9 REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934

OR

OR

9 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

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

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

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

The number of outstanding shares of each of the classes of capital or common stock of the registrant as of the close
of the period covered by the annual report:

Indication by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days:

Yes X No__

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

Item 17__ Item 18 X

PART I

PART II

PART III

This annual report on Form 20-F, or our "Annual Report", contains certain "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or 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 the terms of our License, as defined herein, and our tariffs with the Argentine government;
• anticipated revenues, capital expenditures, cash flows and financing requirements;
• economic and political developments in Argentina, including the effects of the devaluation in 2002 of the Peso and restrictions on payments abroad and actions by the Ente Nacional Regulador del Gas, the Argentine regulatory agency with jurisdiction over us, or "ENARGAS", and other governmental authorities that may affect us;
• the effects 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;
• the reviewing court's potential interpretation of the Argentine Bankruptcy Law, as well as its approval of our "Acuerdo Preventivo Extrajudicial" or "APE", an out-of-court reorganization agreement which would have the effect of restructuring all our financial debt; 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;
• fluctuations in the currency exchange rates between the Argentine Peso and foreign currencies;
• changes in financial and natural gas regulation;
• the current energy crisis affecting Argentina and the impact of emergency laws and regulations enacted or proposed by the Argentine government;
• revocation of our License, as defined below to provide gas services;
• our ability to successfully restructure our indebtedness or refinance our financial obligations when they become due;
• the outcome of pending legal claims against us; and
• the matters discussed under "Risk Factors".

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

Our audited financial statements as of December 31, 2004 and 2003 and for the fiscal years ended December 31, 2004, 2003 and 2002 and the notes thereto, or our "Annual Financial Statements", are set forth in Item 18 of our Annual Report. Our Annual Financial Statements are presented in Pesos and are prepared in accordance with generally accepted accounting principles used in Argentina, or "Argentine GAAP" except as discussed below. Significant differences exist between Argentine GAAP and generally accepted accounting principles used in the United States, or "U.S. GAAP", which might be material to the financial information contained herein. Such differences involve methods of measuring the amounts shown in our Annual Financial Statements as well as additional disclosures required by U.S. GAAP and Regulation S-X of the United States Securities and Exchange Commission. See Notes 17 and 18 to our Annual Financial Statements contained in Item 18 of our Annual Report for a description of the principal differences between Argentine GAAP and U.S. GAAP as they relate to us and a reconciliation to U.S. GAAP of our net loss and shareholders' equity.

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

Our Annual Financial Statements have been prepared assuming that we will continue as a going concern. Our independent auditors, Price Waterhouse & Co. S.R.L., member firm of PricewaterhouseCoopers, Buenos Aires, Argentina, issued a report on our financial statements as of and for the year ended December 31, 2004 stating that we have been negatively impacted by the deterioration of the Argentine economy, the Argentine government's adoption of various economic measures, including the violation of the contractually-agreed license to provide natural gas services, or our "License", and the devaluation of the 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, 2004 do not include any adjustments that might result from the outcome of this uncertainty. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us."

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

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

Unless otherwise indicated, our balance sheets and statements of operations use the exchange rate as of each relevant date or period-end quoted by Banco de la Nación Argentina, or "Banco Nación". In the case of U.S. Dollars, 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, 2004, the only exchange market available was the free market and the quotation was Ps.2.9790 per U.S.$1.00 and as of June 15, the exchange rate was Ps.2.877 per U.S.$1.00. The reader should not construe the translation of currency amounts in our Annual Report to be representations that the Peso amounts actually represent U.S. Dollar amounts or that any person could convert the Peso amounts into U.S. Dollars at the rate indicated or at any other exchange rate. See Item 3: "Key Information-Exchange Rate Information" for information regarding exchange rates.

This Annual Report is incorporated by reference and forms part of our Solicitation Statement dated November 7, 2003.

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

We are an Argentine corporation, or 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. 529/1991, 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, or 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, or "GDP", to decrease by 3.4% in 1999, 0.8% in 2000, 4.4% in 2001, and 10.9% in 2002. Beginning in the second half of 2001, Argentina's recession worsened significantly, precipitating the political and economic crisis described in greater detail below.

Beginning in December 2001, the Argentine government implemented a number of monetary and foreign exchange control measures that included restrictions on the free disposal 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 President Eduardo Duhalde by the Argentine Congress, the Argentine government has implemented measures, whether by executive order, Central Bank regulation or legislation passed by the Argentine Congress, 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, or "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 Central Bank at an exchange rate of Ps.1.40 per U.S.$1.00 (in the case of U.S. Dollars) or at an equivalent rate (in the case of others currencies);
• converting most foreign currency-denominated obligations of entities in Argentina to non-financial institutions in Argentina into Peso-denominated obligations at a one-to-one exchange rate (in the case of obligations denominated in Dollars) or at a comparable rate (in the case of obligations denominated in another foreign currency), plus an adjustment pursuant to the CER or the CVS, as the case may be, plus an equitable adjustment in certain cases;
• restructuring the maturity of, and interest rates on, domestic bank deposits and maintaining restrictions on withdrawals of those deposits;
• enacting an amendment to the charter of the Central Bank to allow it to (1) print currency in excess of the amount of foreign reserves it holds, (2) make short-term advances to the Argentine government and (3) provide financial assistance to financial institutions in the Argentine financial system with liquidity constraints or solvency problems;
• converting public service tariffs, including ours, which had been originally calculated in U.S. Dollars, into Pesos at a one-to-one exchange rate (pesification of tariffs);
• freezing public service tariffs, including ours, and not permitting indexation of any kind in contracts executed after the effective date of the Public Emergency Law;
• authorizing the Argentine government to renegotiate public utility contracts, licenses and concessions, and service tariffs, including ours;
• imposing restrictions on transfers of funds abroad subject to certain exceptions (all of which applied to us and have recently been lifted); and
• requiring the deposit into the Argentine financial system of foreign currency earned from exports, subject to certain exceptions.

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 continue to have a material adverse effect on private sector entities, including us. In addition, the general economic situation in Argentina, including high unemployment, material decreases in incomes or other factors may lead the executive, legislative or judicial branches of the Argentine government to issue decrees, adopt laws or issue injunctions, respectively, requiring gas distribution companies (including us) to end, either temporarily or on a longer-term basis, their practice of terminating service for nonpayment as presently authorized by the regulatory framework under which they operate.

Although economic indicators of the Argentine economy stabilized in 2003 and 2004, including an increase in GDP of 8.7% in 2003 and 9.0% in 2004, lower rates of inflation and a stabilization of the exchange rate of the Peso against the U.S. Dollar, 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 may continue to adversely affect us.

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, or the "IMF", suspended further disbursements to Argentina. This decision deepened Argentina's economic and political crisis.

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

In January 2002, President Duhalde initiated talks with the IMF. On January 24, 2003, the IMF approved an eight-month Stand-by Credit Facility for Argentina of approximately U.S.$2.98 billion that was designed to provide transitional financial support through the period ending August 31, 2003. The Stand-by Credit Facility, which replaced Argentina's prior arrangements with the IMF, did not provide new funds but rather was to be used to refinance existing obligations. In addition, the IMF agreed to extend by one year the maturity of U.S.$3.8 billion in payments Argentina was scheduled to make through August 2003. On September 10, 2003, the Argentine government and the IMF reached an agreement, or the "IMF Agreement," to postpone for a period of three years the maturity date of certain amounts owed by Argentina to the IMF and other international credit organizations including the World Bank, the Interamerican Development Bank and the Paris Club creditors. The IMF Agreement included several obligations of the Argentine government, including the obligation to renegotiate its debt with private creditors, to renegotiate agreements with public utility companies and to review the tariffs charged under such agreements in light of the interests of users, the income of such companies and the possible effect of such renegotiation on the distribution of income.

In an effort to restructure its sovereign debt held by private sector investors, or the "Restructuring", the Argentine government has offered its creditors three types of bonds in exchange for the Argentine sovereign debt they hold as well as bonds in lieu of past due interest on such sovereign debt. As of the date of our Annual Report, approximately 76% of these creditors have accepted the terms of the Restructuring. However, certain of those investors who rejected the Argentine government's offer have instituted legal proceedings against the Argentine government to enforce their Argentine sovereign debt.

In one such proceeding, two hedge funds in New York had secured over U.S. $7 billion in bonds that are subject to Argentina's debt restructuring. The New York Federal Court of Appeals ruled against these hedge funds stating that they did not have the right to freeze these bonds and allowed the Argentine government to deliver these bonds to creditors who had accepted the exchange offer pursuant to the Restructuring. On June 2, 2005, the Argentine government exchanged U.S.$81.8 billion of its sovereign debt with creditors pursuant to the Restructuring.

Creditors representing arpproximately 24% of the Argentine government's sovereign debt have not participated in the Restructuring. We cannot predict if the restructuring process undertaken by the government or any other restructuring it may propose to creditors who did not participate in the Restructuring will end in a successful restructuring of the Argentine sovereign debt, or the consequences that failure to restructure such debt may have on the Argentine economy.

The Argentine government's difficulties in obtaining 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 term 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. 214/2002, the Argentine government converted all foreign currency-denominated bank deposits with institutions in the Argentine financial system into Peso-denominated deposits. The disparity between the rate of conversion to Pesos of foreign currency-denominated deposits with the financial institutions in the Argentine financial system and the rate of conversion to Pesos of foreign currency-denominated loans by those financial institutions, referred to as "asymmetric pesification", had a substantial material adverse effect on the financial condition of those financial institutions. In order to mitigate such adverse effect, the Argentine government adopted Decree No. 214/2002, Decree No. 905 and other applicable resolutions to compensate those financial institutions for the damages they suffered on account of asymmetric pesification of loans and deposits.

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. 214/2002. 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. However, in July 2004, the Supreme Court rejected the claim of an investor who had voluntarily accepted pesification of his deposits and was claiming the difference between the value of those pesified deposits and the value of those deposits in U.S. Dollars. In October 2004, the Supreme Court further determined that mandatory pesification was a reasonable measure for the Argentine government to have taken due to the economic crisis and the resulting run on deposits.

Through Decree No. 739/2003 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.

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

The relative stability of the exchange rate and the lower inflation rate and higher investor confidence in 2003 and 2004 as compared to the 2001 to 2002 period have led to a gradual increase in the level of deposits with the financial system during 2003 and 2004. In 2003, certain interest rates dropped due to the higher liquidity of the financial system resulting from the fact that loans by financial institutions have not increased as much as the rate of increase in deposits. In 2004 deposits increased as a result of the Argentine government's deposits due to high fiscal surpluses. Notwithstanding the existence of higher liquidity levels, we cannot assure you that companies, like us, with foreign currency denominated financial debt will obtain sufficient funds to refinance their debt.

Due to the above mentioned financial difficulties, extreme volatility and uncertainty created by court decisions, the Argentine banking system as a whole may be subject to a lack of confidence, and a large number of depositors may seek to withdraw all of their deposits and convert their Pesos into Dollars in the future. If this happens, the Argentine government may be required to provide additional financial assistance to banks. If the Argentine government is not able to provide this assistance and these withdrawals are significant, this could lead to the collapse of one or more large banks or even the Argentine financial system.

The Argentine banking system's collapse or the collapse of one or more of the larger banks in the system would have a significant adverse effect on the prospects for economic recovery and political stability in Argentina, resulting in a loss of consumer confidence, lower disposable income and fewer financing alternatives for consumers. These conditions would have a material adverse effect on us by resulting in lower usage of our services and the possibility of a higher level of delinquent or 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 15, 2005 the exchange rate was Ps.2.877 per U.S. Dollar. See "¾ Exchange Rate Information" for additional information regarding Peso/U.S. Dollar exchange rates.

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

We realize substantially all of our revenues in Argentina and in Pesos and, as a result, the devaluation of the Peso and the pesification and freezing of our tariffs have had a material adverse effect on our ability to service our indebtedness which is largely denominated in foreign currency and has significantly increased in Peso terms. In addition, the Peso cost of 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, 2004, our debt in foreign currency was the equivalent of U.S.$509.9 million (including default interest).

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 2003 the Argentine consumer price index increased by 3.7% and the wholesale price index increased by 2.0%. During 2004, the Argentine consumer price index increased by 6.1% and the wholesale price index increased by 7.9%. In the past, inflation materially undermined the Argentine economy and the Argentine government's ability to create conditions that would permit growth. If the value of the Peso cannot be stabilized by positive expectations for Argentina's economic future as well as by strict fiscal and monetary policies, an increase in inflation rates can be expected.

We derive the principal portion of our revenues from monthly basic charges payable in Pesos. Prior to the enactment of the Public Emergency Law, those charges were linked to a rate per unit of usage calculated in U.S. Dollars and we also had the right to adjust that rate semiannually in accordance with variations in the U.S. producer price index. Pursuant to the Public Emergency Law, provisions requiring adjustments in agreements for the provision of public utility services between the Argentine government and the providers of those services (including ourselves) based on foreign inflation indexes and all other indexation mechanisms have been revoked, and the tariffs for the provision of such services are now converted from their original Dollar values to Pesos at a rate of Ps.1.00 per U.S.$1.00. Unless our tariffs increase at a rate at least equal to the rate of inflation, any further increase in the rate of inflation will result in decreases in our revenues in real terms and will adversely affect our results of operations.

We are in the process of renegotiating our tariffs with the Argentine government. We cannot give you any assurance that the outcome of this renegotiation will be favorable to our future economic and financial position. See "-Risk Factors Relating to Us".

Beginning in December 2001, the Argentine authorities implemented a number of monetary and currency exchange control measures that included restrictions on the withdrawal of funds deposited with banks and tight restrictions on making certain transfers abroad, including transfers in connection with repayments to foreign creditors. These regulations, which were constantly modified from the time they were first enacted and which applied to us, have recently been lifted. Currently, local companies may, without the Central Bank's approval: (a) transfer funds abroad for the payment of interest when due (or up to 15 days in advance of the due date) and pay interest in the context of a restructuring process, and (b) transfer funds abroad for the payment of principal at maturity (or up to 15 days in advance of the due date) and prepay principal in the context of a restructuring process, provided that (x) the amount prepaid does not exceed the present value of the debt which is being prepaid, and (y) the new terms and conditions of the restructured debt, including the amounts prepaid, do not result in an increase of the present value of the entire debt. The present value is to be calculated based on the implied interest rate for U.S. Dollar forward transactions in regulated markets. Prior to the transfer of funds abroad for the payment or redemption of principal and interest, the financial entity making the transfer must verify that the debtor has complied with all information requirements.

In addition, futures contracts, forward contracts and other derivative instruments, with some exceptions, have to be approved by the Argentine Central Bank, upon agreement and to obtain foreign currency to settle such transactions.

Argentine residents earnings in foreign currency in connection to the sale of nonfinancial and nonmanufactured products such as patents, commercial brands, copyrights, royalties, licenses, concessions, leases and other transferable contracts, must be exchanged in the local foreign exchange market, within thirty (30) days from the date of the reception of the funds, in Argentina or abroad. Access to the foreign exchange market is limited to Argentine residents and Argentine companies who desire to make a portfolio or other liquid investments abroad, as long as they comply in a timely manner with their payments of their foreign debt.

Pursuant to Decree No. 616/2005, (i) new foreign indebtedness shall be for not less than 365 days, except foreign trading financing and financing of new issuances of debt securities in a public offering and listing on a Argentine stock exchange and (ii) any entrance of funds of nonresidents aimed at (a) holdings of local currency; (b) acquisition of financial assets or liabilities excluding direct foreign investment and financing of new issuances of debt securities in a public offering and listing on a Argentine stock exchange; and (c) investment in sovereign debt securities acquired in the secondary market; is subject to the following restrictions: (a) such funds can be transferred abroad after a 365-day term; (b) the foreign currency must be exchanged in the local foreign exchange market and deposited in a local financial institution; and (c) the investor shall make a deposit of 30% of the relevant investment amount for a 365-day term.

We cannot assure you that further restrictions on transfers of funds abroad will not be established or reinstated and, if they are, whether they will prevent us from servicing our foreign currency-denominated financial debt.

Our Annual Financial Statements have been prepared assuming that we will continue as a going concern. Our independent auditors, Price Waterhouse & Co. S.R.L., member firm of PricewaterhouseCoopers, Buenos Aires, Argentina, issued a report on our financial statements as of and for the year ended December 31, 2004 stating that we were negatively impacted by the deterioration of the Argentine economy, the Argentine government's adoption of various economic measures including the violation of the contractually-agreed license to provide natural gas services and the devaluation of the 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, 2004 do not include any adjustments that might result from the outcome of this uncertainty. See Item 18: "Financial Statements".

As of December 31, 2004 our aggregate financial debt amounted to Ps.1,597.8 million (the equivalent of U.S.$536.4 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".

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 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 massive devaluation of the Peso which has correspondingly reduced the real value of our tariffs and increased the Peso amount of our indebtedness;
• the freezing of our tariffs; and
• the deterioration in the ability of our customers to pay their bills. See "¾ Risk Factors Relating to Argentina-Substantially all our revenues are earned in Argentina and, thus, are highly dependent on economic and political conditions in Argentina".

As a result of our suspension of payments of principal and interest on our financial debt, our creditors are entitled to require immediate repayment of so much of such debt as has not already matured and to seek to exercise remedies, including without limitation, seeking to obtain and enforce attachment against our assets. If we are not able to reach a satisfactory agreement with our creditors we will likely be forced to conduct reorganization or liquidation proceedings, which could cause the forfeiture of our License. See Item 4: "Information on the Company¾ Business Overview¾ Regulatory Framework¾ The Gas Act and Our License-Penalties and Revocation".

On December 31, 2003, we received a notification from Citibank, N.A., acting as trustee for the Floating Rate Series C Notes, announcing the acceleration of such notes. As of the date of our Annual Report, two bankruptcy proceedings have been brought against us by holders of our notes, or "negotiable obligations". Both bankruptcy petitions were dismissed, after we deposited the amounts claimed with the courts as proof of our solvency.

On November 7, 2003, we publicly announced an APE Solicitation, of consent from our financial creditors to an APE, an out-of-court reorganization agreement which would have the effect of restructuring all our financial debt. See Item 5: "Operating and Financial Review and Prospects-Liquidity and Capital Resources-Debt" for a description of our debt restructuring plan.

In addition to rights granted by law to our bank creditors to set off against our deposits with them amounts we owe them, certain of our agreements with certain of our bank creditors contain provisions authorizing them to debit our accounts for amounts we owe them or to set off such amounts against our deposits with them. One of our bank creditors has exercised its right to such setoff and we cannot assure you that one or more of our bank creditors will not avail themselves of their rights and provisions or that, if they do, the resulting debits or setoffs will not have a material adverse effect on us.

In order to ensure the continuity and quality of public utility services, Decree No. 1834/02 provided that neither the filing of a reorganization proceeding by us nor the filing of a bankruptcy petition against us on or before December 10, 2003 would cause the termination of our License. Law No. 25,972 extended this term until December 31, 2005. We cannot assure you that this Decree will remain in effect after that date or that a failure to refinance our debt may not have a material adverse effect on us.

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, or 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 our License and tariff renegotiation is uncertain both as to its timing and final form. Therefore we cannot assure you if and when the renegotiation process will conclude nor can we assure you whether the renegotiation process will result in additional restrictions (for example, required capital expenditures which prove to be unprofitable) or that the tariffs that result from the renegotiation will maintain their value in U.S. Dollars or Pesos over time to compensate for any past and future increases in inflation or devaluation of the Peso. Inflation in terms of the wholesale price index and the consumer price index for the year ended December 31, 2002 was 119% and 41%, respectively, and the devaluation of the Peso against the U.S. Dollar amounted to 237% during that year. Inflation in terms of the wholesale price index and the consumer price index for the year ended December 31, 2003 was 2.0% and 3.7%, respectively, and the revaluation of the Peso against the U.S. Dollar amounted to 12.9% during such year. Inflation in terms of the wholesale price index and the consumer price index for the year ended December 31, 2004 was 7.9% and 6.1%, respectively, and the devaluation of the Peso against the U.S. Dollar amounted to 1.5% during such year.

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

On January 24, 2003, the Argentine government issued Emergency Decree No. 120/2003, 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. 146/2003 and Resolution No. 2,787/2003 issued by ENARGAS, provided an interim tariff increase of approximately 10% for the electricity and gas sectors. On January 30, 2003 we started invoicing our customers with the increased tariffs. However, the National Ombudsman, the Ombudsman of the City of Buenos Aires and a number of consumer advocacy organizations filed objections to both decrees with various courts and, pursuant to these objections, a court issued a preliminary injunction prohibiting the increase provided for by these tariffs. As a result of such injunction, on February 27, 2003 we suspended the invoicing of our customers at the increased tariff level and resumed invoicing at the former lower tariff levels.

In October 2004 ENARGAS issued Resolution No. 3,092/2004 which established a new tariff framework applicable to the period from October, 2004 to April, 2005. This new tariff framework is in accordance with Resolution No. 208/2004 which represents an agreement among gas producers and ENARGAS. We cannot assure you that we will receive any further interim tariff increases, 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.

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.

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

Further, pursuant to Resolution No. 208 issued by the Energy Secretariat, Notes Nos. 2,975, 3,332 and 3,674 issued by ENARGAS and Note No. 671 issued by the Federal Planning Ministry, ENARGAS is permitted to redistribute gas volumes that we have contracted to receive from gas producers under our renegotiated gas agreements to other gas distribution companies.

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

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 operate in a regulated industry. Changes in the regulatory framework applicable to us may have a material adverse effect on our financial performance. As a result of the economic volatility experienced in Argentina since 2001, the Argentine government has put in place various regulatory measures, including, for example, the creation of an electronic gas market, a trust fund for investment in natural gas transportation and distribution authorizing the Energy Secretariat to enter into agreements with natural gas producers to adjust the price of natural gas at transportation system entry point, or "TSEP," suspension of exports of natural gas and setting of certain discounts or surcharges to certain users, that impact the operations of gas distribution companies, including us.

On August 24, 2004, the Executive Power submitted a proposed bill to Congress which sets forth a new regulatory framework for public services rendered by companies (including us) created by the privatization of state-owned utilities. If approved, the bill would apply to holders of existing and future concessions and licenses to render public services (including our License). The proposed bill provides for a material alteration of the framework under which we are currently operating. Although the proposed bill provides that holders of licenses or concessions should be entitled to a reasonable return on their investments, it grants the Executive Power the right, among others, to impose on utilities a requirement to make certain investments (which may not be profitable to us), the obligation to subsidize part of the tariffs charged to certain economically disadvantaged customers. The proposed bill also provides that the Argentine government shall be entitled to vary the terms and scope of the License or concession, in pursuing the public interest. The exercise by the Executive Power of the rights granted to it by the proposed bill may affect substantial terms of our License (such as tariffs) and the conditions under which we render our services.

We cannot assure you that the interpretation and application of the above mentioned regulations, together with any changes to the regulatory framework would not materially and adversely affect us. See Item 4: "Information on the Company-Business Overview-Regulatory Framework-New Regulations".

We operate in a regulated industry and, accordingly, our results of operations depend on the applicable regulatory framework and the interpretation and application of such framework by ENARGAS, the agency of the Argentine government created to regulate privatized gas transportation and distribution companies. ENARGAS' interpretation and application of the regulatory framework has been adverse to our business on a number of occasions. Pursuant to the framework that regulated the public service of gas distribution 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.30.0 million with respect to our purchases of gas from 1995 through February 2005. 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 Company¾ Business Overview¾ Tariffs¾ US PPI Adjustments to Tariffs and Related Disputes", "-Information on the Company-Tariffs¾ Gas Purchase Price Adjustments to Tariffs and Related Disputes" and "Information on the Company¾ Business Overview¾ 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, or "US PPI", as contemplated by our License prior to the enactment of the Public Emergency Law. The US PPI adjustment would have resulted in a 3.78% increase in the transportation and distribution components of our tariffs as of that date. ENARGAS' failure to include a US PPI adjustment 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 2000. 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 Company¾ Business Overview¾ Regulatory Framework¾ 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. 669/2000 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. 669/2000, that is, 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 Transportadora de Gas del Sur S.A., or "TGS"and Transportadora de Gas del Norte S.A., or "TGN".

In May, July and August 2002, ENARGAS issued resolutions authorizing tariff increases from May 1, 2002 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. 146/2003 and ENARGAS' Resolution No. 2,787/2003 issued on January 30, 2003, a "social tariff" was created in order to reduce the price of gas for poor and unemployed users. Such reduction of the "social tariff' is offset by an increase in the tariffs charged to other users. A few days later, the court suspended these increases, following the injunctions filed by the National Ombudsman, the Ombudsman of the City of Buenos Aires and certain advocacy organizations. However, the special tariff was left in place.

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.

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

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

If our losses for any year exceed our reserves plus 50% of our capital stock at the end of that year, we would be required to reduce our capital stock pursuant to Article 206 of the Argentine Corporations Law unless we receive a capital contribution sufficient to restore our financial condition. In addition, if our shareholders' equity becomes negative (that is, if our liabilities exceed our assets) at any year-end, we will be required to be dissolved and liquidated pursuant to Article 94 of the Argentine Corporations Law unless we receive a capital contribution which once more causes our assets to exceed our liabilities. On July 16, 2002 the Argentine government issued Decree No. 1,269/2002, which suspended the enforcement of such provisions of the Argentine Corporations Law until December 10, 2003. This term was extended until December 10, 2004 by Decree No. 1,293/2003 and further extended until December 10, 2005 by Decree No. 540/2005. 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.

As of March 31, 2005, we had outstanding negotiable obligations due from 2002 to 2004 in the principal amounts of U.S.$230.0 million and Euros 109.5 million and bank financing totaling the equivalent of U.S.$73.9 million.

On November 7, 2003, we publicly announced an APE Solicitation, of consents from our financial creditors to an APE, an out-of-court reorganization agreement which would have the effect of restructuring all our financial debt comprising all financial creditors including those creditors who have not consented to the APE. As of May 18, 2005, powers of attorney and support agreements have been received with respect to Ps.77.3 million principal amount of our existing debt. See Item 5: "Operating and Financial Review and Prospects-Liquidity and Capital Resources-Debt" for a description of our debt restructuring plan.

While we are engaged periodically in discussions with our financial creditors that have not accepted our APE Solicitation with a view to agreeing with them on mutually satisfactory terms on which our financial debt may be restructured, we can give no assurance that we will be able to refinance our debt at all or on terms which are acceptable to us. 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 our Annual Report that we will be successful in renegotiating our financial liabilities. See Item 5: "Operating and Financial Review and Prospects-Liquidity and Capital Resources-Debt".

We did not experience any significant difficulties regarding deliveries of gas from our suppliers during the winters of 2002, 2003 and 2004.

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

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

As noted above under "¾ Demand for our services is highly sensitive to weather conditions in Argentina", our revenues tend to be relatively higher in years with cold winters and lower levels of hydroelectric generation. Also, in the absence of unusual circumstances, our expenses in those years do not increase in proportion to our revenues, thus making those years relatively more profitable than years with warmer winters and higher levels of hydroelectric generation. This may not be the case during 2005, however, because of possible increases in our expenses attributable to shortages in gas and transportation supply, including:

• Relatively high prices in the spot market. We purchase approximately 80% of the gas we require under long-term contracts and purchase the balance in the spot market. In addition, the Energy Secretariat and ENARGAS have determined that natural gas that we would otherwise supply to our customers under our existing supply agreements with such customers should be redirected to other gas users. This redirection may result in the purchase of greater volumes of natural gas by us in the spot market. We expect the spot market price for gas during the winter 2005 period to be between two and three times higher than the price we pay for gas under our long-term contracts and we believe that it is unlikely that we will be able to pass through to our customers the higher prices that we pay in the spot market, thus increasing our expenses without an offsetting increase in our revenues.
• Insufficient long-term firm transportation. Because of the increase in demand for natural gas outlined under "¾ The energy industry in Argentina may experience an increase in the demand for natural gas that may not be met by current gas and transportation supply and which could lead to our inability to satisfy the needs of our customers" , any increase in demand for natural gas due to cold weather, lower hydroelectric power generation or the lower cost of natural gas relative to other fuels could cause us to require more transportation capacity than that for which we have contracted. As a result, we will have to acquire additional transportation capacity under so-called "peaking agreements" under which our cost of transportation is up to three times higher than what we pay under our long-term transportation contracts. We believe that it is unlikely that we will be able to pass through to our customers a substantial portion of any payments we are required to make under peaking agreements.
• Power plant fines. Our contracts with our power plant customers permit us to interrupt our supply of gas to them within certain limits. If we exceed these limits we are required to pay fines to our power plant customers, which fines increase with increases in the contracted volumes that we do not deliver. An increase in demand from our uninterruptible customers coupled with a shortage of gas due to supply or transportation constraints could result in a substantial increase in the fines we are required to pay our power plant customers in 2005 in comparison to such payments in 2004.

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 2001, the price of fuel oil decreased as a result of lower oil prices, although gas prices continued to be more economical than other alternate fuels. In 2002, 2003 and 2004 the price of fuel oil increased as a result of higher oil prices and of the devaluation of the Peso as did the price of other alternate fuels such as gasoline or diesel fuel. In 2002 and 2003, natural gas prices remained frozen. In 2004, natural gas prices increased as a result of the 2004 Agreement. However, natural gas prices continued to be more economical compared to alternate fuels.

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

For the abovementioned reasons and as a consequence of the lower cost of natural gas compared to the cost of the energy equivalent amount of gas-oil, gasoline or diesel fuel, demand for natural gas and transportation and distribution services from our electric generating customers and our CNG customers has increased. In 2004, our gas deliveries to power plant and CNG customers accounted for approximately 50% of our gas deliveries to all users, approximately 19% of our sales, approximately 9% of our gas deliveries to all customers and approximately 11% of our sales, respectively. See Item 5: "Operating and Financial Review and Prospects-Operating Results".

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

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

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

We cooperate with power plant users and certain industrial users that purchase gas directly from gas suppliers but continue to use our transportation and distribution services. This type of arrangement permits us (a) to avoid incurring gas purchase costs (and take-or-pay charges) and (b) to collect a tariff from the customers, thereby defraying all or part of the cost of our firm transportation capacity used for such services. These arrangements also enable us to achieve certain savings by avoiding (a) the cost of purchasing the gas that is used as compression fuel which, pursuant to the regulatory framework, cannot be passed on to 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 users and we are implementing appropriate contracting and pricing policies that discourage the construction of direct connecting pipelines between our major users and the transportation systems that would completely bypass our system and avoid the use of our firm transportation capacity. It is possible that certain of our users will completely bypass our services or require us to further unbundle our services in a manner that could adversely affect our margins. On June 1, 2000, ENARGAS issued Resolution No. 1,748/2000 which introduces amendments to the Service Regulation for "Small" and "Large" General Service Users, with alternatives for the purchase of gas and/or transportation from third parties, reducing the benchmark volume limit from 10,000 CM (353 MCF) to 5,000 CM (177 MCF) per day and further reducing the limit for interruptible demand to 1.5 MMCM/year (53 MMCF/year) from 3.0 MMCM/year (106 MMCF/year) for distribution bypass. Additionally, the period to notify ENARGAS and the distribution companies of the intended bypass 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. See Item 4: "Information of the Company-Business Overview-Regulatory Framework". Our management believes that the effect of any such situations could, however, be partially mitigated by provisions in certain of our firm transportation contracts with TGS which provide that, if any of our users enters into a firm transportation agreement with TGS (either directly with TGS or with a third party such as a producer or gas broker), we would have the right to reduce our firm transportation commitment with TGS by up to the amount of the lost service between us and such customer. Our firm transportation contracts with TGN contain similar provisions.

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

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, or "Gas Purchase Contracts", which are essential to the provision of our service.

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

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

On April 2, 2004, the Energy Secretariat and a large number of natural gas producers executed an agreement, or the "2004 Agreement", to set the price of natural gas at the transportation system entry point, or "TSEP", through 2006. The Ministry of Federal Planning, Public Investment and Services, or the "Federal Planning Ministry", confirmed the validity of the 2004 Agreement through Resolution No. 208. The 2004 Agreement established a 45-day term, beginning on April 23, 2004, during which outstanding gas purchase agreements among producers and gas distribution companies were to be renegotiated (principally in respect of volumes and take-or-pay obligations). Gas purchase contracts renegotiated pursuant to such resolution due in December 2006. See Item 4: "Information of the Company-Business Overview-Regulatory Framework-New Regulations". During May and June 2004, we renegotiated all but one of these contracts and in May 2005, we renegotiated the last of these contracts. With respect to these renegotiated gas contracts, gas producers have waived their claims to both the Peso equivalent of the original Dollar price they were entitled to receive under the Existing Contracts and the pesified value of the Existing Contracts plus the CER adjustment provided the Government abides by the terms of the 2004 Agreement. There can be no assurance that the Government will continue to abide by the terms of the 2004 Agreement.

We have continued to insist on a fundamental principle of the regulatory framework under which we operate, namely, that we are entitled to pass through to our customers the price we pay for gas that we deliver to them. We anticipate that any increase, whether retroactive or prospective, in the price we pay for natural gas will be passed through to our customers. We are presently paying all of our gas producers the amounts agreed under the 2004 Agreement. However, we cannot assure you that any changes in the regulatory framework as to the terms of the 2004 Agreement will not have an adverse effect on our ability to pass through to our customers the price we pay for natural gas we deliver to them. See Item 4: "Information on the Company-Business Overview-Commercial Contracts-Natural Gas Purchase Contracts-Current Gas Purchase Contracts".

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

As a result of the 2004 Agreement, we renegotiated our gas supply contracts as described above. Our take-or-pay commitments through 2005 under those gas purchase contracts require us to pay for an average of 72% to 85% of the gas that we are entitled to purchase under such contracts.

While we believe it is unlikely that the take-or-pay provisions in our gas supply contracts will result in any significant liability for gas not taken we can give no assurance that such liability may not arise during 2005 or any subsequent years. See Item 4: "Information on the Company-Business Overview-Commercial Contracts-Natural Gas Purchase Contracts-Current Gas Purchase Contracts" and Item 4: "Information on the Company-Business Overview-Commercial Contracts-Natural Gas Purchase Contracts-Take-or-Pay Obligations".

Our License, the specific bidding rules, or the "Pliego", governing the privatization of Gas del Estado S.E., or "Gas del Estado", and the regulations issued pursuant to the law under which we were privatized, Law No. 24,076, or 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 S.A., or "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 our License. See Item 4: "Information on the Company-Business Overview-Regulatory Framework-The Gas Act and Our License-Penalties and Revocation". On September 17, 2002 the Argentine government issued Decree No. 1834/2002 (which shall remain in effect as long as the Public Emergency Law is in effect) which provides that the filing of reorganization proceedings or of a petition in bankruptcy by or against companies that are renegotiating their government-granted licenses as a result of the Public Emergency Law shall not lead to termination of the licenses of such companies.

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

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

We have been subject to various legal proceedings brought by the Province of Neuquén and the Province of Rio Negro, which we have vigorously defended. As of March 31, 2005 these Provinces allege that we owe approximately Ps. 234.6 million in stamp taxes.

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, although no assurances can be given that the Argentine government will ultimately pay such stamp taxes, if so required.

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. In the past, ENARGAS has not permitted us to pass through certain material costs and no assurance can be given that, if we are required to pay these stamp taxes, our tariffs will be increased sufficiently to fully or partially compensate us.

TGS filed a declaratory action agaist 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 collection proceedings until the Supreme Court issues a final ruling. On April 15, 2004, the Supreme Court decided to uphold the request made by TGS and consequently, declared that offers with tacit acceptance, which are the subject matter of this litigation, cannot be subject to stamp tax.

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. Based on interim judicial decisions, we have not established any reserves for either current or potential stamp tax claims. Since these types of claims are not limited to us but involve the entire gas industry, the resolution of this controversy may entail a general agreement or regulatory change. See Item 8: "Financial Information-Legal Proceedings-Stamp Tax".

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 our licensed service, including communication lines and interconnections to third parties. The regulatory framework also establishes that cost variations resulting from changes in taxation rules shall be passed through to our tariffs.

In 1997, in the context of the Agreement for the Coordinated Action for Works in Public Spaces, or "SWA", entered into between public services companies and the Government of the City of Buenos Aires, or "GCBA", it was agreed that we would pay GCBA certain amounts each year for works done during the year, or the "SWA Rate". In 2000, GCBA created an additional rate referred to as the "Study, Revision and Inspection of Works in Public Spaces Rate", or the "Inspection Rate", which had the effect of taxing public services companies for the same works that were being taxed under the SWA Rate.

GCBA has made various claims against us with respect to the Inspection Rate. As of March 31, 2005, the GCBA alleges that we owe approximately Ps.10.2 million. We are continuing our negotiations with ENARGAS, the Energy Secretariat and GCBA in an attempt to resolve the matter and pass through to the consumers the rate imposed by GCBA.

In 1998, GCBA created an Occupancy of Public Space Rate, or "Occupancy Rate" applicable (among others) to gas pipelines. We and other utility companies have challenged the validity of the Occupancy Rate. GCBA has made various claims against us with respect to the Occupancey Rate. As of March 31, 2005, GCBA alleges that we owe approximately Ps.20.1 million.

In March 2005, the Energy Secretariat authorized Litoral Gas S.A., a gas distribution company, to include the Occupancy Rate amounts claimed by three municipalities of the Province of Santa Fe in the tariff paid by their customers. Due to GCBA's rejection of our administrative appeals we have continued our negotiations with ENARGAS, the Energy Secretariat and GCBA in an attempt to resolve the matter and pass through to consumers the rate claimed by GCBA.

We can give no assurance as to the outcome of such negotiations, whether other jurisdictions may claim similar levies or whether we will be permitted to pass through any final amounts claimed to our tariffs.

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 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, or 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, or 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 the majority of the members of our Board of Directors and the majority of the members of our Supervisory Committee. In addition, pursuant to our by-laws, or the "By-Laws" the Class A shareholders have the power to elect two of the three members of our Supervisory Committee. Accordingly, our other shareholders are not able to affect the outcome of any shareholder vote, including the election of our Board of Directors.

We are the largest natural gas distribution company in Argentina (in terms of number of customers and volume of gas deliveries), with approximately 26.0% of total deliveries of all gas distribution companies in Argentina during 2004 according to ENARGAS' 2004 Annual Report. We have over 1.9 million customers in our service area (the City of Buenos Aires and southern and eastern greater metropolitan Buenos Aires), a densely populated area with major dual-fuel electric power plants and industrial and commercial customers of natural gas. We are one of nine natural gas distribution companies formed in connection with the privatization of Gas del Estado, and we commenced commercial operations in December 1992. We are one of the largest publicly traded natural gas distribution companies, in terms of customers served, in North and South America.

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). During 2004, sales of natural gas to residential customers accounted for approximately 46.8% of our sales, while sales of gas and transportation and distribution services to industrial and commercial customers and governmental entities accounted for approximately 20.1% of our 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 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 15,840 km of mains. We purchase natural gas primarily from producers in southern and western Argentina. Gas purchased by us is transported through Argentina's two trunk pipeline systems, one of which is operated by TGS and the other by TGN.

In the 1992 privatization of Gas del Estado, the Argentine government granted us a 35-year License, extendable for ten years under certain conditions, giving us the exclusive right to distribute natural gas within our designated service area. We are regulated by ENARGAS, an agency of the Argentine government. ENARGAS has broad regulatory authority over the gas distribution and transportation industries, including their tariffs. The Gas Act provides that the tariffs for natural gas we charge to end users shall consist of the sum of three components: (i) the price of gas purchased; (ii) the transportation tariff for transporting gas from the production area to the distribution system; and (iii) the distribution tariff established by ENARGAS. Our License provides for the semiannual adjustment of our tariffs as a result of changes in the US PPI, and in certain other circumstances, and the Gas Act and our License provide that such tariffs will be adjusted every five years pursuant to a "pricecap with periodic review" methodology, a type of incentive regulation that allows regulated companies (i) to retain a portion of the economic benefits arising from efficiency gains, and (ii) to recover the cost of investments made by them as well as a reasonable return on those investments. The Public Emergency Law converted our U.S. Dollar-denominated tariffs into Pesos at an exchange rate of Ps.1 per U.S.$1 and superseded and suspended a number of these provisions. Our tariffs have not been adjusted as contemplated by the Gas Act and our License since July 1999 (in respect of transportation and distribution tariffs) and May 2002 and May and October 2004 (in respect of the prices we pay for gas). The Public Emergency Law has superseded a number of these provisions. See
"-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 "-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, including:

• 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 except for two partial payments of interest made in July and November 2002;
• Renegotiation of commercial and operational contracts;
• Securing any necessary tax advice in order to make the best possible tax use of past and future tax losses; and
• Retaining international financial advisors to develop a comprehensive plan to restructure all of our financial indebtedness.

Before the onset of the Argentine economic crisis and in order to achieve our goals, we had implemented a strategy that included capital investments and other measures designed to: (a) provide continued high-quality service to our customers; (b) ensure sustained growth in dividends; (c) achieve a significant reduction in operating expenses; (d) implement a market strategy more closely based on market analysis; (e) improve the use of our current transportation capacity and become a key participant in the transportation capacity market; (f) further develop the CNG market; (g) continue to preserve the environment; (h) develop our human resources; and (i) generate an organizational culture based on excellence.

Although we are constrained by our 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.

Since we commenced our operations, our management team has concentrated on controlling operating costs and improving operating efficiency and 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, 2004 we had 1,014 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.

The following table sets forth certain information regarding our services to our customers during 2004:

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

We provide service to more than 1.9 million residential customers within our service area, approximately 65% of whom are located in the City of Buenos Aires. In 2004, sales to residential customers accounted for approximately 21.3% of the volume of natural gas we delivered to our customers and approximately 46.8% of our sales, while during 2003 sales to residential customers accounted for 26.6% and 59.0% of the volume of natural gas we delivered to our customers and our sales, respectively. Our volume of sales to residential customers decreased from approximately 1.8 BCM (64 BCF) in 2003 to approximately 1.7 BCM (60 BCF) during 2004. This decrease was mainly due to higher average temperatures which resulted in lower residential consumption of natural gas. We added approximately 29,104 and 16,289 net new residential customers in 2004 and 2003, respectively. This increase in customers partially offset the decrease in sales of natural gas in 2004.

Residential customers receive residential service and pay the tariff for that class of service. Our tariff schedule is structured so that residential customers pay a higher tariff per unit of consumption than other groups due to the lower load factor and higher operating costs associated with these customers. Under our License, we are generally required to provide continuous uninterrupted service to residential customers. No written contracts are required to obtain residential service. The tariff for residential customers consists of a fixed charge per invoice and a charge per unit of consumption.

Pursuant to Decree No. 181/2004 residential service tariffs have been divided into three categories, R1, R2, and R3, according to the level of gas consumed. The same tariffs will be applicable to transportation and distribution services of the three categories of residential customers until completion of the process of renegotiation of public services tariffs, at which time different tariffs are to be established for each category of residential customer on the basis of their consumption of natural gas.

On April 29, 2004, the Energy Secretariat issued Resolution No. 415/2004, pursuant to which residential, commercial and small industrial users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2004, users who consumed less than 90% of the amount of gas they used during the same invoiced period in 2003 have received a discount equal to 10% to 12% on the cost of their annual natural gas consumption, while users who use above 95 percent of the gas they consumed during the same invoiced period in 2003 have paid a surcharge on the gas they consume over the 95% level.

On April 11, 2005, the Energy Secretariat issued Resolution No. 624/2005, which extended Resolution No. 415/2004. Pursuant to Resolution No. 624/2005 residential, commercial and small industrial users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2005, users who consume less than 90 or 95 percent, depending on the type of user, of the amount of gas they consumed during an equivalent period in 2004, adjusted for the average temperature during each period, will receive a discount equal to one cubic meter per each cubic meter saved below those levels, while users whose consumption is above 90 or 105%, depending on the type of user, will pay a surcharge on the gas they consume over those levels. Resolution No. 624/2005 expires in September 2005 but may be extended.

During 2004, total deliveries to power plants accounted for approximately 50.0% of the volume of natural gas we delivered to our customers and approximately 19.4% of our sales, compared to 42.0% of the volume of natural gas we delivered to our customers and 8.2% of our sales during 2003. Volumes of natural gas delivered to power plants in our distribution area increased from 2.8 BCM (99 BCF) in 2003 to 4.0 BCM (142 BCF) in 2004. This increase of approximately 44.6% was mainly due to an increase in the demand for electricity and lower hydroelectric generation in 2004 compared to 2003, which led to an increase in the dispatch of gas to thermal power plants.

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

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 diesel 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 diesel, 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 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 bypass. 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 bypass 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 "-Commercial Contracts-Gas Transportation Contracts".

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

Under the regulatory system governing the Argentine electricity industry, electricity-generating plants are dispatched in ascending order of marginal cost of generation to enable the national electricity system to operate at the lowest possible cost. Hydroelectric generating plants have the lowest marginal cost of generation in the national electricity system. Therefore, higher marginal cost power plants, such as thermoelectric plants (including our power plant customers), will not have their output dispatched to the extent hydroelectric power is available. Accordingly, above average rain or snowfall which permits relatively greater dispatch of hydroelectric generating stations will tend to decrease the dispatch of our power plant customers and their consumption of gas, resulting in our delivering less gas to them. Conversely, any event that increases the demand for natural gas for electric power generation, such as below average rainfall or snowfall which limits hydroelectric power generation, will increase the dispatch of our power plant customers which in turn will benefit us. Below average rainfall and snowfall limited hydroelectric power generation during most of 2000, resulting in a relative increase in thermal power generation and in the demand for gas by thermal power plants. In 2001 and 2002, however, abundant rainfall and snowfall permitted increased hydroelectric power generation and caused a substantial decline in thermal power generation and in the related demand for gas compared to 2000. Additionally, in 2002 the demand for electricity decreased compared to 2001 due to the Argentine economic crisis. The consumption of electricity in Argentina increased dramatically during 2003 and 2004. The partial stabilization of the Argentine economy increased electricity consumption by 8.9% in 2003 compared to 2002 and 8.5% in 2004 compared to 2003.

According to CAMMESA, of Argentina's total electricity consumption during 2004, approximately 54% was generated by thermal power plants, approximately 36% was generated by hydroelectric power plants, approximately 8% was generated by nuclear power plants and approximately 2% was imported.

We, as a provider of transportation and distribution services, and producers of gas compete directly with sellers of fuel oil for sales of fuel to dual-fuel power plants. Fuel oil prices in Argentina have historically been volatile but generally above the delivered price of gas for an equivalent amount of energy. However, energy-equivalent fuel oil prices have occasionally dropped below the price of gas at the wellhead plus our maximum tariff price for interruptible gas transportation to power plants. To enable us to achieve a higher load factor during the warmer months when residential demand is weaker, certain power plant customers have agreed to pay for a minimum amount of our transportation and distribution services at discounts from maximum tariffs. Conversely, during the winter months, we agreed with certain dual-fuel power plants in our service area to deliver to such power plants a minimum volume of gas on an interruptible basis. If we fail to meet our commitments, we are required to refund a portion of the excess of the cost of fuel oil over the price of the undelivered gas on an energy-equivalent basis. Such agreements were negotiated in order to obtain the commitment of such power plants to agreed volumes of our transportation and distribution services, notwithstanding the risk that we might have to interrupt our deliveries to such power plants in order to serve our residential customers. In light of the current shortage of natural gas supply, under the agreement between producers and the Energy Secretariat (approved by Resolution No. 208/2004), the producers committed certain volumes to be sold to power plants at the agreed prices. See
"-Regulatory Framework-New Regulations-Decree No. 181".

Further, Resolution No. 752/2005 was issued by the Energy Secretariat and published in the Official Gazzette. Resolution No. 752/2005 provides that all natural gas users, except for residential and General Service P categories, are authorized to acquire natural gas at the transportation system entry point, or "TSEP". In addition to this general rule, said Resolution No. 752/2005 creates a new natural gas marketing structure by providing certain supply restrictions, which apply to distribution companies. In accordance with these restrictions, gas distribution companies will be unable to supply short, medium and long term natural gas to: (i) large users, either on a firm or interruptible basis, from August 1, 2005; (ii) General Service G users, from August 1, 2005; (iii) General Service P users with an average consumption of more than 9,000 cubic meters of natural gas, from August 1, 2005; and (iv) firm and interruptible CNG users, from January 1, 2006. Accordingly, such users will have to acquire natural gas directly from natural gas producers. In addition, Resolution No.752/2005 provides that distribution companies will be authorized to provide natural gas to the users mentioned above, only if they acquire the natural gas on account of such users, within the framework of the Electronic Gas Market, or the "EGM". Regarding the CNG market, Resolution No 752/2005 creates a new marketing structure for the assignment of natural gas, which will be in force on January 1, 2006. It is still uncertain to what extent the natural gas marketing structure created by Resolution No. 752/2005 could affect our operations.

During 2004 and 2003, sales to industrial, commercial and governmental customers accounted for approximately 20.1% and 20.6% respectively of our total sales while the volume of natural gas we sold and delivered to these customers in 2004 and 2003 accounted for 17.8% and 20.1% respectively of total volume delivered to our customers and approximately 20.6% of our sales in 2003. Volumes sold and delivered to industrial, commercial and governmental customers increased by 7.7% during 2004 compared to 2003 due to the partial recovery of the Argentine economy. Our customers include major industries such as glass, food, chemical and paper producers. Some of them use natural gas as a raw material or have continuous specialized processes that depend on a constant supply of natural gas to support such processes.

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

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

Large industrial customers, or "SGG" 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. We currently operate a program that combines firm and interruptible service for large industrial customers, which includes interruptible services during 30 days in winter. The interruptions are generally due to insufficient transportation capacity or gas supply at times of peak demand and are imposed to assure the provision of gas to non-interruptible customers, such as residential customers. See "-Bypass Rights and Competition".

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

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

On April 29, 2004, the Energy Secretariat issued Resolution No. 415/2004, pursuant to which residential, commercial and small industrial users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2004, users who consumed less than 90% of the amount of gas they used during the same invoiced period of 2003 have received a discount equal to 10% to 12% on the cost of their annual natural gas consumption, while users who used above 95% of the gas they consumed during the same invoiced period of 2003 have paid a surcharge on the gas they consume over the 95% level.

On April 11, 2005, the Energy Secretariat issued Resolution No. 624/2005, which extended Resolution No. 415/2004. Pursuant to Resolution No. 624/2005 residential, commercial and small industrial users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2005, users who consume less than 90 or 95 percent, depending on the type of user, of the amount of gas they consumed during an equivalent period in 2004, adjusted for the average temperature during each period, will receive a discount equal to one cubic meter per each cubic meter saved below those levels, while users whose consumption is above 90 or 105%, depending on the type of user, will pay a surcharge on the gas they consume over those levels. Resolution No. 624/2005 expires in September 2005 but may be extended.

Sales to suppliers, dealers and users of CNG as a vehicle fuel accounted for approximately 8.7% and 11.3%, respectively, of the volume of natural gas we delivered and of our sales in 2004 compared to approximately 9.6% of the volume of natural gas delivered and 10.2% of our sales in 2003. Volumes of CNG delivered during 2004 increased by 10.4% compared to the previous year due to an increase in the number of vehicles converted to CNG as a result of repeated increases in the prices of competing fuels. The rate of increase in our CNG sales during 2004 was lower than the rate of increase in such sales during 2003 due to increases in natural gas prices and the possibility of natural gas shortages in 2004. Approximately 301 service stations provide CNG service in our service area.

Our marketing efforts during 2004 focused on promoting the use of CNG in heavy vehicles and ensuring safe and effective vehicle performance for heavy diesel engines converted to CNG. We made these efforts in conjunction with other distribution and transmission companies.

Decree No. 180/2004 created new categories of service for CNG users: CNG Firm and Interruptible Sale categories and CNG Firm and Interruptible Transportation categories which will be effective upon elimination of the prohibition against purchasing gas directly from producers or marketing companies. Since 2004, CNG customers have been required to contract for firm or interruptible capacity, according to service categories created by Decree 180/2004. The tariff for CNG users consists of a fixed charge per invoice, a charge per unit consumed, and a demand charge.

We were party to a contract with TGS from 1996 through 2000 under which TGS produced and sold for our account liquids extracted from gas we delivered to TGS' processing plant at Bahía Blanca, Province of Buenos Aires. During 2001 some 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, beginning in 2001 we have delivered gas to the TGS processing plant containing lower volumes of associated liquids than were contained in the gas we have delivered in prior years, resulting in TGS extracting lower volumes of liquids from such gas than it had in the past. We have negotiated with TGS a reduction in its fee for processing the gas we deliver to its processing plant. During 2004, deliveries of natural gas for processing accounted for approximately 2.2% of the volume of natural gas we delivered and 2.4% of our sales compared to approximately 1.7% of the volume of natural gas we delivered and 2.0% of our sales in 2003.

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. In 2000, 2001, 2002, 2003 and 2004, our load factors were 93.3%, 78.1%, 71.9%, 83.5% and 98.2%, respectively.

As of May 31, 2005, 2004 and 2003 we had an aggregate firm transportation capacity for distribution and liquids processing of 23.4 MMCM (826.4 MMCF) per day, 22.8 MMCM (805.2 MMCF) per day and 22.8 MMCM (805.2 MMCF) per day, respectively. 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 "-Regulatory Framework-The Gas Act and Our License-Penalties and Revocation". 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.91.1 million at December 31, 2004, Ps.76.8 million at December 31, 2003 and Ps.77.2 million at December 31, 2002 (in Pesos as of February 28, 2003). As of December 31, 2004, we had a reserve of Ps.74.0 million against past due receivables.

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

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 regulations, 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, or 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, or "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 15,840 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 340 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, or "SCADA" system monitors pressure and flow at the city gates and certain large customers. The SCADA system also monitors pressure at different regulator stations on the network allowing us to take decisions for managing the flows on the system in order to guarantee supply to all our customers.

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

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

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

We classify and prioritize gas leaks reported by the public according to the risk involved in each leak. During 2004, 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 97.9% of them within an hour of their being reported, compared to 98.3% in 2003.

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

Preventive maintenance activities seek to minimize the risk of system failure and are responsible for the system's scheduled and unscheduled maintenance activities. Investment in preventive maintenance allows us to reduce the number of leaks leading to reported emergencies. We have introduced a pressure management program consisting of placing profilers in most of the district governors that feed the low-pressure system. These profilers allow us to maintain even pressures in the system in spite of demand fluctuation, avoiding over-pressurization at night and ensuring proper supply during periods of peak demand. We have installed remote control equipment on 40 key district governors which enable us to adjust pressure settings more rapidly.

We have replaced significant portions of our older pipeline systems, mainly focusing on the cast iron and steel networks. Due to the current economic situation in Argentina, we will continue the minimum maintenance activities necessary to ensure a safe and reliable gas distribution system.

Argentina had proven natural gas reserves estimated at 612,496 MMCM (21,630 BCF) in 2003 with an estimated reserve life of 12 years. In 2002, Argentina's proven natural gas reserves were estimated at 663,523 MMCM (23,432 BCF), with an estimated reserve life of 13 years. In 2001, Argentina's proven natural gas reserves were estimated at 763,526 MMCM (26,964 BCF), with an estimated life of 17 years. Most of such reserves have been discovered as a consequence of oil exploration activities. Total domestic natural gas production was 52,310 MMCM (1,847) during 2004, 50,599 MMCM (1,787 BCF) during 2003 and 45,770 MMCM (1,616 BCF) during 2002. There are 19 known sedimentary basins in Argentina, ten of which are located entirely onshore, six of which are combined onshore/offshore and three of which are entirely offshore. Oil and natural gas production is concentrated in five basins: Noroeste in northern Argentina, Neuquén and Cuyana in west central Argentina and Austral and Golfo San Jorge in the south of Argentina (which include onshore and offshore fields). The major natural gas-producing basins are Noroeste, Neuquén and Austral, which together contain approximately 93.7% of Argentina's proven natural gas reserves and accounted for approximately 92.5% of its production of natural gas during 2004. In certain basins, the availability of natural gas is limited by production, transportation and processing constraints. See "-Business Overview-Commercial Contracts-Gas Transportation Contracts". TGS transports natural gas from the Neuquén basin, the Austral basin and the Golfo San Jorge basin. Natural gas transported by TGN is extracted from the Neuquén basin, the Noroeste basin and natural gas basins in Bolivia. Neither TGS nor TGN is directly connected to the Cuyana gas basin. Of the natural gas purchased by us during 2004, approximately 62% was originated in the Neuquén basin, and the remaining 38% was originated in the Austral and Golfo San Jorge basins.

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), or 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 gas prices which we pass on to our users to the extent it determines that the price we paid exceeds the price paid by other distributors in similar conditions and for equivalent volumes. See "-Regulatory Framework-Tariffs-Semiannual Adjustments to Tariffs Contemplated by Our License". In considering a request that the prices we paid for gas be included in our tariffs, our License provides that ENARGAS may review whether the price increases were prudently incurred. In August 1994, the Argentine government enacted Decree No. 1,411/1994 which empowers ENARGAS to limit the pass-through of gas prices to prices that are no higher than the lowest price for similar quantities of gas purchased under similar conditions from the same field in the event it should find that the contracts under which we purchased 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 "-Regulatory Framework-Tariffs-Semiannual Adjustments to Tariffs Contemplated by Our License". Tariff adjustments based on gas price changes occur in May and October. We must submit our gas purchase contracts to ENARGAS to support a request for a tariff adjustment that is based on estimated quantities to be purchased at contractual prices under each such contract during the upcoming tariff period. We have disagreed with ENARGAS on the adjustment of tariffs to reflect increases in the price of gas on a number of occasions when ENARGAS partially denied or delayed tariff increases we requested based upon price increases we had contractually agreed to with our gas suppliers. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us-We have been subject to, and may continue to be subject to, adverse tariff adjustments".

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

As a result of these negotiations our contracts with Total Austral S.A., Pan American Energy LLC, Sucursal Argentina, Wintershall S.R.L., or the "Total/Pan American Energy/Wintershall Contract" and YPF, or the "YPF Contract", were amended. Volume deliverable under the Total/Pan American Energy/Wintershall Contract amounted to 3.20 MMCM per day (113 MMCF) during the summer and winter period, with take-or-pay commitments between 70% and 85% of the monthly contract quantities. Volume deliverable under the YPF Contract amounted to 3.00 MMCM per day (106 MMCF) during summer time and 6.00 MMCM per day (212 MMCF) during winter time, with a take-or-pay commitment of up to 72% during summer time and 80% during winter time. The YPF Contract was to expire in February 2007, however it was renegotiated in May 2005 as a result of the contract renegotiation process.

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

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

The 2004 Agreement set the price of natural gas at the TSEP through 2006. The Federal Planning Ministry confirmed the validity of the 2004 Agreement through Resolution No. 208. The 2004 Agreement established a 45-day term, beginning on April 23, 2004, during which outstanding gas purchase agreements among producers and gas distribution companies were to be renegotiated (principally in respect of volumes and take-or-pay obligations). Gas purchase contracts renegotiated pursuant to such resolution due in December 2006. See "-Regulatory Framework-New Regulations-Decree No. 181". As of April 2005, we have renegotiated all of these contracts as set out below. In addition, under the terms of the 2004 Agreement gas producers have waived their claims under either the Existing Contracts provided the government abides by the terms of the 2004 Agreement.

The Total/Pan American Energy/Wintershall Contract from the Neuquén Basin was divided into two contracts, without a change in the aggregate volumes. The Total Austral S.A./Pan American Energy LLC Argentine Branch contract provides us with 2.00 MMCM (71 MMCF) and the Wintershall Energía S.A. contract with 1.20 MMCM (42 MMCF). Under each of these contracts 70% of the volume supplied during summer months and 85% of the volume supplied during winter months is on a take-or-pay basis. These contracts each expire on January l, 2007.

In the Austral Basin, Total Austral S.A. and Wintershall Energía S.A. each provide us with 1.87 MMCM (66 MMCF), and Pan American Sur S.R.L. with 1.25 MMCM (44 MMCF). Under each of these contracts 90% of the volume supplied is on a take-or-pay basis. The Total Austral S.A. and Pan American Sur S.R.L. contracts expire in January 2007. The Wintershall Energía S.A. contract expires on January 1, 2011, however, prices agreed under this contract must be renegotiated in January 2007 in accordance with the terms of the 2004 Agreement.

In May 2005, we entered into a further gas contract with YPF, or the "Renegotiated YPF Contract", which provides us annually with variable volumes of natural gas from the Neuquén basin. Volumes provided range from a minimum of 2.40 MMCM (85 MMCF) in the summer months to a maximum of 6.00 MMCM (212 MMCF) in the winter months. Under the Renegotiated YPF Contract 85% of the volume is supplied on a take-or-pay basis. The Renegotiated YPF Contract expires in December 2006.

In addition to the contracts described above, we also have several minor contracts with other gas producers. Under all contracts, including our minor contracts with other gas producers, we are entitled to purchase a total of approximately 17.27 MMCM of gas per day (610 MMCF) during the winter months, of which 14.63 MMCM (517 MMCF), or 85%, per day has been contracted on a take-or-pay basis and 14.59 MMCM of gas per day (515 MMCF) during the summer months, of which 10.54 MMCM (372 MMCF), or 72% 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 May 31, 2005, during the years and seasons indicated, and our seasonal daily take-or-pay obligations under such contracts:

Our exposure to take-or-pay liability is affected by a number of factors that are not within our control. As a result of the decline in demand for natural gas during 2002, we commenced negotiations with our gas suppliers to modify the terms of our gas purchase contracts. In late 2003 we reached agreement with our gas suppliers on the Revised Purchase Contracts. As part of such agreements we were relieved of any take-or-pay obligations we might have had under the Existing Contracts. As a result of the 2004 Agreement we renegotiated our gas supply contracts. See "-Current Gas Purchase Contracts". Our take-or-pay commitments through 2005 under those gas purchase contracts require us to pay an average of 72% to 85% of the cost of gas that we are entitled to purchase under such contracts.

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

Since early 1999, we have been purchasing gas in the spot market; since May of the same year, we have taken advantage of Executive Decree No. 1,020/1995, 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 an average of 1.5% during the summer months and 10.4% during the winter months of our gas purchases for each summer and winter period of 2004 compared to an average of 7% during the summer months and 13% during the winter months of our gas purchases for each summer and winter period of 2003.

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 Martin, 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 Martin, 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 2004, approximately 7% of all gas purchased by us was provided to the transportation companies as in-kind allowances.

In the past, the expanded gas transportation capacity of the transportation companies in Argentina has generally been 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 2004. See "-Final Transportation Balance".

We cannot acquire additional firm transportation capacity because TGS and TGN are not constructing or expanding new gas pipelines. Decree No. 180 and the regulations issued thereunder to date established an investment system for basic infrastructure works through the creation of a trust fund to deal with gas transportation and distribution investments proposed within the scope of activities carried out by the transportation and distribution companies. Such decree was further regulated by Ministry of Planning Resolution No. 185/2004 (published in the Official Gazette on April 20, 2004) which created a global program for the issuance of debt securities and/or equity securities in financial trusts with a view to natural gas distribution and transportation expansion and/or extension works. Meetings were carried out to consider a project proposed by the Energy Secretariat and the possible impact of such proposal on the current transportation and distribution system. Each of TGS and TGN were involved in an open bidding process under the terms of Resolution No. 185/2004 in order to expand their transportation capacity by approximately 5% of their current total transportation capacity. This bid to expand their transportation capacity was approved by ENARGAS on June 16, 2004. As a result of the bidding process, TGS awarded us a firm transportation capacity of 159,459 m3/day from the Tierra del Fuego basin to the Province of Santa Cruz, which is to be used to supply its firm customers. This award will be valid from June 1, 2005 to June 1, 2020, subject to the completion of the extension works by TGS. As of the date of this Annual Report, extension works performed by TGS have not been completed.

As of May 31, 2005, we had contracted for aggregate firm transportation capacity of 23.4 MMCM (826 MMCF) per day, an increase of 32.1% from January 1, 1993. While we transport gas primarily with TGS, we began to transport gas with TGN in 1994. We increased our rights to firm transportation capacity, primarily by acquiring a significant portion of newly constructed transportation capacity from TGS and TGN and through supplementary arrangements with other holders of transportation capacity rights. In addition, we have entered into several exchange and displacement agreements with TGS that allow us to improve our utilization of existing transportation capacity, and we have acquired the right to use the firm transportation capacity of others on an interruptible basis, thereby permitting higher overall annual sales and the ability to better meet the demands of non-interruptible customers during peak periods.

As of May 31, 2005, we had available firm transportation capacity with TGS of 21.88 MMCM (773 MMCF) of gas per day through eight transportation agreements containing similar terms. Unless otherwise indicated, all of these contracts with TGS expire in May 2014. The largest transportation agreement provides us with aggregate firm transportation capacity for distribution of 17.02 MMCM (601 MMCF) of gas per day from the following producing areas: Province of Tierra del Fuego, 3.40 MMCM (120 MMCF); Province of Santa Cruz, 1.07 MMCM (38 MMCF); and the Province of Neuquén, 12.15 MMCM (429 MMCF). This contract includes 0.40 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. We are entitled under this contract to a 30% step-down right exercisable on May 1, 2004 but due to the increase in demand, we have not exercised this right. See "-Business Overview-Revenues-Processed Natural Gas Service".

Our other contracts with TGS provides us with firm transportation capacity of 1.65 MMCM (58 MMCF) of gas per day from the Neuquén basin, 0.54 MMCM (19 MMCF) of gas per day from the Neuquén basin, 1.50 MMCM (53 MMCF) of gas per day from the Tierra del Fuego basin, 0.10 MMCM (3 MMCF) of gas per day from the Neuquén basin, 0.51 MMCM (18 MMCF) of gas per day from the Neuquén basin, 0.55 MMCM (19 MMCF) from Tierra del Fuego basin to the province of Santa Cruz and 0.01 MMCM (0.2 MMCF) from Neuquén basin to the city of Bahía Blanca in the province of Buenos Aires. This latter contract expires in December 2008.

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, or the "TGN Contract" for 1.50 MMCM (53 MMCF) per day of firm transportation capacity to be constructed by TGN. The TGN Contract became effective on June 1, 1994. The TGN Contract expires on May 31, 2006 and may be renewed at our election for successive three-year periods, up to a maximum of nine years.

On June 1, 1996, we contracted with TGN for 0.50 MMCM (18 MMCF) per day of firm transportation. The arrangement with TGN provides for two contracts, one being for 0.40 MMCM (14 MMCF) per day of firm transportation capacity for distribution and expiring in May 2006 and the other being for 0.10 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 1.03 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 0.54 MMCM (18 MMCF) per day of our firm transportation capacity with TGN. The contract became effective in May 2001 and expires in May 2016.

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

In order to face an estimated peak demand for non-interruptible service of approximately 22 MMCM (776 MMCF) per day from May through September 2004, we contracted for aggregate firm transportation capacity of 23.4 MMCM (826 MMCF) of gas per day, which was generally adequate to satisfy demand during the winter of 2004. During the 2004 winter months, peak-day deliveries did not exceed firm transportation capacity. Our load factors were 98.2%, 83.5% and 71.9% for 2004, 2003 and 2002, 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, or 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 preventive 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 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, or the "Amendment" to the Technical Assistance Agreement which became effective on March 1, 2002. The Amendment requires us to pay an annual fee equal to the greater of (a) Ps.0.36 million, adjusted by CER, or the "Fixed Management Fee", and (b) the 7% of our net profits, or 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 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. This deferred fee is payable in equal monthly payments over thirty-six months.

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, or the Manpower Supply Agreement . Any employees hired under the Manpower Supply Agreement on a long-term basis are placed on our payroll. We reimburse BG Group for the salaries, expenses and other costs associated with the short-term placement of BG Group managers with us. While we hired a number of senior managers under the Manpower Supply Agreement, we have not done so since March 2002.

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

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

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

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

We have built strong working relationships with many of our major customers and are implementing contracting and pricing policies that discourage the construction of direct connecting pipelines between our major customers and the transportation systems that would completely bypass our system and avoid the use of our firm transportation capacity. It is possible that certain of our customers will completely bypass our services or require us to further unbundle our services in a manner that could adversely affect our margins. It is also possible that ENARGAS will reduce the minimum volume of gas that is required for a customer to purchase transportation capacity directly from the transporter. On June 1, 2000, ENARGAS issued Resolution No. 1,748/2000, 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 bypass 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. 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.

Alternative energy sources, primarily fuel oil for power plants and LPG for residential customers and smaller commercial customers, are currently substitutes for natural gas. The abundance of natural gas in Argentina has historically provided natural gas with a large cost advantage over fuel oil. 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 health, safety and protection of the environment. Foreseeing increasing local health, safety and environmental or "HSE", legal requirements, we have adopted BG Group's HSE strategies and are committed to complying with BG Group's HSE performance standards (international best practice). We are also approaching green house gases emission reduction issues to minimize the impact on climate change, meeting the expectations raised from the community and non-governmental organisations.

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

As of December 31, 2004, we maintained insurance coverage for third-party loss and casualty for up to U.S.$50 million and our physical assets were insured for up to U.S.$42.4 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 in our Annual Report, the Public Emergency Law has altered such framework significantly and in a manner that is detrimental to us. These changes also create uncertainty as to our future business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our License established a system of penalties in the event of a breach by us of our obligations thereunder, including warnings, fines and revocation of our License. See "-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, or 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 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. 1834/2002, 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. This date was extended to December 10, 2004 by Decree No. 1,293/2003 and further extended by Decree No. 540/2005 to December 31, 2005. 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 "-The Gas Act and Our License-Term of Our License". At the end of our License term, if we have performed adequately during the term of our License (including any extension, if applicable), we may participate in a new bidding process. In such case, we will have the right to match the best offer made (by paying the excess of the best offer above the appraised value of the Essential Assets) or, if we decline to match the best offer, to receive the appraised value of the Essential Assets, in both cases as calculated in accordance with our License.

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

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

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

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

ENARGAS' duties include, among other things:

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

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

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

A substantial portion of the assets transferred by Gas del Estado have 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 "-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 tariff 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 tariff increases from May 1, 2002 pursuant to tariff values in Pesos for the 2001 winter months. Such increases, however, did not reflect the seasonal incremental cost of gas at the wellhead.

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

On April 29, 2004, the Energy Secretariat issued Resolution No. 415/2004, pursuant to which residential and commercial users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2004, users who consumed less than 90%of the amount of gas they used during the same invoiced period of 2003 have received a discount equal to 10% to 12% on the cost of their annual natural gas consumption, while users who used above 95% of the gas they consumed during the same invoiced period of 2003 have paid a surcharge on the gas they consume over the 95% level.

On May 11, 2004 ENARGAS by means of Resolution No. 3,014/2004 approved, on a temporary basis, the tariff framework expressed in pesos applicable to the period extending from May 1, 2004 to September 30, 2004. On October 28, 2004 ENARGAS by means of Resolution No. 3,092/2004 approved, on a temporary basis, the Tariff Framework expressed in pesos applicable to the period extending from October 1, 2004 to April 30, 2005.

On April 11, 2005, the Energy Secretariat issued Resolution No. 624/2005, which extended Resolution No. 415/2004. Pursuant to Resolution No. 624/2005 residential, commercial and small industrial users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2005, users who consume less than 90% or 95%, depending on the type of user, the amount of gas they consumed during an equivalent period of 2004, adjusted for the average temperature during each period, will receive a discount equal to one cubic meter per each cubic meter saved below those levels, while users whose consumption is above 90% or 105%, depending on the type of user, will pay a surcharge on the gas they consume over those levels. Resolution No. 624/2005 expires in September 2005 but may be extended.

The following table sets forth our maximum tariff in effect at December 31, 2004 for each class of service:

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 might 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, or 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. 120/2003, 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. 146/2003 and ENARGAS Resolution No. 2,787 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.

Through Decree No. 311/2003 dated July 3, 2003, the Argentine government created the "Unit for the Renegotiation and Analysis of Utility Contracts", or "UNIREN", with the objective of providing advice on the renegotiation process of 61 public works and services contracts, and developing a common regulatory framework for all utilities. UNIREN is presided over by the Federal Planning Minister, and it continues the contract renegotiation process developed by the previous Contract Renegotiation Committee, and assumes responsibility for all issues in progress. On July 11, 2003 both ministers issued Joint Resolution No. 118/2003 and No. 25/2003 appointing Mr. Jorge Gustavo Simeonoff as Executive Secretary for UNIREN. Mr. Simeonoff had held a similar position at the Contract Renegotiation Commission. Although such decree does not specify deadlines, several government officials have announced that the process would last 18 months.

On October 14, 2003, UNIREN called a meeting for November 26, 2003 with the objective of agreeing on a schedule to analyse the different aspects of the renegotiation of the licenses of gas and electricity distribution companies. On October 22, 2003, the Official Gazette published Law No. 25,790/2003, which extends until December 31, 2004 the deadline for the renegotiation of contracts established by Section 9 of the Emergency Law. The new law also established that the powers of regulators on contract revisions, tariff adjustments and modifications provided for in the relevant regulatory frameworks can be exercised provided they are consistent with the development of the renegotiation process undertaken by the Argentine Government under Section 9 of the Emergency Law.

On November 26, 2003, UNIREN announced its intention to call a meeting among the licencees with the objective of agreeing on a schedule to analyze the different aspects of the renegotiation of our License. On November 28, 2003 UNIREN sent us guidelines relating to such renegotiation including a schedule of issues. On January 13, 2004, we sent UNIREN a proposal to include certain issues relevant to us as part of the agenda for the renegotiation. As of the date of our Annual Report, UNIREN has not responded to our proposal.

In May 2004, we learned of a draft proposal that UNIREN had sent to electricity distributors, which was rejected by those distributors. In June 2004 the Secretary of UNIREN informally submitted a Memorandum of Agreement to the President of the Asociación de Distribuidoras de la Industria del Gas, or "ADIGAS". This Memorandum was informally rejected by all gas distribution companies, including ADIGAS.

In July 2004, UNIREN formally submitted a proposed Letter of Understanding to gas and electricity transporters, granting them 10 working days to respond. All the gas and electricity transportation companies rejected the proposed Letter of Understanding. From August through October 2004, informal meetings were held with UNIREN's technical staff but no resolution was achieved.

In August 2004, the Executive Power submitted a bill to Congress which sets forth a new regulatory framework for public services rendered by companies (including us) created by the privatization of state-owned utilities. If approved, the bill would apply to holders of existing and future concessions and licenses to render public services (including our License). We cannot assure that the proposed bill will not be passed as currently proposed, and if enacted as a law, we cannot predict the impact that such law may have on the manner in which we conduct our business or our future income. During the last quarter of 2004, meetings were held among us and several lawmakers and their advisors in which we raised our concerns about many of the issues addressed in the bill submitted by the Executive Power and to propose changes consistent with the current regulatory framework as it applies to us. During this period, UNIREN had issued a letter of understanding to electricity distribution companies.

Additionally in November 2004, at the request of the Energy Secretariat, the chambers of electricity and gas distributors together with the Regulators and the Energy Secretariat were asked to participate in various committees to establish the principles for the creation of a social tariff in the energy sector. Although the different sectors participated in these committees, no further developments have been made.

The Argentine Congress approved legislation in December 2004 extending until December 31, 2005 the period for the Executive Power to renegotiate the public utility contracts. In January, 2005, UNIREN issued Note No. 26/05, which included a Letter of Understanding containing the terms of a proposal made by the Argentine government regarding the renegotiation of our License. In March 2005, UNIREN issued Resolution No. 2/2005 calling for a public hearing to be held on April 22, 2005 to consider the Letter of Understanding. On April 22 we had a public hearing with UNIREN and in June 2005, UNIREN issued Note No 1449/05 which contained a proposal with respect to our License renegotiation. As of the date of our Annual Report, we are currently analizing the abovementioned proposal.

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 "-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 users 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.30 million with respect to our purchases of gas from 1995 through February 2005. 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 Decree 214/2002 had the effect, among others, of fixing the price we pay for gas under our Gas Purchase Contracts. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us-We have been renegotiating certain of our agreements, including agreements for the purchase of natural gas, which have been pesified". However, the Public Emergency Law and such Decree 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 Decree No. 1020/1995. See "-Commercial Contracts-Natural Gas Purchase Contracts-Limitations on Short-Term Gas Purchase Contracts".

On January 10, 2000, ENARGAS issued Resolution No. 1,477/2000, 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. 669/2000 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. 669/2000 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. 669/2000, that is, 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. 557/1998, 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. 667/1998, 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 customers of CNG.

Through Resolution No. 901/1999, 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. 1,160/2000, 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. 1,477/2000, 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 CNG-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. 669/2000. Nevertheless, on August 29, 2000, we received notice of a court order suspending Decree No. 699/2000, and accordingly, ENARGAS informed us that the tariffs should be reduced to exclude the US PPI adjustment. See "-US PPI Adjustments to Tariffs and Related Disputes".

Pursuant to Resolution No. 1,941, ENARGAS adjusted our tariffs for the period commencing October 1, 2000 to January 1, 2001 by replacing the winter gas price with the summer gas price.

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 CNG-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 an 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 have appealed this interpretation of our tariffs.

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.

Through Resolution No. 2,611/2002 dated May 31, 2002, ENARGAS 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 2002, ENARGAS, through Resolutions No. 2,653 and 2,691, established the extension of the tariff charts approved by Resolution No. 2,611/2000 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, or "FIEL", which would provide the basis for the preparation of the methodology, or the "Methodology", for the Second Five-Year Tariff Review, or "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 bypass.

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 to 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 November 2001, we submitted to ENARGAS the suggested investment program for the period 2003 through 2007, which would be financed with the tariff base to be fixed for January 1, 2003 and with the K Investment Factors. 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 RQTII process.

Towards the end of 2001, ENARGAS required us to provide expenditure projections for the period 2003 through 2007. We requested an extension with respect to ENARGAS' 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, or the "Surcharge". The Surcharge is levied to finance a special subsidy aimed at reducing tariffs of residential users 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.

Executive Decrees No. 180/2004 and 181/2004 enacted on February 12, 2004 by the Argentine government, modify the existing regulatory framework that applies to gas distribution companies, including us. However, the interpretation and application of certain amendments effected through the Decrees and their impact on us is uncertain since regulations that will govern these amendments are yet to be developed by the Federal Planning Ministry and the Energy Secretariat, which forms part of the Federal Planning Ministry, who are responsible for the implementation of the Decrees.

Pursuant to Executive Decree No. 180/2004, or "Decree No. 180" a trust fund, or the "Trust Fund" has been established to serve as the principal vehicle for investments in gas distribution and transportation projects. The Trust Fund is to be administered by the Federal Planning Ministry with initial investments in the Trust Fund to be made by (a) rate charges, which will be paid by the users of the transportation and distribution services; (b) special credit facilities; and (c) specific contributions made by direct beneficiaries.

Decree No. 180 establishes an Electronic Gas Market, or "EGM", which is intended to function as a centralized market through which spot-market, various secondary markets or transportation capacity resale market transactions will occur. Entities in these markets shall be authorized to charge fees and commissions that are to be approved by the Energy Secretariat for transactions carried out on the EGM. The EGM will be regulated mainly by the Energy Secretariat, which forms part of the Federal Planning Ministry. Decree No. 180 amends the Special Conditions for large users "ID Transportation" and "IT Transportation" categories approved by Decree No. 2255 dated December 2, 1992. Such amendments will not become effective until the end of the renegotiation of public utility contracts or until distribution rate adjustments are determined within the framework of those renegotiations. In addition, Decree No. 180 replaces the CNG sale user category established under Decree No. 2255 with the CNG Firm Sale and CNG Interruptible Sale categories. Decree No. 180 also establishes new "CNG Firm Transportation" and "CNG Interruptible Transportation" categories. These new customer categories will not become available until the prohibition that restricts natural gas companies from purchasing their own gas is lifted.

Decree No. 180 further provides that users who purchase services from their local area distribution company, where charges for capacity reserve or take-or-pay covenants or other equivalent provisions apply, shall be authorized to resell the service they receive at the delivery point of the transportation system, or "City Gate", without obtaining approval from the distribution company in that area. The terms of any such resale are to be established by the EGM. On June 8, 2004, through Resolution No. 606/2004, the Energy Secretariat amended such provision allowing users purchasing services from local distributors where charges for reserve capacity, take-or-pay covenants or other equivalent provisions apply; to exchange, re-sell or assign such services to other users connected to the same or other distribution companies. Resolution No. 606/2004 expressly provides that the parties shall be free to negotiate the terms and conditions of such exchange, re-sale or assignment until such time as the EGM is operating. Until such time as the EGM is operating, ENARGAS shall announce through the internet the offers of users interested in exchange, re-sale or assignment of their services. Additionally, Resolution No. 606/2004 provides that the distribution companies shall facilitate the performance of these transactions by delivering all the services hired by the re-sellers to the buyers.

Subject to certain limitations, Decree No. 180 permits distribution companies and their shareholders to hold a controlling interest in not more than one company which, not being a distribution company, a subdistribution company or a natural gas producer, is engaged in selling gas under the terms of Sections 14 and 83 of Law 24,076. Consequently, we shall be entitled to hold a controlling interest in only one gas marketing company.

In the event of a gas supply crisis, the Energy Secretariat, pursuant to Decree No. 180 can take whatever steps it deems necessary to provide an adequate level of service. Decree No. 180 provides that supply shall be guaranteed to (i) residential service users, (ii) certain general service users, and (iii) sub-distributor service users.

Executive Decree No. 181, or "Decree No. 181", instructs the Energy Secretariat, which forms part of the Federal Planning Ministry, to prepare a scheme for the normalization of gas prices at the TSEP for network gas distribution service providers and for the users of such providers who will purchase gas from those providers in accordance with Decree No. 181.

Consequently, Decree No. 181 provides that the Energy Secretariat is authorized to enter into agreements with natural gas producers to adjust the price of natural gas at the TSEP, purchased by the network gas distribution providers. The Energy Secretariat shall be able to implement protection mechanisms in favor of users who purchase gas directly from the producers who are parties to these agreements. In addition these agreements should protect segments with less energy management capacity.

On Apri1 2, 2004, the Energy Secretariat and a large number of natural gas producers executed the 2004 Agreement. The Federal Planning Ministry confirmed the validity of such agreement through Resolution No. 208. The agreements entered into by the Energy Secretariat also established a 45-day term during which outstanding gas purchase agreements among producers and gas distribution companies shall be renegotiated. The renegotiation period commenced on April 23, 2004. Gas purchase contracts renegotiated pursuant to such resolution due in December 2006. As of the date of this Annual Report, we have completed all of the renegotiations of our outstanding gas purchase agreements with gas producers. Further, pursuant to Resolution No. 208 issued by the Energy Secretariat, Notes Nos. 2,975, 3,332 and 3,674 issued by ENARGAS and Note No. 671 issued by the Federal Planning Ministry, ENARGAS is permitted to reallocate gas volumes that we have contracted to receive from gas producers under our renegotiated gas agreements to other gas distribution companies.

On April 20, 2004, the Federal Planning Ministry issued Resolution No. 185/2004 which created a Global Program for the issuance of Debt Securities and/or Equity Securities in Financial Trusts in order to fund new natural gas distribution and transportation expansion or extension works.

On June 15, 2004 the Energy Secretariat published Resolution No. 657/2004, which establishes guidelines for the interruption of the supply of natural gas to firm users and the general principles that must be followed by distribution companies when negotiating natural gas firm supply agreements with their customers. Distribution companies must prepare a list with respect to the order of services that will be interrupted according to the guidelines established by Resolution No. 657/2004. This list must be submitted to ENARGAS for approval.

In conjunction with Decree No. 180, the Energy Secretariat issued Resolution No. 265/2004 which adopts certain measures intended to prevent a domestic gas supply crisis. Resolution No. 265/2004, thus, (1) suspends the export of natural gas surplus which could be used for domestic supply; (2) suspends all the authorization requests for natural gas exports; and (3) instructs the Undersecretariat of Fuels to develop a program for the rationalization of natural gas exports and transportation capacity to effect such rationalization.

On April 22, 2004, the Undersecretariat of Fuels issued Disposition No. 27/2004 which creates a program for the rationalization of natural gas exports and transportation capacity to effect such rationalization.

On April 29, 2004, the Energy Secretariat issued Resolution No. 415/2004, pursuant to which users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2004, users who consumed less than 90% of the amount of gas they used during the same invoiced period of 2003 have received a discount equal to 10% to 12% of the cost of their natural gas consumption, while users who used above 95% of the gas they consumed during the same invoiced period of 2003 have paid a surcharge on the gas they consume over the 95% level.

On April 11, 2005, the Energy Secretariat issued Resolution No. 624/2005 which extends Resolution No. 415/2004. Pursuant to Resolution No. 624/2005 residential, commercial and small industrial users receive certain discounts or are surcharged in accordance with their consumption of natural gas. In 2005, users who consume less than 90% or 95%, depending on the type of user, of the amount of gas they consumed during an equivalent period of 2004, adjusted for the average temperature during each period, will receive a discount equal to one cubic meter per each cubic meter saved below those levels, while users whose consumption is above 90% or 105%, depending on the type of user, will pay a surcharge on the gas they consume over those levels. Resolution No. 624/2005 expires in September 2005 but may be extended.

In May 2005, the Executive Branch issued Decree No. 465/2005, instructing the Federal Planning Ministry to prepare a scheme for the expansion of natural gas transportation facilities for the year 2006.

On May 23, 2005, Resolution No. 752/2005 was issued by the Energy Secretariat and published in the Official Gazzette. Resolution No 752/2005 provides that all natural gas users, except for residential and General Service P categories, are authorized to acquire natural gas at the transportation system entry point, or "TSEP". In addition to this general rule, said Resolution No. 752/2005 creates a new natural gas marketing structure by providing certain supply restrictions, which apply to distribution companies. In accordance with these restrictions, gas distribution companies will be unable to supply short, medium and long term natural gas to: (i) large users, either on a firm or interruptible basis, from August 1, 2005; (ii) General Service G users, from August 1, 2005; (iii) General Service P users with an average consumption of more than 9,000 cubic meters of natural gas, from August 1, 2005; and (iv) firm and interruptible CNG users, from January 1, 2006. Accordingly, such users will have to acquire natural gas directly from natural gas producers. In addition, Resolution No.752/2005 provides that distribution companies will be authorized to provide natural gas to the users mentioned above, only if they acquire the natural gas on account of such users, within the framework of the EGM. Regarding the CNG market, Resolution No 752/2005 creates a new marketing structure for the assignment of natural gas, which will be in force on January 1, 2006. It is still uncertain to what extent the natural gas marketing structure created by Resolution No. 752/2005 could affect our operations.

On November 2, 2004, the Argentine Congress enacted Law No. 25,943/2004, pursuant to which a new
state-owned energy company, "Energía Argentina Sociedad Anónima" or "ENARSA", was created. According to Law No. 25.943/2004, ENARSA shall be authorized, among other activities related to the energy industry, to participate in natural gas transportation and distribution activities; on its own, by means of a third party or associated with third parties.

It is still uncertain to what extent the creation of ENARSA could affect our operations or whether ENARSA will ever be engaged in natural gas transportation and/or distribution activities.

The EGM commenced operations on June 6, 2005 with the participation of certain natural gas producers and distribution companies. The EGM is intended to function as a centralized market through which spot-market and some of the transportation capacity resale market transactions will occur. The EGM currently carries out spot market transactions but it is expected to also carry out futures transactions following approval by the Energy Secretariat. The aim of the EGM is to increase transparency and lower the spot market prices.

Circular No. 05/2005 of the Mercado Electrónico de Gas S.A., or " MEG", the entity that carries out the natural gas trading operations, opened a registration period for agents willing to operate in the EGM. On March 18, 2005 our Board of Directors approved the creation of a new company, MetroEnergía S.A., or MetroEnergía which was established to trade on the EGM on its own behalf and on behalf of third parties. We are the controlling shareholder of MetroEnergía and own 95% of its capital stock and BG Argentina and YPF own 2.73% and 2.27% of MetroEnergía capital stock respectively, . The opening of the EGM will expose part of our pricing structure to competition and we are uncertain as to what extent the opening of the EGM could affect the prices of natural gas.

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, Plant 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. See "-Business Overview".

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 our Annual Report. See "Forward-looking Statements and Associated Risks". For a discussion of important factors, including, but not limited to, the going concern issue mentioned in the report 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".