Indication by check mark which financial statement item the registrant has elected to follow:

PART I

This annual report on Form 20-F (this "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 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 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 this 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 this Annual Report as anticipated, believed, estimated or expected. We have no plans to update any industry information or forward-looking statements set out in this Annual Report and have no obligation to update any such statements.

Our audited financial statements as of December 31, 2002 and 2001 and for the fiscal years ended December 31, 2002, 2001 and 2000 and the notes thereto (the "Annual Financial Statements") are set forth in Item 18 of this Annual Report. Our Annual Financial Statements are presented in constant 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 herein. Such differences involve methods of measuring the amounts shown in the Annual Financial Statements as well as additional disclosures required by U.S. GAAP and Regulation S-X of the Securities and Exchange Commisison. See Notes 18 and 19 to our Annual Financial Statements contained in Item 18 of this 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.

Our Annual Financial Statements have been prepared assuming that we will continue as a going concern. Our independent auditors, PricewaterhouseCoopers, Buenos Aires, Argentina, issued a report on our financial statements as of and for the year ended December 31, 2002 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 terms 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, 2002 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 this 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 this Annual Report were rounded for ease of presentation.

In this 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 income statements 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, 2002, the only exchange market available was the free market and the quotation was approximately Ps.3.37 per U.S.$1.00 and as of June 23, 2003, the exchange rate was Ps.2.79 per U.S. $1.00. The reader should not construe the translation of currency amounts in this 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.

You should carefully consider the risks described below, in addition to the other information set forth in this Annual Report, including the 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 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 of Argentina, 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. 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 gross domestic product ("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 0.8% in 2000, by 4.4% in 2001 and an estimated 10.9% in 2002, according to the Argentine Ministry of Economy. The unemployment rate increased from 14.5% in May 1999 to 15.4% in May 2000, 16.4% in May 2001 and 18.3% in October 2001. The unemployment rate was 17.8% in October 2002 as published by the Argentine Ministry of Economy. 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 US$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 consessions, 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 (1) civil unrest, rioting, looting, nationwide protests, widespread social unrest and strikes, (2) expropriation, nationalization and forced renegotiation or modification of existing contracts, (3) changes in monetary and taxation policies, including tax increases and retroactive tax reforms, and (4) 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 have resulted in changes in consumer behavior across all sectors of the Argentine population. Such effects have resulted and may continue to result in a decrease in the use of our services by our customers and the type of products and services demanded by them, with a possible corresponding reduction in our revenues.

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.

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 replaces 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. To date the IMF and other multilateral and official sector lenders have indicated that additional amounts of financial support will be dependent on the implementation by Argentina of a sustainable economic program. The IMF, through various pronouncements, indicated that such program should include meeting certain fiscal surplus targets, improving methods of tax collection, reforming tax sharing between the federal government and the provinces, imposing spending controls on the federal and provincial governments, redeeming the debt obligations issued by most provinces which circulated as the equivalent of domestic currency and restructuring the foreign indebtedness on which Argentina has defaulted.

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. In March 2002, the Argentine government issued Decree No. 762/02 by which it replaced the CER with the CVS for certain debts.

All these factors, including the different exchange rates applied to the conversion of foreign currency-denominated bank deposits and foreign currency-denominated loans, have increasingly strained the Argentine financial system. Since January 2002, the Central Bank has been forced to grant substantial financial aid to most of the banks in the Argentine financial system. The corralito, the corralón and certain other measures have, to a significant extent, shielded banks from a further massive withdrawal of deposits, but they have also led to the paralysis of virtually all commercial and financial activities, diminished spending and greatly increased social unrest, exacerbating the already severe recession. As a result, there has been widespread public repudiation of, and protests directed against, financial institutions, which also has had a material adverse effect on the Argentine financial system.

On June 1, 2002, the Argentine government enacted Decree No. 905/02, which gave owners of rescheduled bank deposits originally denominated in foreign currencies as well as those originally denominated in Pesos the option (during a period of 30 banking business days in Argentina starting on June 1, 2002) of receiving bonds issued by the Argentine government in lieu of payment of such deposits. These bonds could be applied to the payment of certain loans under certain conditions. On September 17, 2002, Decree No. 1,836/02 launched another similar exchange offer. Depositors, however, showed little interest in the first or second phases of the offer to exchange their deposits for bonds.

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.

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 factors mentioned above have increased the pressures on an already weakened Argentine financial system. Certain foreign controlled banks have closed their operations in Argentina. Given depositors' loss of confidence in the Argentine financial system, the elimination of the corralón could result in an attempt by depositors to withdraw their deposits and convert the resulting Pesos into U.S. Dollars. Any such pattern of withdrawals would reverse the recent increase in the level of bank deposits while heavy conversions to U.S. Dollars could cause a sharp increase in the Peso/Dollar exchange rate and in inflation. Moreover, due to the liquidity problems of banks in the Argentine financial system, these withdrawals could result in the collapse of the Argentine financial system and could exacerbate the depreciation of the Peso. As of the date of this Annual Report, such pattern of withdrawals had not occurred.

The Argentine banking system's collapse, or the collapse of one or more of the larger banks in the system, would have a material and adverse effect on the prospects for economic recovery and political stability, resulting in a loss of consumer confidence, lower disposable income and fewer financing alternatives for consumers. Such a collapse and its effect on consumers could also have a material and adverse effect on us, including lower usage of our services and a higher level of delinquent and uncollectible accounts.

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, 2003, the exchange rate was Ps.2.79 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 volatily 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, 2002, our debt in foreign currency was the equivalent of U.S.$402.7 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 the first quarter of 2003 the Argentine consumer price index increased by 2.5% and the wholesale price index increased by 0.2%. 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, 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 early December 2001, the Argentine government 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 making certain transfers abroad, including transfers in connection with repayments to foreign creditors. These regulations, which were constantly modified since they were first enacted and which applied to us, have recently been lifted with the exception that transfers abroad in connection with payment of principal of financial debt prior to maturity or payment of interest on financial debt prior to 15 days before its due date require prior Central Bank approval. 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.

On April 27, 2003, presidential elections were held in Argentina. Two candidates from the Peronist party, Carlos Menem, the former president of Argentina, and Néstor Kirchner, the candidate supported by Argentina's then-president, Eduardo Duhalde, obtained approximately 24% and 22% of the total votes, respectively. In accordance with Argentine law, a run-off election was scheduled to take place on May 18, 2003. However, on May 14, 2003, Carlos Menem announced his withdrawal from the run-off election. As a result, Néstor Kirchner became the new president and took office on May 25, 2003. We cannot predict the policies of the Kirchner administration or their effect on us.

As of December 31, 2002 our financial debt amounted to Ps.1,420.3 million (the equivalent of U.S.$421.4 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 to provide legally mandated licensed public services. See Item 5: "Operating and Financial Review and Prospects-Liquidity and Capital Resources". While we have accrued unpaid interest on our financial debt at the rates specified in the relevant governing documents, we have not accrued penalty interest on overdue amounts although that was prescribed by such documents.

Certain of our debt agreements contain clauses that allow the banks to debit automatically from our bank accounts the amount of interest and principal owed to them. Although banks are not currently applying these clauses in view of the comprehensive financial restructuring plan that we intend to develop, we can not assure that in the future the banks would not apply these clauses.

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 are thus 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 the License-Expiration".

Certain of our creditors have requested that we launch a debt restructuring plan prior to completion of the renegotiation of our tariffs with the Argentine government. Accordingly, we intend to develop and present a comprehensive financial restructuring plan to our creditors with respect to all of our financial indebtedness. However, no assurance can be given 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 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.

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 constant 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 amounted to 237% during that 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 ENARGAS Resolution No. 2787 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.

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 the Ente Nacional Regulador del Gas ("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 Adjustment", "Regulatory Framework-Tariffs-Gas Purchase Costs Pass-Through" 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 consumers. Such reduction of the "social tariff" is offset by an increase in the tariffs charged to other consumers. A few days later, the court suspended these increases, following the injuctions 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.

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. 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, 2003 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.$75 million.

Should we not succeed in renegotiating substantially all of our debt obligations, we will not have sufficient funds to meet our financial liabilities to our creditors as they come due. We cannot assure you as of the date of this Annual Report that we will be successful in renegotiating our financial liabilities.

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.

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. We intend to pursue appropriate discounting policies in order to compete with the prices of fuel oil as a fuel for dual-fuel power plants. No assurance can be given that future increases in natural gas prices or decreases in the price of fuel oil would not render the use of the latter more economical, thus adversely affecting 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 the energy equivalent amount of gas-oil, we believe that demand for natural gas from our electric generating customers has increased and will continue to increase as a result of the installation of combined cycle technology. No assurance can be given that future increases in natural gas prices or decreases in gas-oil prices would not render the latter more economical to customers and thereby adversely affect our revenues. See Item 4: "Information on the Company-Business Overview-Revenues-Power Plants". In 2002, our gas deliveries to power plants accounted for approximately 36% of our gas deliveries to all customers and approximately 8% of our net sales. See Item 5: "Operating and Financial Review and Prospects".

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 consumers 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 consumers. Such consumers arrange their own gas supplies while they continue to use our distribution system and our transportation capacity for delivery of the gas. In such cases, the consumers pay us a tariff for the use of our distribution system and transportation capacity. Alternatively, consumers 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. Consumers 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, consumers 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 consumers 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 customers and certain industrial customers 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 customers and (b) certain gross turnover taxes imposed on our sales of gas. Under such arrangements, all such customers will continue to depend on the distribution and transportation services we provide.

We have built strong working relationships with many of our major customers and we are implementing appropriate 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 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 customers 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 customers 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 customers 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 customers 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 demands 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.

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 stamp 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 Neuquén not to collect the stamp tax.

Furthermore, on April 6, 2001, 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.

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.

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. Although we have begun negotiations with gas producers to modify their terms (See Item 3: "- Risk Factors - Risk Factors Related to Us-We may incur take-or-pay liabilities"), as of the date of this Annual Report we cannot predict the outcome of such negotiations or whether we will be able to contract for sufficient volumes of gas to supply our customers. See Item 4: "Information on the Company-Business Overview-Commercial Contracts-Natural Gas Supply-Current Gas Purchase Contracts".

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 gas producers the amounts which ENARGAS has authorized us to pass through in Pesos. However, gas producers are reserving their rights with respect to a future claim for an amount equal to the difference between the price we are paying them and the adjusted contractual price. Most of our gas purchase contracts provide that, in cases where ENARGAS does not authorize the pass-through of the contractual price, the parties may renegotiate the terms of the gas purchase contract. In the event that an agreement is not reached between us and the gas producer, such gas purchase contracts provide that we may terminate the contracts without being obliged to pay compensation to the gas producer. Other gas distribution companies are in a position similar to ours with respect to their relations with their gas suppliers and, as a result, we believe that a resolution of the dispute between producers and distributors may take the form of an industry-wide agreement or regulation.

We did not experience any significant problems regarding deliveries of gas from our suppliers during the winters of 2000, 2001 and 2002. Our financial condition and results of operations could be adversely affected if we were unable to obtain gas of deliverable quality in sufficient volume to meet the demands of our customers.

In addition, our financial condition and results of operations could be adversely affected if an accident or other event affecting the facilities that transport gas to us caused a disruption in those facilities and as a result thereof deliveries were to be restricted or discontinued for a significant period of time.

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.

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, we and several other public service companies 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 as a pass-through cost and would have to be absorbed by the consumers 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 in the tariff paid by our customers in the City of Buenos Aires of any amounts we are required to pay as a result of these claims.

We have consistently denied legal validity for 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.

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.

We are the largest natural gas distribution company in Argentina (in terms of number of customers and volume of gas deliveries), with approximately 24.1% of total deliveries of all gas distribution companies in Argentina during 2002 according to the ENARGAS, 2002 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 users 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 2002, sales to residential customers accounted for approximately 60.7% of net sales, while sales of gas and of transportation and distribution services to industrial and commercial users and governmental entities accounted for approximately 19.8% 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 15,774 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 (the "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;
• Cancellation of employee training programs;
• Detailed listing of our contractual obligations payable and receivable in order to assess the level of our legal, economic and financial exposure and to determine our action plan for renegotiating and adjusting contracts in light of our prospects;
• 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 have decided to launch a debt restructuring plan prior to completion of the renegotiation of our tariffs with the Argentine government. Accordingly, we intend to develop and present a comprehensive financial restructuring plan to our creditors with respect to all of our financial indebtedness. However, no assurance can be given 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: (i) provide continued high-quality service to our customers; (ii) ensure sustained growth in dividends; (iii) achieve a significant reduction in operating expenses; (iv) implement a market strategy more closely based on market analysis; (v) improve the use of our current transportation capacity and become a key participant in the transportation capacity market; (vi) further develop the CNG market; (vii) continue to preserve the environment; (viii) develop our human resources; and (ix) 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, 2002 we had 1,005 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 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 Ps.1,168 million in capital expenditures from 1993 through 2002, Ps.98.6 million in 2000, Ps.137.8 million in 2001 and Ps.20.3 million in 2002 (all amounts in constant Pesos). Due to the financial crisis in Argentina and the pesification and freezing of our tariffs, we have reduced our capital expenditures to amounts required to fulfill License provisions and ensure safe operation of the network but not exceeding asset depreciation. 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 continued economic turmoil and 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 on 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".

The following table sets forth certain information regarding our services to our customers during 2002:

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(b) Some of our customers have multiple facilities. As a result, the number of facilities to which we supply gas is greater than the number of our customers.

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

We provide service to more than 1.8 million residential customers within our service area, approximately 67% of whom are located in the City of Buenos Aires. A partial census taken in 1991 by the Argentine government indicates that 77% of households within our service area (and 95% of households within our service area in the City of Buenos Aires) were connected to our distribution system. In 2002, sales to residential consumers accounted for approximately 30% of the volume of natural gas we delivered to our customers and approximately 61% of our net sales, while during 2001 sales to residential customers accounted for 28% and 62% of the volume of natural gas we delivered to our customers and our net sales, respectively. Our tariff schedule is structured so that residential users pay a higher tariff per unit of consumption than other groups due to the lower load factor and higher operating costs associated with these users. Under our License, we are generally required to provide continuous uninterrupted service to residential customers.

Our volume of sales to residential customers decreased from approximately 1.8 BCM (64 BCF) in 2001 to approximately 1.7 BCM (61 BCF) during 2002. We added approximately 8,387 and 29,866 net new residential customers in 2002 and 2001, 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.

During 2002, total deliveries to power plants accounted for approximately 36% of the volume of natural gas we delivered to our customers and approximately 8% of our net sales, compared to 42% of the volume of natural gas we delivered to our customers and 9% of our net sales during 2001. Volumes of natural gas delivered to power plants in our distribution area decreased from 2.7 BCM (95 BCF) in 2001 to 2.1 BCM (74 BCF) in 2002. Such decrease of approximately 21.8% was mainly due to the increase in rain and snowfall in 2002 compared to 2001 which permitted increased generation of hydroelectric power which supplanted power generated by gas-fired plants and to the profound Argentine economic recession that resulted in a decrease in demand for electricity during 2002 compared to the previous year.

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".

All of our power plants and some of our industrial users 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 possible 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. 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 which 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.

According to CAMMESA, of Argentina's total electricity consumption during 2002, approximately 41% was generated by thermal power plants, approximately 49% was generated by hydroelectric power plants, approximately 7% was generated by nuclear power plants and approximately 3% 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.

During 2002, total sales and deliveries to industrial, commercial and governmental customers accounted for approximately 21% of the volume of natural gas we sold and delivered to our customers and approximately 20% of our net sales compared to approximately 20% of the volume of natural we sold and delivered to our customers and approximately 20% of our net sales in 2001. Volumes sold and delivered to industrial, commercial and governmental customers decreased by 2.4% during 2002 compared to 2001 due to a lower level of economic activity in Argentina since 1999 and the recent economic crisis. 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 users 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 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 users 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 users, 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, 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.

Sales to suppliers, dealers and users of CNG as a vehicle fuel accounted for approximately 9% and 8%, respectively, of the volume of natural gas we delivered and of our net sales in both 2002 and 2001. Volumes of CNG delivered during 2002 increased by 3.7% compared to the previous year due to an increase in the number of CNG-converted vehicles as a result of repeated increases in the prices of competing fuels.

The tariff for CNG customers consists of a fixed charge per invoice and a charge per unit of consumption. Our management believes that the existing infrastructure within our service area presents favorable conditions for further development of our CNG business. Approximately 279 service stations provide CNG service in our service area, and the use of CNG for vehicles is already relatively well accepted. On an energy equivalent-basis, the cost of CNG is approximately one-third of the cost of gasoline and two-thirds of the cost of diesel fuel. Our management believes that opportunities exist, in part for environmental reasons, for additional conversions of government vehicles and company fleets to cleaner-burning CNG. While the costs of converting diesel-burning buses to CNG are currently too high in Argentina to permit widespread bus conversions to CNG, we are studying applications of new CNG conversion technology which could significantly reduce the costs of diesel-burning bus conversions.

Due to the political and economic situation in Argentina during the first quarter of 2002, CNG sales and conversion kit sales were reduced. Nevertheless, during the last nine months of 2002, such sales increased significantly. The marketing efforts made by us during 2002 were focused mainly on vehicle conversions, through commercial agreements with CNG equipment suppliers, and on installation workshops in order to promote state-of-the-art conversions and to ensure safe and good vehicle performance at a reasonable price.

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 in 2002 and 2001 containing lower volumes of associated liquids than were contained in the gas we 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 2002, deliveries of natural gas for processing accounted for approximately 3% of the volume of natural gas we delivered and of our net sales compared to approximately 2% of the volume of natural gas we delivered and 1% of our net sales in 2001.

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 1998, 1999, 2000, 2001 and 2002, our load factors were 67.3%, 84.1%, 93.3%, 78.1% and 71.9%, respectively.

As of December 31, 2002, we had an aggregate firm transportation capacity for distribution and liquids processing of 22.8 MMCM (805.2 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.76.6 million at December 31, 2002, Ps.171.9 million at December 31, 2001 (in constant Pesos) and Ps.116.9 million at December 31, 2000 (in constant Pesos). As of December 31, 2002, we had a reserve of Ps.59.9 million against such amounts.

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, 2002 our capital expenditures have amounted, in the aggregate, to Ps.1,168 million (in constant Pesos).

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 15,774 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 consumers to enable remote monitoring and control of distribution, including the ability to monitor the interruption of supplies to customers 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. 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 2002, 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 97.1% of them within an hour of their being reported, compared to 96.6% 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 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 customers 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". 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". 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. As a result thereof and of the decline in demand for natural gas, we have commenced negotiations with our gas suppliers to modify appropriately the terms of our Gas Purchase Contracts. As of the date of this Annual Report, we are not able to predict the outcome of these negotiations. 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 established. 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".

During 2002 and early 2003, we continued to pay gas producers in Pesos, in accordance with the tariff chart approved by ENARGAS, and the gas producers continued to reserve their rights to charge their full contractual entitlement.

Our contracts currently in effect entitle us to purchase approximately 12.5 MMCM (442 MMCF) of gas per day during the winter months, of which 10.6 MMCM (375 MMCF), or 85%, 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 December 31, 2002, during the years and seasons indicated, and our seasonal daily take-or-pay obligations under such contracts:

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While recognizing the predominance of YPF as a supplier in the Argentine natural gas market, we seek to purchase gas from a diversified group of suppliers and to contract for gas produced in several natural gas-producing basins.

Our contract with YPF provides for significant seasonal variations in the daily programmed volumes of natural gas that permit corresponding reductions in the take-or-pay commitments during the warmer months. Our take-or-pay commitments under our other gas supply contracts generally range between 80% and 90% of the daily contract quantities, depending on the season of the year and the basin in which gas is produced. Larger take-or-pay commitments are generally required during the winter months. Contracts for the supply of gas from the Neuquén basin generally contain lower take-or-pay commitments than contracts for gas produced in other basins as a result of the Neuquén basin's plentiful gas supply, lower transportation costs to our service area and superior transportation facilities.

On January 8, 1999, we contracted with Total Austral (the "Total Contract") to purchase 4.7 MMCM (166 MMCF) of natural gas per day. The Total Contract became effective on May 1, 1999 and expires on May 1, 2006. Total Austral's obligation to provide natural gas consist of two commitments, one to provide 3.7 MMCM (131 MMCF) and another to provide 1.0 MMCM (35.3 MMCF). The Total Contract also provides for significant seasonal reductions in the take-or-pay commitments during the warmer months. Our take-or-pay commitments under the Total Contract range between 70% and 85% of the monthly contract quantities with respect to our commitment to purchase 3.7 MMCM (131 MMCF) of natural gas per day and between 10% and 90% of the monthly contract quantities with respect to our commitment to purchase 1.0 MMCM (35.3 MMCF) of gas per day. Total Austral's deliver-or-pay commitments under the Total Contract are 4.7 MMCM (166 MMCF) of natural gas per day.

We also contracted with Pan American Energy (the "Pan American Contract") for 0.7 MMCM (24.7 MMCF) of natural gas per day on January 22, 1999. The Pan American Contract became effective on May 1, 1999 and expires on May 7, 2004. The Pan American Contract also provides for significant seasonal reductions in the take-or-pay commitments during the warmer months. Our take-or-pay commitments under the Pan American Contract range between 60% and 85% of the monthly contract quantities, depending on the season of the year. Pan American Energy's deliver-or-pay commitment is 0.7 MMCM (24.7 MMCF) of natural gas per day.

We entered into two additional commercial agreements with YPF. The first agreement provides us with 0.4 MMCM (14 MMCF) and 1.2 MMCM (42 MMCF) of natural gas per day during the summer and winter periods, respectively, from the Neuquén basin. The second agreement provides us with 2.0 MMCM (71 MMCF) of natural gas per day from the Austral basin. These agreements became effective on May 1, 1999 and expire on February 15, 2004 and April 30, 2004, respectively. The YPF agreements also provide for significant seasonal reductions in the take-or-pay commitments during warmer months. Our take-or-pay commitments under these agreements are 80% for the Neuquén basin agreement and 90% for the Austral basin agreement. YPF's deliver-or-pay commitments are 0.4 MMCM (14 MMCF) and 1.2 MMCM (42 MMCF) of natural gas per day for the first agreement and 2.0 MMCM (71 MMCF) for the second agreement. These contracts generally provide for proportionate reductions in our take-or-pay commitments if demand from power plants drops below 6.0 MMCM (211.9 MMCF) of gas per day, and allow us to reduce daily contract quantities and take-or-pay amounts by an amount equal to any direct purchases by a customer in our service area from a gas supplier. See Item 4: "-Business Overview-Bypass Rights and Competition".

Certain of our contracts require price renegotiation if the contract price varies more than a specified amount from prices paid by us for gas from other producers in the same basin. Most of such contracts do not specify an outcome in the event the parties do not agree on a new price.

During the year ended December 31, 2002, we exercised options under contracts for the purchase of natural gas in order to adjust the contracted volumes to the demand for natural gas, optimize the service offered to customers and encourage the intensive use of gas in multiple applications, including conversions of heavy duty and public transportation vehicles to cleaner burning CNG.

We have agreed with our suppliers on the manner in which they would manage any refusal by ENARGAS to permit the pass-through of a contracted price increase. In general, our gas supply contracts establish procedures that allow us to delay paying gas prices that we are legally prevented from passing through to our customers and to renegotiate the price with the supplier in such event. It is not possible to predict the outcome of these untested procedures if any were to be invoked by us. See Item 4: "-Business Overview-Tariffs-Gas Purchase Price Adjustments to Tariffs and Related Disputes".

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. From 1993 through 2001 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.

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 five percent and 15% of our monthly gas purchases in 2002 and four percent and 12% of our monthly gas purchases in 2001.

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 2002, approximately 7% of all gas purchased by us was provided to the transportation companies as in-kind allowances.

The expanded gas transportation capacity of the transportation companies in Argentina is generally adequate 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 2002. See Item 4: "-Business Overview-Gas Transportation-Final Transportation Balance".

As of December 31, 2002, we had contracted for aggregate firm transportation capacity of 22.8 MMCM (805 MMCF) per day, an increase of 29% 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.

Our firm transportation contracts with TGS and TGN contain step-down rights that partially mitigate our risk of complete bypass. Under such agreements, if one of our customers enters into a firm transportation agreement with a transportation company (either directly with the transportation company or with a third party such as a producer or gas broker), we would have the right to reduce commensurately our firm transportation commitment with such transportation company. See Item 4: "-Business Overview-Operations-Bypass Rights and Competition".

As of December 31, 2002, we had available firm transportation capacity with TGS of 21.3 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, 2.0 MMCM (71 MMCF); and the Province of Neuquén, 11.3 MMCM (399 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. 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.

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, 2004 and may be renewed at our election for successive three-year periods, up to a maximum of nine years. We may not release after 1997 any of the transportation capacity, except to the extent that it is bypassed by a customer who, directly or indirectly, contracts for firm transportation capacity with TGN.

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 21.3 MMCM (752 MMCF) per day from May through September 2002, we contracted for aggregate firm transportation capacity to 22.8 MMCM (805 MMCF) of gas per day, which was generally adequate to satisfy demand during the winter of 2002. During the 2002 winter months, peak-day deliveries did not exceed firm transportation capacity. Our load factors were 71.9%, 78.1% and 93.3% for 2002, 2001 and 2000, 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 (i) Ps.360,000, adjusted by CER (the "Fixed Management Fee"), and (ii) 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.

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 consumers 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 consumers. Such consumers arrange their own gas supplies while they continue to use our distribution system and our transportation capacity for the delivery of gas. In such cases, consumers would pay a tariff to us for the use of the distribution system and our transportation capacity. Alternatively, consumers 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. Consumers 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 consumers 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 consumers which require an uninterrupted gas supply. In addition, a consumer 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 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 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 believe that our current operations are in substantial compliance with applicable laws and regulations relating to the 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 mitigate their impact on climate change, meeting the expectations raised from the community, non-governmental organizations and financial organizations.

To assure compliance with legal, regulatory and corporate requirements, we are implementing an HSE Management System to be certified by end of 2003 under ISO 14001 (Environmental Management) and OHSAS 18001 (Occupational Health and Safety Assessment Series) standards.

As of December 31, 2002, we maintained insurance coverage for third-party loss and casualty for up to U.S.$ 75 million and our physical assets were insured for up to U.S.$ 94.0 million for any one incident. During March 2003, we renewed our insurance coverage for third-party loss and casualty for up to U.S.$ 50.0 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 this 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 consumers, 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 consumers 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, consumers 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 consumers or third parties. This resolution requires that, in cases in which the distributor maintains that the expansion is unecononomical and, accordingly, requires contributions from consumers or third parties, the distributor prove the correctness of its assetions. 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 land owners. 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.

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 consumers, 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 Ministry of Economy and Public Works and Services 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.

The following table sets forth our maximum tariff in effect since May 1, 2002 for each class of service:

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(a) Residential customers are generally billed on a bimonthly basis. All other customers are billed monthly.

(b) Fixed charge per invoice.

(c) Charge per unit of consumption.

(d) Monthly charge for CM per day of reserved capacity.

In January 2002, pursuant to the Public Emergency Law, the tariffs 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. Our tariffs were also frozen, as indexation of any kind is not permitted under the Public Emergency Law. The Public Emergency Law also provides that the Argentine government should renegotiate public utility services agreements affected by the pesification and a Renegotiation Commission has been created within the Ministry of Economy in order to facilitate such renegotiations. The pesification and freezing of our tariffs violate express provisions of our License.

Resolution No. 20/2002 of the Ministry of Economy required public utility companies to present to the Renegotiation Committee information regarding the impact on their financial and economic condition of the emergency, a summary of their financial and economic situation, the details of their indebtedness, the development of their contracts (including relevant amendments) and the level of their performance. The Ministry of Economy has stated that the furnishing of such information by a company would not be deemed to constitute a waiver of any rights such company may have. In addition, we have made all necessary express reservations of our legal rights under our License and the applicable regulatory framework.

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 in 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
• our profitability.

The outcome of the renegotiation with the Argentine government is uncertain. Our main concerns include (1) whether real tariff increases will be granted at a level sufficient to allow us to meet both our operational costs and financial obligations and to provide a reasonable return on equity, and (2) the uncertain timing of the closing of the renegotiations.

In order to assist public utility companies in the renegotiation process, the Ministry of Economy issued procedural guidelines establishing a schedule comprised of four phases (the "Procedural Guidelines"):

• phase I: informal meetings with the relevant parties to discuss the renegotiation process;
• phase II: presentations by public utility companies explaining how they have been impacted by the Argentine economic crisis and submitting proposals for possible solutions;
• phase III: discussion and analysis of the proposals; and
• phase IV: submission of proposed agreements to the Ministry of Economy for consideration.

Pursuant to the Procedural Guidelines, we have submitted both an interim request for a tariff increase and a comprehensive proposal regarding our tariff regime within the prescribed time periods established. 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 ENARGAS Resolution No. 2787 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 certain 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 in 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.

Except in respect of the seasonal tariff increases to reflect our costs of purchasing gas, all tariff increases have been suspended by the Public Emergency Law. See Item 4: "-Business Overview-Regulatory Framework-Tariffs-Current Tariffs".

The Gas Act and our License contemplate that the distributors' tariffs will be adjusted semiannually to reflect changes in the cost of purchasing and transporting gas and the inflation rate reflected by the US PPI. The purpose of these adjustments is to ensure that the distributor recovers no more and no less than its actual cost of purchasing and transporting gas and to compensate it for assumed increases in other operating costs. The mechanics of these periodic adjustments are specified in our License.

Tariffs are required to be adjusted semiannually in May (for the five-month winter period) and in October (for the seven-month summer period) to reflect projected changes in the cost of purchasing gas. The Gas Act and our License authorize us to pass through to our customers the cost of gas purchases by adjusting the price to end users to reflect any change in the actual cost of gas purchased during each tariff period, provided that ENARGAS may limit the pass-through of such cost to the extent it determines that such cost exceeded the costs negotiated by other distribution companies in equivalent circumstances. In August 1994, the Argentine government enacted Decree No. 1,411/1994, which empowers ENARGAS to limit the pass-through of price increases to prices that are no higher than the lowest price for similar quantities of gas purchased under similar conditions from the same basin in the event it should find that the contracts proposed for its review were not the product of a transparent, open and competitive process. We are required to account for differences between the projected cost of gas and the actual cost of gas prudently incurred, with any difference during that period, plus interest, being surcharged upon or credited to customers' bills, as appropriate, through a tariff adjustment.

Pursuant to our License, tariffs are also to be adjusted semiannually in January and July to reflect changes in the US PPI.

Our tariffs may also be adjusted in January and July, upon notice to ENARGAS and lack of objection by ENARGAS thereto, to reflect changes in the transportation companies' tariffs pursuant to the transportation licenses and the K Investment Factor. A reduction in transportation tariffs would result in a corresponding reduction in our tariffs.

We may apply for an adjustment to tariffs to reflect unforeseen events or certain force majeure occurrences or to reflect changes in the taxes on tariffs. The Gas Act provides that customers may apply for a tariff reduction if warranted by objective and justifiable circumstances.

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. We have disagreed repeatedly with ENARGAS' interpretation and application of the regulatory framework. Pursuant to the framework that regulates the public service of distribution of gas in Argentina, our 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. While some of our appeals have been rejected, our appeals related to Ps.18.3 million of gas purchase costs remain pending.

The enactment of the Public Emergency Law and of Executive Order 214/2002 had the effect, among others, of fixing the price we pay for gas under our Gas Purchase Contracts. See Item 3: "Risk Factors - Risk Factors Relating to Us - We are currently renegotiating certain of our arrangements, including agreements for the purchase of natural gas, which have been pesified". However, the Public Emergency Law and such Executive Order do not affect the prices at which we purchase gas in the spot market which we expect to be substantially higher than the prices we pay for gas under our Gas Purchase Contracts. We are unable to predict the level of our gas purchases in the spot market because it is affected by a number of unpredictable variables, including average temperatures and the rainfall levels in winter. There is a risk that ENARGAS may deny the pass-through to our tariffs of the entire amount of our costs of purchase of gas in the spot market within the terms of Executive Order 1020/95. See Item 4: "-Business Overview-Commercial Contracts-Natural Gas Supply-Short-term Supply Contract Limitations."

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.

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 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 for the first half of 2000.

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 amount 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 would have paid to TGS and TGN.

Under the Gas Act, the regulations thereunder and the pertinent provisions and formulae contained in our License, ENARGAS is responsible for determining the distribution tariffs that are to be effective during each succeeding five-year period following the initial five-year period ended December 31, 1997. This determination is to be made on the basis of rules that ENARGAS promulgated on March 12, 1996. The Gas Act requires that, in formulating such rules, ENARGAS must provide the companies with (1) an opportunity to collect revenues sufficient to recover all proper operating costs reasonably applicable to service, taxes and depreciation and (2) a reasonable rate of return, determined in relation to the rate of return of businesses having comparable risk, efficiency and quality of service.

The tariff-setting methodology contemplated by the Gas Act and our License is the "price-cap with periodic review" model. This methodology has been adopted by a number of other countries and is commonly referred to by its mathematical expression "RPI-X+K". Because the international market indicator selected by Argentina was the US PPI published by the Bureau of Labor Statistics and the United States Department of Labor, the Argentine tariff adjustment formula is more correctly expressed as "US PPI-X+K". The tariff-setting methodology differs from the form of utility regulation utilized in the United States primarily with respect to the length of the period between regulatory reviews, and in being forward-looking rather than historical-cost-based.

Under the Argentine model, distribution tariffs may be adjusted by the X Efficiency Factor and the K Investment Factor (both of which were set at zero for the initial five-year period). Based upon the regulatory theory that distribution tariffs should provide a reasonable return and that the benefit of increased efficiency should be shared by the consumer and the distribution company, the inclusion of an efficiency factor results in a mandatory decrease in distribution tariffs on the assumption that operating efficiencies will decrease the distribution companies' costs each year. The inclusion of the X Efficiency Factor in the pricing system provides the distribution company with an incentive to cut costs. If the distribution company is able to decrease costs faster than the rate implied by the X Efficiency Factor, the savings become increased profits; if the distribution company is unable to meet or exceed this rate, the shortfall reduces its profits. The adjustment to account for efficiencies is proposed by ENARGAS, using specific plans for efficiency improvements submitted by us and taking into account both the expected cost savings and the investment required for the implementation of such plans. ENARGAS is required to propose the X Efficiency Factor as it applies to us not later than 12 months prior to the commencement of the five-year period for which it is to apply, following which proposal we have a four-month period in which to respond to ENARGAS. A final X Efficiency Factor is to be fixed by ENARGAS not later than six months prior to the commencement of the relevant five-year period.

The inclusion of the K Investment Factor in the formula specified in our License is intended to permit an increase in distribution tariffs at the time of their adjustment to compensate us for certain investments approved by ENARGAS. The investments contemplated by the K Investment Factor are those designed to improve the efficiency, safety or reliability of the system, and may either be required by ENARGAS to be made or may initially be proposed to be undertaken by us. In either case, however, the commitment to make such investments during the five-year period will be binding on us. We may also petition ENARGAS at any time for a distribution tariff adjustment relating to proposed investments to expand system capacity. ENARGAS, based on an investment plan submitted by us 18 months prior to the commencement of the relevant five-year period, is required to propose K Investment Factors not later than 12 months prior to the commencement of the relevant five-year period, following which we will have a four-month period in which to respond to ENARGAS' proposal. A final K Investment Factor and related investment program are to be fixed by ENARGAS not later than six months prior to the commencement of the relevant five-year period.

If we do not agree with the X Efficiency or K Investment Factors established by ENARGAS, or with the terms of a mandatory investment program established by ENARGAS, the distribution tariff established by ENARGAS will be applied, but we may seek review of ENARGAS' actions by administrative or judicial procedures.

ENARGAS, through Resolution No. 557, dated January 5, 1998, adjusted our tariffs as of January 1, 1998, as follows: (i) it applied a 0.9456% increase to the transportation and distribution components of our tariffs in order to reflect the variation in the US PPI; (ii) it set the X Efficiency Factor at 4.7% over the distribution component of our tariffs for residential service, small volume general service, CNG service and subdistributor customers on a one-time basis; and (iii) it acknowledged our need to contract additional transportation volume to meet our non-interruptible demand during the winter months.

Through Resolution No. 667, dated July 6, 1998, ENARGAS modified our tariffs as of July 1, 1998, as follows: (i) it adjusted the transportation and distribution components of our tariffs in order to reflect changes in the US PPI, which resulted in a 2.42% reduction in the transportation and distribution components of our tariffs to the customers referred to in clause (ii) of the previous paragraph; and (ii) it applied the K Investment Factor for the second quarter of 1998 resulting from investments, resulting in a distribution margin increase of 0.61% applicable to residential customers, of 0.44% applicable to small volume general customers and of 0.53% applicable to users of CNG.

Through Resolution No. 901, dated January 6, 1999, ENARGAS adjusted our tariffs as of January 1, 1999, as follows: (i) it adjusted the transportation and distribution components of our tariffs in order to reflect changes in the US PPI, which resulted in a 0.64% reduction in the transportation and distribution components of our tariffs; (ii) it applied the K Investment Factor resulting from investments, resulting in a distribution margin increase of 0.58% applicable to residential customers, of 0.42% applicable to small volume general users and of 0.50% applicable to users of CNG; and (iii) it completed the adjustment to the transportation tariff component applicable to non-interruptible demand.

Through Resolution No. 1,160, dated July 5, 1999, ENARGAS adjusted our tariffs as of July 1, 1999, as follows: (i) it adjusted the transportation and distribution components of our tariffs in order to reflect changes in the US PPI, which resulted in a 0.24% increase in the transportation and distribution components of our tariffs; and (ii) it applied the K Investment Factor resulting from investments, resulting in a distribution margin increase of 0.54% applicable to residential customers, of 0.39% applicable to small volume general services and of 0.47% applicable to users of CNG.

Through Resolution No. 1,477, dated January 10, 2000, ENARGAS adjusted our tariffs as of January 1, 2000, applying the K Investment Factor resulting from investments, resulting in a distribution margin increase of 0.51% applicable to residential customers, of 0.37% applicable to small volume general services and of 0.44% applicable to users of CNG. Moreover, ENARGAS established, through the same resolution, the methodology to recover the accrued revenues corresponding to the application of the US PPI during the first half of 2000.

Through Resolution No. 1,804, ENARGAS adjusted our tariffs as of July 1, 2000, as follows: (a) it adjusted the transportation and distribution component of our tariffs for the second half of 2000 in order to reflect changes in US PPI, which resulted in an increase of 3.7751%, in addition to a recovery of the accrued debt for the balance of tariffs that were not billed from January through July 2000, and (b) applying the adjustment pursuant to the K Investment Factor to such six-month period resulting from investments, resulting in an increase of the distribution margins as follows: residential-0.48%, small volume general users-0.35%, and GNC-0.41%. ENARGAS applied such US PPI recovery pursuant to a deed whereby there was established the financing mechanism for the tariff adjustment for the first six-month period of the year 2000. The Executive Branch approved such deed and the financing mechanism through Decree No. 669 dated August 4, 2000. Nevertheless, on August 29, 2000, we received notice of a court order suspending Decree No. 699, and accordingly, ENARGAS informed us that the tariffs should be reduced to exclude the US PPI adjustment. See "Item 4: "-Business Overview-Tariffs-US PPI Adjustment to Tariffs and Related Disputes".

Pursuant to Resolution No. 1,941, ENARGAS adjusted our tariffs as follows: (a) replaced the winter gas price by summer gas price, and (b) applied K Investment Factor's adjustment.

Through Resolution No. 2,070, ENARGAS adjusted our tariffs as of January 1, 2001, applying the K Investment Factor resulting from investments, resulting in an increase of the distribution margins as follows: residential-0.45% and small volume general users-0.33%.

Pursuant to Resolution No. 2,347, ENARGAS adjusted our tariffs as of July 1, 2001 applying the K Investment Factor from investments, resulting in an increase of the distribution margins as follows: residential-0.36%, small volume general users-0.27%, and users of GNC-0.32%. ENARGAS approved a K Investment Factor value that is lower than the one we requested, even though the works carried out during the first semester of 2001 were completed. This results from a particular interpretation by ENARGAS of the commitment undertaken by us at the time, assuming an excess of up to 5% of the total project's extension. We appealed this last point.

Through Resolution No. 2,487, ENARGAS approved our tariffs as of January 1, 2002 maintaining the existing values expressed in Pesos as of October 2001 in accordance with the Public Emergency Law.

ENARGAS, through Resolution No. 2,611 dated May 31, 2002, provisionally approved the tariff chart effective from May 1 to June 30, 2002 with a gas component value identical to the one approved for the previous winter period. In July and August, ENARGAS, through Resolutions No. 2,653 and 2,691, established the extension of the tariff charts approved by Resolution No. 2,611 for an undetermined period of time.

In December 2000, ENARGAS submitted to natural gas distribution and transportation licensees a set of documents prepared by local and international consultants under the guidance of a think-tank (Foundation for Latin American Economic Research (FIEL)) which would provide the basis for the preparation of the methodology (the "Methodology") for the Second Five-Year Tariff Review (RQT II), that would determine the tariff structure applicable from January 1, 2003 to December 31, 2007.

In order to perform the tasks required by a complex process such as the five-year tariff review, we set up a working group formed by representatives of our various departments, with comprehensive interaction between a Technical Committee and a Coordinating Committee constantly monitoring the progress of the process.

The complex economic and financial environment and the successive changes at the Energy Secretariat, the government agency responsible for long-term energy policymaking, delayed issue of the Methodology by ENARGAS.

On April 6, 2001, ENARGAS informed the gas transportation and distribution licensees on the Methodology, in connection with which ENARGAS stated that it was advisable to carry out the following regulatory adjustments during the RQT II:

• A comprehensive review of rate levels ("full rate case") in order to correct any possible distortions that may have accumulated since privatization.
• Regulatory structure reforms to optimize system operation and expansion.
• Ensuring service quality and reliability and defining the severity degree of the winter for which distributors must guarantee gas supply and reliability of the main system in order to meet demand.
• Accounting segregation of the business of distribution licensees into marketing (gas supply and transportation) and distribution activities, as from January 2003.
• Redefinition of small and large general service users, with the possibility of a commercial by-pass.

In May 2001, ENARGAS released a document on the methodology for determination of the cost of capital that would be used to discount the cash flows of income and expenses related to the new five-year period. This methodology would be used to determine the "reasonable profit" of gas transportation and distribution licensees for the period 2003-2007.

We submitted comments on said methodology and requested clarification on guidelines established at that time. In addition to this, we submitted information on the tariff base, which involves investments made from the beginning of operations until the year 2000, as well as itemized information on demand, sales and expenses during the year 2000.

On November 13, 2001, ENARGAS informed the gas transportation and distribution licensees of the cost of capital rates that would apply to distribution and transportation activities (12.1% and 10.4% respectively). We have appealed the rate fixed by ENARGAS, which is based on a methodology that we dispute.

In late November 2001, we submitted to ENARGAS the suggested investment program for the period 2003/2007, which would be financed with the tariff base to be fixed for January 1, 2003 and with the K Investment Factors. We also reserved the right to submit other additional investments taking advantage of the possibility officially announced by ENARGAS. In view of the deterioration experienced by the Argentine economy at the time, we made the implementation of the investments contingent on the possibility of obtaining funds in capital markets at reasonable rates compatible with the cost of capital rate that ENARGAS would recognize in the QTII process.

Towards the end of 2001, ENARGAS required us to provide expenditure projections for the period 2003/2007. We requested an extension with respect to ENERGAS' request, as it was not possible for us to determine the impact that changes in the Argentine economy, the devaluation of the Peso and the passing of the Public Emergency Law and its implementing regulations could have on the prices of domestic and imported goods and services.

Finally, in a note dated February 8, 2002, ENARGAS declared the suspension of terms fixed for the QTII process until the renegotiation process provided for by the Public Emergency Law was conducted.

Law No. 25,565 and Decree No. 786/2002 created a surcharge, applicable from the date of enactment of such Decree (May 8, 2002), of Ps.0.004 per cubic meter of gas applicable to all gas consumption (the "Surcharge"). The Surcharge is levied to finance a special subsidy aimed at reducing tariffs of residential consumers in certain regions of Argentina.

The gas producers are required to act as collection agents of the Surcharge and must include the amount of the Surcharge into their invoices for sales of gas to distributors, which are entitled to pass on such Surcharge to their customers. Decree No. 786/2002 establishes certain mechanisms to ensure that gas distribution companies will be able to pass through the cost of the Surcharge without suffering any losses or obtaining any gain.

1. Organizational Structure.

We are not part of a group. We have no subsidiaries. See Item 7: "Major Shareholders and Related Party Transactions".

2. Property, Plants and Equipment.

Our principal properties consist primarily of distribution mains, service pipelines, pressure reduction stations, regulators, valves, meters and real estate for central, operational and branch offices. These properties are located in our service area and are described above.

1. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

The following discussion contains forward-looking statements that involve risks, uncertainties and assumptions. These forward-looking statements include, among others, words such as "anticipates", "believes", "could", "estimates", "expects," "foresees", "intends", "may", "should" or "will continue" and similar language. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth elsewhere in this Annual Report. See "Forward-looking Statements and Associated Risks". For a discussion of important factors, including, but not limited to, the going concern qualification in the opinion issued by our auditors, the suspension of payments on our financial debt, the pesification of our tariffs and other factors which could cause actual results to differ materially from the results referred to in the forward-looking statements, see Item 3: "Key Information - Risk Factors".

We maintain our financial books and records and publish our financial statements in constant Pesos and prepare our financial statements in accordance with Argentine GAAP. Significant differences exist between Argentine GAAP and U.S. GAAP which might be material to the financial information herein. Such differences involve methods of measuring the amounts shown in the Annual Financial Statements as well as additional disclosures required by U.S. GAAP and Regulation S-X of the Exchange Act. See Notes 18 and 19 to our Annual Financial Statements contained in Item 18 in this 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.

The Argentine economy has been mired in a severe economic recession that began in the second half of 1998. Argentina's GDP has fallen every year since then, culminating in a decrease of 10.9% in 2002. In addition, Argentina experienced a rise in its wholesale price index of 119% during 2002 and the Peso was devalued by 237.0% from late 2001 through December 31, 2002.

The following table shows annual percentage changes in Argentina's gross domestic product for the indicated years.

The following table shows annual percentage changes in Argentina's wholesale and consumer price indexes for the indicated years.

Our financial results have been negatively affected by the drastic political and economic changes that took place in Argentina in 2002. Because the political and economic environment is currently in flux, the following discussion may not be indicative of our current or future results of operations, financial position, liquidity or capital resources and may not contain information necessary to help you understand the information contained in this discussion. In particular, it may be difficult to discern trends from our historical financial statements due to the following factors:

• the volatility of the exchange rate; and
• the reintroduction of inflation accounting.

Accordingly, the following discussion should be read in conjunction with, and is qualified in its entirety by, the Risk Factors contained in this Annual Report. The most important factors affecting our results of operations were the following:

• Pesification of our tariffs

• Freezing of our tariffs

• Devaluation

• Inflation and inflation accounting

The pesification and freezing of our tariffs, the devaluation of the Peso and inflation and inflation accounting are the principal reasons for the differences between our results of operations and financial position in 2002 and 2001. Another factor that adversely affected our results of operations and financial position is:

• Elimination of access to financing

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;
• Cancellation of employee training programs;
• Detailed listing of our contractual obligations payable and receivable in order to assess the level of our legal, economic and financial exposure and to determine our action plan for renegotiating and adjusting contracts in light of our prospects;
• 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.

Even though we took the measures mentioned above to mitigate the effects on our business of the current crisis, our future remains highly uncertain.

The situation in Argentina remains highly volatile. Although there were macroeconomic improvements in Argentina during the last quarter of 2002, including slight wholesale price index deflation and increases in the value of the Peso against the U.S. Dollar, we continue to operate in a very difficult and volatile environment. In particular, we expect that the following circumstances may have a material effect on our results of operations and liquidity in future periods:

• the outcome of the renegotiation of our tariffs with the Argentine government;
• the uncertainty generated by our need to refinance our existing debt as it comes due; and
• the macroeconomic situation in Argentina, including inflation, devaluation and unemployment.

In particular, our results of operations and financial condition are very susceptible to changes in the exchange rate of the Peso against the U.S. Dollar and the Euro because our primary assets and revenues are denominated in Pesos while substantially all of our financial liabilities are denominated in U.S. Dollars or Euros.

In addition to these circumstances, changes in Argentina may have other unforeseen consequences that could negatively affect our results of operations and financial position. We cannot assure you that other laws that negatively affect us will not be introduced.

In connection with the preparation of the financial statements as of December 31, 2002 we have relied on estimates and assumptions derived from historical experience and various other factors that are reasonable and relevant. Although we review these estimates and assumptions in the ordinary course of our business, the portrayal of our financial condition and results of operations often requires our management to make judgments regarding the effects of matters that are inherently uncertain on the carrying value of our assets and liabilities. Actual results may differ from those estimated under different estimates, assumptions or conditions.

The most judgmental assumptions in our expected cash flows are:

1. Tariff increases: our forecasts have assumed tariff increases that will reach tariff levels of less than 50% of the tariffs in Dollars as of December 2001.
2. Restructuring of the indebtedness: we have assumed the financial debt will be restructured in such a way that will allow us to recover suitable financial indicators.
3. Exchange rate and inflation rate: we have considered steady levels consistent with those in force at the date of this Annual Report.

In order to provide an understanding about how management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to each critical accounting policy described as follows (see Note 3 to the financial statements as of December 31, 2002):

• Revenue recognition and account receivables;
• Impairment of long-lived assets;
• Provision for allowances and contingencies;
• Deferred income tax; and
• Exchange losses.

Revenue is recognized on an accrual basis upon delivery to customers, which includes estimated amounts of gas delivered but not yet billed at the end of each year. The amounts effectively delivered have been estimated based upon the volumes of gas purchased and other historical data.

We provide for losses relating to accounts receivables. The allowance for doubtful accounts is based on our estimates of collections. While management uses the information available to make evaluations, future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in making the evaluations. The corresponding charge is included in selling expenses; no adjustment is made to net sales revenue. To establish the allowance for doubtful accounts our management constantly evaluates the amount and characteristics of our account receivables.

We periodically evaluate the carrying value of our long-lived assets for impairment. We consider the carrying value of long-lived assets to be impaired when the expected cash flows undiscounted and without interest, from such assets is less than their carrying value. In that event, a loss would be recognized within operating profit based on the amount by which the carrying value exceeds the fair market value of the long-lived assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. There are no provisions for impairment recorded in our financial statements as of December 31, 2002.

Since the estimated fair value of the Company's fixed assets exceeds the recorded book value, changes in these estimates would have to occur to result in an impairment charge.

We have certain contingent liabilities with respect to existing or potential claims, lawsuits and other proceedings. We accrue liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Such accruals are based on developments to date, our estimate of the outcomes of these matters and lawyers' experience in contesting, litigating and settling other matters. As the scope of the liabilities becomes better defined, there may be changes in the estimates of future costs, which could have a material effect on our future results of operations and financial condition or liquidity.

The realization of deferred income tax assets depends on the generation of future taxable income when temporary differences would be deductible. Accordingly, we have considered the reversal of the deferred income tax liabilities, tax planning and taxable income projections based on our best estimates. We periodically perform economic and financial projections based on alternative scenarios that consider macroeconomic, financial, market and regulatory estimates. In making these projections, our management has considered tariff changes and adjustments to our cost in its projections, in order to reestablish our economic and financial equation. Actual results could differ from those estimated. Based on those projections, we have recorded as of December 31, 2002 a valuation allowance against the deferred tax assets considered non recoverable.

Under US GAAP, Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes" states more specific and strict rules to determine a valuation allowance for tax credits. Under this pronouncement, an enterprise must use judgment in considering the relative impact of negative and positive evidence to determine if a valuation allowance is needed or not. For example, negative evidence includes: a) losses expected in early future years by a presently profitable entity; b) unsettled circumstances that, if unfavorably resolved, would adversely affect future operations and profit levels on a continuing basis in future years; and c) a carryforward that is so brief that it would limit realization of tax benefits if significant deductible temporary difference is expected to reverse in a single year.

Considering the magnitude of the negative effect of the devaluation of the Argentine Peso on the Company's financial position and results of operations, as well as the uncertainty generated by the local economic situation regarding the realization of the deferred tax credits in a brief period, under US GAAP we decided to set up a valuation allowance against 100% of our tax loss carryforwards and certain of our other deferred tax assets.

Under Argentine GAAP, exchange losses arising from the devaluation of the Peso as from January 6, 2002 and other effects derived from such devaluation, to the extent they are related to foreign currency liabilities existing at such date, are to be added to the cost basis of assets acquired or constructed with direct financing by such foreign currency liabilities. Similar alternative treatment is permitted, but not required, for exchange losses arising from indirect financing. In both cases, the amount of the exchange loss capitalized as part of the value of an asset may not exceed the recoverable value of such assets.

We only have indirect financing and, therefore have elected not to capitalize the mentioned exchange losses but instead to expense them in 2002. Since the capitalization of exchange losses under Argentine GAAP is to be considered an increase in the cost of non-monetary assets on account of inflation adjustment, net loss under Argentine GAAP for 2002 would not have changed if we had applied the above-mentioned alternative criterion.

1. Operating Results

The following review of the results of our operations and financial condition should be read in conjunction with our Annual Financial Statements and with our Selected Financial and Operating Data included in Item 3: "Key Information". Our Annual Financial Statements have been prepared in accordance with Argentine GAAP. Accordingly, our Annual Financial Statements reflect the effects of inflation through August 31, 1995. As from that date and according to Argentine GAAP and CNV requirements, the restatement for inflation was discontinued through December 31, 2001. In accordance with CNV General Resolution No. 415 dated July 25, 2002, financial statements are to be expressed in constant Pesos and restated for inflation since January 1, 2002. To this end, Resolution No. 6 of the Argentine Federation of Professional Counsels in Economic Sciences has been adopted to provide that accounting measurements restated as of August 31, 1995, as well as those corresponding to the period from that date to December 31, 2001, will be considered restated as at the latter date. Balances as of December 31, 2001 and 2000, disclosed for comparative purposes, have been restated for inflation as of December 31, 2002 on the basis of conversion factors derived from IPIM, issued by INDEC. The inflation rate for 2002 amounted to 119% in accordance to the mentioned index. See Item 8: "Financial Information".

Assets and liabilities in foreign currency as of December 31, 2002 have been valued at nominal value translated at year-end exchange rates, except for financial debts in foreign currency owed to Argentine financial system institutions which have been converted into Pesos at a rate of Ps.1 per U.S.$1 plus a CER adjustment, including accrued interest, if applicable; and accounts payable in foreign currency that are under renegotiation and have been converted into Pesos at a rate of Ps.1 per U.S.$1. See Note 3 (i) to our Annual Financial Statements.

Our results of operations vary significantly from season to season, with our sales and operating income being significantly higher during the winter months (March through September). The table below sets forth our net sales, gross profit, operating (loss) income, (loss) income before tax and net (loss) income for each quarter of 2002 (figures are adjusted for inflation as of December 31, 2002):

Net sales decreased by 50.0% during 2002 to Ps.719.3 million from Ps.1,438.3 million during 2001. This reduction was mainly due to the decrease in net sales to residential customers, net sales to industrial, commercial and governmental entities and net sales to power plants, amounting to Ps.446.6 million, Ps.139.8 million and Ps.78.3 million, respectively. Moreover, net sales of CNG and liquid gas processing net sales also decreased by Ps.52.6 million and Ps.1.6 million, respectively.

Net sales to residential customers decreased by 50.6%, from Ps.883.2 million during 2001 to Ps.436.6 million in 2002. Gas volumes delivered to residential customers decreased by 2.5% during 2002 compared to the previous year, despite the fact that lower temperatures were registered in 2002 compared to 2001. While the number of our residential customers at December 31, 2002 was 0.5% above the number of our residential customers at December 31, 2001, our per capita residential consumption showed a year-to-year decline of 2.9%.

Net sales of gas and transportation and distribution services to power plants decreased during 2002 by 58.5% compared to the previous year. Volumes delivered to these customers decreased by 21.8% during 2002 compared to 2001. This decrease in volumes was caused in part by the year-to-year increase in hydroelectric power generation in most basins, which displaced generation by our power plant customers, as well as by the Argentine economic recession that caused a decrease in electricity demand during 2002 compared to the previous year. This decrease was also due in part to the fact that, although our power plant customers purchased gas from us in 2001, they purchased no gas from us in 2002, partially offest by an increase in 2002 of their purchases from us of transportation and distribution services in comparison to 2001, which services are billed at lower tariffs than the tariffs for gas sales.

Due to the lower level of economic activity in Argentina since 1999, deepened by the recent economic crisis, volumes delivered to industrial, commercial and governmental customers decreased by 2.4% during 2002 compared to the previous year. Net gas sales and transportation and distribution services to these customers decreased by 49.5% during 2002 compared to the previous year. This decrease was due in part to decreases in the volumes of sales of gas to certain customers and increases in the volumes delivered under transportation and distribution services that are billed at a lower tariffs than the tariffs for gas sales.

Net sales of CNG decreased by 44.6% during 2002 compared to the previous year. Volumes of CNG delivered during 2002 increased by 3.7% compared to the previous year due to an increase in the number of CNG-converted vehicles as a result of repeated increases in the prices of competing fuels.

Gas volumes available for processing during 2002 increased by 81.8% and net sales decreased by 7.9% in comparison to 2001.

The table below sets forth our net sales by customer category for the years ended December 31, 2002 and 2001, and the percentage of net sales represented by net sales to each class of customer: