Since his appointment on January 2, 2002, President Duhalde and the Argentine government undertook a number of far-reaching initiatives, including:

• ratifying the suspension of payment of certain of Argentina's sovereign debt declared by interim President Rodríguez Saá;
• amending the Convertibility Law to end the fixed rate of exchange of one Peso per U.S. Dollar, with the resulting volatility and devaluation of the Peso;
• converting certain U.S. Dollar-denominated loans by financial institutions in the Argentine financial system into Peso-denominated loans ("pesification") at a one-to-one exchange rate plus an adjustment for variations in consumer prices (Coeficiente de Estabilización de Referencia or "CER") or in salaries (Coeficiente de Variación de Salarios or "CVS"), as the case may be;
• converting U.S. Dollar-denominated bank deposits in financial institutions in the Argentine financial system into Peso-denominated bank deposits at an exchange rate of Ps.1.40 per U.S. Dollar plus an adjustment pursuant to CER;
• requiring the obligatory sale, currently suspended, by all banks of all their foreign currency held in Argentina to the Argentine Central Bank at an exchange rate of Ps.1.40 per U.S.$1.00 (in the case of U.S. Dollars) or at an equivalent rate (in the case of others currencies);
• converting most foreign currency-denominated obligations of entities in Argentina to non-financial institutions in Argentina into Peso-denominated obligations at a one-to-one exchange rate (in the case of obligations denominated in Dollars) or at a comparable rate (in the case of obligations denominated in another foreign currency), plus an adjustment pursuant to the CER or the CVS, as the case may be, plus an equitable adjustment in certain cases;
• restructuring the maturity of, and interest rates on, domestic bank deposits and maintaining restrictions on withdrawals of those deposits;
• enacting an amendment to the charter of the Central Bank to allow it to (1) print currency in excess of the amount of foreign reserves it holds, (2) make short-term advances to the Argentine government and (3) provide financial assistance to financial institutions in the Argentine financial system with liquidity constraints or solvency problems;
• converting public service tariffs, including ours, which had been originally calculated in U.S. Dollars, into Pesos at a one-to-one exchange rate (pesification of tariffs);
• freezing public service tariffs, including ours, and not permitting indexation of any kind in contracts executed after the effective date of the Public Emergency Law;
• authorizing the Argentine government to renegotiate public utility contracts, licenses and concessions, and service tariffs, including ours;
• imposing restrictions on transfers of funds abroad subject to certain exceptions (all of which applied to us and have recently been lifted); and
• requiring the deposit into the Argentine financial system of foreign currency earned from exports, subject to certain exceptions.

Commercial and financial activities in Argentina were virtually paralyzed in 2002, further aggravating the economic recession that precipitated the current crisis. Moreover, due to ongoing social and political protests, Argentina's economy and society continue to or may face risks including: (a) civil unrest, rioting, looting, nationwide protests, widespread social unrest and strikes, (b) expropriation, nationalization and forced renegotiation or modification of existing contracts, (c) changes in monetary and taxation policies, including tax increases and retroactive tax reforms, and (d) mandatory salary increases.

The deepening recession, including a 10.9% decrease in GDP in 2002, high unemployment and underemployment that preceded and that has followed the devaluation of the Peso and high inflation have led to a reduction of wages in real terms and of disposable income and resulted in changes in consumer behavior across all sectors of the Argentine population.

On April 27, 2003, presidential elections were held in Argentina. The newly elected president, Néstor Kirchner, took office on May 25, 2003. We believe the Kirchner administration has retained substantially all of the economic programs of the previous government, maintaining a competitive exchange rate for exports. Export payments continue to be an important source of revenue for the Kirchner administration, due in part to record agricultural production and high international prices for agricultural commodities during 2002 and 2003.

In 2003, some economic indicators of the Argentine economy began to stabilize. Inflation has also stabilized as the Peso has strengthened versus the U.S. dollar. As of December 31, 2003, the exchange rate was Ps.2.935 per U.S. dollar compared to Ps.3.370 per U.S. dollar as of December 31, 2002. Notwithstanding this recent and partial stabilization, the Argentine economy has quickly deteriorated in the past, and may quickly deteriorate in the future, and we cannot assure you if, or when, the Argentine economy will begin a sustained recovery.

Due to a failure to meet fiscal deficit targets, including those for the fourth quarter of 2001, on December 5, 2001 the International Monetary Fund ("IMF") suspended further disbursements to Argentina. This decision deepened the economic and political crisis.

On December 23, 2001, interim President Rodríguez Saá declared the suspension of debt payments on approximately U.S.$63 billion of Argentina's sovereign debt which amounted to approximately U.S.$144.5 billion as of December 31, 2001. On January 2, 2002, President Duhalde ratified this decision. Consequently, the principal international rating agencies lowered the rating of Argentina's sovereign debt to default status.

In January 2002, President Duhalde initiated talks with the IMF. On January 24, 2003, the IMF approved an eight-month Stand-by Credit Facility for Argentina of approximately U.S.$2.98 billion that was designed to provide transitional financial support through the period ending August 31, 2003. The Stand-by Credit Facility, which replaced Argentina's prior arrangements with the IMF, did not provide new funds but rather was to be used to refinance existing obligations. In addition, the IMF agreed to extend by one year the maturity of U.S.$3.8 billion in payments Argentina was scheduled to make through August 2003. On March 19, 2003, the IMF made available to Argentina U.S.$307 million under the Stand-by Credit Facility. On September 10, 2003, the Argentine government and the IMF reached an agreement to postpone the maturity date of certain amounts owed by Argentina to the IMF and other international credit organizations. The main terms of the agreement include the postponement of the maturity date of U.S.$24.61 billion principal amount of debt owed by Argentina to international credit organizations, of which U.S.$12.5 billion is owed to the IMF, U.S.$5.622 billion is owed to the World Bank and the Interamerican Development Bank, and U.S.$3.488 billion is owed to Paris Club creditors, subject to payment by Argentina to the IMF of U.S.$2.1 billion in interest which came due on September 8, 2003. The agreement includes several obligations of the Argentine government, including the obligation to renegotiate its debt with private creditors, to renegotiate the agreements with public utility companies and to review the tariffs charged under such agreements in light of the interests of users, the income of such companies and the possible effect of such renegotiation on the distribution of income. Argentina made the required interest payment on September 11, 2003. The agreement was formally approved by the IMF on September 20, 2003.

On March 17, 2004 a Decree was published in the Official Gazette that provided for the creation of a syndicate of commercial banks to act as dealer managers for the restructuring of the sovereign debt, in accordance with the commitment recently made to the IMF. The members are Merrill Lynch, UBS Investment Bank and Barclays Capital for the international offering, and BBVA Banco Francés, Banco Galicia y Buenos Aires and Banco Nación for the domestic offering.

In an effort to restructure its sovereign debt held by private sector investors, the Argentine government has offered to its creditors three types of bonds in exchange for the Argentine sovereign debt they hold as well as bonds in lieu of past due interest on such sovereign debt. In general, those investors have rejected the Argentine government's offer and certain of those investors have instituted legal proceedings against the Argentine government to enforce their Argentine sovereign debt.

We cannot predict if the restructuring proposed by the government or any other restructuring it may propose will end in a successful restructuring of the Argentine sovereign debt, or the consequences that failure to restructure such debt may have on the Argentine economy.

The Argentine government's current insolvency and inability to obtain financing can be expected to significantly affect its ability to implement any reforms and restore economic growth. This may result in deeper recession, higher inflation, greater unemployment, and greater social unrest. If this happens, our financial condition and results of operations would likely continue to be materially adversely affected.

In 2001, especially in the fourth quarter, a significant amount of deposits was withdrawn from institutions in the Argentine financial system as a result of increasing political instability and uncertainty. This run on deposits had a material adverse effect on the Argentine financial system as a whole. The magnitude of deposit withdrawals, the general unavailability of external or local credit and the obligatory restructuring of public sector debt with local holders (a substantial portion of which was placed with banks), created a liquidity crisis which undermined the ability of Argentine banks to pay their depositors. To prevent a run on the U.S. Dollar reserves of local banks, on December 1, 2001 the De la Rúa administration restricted the amount of cash that local depositors could withdraw from banks and introduced foreign exchange controls restricting capital outflows. These measures, known as the "corralito", were replaced by the Duhalde administration which, in an attempt to stop the continuing drain on bank reserves, implemented measures, known as the "corralón", which regulated how and when money in savings and checking accounts and maturing time deposits would become available to depositors. Despite the corralito and corralón, between January 1 and April 30, 2002, approximately Ps.13.0 billion were withdrawn from banks as the result of judicial orders, an average of Ps.109 million per day.

On February 4, 2002, pursuant to Emergency Decree No. 214/02, the Argentine government converted all foreign currency-denominated bank deposits with institutions in the Argentine financial system into Peso-denominated deposits at the exchange rate of Ps.1.40 per U.S. Dollar (in the case of obligations denominated in Dollars) or at a comparable rate (in the case of obligations denominated in another foreign currency), with an adjustment of such new Peso deposits pursuant to the CER. The Argentine government also announced the conversion of most foreign currency-denominated debts to financial institutions in the Argentine financial system into Peso-denominated debts at a one-to-one exchange rate (in the case of obligations denominated in Dollars) or at a comparable rate (in the case of obligations denominated in another foreign currency), to be adjusted pursuant to the CER. The disparity between the rate of conversion to Pesos of foreign currency-denominated deposits with the financial institutions in the Argentine financial system and the rate of conversion to Pesos of foreign currency-denominated loans by those financial institutions, referred to as "asymmetric pesification", had a substantial material adverse effect on the financial condition of those financial institutions. In order to mitigate such adverse effect, the Argentine government adopted Decree No. 214/02, Decree No. 905 and other applicable resolutions to compensate those financial institutions for the damages they suffered on account of asymetric pesification of loans and deposits. In March 2002, the Argentine government issued Decree No. 762/02 by which it replaced the CER with the CVS for certain debts (principally debt owed by individuals). In addition Law No. 25,796, dated October 29, 2003, adopted the CVS to adjust individuals debt with financial institutions and to compensate financial institutions for the loss derived from application of the CVS to their loans to individuals instead of the CER which is applicable to loans by financial institutions to other borrowers.

In a decision dated March 5, 2003, the Supreme Court of Argentina struck down on constitutional grounds the mandatory conversion to Pesos of U.S. Dollar deposits held by the Province of San Luis with Banco Nación pursuant to Emergency Decree No. 214/02. Under Argentine law, Supreme Court rulings are limited to the particular facts and defendant in the case; however, lower courts tend to follow the precedents set by the Supreme Court. There are also numerous other cases in the Argentine judicial system challenging the constitutionality of pesification pursuant to the Public Emergency Law. The Supreme Court's decision creates uncertainty for the Argentine banking system as a whole and raises the possibility that the Argentine government may be required to provide additional financial assistance to banks in the form of U.S. Dollar-denominated bonds, a step which would add to the country's outstanding debt and is viewed with concern by holders of Argentina's outstanding bonds. As of the date of our Annual Report, there has been no other decision of the Supreme Court of Argentina regarding this matter.

Through Decree No. 739/03 dated March 28, 2003 the Argentine government made a further attempt to eliminate the corralón by giving holders of deposits originally denominated in foreign currency the option to exchange such deposits for Pesos at a rate of Ps.1.40 per U.S.$1.00 (in the case of deposits originally denominated in U.S. Dollars) or at a comparable rate (in the case of deposits originally denominated in another foreign currency) adjusted pursuant to the CER, plus accrued interest, and for 10-year U.S. Dollar denominated bonds to be issued by the Argentine government in an amount equal to the difference between the amount in Pesos to be received by the depositors and the Peso equivalent of the amount of the original deposit at the exchange rate applicable on April 1, 2003. This offer was accepted by holders of approximately 50% of such deposits.

The relative stability of the exchange rate and the lower inflation rate and higher investor confidence as compared to the 2001-2002 period have led to a gradual increase in the level of deposits with the financial system during 2003. However, certain interest rates have dropped due to the high liquidity in the financial system resulting from the fact that loans by the financial system have not increased at a rate comparable to the rate of increase in deposits. Therefore, financial institutions are less focused on liquidity and more on lack of solvency and profitability.

Compensation from the government to financial institutions in the Argentine financial system as a result of the asymmetric pesification of loans and deposits and an increase in lending by the financial system to the private sector may be necessary in order to prevent future collapses that could hold back the current pace of recovery of the Argentine economy. Such collapse, and its effects on our customers would have a material adverse effect on us, including lower usage of the services we provide and a high level of uncollectible accounts.

Notwithstanding the existence of high liquidity levels, we cannot assure you that companies, like us, with foreign currency denominated financial debt will obtain sufficient funds to refinance their debt.

The Argentine government's economic policies and any future decrease in the value of the Peso against the U.S. Dollar could adversely affect our financial condition and results of operations. The Peso has been subject to large devaluation in the past and may be subject to significant fluctuations in the future.

The Public Emergency Law put an end to ten years of U.S. Dollar-Peso parity and authorized the Argentine government to set the exchange rate between the Peso and other currencies. The Argentine government initially established a dual exchange rate of Ps.1.40 per U.S. Dollar for certain transactions and a free-floating rate for all other transactions. This dual system was later eliminated in favor of a single free-floating exchange rate for all transactions. Since the floating of the Peso, the Peso has fluctuated significantly, causing the Central Bank to intervene in the market to limit changes in the value of the Peso by selling U.S. Dollars and, lately, by buying U.S. Dollars. As of June 23, 2004, the exchange rate was Ps. 2.9430 per U.S. Dollar. See Item 3: "-Exchange Rate Information" for additional information regarding Peso/U.S. Dollar exchange rates.

We cannot assure you that future policies adopted by the Argentine government will be able to limit the volatility of the value of the Peso and, therefore, the Peso could be subject to significant fluctuations which could materially and adversely affect our financial conditions and results of operations. Also, the Argentine government is facing severe fiscal problems as a result of the devaluation of the Peso. As most of the Argentine government's financial liabilities are U.S. Dollar-denominated, there has been an increase in Peso terms in the amount of the Argentine government's total debt as a result of the Peso's devaluation. Peso-denominated tax revenues constitute the majority of the Argentine government's tax receipts and, notwithstanding their nominal increase due to inflation, tax revenues have decreased in U.S. Dollar terms. Therefore, the Argentine government's ability to honor its foreign debt obligations has been materially and adversely affected by the devaluation of the Peso.

We realize substantially all of our revenues in Argentina and in Pesos and, as a result, the devaluation of the Peso and the pesification and freezing of our tariffs have had a material adverse effect on our ability to service our indebtedness which is largely denominated in foreign currency and has significantly increased in Peso terms. In addition, the Peso cost of the approximately 12% of our expenses denominated in foreign currency and of our imported goods (including capital goods) has increased due to such devaluation. Furthermore, the devaluation of the Peso has had a material adverse effect on our financial condition as the Peso-denominated book value of our assets has not increased at the same rate as has the Peso-denominated book value of our largely foreign currency-denominated indebtedness. Any further depreciation of the Peso against the U.S. Dollar will correspondingly increase the amount of our debt in Pesos, with further adverse effects on our results of operations and financial condition. As of December 31, 2003, our debt in foreign currency was the equivalent of U.S.$461.1 million.

Given the continuing economic crisis in Argentina and the related economic and political uncertainties, it is impossible to predict whether, and to what extent, the value of the Peso may further depreciate or appreciate against the U.S. Dollar and how those uncertainties will affect consumption of gas services. Moreover, we cannot predict whether the Argentine government will further modify its monetary policy and, if so, what impact these changes could have on our financial condition and results of operations.

On January 24, 2002, the Argentine government amended the charter of the Central Bank to allow the Central Bank to print currency without having to maintain a fixed and direct relationship to foreign currency and gold reserves. This amendment allows the Central Bank to make short-term advances to the Argentine government to cover its anticipated budget deficits and to provide assistance to financial institutions with liquidity or solvency problems.

If the Central Bank issues significant amounts of currency to finance public sector spending or to assist financial institutions in distress, inflation could result. During 2002, the Argentine consumer price index increased 41% and the wholesale price index increased 119%. During 2003 the Argentine consumer price index increased by 3.7% and the wholesale price index increased by 2.0%. Although the Argentine government has stated that its policy is to limit increases in the consumer and wholesale price indexes to comparable percentages, we cannot assure you that the current or any future administration will be able to do so. In the past, inflation materially undermined the Argentine economy and the Argentine government's ability to create conditions that would permit growth. If the value of the Peso cannot be stabilized by positive expectations for Argentina's economic future as well as by strict fiscal and monetary policies, an increase in inflation rates can be expected.

We derive the principal portion of our revenues from monthly basic charges payable in Pesos. Prior to the enactment of the Public Emergency Law, those charges were linked to a rate per unit of usage calculated in U.S. Dollars and we also had the right to adjust that rate semiannually in accordance with variations in the U.S. producer price index. Pursuant to the Public Emergency Law, provisions requiring adjustments in agreements for the provision of public utility services between the Argentine government and the providers of those services (including ourselves) based on foreign inflation indexes and all other indexation mechanisms have been revoked, and the tariffs for the provision of such services are now converted from their original Dollar values to Pesos at a rate of Ps.1.00 per U.S.$1.00. Unless our tariffs increase at a rate at least equal to the rate of inflation, any further increase in the rate of inflation will result in decreases in our revenues in real terms and will adversely affect our results of operations. We are in the process of renegotiating our tariffs with the Argentine government. We cannot give you any assurance that the outcome of this renegotiation will be favorable to our future economic and financial position. See Item 3: "-Risk Factors Relating to Us".

Beginning in December 2001, the Argentine authorities implemented a number of monetary and currency exchange control measures that included restrictions on the withdrawal of funds deposited with banks and tight restrictions on transfers abroad. While most restrictions in connection with repayments to foreign creditors have been lifted, we cannot assure you that they will not be reinstated and, if they are, whether they will be more or less restrictive than they were before. Currently, local companies may, without the Argentine Central Bank's approval: (a) transfer funds abroad for the payment of interest when due (or in advance of the due date) and redeem interest in the context of a restructuring process, and (b) transfer funds abroad for the payment of principal at maturity (or, subject to certain requirements, up to 90 days in advance of the due date) and redeem principal in the context of a restructuring process, provided that (x) the amount prepaid does not exceed the present value of the debt which is being prepaid, and (y) the new terms and conditions of the restructured debt, including the amounts prepaid, do not result in an increase of the present value of the entire debt. The present value is to be calculated based on the implied interest rate for U.S. Dollar forward transactions in regulated markets. Prior to the transfer of funds abroad for the payment or redemption of principal and interest, the financial entity making the transfer must verify that the debtor has complied with all information requirements. We cannot assure you that restrictions on transfers of funds abroad will not be reinstated and, if they are, that they will not prevent us from servicing our foreign debt.

Our Annual Financial Statements have been prepared assuming that we will continue as a going concern. Our independent auditors, Price Waterhouse & Co., Buenos Aires, Argentina, issued a report on our financial statements as of and for the year ended December 31, 2003 stating that we were negatively impacted by the deterioration of the Argentine economy, the Argentine government's adoption of various economic measures including the violation of the contractually-agreed license to provide natural gas services and the devaluation of the Argentine Peso, circumstances that led us to announce on March 25, 2002 the suspension of payment on our financial debt. In their opinion, these circumstances raise substantial doubt about our ability to continue as a going concern. Our financial statements as of and for the year ended December 31, 2003 do not include any adjustments that might result from the outcome of this uncertainty. See Item 18: "Financial Statements".

As of December 31, 2003 our aggregate financial debt amounted to Ps.1,423.9 million (the equivalent of U.S.$485.2 million at that date). On March 25, 2002, we suspended principal and interest payments on all of our financial indebtedness and we are currently managing our cash flow in order to be able to continue as a going concern. See Item 5: "Operating and Financial Review and Prospects-Liquidity and Capital Resources".

Our results of operations, financial condition and cash flows have been materially and adversely affected as a direct result of several crisis-related events:

• the massive devaluation of the Peso;
• the conversion to Pesos of our U.S. Dollar-denominated tariffs on a one-to-one basis, leading to a mismatch between our Peso-denominated cash flow and foreign currency-denominated debt payments;
• the freezing of our tariffs; and
• the deterioration in the ability of our customers to pay their bills. See Item 3: "- Risk Factors - Risk Factors Related to Argentina - Substantially all our revenues are earned in Argentina and, thus, are highly dependent on economic and political conditions in Argentina".

As a result of our suspension of payments of principal and interest on our financial debt, our creditors are entitled to require immediate repayment of so much of such debt as has not already matured and to seek to exercise remedies, including without limitation, seeking to obtain and enforce attachment against our assets. If we are not able to reach a satisfactory agreement with our creditors we will likely be forced to conduct reorganization or liquidation proceedings, which could cause the forfeiture of our License. See Item 4: "Information on the Company-Business Overview-Regulatory Framework-The Gas Act and our License-Expiration". On September 30, 2003, we received a notification from Citibank, N.A., acting as Trustee for the Floating Rate Series C Notes, announcing the acceleration of such notes.

As of the date of our Annual Report, two bankruptcy proceedings have been brought against us by holders of Negotiable Obligations. Those proceedings are still pending.

On November 7, 2003, we publicly announced a restructuring proposal in respect of our financial debt involving a cash tender offer and a solicitation (the "APE Solicitation") of consent from our financial creditors to an "Acuerdo Preventivo Extrajudicial" or "APE", an out-of-court reorganization agreement which would have the effect of restructuring all our financial debt. See Item 5: "Operating and Financial Review and Prospects - Liquidity and Capital Resources - Debt" for a description of our debt restructuring plan.

In addition to rights granted by law to our bank creditors to set off against our deposits with them amounts we owe them, certain of our agreements with certain of our bank creditors authorize them to debit our accounts for amounts we owe them or to set off such amounts against our deposits with them. One of our bank creditors has taken such action, however, we cannot assure you that one or more of our other bank creditors will not do so in the future or that, if taken, such actions will not have a material adverse effect on us.

While we are engaged periodically in discussions with our financial creditors that have not accepted our APE Solicitation with a view to agreeing with them on mutually satisfactory terms on which our financial debt may be restructured, we can give no assurance that we will be able to refinance our debt at all or on terms which are acceptable to us. In order to ensure the continuity and quality of public utility services, Decree No. 1834/02 provided that neither the filing of a reorganization proceeding by us nor the filing of a bankruptcy petition against us on or before December 10, 2003 would cause the termination of our License. This term was extended until December 31, 2004 by Law. No. 25,820. We cannot assure you that this Decree will remain in effect after that date or that a failure to refinance our debt may not result in the forfeiture of our License.

Future negative economic developments may result in the adoption of further measures by the Argentine government, including changes to measures already adopted. We cannot assure you what effect these developments and measures may have on the value of our assets or our results of operations.

In January 2002, pursuant to the Public Emergency Law, the tariffs which we charge our customers were converted from their original Dollar values to Pesos at a rate of Ps.1.00 per U.S.$1.00 and our tariffs were also frozen. The Public Emergency Law also authorized the Argentine government to renegotiate its contracts (including our License) related to public works and services. We are currently in negotiations with the body established by the Argentine government to renegotiate such contracts (the "Renegotiation Commission") regarding the tariffs we may charge in the future.

According to the Public Emergency Law, the government must consider the following factors when negotiating the new tariff regime:

• the effect of these tariffs on the competitiveness of the general economy and on the distribution of income,
• the service standards,
• the investments which licensed companies have been authorized to make and have made,
• consumer protection and accessibility of the services,
• the security of the systems, and
• profitability of the public service companies.

The outcome of the tariff renegotiation is uncertain both as to its timing and final form. Therefore we cannot assure you if and when the renegotiation process will conclude nor can we assure you whether the renegotiation process will result in additional restrictions (for example, required capital expenditures which prove to be unprofitable) or that the tariffs that result from the renegotiation will maintain their value in U.S. Dollars or Pesos over time to compensate for any past and future increases in inflation or devaluation of the Peso. Inflation in terms of the wholesale price index and the consumer price index for the year ended December 31, 2002 was 119% and 41%, respectively, and the devaluation of the Peso against the U.S. Dollar amounted to 237% during that year. Inflation in terms of the wholesale price index and the consumer price index for the year ended December 31, 2003 was 2.0% and 3.7%, respectively, and the devaluation of the Peso against the U.S. Dollar amounted to 43.5% during such year.

Pursuant to the process established for the renegotiations, we have submitted both an interim request for a tariff increase and a comprehensive proposal regarding our tariff regime within the prescribed time periods. We do not know when the renegotiations will be concluded and whether they will be concluded in a manner that will not have a material adverse effect on us.

On January 24, 2003, the Argentine government issued Emergency Decree No. 120/03 which established that the Argentine government may provide for interim tariff increases or adjustments until the process of renegotiation of public service contracts and licenses required under the Public Emergency Law is completed. On January 30, 2003, Decree No. 146/03 and Resolution No. 2787 issued by the Ente Nacional Regulador del Gas ("ENARGAS") provided an interim tariff increase of approximately 10% for the electricity and gas sectors. On January 30, 2003 we started invoicing our customers with the increased tariffs. However, the National Ombudsman, the Ombudsman of the City of Buenos Aires and a number of consumer advocacy organizations filed objections to both decrees with various courts and, pursuant to these objections, a court issued a preliminary injunction prohibiting the increase provided for by these tariffs. As a result of such injunction, on February 27, 2003 we suspended the invoicing of our customers at the increased tariff level and resumed invoicing at the former lower tariff levels. We cannot assure you that we will receive any further interim tariff increase, or if we do, that we will not be enjoined from increasing our tariffs pursuant to any such increase. Furthermore, even if we are successful in obtaining approval of our proposed tariff increases, we cannot assure you that such increases will not result in greater rates of payment default by our customers.

Under the Public Emergency Law , gas distribution and transportation tariffs were converted from U.S. Dollars to Pesos at a one-to-one rate and were frozen and the price charged by producers of natural gas was pesified and frozen, resulting in the price of natural gas being substantially lower on an energy-equivalent basis than the prices of competing fuels. These factors led to a substantial increase in the demand for natural gas and, combined with low investments in facilities for the production, transportation and distribution of natural gas as a result of the unfavorable economic environment, produced a large mismatch between demand for and supply of natural gas and gas transportation capacity.

As a consequence of the foregoing, we cannot assure you that we will be able to obtain sufficient natural gas and natural gas transportation capacity to fulfill the demand of natural gas of our customers.

We operate in a regulated industry and, accordingly, our results of operations depend on the applicable regulatory framework and the interpretation and application of such framework by ENARGAS, the agency of the Argentine government created to regulate privatized gas transportation and distribution companies. We have disagreed repeatedly with ENARGAS' interpretation and application of the regulatory framework. Pursuant to the framework that regulated the public service of distribution of gas in Argentina, the distribution tariffs are required to be adjusted periodically to reflect changes in the cost of purchased gas. Notwithstanding the foregoing, ENARGAS has limited on several occasions the pass-through of the cost of gas we purchased, thus preventing us from recovering approximately Ps.25 million with respect to our purchases of gas from 1995 through 2001. We have filed appropriate appeals in respect of these matters, some of which have been rejected. Future interpretations and applications of the regulatory framework by ENARGAS, including future limitations on the pass-through of material gas purchase costs, could materially and adversely affect us. See Item 4: "Information on the Company-Business Overview-Regulatory Framework-Tariffs-US PPI Adjustments to Tariffs and Related Disputes", "Regulatory Framework-Tariffs-Gas Purchase Price Adjustments to Tariffs and Related Disputes" and "-Regulatory Framework".

On January 10, 2000, ENARGAS issued Resolution No. 1,477, which adjusted our tariffs as of January 1, 2000 without including an adjustment to reflect an increase in the US Producer Price Index Industrial Commodities ("US PPI") as contemplated by our License prior to the enactment of the Public Emergency Law. This adjustment would have resulted in a 3.78% increase in the transportation and distribution components of our tariffs as of that date. This was due to the fact that, in negotiations with ENARGAS and the Argentine government, the distribution and transportation companies agreed to defer the billing of the amounts related to the US PPI adjustment for the first six months of such year. Moreover, ENARGAS established, through the same resolution, the methodology to recover during the ten-month period following July 1, 2000 the uncollected amounts attributable to the application of the US PPI to our tariffs for the first half of 2000. See Item 4: "Information on the Company-Business Overview-Regulatory Framework-Tariffs".

On July 17, 2000, the distribution and transportation companies, ENARGAS and the Argentine government agreed to increase tariffs as from July 1, 2000 (a) to reflect the US PPI adjustment which, by virtue of the agreement referred to in the preceding paragraph, was not added to tariffs as of January 1, 2000 and (b) by the amount which would have been billed during the first six months of 2000 on account of such US PPI adjustment if it had been added to tariffs on January 1, 2000 and to have such increase recovered, together with accrued interest, as follows: (x) 30% from July 1, 2000 through April 30, 2001, and (y) the remaining 70% from October 1, 2000 through April 30, 2001. Additionally, they agreed to defer the billing of the amounts related to the US PPI adjustments for the period from July 1, 2000 through June 30, 2002 and to create a "PPI Stabilization Fund". The PPI Stabilization Fund became effective on July 1, 2000 and was comprised of the amounts that result from the difference between the tariffs actually charged and the tariffs that would have been charged through June 30, 2002 if such US PPI adjustment had been added to tariffs as contemplated by the regulatory framework. The Argentine government ratified the foregoing by Decree No. 669 dated August 4, 2000. In light of the foregoing, we accrued the deferred amounts during the deferral period, together with interest at an 8.2% annual rate.

On August 29, 2000 we were notified that, in a proceeding initiated by the National Ombudsman of Argentina, a court order had been issued suspending Decree No. 669 on the grounds that the tariff adjustment pursuant to a mechanism of indexation based on a foreign index was illegal under the Convertibility Law. An appeal against the injunction and a challenge to the National Ombudsman's jurisdiction was made by ENARGAS, the Ministry of Economy and the gas licensees, including us, but was rejected. ENARGAS subsequently informed us that the tariffs would revert to the ones in force prior to Decree No. 669, i.e., without the US PPI linkage. Since the Public Emergency Law eliminated the US PPI adjustment of tariffs, we are not pursuing the appeal of such decision to the Supreme Court. However, we will continue to challenge the decision ruling the US PPI adjustment illegal and will try to recover it up to the effective date of the Public Emergency Law.

In view of the above described scenario and the recent developments which have occurred in the context of the Argentine financial crisis explained above, we wrote off as an "Extraordinary Loss" in 2001 the difference between the income we had accrued during 2000 and 2001 attributable to unbilled US PPI adjustments less expenses we had accrued during such period on account of increases in transportation tariffs attributable to US PPI adjustments to those tariffs which we had paid to TGS and TGN.

In May, July and August 2002, ENARGAS issued resolutions authorizing from May 1, 2002 tariff increases pursuant to tariff values in Pesos for the 2001 winter months. Such increases, however, did not reflect the seasonal incremental cost of gas at the wellhead. In addition, pursuant to Decree No. 146/03 and ENARGAS' Resolution No. 2787 issued on January 30, 2003, a "social tariff" was created in order to reduce the price of gas for poor and unemployed users. Such reduction of the "social tariff" is offset by an increase in the tariffs charged to other users. A few days later, the court suspended these increases, following the injunctions filed by the National Ombudsman, the Ombudsman of the City of Buenos Aires and certain advocacy organizations.

As noted in Item 4: "Information on the Company-Business Overview-Commercial Contracts-Natural Gas Purchase Contracts-Limitations on Short-term Gas Purchase Contracts", we expect to purchase a portion of our gas supplies in the spot market. We can give no assurance that we will be permitted to pass through to our tariffs the full cost of these spot purchases.

We are currently renegotiating our License and our tariffs. The outcome of our License and tariff renegotiation could materially and adversely affect our operations and financial results.

In January 2002, pursuant to the Public Emergency Law, the tariffs which we charged our users were converted from their original Dollar values to Pesos at a rate of Ps.1.00 per U.S.$1.00 and our tariffs were also frozen. The Public Emergency Law also authorized the Argentine government to renegotiate its contracts (including our License) related to public works and services. We are currently in negotiations with the commission established by the Argentine government to renegotiate such contracts (the "Renegotiation Commission") regarding the tariffs we may charge in the future.

The outcome of the tariff renegotiation is uncertain, both as to its timing and final form. Therefore, we cannot assure you if and when the renegotiation process will conclude, whether the renegotiation process will result in additional restrictions (for example, required capital expenditures which prove to be unprofitable) or that the tariffs that result from the renegotiation will maintain their value in U.S. Dollars or Pesos. As a result of this uncertainty the outcome of the renegotiation of our License and tariffs could have a material adverse effect on our results of operations and profitability.

If our losses for any year exceed our reserves plus 50% of our capital stock at the end of that year, we would be required to reduce our capital stock pursuant to Article 206 of the Argentine Corporations Law unless we receive a capital contribution sufficient to restore our financial condition. In addition, if our shareholders' equity becomes negative (that is, if our liabilities exceed our assets) at any year-end, we will be required to be dissolved and liquidated pursuant to Article 94 of the Argentine Corporations Law unless we receive a capital contribution which once more causes our assets to exceed our liabilities. On July 16, 2002 the Argentine government issued Decree No. 1,269/02 which suspended the enforcement of such provisions of the Argentine Corporations Law until December 10, 2003. This term was extended until December 10, 2004 by Decree No. 1293/2003. We cannot assure you that, should such provisions of the Argentine Corporations Law again be in force, our future losses will not require the reduction of our capital or our dissolution and liquidation if we do not receive appropriate capital contributions.

In light of recent macroeconomic developments in Argentina and the negative impact that such macroeconomic events had on us, we are unable to access the capital markets, and third-party financing sources, both domestically and internationally, are no longer available to us in amounts sufficient to enable us to refinance our debt obligations. In addition, as a result of the devaluation of the Peso and the pesification of our tariffs, our internally generated funds alone are not sufficient to meet our debt obligations as they come due. Furthermore, we are unable to determine whether the current macroeconomic environment in Argentina will worsen in the short term and further harm our ability to meet our current and future debt obligations.

We have outstanding as of March 31, 2004 the following major indebtedness:

• negotiable obligations due 2002-2004 in the principal amounts of U.S.$230 million and Euros110 million; and
• bank financing outstanding totaling the equivalent of U.S.$73 million.

We did not experience any significant problems regarding deliveries of gas from our suppliers during the winters of 2001, 2002 and 2003.

Because of the increase in demand for natural gas and shortages in both supply and transportation capacity, we may be unable to supply all gas demanded by our customers on certain days during the year. In such a case our License requires us to interrupt deliveries to our industrial and CNG customers before interrupting supply to our residential customers. If after taking such actions we are still unable to supply our residential customers, our License requires that we declare a state of emergency and follow the instructions of ENARGAS. In such cases, after an administrative proceeding we might be subject to a fine of up to U.S.$ 500,000 and eventually to a cancellation of our License. In addition, we may be exposed to liability for damages caused to our customers by such interruptions. If we are unable for any reason to supply gas demanded by our customers for a significant period of time, our financial condition and results of operations may be materially and adversely affected.

Our sales and earnings are highly sensitive to weather conditions in Argentina. Demand for natural gas is, and, accordingly, our revenues are, significantly higher during the winter months than during the rest of the year. Unseasonably warm weather in our service area during the winter months can cause a significant reduction in demand for gas, especially among residential customers, our largest single source of revenues and the class of customer the tariff for which provides us with our highest margins. Since the regulatory scheme under which we operate does not allow us to recover the cost of our unused firm transportation capacity through our tariffs, the adverse effect of a weather-related reduction in demand of our residential customers may be compounded if we are unable to use our transportation capacity for other classes of customers or to dispose of our surplus capacity.

Under the Argentine electrical regulatory system, electricity generators are dispatched in ascending order of marginal cost of generation. Since hydroelectric generation plants generate power at a marginal cost that is lower than the marginal cost of generation by other types of power plants (including our power plant customers), a material increase in power generated by hydroelectric generating stations displaces a material amount of power generated by other types of power plants (including our power plant customers) and causes a corresponding decrease in our sales to those customers. Both heavy precipitation and a material increase in installed hydroelectric generation capacity will, unless the related power is exported or unless transmission facilities are insufficient to transmit such power, most likely increase the supply of hydroelectric power, thereby reducing thermal generation and, as a result, our sales to power plants. The effect of this displacement is particularly adverse to us if it occurs during the warmer months of the year, the period during which our sales to power plants typically represent a significant portion of our revenues and permit us to use our excess firm transportation capacity.

As noted above under "-Demand for our services is highly sensitive to weather conditions in Argentina" and "-Our revenues may be adversely affected by increases in the supply of hydroelectric power", our revenues tend to be relatively higher in years with cold winters and lower levels of hydroelectric generation. It is also the case that, in the absence of unusual circumstances, our expenses in those years do not increase in proportion to our revenues, thus making those years relatively more profitable than years with warmer winters and higher levels of hydroelectric generation. This may not be the case during 2004, however, because of possible increases in our expenses attributable to shortages in gas and transportation supply, including:

• Relatively high prices in the spot market. We purchase approximately 80% of the gas we require under long-term contracts and purchase the balance in the spot market. We expect the spot market price for gas this winter to be between two and three times higher than the price we pay for gas under our long-term contracts and we believe that it is unlikely that we will be able to pass through to our customers the higher prices that we pay in the spot market, thus increasing our expenses without an offsetting increase in our revenues.
• Insufficient long-term firm transportation. Because of the increase in demand for natural gas outlined under "-The energy industry in Argentina may experience an increase in the demand for natural gas that may not be met by current gas and transportation supply and which could lead to our inability to satisfy the needs of our customers, any increase in demand for natural gas due to cold weather or lower hydroelectric power generation could cause us to require more transportation capacity than that for which we have contracted. As a result, we will have to acquire additional transportation capacity under so-called "peaking agreements" under which our cost of transportation is up to three times higher than what we pay under our long-term transportation contracts. We believe that it is unlikely that we will be able to pass through to our customers a substantial portion of any payments we are required to make under peaking agreements.
• Power plant fines. Our contracts with our power plant customers permit us to interrupt our supply of gas to them within certain limits. If we exceed these limits we are required to pay fines to our power plant customers, which fines increase with increases in the contracted volumes that we do not deliver. An increase in demand from our uninterruptible customers coupled with a shortage of gas due to supply or transportation constraints could result in a substantial increase in the fines we are required to pay our power plant customers in 2004 in comparison to such payments in 2003.

We compete directly with sellers of fuel oil for sales to dual-fuel power plants. Fuel oil prices in Argentina have been volatile but generally above the price of gas for an equivalent amount of energy. However, energy-equivalent fuel oil prices have occasionally dropped below our maximum tariff price for interruptible gas sales to power plants. In 2000 and 1999, the price of fuel oil increased as a result of higher oil prices in the Argentine and international oil markets. In 2001, the price of fuel oil decreased as a result of lower oil prices, although gas prices continue to be more economical. In 2002, the price of fuel oil increased as a result of higher oil prices and of the devaluation of the Peso as did the price of other alternative fuels such as gasoline or diesel fuel. While the price of natural gas remained frozen by the government's degree, the price of alternative fuels increased following the exchange rate and the international oil price.

Our generating plant customers have installed combined cycle technology. While electric generating plants with combined cycle technology require less natural gas than open cycle generating plants to generate the same amount of electricity, we estimate that the combined cycle generating plants' operating efficiency will increase output under the rules of CAMMESA, the entity that administers Argentina's wholesale electricity market. The combined cycle technology uses gas-oil as an alternative fuel instead of fuel oil.

For the abovementioned reasons and as a consequence of the lower cost of natural gas compared to the cost of the energy equivalent amount of gas-oil, gasoline or diesel fuel, demand for natural gas from our electric generating customers and our CNG customers has increased. In 2003, our gas deliveries to power plant and CNG customers accounted for approximately 42% of our gas deliveries to all users, approximately 8% of our net sales, approximately 11% of our gas deliveries to all customers and approximately 10% of our net sales. See Item 5: "Operating and Financial Review and Prospects - Operating Results".

No assurance can be given that future increases in natural gas prices or decreases in gas-oil, gasoline and diesel fuel prices would not render the latter more economical to users and thereby adversely affect our revenues. See Item 4: "Information on the Company-Business Overview-Revenues-Compressed Natural Gas Service".

Although our License grants us the exclusive right to distribute natural gas within our service area, Argentina's gas delivery system is an open-access system. A primary feature of an open-access system is that large users within our service area are permitted to contract for the purchase of natural gas from marketers or producers and enter into contracts with transportation and distribution companies to deliver the purchased gas to these users. Such users arrange their own gas supply while they continue to use our distribution system and our transportation capacity for delivery of the gas. In such cases, the users pay us a tariff for the use of our distribution system and transportation capacity. Alternatively, users may build a direct connection to a transmission system while still purchasing gas from us and paying us a tariff to cover the cost of the purchased gas. Customers within our service area who contract for both direct purchase and transportation of gas without use of our distribution system would not pay us a tariff.

Any consumer who wishes to bypass our system completely and so avoid paying us any tariff must incur various costs and face certain practical limitations that, in some cases, make bypass economically disadvantageous or impractical. For example, users not using our distribution system must incur the expense of building and maintaining connection lines (an expense that increases with distance from the transmission line and population density of the proposed pipeline area) as well as the expense of associated metering and other items. Limited access to firm transportation capacity will also be a problem for users who require an uninterrupted gas supply. In addition, a customer desiring to purchase gas from a third party must give ENARGAS and us three months' notice of such fact.

We cooperate with power plant users and certain industrial users that purchase gas directly from gas suppliers but continue to use our transportation and distribution services. This type of arrangement permits us (a) to avoid incurring gas purchase costs (and take-or-pay charges) and (b) to collect a tariff from the customers, thereby defraying all or part of the cost of our firm transportation capacity used for such services. These arrangements also enable us to achieve certain savings by avoiding (a) the cost of purchasing the gas that is used as compression fuel which, pursuant to the regulatory framework, cannot be passed on to users and (b) certain gross turnover taxes imposed on our sales of gas.

We have built strong working relationships with many of our major users and we are implementing appropriate contracting and pricing policies that discourage the construction of direct connecting pipelines between our major users and the transportation systems that would completely bypass our system and avoid the use of our firm transportation capacity. It is possible that certain of our users will completely bypass our services or require us to further unbundle our services in a manner that could adversely affect our margins. It is also possible that ENARGAS will reduce the minimum volume of gas that is required for a large customer to purchase transportation capacity directly from the transporter. Our management believes that the effect of any such situations could, however, be partially mitigated by provisions in certain of our firm transportation contracts with TGS which provide that, if any of our users enters into a firm transportation agreement with TGS (either directly with TGS or with a third party such as a producer or gas broker), we would have the right to reduce our firm transportation commitment with TGS by up to the amount of the lost service between us and such customer. Our firm transportation contracts with TGN contain similar provisions.

Alternative energy sources, primarily fuel oil for power plants and liquid processed gas ("LPG") for residential users and smaller commercial users, are currently substitutes for natural gas. The abundance of natural gas in Argentina has historically provided natural gas with a large cost advantage over fuel oil, although such cost advantage has recently diminished due to lower world oil prices and the availability of low-cost Brazilian fuel oil. We intend to continue discounting policies with power plants to remain competitive with the price of fuel oil. In order to enable us to achieve a higher load factor during the warmer months when residential demand is weaker, certain power plant users have agreed to take a minimum amount of gas at discounts from maximum tariffs. Conversely, during the colder months, we and certain dual-fuel power plants in our service area agreed that we would deliver to such power plants a minimum volume of gas on an interruptible basis. If we fail to meet our commitments, we will be required to refund a portion of the excess cost of fuel oil over the price of undelivered gas on an energy-equivalent basis. Natural gas is significantly less expensive than LPG and offers residential and smaller commercial users a significant reduction in fuel costs.

On June 1, 2000, ENARGAS issued Resolution No. 1,748 which introduces amendments to the Service Regulation for "Small" and "Large" General Service Users, with alternatives for the purchase of gas and/or transportation from third parties, reducing the benchmark volume limit from 10,000 CM (353 MCF) to 5,000 CM (177 MCF) per day and further reducing the limit for interruptible demand to 1.5 MMCM/year (53 MMCF/year) from 3.0 MMCM/year (106 MMCF/year) for distribution by-pass. Additionally, the period to notify ENARGAS and the distribution companies of the intended by-pass was reduced from six to three months. On December 15, 2000 we filed an administrative proceeding, seeking the suspension of such Resolution, which has not yet been resolved. In addition, Decree No. 181/2004 empowers the Secretary of Energy to determine user categories and the dates from which distribution companies will be prevented from supplying natural gas to users in those categories. Likewise, Decree No. 180/2004, authorizes industrial users to resell at the city gate transportation and distribution services for which they have contracted with distribution companies without the participation of us or any other distributors. As of the date of our Annual Report, regulations have not been issued to implement these Decrees. We cannot assure you as to the impact of such Decrees on us. See Item 4: "Information of the Company - Business Overview - Regulatory Framework - New Regulations".

The Public Emergency Law provides for conversion into Pesos of the original foreign currency values expressed in contracts between private parties in Argentina which were in effect at the effective date of the Public Emergency Law at an exchange rate of Ps.1 per U.S.$1 (or at an equivalent exchange rate for other foreign currencies). The Public Emergency Law also terminated all indexation clauses in those contracts and provided that, should any such contract, as modified by operation of the Public Emergency Law, be too burdensome for one of the parties and should the parties fail to reach an agreement with respect thereto, the matter may be referred to the courts so that an equitable solution may be established. Peso-denominated obligations arising after the passing of the Public Emergency Law may not be subject to indexation clauses.

On the effective date of the Public Emergency Law we were a party to several agreements which have been pesified, the most important ones being contracts for the purchase of natural gas ("Gas Purchase Contracts") which are essential to the provision of our service.

Pursuant to the Public Emergency Law, producers were entitled to the pesified value of their existing purchase contracts with us (the "Existing Contracts") plus the CER adjustment. During 2002 and 2003, we paid gas producers in Pesos, in accordance with the tariff chart approved by ENARGAS but we did not pay them the CER adjustment. Gas producers continued to reserve their rights to charge an amount equal to the Peso equivalent of the original Dollar price they were contractually entitled to under the Existing Contracts. During 2003, gas producers revised their initial claim for payment under the Existing Contracts and claimed instead the pesified value of the Existing Contracts plus the CER adjustment.

As a result of the decline in demand for natural gas during 2002, we commenced negotiations with our gas suppliers to modify the terms of our gas purchase contracts. In late 2003 we reached agreement with our gas suppliers on revised volumes and take-or-pay obligations (the "Revised Purchase Contracts"). As part of such agreements we were relieved of any take-or-pay obligations we might have had under the Existing Contracts.

On April 2, 2004, the Secretary of Energy and a large number of natural gas producers executed an agreement (the "2004 Agreement") to set the price of natural gas at the transportation system entry point ("TSEP") through 2006. The Federal Planning Ministry confirmed the validity of the 2004 Agreement through Resolution No. 208. The 2004 Agreement established a 45-day term, beginning on April 23, 2004, during which outstanding gas purchase agreements among producers and gas distribution companies were to be renegotiated (principally in respect of volumes and take-or-pay obligations). See Item 4: "Information of the Company - Business Overview - Regulatory Framework - New Regulations". During May and June 2004, we renegotiated all but one of these contracts. With respect to those renegotiated gas contracts, gas producers have waived their claims to both the Peso equivalent of the original Dollar price they were entitled to receive under the Existing Contracts and the pesified value of the Existing Contracts plus the CER adjustment provided the Government abides by the terms of the 2004 Agreement.

We have continued to insist on a fundamental principle of the regulatory framework under which we operate, namely, that we are entitled to pass through to our customers the price we pay for gas that we deliver to them. We anticipate that any increase, whether retroactive or prospective, in the price we pay for natural gas will be passed through to our customers. We are presently paying all except one of our gas producers the amounts agreed under the 2004 Agreement. However, we cannot assure you that any changes in the regulatory framework as to the terms of the 2004 Agreement will not have an adverse effect on our ability to pass through to our customers the price we pay for natural gas we deliver to them. In addition we cannot assure you with respect to the gas purchase contract which we have not renegotiated as of the date of our Annual Report that such gas producer will not continue to reserve its rights to payment under the terms of the Existing Contracts. In the event that an agreement is not reached between us and such gas producer, such gas purchase contract provides that we may terminate the contract without being obliged to pay compensation to the gas producer. See Item 4: "Information on the Company-Business Overview-Commercial Contracts -Current Gas Purchase Contracts"

Most of our gas purchase contracts include provisions, known as "take-or-pay" provisions, that require us to pay for certain minimum volumes of gas even if we do not take such volumes.

As a result of the 2004 Agreement, we renegotiated our gas supply contracts as described above. Our take-or-pay commitments through 2004 under those gas purchase contracts require us to pay for an average of 70-80% of the gas that we are entitled to purchase under such contracts.

While we believe it is unlikely, especially during winter 2004, that the take-or-pay provisions in our gas supply contracts will result in any significant liability for gas not taken we can give no assurance that such liability may not arise during 2004 or any subsequent years. See Item 4: "Information on the Company - Business Overview - Commercial Contracts - Current Gas Purchase Contracts" and Item 4: "Information on the Company - Business Overview - Commercial Contracts - Take-or-Pay Obligations".

Our License, the specific bidding rules governing the privatization of Gas del Estado (the "Pliego") and the regulations issued pursuant to the law under which we were privatized, Law No. 24.076 (the "Gas Act"), contain requirements regarding quality of service, capital expenditures, restrictions on transfer and encumbrance of assets, restrictions on cross-ownership between producers, transporters and distributors of gas and restrictions on the transfer by Gas Argentino of our Class A Shares and the transfer by Gas Argentino's shareholders of their shares of Gas Argentino. Failure to comply with these requirements or restrictions may result in a revocation of our License by the Argentine government, upon the recommendation of ENARGAS. The purchase by us of more than 20% of our gas in any month from any person that controls Gas Argentino or from any affiliate of the controlling person could result, under certain circumstances, in the revocation of our License. Furthermore, our bankruptcy would result in the revocation of the License. See Item 4: "Information on the Company-Business Overview-Regulatory Framework-The Gas Act and the License-Expiration". On September 17, 2002 the Argentine government issued Decree No. 1834 (which shall remain in effect as long as the Public Emergency Law is in effect) which provides that the filing for reorganization proceedings or of a petition in bankruptcy by or against companies that are renegotiating their government-granted licenses as a result of the Public Emergency Law shall not lead to termination of the licenses of such companies.

As a general rule, upon the expiration of our License, we will be entitled to receive the lower of the following two amounts: (a) the net book value of our Essential Assets (including property, plant and equipment) determined on the basis of the price paid by Gas Argentino and the original cost of subsequent investments carried in US Dollars and adjusted by the US PPI, net of accumulated depreciation, and (b) the proceeds of a new competitive bidding process to acquire our License, net of costs and taxes paid by the successful bidder. If our License is terminated by the Argentine government prior to the expiration of its full term as a result of nonperformance by us, the Argentine government may offset against our net book value any sum due to the Argentine government for damages caused by the events resulting in the termination of our License. Such damages are required by our License to be at least 20% of the net book value of our assets. Alternatively, the Argentine government under such circumstances could require Gas Argentino to transfer its holding of our shares to ENARGAS as trustee for their subsequent sale through a competitive bidding process. Compensation received by us for the termination of our License may be insufficient to enable us to pay our obligations, including interest on and the principal amount of our financial indebtedness.

Stamp taxes are levied by most provinces in Argentina on documents evidencing legal transactions, such as deeds, mortgages, contracts and letters of acceptance. Contracts executed outside a province would be taxable in that jurisdiction if the contract has effects within the province. Due to the instrumental nature of the stamp tax, it applies only to written documents (a) that contain an offer and an express acceptance by the other party in the same document or (b) that are documented by means of an exchange of letters whereby the acceptance letter contains or restates the main terms of the agreement. We operate with different gas and transportation companies through the exchange of letters with acceptance by performance ("Tacit Acceptance Contracts"). We believe that stamp taxes do not apply to such contracts. Although most provincial tax codes provide that stamp taxes may only be levied on contracts of the type described in the preceding clauses (a) and (b), in recent years many provinces have begun to challenge the use of Tacit Acceptance Contracts, resulting in a wide variety of litigation for the purpose of subjecting Tacit Acceptance Contracts to stamp tax.

On January 26, 2000, the tax authorities of the Province of Neuquén informed us that we are liable for stamp taxes for up to Ps.14.5 million with respect to Tacit Acceptance Contracts executed by us and gas companies after the privatization of Gas del Estado. On April 4, 2001, the tax authorities of the Province of Neuquén notified us of the final determination with respect to contracts transferred by Gas del Estado to us and entered into before the privatization of Gas del Estado, of which we are allegedly liable for an amount of Ps.48.1 million (including fines and interest). Additionally, the Province of Neuquén asserted that we are liable for stamps tax of Ps.23.8 million (including fines and interest) in respect of transportation contracts entered into after the privatization of Gas del Estado.

We have filed a declaratory action against the Province of Neuquén with the Supreme Court of Argentina to determine the validity of the claims made by the Province of Neuquén and to request that the Supreme Court, on the basis of similar cases, order an injunction against the Province of Neuquén with respect to such claims. The Supreme Court upheld the request and instructed the Province of Neuquén not to collect the stamp tax.

Furthermore, on April 6, 2001, Transportadora de Gas del Sur S.A. ("TGS") informed us of the final determination made by the Province of Río Negro regarding the contracts transferred by Gas del Estado and entered into by us and TGS before and after the privatization of Gas del Estado establishing that we are responsible for an amount of up to Ps.148.2 million (including fines and interest). Accordingly, TGS filed a declaratory action against the Province of Río Negro with the Supreme Court and obtained an injunction as a consequence of which the Province of Río Negro has suspended all the collection proceedings until the Supreme Court issues a final ruling.

The Ministry of Economy has acknowledged, in a letter dated October 7, 1998, the Argentine government's responsibility for stamp taxes accrued prior to December 28, 1992, the date of the privatization of Gas del Estado.

ENARGAS has notified us and the Ministry of Economy that stamp tax had not been considered for purposes of establishing the initial distribution tariffs and that, if the payment of stamp tax with respect to Tacit Acceptance Contracts is upheld by the Supreme Court, the stamp tax should be deemed to be a new tax which would be required to be passed through to tariffs. ENARGAS also instructed all distribution and transportation companies to initiate administrative and/or legal actions to contest the claims of the Province of Neuquén in respect of stamp taxes.

On September 18, 2003 the tax authorities of the Province of Neuquén notified us of the commencement of a new administrative proceeding related to the offer of gas purchase contracts with YPF S.A, Petrobras S.A., Petrolera Santa Fe S.A., Wintershall S.R.L., Total Austral S.A. and Pan American Energy LLC, Sucursal Argentina, claiming 50% of the stamp tax related to the offers on which the producers have paid 50% of the stamp tax under the terms of Provincial Decree 786/98. Furthermore, the Province of Neuquén is making a claim in respect of offers with tacit acceptance related to the resale of transportation capacity from us to Petrobras S.A.

On November 19, 2003 we requested an injunction as part of the request for declaratory judgment we filed in November 1999 related to gas contracts.

On March 31, 2004 the Supreme Court upheld our injunction and instructed the Province of Neuquén to cease to initiate proceedings aimed at collecting stamp tax on those contracts.

In the proceedings "Transportadora de Gas del Sur S.A. against the Province of Santa Cruz about request for declaratory judgement", on April 15, 2004, the Supreme Court decided to uphold the request made by TGS and consequently, declared that offers with implicit acceptance, which are the subject matter of this litigation, cannot be taxed. The ruling established that legal expenses were to be borne by the Province.

On the same date and with the same result obtained by TGS, the Supreme Court ruled on proceedings "Y.P.F. S.A. against the Province of Tierra del Fuego on request for declaration of constitutionality" and "Shell Compañía Argentina de Petróleo S.A. against Neuquén on request of unconstitutionality". The recent rulings of the Supreme Court, summarised above, would probably be applicable to actions brought by us.

No assurance can be given as to whether the imposition by the Provinces of Neuquén and Río Negro of stamp taxes on Gas del Estado's pre-privatization contracts or on our Tacit Acceptance Contracts executed after the privatization of Gas del Estado will be upheld, whether we will be indemnified by the Argentine government in respect of pre-privatization stamp taxes or whether we will be able to recover through tariff increases stamp taxes on Tacit Acceptance Contracts entered into after the Takeover Date. There can be no assurance that new claims or tax proceedings will not be filed or initiated against us in respect of stamp taxes. We have not established any reserves for either current or potential stamp tax claims. Since these types of claims are not limited to us but involve the entire gas industry, the resolution of this controversy may entail a general agreement or regulatory change. See Item 8: "Financial Information -Legal Proceedings-Stamp Tax".

The regulatory framework establishes that cost variations resulting from changes in taxation rules shall be passed through to our tariffs.

Our License provides that we shall be entitled to occupy and use free of charge all streets, avenues, parks, bridges, roads and other public spaces, including underground areas and airspace, required to install facilities for the licensed service, including communication lines and interconnections to third parties.

In 1997, several public service companies, including us, entered into an agreement for the coordination of work in public spaces ("Streets Work Agreement" or "SWA") with the government of the City of Buenos Aires ("GCBA"). Pursuant to such agreement, we agreed to pay the GCBA Ps.0.5 million per year, to compensate for street work inspection costs.

In 1998, the GCBA created an occupancy of public space levy, applicable (among others) to gas pipelines, which was included in the city's annual budgets. That levy has been challenged by the public service companies and has not been paid.

From 2000 onwards, the GCBA included in its budget a study, revision and inspection of works in public spaces levy applicable (among others) to gas pipelines. Although the SWA was explicitly mentioned as a precedent, the tax amounts were unilaterally increased by the GCBA.

On January 26, 2001, ENARGAS informed us that, in the case of the study, revision and inspection of works in public spaces levy, we would have to demonstrate the impact of the changes on end-user prices, whereas, in the case of the occupancy of public space levy, we would have to challenge the validity of the new tax, both through administrative proceedings and judicial action. ENARGAS also informed the GCBA that all changes in taxation would be dealt with as a pass-through cost and would have to be absorbed by the users of the jurisdiction in which these changes were introduced.

On April 30, 2001, the GCBA sent a letter claiming the payment of the study, revision and inspection of works in public spaces levy, which was followed by a formal claim on May 16, 2001 for Ps.5.2 million for 2000.

In addition to the amount claimed on May 16, 2001, on December 2, 2002 the GCBA made a written request regarding the study, revision and inspection of works in public spaces levy for an amount of Ps.7.7 million relating to the years 2000 and 2001. Subsequently the GCBA claimed said amount for 2002 and also claimed unpaid amounts in relation to the agreement entered into in 1997 (Ps.0.7 million and Ps.0.3 million, respectively). We filed an administrative appeal against both claims.

On May 12, 2003, the GCBA claimed the payment of the occupancy of public space levy for the period from 1998 to 2003 in the total amount of Ps.16.3 million, payable by us on May 31, 2003. We filed an administrative appeal against this claim. In addition, we gave notice to ENARGAS as a first step to requesting inclusion of any amounts we are required to pay as a result of these claims in the tariff paid by our customers in the City of Buenos Aires.

On July 11, 2003, the GCBA claimed the payment of the study, revision and inspection of works in public spaces levy for the month of May 2003 in the amount of $ 0.08 million. We filed an administrative appeal against this claim. Furthermore, we received new claims for the study, revision and inspection of work in public spaces levy for the months of July, August, September and October 2003 in the amount of approximately $ 0.334 million. We are initiating an administrative proceeding against these claims.

On February 27, 2004, the GCBA claimed the payment of a rate for the use of the public land (the "Occupancy Rate") for the third and fourth quarters of 2003 and the first quarter of 2004 in the total amount of Ps.1.8 million, payable by us by March 31, 2004. We filed an administrative appeal against this claim.

We have consistently denied the legal validity of the occupancy of public space levy and insisted that the amount applicable for the study, revision and inspection of works levy should be the one established in the SWA which we paid regularly.

Notwithstanding the above, we are continuing our negotiations with the GCBA on these matters. We can give no assurance as to the outcome of such negotiations or whether other jurisdictions may claim similar levies. We have also received similar claims for small amounts from municipalities in the Province of Buenos Aires, some of which we have paid. See Item 8: "Financial Information - Legal Proceedings - Government of the City of Buenos Aires - Occupancy of Public Space".

Publicly available information about the issuers of securities listed on the Buenos Aires Stock Exchange provides less detail in certain respects than the information that is regularly published by or about listed companies in the United States and certain other countries. In addition, regulations governing the Argentine securities market are not as extensive as those in effect in the United States and other major world markets. While we are subject to the periodic reporting requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), the periodic disclosure required by foreign issuers under the Exchange Act is more limited than the periodic reporting disclosure required by listed United States issuers. Furthermore, there is a lower level of regulation of the Argentine securities markets and of the investors in such markets as compared with the securities markets in the United States and certain other developed countries. We prepare our financial statements in accordance with Argentine GAAP which differs in certain respects from US GAAP.

Gas Argentino holds all of our shares of class A common stock, par value one Peso per share (the "Class A Shares") (representing 51% of our capital stock), and 49% of our shares of Class B common stock, par value one Peso per share (the "Class B Shares") (representing 19% of our capital stock). Gas Argentino has the power to determine the outcome of substantially all matters to be decided by a vote of our shareholders and to elect a majority of the members of our Board of Directors and a majority of the members of our Supervisory Committee. In addition, pursuant to our by-laws (the "By-Laws") the Class A shareholders have the power to elect two of the three members of our Supervisory Committee.

1. INFORMATION ON THE COMPANY

We were formed in November 24, 1992 as a sociedad anónima under the laws of Argentina with a duration of 99 years. Our legal name is Metrogas S.A. and our commercial name is MetroGAS. We are domiciled in and are governed by the laws of Argentina.

Our administrative and registered office is located at Gregorio Aráoz de Lamadrid 1360, (1267) Buenos Aires, Argentina, and our telephone number is (54-11) 4309-1434. At December 31, 2003, we employed approximately 987 people and we have several commercial offices in the city of Buenos Aires and in the greater Buenos Aires area. Since November 17, 1994, our Class B Shares have been listed on the Buenos Aires Stock Exchange and our American Depositary Shares, each representing ten Class B Shares, have been listed on the New York Stock Exchange.

Prior to being privatized, Gas del Estado S.E. ("Gas del Estado"), a state owned corporation formed by the Argentine government, owned and operated virtually all natural gas transportation and distribution facilities in Argentina. Through high-pressure transportation pipelines measuring approximately 10,590 km in length, Gas del Estado transported gas from producing basins located primarily in western, northwestern and southern Argentina to distribution areas for delivery to customers.

Gas del Estado was privatized pursuant to Law No. 24,076 (the "Gas Act"), which was enacted in June 1992 and implemented through Decrees Nos. 1,738/1992 and 1,189/1992. The Gas Act established a new industry structure for natural gas transportation and distribution in Argentina. Gas del Estado's integrated functions of purchasing, processing, transporting, distributing and selling gas were assumed by two newly created transportation companies and eight newly created distribution companies, each of which was licensed and regulated under a new regulatory framework. The Argentine government successfully completed the privatization of Gas del Estado in December 1992 by transferring a majority of the common stock of all the gas distribution and transportation companies to the respective holding companies that were formed by the consortia which purchased them. The Argentine government retained ownership of a portion of the equity in each new company ranging from 10% to 40%, including an original equity interest in us of 30%. The Argentine government has sold much of such retained ownership in certain of the privatized gas transportation and distribution companies to the public (such as the November 1994 offering of our Class B Shares) or in private transactions (such as the January 1997 private sale of our remaining Class B Shares). The remainder of the Argentine government's shares in us were transferred to our employees through an employee stock ownership plan known as the Programa de Propiedad Participada (the "PPP"). See Item 7: "Major Shareholders and Related Party Transactions-Major Shareholders".

The Argentine government promulgated detailed bidding procedures governing the privatization of Gas del Estado. Such procedures were contained in specific bidding rules (the "Pliego"). The Pliego required that the bidding group for a gas distribution company include among its members a designated technical operator with experience in operating a gas distribution company serving at least 500,000 residential customers. The technical operator was required to enter into a technical assistance agreement under which it would provide us with, among other things, certain technical and managerial assistance. See Item 4: "-Business Overview-Agreements with BG Group-Technical Assistance Agreement".

The Pliego required that each bid be composed of a specific U.S. Dollar amount (payable partially in cash and partially in Argentine public, foreign and domestic debt instruments) plus a fixed amount of U.S.$62 million to be paid in cash on December 28, 1992 (the "Takeover Date") representing certain liabilities of Gas del Estado to the Argentine government. After various rounds of bidding, a consortium (the "Consortium") composed of British Gas plc, Perez Companc S.A. ("Perez Companc"), Astra Compañía Argentina de Petróleo S.A. ("Astra") and Invertrad S.A. ("Invertrad") was successful with a bid of U.S.$300 million plus the mandatory amount of U.S.$62 million. As a result, the bidding price for the 70% majority interest in us amounted to U.S.$362 million.

The Consortium formed Gas Argentino S.A. ("Gas Argentino") in order to hold its interest in us. See Item 7: "Major Shareholders and Related Party Transactions-Major Shareholders". British Gas plc qualified as the technical operator (the "Technical Operator") of the Consortium. See Item 6: "Directors, Senior Management and Employees-Directors and Senior Management-Technical Assistance-Technical Assistance Agreement".

Pursuant to the privatization of Gas del Estado, a Transfer Agreement was entered into on the Takeover Date among the Argentine government, Gas del Estado, British Gas plc, Perez Companc, Astra, Invertrad, Gas Argentino and us (the "Transfer Agreement"). The Transfer Agreement provided for the transfer to us of the assets of Gas del Estado associated with the distribution system within our service area.

The Transfer Agreement required that (in addition to the bidding price paid by Gas Argentino) we assume certain short- and medium-term indebtedness of Gas del Estado in the aggregate amount of approximately U.S.$110 million, consisting of obligations of U.S.$60 million due to the Argentine government and U.S.$50 million due to YPF. We also executed three short-term notes in the aggregate amount of approximately U.S.$26 million to pay for certain inventory and receivables attributable to gas delivered by Gas del Estado prior to the Takeover Date. As of December 31, 1997, we had repaid the U.S.$60 million debt to the Argentine government, the U.S.$50 million debt to YPF and the three short-term notes totaling approximately U.S.$26 million. In addition, the Transfer Agreement provided that we would act as collection agent for certain overdue receivables owed to Gas del Estado. Accordingly, we were required to make a nonrefundable prepayment of U.S.$23.8 million, which represented a minimum payment to be received by Gas del Estado on account of the overdue receivables. See Item 4: "-Business Overview-Revenues-Slow Paying Accounts and Overdue Receivables".

Under the Transfer Agreement, we assumed certain obligations with regard to our new employees who had previously been employed by Gas del Estado. We were required to accept such employees at their previous salary and seniority levels and accept responsibility for labor claims, occupational hazard claims and retirement liabilities that arose after the Takeover Date. We were required to cooperate in implementing the PPP to enable our employees to acquire 10% of our shares which were originally held by the Argentine government. In addition, our employees are entitled to participate in our annual profits by receiving an aggregate distribution equal to 0.5% of our earnings after taxes.

On January 20, 1993, Invertrad assigned its interest in the Consortium to Argentina Private Development Trust Co., Ltd. (currently known as Argentina Private Development Co., Ltd.) ("APDC"). On November 12, 1993, British Gas plc transferred its interest in the Consortium and in Gas Argentino to British Gas Netherlands Holding B.V. ("BGNH"), a wholly owned subsidiary of British Gas plc. On September 24, 1997, Astra acquired 100% of the shares of APDC. On August 11, 1998, Perez Companc transferred its interest in Gas Argentino to BGNH, Astra and APDC, pro rata on the basis of their respective holdings. On August 30, 1999, BGNH transferred its interest in the Consortium and in Gas Argentino to British Gas International B.V. ("BGI"), an entity ultimately controlled by BG Group plc ("BG Group"). Astra merged with YPF S.A. ("YPF") effective January 1, 2001. On December 21, 2001, APDC transferred its interest in Gas Argentino to YPF. On the date of this Annual Report BG Group indirectly owns 54.67% of Gas Argentino and YPF directly owns 45.33% of Gas Argentino.

The information concerning the Argentine natural gas industry set forth below has been prepared based on materials obtained from public sources, including Gas del Estado, the Argentine Secretary of Energy, public laws, decrees and regulations and other sources identified below. The information has not been independently verified by us or by our advisors.

Prior to the privatization of Gas del Estado, the Argentine gas industry was effectively controlled by the Argentine government. From January 1944 to December 1992, the integrated system of transportation and distribution of natural gas was under the exclusive control of Gas del Estado and its predecessors. In addition, until 1990, YPF (formerly the state owned oil company of Argentina), directly or through contractors, was the only producer of natural gas in Argentina.

The distribution assets of Gas del Estado were divided into nine systems on a geographical basis as specified in the license of each of the nine distribution companies. The Buenos Aires metropolitan area, the principal gas market in Argentina, was divided between two distribution companies, us and Gas Natural BAN S.A. ("BAN"). We are the largest distribution company in Argentina (in terms of number of customers and volume of gas deliveries), with approximately 23.4% of total deliveries of all gas distribution companies in 2003, and we serve a market area generally covering the southern and eastern portions of greater Buenos Aires, including the City of Buenos Aires. Camuzzi Gas Pampeana S.A. is the second largest distribution company in Argentina (in terms of volume of gas deliveries) with approximately 18.4% of the total deliveries of all gas distribution companies in 2003, serving the area covering the Province of Buenos Aires (excluding greater Buenos Aires). Camuzzi Gas del Sur S.A. is the third largest distribution company in Argentina (in terms of volume of gas deliveries) with approximately 14.0% of the total deliveries of all gas distribution companies in 2003, serving the market area generally covering southern Argentina. BAN is the fourth largest distribution company in Argentina (in terms of volume of gas deliveries), with approximately 12.1% of total deliveries of all gas distribution companies in 2003, serving an area covering the northern and western sections of greater Buenos Aires. The remaining gas distribution companies in Argentina are Gasnor S.A., Distribuidora de Gas del Centro S.A., Distribuidora de Gas Cuyana S.A. (whose respective service areas are located in northwestern and west-central Argentina), Litoral Gas S.A. (which covers the northwest of the Province of Buenos Aires) and Gasnea S.A. (which serves the northeastern Argentina).

Gas del Estado's transportation assets were divided on a broad geographical basis into a northern and a southern trunk pipeline system designed to give both systems access to gas sources and to main centers of demand, including the greater Buenos Aires area. As a result of the division, our distribution system is directly connected to the southern trunk pipeline system operated by TGS, our primary gas transportation supplier. In addition, we are connected indirectly to the northern trunk pipeline system operated by Transportadora de Gas del Norte S.A. ("TGN") through a large diameter, high pressure ringmain around Buenos Aires and through a pipeline of a neighboring distribution company.

Pursuant to the Gas Act and related decrees, each privatized company was granted a license to operate the transferred assets and a regulatory framework for the privatized industry was established based on open, nondiscriminatory access. A regulatory agency named ENARGAS was created to regulate the transportation, distribution, marketing and storage of natural gas in Argentina. The Gas Act also provided for the regulation of wellhead gas prices in Argentina for an interim period of between one and two years from June 1992 with prices to be deregulated no later than June 1994. Prior to deregulation, the regulated price was set at U.S.$0.97 per MMBTU at the wellhead, which had been the regulated price since 1991. In accordance with the Gas Act, gas prices were deregulated as of January 1, 1994.

World natural gas reserves and world demand for natural gas have each increased significantly in recent years. Natural gas is widely distributed worldwide and is the only fossil fuel to have experienced reserve estimate increases in nearly every region of the world over the past decade. Due to lower alternate fuel and operating costs, natural gas has distinct economic advantages over other sources of energy such as coal and nuclear power. Furthermore, natural gas provides substantial environmental advantages as compared to these other energy sources resulting from lower byproduct discharges. A 1998 United States Department of Energy international energy study forecasted a 65% increase in worldwide energy requirements by 2020 from 1996 levels, with nearly half of that increased demand expected to be filled by natural gas.

Argentina has a well-developed natural gas market, where natural gas constitutes approximately 46% of total primary energy consumed. Natural gas consumption in Argentina has increased more than three times its consumption in 1980, from approximately 9.3 BCM (328 BCF) in 1980 to 30.8 BCM (1,088 BCF) in 2003. Such increases reflect energy substitution by end users, low prices relative to those for competing energy sources and an increase in gas pipeline capacity. Also, natural gas has experienced a significant increase in energy market share in recent years. Demand for gas in Argentina is subject to significant seasonal variations with peak residential demand for heating occurring in winter. Despite the relatively high market share of natural gas compared with other countries, we believe that additional market opportunities for natural gas exist in Argentina and that demand for natural gas will increase in conjunction with any growth of the Argentine economy.

The following table sets forth the total Argentine consumption of natural gas by class of user for the calendar years indicated:

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Notes:

(a) Primarily used for automobiles.

Sources: Argentine Secretary of Energy 1992 Annual Report, 1985 and 1991 Yearbooks of Gas del Estado. Data for 1995, 1998, 1999, 2000, 2001, 2002 and 2003 were compiled from information provided by Compañía Administradora del Mercado Mayorista Eléctrico S.A. ("CAMMESA") and ENARGAS.

The following table sets forth the location of the principal natural gas-producing basins supplying the Argentine natural gas market. Argentine natural gas reserve and production data are estimated as of December 31, 2003.

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Notes:

Source: Argentine Oil and Gas Institute.

Total Domestic Production. Total Argentine natural gas production during 2003 was 50,599 MMCM (1,787 BCF), an increase of 10.6% over 2002. At December 31, 2003, total Argentine natural gas proven reserves were 612,496MMCM (21,630 BCF).

Neuquén Basin. The Neuquén basin is the largest of the Argentine basins. It has an exploitable surface area of more than 100,000 km2 and is one of our major supply sources. At December 31, 2003, the Neuquén basin accounted for approximately 50.8% of Argentina's proven natural gas reserves. The Neuquén basin is located in west central Argentina and is strategically located in relation to Buenos Aires, Argentina's principal natural gas market. In 2003, the Neuquén basin produced an aggregate average of 81.7 MMCM (2.9 BCF) of natural gas per day, or 58.9% of total Argentine natural gas production.

Noroeste Basin. In 2003, the Noroeste basin, located in northwestern Argentina, produced an average of 22.2 MMCM (0.8 BCF) of natural gas per day, or 16.0% of total Argentine natural gas production, and at December 31, 2003, accounted for approximately 20.3% of Argentina's proven natural gas reserves.

Austral and Golfo San Jorge Basins. In 2003, the Austral and Golfo San Jorge basins, located in the extreme southern region of Argentina, produced an average of 34.5 MMCM (1.2 BCF) of natural gas per day, or 24.9% of total Argentine natural gas production. In the Austral basin, which at December 31, 2003 accounted for approximately 22.6% of Argentina's proven natural gas reserves, exploration has centered in and around the basin's existing gas fields and on other fields located offshore. The Golfo San Jorge basin is primarily an oil-producing basin.

2. Business Overview

We are the largest natural gas distribution company in Argentina (in terms of number of customers and volume of gas deliveries), with approximately 23.4% of total deliveries of all gas distribution companies in Argentina during 2003 according to ENARGAS' 2003 Annual Report. We have over 1.9 million customers in our service area (the City of Buenos Aires and southern and eastern greater metropolitan Buenos Aires), a densely populated area with major dual-fuel electric power plants and industrial and commercial customers of natural gas. We are one of nine natural gas distribution companies formed in connection with the privatization of Gas del Estado, and we commenced commercial operations in December 1992. We are one of the largest publicly traded natural gas distribution companies, in terms of customers served, in North and South America.

During 2003, sales to residential customers accounted for approximately 59.0% of net sales, while sales of gas and of transportation and distribution services to industrial and commercial customers and governmental entities accounted for approximately 20.6% of our net sales. The remainder of our sales of natural gas and of transportation and distribution services were to power plants and suppliers of, and dealers in, compressed natural gas ("CNG") used as vehicle fuel. For a further description of the principal markets in which we compete, see Item 4: "Information on the Company-Our History and Development-The Argentine Natural Gas Industry" and Item 5: "Operating and Financial Review and Prospects-Operating Results".

Our distribution system consists of approximately 15,780 km of principal and service-distribution mains and service pipelines. We purchase natural gas primarily from producers in southern and western Argentina. Gas purchased by us is transported through Argentina's two trunk pipeline systems, one of which is operated by TGS and the other by TGN.

In the 1992 privatization of Gas del Estado, the Argentine government granted us a 35-year License, extendable for ten years under certain conditions, giving us the exclusive right to distribute natural gas within our designated service area. We are regulated by ENARGAS, an agency of the Argentine government. ENARGAS has broad regulatory authority over the gas distribution and transportation industries, including their tariffs. The Gas Act provides that the tariffs for natural gas we charge to end users shall consist of the sum of three components: (i) the price of gas purchased; (ii) the transportation tariff for transporting gas from the production area to the distribution system; and (iii) the distribution tariff established by ENARGAS. Our License provides for the semiannual adjustment of our tariffs as a result of changes in the US PPI and in certain other circumstances, and the Gas Act and our License provide that such tariffs will be adjusted every five years pursuant to a "pricecap with periodic review" methodology, a type of incentive regulation that allows regulated companies (i) to retain a portion of the economic benefits arising from efficiency gains, and (ii) to recover the cost of investments made by them as well as a reasonable return on those investments. The Public Emergency Law has superseded a number of these provisions. See Item 4: "-Business Overview-Regulatory Framework".

After the crisis at the beginning of 2002, we refocused our strategy on the short-term risks and challenges facing us. Since then, our short-term strategy has been aimed at working with the Argentine government in order to expedite decisions and obtain tariff increases that ensure continuity of our operations, maintenance of safety and quality standards and coverage for debt repayment. See Item 4: "-Business Overview-Regulatory Framework-Tariffs-Renegotiation of the Tariffs".

Our management has also taken and continues taking a variety of actions to mitigate the impact of the current economic crisis on us, the following of which are among the most important:

• Strict management of cash-flow to adjust our financial expenditures to the funds available to us;
• Reduction of capital expenditures and preventive maintenance programs without thereby affecting our ability in the near term to serve our customers safely or operate our network in accordance with quality and environmental standards;
• Tight control of all price adjustment requests from suppliers and required extension of payment terms;
• Suspension of principal and interest payments to financial creditors;
• Reduction of employee training programs;
• Renegotiation of commercial and operational contracts;
• Securing any necessary tax advice in order to make the best possible tax use of past and future tax losses; and
• Retaining international financial advisors to develop a comprehensive plan to restructure all of our financial indebtedness.

In addition and at the request of our creditors, we launched a debt-restructuring plan prior to completion of the renegotiation of our tariffs with the Argentine government. See Item 5: "Operating and Financial Review and Prospects - Liquidity and Capital Resources - Debt" for a description of our debt restructuring plan. We can give no assurance that we will be able to refinance our debt at all or on terms which are acceptable to us.

Constrained as we are by exposure to the risks and circumstances described in Item 3: "Key Information-Risk Factors", our long-term strategy is to maintain and enhance our position in the energy market in Argentina. We continue to be an active participant in the domestic energy market, focusing on providing efficient and reliable natural gas service to our customers and being the country's most innovative provider of natural gas distribution services and related products. In order to achieve our goals before the onset of the Argentine economic crisis, we had implemented a strategy that included capital investments and other measures designed to: (a) provide continued high-quality service to our customers; (b) ensure sustained growth in dividends; (c) achieve a significant reduction in operating expenses; (d) implement a market strategy more closely based on market analysis; (e) improve the use of our current transportation capacity and become a key participant in the transportation capacity market; (f) further develop the CNG market; (g) continue to preserve the environment; (h) develop our human resources; and (i) generate an organizational culture based on excellence.

Since we commenced our operations, our management team has concentrated on controlling operating costs, improving operating efficiency, reducing the number of past due accounts and improving collections. In February 1993, we implemented a voluntary retirement plan that resulted in the retirement of 1,268 employees by December 31, 1997. On December 31, 2003 we had 987 employees compared with 2,021 employees on December 31, 1992. In addition, we achieved operating efficiencies by renegotiating service contracts with independent suppliers and contracting for certain services previously performed by us.

As part of our strategy, we embarked on and continued through 2001 a major capital expenditure program designed to extend and renovate pipelines, regulators, valves and meters, to ensure the safety and reliability of our distribution system, to modernize and centralize our information systems and to upgrade our customer service branch network. We expended approximately U.S.$. 524.9 million in capital expenditures from 1993 through 2001. Due to the financial crisis in Argentina and the pesification and freezing of our tariffs, beginning in 2002 we reduced our capital expenditures to amounts required to fulfill License provisions and ensure safe operation of the network. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Argentina-Recent political and economic instability resulted in a severe recession in 2001 and 2002 and may result in economic recession" and "-The devaluation of the Peso, the pesification and freezing of our tariffs and the macroeconomic conditions currently prevailing in Argentina have had, and may continue to have, a material adverse effect on our results of operations and financial condition" and "-Risk Factors Relating to Us-On March 25, 2002 we suspended our payments of principal and interest on all of our financial debt, and the failure by us to refinance our debt may cause our bankruptcy and the forfeiture of our License". During 2002 and 2003 our capital expenditures amounted to U.S.$6.0 million and U.S.$4.8 million, respectively.

The following table sets forth certain information regarding our services to our users during 2003:

______

Notes:

(a) Percentages of all gas delivered.

The following is a brief description of the principal categories of our users and the class of service most often provided to users in each category.

We provide service to more than 1.8 million residential customers within our service area, approximately 66% of whom are located in the City of Buenos Aires. In 2003, sales to residential customers accounted for approximately 27% of the volume of natural gas we delivered to our customers and approximately 59% of our net sales, while during 2002 sales to residential customers accounted for 30% and 61% of the volume of natural gas we delivered to our customers and our net sales, respectively. Our tariff schedule is structured so that residential customers pay a higher tariff per unit of consumption than other groups due to the lower load factor and higher operating costs associated with these customers. Under our License, we are generally required to provide continuous uninterrupted service to residential customers.

Our volume of sales to residential customers increased from approximately 1.7 BCM (61 BCF) in 2002 to approximately 1.8 BCM (64 BCF) during 2003. We added approximately 16,289 and 8,387 net new residential customers in 2003 and 2002, respectively. Residential customers receive residential service and pay the tariff for that class of service. No written contracts are required to obtain residential service. The tariff for residential customers consists of a fixed charge per invoice and a charge per unit of consumption. Pursuant to Decree No. 181/2004 residential service tariffs have been divided into three categories, R1, R2, and R3, according to the level of gas consumed. The same tariffs will be applicable to transportation and distribution services of the three categories of commercial customers until completion of the process of renegotiation of public services tariffs, at which time different tariffs are to be established for each category of commercial customer on the basis of their consumption of natural gas.

On April 29, 2004, the Secretary of Energy issued Resolution No. 415/2004, pursuant to which residential and commercial users are rewarded or penalized in accordance with their consumption of natural gas. This program rewards users who save energy and penalizes certain users who do not. Thus, users who consume less than 90 percent of the amount of gas they used during the same invoiced period in 2003 will be rewarded by a 10 to 12% discount on the cost of their annual natural gas consumption, while users who use above 95 percent of the gas they consumed during the same invoiced period in 2003 will pay a surcharge on the gas they consume over the 95 percent level. Resolution No. 415/2004 expires in 2005 but may be extended.

During 2003, total deliveries to power plants accounted for approximately 42% of the volume of natural gas we delivered to our customers and approximately 8% of our net sales, compared to 36% of the volume of natural gas we delivered to our customers and 8% of our net sales during 2002. Volumes of natural gas delivered to power plants in our distribution area increased from 2.1 BCM (74 BCF) in 2002 to 2.8 BCM (99 BCF) in 2003. This increase of approximately 33.3% was mainly due to an increase in the demand for electricity and lower hydroelectric generation in 2003 compared to 2002, which led to an increase in the dispatch of gas to thermal power plants.

Our contracts with electric power plants usually contain provisions pursuant to which the power plant is required to pay for reserved transportation capacity whether or not used (known as ship-or-pay provisions). The ship-or-pay provisions guarantee a minimum income to us.

Our generating plant customers have installed combined cycle technology. While electric generating plants with combined cycle technology require less natural gas than open cycle generating plants to generate the same amount of electricity, we estimate that the combined cycle generating plants' greater operating efficiency will increase their dispatch under the rules of CAMMESA, the entity that administers Argentina's wholesale electricity market. The combined cycle technology uses gas-oil as an alternative fuel instead of fuel oil. For that reason and as a consequence of the lower cost of natural gas compared to the cost of an energy equivalent amount of gas-oil, we believe that demand for natural gas from our electric generating customers has increased as a result of such installation of combined cycle technology. The following combined cycle plants located in our service area have been our customers since the following dates: Central Térmica Buenos Aires-1995; Central Costanera-1998; Central Puerto-1999; and Dock Sud-2001. Since 2001 we have also provided transportation services to the marketer supplying natural gas to A.E.S. Paraná, a combined cycle plant located outside our service area.

The combined cycle power plants contract for firm transportation and distribution service with a peaking arrangement that allows us to interrupt the service during periods of high demand and insufficient transportation capacity or gas supply in order to ensure uninterrupted service to our residential customers. The power plants pay lower tariffs than those permitted by our License, in view of the competition derived from alternative sources of fuel and the risks of by-pass. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us-Our revenues may be adversely affected by the right of our clients to by-pass our services".

Our lower margin provision of transportation and distribution services to power plants during spring and summer, when demand for residential service becomes lower, cover a portion of our annual firm transportation costs. See Item 4: "-Business Overview-Commercial Contracts-Gas Transportation Contracts".

All of our power plants and some of our industrial customers purchase gas directly from gas suppliers. Such gas is delivered using our firm transportation capacity and our distribution services, thereby allowing us (a) to avoid incurring gas purchase costs (and possible take-or-pay charges) and (b) to collect a tariff from these customers, thereby defraying all or part of the cost of our firm transportation capacity. These arrangements also allow us to achieve savings by avoiding (a) the cost of purchasing the gas that is used as compression fuel which, pursuant to the regulatory framework, cannot be passed on to customers and (b) certain gross turnover taxes imposed on our sales of gas. Under such arrangements, all such customers purchased the distribution and transportation services we provide. See Item 4: "-Business Overview-Bypass Rights and Competition".

Under the regulatory system governing the Argentine electricity industry, electricity-generating plants are dispatched in ascending order of marginal cost of generation to enable the national electricity system to operate at the lowest possible cost. Hydroelectric generating plants have the lowest marginal cost of generation in the national electricity system. Therefore, higher marginal cost power plants, such as thermoelectric plants (including our power plant customers), will not have their output dispatched to the extent hydroelectric power is available. Accordingly, above average rain or snowfall which permits relatively greater dispatch of hydroelectric generating stations will tend to decrease the dispatch of our power plant customers and their consumption of gas, resulting in our delivering less gas to them. Conversely, any event that increases the demand for natural gas for electric power generation, such as below average rainfall or snowfall which limits hydroelectric power generation, will increase the dispatch of our power plant customers which in turn will benefit us. Below average rainfall and snowfall limited hydroelectric power generation during most of 2000, resulting in a relative increase in thermal power generation and in the demand for gas by thermal power plants. In 2001 and 2002, however, abundant rainfall and snowfall permitted increased hydroelectric power generation and caused a substantial decline in thermal power generation and in the related demand for gas compared to 2000. Additionally, in 2002 the demand for electricity decreased compared to 2001 due to the Argentine economic crisis.

The consumption of electricity in Argentina increased dramatically during 2003 and early 2004 and is expected to continue to increase for the remainder of 2004. The partial stabilization of the Argentine economy increased electricity consumption by 8.9% in 2003 compared to 2002.

According to CAMMESA, of Argentina's total electricity consumption during 2003, approximately 47% was generated by thermal power plants, approximately 43% was generated by hydroelectric power plants, approximately 9% was generated by nuclear power plants and approximately 1% was imported.

We, as a provider of transportation and distribution services, and producers of gas compete directly with sellers of fuel oil for sales of fuel to dual-fuel power plants. Fuel oil prices in Argentina have historically been volatile but generally above the delivered price of gas for an equivalent amount of energy. However, energy-equivalent fuel oil prices have occasionally dropped below the price of gas at the wellhead plus our maximum tariff price for interruptible gas transportation to power plants. To enable us to achieve a higher load factor during the warmer months when residential demand is weaker, certain power plant customers have agreed to pay for a minimum amount of our transportation and distribution services at discounts from maximum tariffs. Conversely, during the winter months, we agreed with certain dual-fuel power plants in our service area to deliver to such power plants a minimum volume of gas on an interruptible basis. If we fail to meet our commitments, we are required to refund a portion of the excess of the cost of fuel oil over the price of the undelivered gas on an energy-equivalent basis. Such agreements were negotiated in order to obtain the commitment of such power plants to agreed volumes of our transportation and distribution services, notwithstanding the risk that we might have to interrupt our deliveries to such power plants in order to serve our residential customers. In light of the current shortage of natural gas supply, under the agreement between producers and the Secretary of Energy (approved by Resolution No. 208/2004), the producers committed certain volumes to be sold to power plants at the agreed prices. See Item 4: "Information on the Company - Business Overview - Regulatory Framework - New Regulations".

During 2003, total sales and deliveries to industrial, commercial and governmental customers accounted for approximately 20% of the volume of natural gas we sold and delivered to our customers and approximately 21% of our net sales compared to approximately 21% of the volume of natural gas we sold and delivered to our customers and approximately 20% of our net sales in 2002. Volumes sold and delivered to industrial, commercial and governmental customers increased by 10.4% during 2003 compared to 2002 due to the partial stabilization of the Argentine economy. Our customers include major industries such as glass, food, chemical and paper producers. Some of them use natural gas as a raw material or have continuous specialized processes that depend on a constant supply of natural gas to support such processes.

Industrial customers that consume at least 10.0 MCM (353 MCF) per day are permitted, subject to the availability of firm capacity, to contract for large volume firm service. The tariff for such service consists of a charge per unit consumed, a fixed charge per invoice and a demand charge. Demand charges allow us to recover the demand charges levied by transportation companies for specific amounts of firm transportation capacity reserved by us. Industrial customers are billed monthly.

Smaller industrial users ("SGP") using a minimum of 1.0 MCM (35 MCF) per day may contract for large volume general service. The tariff for such service consists of a demand charge and a charge per unit of consumption from one of two rate blocks, as well as a fixed charge per invoice.

Large industrial customers with a minimum consumption of 3 MMCM/year (106 MMCF/year) and whose operating processes are interruptible or can replace natural gas with other sources of energy have the right to contract for large volume interruptible service. We have the right to interrupt service under these contracts. The interruptions are generally due to insufficient transportation capacity or gas supply at times of peak demand and are imposed to assure the provision of gas to non-interruptible customers, such as residential customers. We currently operate a program that combines firm and interruptible service for certain large industrial customers in which tariff rates are reduced in exchange for corresponding increases in the number of acceptable service interruptions during peak winter months, thereby expanding the pricing and service availability options of our customers and improving our ability to manage the supply of gas during periods of peak demand. See Item 4: "-Business Overview-Bypass Rights and Competition".

We also supply gas to commercial users (e.g., restaurants, hotels and shopping malls). Such users receive small volume general service which is available to any nonresidential user. The tariff for this service consists of a charge per unit of consumption with three different rate categories based on the customer's usage, as well as a fixed charge per invoice.

As in the case of residential customers, Decree 181/2004 established the division of commercial users into three categories, SGP 1, SGP 2 and SGP 3, according to their consumption levels. The third category of commercial users is no longer deemed uninterruptible in relation to priority rules for the application of restrictions (dispatch rules). The same tariffs will be applicable to transportation and distribution services of the three categories of commercial customers until completion of the process of renegotiation of public services tariffs, at which time different tariffs are to be established for each category of commercial customer on the basis of their consumption of natural gas.

On April 29, 2004, the Secretary of Energy issued Resolution No. 415/2004, pursuant to which residential and commercial users are rewarded or penalized in accordance with their consumption of natural gas. This program rewards users who save energy and penalizes certain users who do not. Thus, users who consume less than 90 percent of the amount of gas they used during the same invoiced period of 2003 will be rewarded by a 10 to 12% discount on the cost of their annual natural gas consumption, while users who use above 95 percent of the gas they consumed during the same invoiced period of 2003 will pay a surcharge on the gas they consume over the 95 percent level. Resolution No. 415/2004 expires in 2005 but may be extended.

Sales to suppliers, dealers and users of CNG as a vehicle fuel accounted for approximately 10% and 10%, respectively, of the volume of natural gas we delivered and of our net sales in 2003 compared to approximately 9% of the volume of natural gas delivered and 9% of our net sales in 2002. Volumes of CNG delivered during 2003 increased by 20.9% compared to the previous year due to an increase in the number of vehicles converted to CNG as a result of repeated increases in the prices of competing fuels.

Approximately 287 service stations provide CNG service in our service area. During 2003, it became practicable to convert diesel engines to run on CNG, resulting in a substantial number of such conversions and a resulting increase in demand for CNG.

The marketing efforts made by us during 2003 focused on promoting state-of-the-art conversions and ensuring safe and good vehicle performance at a reasonable price. We made these efforts in conjunction with CNG equipment suppliers and installation workshops. Moreover and mainly due to the devaluation of the Peso, natural gas prices are lower than other competitive fuels on an energy equivalent basis, thus resulting in increased conversions of vehicles to CNG. All these factors led to increased CNG sales.

The tariff for CNG users consists of a fixed charge per invoice and a charge per unit of consumption.

Decree No. 180/2004 created new categories of service to CNG users: CNG Firm and Interruptible Sale categories and CNG Firm and Interruptible Transportation categories which will be effective upon elimination of the prohibition against purchasing gas directly from producers or marketing companies.

We have been party to a contract with TGS since 1996 under which TGS produces and sells for our account liquids extracted from gas we deliver to TGS' processing plant at Bahía Blanca, Province of Buenos Aires. During 2001 natural gas producers began operating a new gas processing plant in southern Argentina. As a result of the extraction by the new plant of natural gas liquids from gas subsequently delivered to us, we delivered gas to the TGS processing plant since 2001 containing lower volumes of associated liquids than were contained in the gas we have delivered in prior years, resulting in TGS extracting lower volumes of liquids from such gas than it had in the past. We have negotiated with TGS a reduction in its fee for processing the gas we deliver to its processing plant. During 2003, deliveries of natural gas for processing accounted for approximately 2% of the volume of natural gas we delivered and 2% of our net sales compared to approximately 3% of the volume of natural gas we delivered and 3% of our net sales in 2002.

Since gas distribution companies are required to pay for all contracted firm transportation capacity regardless of whether it is utilized but are prohibited from passing through to their tariffs the cost of unused firm transportation capacity for which they have contracted, we strive to achieve the highest possible load factor, that is, to use the highest possible percentage of the firm transportation capacity for which we have contracted. Our management believes that the large number of our residential customers, who account for most of our sales during the peak winter months, and our large base of industrial and power plant customers, which can be served on an interruptible basis throughout the winter months and to which we can make increased sales during the warmer months, constitute a favorable market profile. During 1993, we utilized approximately 92% of our firm transportation capacity of 17.7 MMCM (625.1 MMCF) per day. Throughout the 1993 winter months, we served demand substantially in excess of our firm transportation capacity, utilizing a combination of transportation rights acquired from other gas distributors, linepack (gas stored in the transmission system by virtue of its pressure) and exchange and displacement gas (gas purchased from or exchanged with other holders of transportation capacity). During the 1993 period, deliveries were above our firm transportation capacity for over 70% of the year and there were 36 days during which deliveries exceeded approximately 20.0 MMCM (706.3 MMCF).

Largely as a result of an approximate 20% increase in average firm transportation capacity in 1994 compared to 1993, our load factor dropped to approximately 80.3% during 1994. In 1999, 2000, 2001, 2002 and 2003, our load factors were 84.1%, 93.3%, 78.1%, 71.9 and 83.5%, respectively.

As of June 23, 2004, we had an aggregate firm transportation capacity for distribution and liquids processing of 23.35 MMCM (824 MMCF) per day, representing an increase of 29% from January 1, 1993. Our decision to secure significantly more firm transportation capacity was based in part on our experience during the winter months of 1993 when we struggled to meet non-interruptible residential demand, a legal obligation under our License which, if not fulfilled, could result in the imposition of significant penalties on us, including, in certain circumstances, revocation of our License. See Item 4: "-Business Overview-Regulatory Framework-The Gas Act and our License-Expiration". Since we have no gas storage facilities available to us, we made a strategic decision to increase our access to firm transportation capacity to meet expected growth in demand by increasing our firm transportation capacity with TGS and TGN.

Past due receivables (owed mainly by residential customers and small volume general service commercial clients) totaled Ps.76.8 million at December 31, 2003, Ps.77.2 million at December 31, 2002 (in Pesos as of February 28, 2003) and Ps.173.2 million at December 31, 2001 (in Pesos as of February 28, 2003). As of December 31, 2003, we had a reserve of Ps.66.1 million against past due receivables.

Under our License, we may terminate gas services to delinquent customers provided such customers receive prior notice of termination. No minimum period between notice to delinquent customers and the termination of service is specified in our License or required by ENARGAS. We currently provide customers with at least ten working days' notice prior to termination of gas services. Our management expects, based on industry experience and the lack of economic alternatives to gas for residential customers, that our practice will continue to contribute to a significant reduction in the number of unpaid accounts.

From the Takeover Date through December 31, 2003 our capital expenditures have amounted, in the aggregate, to U.S.$. 535.9 million.

We are required under our License to maintain our operating system in good order. Safety, design, maintenance and operations standards required to be met by Argentine gas distribution systems were governed by Gas del Estado's technical norms, which were based primarily on the (1976) United States Code of Federal Regulations, Title 49, Sections 190 - 192, with some modifications for local conditions and inclusions from a variety of European standards. After the privatization of Gas del Estado, the Argentine government required that Argentine gas distribution systems, including ours, be brought up to current (1991) United States Federal Standards No. 49. Pursuant to our License, we, like the other privatized natural gas transportation and distribution companies, were required during 1993 through 1997 to make certain initial capital investments (the "Mandatory Investments") to meet these requirements during our first five years of operations. ENARGAS has ruled that we have complied with the Mandatory Investment program.

We acquired from Gas del Estado approximately 11,182 km of distribution mains and service pipes supplying approximately 1.9 million customers within our service area. We acquired pipelines operating in four pressure regimes: 286 km of high-pressure system operating at 22 times normal barometric pressure ("Bar"), 548 km of 10 Bar intermediate-pressure system, 6,101 km of 1.5 Bar medium-pressure system and 4,246 km of 0.022 Bar low-pressure system. The records and maps of the distribution system transferred by Gas del Estado have generally been found to be accurate. Upon our commencement of operations in December 1992, we conducted a survey of the assets received from Gas del Estado and began a survey of the distribution pipelines, as described below. We found the assets and the distribution system to be in relatively good condition and adequate for performance of their intended functions.

All of our high and intermediate-pressure systems are of welded steel construction, approximately 80% of which is under 40 years old. Approximately 51% of the medium-pressure system is constructed of welded steel and approximately 49% is constructed of polyethylene. Approximately 85% of the steel medium-pressure system is less than 25 years old and over 90% of the entire medium-pressure system is less than 30 years old. The age of these systems is relatively new by industry standards. The low-pressure system is almost completely made of cast iron, over half of which is less than 50 years old. Our current policy is to replace cast iron pipes with medium-pressure or low-pressure polyethylene pipe depending on which is the most cost-effective solution. Polyethylene pipe has various operational advantages, the most important being its lack of vulnerability to corrosion.

Since the Takeover Date, we have increased the length of our distribution system from 11,182 km to approximately 15,780 km. This increase has primarily been as a result of system expansion, with the majority of such expansion being undertaken with medium-pressure polyethylene pipes. In addition to the distribution mains, the distribution network includes 342 pressure reduction stations. There are no material capacity constraints within the distribution system with regard to serving the present customer base.

The gas injected into the system at the City Gates is odorized by means of a proportional injection system comprised principally of flow controllers and pumps. The system has back-up streams that come into operation in case of malfunctions in the main stream. Samples of gas are taken at around 60 points on the system to monitor odorant concentration and to verify equipment performance.

To ensure that the demands on the system are met according to standards, an on-line Supervisory Control and Data Acquisition ("SCADA") system monitors pressure and flow at City Gates and certain large customers. The SCADA system also monitors pressure at different regulator stations on the network allowing us to take decisions for managing the flows on the system in order to guarantee supply to all our customers.

Our metering system consists of approximately 1.9 million meters. New metering systems with temperature and pressure correctors were introduced for large customers to enable remote monitoring and control of distribution, including the ability to monitor the interruption of supplies to users with interruptible supply contracts during the periods of peak winter demand.

Following the privatization of Gas del Estado, our management emphasized projects intended to ensure the safety and reliability of our distribution system. We completed a review of all the regulators and governors located at the pressure regulator stations and we have replaced or repaired them as necessary. We also conducted a comprehensive survey of leakage covering the entire system and found that the system had a leakage rate comparable to international standards. We performed a risk-based maintenance analysis of the pressure regulator stations aimed at adapting them to modern operational standards. This study resulted in the first phase of the project that ended in December 2001 whereby work was completed at thirty-one pressure regulator stations.

In order to ensure the integrity of the distribution system in the most cost-effective manner, we separate preventive and corrective maintenance activities. Corrective maintenance is carried out by our Service Center, which consolidates a number of activities related to customer service. The Service Center is the main communication channel with customers, particularly when handling emergencies. Safety, cost, quality and speed of service are key aspects of this function.

We classify and prioritize gas leaks reported by the public according to the risk involved in each leak. During 2003, we handled all gas leaks reported by the public which were classified as high priority within the first two hours of their being reported and handled 98.3% of them within an hour of their being reported, compared to 97.1% in 2001.

We have conducted and will continue conducting a substantial amount of multifunctional training in safety and operations with a view to having a team that will improve customer service at a lower cost. We focus maintenance training on preventive, rather than corrective, activities intended to minimize risks.

Preventive maintenance activities seek to minimize the risk of system failure and are responsible for the system's scheduled and unscheduled maintenance activities. Investment in preventive maintenance allows us to reduce the number of leaks leading to reported emergencies. We have introduced a pressure management program consisting of placing profilers in most of the district governors that feed the low-pressure system. These profilers allow us to maintain even pressures in the system in spite of demand fluctuation, avoiding over-pressurization at night and ensuring proper supply during periods of peak demand. We have installed remote control equipment on 20 key district governors which enable us to adjust pressure setting more rapidly.

We have replaced significant portions of our older pipeline systems, mainly focusing on the cast iron and steel networks.

Due to the current economic situation in Argentina, we will continue the minimum maintenance activities necessary to ensure a safe and reliable gas distribution system.

Initial Gas Purchase Contracts

In anticipation of the privatization of Gas del Estado, the Argentine government caused several gas supply contracts to be executed between Gas del Estado and YPF. Those gas supply contracts were assigned to one or more distribution companies to provide them with access to gas supplies upon the commencement of their operations in December 1992, according to their respective anticipated gas supply requirements, and to avoid gas supply disruptions to customers after the privatization of Gas del Estado. As part of the transfer of assets from Gas del Estado to the distribution companies, we were assigned rights under two gas supply contracts: (i) a gas purchase contract dated November 18, 1991 between Gas del Estado and YPF (which subsequently made a partial assignment of its rights and obligations thereunder to certain private producers that had acquired a majority working interest in areas formerly operated by YPF) (the "Austral Contract"), and (ii) a contract entered into between Gas del Estado and YPF specifically for assignment to us.

Natural gas prices at the wellhead were deregulated in accordance with the Gas Act by Executive Decree No. 2,731/1993 as of January 1, 1994. As a result, the price of gas under our new and renegotiated supply contracts increased from the previously regulated price of U.S.$0.97 per MMBTU to a weighted average of U.S.$1.3 per MMBTU at December 2001.

The cost of gas, before and after deregulation, is passed through to our customers, subject to ENARGAS' approval. ENARGAS may limit the portion of the gas prices which we pass on to our users to the extent it determines that the price we paid exceeds the price paid by other distributors in similar conditions and for equivalent volumes. See Item 4: "-Business Overview-Regulatory Framework-Tariffs-Semiannual Adjustments to Tariffs Contemplated by Our License". In considering a request that the prices we paid for gas be included in our tariffs, our License provides that ENARGAS may review whether the price increases were prudently incurred. In August 1994, the Argentine government enacted Decree No. 1,411/1994 which empowers ENARGAS to limit the pass-through of gas prices to prices that are no higher than the lowest price for similar quantities of gas purchased under similar conditions from the same field in the event it should find that the contracts under which we purchased the gas were not the product of a transparent, open and competitive process.

The Gas Act and our License contemplate that tariffs will be adjusted semiannually to reflect changes in the cost of purchasing gas and purchasing transportation services. See Item 4: "-Business Overview-Operations-Tariffs-Semiannual Adjustments to Tariffs Contemplated by Our License". Tariff adjustments based on gas price changes occur in May and October. We must submit our gas purchase contracts to ENARGAS to support a request for a tariff adjustment that is based on estimated quantities to be purchased at contractual prices under each such contract during the upcoming tariff period. We have disagreed with ENARGAS on the adjustment of tariffs to reflect increases in the price of gas on a number of occasions when ENARGAS partially denied or delayed tariff increases we requested based upon price increases we had contractually agreed to with our gas suppliers. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us-We have been subject to, and may continue to be subject to, adverse tariff adjustments".

The Public Emergency Law (passed on January 6, 2002) and Decree No. 214/2002 which converted all U.S. Dollar-denominated obligations existing as of January 6, 2002 into Peso-denominated obligations at a rate of exchange of one Peso per U.S. Dollar, have affected all of our U.S. Dollar-denominated contracts governed by Argentine law, including our gas supply agreements which are essential in order to provide our licensed service. The Public Emergency Law also provides that, should any such contract, as modified by operation of the Public Emergency Law, be too burdensome for one of the parties and should the parties fail to reach an agreement with respect thereto, the matter may be referred to the courts so that an equitable solution may be reached. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us-We are currently renegotiating certain of our agreements, including agreements for the purchase of natural gas, which have been pesified".

Pursuant to the Public Emergency Law producers were entitled to the pesified value of their Existing Contracts plus the CER adjustment. During 2002 and 2003 we paid gas producers in Pesos, in accordance with the tariff chart approved by ENARGAS but we did not pay them the CER adjustment. Gas producers continued to reserve their rights to charge an amount equal to the Peso equivalent of the original Dollar price they were contractually entitled to under the Existing Contracts. During 2003, gas producers revised their initial claim for payment under the Existing Contracts and claimed instead the pesified value of the Existing Contracts plus the CER adjustment.

As a result of the decline in demand for natural gas during 2002, we commenced negotiations with our gas suppliers to modify the terms of our gas purchase contracts. In late 2003 we reached agreement with our gas suppliers on revised volumes and take-or-pay obligations (the "Revised Purchase Contracts"). As part of such agreements we were relieved of any take-or-pay obligations we might have had under the Existing Contracts.

As a result of these negotiations our contracts with Total Austral S.A., Pan American Energy LLC, Sucursal Argentina, Wintershall S.R.L. (the "Total/Pan American Energy/Wintershall Contract") and YPF S.A. (the "YPF Contract ") were amended. Volume deliverable under the Total/Pan American Energy/Wintershall Contract amounted to 3.2 MMCM per day (113 MMCF) during the summer and winter period, with take-or-pay commitments between 70% and 85% of the monthly contract quantities. Volume deliverable under the YPF Contract amounted to 3.0 MMCM per day (106 MMCF) during summer time and 6.0 MMCM per day (212 MMCF) during winter time, with a take-or-pay commitment of up to 72% during summer time and 80% during winter time. The YPF Contract expires in February 2007.

The 2004 Agreement set the price of natural gas at the TSEP through 2006. The Federal Planning Ministry confirmed the validity of the 2004 Agreement through Resolution No. 208. The 2004 Agreement established a 45-day term, beginning on April 23, 2004, during which outstanding gas purchase agreements among producers and gas distribution companies were to be renegotiated (principally in respect of volumes and take-or-pay obligations). See Item 4: "-Regulatory Framework - New Regulations". During May and June 2004, we renegotiated all but one of these contracts as set out below. In addition, under the terms of the 2004 Agreement gas producers have waived their claims under either the Existing Contracts provided the government abides by the terms of the 2004 Agreement.

The Total /Pan American Energy/Wintershall Contract from the Neuquén Basin was divided into two contracts, without a change in the aggregate volumes. The Total Austral S.A./Pan American Energy LLC Argentine Branch contract provides us with 2 MMCM (71 MMCF) and the Wintershall Energía S.A. contract with 1.2 MMCM (42 MMCF). Under each of these contracts 90% of the volume supplied is on a take-or-pay basis. These contracts each expire on January 1, 2007.

In the Austral Basin, Total Austral S.A. and Wintershall Energía S.A. each provide us with 1.875 MMCM (66 MMCF), and Pan American Sur S.R.L. with 1.250 MMCM (44 MMCF). Under each of these contracts 90% of the volume supplied is on a take-or-pay basis. These contracts expire on January 1, 2011 however, prices and volumes agreed under these contracts must be renegotiated in January, 2007 in accordance with the terms of the 2004 Agreement.

In addition to the contracts described above, we also have several minor contracts with small gas producers.

Under all contracts, including our minor contracts with small gas producers, we are entitled to purchase a total of approximately 17.29 MMCM of gas per day (610 MMCF) during the winter months, of which 13.87 MMCM (489 MMCF), or 80%, per day has been contracted on a take-or-pay basis and 13.58 MMCM of gas per day (480 MMCF) during the summer months, of which 9.32 MMCM (329 MMCF), or 70% per day has been contracted on a take-or-pay basis.

The following table sets forth the daily aggregate amount of natural gas we may purchase under long-term contracts as of June 23, 2004, during the years and seasons indicated, and our seasonal daily take-or-pay obligations under such contracts:

______

Notes:

Our gas purchase contracts generally allow us to recover any amounts paid as a result of incurring take-or-pay liabilities to gas suppliers within periods of three to twelve months by taking additional gas in amounts in excess of daily contract minimum volumes. We believe that it is unlikely that the take-or-pay provisions in our gas supply contracts will result in any significant liability for gas not taken. Since 1993 we incurred no take-or-pay liability under our gas purchase contracts that we were not able to recover by taking such gas supply at a later time at no additional cost to us.

Our exposure to take-or-pay liability is affected by a number of factors that are not within our control. As a result of the decline in demand for natural gas during 2002, we commenced negotiations with our gas suppliers to modify the terms of our gas purchase contracts. In late 2003 we reached agreement with our gas suppliers on revised volumes and take-or-pay obligations (the "Revised Purchase Contracts"). As part of such agreements we were relieved of any take-or-pay obligations we might have had under the Existing Contracts. As a result of the 2004 Agreement we renegotiated our gas supply contracts. See "-Business Overview - Commercial Contracts - Current Gas Purchase Contracts". Our take-or-pay commitments through 2004 under those gas purchase contracts require us to pay an average of 70-80% of the gas that we are entitled to purchase under such contracts.

Executive Decree No. 2,731/1993 established a system whereby all gas purchases and sales made under contracts having a duration of more than six months are deemed to be made in the long-term natural gas market and all other gas purchases and sales are deemed to be made in the short-term natural gas market. This decree requires that sellers and buyers of natural gas register in a special registry and establishes several reporting obligations regarding volumes, prices, shipping and delivery points and the absence of clauses that restrict or distort competition. All information furnished pursuant to these requirements is to be treated by the Energy Secretariat as confidential. Pursuant to these regulations, distribution companies (including us) are allowed to purchase no more than 20% of their gas supplies in the short-term natural gas market. The ceiling on purchases in the short-term natural gas market may be waived by the Energy Secretariat in the event of force majeure and may be increased to 40% upon development of increased competitiveness in the short-term natural gas market.

Since early 1999, we have been purchasing gas in the spot market; since May of the same year, we have taken advantage of Executive Decree No. 1,020, under which we share with our customers 50% of the profit or loss resulting from differences between our purchase prices of gas in the spot market and reference prices posted by ENARGAS. The volume we purchased in the spot market accounted for between 7% to 13% of our monthly gas purchases in 2003 and between 5% and 15% of our monthly gas purchases in 2002.

General

Two gas transportation companies, TGS and TGN, were created in connection with the privatization of Gas del Estado. They are regulated by ENARGAS and must provide transportation service to customers pursuant to the terms of their licenses, the Gas Act and other regulations. See "-Our History and Development-The Argentine Natural Gas Industry". Transportation companies are prohibited from buying gas for resale; we and the other distribution companies purchase gas directly from producers for resale to customers.

The TGS system consists of three main pipelines, the San Martín, Oeste-Neuba I and Oeste-Neuba II pipelines. The TGN system consists of two main transmission pipelines, the Norte line and the Centro-Oeste line. In addition, the TGN system is connected to the Bolivian gas transportation system. The TGS system includes the Buenos Aires ring connecting it to the TGN system. Our contracts with TGS (see "-TGS Transportation Rights") provide for service over the San Martín, Oeste Neuba I and Oeste-Neuba II pipelines. We also have contracts with TGN (see "-TGN Transportation Rights") providing transportation of natural gas by use of an indirect connection via the Buenos Aires ring.

The transportation tariff for firm transportation consists of a capacity reservation charge and is expressed as a maximum monthly charge based on the cubic meters per day of reserved transportation capacity. Firm transportation capacity contracted by distribution companies must be paid for whether or not the capacity is actually used but the cost of unused transportation capacity may not be passed through to customers. Accordingly, it is important that distribution companies achieve a balance between their firm transportation commitments and demand for gas in their service areas. In contrast, interruptible transportation services are provided on the basis that the transportation company will be used to transport gas when and if capacity is available in the system. Tariffs for interruptible transportation service are equivalent to the unit tariff of the reservation charge for the firm service using a load factor of 100%. For both firm and interruptible transportation services, we are obligated to provide the transportation company with a natural gas in-kind allowance, equivalent to the gas consumed as compressor fuel or lost in transportation. From 1993 through 2003, approximately 7% of all gas purchased by us was provided to the transportation companies as in-kind allowances.

In the past, the expanded gas transportation capacity of the transportation companies in Argentina has generally been adequated to allow us to meet peak-day demands of all our non-interruptible customers. Nevertheless, we, like other distribution companies, will normally interrupt service to power plants and other industrial users at peak periods in order to meet core non-interruptible demand. We met all demand for non-interruptible service during the winter months from 1995 through 2003. See Item 4: "-Business Overview-Gas Transportation Contracts - Final Transportation Balance".

We cannot acquire additional firm transportation capacity because TGS and TGN are not constructing or expanding new gas pipelines. Decree No. 180 and the regulations issued thereunder to date established an investment system for basic infrastructure works through the creation of a trust fund to deal with gas transportation and distribution investments proposed within the scope of activities carried out by the transportation and distribution companies. Such decree was further regulated by Ministry of Planning Resolution No. 185/2004 (published in the Official Gazette on April 20, 2004) which created a global program for the issuance of debt securities and/or equity securities in financial trusts with a view to natural gas distribution and transportation expansion and/or extension works. Meetings were carried out to consider a project proposed by the Secretary of Energy and the possible impact of such proposal on the current transportation and distribution system. Each of TGS and TGN were involved in an open bidding process under the terms of Resolution No. 185/2004 in order to expand their transportation capacity by approximately 5% of their current total transportation capacity. This bid to expand their transportation capacity was approved by ENARGAS on June 16, 2004. Distribution companies as well as industrial companies interested in purchasing this increased transportation capacity were involved in a bidding process. Once the successful bidders are determined, such successful bidders shall pay a fee relating to the increased transportation capacity that has been granted to them pursuant to the bidding process.

As of June 23, 2004, we had contracted for aggregate firm transportation capacity of 23.35 MMCM (824 MMCF) per day, an increase of 32% from January 1, 1993. While we transport gas primarily with TGS, we began to transport gas with TGN in 1994. We increased our rights to firm transportation capacity, primarily by acquiring a significant portion of newly constructed transportation capacity from TGS and TGN and through supplementary arrangements with other holders of transportation capacity rights. In addition, we have entered into several exchange and displacement agreements with TGS that allow us to improve our utilization of existing transportation capacity, and we have acquired the right to use the firm transportation capacity of others on an interruptible basis, thereby permitting higher overall annual sales and the ability to better meet the demands of non-interruptible customers during peak periods.

As of June 23, 2004, we had available firm transportation capacity with TGS of 21.85 MMCM (752 MMCF) of gas per day through six transportation agreements containing similar terms. The largest transportation agreement provides us with aggregate firm transportation capacity for distribution of 17.1 MMCM (604 MMCF) of gas per day from the following producing areas: Province of Tierra del Fuego, 3.4 MMCM (120 MMCF); Province of Santa Cruz, 1.1 MMCM (39 MMCF); and the Province of Neuquén, 12.2 MMCM (430 MMCF). This contract includes 0.4 MMCM (14 MMCF) per day of firm capacity for the transportation of natural gas to the liquid gas separating complex owned by TGS near the city of Bahía Blanca in the Province of Buenos Aires. This contract expires in May 2014. We are entitled under this contract to a 30% step-down right exercisable on May 1, 2004 but due to the demand increase we decided not to use it. See Item 4: "-Business Overview-Revenues-Processed Natural Gas Service".

The second contract with TGS provides us with firm transportation capacity of 1.6 MMCM (56 MMCF) of gas per day from the Neuquén basin. This contract expires in May 2014.

The third contract with TGS provides us with firm transportation capacity of 0.5 MMCM (18 MMCF) of gas per day from the Neuquén basin. This contract expires in May 2014.

The fourth contract with TGS provides us with firm transportation capacity of 1.5 MMCM (53 MMCF) of gas per day from the Tierra del Fuego basin. This contract expires in May 2014.

The fifth contract with TGS provides us with firm transportation capacity of 0.1 MMCM (3 MMCF) of gas per day from the Neuquén basin. This contract expires in May 2014.

The sixth contract with TGS provides us with firm transportation capacity of 0.5 MMCM (18 MMCF) of gas per day from the Neuquén basin. This contract expires in May 2014.

The seventh contract with TGS provides us with firm transportation capacity of 0.55 MMCM (19 MMCF) from Tierra del Fuego basin to the province of Santa Cruz. This contract expires in May 2014.

In addition, we have six interruptible transportation contracts with TGS for a total of approximately 14.1 MMCM (498 MMCF) of gas per day. The first contract provides for interruptible transportation capacity of up to 6.5 MMCM (230 MMCF) of gas per day on the Neuba II pipeline. That contract expired on August 31, 1997 but it remains in effect pursuant to our exercise of an annual renewal clause. The second contract provides for interruptible transportation service for 3.0 MMCM (106 MMCF) of gas per day. This contract became effective in May 1997, and expires in May 2014. The third contract provides for interruptible transportation service for 1.0 MMCM (35 MMCF) of gas per day. This contract became effective in June 1996, and expired in June 1997, but it remains in effect pursuant to an automatic annual renewal clause. The fourth contract provides for interruptible transportation capacity up to 0.6 MMCM (21 MMCF) of gas per day. This contract became effective on June 10, 1999 and expired on June 10, 2000 but it remains in effect pursuant to an automatic annual renewal clause. The fifth contract provides for interruptible transportation service for 2.0 MMCM (70.6 MMCF) of gas per day. This contract became effective on June 1, 1999 and expired on June 1, 2000, but it remains in effect pursuant to an automatic annual renewal clause. The sixth contract provides for interruptible transportation service for 1.0 MMCM (35 MMCF) of gas per day. This contract became effective on May 2, 2000 and expired on May 2, 2001 but it remains in effect pursuant to an automatic annual renewal clause.

On September 9, 1993, we entered into a contract with TGN (the "TGN Contract") for 1.5 MMCM (53 MMCF) per day of firm transportation capacity to be constructed by TGN. The TGN Contract became effective on June 1, 1994. The TGN Contract expires on May 31, 2006 and may be renewed at our election for successive three-year periods, up to a maximum of nine years.

On June 1, 1996, we contracted with TGN for 0.5 MMCM (18 MMCF) per day of firm transportation. The arrangement with TGN provides for two contracts, one being for 0.4 MMCM (14 MMCF) per day of firm transportation capacity for distribution and expiring in May 2006 and the other being for 0.1 MMCM (4 MMCF) per day and expiring in May 2006.

In June 1997, we entered into several agreements with certain industrial companies which transfers to them 1.0 MMCM (35 MMCF) of gas per day of our firm transportation capacity with TGN. This contract became effective in July 1997 and expires in May 2006.

During 2001 we entered into an agreement for 0.5 MMCM (18 MMCF) per day of our firm transportation capacity with TGN. The contract became effective in May 2001and expires in May 2016.

We entered into an agreement with a gas distribution company for interruptible capacity from the Neuquén basin for a period of seven years beginning November 1, 1994, which assures us of a minimum of 2.5 MMCM (88.3 MMCF) of gas per day. The agreement was renewed on May 2001 for a period of fifteen years and 3.0 MMCM (106 MMCF) of gas per day. Pursuant to this contract, we have agreed to certain "ship-or-pay" obligations at a reduced rate.

In order to face an estimated peak demand for non-interruptible service of approximately 22 MMCM (776 MMCF) per day from May through September 2003, we contracted for aggregate firm transportation capacity to 23.35 MMCM (824 MMCF) of gas per day, which was generally adequate to satisfy demand during the winter of 2003. During the 2003 winter months, peak-day deliveries did not exceed firm transportation capacity. Our load factors were 83.5%, 71.9% and 78.1% for 2003, 2002 and 2001, respectively.

We have a number of agreements with BG International Limited, a subsidiary of BG Group, with respect to BG Group's role as our Technical Operator.

BG Group provides technical assistance to us as Technical Operator under the terms of an eight-year technical assistance agreement originally dated December 28, 1992 (the "Technical Assistance Agreement"), which is renewable with the consent of both parties and the term of which has been extended as described below. The services required to be provided by BG Group under the Technical Assistance Agreement include advising us on: (i) replacement, repairs and renovation of facilities and equipment to ensure that the performance of the system is in accordance with standards of prudent companies with good reputations; (ii) preparation of performance evaluations, operating cost analyses and construction assessments and advice related to budget control; (iii) safety, reliability and efficiency of system operation and gas industry services; (iv) compliance with applicable laws and regulations relating to safety and health, pollution and environmental protection of the system; (v) routine and preventative maintenance of the system; (vi) staff training; (vii) design and implementation of the procedures necessary to accomplish the aforesaid services; and (viii) design and implementation of a management information and inspection system for all major aspects of natural gas distribution.

The original Technical Assistance Agreement provided for the payment to BG Group of an annual technical assistance fee net of any Argentine value added tax or local gross turnover tax equal to the greater of (i) U.S.$3.0 million and (ii) 7% of the amount obtained after subtracting U.S.$3.0 million from pre-tax net income before interest expense, financial income (expenses) and holding gains (losses) and income taxes. The parties renewed the Technical Assistance Agreement on December 28, 2000. While the terms and conditions of the original Technical Assistance Agreement were generally maintained, it was amended to provide that (a) the annual fixed fee will be payable in advance and in 12 installments instead of in three installments, (b) the parties may terminate the Technical Assistance Agreement upon 180 days' notice and (c) the Technical Assistance Agreement will expire on December 28, 2008. On January 4, 2001 ENARGAS informed the parties it did not have any objections regarding the renewal.

The Technical Assistance Agreement also provides for BG Group to make its employees available to us for either long-term employment, in accordance with the Manpower Supply Agreement discussed below, or for purposes of providing advice or implementing such advice. Advice is provided to us at no cost, subject to the reimbursement by us of all direct expenses incurred by BG Group, including travel and living expenses incurred by BG Group employees providing such advice. The fees of BG Group under the Technical Assistance Agreement and other disbursements thereunder and under the Manpower Supply Agreement are to be paid out of our revenues prior to the declaration and payment of dividends.

The shareholders of Gas Argentino have agreed to provide resources and to send employees to us in order to assist the Technical Operator in performing its duties under the Technical Assistance Agreement. BG Group has agreed to compensate YPF S.A. for any such collaboration out of the funds received by it under the Technical Assistance Agreement. We have benefited from BG Group's experience as an operator in the natural gas industry.

Pursuant to the Public Emergency Law and Decree No. 214/2002, our Dollar-denominated payment obligations under the Technical Assistance Agreement were converted to Pesos at the rate of Ps.1 per U.S. Dollar plus a CER adjustment. Consequently, and due to our financial situation, the parties entered into an amendment (the "Amendment") to the Technical Assistance Agreement which became effective March 1, 2002. The Amendment requires us to pay an annual fee equal to the greater of (a) Ps.360,000, adjusted by CER (the "Fixed Management Fee"), and (b) the 7% of our net profits (the "Profit Fee") if a financial debt restructuring is achieved. The Amendment also establishes that from the fiscal year in which the Profit Fee is higher than Ps.3 million adjusted by CER as from March 31, 2002 and provided we achieve a financial debt restructuring, the Amendment will have no further effect and we shall pay, in addition to the ordinary management fee, an amount equal to the Fixed Management Fee of Ps.3 million adjusted by CER as from March 1, 2002 annually, less any payments made in accordance with the Amendment.

In order to provide us with highly trained and experienced employees to fill certain senior management positions, we entered into a Manpower Supply Agreement with BG Group dated November 13, 1993. Any employees hired under the Manpower Supply Agreement on a long-term basis are placed on our payroll. We reimburse BG Group for the salaries, expenses and other costs associated with the short-term placement of BG Group managers with us. While we hired a number of senior managers under the Manpower Supply Agreement, we have not done so since March 2002.

A new Personnel Supply Agreement was entered into in August 24, 2002 between BG Argentina and us, effective from February 1, 2004 for a term of four years from such date. Pursuant to such agreement BG Argentina has to provide highly trained personnel for management and operational positions on a monthly fee basis to be calculated pursuant to the costs that BG Argentina incurs in order to provide the service.

Although our License grants us the exclusive right to distribute natural gas within our service area, Argentina's gas delivery system is an open-access system. A primary feature of an open-access system is that large users within our service area are permitted to contract for the purchase of natural gas from marketers or producers and enter into contracts with transportation and distribution companies to deliver the purchased gas to these users. Such users arrange their own gas supply while they continue to use our distribution system and our transportation capacity for the delivery of gas. In such cases, users would pay a tariff to us for the use of the distribution system and our transportation capacity. Alternatively, users may build a direct connection to a transmission system but purchase gas from us and pay a tariff to us to cover the cost of the purchased gas. Customers in our service area who contract for both direct purchase and transportation of gas without use of our distribution system would not pay us a tariff.

The consumer which wishes to bypass our system completely and avoid paying any tariff to us must incur various costs and face certain practical limitations that, in some cases, make bypass economically disadvantageous or impractical. For example, bypass users not using our distribution system must incur the expense of building and maintaining connection lines (an expense that increases with distance from the transmission line and with population density of the proposed pipeline area) as well as the expense of associated metering and other facilities. Limited access to firm transportation capacity will also be a problem for users which require an uninterrupted gas supply. In addition, a customer desiring to purchase gas from a third party must give ENARGAS and us three months' notice of its intention to do so.

All of our power plant customers and some of our industrial customers purchase gas directly from gas suppliers. Such gas is delivered using our firm transportation capacity and our distribution services, thereby allowing us (i) to avoid incurring gas purchase costs (and take-or-pay charges) and (ii) to collect a tariff from these customers, thereby defraying all or part of the cost of our firm transportation capacity to such customer. These arrangements also enable us to achieve savings by avoiding (a) the cost of purchasing gas that is used as compression gas fuel which, pursuant to the regulatory framework, cannot be passed on to customers and (b) certain gross turnover taxes imposed on our sales of gas. Under such arrangements, all such customers purchase the distribution and transportation services we provide.

We have built strong working relationships with many of our major customers and are implementing contracting and pricing policies that discourage the construction of direct connecting pipelines between our major customers and the transportation systems that would completely bypass our system and avoid the use of our firm transportation capacity. It is possible that certain of our customers will completely bypass our services or require us to further unbundle our services in a manner that could adversely affect our margins. It is also possible that ENARGAS will reduce the minimum volume of gas that is required for a customer to purchase transportation capacity directly from the transporter. Our management believes that the effect of any such situations could, however, be partially mitigated by provisions in certain of our firm transportation contracts with TGS which provide that, if a customer of ours enters into a firm transportation agreement with TGS (either directly with TGS or with a third party such as a producer or gas broker), we have the right to reduce commensurately our firm transportation commitment with TGS. Our firm transportation contracts with TGN contain similar provisions.

On June 1, 2000, ENARGAS issued Resolution No. 1,748, which introduced amendments to the Service Regulation for "Small" and "Large" General Service Users which permit the user of 5,000 CM (176.6 MCF) per day of gas instead of 10,000 CM (353.1 MCF) of gas per day to contract for transportation capacity on a firm commitment basis and permit the user of 1.5 MMCM/year (52.9 MMCF) per year of gas instead of 3.0 MMCM (105.9 MMCF) of gas per year to contract for transportation capacity on an interruptible basis. Additionally, the period to notify ENARGAS and the distribution companies of any such proposed by-pass was reduced from six to three months. On December 15, 2000 we filed an administrative proceeding objecting to these changes. This proceeding has not yet been resolved.

Alternative energy sources, primarily fuel oil for power plants and liquid processing gas ("LPG") for residential customers and smaller commercial customers, are currently substitutes for natural gas. The abundance of natural gas in Argentina has historically provided natural gas with a large cost advantage over fuel oil, although such cost advantage has recently diminished due to lower world oil prices and the availability of low-cost Brazilian fuel oil. We intend to continue discounting policies with power plants in order to remain competitive with the price of fuel oil. To allow us to achieve a higher load factor during the warmer months when residential demand is weaker, certain power plant customers agreed to take at least a minimum amount of gas at discounts from maximum tariffs. Conversely, during the colder months, we agreed with certain dual-fuel power plants in our service area that we would deliver to such power plants a minimum volume of gas on an interruptible basis. If we fail to meet our commitments, we are required to refund a portion of the excess cost of fuel oil over the price of undelivered gas on an energy-equivalent basis. With respect to LPG, natural gas is significantly less expensive and offers residential and smaller commercial customers a significant reduction in fuel costs.

We are confident that our current operations are in substantial compliance with applicable laws and regulations relating to health, safety and protection of the environment.

Foreseeing increasing local health, safety and environmental (HSE) legal requirements, we have adopted BG Group's HSE strategies and are committed to complying with BG Group's HSE performance standards (international best practice). We are also approaching green house gases emission reduction issues to minimize the impact on climate change, meeting the expectations raised from the community and non-governmental organisations.

To assure continuous improvement and compliance with legal, regulatory and corporate requirements, ISO 14001 (Environmental Management) and OHSAS 18001 (Occupational Health and Safety Assessment Series) standards have been jointly implemented and certified.

As of December 31, 2003, we maintained insurance coverage for third-party loss and casualty for up to U.S.$ 50 million and our physical assets were insured for up to U.S.$ 86.8 million. We believe that our insurance coverage is commensurate with standards for the international gas distribution industry. We do not carry business interruption insurance. There is no assurance that insurance coverage will be available or adequate for any particular risk or loss.

Below is a description of the regulatory framework applicable to gas transportation and distribution companies, including us. However, and as noted below and elsewhere on our Annual Report, the Public Emergency Law has altered such framework significantly and in a manner that is detrimental to us. These changes also create uncertainty as to our future business.

We have taken all action necessary to reserve our legal rights under our License and the applicable regulatory framework.

In 1994, the Argentine Constitution was amended with respect to public utilities. The amendments include grants of certain rights to users of public utility services, antidiscrimination provisions and provisions requiring regulation of legal and natural monopolies and for user representation on public utility regulatory agencies, including ENARGAS. Although the effect of these amendments on the Argentine natural gas regulatory regime cannot be ascertained at present, the present regulatory framework is generally consistent with the Argentine Constitution, as amended.

The Gas Act, together with Decree No. 1,738/1992, as amended (the "Executive Decree"), other regulatory decrees, the Pliego, the respective transfer agreements and the licenses of each of the privatized gas companies establish the legal framework for the transportation, distribution, storage and marketing of gas in Argentina under a competitive and partially deregulated system. The Gas Act and the respective licenses establish ENARGAS as the regulatory entity charged with administering and enforcing the Gas Act and the Executive Decree and related regulations, subject to judicial review.

Gas transportation and distribution companies operate in an open-access, nondiscriminatory system under which producers and users, as well as distributors, are entitled to equal and open access to the transportation pipelines and distribution system in accordance with the Gas Act, applicable regulations and the licenses of the privatized companies.

The Gas Act provides that a distributor must not unduly discriminate among customers nor may it grant any customer an undue preference. The distributor must offer open access to all parties on an equal footing to any available capacity on the distribution system.

The Gas Act prohibits transportation companies from buying or selling natural gas. In addition:

• gas producers, distributors and users which contract directly with gas producers may not own a controlling interest (as defined in the Gas Act and regulatory decrees) in a transportation company;
• gas producers and transporters may not own a controlling interest in a distribution company;
• customers which purchase gas directly from producers may not own a controlling interest in a distribution company in their geographic area; and
• contracts between affiliated companies engaged in the different phases of the natural gas industry must be approved by ENARGAS. ENARGAS may disapprove such contracts if it determines that they were not entered into on an arm's-length basis.

Our License authorizes us to provide the public service of gas distribution and was granted to us for an original term of 35 years. The Gas Act provides that we may apply to ENARGAS for a renewal of our License for an additional ten-year term upon expiration of the original 35-year term. ENARGAS is required at that time to evaluate our performance and make a recommendation to the Argentine government. We will be entitled to such ten-year extension of our License unless ENARGAS can prove that we are not in substantial compliance with all of our obligations arising under the Gas Act, the Pliego, related regulations and decrees and our License. At the end of the 35-year or 45-year term, as the case may be, the Gas Act requires that a new competitive tender process be held for the granting of a new license. We will have the option, if we have complied with our obligations, to match the best bid offered to the Argentine government by any third party. Regulations have not been issued by ENARGAS regarding the procedures to be followed in awarding a new license upon a competitive tender or with respect to our compensation upon the expiration of our License term. See Item 4: "-Business Overview-Operations-Regulatory Framework-The Gas Act and our License-Expiration".

Our License cannot be amended without our consent, subject to two exceptions. First, ENARGAS may alter the terms of the service specified in our License, provided that an appropriate adjustment is made to the tariffs which we can charge for our services to offset the financial impact of the alteration of the terms of our License. Second, ENARGAS may modify the tariffs initially established in connection with the issuance of our License in accordance with the tariff-setting provisions of the Gas Act. See Item 4: "-Business Overview-
Regulatory Framework-Tariffs".

The Gas Act provides that only licensed private companies may engage in the distribution of gas. A license confers the exclusive right to distribute gas within a specified geographic area, although pre-existing sub-distributors or those which may be created with ENARGAS' approval may also distribute gas. The exclusive right to distribute gas in a geographic area does not encompass the exclusive right to sell gas within that area. Under certain circumstances, users may purchase gas directly from producers or marketers. However, if the gas purchased from others is delivered using our distribution system, the same distribution margin is applicable whether we deliver our own gas to a consumer or the gas is purchased by the consumer from a third party.

A consumer wishing to be supplied with gas from a third party must give ENARGAS and us a minimum of three months notice of its intention to do so. ENARGAS may, depending on market conditions, reduce the minimum length of such notice period. Given current market conditions, the notice period has now been reduced to three months. If a consumer purchases gas directly from others and later wishes us to make sales of gas to it, we are not obligated to reinstate this supply service. If, however, the customer protests our refusal to reinstate service, the matter will be resolved by ENARGAS. See "-Operations -Bypass Rights and Competition".

We have various obligations under the Gas Act, including the obligation to comply with all reasonable requests for service within our service area. A request for service is not considered reasonable if it would be uneconomical for a distribution company to undertake the requested extension of service. We also have the obligation to operate and maintain our facilities in a safe manner, which obligation may require certain investments for the replacement or improvement of facilities as set forth in our License.

Our License details further our obligations which include the obligation to (a) provide distribution service, (b) maintain continuous service, (c) operate in a prudent manner, (d) maintain the distribution network, (e) carry out mandatory investments, (f) keep certain records, and (g) provide periodic reports to ENARGAS.

Our License prohibits us without the prior approval of ENARGAS from assuming debts of Gas Argentino, granting a security interest in our assets in favor of creditors of Gas Argentino, reducing our capital or distributing our assets except by way of dividends in accordance with Argentine law.

Major expansions of gas distribution facilities require prior approval of ENARGAS. The Gas Act provides that the distributor will be granted all rights necessary to effect approved expansions and carry out the licensed service. If a customer requests an expansion of the distribution facilities but the distributor deems it uneconomical, a contribution towards the cost of the expansion may be required from the customer. Disputes regarding the economic feasibility of expansions are resolved by ENARGAS. On July 22, 1993, ENARGAS issued a resolution which regulates the cases in which expansions require approval from ENARGAS either because of their magnitude or because contributions are required by the distributor from users or third parties. This resolution requires that, in cases in which the distributor maintains that the expansion is uneconomical and, accordingly, requires contributions from users or third parties, the distributor prove the correctness of its assertions. Consumers may undertake construction of facilities deemed by the distributor to be uneconomical subject to ENARGAS' approval.

Pursuant to ENARGAS's Resolution No. 283/1996, issued in March 1996, we are required to pay for the expansions of our distribution network that have been partially or completely financed by our customers and have incorporated into our network after the Takeover Date by delivering gas to such customers at no charge and in volumes determined on the basis of a formula set forth in such resolution, which formula is intended to be equitable to our customers and to us. We have no significant obligations to deliver gas after December 31, 2002 in payment of such expansions.

Our License authorizes us to occupy public property without charge for the purpose of rendering the licensed service, or if a charge is levied by a provincial or municipal authority, we may add a surcharge to the relevant tariffs to recover our added costs. Our License also grants us the right to obtain easements over private property required to carry out the licensed service, subject to payment of compensation to the landowners. The Argentine government is obligated to transfer title to the existing easements to us in our service area. The Argentine government is required to clear the title to such easements at the Argentine government's expense or, at our election, we may assume this responsibility and add a surcharge to our tariffs to recover the cost of doing so.

Our License established a system of penalties in the event of a breach by us of our obligations thereunder, including warnings, fines and revocation of our License. See Item 4: "-Business Overview - Regulatory Framework - The Gas Act and our License - Expiration". These penalties may be assessed by ENARGAS based on, among other considerations, the magnitude of the breach or its effect on the public interest. Fines of up to U.S.$500,000 may be levied for persistent breaches of the terms of our License.

Our License may only be revoked by the Argentine government and then only upon ENARGAS' recommendation. Our License specifies several grounds for revocation, including (a) failure to provide 35% or more of our service for 15 consecutive days or 30 nonconsecutive days during a year or (b) the failure to provide 10% or more of our service for 30 consecutive days or 60 nonconsecutive days during a year, provided, in either case, such failure is due to reasons attributable to us. Our License may also be terminated by the Argentine government if (a) the restrictions established by the Pliego and the Transfer Agreement in connection with the transfer of stock in us or Gas Argentino are breached (see Item 7: "Major Shareholders and Related Party Transactions"), (b) the restrictions established by the Gas Act and the Pliego on cross-ownership between production, transmission and distribution of gas are breached, or (c) we attempt a transfer of our License or transfer or encumber a portion of the assets transferred to us by Gas del Estado designated essential assets (the "Essential Assets") or use the Essential Assets for purposes other than those established in our License without ENARGAS' approval. Additional events resulting in cancellation of our License include gross failure by us to make mandatory investments or our other obligations under our License, and our bankruptcy, liquidation or the winding up; however, except in the case of our bankruptcy, liquidation or winding up, our License requires that we be given notice and the opportunity to cure prior to termination. The Argentine government has issued Decree No. 1834/02, which provides that neither the filing of a reorganization proceeding by us nor the filing of a bankruptcy petition against us on or before December 10, 2003 will cause the termination of our License. We cannot assure you that the suspension of this provision of our License will remain in effect after that date. This date was extended until December 10, 2004 by Decree No. 1293/03.

If our License is terminated by the Argentine government prior to the expiration of its full term as a result of nonperformance by us, the Argentine government may offset our net book value against any sum due for damages to the Argentine government caused by the events resulting in the termination of our License. Such damages cannot be less than 20% of our net book value. In addition, the Argentine government under such circumstances can require Gas Argentino to transfer its shares in us to ENARGAS as trustee until those shares are sold pursuant to a competitive tender.

Upon forfeiture of our License, the Argentine government has the right to appoint an interim operator to continue providing the licensed services until a new licensee is appointed. The fees and expenses incurred by such interim operator shall be borne by us. We will not be entitled (subject to judicial review) to any payment for loss of profit or in consideration for the interim operator's use of our property.

Upon revocation of our License, we must transfer to the Argentine government (or to a party designated by the Argentine government) all Essential Assets free and clear of any liens and encumbrances, unless the Argentine government requires Gas Argentino to transfer its shares in us for a subsequent competitive tender.

As a general rule, upon the expiration of our License at the end of its full term, we will be entitled to the lower of the following two amounts: (a) the net book value of our Essential Assets (including property, plant and equipment) determined on the basis of the price paid by Gas Argentino and the original cost of subsequent investments carried in US Dollars and adjusted by the US PPI, net of accumulated depreciation and (b) the proceeds of a new competitive bidding process to acquire our License, net of costs and taxes paid by the successful bidder. See Item 4: "-Business Overview-Regulatory Framework-The Gas Act and our License-Term of our License". At the end of our License term, if we have performed adequately during the term of our License (including any extension, if applicable), we may participate in a new bidding process. In such case, we will have the right to match the best offer made (by paying the excess of the best offer above the appraised value of the Essential Assets) or, if we decline to match the best offer, to receive the appraised value of the Essential Assets, in both cases as calculated in accordance with our License.

All of our debts must be repaid upon expiration of our License, unless (a) we are awarded a new license by exercising the right to match the best offer in a new bid that is called upon expiration of our License or (b) the Argentine government terminates our License and ENARGAS instructs Gas Argentino as a result thereof to transfer all its shares in us to ENARGAS as trustee for their subsequent competitive tender.

Our License may also terminate before the expiration of its term if we give notice that we are waiving our License due to serious and repeated defaults by the Argentine government. In such case, we will be entitled to payment by the Argentine government of the lower of the following two amounts: (a) the net book value of our Essential Assets (including property, plant and equipment) determined on the basis of the price paid by Gas Argentino, and the original cost of subsequent investments carried in US Dollars and adjusted by the US PPI, net of the accumulated depreciation; and (b) the proceeds of a new competitive bidding process to acquire our License, net of costs and taxes paid by the successful bidder.

The Gas Act established ENARGAS as the body to administer and enforce the Gas Act and applicable regulations. ENARGAS' jurisdiction extends to the transportation, marketing, storage and distribution of gas. Its mandate, as stated in the Gas Act, includes the protection of users, the fostering of competition in the supply and demand for gas, and the encouragement of long-term investment in the gas industry.

The Gas Act provides that ENARGAS will be managed by a board of five full-time members who are appointed by the Argentine government with the consent of a Congressional committee. Members of the board serve staggered terms. The terms of the initial board members ran from one to five years. The terms of subsequent board members are five years and board members may be reappointed. The members of the board may, with the consent of a Congressional committee, be removed by the Argentine government, which must expressly state the reasons for such a decision.

ENARGAS' duties include, among other things:

• enforcing the provisions of the Gas Act, applicable regulations and the licenses of the privatized companies;
• advising the Argentine government on the granting, renewal and revocation of licenses;
• issuing orders, regulations or publications of its findings in relation to specific matters brought before it;
• issuing and monitoring compliance with regulations covering safety, technical standards, uniform accounting, metering and billing, and disconnection procedures;
• preventing any anticompetitive or discriminatory behavior by entities subject to the Gas Act;
• approving tariffs and their adjustments;
• issuing guidelines to be observed by the licensee companies in connection with open access to the gas distribution system and ensuring a fair and equal distribution of the available transmission capacity, taking into account the priority for non-interruptible service;
• granting approval for the transfer of controlling interests in the distribution and transportation companies;
• approving construction of new significant facilities, and the expansion or abandonment of existing ones;
• inspecting and testing facilities and ordering the suspension of service and the repair or replacement of facilities and equipment;
• issuing regulations regarding the maintenance of facilities and reporting requirements relating thereto;
• providing for the protection of the environment and public service;
• requiring regulated entities to supply information and documentation in order to verify compliance with the relevant regulations and inspecting transporters;
• applying the penalties, including warnings and fines, provided for in the Gas Act and the licenses; and
• appearing before civil and criminal courts to enforce compliance of the Gas Act and regulations thereunder.

ENARGAS is funded by the annual control and inspection fees paid by, among others, distribution and transportation companies, traders and providers of storage facilities, and by fines and seizures collected in enforcing the regulations. The fee for each company is determined annually by ENARGAS on the basis of the gross income of the regulated industry and the Company's proportionate share of such gross income.

Actions of ENARGAS under the Gas Act are subject to judicial review. Conflicts between two regulated entities or between a regulated entity and a third party arising from the distribution, storage, transportation or marketing of natural gas must be first submitted to ENARGAS for its decision. ENARGAS' decision may be appealed through administrative proceedings to the Secretary of Energy or directly to the federal courts of Argentina.

A substantial portion of the assets transferred by Gas del Estado has been defined in our License as "Essential Assets" for the performance of the licensed service. Pursuant to our License, we are required to segregate and maintain the Essential Assets, together with any future improvements, in accordance with certain standards defined in our License.

We may not, for any reason, dispose of, encumber, lease, sublease or lend Essential Assets for purposes other than provision of the licensed service without ENARGAS' prior authorization. Any expansion or improvements that we may make to the distribution system may be encumbered only for the purpose of securing financing with maturities in excess of one year entered into to finance such expansions or improvements.

Pursuant to the Transfer Agreement, we are required to hold the Argentine government harmless from any claim against the Argentine government for damages caused with or by the Essential Assets or arising from their operation as of the Takeover Date.

The regulatory framework establishes various classes of service and a corresponding tariff for each class of service. The mechanism for setting the tariffs for each class of service is set forth in the Gas Act and in our License. The Gas Act provides that the tariff for natural gas, which may be charged to end users by us, consists of the sum of three components: (i) the price of gas purchased; (ii) the transportation tariff for transporting gas from the production area to the distribution system; and (iii) the distribution tariff established by ENARGAS.

A distribution company may offer discounts from its posted, approved tariffs that reflect a reduction in its rate of return, provided that discounts are not offered in an unduly discriminatory manner and the discounted tariffs are not below the distribution company's cost. Revenues lost as a result of discounting may not be recovered from other customers. See Item 4: "-Business Overview-Bypass Rights and Competition".

As from January 1, 2002, all public services tariffs, including our tariffs, were pesified and frozen in accordance with the Public Emergency Law. Therefore, tariffs are no longer expressed in U.S. Dollars but rather have been converted to Pesos at the rate of Ps.1.00 per U.S.$1.00 and adjustments of tariffs to reflect changes in price indexes of foreign countries are no longer made. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us-We have been subject to, and may continue to be subject to, adverse tariffs adjustments".

We now have two types of tariff, one for the City of Buenos Aires and the other for the Province of Buenos Aires. This is due to the fact that gas tariffs, as of July 1998, were issued by ENARGAS net of turnover tax imposed by the provinces. Turnover tax is payable by the gas distribution companies and was included in the original tariff as of January 1, 1993. Thereafter, different provincial jurisdictions varied the rate of turnover tax and, in some cases, the basis on which it was payable. Thus, in accordance with the Gas Act which provides for the pass-through to customers of any changes in taxes applied to tariffs, ENARGAS authorized the billing of turnover tax to customers as a separate line item in their bills. The aggregate net income of gas distribution companies is not affected by the above-mentioned modification.

In May, July and August 2002, ENARGAS issued resolutions authorizing from May 1, 2002 tariff increases pursuant to tariff values in Pesos for the 2001 winter months. Such increases, however, did not reflect the seasonal incremental cost of gas at the wellhead.

In November 2003, ENARGAS once again postponed a public hearing for the discussion of wellhead gas prices. This hearing was originally scheduled for June 2003 and was postponed to August 2003 and again to November 2003. Finally, ENARGAS issued a resolution approving increases in natural gas tariffs and issued the present tariff charts.

On April 29, 2004, the Secretary of Energy issued Resolution No. 415/2004, pursuant to which residential and commercial users are rewarded or penalized in accordance with their consumption of natural gas. This program rewards users who save energy and penalizes certain users who do not. Thus, users who consume less than 90 percent of the amount of gas they used during the same invoiced period of 2003 will be rewarded by a 10 to 12% discount on the cost of their annual natural gas consumption, while users who use above 95 percent of the gas they consumed during the same invoiced period of 2003 will pay a surcharge on the gas they consume over the 95 percent level. Resolution No. 415/2004 expires in 2005 but may be extended.

The following table sets forth our maximum tariff in effect since May 11, 2004 for each class of service: