MGS Metrogas S.A.

Gregorio Araoz de Lamadrid 1360
(1267) Buenos Aires, Argentina
(Address of principal executive offices)

Eugenia Gatti

(egatti@metrogas.com.ar) (54) (11) 4309-1381

Gregorio Araoz de Lamadrid 1360 - (1267) Buenos Aires, Argentina

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close
of the period covered by the annual report:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes þ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

¨ Yes þ No

Note : Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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

þ Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

þ Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act:

¨ Large accelerated filer ¨ Accelerated filer þ Non -accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:

¨ Item 17 þ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes þ No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court:

¨ Yes ¨ No

TABLE OF CONTENTS

Page

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:

1. the renegotiation of the terms of our License, as defined herein, and our tariffs with the Argentine Government;
2. anticipated revenues, capital expenditures, cash flows and financing requirements;
3. economic and political developments in Argentina, foreign exchange restrictions on payments abroad, as well as actions by the Ente Nacional Regulador del Gas ("ENARGAS"), the Argentine regulatory agency with jurisdiction over us, and other governmental authorities that may affect us;
4. the effects of inflation and currency volatility on our financial condition and results of operations;
5. the implementation of our business strategy;
6. descriptions of new services and anticipated demand for services and other changes in rates and tariff regulations and charges for gas services;
7. descriptions of the expected effects of our competitive strategies; and
8. 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:

1. the economic and political instability of Argentina;
2. changes in inflation;
3. fluctuations in the currency exchange rates between the Argentine Peso and foreign currencies;
4. changes in financial and natural gas regulation;
5. the current gas and electricity supply bottleneck affecting Argentina and the impact of emergency laws and regulations enacted or proposed by the Argentine Government;
6. revocation of our License, as defined below to provide gas services;
7. our ability to successfully cancel our indebtedness or refinance our financial obligations when they become due;
8. the outcome of pending legal claims against us; and
9. 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.

In this document, any reference to "we," "our," "ours," and "us" means MetroGAS S.A.

In this annual report, references to "US$," "U.S. Dollars" and "Dollars" are to United States Dollars and references to "Ps.," "Pesos" or "$" 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. Any reference to the "Government" or the "Argentine Government" is to the government of the Republic of Argentina.

In addition, 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.

This annual report contains our audited consolidated financial statements as of December 31, 2008 and 2007 and for the fiscal years ended December 31, 2008, 2007 and 2006 and the notes thereto, or our "Annual Consolidated Financial Statements", which have been audited by Price Waterhouse & Co. S.R.L. (member firm of PricewaterhouseCoopers), Buenos Aires, Argentina, an independent registered public accounting firm, whose report dated April 22, 2009 is included elsewhere herein. See Item 18 - "Financial Statements". Our Annual Consolidated Financial Statements are presented in Pesos and are prepared in accordance with generally accepted accounting principles used in Argentina, or "Argentine GAAP". 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 Consolidated Financial Statements as well as additional disclosures required by U.S. GAAP and Regulation S-X of the United States Securities and Exchange Commission, or "SEC." See Notes 17 and 18 to our Annual Consolidated Financial Statements for a description of the principal differences between Argentine GAAP and U.S. GAAP as they relate to us and for reconciliation to U.S. GAAP of our net income (loss) and shareholders' equity.

As indicated in Note 3.4., in order to comply with regulations of the Comisión Nacional de Valores ("CNV"), we discontinued inflation accounting as of February 28, 2003. Since Argentine GAAP required companies to discontinue inflation adjustments only as from September 30, 2003, the application of CNV resolution represented a departure from Argentine GAAP, However, the effects of this departure is no longer material to the consolidated financial statements as of December 31, 2008, 2007 and 2006 and for the three years then ended.

The CNV issued General Resolutions 485 and 487 on December 29, 2005 and January 26, 2006, respectively, adopting, with certain modifications, the new accounting standards previously issued by the CPCECABA through its Resolution CD 93/2005. These standards were effective for the fiscal years or interim periods corresponding to fiscal years beginning as from January 1, 2006. The most significant changes included in the accounting standards adopted by the CNV relate to (i) changes in the impairment test of long-lived assets and (ii) changes to deferred income tax accounting. Under the new standards, the carrying value of a long-lived asset is considered impaired by a company when the expected cash flows from such asset are separately identifiable and less than its carrying value. Expected cash flows are determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved.

The new standards provide for the accounting treatment of differences between the tax basis and book basis of non-monetary items for deferred income tax calculation purposes when companies prepare price-level restated financial statements. The new accounting standard mandates companies to treat these differences as temporary differences but allows a one-time accommodation to continue treating the differences between the tax basis and indexed book basis of non-monetary items as permanent at the time of adoption of the standard. As a result, we elected to continue treating differences as permanent. In addition, the new standards provide for the recognition of deferred income taxes on a non-discounted basis.

Certain amounts and ratios contained in our annual report (including percentage amounts) have been rounded up or down for ease of presentation. The effect of such rounding is not material. Such amounts, as so rounded, are also used in the text of our annual report. Accordingly, numerical figures shown as totals in tables may not be an arithmetic aggregation of the figures that preceded them.

In addition, our financial statements use the exchange rate as of each relevant date or period-end quoted by Banco de la Nacion Argentina, or "Banco Nacion." In the case of U.S. Dollars, Banco Nacion quotes for such exchange rates were Ps.1.00 per US$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 US$1.00 while the official market rate was Ps. 1.40 per US$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, 2008, the only exchange market available was the free market and the quotation was Ps.3.453 per US$1.00 and as of April 8, 2009 the exchange rate was Ps. 3.6770 per US$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.

The contents of our website are not part of our annual report.

1.  
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not Applicable.

2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not Applicable.

3. KEY INFORMATION
1. Selected Consolidated Financial Data

The following tables set forth our selected consolidated financial and operating data as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004, respectively. Our financial and operating data should be read in conjunction with, and are qualified in their entirety by, our Annual Consolidated Financial Statements, the notes related thereto and the information contained in Item 5: "Operating and Financial Review and Prospects."

We maintain our financial books and records and publish our financial statements in constant Pesos as of February 28, 2003, and prepare our consolidated financial statements in conformity with Argentine GAAP. Significant differences exist between Argentine GAAP and U.S. GAAP that might be material to the financial information contained herein. Such differences involve methods of measuring the amounts shown in our Annual Consolidated Financial Statements as well as additional disclosures required by U.S. GAAP and Regulation S-X of the Exchange Act. See Notes 17 and 18 to our Annual Consolidated Financial Statements for a description of the principal differences between Argentine GAAP and U.S. GAAP as they relate to us and reconciliation to U.S. GAAP of our net income (loss) and shareholders' equity.

__________

Notes:

The following table sets forth, for the periods indicated, the period-end, average, low and high rates for the purchase of U.S. Dollars, expressed in Pesos per U.S. Dollar. On December 31, 2008, the Peso/U.S. Dollar exchange rate was Ps.3.453 per US$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for Pesos.

Argentina's annual GDP growth fell from 9.1% in 2007 to 4.4% in 2008.

Sustainable economic growth is dependant on a variety of factors, including international demand for Argentine exports, the stability and competitiveness of the Peso against foreign currencies, the confidence of consumers and foreign and domestic investors and stable and relatively low inflation.

Currently, Argentina does not display the components of sustainable economic growth, which, in turn, demonstrates that the Argentine economy has started to experience signs of instability.

Also, the Argentine economy appears fragile due to the following: relatively high unemployment rates; limited availability of long-term fixed rate loans; investment as a percentage of GDP remains low; current fiscal surplus levels could become a fiscal deficit; inflation rates continue to increase and could accelerate; and Argentina's public debt remains high and access to the international capital markets is limited. Moreover, economic recovery will depend, to some extent, on high commodity prices, which are volatile and outside the control of the Government, and excess capacity, which has declined considerably.

If these factors persist, they will have a significant negative impact on the Argentine economy and on our business.

In the first half of 2005, Argentina restructured part of its defaulted sovereign debt. The Argentine Government announced that as a result of the restructuring it had approximately US$126.6 billion in total outstanding debt. Of this amount, approximately US$19.5 billion corresponds to defaulted bonds currently owned by creditors who did not participate in the debt restructuring (holdout creditors).

Some bondholders in the United States, Italy and Germany have filed legal actions against Argentina, and holdout creditors may initiate new suits in the future. In fact, a French court recently ordered the seizure of all the Argentine Embassy's bank accounts in France in order to comply with another order issued by an American court, the latter having jurisdiction over all holdout creditors' claims against Argentina pertaining to Argentina's default on its sovereign debt obligations. Additionally, foreign shareholders of certain Argentine companies have filed claims in excess of US$17 billion before the International Center for the Settlement of Investment Disputes ("ICSID"), alleging that certain government measures are inconsistent with the fair and equitable treatment standards set forth in various bilateral investment treaties to which Argentina is a party.

Argentina's past default and its failure to completely restructure its remaining sovereign debt and fully negotiate with the holdout creditors may continue to prevent Argentina from reentering the international capital markets. Litigation initiated by holdout creditors as ICSID claims may result in material judgments against the Argentine Government and could result in attachments of or injunctions relating to assets of Argentina that the government intended for other uses. As a result, the Argentine Government may not have the necessary financial resources to implement reforms and foster growth, which could have a material adverse effect on the country's economy and, consequently, on our business.

As a result of certain economic and political factors, such as the global economic crisis, the conflict between the Argentine Government and the agricultural sector, the increase in inflation and the decrease in consumption, depositors withdrew US$21 billion from Argentine banks during the course of 2008.

In the event the economy continues its downward trend, a large number of depositors may seek to withdraw all of their deposits from the Argentine banking system and convert their Pesos into U.S. Dollars in the future. If this happens, the Argentine Government may again be required to impose more restrictions on the ability of depositors to withdraw their deposits, impose exchange controls and other related measures. If the Argentine Government is unable to impose these measures and if the withdrawals of funds are significant, we could see the deterioration of the Argentine financial system and the Argentine economy.

In 2002, 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 April 8, 2009 the exchange rate was Ps. 3.6770 per U.S. Dollar. See "-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 Peso and, therefore, the Peso could be subject to significant fluctuations which could materially and adversely affect our financial condition and results of operations. 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 total 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 derive substantially all of our revenues in Pesos from our activities in Argentina 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 significantly increased in Peso terms. In addition, the Peso cost of approximately 5.2% of our expenses denominated in foreign currency and of our imported goods (including capital goods) 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, 2008, our nominal financial debt in foreign currency was the equivalent of US$ 253.7 million. (Dollar/Euro rate = 1.3874)

We cannot predict whether, and to what extent, the value of the Peso may further depreciate against the U.S. Dollar and how those currency movements may 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 may have on our financial condition and results of operations.

After some years of stability, inflationary pressures led to increases in the Argentine consumer price index (" CPI ") of 6.1% during 2004 and 12.3% in 2005. However, as a result of the execution of fixed price agreements and restrictions on, and in certain cases, suspension of, exports, CPI only registered a 9.8% increase in 2006. The downward trend in CPI continued in 2007 and 2008 as the Argentine statistics and census agency (" Instituto Nacional de Estadisticas y Censos " or " INDEC "), reported that CPI increased by only 8.5% in 2007 and 7.2% in 2008. From January 1, 2009 through February 28, 2009, CPI rose by 1.0%.

In the past, inflation has materially undermined the Argentine economy and the Argentine Government's ability to create conditions conducive to growth. A return to a high inflation environment could undermine Argentina's foreign competitiveness by diluting the effects of the Peso devaluation and negatively impacting the level of economic activity and employment.

Prior to the enactment of the Public Emergency Law, the tariffs that we charged 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 were converted from their original U.S. Dollar values to Pesos at a rate of Ps.1.00 per US$1.00. Unless our tariffs increase at a rate at least equal to the rate of inflation, any further increase in the rate of inflation will result in decreases in our revenues in real terms and will adversely affect our results of operations.

We are in the process of renegotiating our tariffs with the Argentine Government. We cannot give you any assurance that the outcome of this renegotiation will be favorable to our future economic and financial position. See Item 3: "-Risk Factors Relating to Us."

In addition, concerns have arisen regarding the accuracy of inflation rates reported by the INDEC, the dismissal of certain officers and intervention in the staffing of INDEC by the Argentine Government, and the operation of the Central Bank. Due to the foregoing, on May 7, 2008, the Argentine Government announced an amendment to the method utilized by the INDEC to measure CPI. The Argentine Government has applied such new method to calculate CPI as of May 2008.

Starting in February 2002, any dividend payment outside Argentina, irrespective of the amount, needed prior authorization from the Central Bank. In December 2002 the rule was amended through Communication "A" 3,845 which required Argentine companies to obtain prior authorization from the Central Bank to purchase currency in excess of US$150,000 (in the aggregate) per month. This amendment applied to the payment of dividends.

On January 7, 2003, the Central Bank issued Communication "A" 3,859 which is still in force. Pursuant to this Communication, Argentine companies have no limitation on their ability to purchase foreign currency and transfer it outside Argentina to pay dividends as long as such dividend payments result from approved audited financial statements. In the future, similar restrictions may be enacted by the Argentine Government or the Central Bank and, if this were to occur, it could limit our ability to transfer funds abroad, which could have an adverse effect on the value of our common shares and the ADSs.

In addition, by means of Decree 616/05, the Argentine Government established that, except in limited circumstances, the entrance of foreign currency into the local exchange market from foreign loans granted to private sector companies and certain foreign investments must be formalized and must remain in Argentina for at least 365 calendar days from the date the funds enter Argentina. In this respect, pursuant to Central Bank regulations, principal under foreign financial loans may not be repaid before the expiration of a 365-day term counted as from the day of the conversion to Pesos of the loan proceeds in the local foreign exchange market, irrespective of the form of repayment and of whether access to the exchange market is required or not for such purpose.

Decree 616/05 also established the obligation to constitute a deposit over 30% of the funds transferred to Argentina for foreign financial financings or certain foreign investment. This deposit is nominative, nontransferable, does not accrue interest, may be formalized in U.S. Dollars and has a term of 365 calendar days. The deposit may not be granted as security in relation to other credit operations. The financing of exports and imports and all primary public offerings of securities in regulated markets are excluded from the restrictions imposed by Decree 616/05. Specific financings are exempted from the mandatory 30% deposit.

Although the Argentine Government has exempted certain corporations from compliance with Decree 616/05 in particular cases, this Decree can severely limit our capacity to access international capital markets or to obtain financings subject to these provisions, and thus may adversely affect our financial situation and our operational results. Therefore, investors are advised to undertake a thorough reading of Executive Decree No. 616/05, Argentine Ministry of Economy and Production Resolution No. 637/05 and the Argentine Criminal Law on foreign exchange matters as well as all regulations issued thereunder, any supplementary rules related thereto and all other relevant regulations.

In addition to our 1,021 employees, we rely on a number of third party services providers to outsource certain services. We follow very strict policies to control the compliance by such third party services providers with their labor and social security obligations. However, due to changes in the interpretation by the courts of labor laws that tend to favor employees in Argentina, companies' labor and social security obligations towards their own employees and employees of third party services providers have significantly increased. As a result of the foregoing, potential severance payment liabilities have significantly increased and, in the event any third party provider fails to duly comply with its labor and social security obligations towards its employees, we may be faced with increasing litigation by employees of such third party provider trying to hold us liable for the payment of any labor and social security obligations defaulted by any such third party services provider. Therefore, our labor costs may increase as our indemnification responsibilities and costs expand, adversely affecting the result of our operations.

Argentina faces social and political tensions and high levels of poverty and unemployment continue. These conditions could adversely affect our relations with our employees, which could affect our operations. The principal challenge of Cristina Kirchner's administration is to generate confidence and create the necessary conditions to allow long-term and sustainable growth.

There is no assurance that Cristina Kirchner's administration will be able to implement the required reforms to engender economic growth and reestablish political confidence. If the Argentine Government is unable to foster economic growth, civil unrest and unemployment could return, which could have an adverse effect on the economy and financial system. The Argentine Government faces a conflict with farmers who oppose the Government's taxation policy on agricultural exports and the Government's restrictions on exports of meat and cereal products. If this situation continues, it may have a significant impact on the Argentine economy and the prospective growth of the country. Future government policies aimed at addressing social unrest may include expropriation, nationalization, forced renegotiation or modification of existing contracts (including our concession), suspension of the enforcement of creditors' rights and shareholders' rights, new taxation policies, including royalty and tax increases and retroactive tax claims, and changes in laws, regulations and policies affecting foreign trade and investment. If any of these policies are adopted, they could adversely and materially affect the economy and our business.

Financial and securities markets in Argentina are influenced, to varying degrees, by economic and market conditions in other global markets. Although economic conditions vary from country to country, investors' perceptions of the events occurring in one country may substantially affect capital flows into and securities from issuers in other countries, including Argentina. The Argentine economy was adversely impacted by the political and economic events that occurred in several emerging economies and continues to be affected by events in the economies of its major regional partners. Furthermore, the Argentine economy has been affected by events in developed economies which are trading partners or that impact the global economy. Consequently, there can be no assurance that the Argentine financial system and securities markets will not continue to be adversely affected by events in developed countries' economies or in other emerging markets.

Towards the end of 2007 and into 2008, the American economy started to show signs of weakness as a result of the crisis in the national mortgage market, also known as the subprime mortgage crisis. The essential components of the subprime mortgage crisis are (i) a drastic increase in the rate of default on mortgage payments caused by significant increases in subprime mortgage interest rates and (ii) unprecedented drops in the prices of the underlying properties and financial products backed by these subprime mortgages. The considerable drop in the value of the financial products backed by the subprime mortgages led to insolvency concerns at many of the major American banks. The American financial crisis quickly spread to other countries, which, in turn, lead to a liquidity and stability crisis in the international financial markets.

This international financial crisis has led to a fall in the world's major stock exchanges to historically low levels, significant fluctuations in the price of oil and other commodities, recession in many countries and unemployment rate increases in developed countries.

Partially taking into account these events, the Argentine government passed two important laws towards the end of 2008: a law which established a tax regularization regime and a law which eliminated the private retirement system.

On November 18, 2008, the National Congress passed a law establishing a tax regularization regime, which alters the Argentine labor and tax regimes to (i) guarantee a tax moratorium and (ii) encourage individuals and corporations to disclose the amount of Argentine and foreign currency and other assets held by them, both domestically and abroad, in order to repatriate these assets, subject to the payment of a special tax. Individuals and corporations who choose to disclose their information do not have to reveal the source of their funds or the relevant dates of purchase to the Argentine Tax Authority (AFIP) and are also exempt from any civil, commercial or criminal actions related to the disclosed assets. These measures may promote the entrance into Argentina of currency and other assets from dubious sources and thus may violate many of Argentina's regulations and international commitments against money laundering and could generate even more distrust in the Argentine financial system.

On November 20, 2008 the National Congress passed a law eliminating the private retirement system which established, among other regulations, that: (i) the funds accumulated during 14 years by the private system were to be transferred to a new administrator: the National Social Security Administrative Office ( Administración Nacional de la Seguridad Social or ANSES), (ii) the private retirement system was converted into a public regime and every worker is required to contribute to the new system, and (iii) the capitalization regime of administration of funds by the Retirement and Pension Funds Administrators (AFJP) was eliminated. The elimination of this system may lead to significant losses in the local capital markets since the AFJPs were the major institutional investors in Argentina.-

Additionally, operating under the theory that the worst part of the international financial crisis will not have yet occurred by the end of 2009, on March 17, 2009, the Argentine Government presented a law to the National Congress to advance mid-term elections to June 28, 2009 from October 25, 2009, their originally scheduled date. These mid-term elections are expected to change the composition of the National Congress, since there are 127 seats in the Chamber of Deputies and 24 seats in the Senate (i.e., one third of the Senate's seats) up for election. This law was passed by the National Congress on March 26, 2009.

Unfavorable economic conditions in Argentina (including lack of access to the international credit markets, lower demand for exports of Argentinean products, significant decrease in external direct investment and inflation) as well as the global economic slowdown originated by the recession in the developed countries has adversely impacted the Argentine economy and the growth of Argentine companies, which may also negatively impact the value of our capital stock.

In January 2002, the Executive Power issued Law No. 25,561 (Public Emergency Law) by which it was able to convert the public service companies' tariffs from their original U.S. Dollar values to Pesos at a rate of Ps.1.00 per U.S.$1.00 and freeze them at that rate. The Public Emergency Law also authorized the Argentine Government to renegotiate public service companies' licenses (including our License). We are currently negotiating with the UNIREN ("Unidad de Renegociación y Análisis de Contratos de Servicios Públicos"), an organization established by the Argentine Government, to renegotiate the license contracts and the tariffs that we may be able to 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 that new tariffs may have on the economy, especially with respect to competitiveness and income distribution, 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 the profitability of the public service companies.

On January 24, 2003, the Argentine Government issued Emergency Decree No. 120/2003, which established that the Argentine Government may provide an interim tariff increase or adjustment that will be in force until the renegotiation process of public service contracts and licenses established by 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 for the increased tariffs. However, the National Ombudsman, the Ombudsman of the Autonomous City of Buenos Aires and a number of advocacy consumer organizations filed their objections to both decrees in numerous courts and, pursuant to these objections, a court issued a preliminary injunction prohibiting the tariff increase. As a result of the 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.

The outcome of our license and tariff renegotiation is uncertain both as to its timing and final form. As of December 31, 2007, the number of companies that have reached an agreement with the government has increased. The first gas distribution company to sign an agreement with the Argentine Government related to the renegotiation of the license and tariffs already received the Executive Power's ratification of the agreement and the stipulated tariff increase became effective on April 1, 2007. On April 26, 2007, two other companies (members of the same economic group) also reached preliminary agreements to renegotiate their gas distribution licenses with the Argentine Government and are now waiting for the PEN's (Executive Power) approval. These companies obtained a 27% increase in their distribution gross margin for all tariff categories except residential customers, starting July 2007 for one of the companies and August 2007 for the second one.

During the second quarter of 2007, two other gas distribution companies reached agreements with the Argentine Government on similar terms. One of these companies has already received an approval decree while the other one is still waiting for Executive Power approval.

During 2008, two additional gas companies reached agreements with the National Government under similar conditions to those mentioned above. These two companies are also waiting for the Executive Power to ratify their agreements through the issuance of approval decrees. However, we have not agreed to the application of the same terms contained in their agreements in our negotiations with UNIREN due to save existing differences between our situation and those of the other gas distribution companies. As a condition precedent to the Executive Branch's approval of the Agreement between us and UNIREN, UNIREN requires that our majority shareholder suspend any and all claims or actions brought against the Argentine Government brought in response to measures adopted by the Argentine Government as a result of the state of emergency established by the Public Emergency Law. Furthermore, the Agreement states that after the publication in the Official Gazette of the ENARGAS resolution that approves the new tariffs, our majority shareholder should withdraw all such claims and actions brought against the Argentine Government. The Agreement provides that we should grant the Argentine Government an indemnity under which we would be responsible for the full cost of any amounts that the Argentine Government is obligated to pay in connection with any claims brought by any of our shareholders. On December 24, 2007, BG, our majority shareholder, obtained a favourable award from the United Nations Commission on International Trade Law ("UNCITRAL") in a claim brought against the Argentine Government for breach of the Bilateral Investment treaty for the Promotion of Investments executed in 1990 between Argentina and the United Kingdom. The Argentine Government challenged this award in U.S. Federal Court and its decision is still pending. 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 a requirement that we agree to indemnify the government in case compensation is obtained by a shareholder as a consequence of a legal action against the government) or if the new tariffs will be sufficient to allow us to cover our costs and service our existing indebtedness after the restructuring or maintain their value in U.S. Dollars or Pesos over time to compensate for any past and future increases in inflation or the devaluation of the Peso.

In addition, we signed a Transition Agreement with UNIREN which was approved by our Shareholders on October 14, 2008. The Transition Agreement was then sent to UNIREN in order to obtain Executive Power approval. On April 14, 2009, the Executive Power issued Decree No. 234/2009 approving the Transition Agreement (which includes the increases in the distribution and transportation tariffs). However, we are not sure how much time it will take for ENARGAS to issue the new tariff schedules.

Pursuant to the process established for the renegotiations, we have submitted both an interim request for a tariff increase and a proposal regarding our tariff regime within the prescribed time periods. We do not know when the renegotiations will be concluded or whether they will have a positive or adverse effect on us. Even if the renegotiations are concluded and we reach an acceptable settlement with the Argentine Government, it is possible that such settlement will lead to social unrest, protests by our customers or objections from consumer advocacy organizations or the National Ombudsman (as recently occurred with the electric tariff increases approved by the Argentine Government), thereby hindering the implementation of any future agreement or the application of new tariffs. Moreover, we can offer you no assurance that tariff increases would not result in an increase in our overdue receivables, and consequently, our result of operations.

Our License provides that we are entitled to occupy and use free of charge all streets, avenues, parks, bridges, roads and other public space, including underground areas and airspace, required to install facilities for our licensed service, including communication lines and interconnections to third parties. We rely on a number of third party services providers to outsource certain services, such as the installation or repairs of our facilities.

The Government of the Autonomous City of Buenos Aires ("GCABA") has been requiring such third party contractors to pay fines of up to Ps. 200,000 per infraction when, from the GCABA's point of view, the streets, avenues and other public spaces of the Autonomous City of Buenos Aires are adversely affected by their work.

Fines are to be applied against the culpable contractors and, eventually, we could be held jointly and severally liable for the payment of any fines applied to them. Additionally, fines could also be applied directly against us in the case of repairs performed by us. Due to the foregoing, the application of such fines by the GCABA on a regular basis will have a material adverse effect on our business .

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. The above mentioned situation may eventually lead to a gas and electricity supply bottleneck due to the high risk of failures in the actual Argentine energy supply system.

Further, pursuant to Resolutions No. 659/2004, 752/2005, 882/2005, 1,329/2006, 1,886/2006 and 599/2007 -all them enacted by the Energy Secretariat- and their regulatory rules, and in order to prevent natural gas shortages and guarantee the natural gas supply to non-interruptible consumers, the ENARGAS and/or other intervening authorities are allowed to redistribute gas volumes and/or reallocate transportation capacity, thus modifying existing contractual rights and obligations set forth under agreements entered into by and between private parties. As a consequence of the foregoing, it is reasonable to construct that we would be able to obtain sufficient natural gas and/or natural gas transportation capacity to fulfill our non-interruptible customers' demand, although we cannot assure you that we will be able to obtain sufficient natural gas transportation capacity to fulfill our firm customers' demand for natural gas, which could lead to a material adverse effect on our cash flow and results of operations.

Since the 2007 winter period, the Secretariat of Interior Commerce and the Energy Secretariat increased their intervention in the operation of our business, especially regarding the restriction of natural gas supplies to certain industrial customers and power plants customers, aiming to guarantee the natural gas supply to non-interruptible customers.

An intervention by the Secretariat of Interior Commerce and/or the Energy Secretariat could affect supply of our services to residential, industrial and power plant customers, altering reliability of the distribution system and resulting in a decrease in our sales that could result in a material adverse effect on our cash flow and results of operations.

We did not experience any significant difficulties regarding deliveries of gas from our suppliers during the winters of 2004, 2005 and 2006. However, as experienced in 2007 and 2008, and expected for 2009, due to the government intervention into our business, the increase in demand for natural gas, the shortages in both supply and transportation capacity, and the negative effects derived from Resolution No. 599/2007 (as analyzed in " After a number of extensions, natural gas purchasing contracts expired on July 31, 2007. The execution of new contracts based on terms and conditions offered by the producers under Resolution No. 599/2007 of the Energy Secretariat could adversely affect our operations. "), we may be unable to meet all gas demanded by our firm customers on certain days during the year (typically, reduced to the winter period). In such cases our License requires us to interrupt deliveries to our industrial and CNG customers before interrupting the 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 and/or to adopt the decisions made within the frame of an Emergency Committee integrated by the intervening authorities and the transportation and distribution companies involved. If said interruptions occur and are attributable to us, after an administrative proceeding we might be imposed a fine of up to US$500,000 and eventually subject to the termination 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.

As later discussed under "Demand for our services is highly sensitive to weather conditions in Argentina" and "Our revenues may be adversely affected by increases in the supply of hydroelectric power", our revenues tend to be relatively higher in years with cold winters and lower levels of hydroelectric generation. 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. However, this may not be the case during 2009, because of possible increases in our expenses derived from shortages in gas and transportation supply, including:

• Insufficient long-term firm transportation capacity . Because of the increase in demand for natural gas, any increase in demand for natural gas due to cold weather, lower hydroelectric power generation or the lower cost of natural gas compared to other fuels could cause us to require more transportation capacity than that for which we have contracted.
• Power plant fines . Our contracts with our power plant customers permit us to interrupt the delivery of gas within certain limits. If we exceed these limits we are required to pay fines that grow in accordance with increases in the contracted volumes that we do not deliver. An increase in demand from our non-interruptible 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 2009.

Our financial condition and results of operations may be adversely affected by our need to purchase additional transportation capacity through "peaking" contracts as well as by the resulting fines from not satisfying our power plant customers' demand.

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 the demand for gas, especially among residential customers, our largest single source of revenues and the class of customers 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 worsened if we are unable to use our excess transportation capacity for other classes of customers or to dispose of our surplus capacity.

Under the Argentine electrical regulatory system, electricity generators are dispatched in ascending order of marginal generation cost. Since hydroelectric generation plants generate power at a lower marginal cost than the generation marginal cost of other power plants (including our power plant customers), a material increase in power generated by hydroelectric generating stations may displace a material amount of power generated by other types of power plants (including our power plant customers) and cause a corresponding decrease in sales to our power plant 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 demand for 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 highly regulated industry. As a result of the economic volatility experienced in Argentina since 2001, the Argentine Government put in place various regulatory measures to attempt to mitigate the adverse effects on the energy sector that have developed.

In February 2004, the Executive Power issued Decree No. 180/04, which created a special trust fund for new transportation and distribution infrastructure; created the Electronic Gas Market to coordinate and centralize all transactions related to spot gas purchases and secondary transportation and distribution markets; replaced, amended and introduced terms and conditions of certain distribution categories; allowed the re-sale of distribution services by distribution users under certain conditions; and authorized the natural gas distributors to have a controlling stake in natural gas marketers. See Item 4 "Information of the Company-Business Overview." Also in February 2004, the Executive Power issued Decree No. 181/04 allowing the Energy Secretariat to enter into an agreement with the natural gas producers to adjust the price of natural gas payable by natural gas distribution companies at the point of entry of the transportation system. The agreement established in this Decree was promulgated by the Ministry of Federal Planning, Public Investment and Services through Resolution No. 208/04.

Pursuant to Decrees Nos. 180/04 and 181/04, the Energy Secretariat and ENARGAS issued several regulatory rules providing for, among other things, the suspension of exports of natural gas, the setting of discounts or surcharges to certain users, and the creation of a regime of cuts to the transportation and distribution services aiming to guarantee the supply of natural gas to non-interruptible users.

In May 2005, the Energy Secretariat issued Resolution No. 752/05, which established the so-called "unbundling" regime. This resolution prohibited natural gas distributors to sell natural gas to certain large consumers. Several modifying resolutions have since been implemented, which (i) altered the deadlines set forth in Resolution No. 752/05, (ii) excluded certain customers and organizations from the unbundling regime, and (iii) implemented additional regulations on the purchase and sale of natural gas. See Item 4 "Information of the Company-Business Overview-ENARGAS-Changes in Regulations."

In February 2006, the Energy Secretariat issued Resolution No. 275/06 whereby it required the natural gas distributors to act as proxies of the CNG supply stations at the first event of the "Mechanism of Allocation of Natural Gas for CNG Supply Stations" and to act on their behalf by (i) carrying out the nominations and deliveries of natural gas until September 30, 2006, for no consideration, (ii) filing irrevocable offers before the Electronic Gas Market and (iii) executing the corresponding natural gas purchase agreements. Up to the date of this report, two events of the referred to Mechanism of Allocation were conducted before the Electronic Gas Market.

By Decree No. 180/04, the Energy Secretariat reserved the right to geographically limit the participation of the gas distributors created by Article 28 of the same decree. These distributors have not, as of yet, been subject to regulation but no assurance can be given that this will continue.

On May 21, 2007, through Decree No. 571/07, the Argentine Government imposed the intervention of ENARGAS for a period of 180 days, which was extended twice for an additional 180-day period each time through Decree No. 2,138/08 of December 14, 2008. We cannot assure you that this intervention will not result in additional regulations that could negatively affect our business in the near future. We cannot assure you that the interpretation and application of the above mentioned regulations, together with any future changes to ENARGAS and the regulatory framework would not materially and adversely affect us. See Item 4: "Information on the Company-Business Overview-Regulatory Framework-Changes in Regulations."

On September 1, 2008, ENARGAS issued Resolution I/409 which divided residential service tariffs into 8 new sub-categories (R1, R2-1 ^st , R2-2 ^nd , R2-3 ^rd , R3-1 ^st , R3-2 ^nd , R3-3 ^rd y R3-4 ^th ), according to each sub-category's annual natural gas consumption.

On November 27, 2008, the Executive Power approved Decree No.2,067/08 (published in the Official Gazette on December 3, 2008), which created the Trust Fund for Gas Imports (" Fondo Fiduciario para Atender a las Importaciones de Gas" ), a fiduciary fund destined for the purpose of importing natural gas. This fund aims to complement the national gas program calling for a reduction in "cut days" and guaranteeing the supply of natural gas in the domestic market. However, we act only as an agent of the fund by applying a tariff charge to our customers to be deposited into the fund and we do not receive any profit from this tariff collection. Moreover, we can give no assurance that these tariff increases will not negatively affect our overdue receivables, and consequently, our results of operations.

Our results of operations depend on the applicable regulatory framework and the interpretation and application of such framework by ENARGAS, the Argentine Government agency 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 regulates the public gas distribution service in Argentina, tariffs paid for gas distribution are required to be adjusted periodically to reflect changes in the cost of purchased gas as well as other taxes and charges we incur in distributing gas to our customers. Notwithstanding the foregoing, ENARGAS has limited on several occasions the pass-through of the cost, taxes and other charges of gas we purchased.

We have filed appropriate appeals with respect to 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, taxes and charges, could have a material adverse effect on our financial condition and results of operations. See Item 4: "Information on the Company-Business Overview."

The main principles that rule the gas pass-through effect established under our distribution license should remain unchanged, or on the contrary, the inability to pass-through our increased costs to our customers could result in an increased financial gap which could have a negative impact on our financial condition and results of operations.

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

In 2000, GCBA created a rate referred to as the "Study, Revision and Inspection of Works in Public Space Rate", or the "Inspection Rate." During 2007, GCBA made various claims against us with respect to the Inspection Rate, further described in Item 8: Financial Information - Legal Proceedings. After administrative and judicial proceedings, we reached an agreement with the GCBA and entered into several payment plans. We notified ENARGAS of the foregoing and requested the authorization to pass through any amounts we pay as a result thereof to our customers. No assurance can be given, however, that we will be permitted to pass through any such amounts.

Moreover, in 1998, GCBA created a Public Space Occupancy Rate, or "Occupancy Rate" applicable to gas pipelines (and others). We and other utility companies have challenged the validity of the Occupancy Rate, further described in Item 8: Financial Information - Legal Proceedings. During 2007 GCBA made various claims against us with respect to the Occupancy Rate. According to the Gas Regulatory Framework, ENARGAS should approve the pass-through of these Occupancy Rates to customers. Although ENARGAS has in prior years approved the pass-through of the Occupancy Rates, it has not yet done so with respect to these most recent rates being charged by GCBA.

As a result, certain distribution companies have requested that the Energy Secretariat grant the pass-through of these costs and have obtained the necessary authorization from the Energy Secretariat to do so. In May 2005, in response to a Presentation filed by us, the Ministry of Economy's Legal Affairs Department commented favourably on the pass-through of these costs to customers through the tariffs and filed its comment with ENARGAS for the final decision.

In addition, the Company timely pays the Occupancy Rate to five other municipalities (Esteban Echeverría, Berazategui, Almirante Brown, Florencio Varela and Ezeiza) and since 2006 executed certain payment agreements to cancel accrued debts in this regard with said municipalities (except for Berazategui, with no accrued debt whatsoever) following legal actions initiated by them. We filed the pertaining requests before the ENARGAS for the approval of the pass-through to tariffs of the amounts paid to the municipalities.

We can give no assurance as to when ENARGAS will ultimately allow us to pass through these payments that we make to the GCBA and the municipalities, whether other jurisdictions may claim similar levies.

During 1994, the Province of Buenos Aires agreed with the Argentine Government that the Province would not impose turnover taxes on sales of natural gas at a rate in excess of 3.5% of the invoice prices of those sales. Subsequently, the Province imposed turnover taxes on sales of natural gas at a higher rate and instructed us to include turnover taxes at the higher rate in our invoices to our customers and to remit the taxes so collected to the Province. We declined to follow those instructions, based on the agreement between the Province and the Argentine government described above. The Province has requested that we pay an amount equal to the increased turnover taxes that our customers would have been required to pay if we had included turnover taxes at the higher rate in our invoices to our customers. We have declined to make the payment. For further information, see Item 8: Financial Information - Legal Proceedings. In March 2008, the Tax Authority of the Province of Buenos Aires notified us of three additional assessments for the period between January 2004 and October 2005. These claims are based, in almost equal proportions, on the above described increase of the tax rate and in certain differences upon assessing the corresponding taxable base (derived mainly from the liquids' processing business). We appealed both claims before the Province's Tax Court.

If we are ultimately required to pay Turnover Tax differences derived from the increase of the tax rate, we will attempt to pass them through to our customers through our tariffs as provided by the terms of our License. However, we can give no assurances as to whether or not we will be required to make such payments or, if we are required to do so, whether we will be able to pass them through to our customers through our tariffs.

In addition, the regulatory framework establishes that cost varations resulting from changes in other items besides taxation (such as material gas purchase costs) shall be passed through to our tariffs.

In this regard, on September 19, 2008, the Energy Secretariat issued Resolution 1,070/2008 which approved an agreement with natural gas producers. One of the key features of said agreement is an increase in the price of natural gas at wellhead.

On October 10, 2008, ENARGAS issued Resolution 446/2008, which approved new tariff schedules. These new tariff schedules incorporated the increase in the price of natural gas at wellhead approved by Energy Secretariat Resolution 1,070/08 into the tariffs for each of the different customer categories established under ENARGAS Resolution 409/2008. ENARGAS Resolution 446/2008 also eliminated the daily differences which were previously in force. However, as a result of lobbying by consumer associations, on October 20, 2008, ENARGAS issued Resolution 466/2008 which reinstated the daily differences for the R1, R2-1 ^st and R2-2 ^nd sub-categories of residential customers (less than 800CM /per annum) and sub-distributors.

On December 23, 2008, ENARGAS issued Resolution 566/2008 which approved a new tariff schedule, incorporating an additional increase in the price of natural gas at wellhead into the tariffs for the following customer categories: R3-1 ^st , R3-2 ^nd , R3-3 ^rd and R3-4 ^th .

The Second Five-Year Tariff Review, which was suspended by ENARGAS in a release issued on February 8, 2002, as a result of the sanction of the Emergency Law, and no date has been set to reinitiate the process as it depends on the Contract Renewal process.

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

In August 2007, there was an incident (related to a manufacturing defect) on a 24" steel main operating at 22 bar. This situation has modified the risk assessment of this main, which takes in account the likelihood of failure and the consequences of such failure. To reduce the risk of similar incidents occurring, evaluation tests were performed during 2008 and led to a reduction in the pressure of the steel main to 12 bar. The preliminary result of these evaluation tests indicates that this pipeline would need to be replaced. However, we have not yet finished the final tests on this steel main and, due to lack of available resources its replacement is not within our maintenance plan for 2009.

We cannot give any assurances as to whether the outcome of the assessment could result in increased investment requirements or whether if investment requirement were increased that our financial situation would allow us to meet those investment requirements. Additionally, the occurrence of similar incidents could adversely affect out result of operations.

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 dissolve and liquidate pursuant to Article 94 of the Argentine Corporations Law unless we receive a capital contribution which would result in our assets exceeding our liabilities.

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 in order to avoid paying us tariffs must incur various costs and face certain practical limitations that, in some cases, make bypassing our system 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 allows us (a) to avoid incurring gas purchase costs (and take-or-pay charges) and (b) to collect a tariff from the customers, thereby defraying all or part of the cost of our firm transportation capacity used for such services. These arrangements also enable us to achieve certain savings by avoiding (a) the cost of purchasing the gas that is used as compression fuel which, pursuant to the regulatory framework, cannot be passed on to customers, and (b) certain gross turnover taxes imposed on our sales of gas. Under such arrangements, all such customers will continue to depend on the distribution and transportation services we provide.

We have built strong working relationships with many of our major customers and we are implementing appropriate contracting and pricing policies that discourage the construction of direct connecting pipelines between our major 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. 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 Transportadora de Gas del Sur S.A. ("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.

The agreements between us and the natural gas suppliers provided for in Resolution No. 208/04 expired on December 31, 2006, as well as the contracts between our gas marketer subsidiary, MetroENERGÍA, and the natural gas suppliers. In December 2006, these agreements were extended until April 30, 2007, and subsequently extended until the end of June 2007 to give time to natural gas suppliers to reply to the National Government's proposal

On June 14, 2007, Resolution No. 599/2007 of the Energy Secretariat was published in the Official Gazette, approving the draft of the "Agreement with Gas Producers 2007-2011", then ratified by the gas producers and in force as of August 1, 2007. This Agreement governs and regulates the supply of natural gas by producers to distribution companies (for the supply of residential users and small business), compressed natural gas or CNG, industries and power plants for the years ended December 31, 2008, 2009 and 2011, depending on the type of consumer, indicating the volumes, basins and point of entry to the transportation system to be observed by each producer. Due to different factors not attributable to us (e.g., lack of compliance of certain producers, lack of transportation capacity, increased demand for natural gas, etc.), the volumes made available to us under the Agreement do not cover our demand for transportation of natural gas to our residential customers.

Although the Agreement with Gas Producers 2007-2011 foresees the execution of gas supply agreements ("GSA") between gas distribution companies and gas producers, we did not execute any GSAs since the terms and conditions offered by the producers were not acceptable to us. We considered the offers made to be a breach of the obligations set forth under the Agreement. None of the other eight gas distributors executed any GSAs. As a consequence of this, as of the date of this annual report we are being supplied natural gas by the producers under terms and conditions of the aforementioned Agreement and ancillary supply orders issued by the authorities focused on guaranteeing the non-interruptible demand.

If new agreements between the National Government and natural gas suppliers are reached, it will require us and MetroENERGÍA to adapt our natural gas contracts to the new terms of such agreements.

We cannot assure you what effect these agreements may have on contracted volumes of natural gas and on our operating costs and results of operations.

Most of our gas purchase contracts include provisions, known as "take-or-pay" provisions, which 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 2007 under those gas purchase contracts require us to pay for an average of 70% 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 2009 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. 1,834/2002 (which shall remain in effect as long as the Public Emergency Law is in effect), which provides that the filing of reorganization proceedings or 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 U.S. Dollars and adjusted by the U.S. PPI, net of accumulated depreciation, and (b) the proceeds of a new competitive bidding process to acquire our License, net of costs and taxes paid by the successful bidder.

If our License is terminated by the Argentine Government prior to the expiration of its full term as a result of nonperformance by us, the Argentine Government may offset against our net book value any sum due to the Argentine Government for damages caused by the events resulting in the termination of our License. Such damages are required by our License to be at least 20% of the net book value of our assets. Alternatively, the Argentine Government under such circumstances could require Gas Argentino to transfer its holding of our shares to ENARGAS as trustee for their subsequent sale through a competitive bidding process. Compensation received by us for the termination of our License may be insufficient to enable us to pay our obligations, including interest on and the principal amount of our financial indebtedness.

The restrictive covenants in our outstanding indebtedness could adversely restrict our financial and operating flexibility and subject us to other risks .

Our currently outstanding indebtedness contains numerous restrictive covenants which limit our financial flexibility. These restrictions, among other things, may limit our ability to operate our businesses and may prohibit or limit our ability to enhance our operations or take advantage of potential business opportunities as they arise. The breach of any of these covenants by us or the failure by us to meet any of these conditions could result in a default under any or all of such indebtedness. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions and licenses process. In addition, if we are unable to generate sufficient cash flow from operations, we may be required to refinance outstanding debt or to obtain additional financing. We cannot assure you that a refinancing would be possible or that any additional financing would be obtained on acceptable terms.

Additionally, according to Argentine corporations' law, we can pay dividends in Pesos out of any undistributed profit, assuming our accounting is done according to Argentine GAAP. Our capacity to pay dividends to our shareholders is restricted by the agreement we reached as part of our recent restructuring process. We cannot distribute dividends until December 31, 2012 and, even then, only if we have repaid at least US$75 million of our outstanding debt. Therefore, our ability to pay dividends is currently limited by our debt rate as defined in our restructuring contract. We cannot guarantee that we can either generate sufficient funds to satisfy the repayment requirement or that our debt rate will allow us to pay dividends at any given time. As of March 2009, we have repurchased in the open market an accumulated amount of US$ 25.4 million of our Series 1 Notes.

The consumer protection law No. 24,240 and amendments (the "Consumer Protection Law") establish certain principles and rules in order to protect consumers. On March 12, 2008 the Executive Power enacted a new amendment to such law. No regulations under this amendment have been issued so it is unclear what impact it will have on our business. However, the amendment substantially modifies the Consumer Protection Law in various aspects such as fines and interest rates. For example, the new Consumer Protection Law specifically includes the services rendered by public utilities under the law; increases the maximum fines that can be applied against suppliers; grants the judges the ability to impose punitive damages against suppliers in favor of consumers; recognizes the consumer's associations capacity to engage in class actions in name of consumers and against suppliers; and reduces the default interest that suppliers can apply against consumers. In line with this amendment to Law No. 24,240, the Supreme Court of Argentine recognized class actions for the first time in relation to a protection of private email correspondence cause of action. These modifications and this Supreme Court precedent may substantially increase the risk of litigation against us as a supplier of natural gas and significantly reduce our collections regarding default interest all of which can adversely affect our financial condition and results of operation.

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 U.S. GAAP.

As part of our strategy, we implemented, and continued through 2001, a major capital expenditure program designed to extend and renovate mains, regulators, valves, and meters in order to ensure the safety and reliability of our distribution system, to modernize and centralize our information systems, and to upgrade our customer service branch network. We made capital expenditures of approximately Ps.524.9 million between 1993 and 2001.

In response to the Argentine economic crisis and the pesification and freezing of our tariffs, at the beginning of 2002 we refocused our strategy on short-term risks and challenges. Since then, our short-term strategy has aimed at working with the Argentine Government to expedite decisions and obtain tariff increases that ensure the continuity of our operations, maintenance of safety and quality standards, and coverage for debt repayment. Thus, we reduced our capital expenditures and preventive maintenance programs without affecting our ability in the near-term to serve our customers safely or operate our network in accordance with quality and environmental standards. We made capital expenditures of approximately Ps. 109.9 million between 2002 and 2005.

Considering the macroeconomic conditions prevailing in Argentina since the Argentine economic crisis (including inflationary pressures since 2004) and that almost ten years have passed since the last increase in distribution tariffs as a result of the delays in the license and tariff renegotiation process with the Argentine Government, our results of operations and financial condition have deteriorated and consequently our level of capital expenditures has been significantly reduced. During 2006, 2007 and 2008, our capital expenditures were approximately Ps.48.9 million, Ps. 62.9 million and Ps.84.2 million, respectively.

The outcome of our license and tariff renegotiation is uncertain both as to its timing and final form so we cannot assure you that the deteroriation of our operational and financial condition will not result in a failure to comply with the Distribution License Basic Rules relating to our obligation to make all improvements to the Essential Assets in a reasonable period of time and to repair and maintain those Essential Assets that have completed their useful life.

On January 1, 2002, all public services tariffs, including our tariffs, were pesified and frozen in accordance with the Public Emergency Law. The Public Emergency Law also authorized the Argentine Government to renegotiate public service companies' licenses (including our License). We are currently negotiating with the UNIREN both the license contract and the tariffs that we may be able to charge in the future. See Item 3: "-Risk Factors Relating to Us.- We are currently renegotiating our license and tariffs with the Argentine Government. This renegotiation may result in new tariffs that do not cover our costs and may have a material adverse impact on our financial position. If we are unable to renegotiate tariffs that cover our costs we may incur operating losses ".

Considering that almost ten years have passed since the last increase in distribution tariffs as a result of the delays in the license and tariff renegotiation process with the Argentine Government, our results of operations and financial condition have deteriorated.

On October 14, 2008 we signed a Transition Agreement with UNIREN which was approved by our Shareholders. The Transition Agreement was then sent to UNIREN in order to obtain Executive Power approval. On April 14, 2009, the Executive Power issued Decree No. 234/2009 approving the Transition Agreement (which includes the increases in the distribution and transportation tariffs). However, we are not sure how much time it will take for ENARGAS to issue the new tariff schedules.

The outcome of our license and tariff renegotiation is uncertain both as to its timing and final form. If the new tariff schedules, including the increase in distribution tariffs agreed in the Transition Agreement signed with the UNIREN in October 2008 and approved by the Executive Power pursuant to Decree No. 234/2009, are not issued by ENARGAS by the second half of 2009, we are likely to have insufficient liquidity and will consequently be required to activate various measures to preserve cash and enhance our liquidity. These measures include refinancing some or all of our outstanding debt, obtaining additional financing, deferring the timing for certain of our estimated capital expenditures and/or further reducing operating expenses. Nevertheless, we cannot assure you that a refinancing would be possible or that any additional financing could be obtained on acceptable terms. If such measures are not successful, we may be required to suspend payments of our outstanding indebtedness in the future.

In addition, we would like to highlight that, as a result of Transportadora de Gas del Norte S.A.'s ("TGN") decision to suspend payment of its outstanding financial indebtedness at the end of 2008, ENARGAS issued a resolution (i) ordering an intervention of TGN for a period of 120 days, (ii) designating an auditor with co-management capacities over TGN, and (iii) ordering that TGN's corporate books be taken away from its head office. However, recently, the National Federal Administrative Court of Appeal issued an order (i) suspending the effects of the ENARGAS' resolution regarding the intervention of such company and the co-management capacities of the designated auditor, (ii) keeping the designated auditor in charge of all the activities that could reasonably affect the public services rendered by TGN and (iii) ordering ENARGAS to return to TGN its corporate books. Based on this recent precedent, we cannot assure you that, if we were to suspend payments on our financial indebtedness, ENARGAS would not take similar measures against us.

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.

At December 31, 2008, Gas Argentino had approximately US$ 100.1 million, including accrued interest, in financial indebtedness. Gas Argentino informed us that on December 7, 2005 it executed an agreement with the holders of all of its financial indebtedness pursuant to which such holders would exchange all obligations related to such financial indebtedness for common stock of Gas Argentino equal to 30% of its equity and the transfer to such holders of all of our Class B Shares owned by Gas Argentino. The exchange was subject to, among other things the approval by ENARGAS and the approval of the Secretary of Interior Commerce with the prior agreement of the Argentine Anti-trust Authority ("Comisión Nacional de Defensa de la Competencia" or "CNDC"). The aforementioned agreement also included a bondholders' option to terminate that agreement if, at December 7, 2006, the closing of the debt restructuring had not occurred. While ENARGAS' approval was obtained, the CNDC's resolution, and consequently the Secretary of Commerce authorization, was pending. On May 15, 2008, Marathon Master Fund Ltd. and Marathon Special Opportunity Master Fund Ltd., one of the holders of part of its financial indebtedness, notified Gas Argentino that they were terminating the agreement, and therefore, debt, including both principal and interest, remains outstanding and Gas Argentino must start a new restructuring process with its creditors.

In August and November, 2008, three different entities claiming to be holders of bonds of Gas Argentino initiated judicial proceedings against the latter which included, among other injunctive measures, attachments on our shares held by Gas Argentino. Gas Argentino has rejected these claims and the matters are pending resolution in the Argentine Courts.

If as a result of the termination of the agreement or for any other reason Gas Argentino is declared bankrupt or Gas Argentino's creditors foreclose on its only asset (our Class A Shares and our Class B Shares held by Gas Argentino) so that our Class Shares are transferred to a third party and such transfer is not approved by ENARGAS our License may be revoked. We cannot assure you that ENARGAS will approve any such transfer.

Gas Argentino's only source of funds for the payments of its obligations is dividends paid by us. However, our capacity to pay dividends to our shareholders is restricted by the agreement we reached as part of our restructuring process. We cannot distribute dividends until December 31, 2012 and, even then, only if we have repaid at least US$75 million of our outstanding debt.

In February 2004 the Executive Power issued Decree 180/04 authorizing the natural gas distributors to have a controlling stake in natural gas marketers. By Decree 180/04, the Energy Secretariat reserved the right to geographically limit the participation of the gas distributors created by Article 28 of the same decree. These distributors have not, as of yet, been subject to regulation but no assurance can be given that this will continue.

In line with the regulatory changes that were made in the gas sector as from the issuing of Executive Orders No 180 and No 181 in 2004, dated May 23, 2005 and December 22, 2005, the Energy Secretariat issued Resolutions No. 752/05 and 2,020/05, respectively. Such resolutions established a schedule to start purchasing natural gas in a direct way for General Service "P" customers and CNG stations. This process was called "gas unbundling".

Consequently and with the goal of indirectly servicing large users of gas and gas transporters that were prohibited by law to service directly, we constituted MetroENERGÍA S.A. On July 2005, ENARGAS gave us the approval to operate MetroENERGÍA as a natural gas trading company and natural gas transportation service company. We currently own 95% of the capital in MetroENERGÍA and BG Argentina S.A., "BG Argentina", along with YPF Inversora Energética S.A., "YPF Inversora", are the holders of the remaining 2.73% and 2.27%, respectively.

One of the main objectives of MetroENERGÍA was to attract those industrial and commercial customers who, until September 1, 2005, January 1, 2006, and March 1 2006, purchased natural gas together with transportation and distribution from us, and who, as a result of Resolution 752/05, must do so from a different supplier.

We cannot assure you that changes in the above mentioned regulations, or any future changes to the regulatory framework would not materially and adversely affect us.

One of the main objectives of MetroENERGÍA was to attract those industrial and commercial customers who, until September 1, 2005, January 1, 2006, and March 1 2006, purchased natural gas together with transportation and distribution from us, and who, as a result of Resolutions 752/05 and No. 2,020/05, must do so from a different supplier.

During 2007, MetroENERGÍA, entered into contracts for supplying natural gas with different producers in order to supply customers who have to purchase gas from third-party suppliers. These contracts, which were originally due between December 31, 2006 and September 30, 2007 were renewed until December 31, 2009 considering volumes established in the Energy Secretariat's Agreement with Natural Gas Producers 2007-2011.

These gas supply agreements are aimed at large customers, electric power plants and customers from General Service "G" and from General Service "P", with consumption not only in our distribution area but also in the rest of the country.

Additionally, MetroENERGÍA had signed invoicing and collection agreements, which were originally effective until May 2008 and have now been renewed until May 2009, with some gas producers for selling natural gas to CNG stations in the scope of the Mechanism of Natural Gas Allocation under Resolutions No. 752/05, No. 2020/05, 1,070/08 and No. 275/06. These agreements can be renewed annually. We can give no assurance that such contracts will be renewed in the same conditions or that changes in the contractual conditions would not materially and adversely affect us.

Actions carried out through MetroENERGÍA allowed us to retain most of the industrial and commercial customers, thus being able to both maintain the participation of this category of customers within our sales portfolio and gain new customers outside our distribution area. No assurance can be given if MetroENERGÍA will be able to continue retaining those customers.

We are Argentina's largest natural gas distribution company (in terms of number of customers and volume of gas deliveries) according to ENARGAS' 2008 annual report. We have over 2.1 million customers in our service area (the city of Buenos Aires and southern and eastern greater metropolitan Buenos Aires). This area is densely populated 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. We are one of the largest publicly traded natural gas distribution companies in North and South America in terms of customers served.

The 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 2008, sales of natural gas to residential customers accounted for approximately 46.1% of our total sales. The remainder of our sales of natural gas and transportation and distribution services was to industrial and commercial customers and governmental entities, power plants and suppliers of, and dealers in CNG, which is 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 16,190 km of mains. We purchase natural gas primarily from producers in southern and western Argentina. Gas purchased 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, which has broad authority over the gas distribution and transportation industries, including their tariffs. The Gas Act provides that the tariffs for natural gas that 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 U.S. PPI and in certain other circumstances. The Gas Act and our License provide that these 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 and reasonable return any investments made by them. The Public Emergency Law converted our U.S. Dollar-denominated tariffs into Pesos at an exchange rate of Ps.1 per US$1, and superseded and suspended a number of these provisions. See "-Regulatory Framework."

In response to the Argentine economic crisis, at the beginning of 2002 we refocused our strategy on short-term risks and challenges. Since then, our short-term strategy has aimed at working with the Argentine Government to expedite decisions and obtain tariff increases that ensure the 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 also has taken and continues to take actions to mitigate the impact of the current economic crisis, including:

1. strict management of cash-flow to adjust our financial expenditures to the funds available to us;
2. reduction of capital expenditures and preventive maintenance programs without affecting our ability in the near term to serve our customers safely or operate our network in accordance with quality and environmental standards;
3. tight control of all price adjustment requests from suppliers and required extensions of payment terms from those suppliers;
4. renegotiation of commercial and operational contracts; and
5. securing any necessary tax advice to make the best possible tax use of past and future tax losses.

Pre-crisis, we had implemented a strategy that included capital investments and other measures designed to: (a) provide continued high-quality service to our customers; (b) ensure sustained growth in dividends; (c) achieve a significant reduction in operating expenses; (d) implement a market strategy more closely based on market analysis; (e) improve the use of our current transportation capacity and become a key participant in the natural gas transportation 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 constrained by 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 participate actively in the domestic energy market, focusing on providing efficient and reliable natural gas service to our customers and on being the country's most innovative provider of natural gas distribution services and related products.

Since commencing operations, our management team has concentrated on controlling operating costs and improving operating efficiency and collections. Between December 31 of 1992 and 2008, we downsized from 2,021 to 1,021 employees. In addition, we renegotiated service contracts with independent suppliers and outsourced various services.

In February 2004, the Executive Power issued Decree No. 180/04 authorizing the natural gas distributors to have a controlling stake in natural gas markets. See Item 3: "Key Information - Risk Factors - Risk Factors related to Us - We operate in a highly regulated industry and changes to the regulatory framework may have a material adverse effect on our financial performance and results of operations."

Consequently, within the framework of Decree No. 180/04's Section 28 and in response to Resolution No. 752/05 and the following modifying resolutions, we created MetroENERGÍA S.A. with the goal of indirectly servicing large gas users and gas transporters, since the prohibited direct service thereto. In July 2005, ENARGAS granted approval to operate MetroENERGÍA as a natural gas trading transportation service company. We currently own 95% of the capital in MetroENERGÍA, with BG Argentina S.A., "BG Argentina," and YPF Inversora Energetica S.A., "YPF Inversora," as the holders of the remaining 2.73% and 2.27%, respectively.

MetroENERGÍA's goal is to purchase and/or sell natural gas and/or its transportation on its own, on behalf of third parties, or in association with third parties.

One of MetroENERGÍA's main objectives was to attract those industrial and commercial customers, who until September 1, 2005, January 1, 2006, and March 1, 2006 purchased natural gas together with transportation and distribution from us, and, as a result of Resolution No. 752/05, must do so from a different supplier.

MetroENERGÍA signed natural gas supply agreements with different producers to supply users that must purchase gas from third party providers. Our gas purchase agreements had been reduced pursuant to Resolution No. 752/05, which gave our main clients the right to ask distribution companies to give their natural gas volumes to third parties that had been hired by producers with the goal of meeting the natural gas demand of those clients. Likewise, MetroENERGÍA signed natural gas supply contracts with power plants, large customers, General Service "G" users, and General Service "P" users with consumption in our distribution area following the different dates that such clients could purchase natural gas from providers other than the licensee distribution service companies.

Additionally, MetroENERGÍA had renewed invoicing and collection agreements, effective until April 30, 2009 with some gas producers for selling natural gas to CNG stations in the scope of the Mechanism of Natural Gas Allocation under Resolutions No. 752/05, No. 2,020/05 and No. 275/06.

Through Resolution No. 599/07, published in the Official Gazette on June 14, 2007, the Energy Secretariat proposed an agreement, to be executed by the natural gas producers before June 22, 2007, covering the supply of natural gas for the domestic market until December 31, 2011 (the "2007-2011 Agreement").

Pursuant to the 2007-2011 Agreement, before June 19, 2007 or any other date defined by the Energy Secretariat, the natural gas producers should offer natural gas purchase agreements reflecting the term, volume, and prices set forth under the 2007-2011 Agreement to natural gas distributors. Pursuant to this agreement the producers are obliged to supply gas to CNG stations, industries, and power plants. Producers, however, are free to decide whether to channel these supplies through marketers or to do it directly.

Since MetroENERGÍA entered into purchase contracts with natural gas producers, it was possible for the Company to sign Gas Supply Agreements with industrial and commercial customers inside and outside of our distribution area at renewed prices and volumes.

Our consolidated sales during the year ending December 31, 2008 decreased by 5.7%, amounting to Ps.901.6 million compared to Ps. 955.9 million in the previous year. The sales decrease during the year ending December 31, 2008 derived from MetroENERGÍA's sales decrease amounting to Ps. 7.1 million and from our gas sales amounting to Ps. 46.0 million, (principally to residential customers).

MetroENERGÍA's trading of natural gas on its own behalf amounted to 51.2% of its operations; trading natural gas on behalf of third parties amounted to 48.8%. MetroENERGÍA receives a fee for its third-party trading activities, which is included under "Sales" in the Statement of Operations.

The following table illustrates certain information regarding our services to our customers during 2008:

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 2.1 million residential customers within our service area, approximately 63% of whom are located in the city of Buenos Aires. In 2007, sales to residential customers accounted for approximately 23.5% of the volume of natural gas we delivered and 44.2% of our sales; during 2008, sales to residential customers accounted for 22.5% and 46.1% of the volume of natural gas we delivered and our sales, respectively. Our volume of sales to residential customers decreased from approximately 2.0 BCM (71 BCF) in 2007 to approximately 1.9 BCM (66 BCF) in 2008. We added 39,615 and 41,988 (net) new residential customers in 2007 and 2008, respectively. 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 generally are 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 were divided into three categories (R1, R2, and R3), according to the level of gas consumption. The same tariffs were to apply to transportation and distribution services consumed by all three categories of residential customers until the renegotiation process for public services tariffs was completed. Upon completion of said renegotiation, different tariffs were established for each category of residential customer according to their respective level of natural gas consumption.

On September 1, 2008, residential service tariffs were divided into 8 new sub-categories (R1, R2-1 ^st , R2-2 ^nd , R2-3 ^rd , R3-1 ^st , R3-2 ^nd , R3-3 ^rd y R3-4 ^th ), according to each sub-category's annual natural gas consumption.

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 for 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, received a discount equal to 10% to 12% on the cost of their annual natural gas consumption; users, who consumed above 95 percent of the gas they consumed during the same invoiced period of 2003 paid a surcharge on the gas they consumed 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 2006, users, who consumed less than 90 or 95% of the amount of gas they consumed during an equivalent period in 2003, depending on the type of user, and adjusted for the average temperature during each period, received a discount equal to one cubic meter per each cubic meter saved below those levels. Users whose consumption is above 90 or 105%, depending on the type of user, paid a surcharge on the gas they consume over those levels. The program is effective from April 15 until September 30 each year. This period however, could be modified by the Energy Secretariat as the program evolves. These resolutions were similarly applied in 2006 and 2007.

In 2008, ENARGAS instructed us, through Notes No. 9,200/2008, No. 9,314/2008 and No. 9,921/2008, not to apply the program described above between April and September 2008 under the conditions laid out for 2008. Instead, we were instructed to apply the program under the terms and conditions in force for 2007, as a result of the large number of claims made by consumers affected by the Program. As explained by ENARGAS, the increasing number of complaints led it to begin a comprehensive examination of the Program. As a result of said instruction from ENARGAS, we were compelled to re-invoice the Program and/or give back credit balances in certain cases.

On June 8, 2005, ENARGAS temporarily approved through Resolution No. 3,208, the tariff chart (expressed in Pesos) applicable from May 1 to June 30, 2005. On July 12, 2005, ENARGAS temporarily approved through Resolution No. 3,227, a new tariff chart that replaced the one approved by Resolution No. 3,208, applicable from May 1 to June 30, 2005.

On March 21, 2006, ENARGAS, in Resolution No. 3,462 temporarily approved the tariff chart applicable retroactively from July 1, 2005, that contained the values of the price of gas at wellhead, as a result of the agreement signed between the Energy Secretariat and natural gas producers for the implementation of the schedule for the normalization of the price of gas at points of entry into the transportation system.

Pursuant to ENARGAS Resolution No. I/446 issued on October 10, 2008, new tariffs were established for customers applicable from September 1, 2008, except for compressed natural gas or CNG, for which the new tariffs were to be applied from October 1, 2008. On December 23, 2008, we were notified, through Resolution No. I/556, of the new tariff charts to be applied from November 1, 2008. However, the new tariff charts do not provide for making up for the distribution service tariffs.

Sales of transportation and distribution services to power plants decreased by 5.4% during the year ended December 31, 2008 as compared to the previous year, mainly due to the 3.2% decrease in gas volumes delivered and to the decrease in the average price of said services.

Our contracts with electric power plants usually contain provisions, known as ship-or-pay provisions, which require the power plant to pay for reserved transportation capacity whether or not used. 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 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 remained at a steady rate. The following combined cycle plants located in our service area have been our customers since the following dates: Central Termica Buenos Aires ("CTBA")-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. Parana, a combined cycle plant located outside of our service area. In the course of 2008, we signed a contract with GENELBA to provide transportation services from June 1, 2009 through December 31, 2019.

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, covers a portion of our annual firm transportation costs. See "-Commercial Contracts-Gas Transportation Contracts."

Most of our power plants and industrial customers purchase gas directly from gas suppliers. This 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 (i) 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 (ii) certain gross turnover taxes imposed on our sales of gas. Under such arrangements, all these customers purchased our distribution and transportation services. See "-Business Overview-Bypass Rights and Competition."

Due to the new Government-approved regulatory system, we have not been allowed to make gas sales to power plants since September 2005. Instead, natural gas is provided partly by MetroENERGÍA S.A. (Central Costanera and CTBA power plant).

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. In addition, above average rain or snowfall, which permits relatively greater dispatch of power by hydroelectric generating stations, will tend to decrease the dispatch of our power plant customers and therefore, their consumption of gas; the result is less delivery of our 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 and benefit us. The consumption of electricity in Argentina increased by 5.9% between 2005 and 2006, and by 4.0% between 2006 and 2007. However, the reduction of economic activity in Argentina led to a 24.0% decrease in electricity consumption during 2008 as compared to 2007.

According to CAMMESA, of Argentina's total electricity consumption during 2008, about 81.0% was generated by thermal power plants; approximately 8.3% was generated by hydroelectric power plants; approximately 8.5% was generated by nuclear power plants; and about 2.2% was imported.

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 includes a transportation charge per unit consumed, a fixed charge per invoice, and a demand charge. Our 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 that consume a minimum of 1.0 MCM (35 MCF) per day may contract for large volume general service ("SGG"). The related tariff includes a demand charge, a distribution charge, transportation charge and a charge per unit of consumption from one of two rate blocks, as well as a fixed charge per invoice.

Customers with a minimum consumption of 3 MMCM (106 MMCF) per year and whose operating processes are interruptible or whose natural gas can be substituted 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 agreements that allow us to ask for interruptions on firm services during 30 days in the winter. The interruptions generally are due to insufficient transportation capacity or gas supply at times of peak demand and are imposed to assure the provision of services to non-interruptible customers, such as residential customers. See "-Bypass Rights and Competition."

In light of Resolution No. 752/05, modified by Resolution Nos. 2,020/05 and 275/06 and enacted to regulate the Executive Power Decree No. 181 that prohibits us from selling natural gas to specified industrial, commercial, and large-user clients, it was possible for MetroENERGÍA to capture power plants, large customers, General Service "G" users, and General Service "P" users to maintain a market share in sales (including consumption in our distribution area) among these categories of clients. Several client meetings and discussions took place in the last months of 2008, extending our sales to December 31, 2009.

We also supply gas to minor commercial and industrial users (e.g., restaurants, hotels and small industries) that consume less than 0.18 MMCM (6 MMCF) per year. These users receive small volume general service which is available to any nonresidential user. The tariff for this distribution and transportation 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 same tariffs will apply to transportation and distribution services for 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. We do not supply natural gas to SGP 3 clients with annual consumption over 0.18 MMCM (6MMCF) per year as they purchase it directly from third parties.

Beginning in April 2006, as a consequence of the "unbundling," we started to provide only transportation and distribution services ("trading" services) to CNG stations.

Beginning in 2004, CNG customers have been required to contract for firm or interruptible capacity, according to service categories created by Decree No. 180/2004. The tariff for CNG users consists of a fixed charge per invoice, a charge per unit consumed, and a demand charge. The volume of transportation firm capacity of the segment decreased by 3% with respect to the volumes contracted for in December 2007 (from 2.68 MMCM to 2.59 MMCM per day).

Our transportation and distribution sales to CNG stations decreased by 2.6% during the year ending December 31, 2008 compared to the previous year, mainly due to the decrease of 4.8% in gas volumes delivered to this customer category.

During 2008, one auction for providing natural gas to a CNG refuelling station was done. The total amount of natural gas assigned to CNG stations was 2.21 MMCM per day, a reduction of 10% from the volumes assigned of December 2007 (2.45 MMCM per day). Also, during 2008, gas distribution companies had to represent CNG filling stations in their natural gas applications before the Electronic Gas Market ("EGM"). This auction for the purchase of natural gas by CNG filling stations within EGM occurred in May 2008 and is effective up to April 2009.

We were party to a contract with TGS from 1996 through 2000 under which TGS produced and sold in exchange for our account liquids extracted from gas that we delivered to the TGS processing plant at Bahia 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 delivered in prior years; in turn, TGS has extracted lower volumes of liquids from this gas than in the past. We have negotiated with TGS a reduced fee for processing the gas we deliver to its processing plant. Sales of gas for processing during the year ending December 31, 2008 increased by 23.5% compared to the previous year, mainly due to the increase in the average price.

MetroENERGÍA's natural gas sales decreased from Ps. 161.8 million during the year ending December 31, 2007 to Ps. 115.6 million during the year ending December 31, 2008, mainly as a result of a decrease in volumes delivered to customers. Gas volumes delivered by MetroENERGÍA corresponding to sales on their own behalf amounted to 472.2 MMCM during the year ending December 31, 2008, compared to 836.1 MMCM during the year ending December 31, 2007.

Commission for MetroENERGÌA's operations on behalf of third parties increased slightly from Ps.7.5 million during the year ending December 31, 2007 to Ps. 7.7 million during the year ending December 31, 2008.

MetroENERGÍA has renewed and increased invoicing and collections arrangements with main natural gas producers for trading of natural gas on their own behalf and on behalf of third parties to be delivered to CNG filling stations allocated as a result of said auction. The volume managed through MetroENERGÍA in 2008 to CNG was in the order of 67.3 MMCM on its own behalf and 517.4 MMCM on behalf of third parties.

Gas distribution companies are required to pay for all contracted firm transportation capacity regardless of whether it is utilized. They are prohibited from passing on to customers, via tariffs, the cost of unused firm transportation capacity. Therefore, we strive to achieve the highest possible load factor, meaning 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 2004, 2005, 2006, 2007 and 2008, our load factors were 98.3%, 95.8%, 98.7%, 100% and 96.8%, respectively.

As of December 2008, we had firm transportation contract volumes with the concession ring zone of 23.62 MMMC per day. The volume of firm transportation contracted to Bahia Blanca, which is used to recover the heat after the generation of subproducts, amounted to 0.41 MMMC per day. In addition, we have 0.55 MMMC of firm transportation contracts for Tierra del Fuego per day.

During 2005, 2006, and 2007, the production of gas was insufficient to meet local demand as a result of the gas and electricity supply bottleneck that Argentina has faced since 2002. In order to prevent shortages, the Energy Secretariat and ENARGAS issued resolutions that allowed distributors gas that was originally destined for exports and electric generation to use for their clients. These resources were utilized by all distributors (except us), which triggered the increase in the costs of fuel-oil use and affected gas sales to Chile and Brazil. The strategy that we implemented, (of buying gas for the long-term, spot prices, and long-term for transportation), has allowed us to avoid using emergency mechanisms while offering our industrial clients services without significant restrictions. At the end of May 2007, the Argentine energy system entered into a state of emergency as a result of low temperatures throughout Argentina, the decline in hydroelectric power, a reduced availability of fuel oil for combined cycle power plants, and insufficient injection of gas at wellheads. The state of emergency continued during 2008. As a consequence of these shortages, we had to suspend service to CNG and industrial consumers within our service area for a couple of days to meet our residential customers' demand.

Since 2006, we have had an aggregate firm transportation capacity for distribution and liquids processing of 24.6 MMCM (869 MMCF) per day. 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; this legal obligation under our License, if not fulfilled, could result in significant penalties on us, including, in certain circumstances, revocation of our License. See Item 4: "-Regulatory Framework-The Gas Act and Our License-Penalties and Revocation." Since we have no gas storage facilities available, we strategically decided 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.83.8 million at December 31, 2008, Ps.61.0 million at December 31, 2007, and Ps.47.2 million at December 31, 2006. As of December 31, 2008, we had a reserve of Ps.13.9 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. 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.

Our License requires us 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 and modified for local conditions and with 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 2 million customers in 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 generally have been found 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 in relatively good condition and adequate for performance of its intended functions.

All of our high and intermediate-pressure systems are of welded steel construction, approximately 90% of which are under 40 years old. Approximately 50% of the medium-pressure system is constructed of welded steel and approximately 50% is constructed of polyethylene. Approximately 86% of the steel medium-pressure system is less than 25 years old, and over 93% 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, approximately 90% 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 16,190 km. This increase is primarily a result of system expansion, with the majority of such expansion being undertaken with medium-pressure polyethylene pipes. In addition to the distribution mains, the distribution network includes 342 pressure reduction stations. There are no material capacity constraints within the distribution system that would affect 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 system, or "SCADA," monitors pressure and flow at the city gates and at certain large customers. SCADA also monitors pressure at different regulator stations on the network, allowing us to monitor and regulate the flows on the system in order to guarantee supply of natural gas to all our customers.

Our metering system consists of approximately 2.1 million meters. New metering systems with temperature and pressure correctors were introduced for large customers to enable remote monitoring and control of distribution, and to include the ability to monitor the interruption of supplies to users with interruptible supply contracts during the periods of peak winter demand.

On account of the current economic situation in Argentina, we will continue carrying out the minimum maintenance activities necessary to ensure a safe and reliable gas distribution system. Due to this situation, activities related to corrective maintenance have been increased.

We classify and prioritize gas leaks reported by the public according to the risk involved in each leak. During 2008, we handled all gas leaks reported by the public that were classified as high priority within the first two hours of their being reported. We handled 99% of those high priority leaks within an hour of their being reported, as compared to 98% in 2007.

We will continue to conduct a substantial amount of multifunctional training in safety and operations with a goal of having a team that will improve customer service at a lower cost.

Preventive maintenance activities seek to minimize the risk of system failure and are responsible for the system's scheduled and unscheduled maintenance activities. In the recent years, we have not been able to mitigate the risk of system failure due to restrictions on resources that impact these preventative maintenance activities.

To improve the reliability of our gas distribution network, we engaged in many pipeline link projects and installed two new regulatory pressure stations during 2008. These improvements led to our distribution capacity increasing to 6.000 CM/h per day.

We continue replacing older, mainly cast iron, mains. In addition, in 2008 we replaced small sections of a high pressure pipeline which were considered insecure. We continue to monitor our maintenance program primarily through our regulatory pressure stations, which allow us to reduce our operative risk while at the same time increasing our network's reliability. Replacement priority is given on the basis of the level of the associated risk.

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 77 key district governors, which enable us to adjust pressure settings more rapidly.

In August 2007, there was an incident (related to a manufacturing defect) on a 24" steel main operating at 22 bar. This situation has modified the risk assessment of this main, which takes in account the likelihood of failure and the consequences of such failure. To reduce the risk of similar incidents occurring, evaluation tests were performed during 2008 and led to a reduction in the pressure of the steel main to 12 bar. The preliminary result of these evaluation tests indicates that this pipeline would need to be replaced. However, we have not yet finished the final tests on this steel main and, due to lack of available resources, its replacement is not within our maintenance plan for 2009.

The price of natural gas at wellhead was deregulated in accordance with the Gas Act by Executive Decree No. 2731/1993 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 US$0.97 (Ps. 0.97) per MMBTU to a weighted average of US$0.59 (Ps.1.83) per MMBTU at December 2005.

The cost of gas, before and after deregulation, is passed through to our customers, subject to ENARGAS' approval. ENARGAS may limit the portion of our gas costs that we pass through 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." Our License provides that ENARGAS may review whether the price increases were incurred prudently. In August 1994, the Argentine Government enacted Decree No. 1,411/1994, which empowers ENARGAS to limit the pass-through of the price of gas to prices that are no higher than the lowest price for similar quantities of gas purchased under similar conditions from the same field. This empowerment arises when ENARGAS finds 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 price of gas 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; ENARGAS had partially denied or delayed tariff increases that we requested based upon price increases that we contracted with our gas suppliers for. See Item 3: "Key Information-Risk Factors-Risk Factors Relating to Us-We have been, and continue to be, subject to adverse tariff adjustments determined by ENARGAS, the Regulatory Authority."

In late 2003, we reached agreement with our gas suppliers on the Revised Purchase Contracts. As part of these 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. 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 that are essential to provide our licensed service. Subject to the continuing compliance of the National Government with the obligations it has assumed, under the provisions of the Agreement for the Implementation of the Schedule for the Normalization of Gas Prices ("2004 Agreement") and as a result of the renegotiations of contracts with most of our gas suppliers, gas producers whose contracts were renegotiated have committed themselves to suspending actions and procedures brought against the gas distributors for claims resulting from the above-mentioned law. As of August 1, 2007, this suspension is considered a permanent waiver in accordance with Resolution No. 599/2007.

The Wintershall Energia S.A. contract, which expires on January 1, 2011, provided us with 1.20 MMCM (42 MMCF). Prices agreed under this contract were renegotiated in accordance with the terms of the 2004 Agreement. Since August 2007, the volume was modified according Res. SE 599/07 up to an average daily of 0.32 MMCM.

As a consequence of the unbundling, during 2006 we reduced daily aggregate amount of natural gas purchases under long-term contracts.

On June 14, 2007, Resolution No. 599/07 of the Energy Secretariat was published in the Official Gazette through which was homologated the proposed draft of the "Agreement with Natural Gas Producers 2007-2011," or "Agreement 2007-2011," then executed by certain natural gas producers, triggering its enforceability. The Agreement 2007-2011: (i) sets forth the volumes to be injected in the points of entry to the transportation system by the natural gas producers for residential and commercial consumers, industries, power plants and CNG supply stations until December 31, 2011 (although with different contractual terms depending the type of consumer), (ii) indicates certain price adjustment parameters depending the type of consumer, and (iii) establishes the mechanisms of natural gas re-routing and additional injections to guarantee the supply of the domestic market in case of shortages. By virtue of said Agreement, the natural gas producers and natural gas distributors should execute gas purchase agreements, including the terms and conditions of the Agreement 2007-2011. At the date of issuance of these financial statements, we did not execute any of these agreements given that (we believe) the offers received from the natural gas producers neither complied with the terms and conditions of the "Agreement with Natural Gas Producers 2007-2011" nor allowed us to guarantee the supply of natural gas to its non interruptible consumers because of the volumes included in said offers.

Contracts that originally were set to expire on December 31, 2006 were kept in the same conditions, including prices, until July 31, 2007. Since August 1, 2007, the natural gas producers have supplied natural gas to us in the volumes set forth under the Agreement with Natural Gas Producers 2007-2011 and based on several notes issued by the Subsecretary of fuels, or "Fuel Subsecretariat," and EGM; delivery arrangements for those contracts with gas producers do not exist.

Due to our understanding that the volumes, basins of injection and routes of transportation foreseen in the Agreement 2007-2011 would prevent us from fully supplying the non interruptible demand, we have made presentations to ENARGAS, the Energy Secretariat and the Fuel Subsecretariat to raise awareness of this situation and to request its remediation.

On September, 2008, the Energy Secretariat reached an agreement with natural gas producers, and issued Resolution SE No. 1,070/08, which (i) increased the price of gas and consequently the margin of gas producers, especially the margin to come from gas distribution sales to residential customers and (ii) establishes new segment prices (some of which have been modified since November 2008 by means of Resolution SE No. 1,417/08).

The following table sets forth the daily aggregate amount of natural gas we may purchase under long-term contracts as of December 31, 2008, during the years and seasons indicated, and our seasonal daily take-or-pay obligations under such contracts:

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

Our exposure to take-or-pay liability is affected by a number of factors that are not within our control. 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 2008 under those gas purchase contracts required us to pay an average 90% of the cost of gas that we are entitled to purchase under such contracts. No payments have been made under these take-or-pay commitments.

Executive Decree No. 2,731/1993 established a system whereby all gas purchases and sales made under contracts having duration of more than six months are deemed to be made in the long-term natural gas market. 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 0.5% during the summer months and 7% during the winter months of our gas purchases for each summer and winter period of 2005 compared to 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. During 2006, 2007 and 2008, we did not make any gas purchases in the spot market.

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 Item 4: "-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. The cost of any unused transportation capacity may not be passed onto 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," which accounts for the gas consumed as compressor fuel or lost in transportation. From 1993 through 2008, 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, normally will 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 2006 and all priority demand for non-interruptible service during 2007 and 2008. See Item 4: "-Final Transportation Balance."

Decree No. 180 and the regulations issued thereunder to date establish 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. Additional regulations were imposed by the 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 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 CM/day from the Tierra del Fuego basin to the Province of Santa Cruz, which is to be used to supply our firm customers. This award became available in the second half of 2005.

As of December 31, 2008, we had contracted for aggregate firm transportation capacity of 24.58 MMCM (868 MMCF) per day, an increase of 37.9% 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. We also have acquired the right to use the firm transportation capacity of others on an interruptible basis, thereby facilitating an increase in overall annual sales and the ability to better meet the demands of non-interruptible customers during peak periods.

As of December 31, 2008, we had available firm transportation capacity with TGS of 22.04 MMCM (779 MMCF) of gas per day through nine 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 Neuquen, 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 Bahia 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 provide us with firm transportation capacity of 1.65 MMCM (58 MMCF) of gas per day from the Neuquen basin, 0.54 MMCM (19 MMCF) of gas per day from the Neuquen 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 Neuquen basin; 0.51 MMCM (18 MMCF) of gas per day from the Neuquen basin; 0.55 MMCM (19 MMCF) from Tierra del Fuego basin to the province of Santa Cruz; 0.01 MMCM (0.2 MMCF) from Neuquen basin to the city of Bahia Blanca in the province of Buenos Aires; and 0.16 MMCM (6 MMCF) from Tierra del Fuego to the province of Buenos Aires. These latter two contracts expire in December 2009 and June 2020, respectively.

In addition, we have six interruptible transportation contracts with TGS for a total of approximately 16.5 MMCM (583 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 capacity of up 1.0 MMCM (35 MMCF) of gas per day. This contract became effective in June 1996 and expired in June 1997, but it remains effective pursuant to an automatic annual renewal clause. The fourth contract allows 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 fifth 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 effective pursuant to an automatic annual renewal clause. The sixth contract provides for interruptible transportation service of up to 3.0 MMCM (105.94 MMCF) of gas per day. This contract became effective on April 25, 2005, but it remains effective pursuant to an automatic annual renewal clause.

As of December 31, 2008, we had available firm transportation capacity with TGN of 2.54 MMCM (89 MMCF) of gas per day.

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 expired on May 31, 2006 and was renewed until May 2009. On June 1, 2007, we recovered 1.03 MMCM (36.37 MMCF) per day of firm transportation capacity pursuant to this contract, which had been transferred in June 1997 by several agreements with certain industrial companies.

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 the other for 0.10 MMCM (4 MMCF). Both contracts expired in May 2006, but they were renewed until May 2009.

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.

In addition, we have five interruptible transportation contracts with TGN for a total of approximately 10.65 MMCM (376 MMCF) of gas per day. The first contract provides for interruptible transportation capacity of up to 0.45 MMCM (16 MMCF) of gas per day. That contract expired on July 29, 2008, but it remains in effect pursuant to an annual renewal clause. The second contract provides for interruptible transportation service for 5.0 MMCM (177 MMCF) of gas per day. This contract became effective on July 1, 2003 and expired on July 1st 2004, but it remains in effect pursuant to an annual renewal clause. The third contract provides for interruptible transportation service of up to 4.0 MMCM (141 MMCF) of gas per day. This contract became effective in March 26, 2007 and expired on April 2008, but it remains effective pursuant to an automatic annual renewal clause. The fourth and fifth contracts provide for interruptible transportation service of up to 0.6 MMCM (21 MMCF) of gas per day, respectively. These contracts became effective on December 28, 2007 and expired on April 30, 2009, but they remain in effect pursuant to automatic annual renewal clauses.

We entered into an agreement with a gas distribution company for interruptible capacity from the Neuquen basin for a period of seven years beginning November 1, 1994. This agreement 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 at 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 23.6 MMCM (833 MMCF) per day from May through September 2007 and 2008, we contracted for aggregate firm transportation capacity of 24.6 MMCM (869 MMCF) of gas per day, which was generally adequate to satisfy demand during the winters of 2007 and 2008. During the 2008 winter months, peak-day deliveries did not exceed firm transportation capacity. Our load factors were 96.8%, 100.0%, and 98.7% for 2008, 2007, and 2006, respectively.

We had 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 provided technical assistance to us as Technical Operator under the terms of an eight-year technical assistance agreement called the "Technical Assistance Agreement," which originally was dated December 28, 1992 and was renewable with the consent of both parties. The Technical Assistance Agreement required BG Group to provide services, including advising us on: (i) replacement, repairs, and renovation of facilities and equipment to ensure that the performance of the system accords with standards of prudent companies with good reputations; (ii) preparation of performance evaluations, operating cost analyses, and construction assessments, along with 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 health and safety, pollution, and the 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 aforementioned services; and (viii) the 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) US$3.0 million and (ii) 7% of the amount obtained after subtracting US$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 generally were maintained, they were amended so that (a) the annual fixed fee would be payable in advance and in 12 installments instead of in three installments, (b) the parties could terminate the Technical Assistance Agreement subject to 180 days notice, and (c) the Technical Assistance Agreement would expire on December 28, 2008. On January 4, 2001, ENARGAS informed the parties it did not have any objections to the renewal.

The Technical Assistance Agreement also provided 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 the purpose of providing advice or implementing such advice. Advice was provided at no cost if we reimburse of direct expenses incurred by BG Group, including travel and living expenses incurred by BG Group employees providing such advice. The fees and other disbursements of BG Group under the Technical Assistance Agreement and the Manpower Supply Agreement were to be paid out of our revenues prior to the declaration and payment of dividends.

The shareholders of Gas Argentino provided resources and personnel that can assist the Technical Operator in performing its duties under the Technical Assistance Agreement. BG Group 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) 7% of our net profits, or the "Profit Fee," if a financial debt restructuring is achieved. The Amendment also established the following: from the fiscal year in which the Profit Fee is higher than Ps. 3 million adjusted by CER as of March 31, 2002 and provided we achieve a financial debt restructuring, the Amendment loses further effect. In addition, we shall make annual payments of an amount equal to the Fixed Management Fee of Ps.3 million adjusted by CER as of March 1, 2002, less any payments made pursuant to the Amendment. This deferred fee is payable in equal monthly payments over thirty-six months.

On December 28, 2008 the Technical Assistance Agreement between BG Group and us expired. BG Group considers that, during the years the agreement was in force, we acquired the necessary technical knowledge to assure the reliability, safety and efficiency of our gas distribution services. Consequently, the contract has not been renewed and BG Group is no longer our Technical Operator. This decision was approved by our Board of Directors on March 6, 2009.

A Personnel Supply Agreement was entered into in July 24, 2002 between BG Argentina S.A. with an automatic renewal at the end of each term. Pursuant to this 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 while providing these services.

As discussed under Item 3: "Key Information - Risk Factors - Our revenues may be adversely affected by the right of our clients to bypass our transportation services," large users of natural gas within our service area are permitted to contract directly with other parties for the sale of natural gas (provided they provide us and ENARGAS with three months notice) as well as supply of natural gas. However, if such users utilize our distribution system, they must pay us a tariff. These users may also build their own transmission systems and thereby completely bypass our services, in which case we would not be entitled to any fees. Users wishing to completely bypass our system face significant impediments to doing so, including significant expenses in building and maintaining connection lines and limited access to firm transportation capacity.

All of our power plant customers and some of our industrial customers purchase gas directly from gas suppliers. The gas is delivered using our firm transportation capacity and our distribution services, thereby allowing us (i) to avoid 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. 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 these arrangements, all 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 policies that discourage attempts by them to bypass our systems. It is possible that some customers will bypass our services completely or require us to further unbundle our services in a manner that could affect our margins adversely. 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. The Resolution permits users 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; it also allows users 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 proposed bypass was reduced from six to three months. On December 15, 2000, we objected to these changes by filing for an administrative proceeding. This matter has not yet been resolved.

Alternative energy sources, primarily fuel oil for power plants and LPG for residential and smaller commercial users, are substitutes for natural gas. The natural gas in Argentina historically has provided natural gas with a large cost advantage over fuel oil. Certain power plant users have agreed to take a minimum amount of gas at discounts from the maximum tariffs during warmer months when residential demand is weaker, lower and we agreed to deliver a minimum volume of gas to these power plants on an interruptible basis. The agreement calls for penalties based on the excess cost of fuel oil if we fail to meet our commitments. Natural gas is significantly less expensive than LPG and offers residential and smaller commercial users a significant reduction in fuel costs.

In addition, CAMMESA has lobbied forcefully to secure transport capacity for power plants. If CAMMESA ultimately succeeds in this lobbying effort, our services may be bypassed and we could be materially and adversely affected.

We believe that our current operations are in substantial compliance with applicable laws and regulations relating to health and safety, and to environmental protection. Foreseeing additional local health, safety and environmental, or "HSE," legal requirements, we have adopted BG Group's HSE strategies. We are committed to complying with BG Group's HSE performance standards (international best practice). We also are engaging issues related to the reduction of greenhouse gas emissions to minimize our impact on climate change.

To ensure 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 successfully re-certified in March 2007 and maintained during 2008.

As of December 31, 2008, we maintained insurance coverage for third-party loss and casualty for up to US$50 million. Our physical assets were insured for up to US$77.9 million. We believe that our insurance coverage corresponds 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 ours. However, and as noted below and elsewhere in our annual report, the Public Emergency Law has altered this framework significantly and to our detriment. These changes also create uncertainty as to our future business.

We have taken all necessary steps 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 generally is consistent with the Argentine Constitution, as amended.

Along with other regulatory decrees, the Pliego, the respective transfer agreements, and the licenses of each of the privatized gas companies, the Gas Act, together with Decree No. 1,738/1992, as amended, or the "Executive Decree," 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 the 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 or grant any customer an undue preference. The distributor must offer open access to any available capacity on the distribution system to all parties on an equal footing.

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

1. 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;
2. gas producers and transporters may not own a controlling interest in a distribution company;
3. customers which purchase gas directly from producers may not own a controlling interest in a distribution company in their geographic area; and
4. 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 via an arm's-length transaction.

Our License, which had an original 35 year team, authorizes us to provide the public service of gas distribution. 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. At that time, ENARGAS is required to evaluate our performance and make a recommendation to the Argentine Government. We will be entitled to a ten-year extension unless ENARGAS proves 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 in order to grant 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. ENARGAS has not issued regulations 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."

Subject to two exceptions, our License cannot be amended without our consent. First, ENARGAS may alter the terms of the service specified in our License, provided that an appropriate adjustment is made to the tariffs that we can charge for our services. These tariffs offset the financial impact of any alternation to the License. Second, ENARGAS may modify the tariffs initially established when the License was issued 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; notably, any pre-existing sub-distributors or those approved by ENARGAS 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 been reduced to three months. If a consumer purchases gas directly from others and subsequently wishes to purchase gas from us, 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; this obligation may require certain investments for the replacement or improvement of facilities as set forth in our License.

Our License details further our obligations. They 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 also prohibits us without the prior approval of ENARGAS from assuming debts of Gas Argentino, from granting a security interest in our assets in favor of creditors of Gas Argentino, and from 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 affect 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 the distributor prove the correctness of its assertions when the distributor maintains that the expansion is uneconomical and accordingly, requires contributions from users or third parties. Subject to ENARGAS' approval, consumers may undertake construction of facilities deemed by the distributor to be uneconomical.

Our License authorizes us to occupy public property without charge for the purpose of rendering the licensed service; 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 of 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; however, at our election, we may assume this responsibility and add a surcharge to our tariffs to recover the cost thereof.

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 breach's magnitude or its effect on the public interest. Fines of up to US$500,000 may be levied for multiple breaches of the License terms.

Our License may only be revoked by the Argentine Government and then only upon ENARGAS' recommendation. Our License specifies several grounds for revocation, including the failure to provide (a) 35% or more of our service for 15 consecutive days or 30 nonconsecutive days during a year or (b) 10% or more of our service for 30 consecutive days or 60 nonconsecutive days during a year; in other case, the failure must be due to reasons attributable to us. The Argentine Government also may be terminate our License 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) if we (i) attempt a transfer of our License, or (ii) to transfer or encumber any assets offered by Gas del Estado and designated as essential assets, or the "Essential Assets," or (iii) use the Essential Assets for purposes other than those established in our License without ENARGAS' approval. Additional events, which will result in the cancellation of our License, include a gross failure by us to make mandatory investments or to meet our other obligations under our License, our bankruptcy, a liquidation or our winding up; however, except in the case of bankruptcy, liquidation or winding up, our License requires that we receive notice and an opportunity to cure before termination. The Argentine Government has issued Decree No. 1,834/2002, 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 guarantee 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 our nonperformance, the Argentine Government may offset our net book value against any damages due to the Argentine Government caused by the events resulting in the termination of our License. These 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, which will act as a trustee until those shares are sold pursuant to a competitive tender.

Upon termination of our License, the Argentine Government may appoint an interim operator to provide the licensed services until a new licensee is appointed. The fees and expenses incurred by an interim operator shall be borne by us. Subject to judicial review, we will not be entitled 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 U.S. Dollars and adjusted by the U.S. 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. If that is the case, we would 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, the amounts would be 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 or (b) the Argentine Government terminates our License and in turn, ENARGAS instructs Gas Argentino to transfer all its shares in us to ENARGAS as trustee for their subsequent competitive tender.

Our License also may 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 that 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 U.S. Dollars and adjusted by the U.S. 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. Board members 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 board members 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:

1. enforcing the provisions of the Gas Act, applicable regulations, and the licenses of the privatized companies;
2. advising the Argentine Government on the granting, renewal, and revocation of licenses;
3. issuing orders, regulations or publications of its findings related to specific matters brought before it;
4. issuing and monitoring compliance with regulations covering safety, technical standards, uniform accounting, metering and billing, and disconnection procedures;
5. preventing any anticompetitive or discriminatory behavior by entities subject to the Gas Act;
6. approving tariffs and their adjustments;
7. 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;
8. granting approval for the transfer of controlling interests in the distribution and transportation companies;
9. approving construction of new significant facilities, and the expansion or abandonment of existing ones;
10. inspecting and testing facilities and ordering the suspension of service and the repair or replacement of facilities and equipment;
11. issuing regulations regarding the maintenance of facilities and reporting requirements relating thereto;
12. providing for the protection of the environment and public service;
13. requiring regulated entities to supply information and documentation in order to verify compliance with the relevant regulations and inspecting transporters;
14. applying the penalties, including warnings and fines, provided for in the Gas Act and the licenses; and
15. appearing before civil and criminal courts to enforce compliance with the Gas Act and regulations thereunder.

ENARGAS is funded by fines and seizures collected in enforcing the regulations, and by the annual control and inspection fees paid by, among others, distribution and transportation companies, traders, and providers of storage facilities. The fee for each company is determined annually by ENARGAS on the basis of the gross income of the regulated industry and our proportionate share of that 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. ENARGAS' decision may be appealed through administrative proceedings to the Energy Secretariat or directly to the federal courts of Argentina.

On May 21, 2007, the Argentine Government issued Decree No. 517/07 by which it began an intervention into ENARGAS for a period of 180 days. The intervention led to the appointment an Intervenor to replace ENARGAS' board of directors and was successively extended through Decrees 1,646/2007, 953/2008 and 2,132/2008, each for an additional period of 180 days; it is currently in effect until May 10, 2009. This intervention may or may not affect our business area negatively in the immediate future.

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.

Without ENARGAS' prior authorization, we may not dispose of, encumber, lease, sublease or lend Essential Assets for any reason or purpose other than to provide a licensed service. Any expansion or improvement made to the distribution system may be encumbered only to secure financing with maturities in excess of one year, to be used for the financing of that expansion or improvement.

The Transfer Agreement prohibits us from bringing any claims against the Argentine Government for damages arising out of or related to the Essential Assets on or after the Takeover Date.

The regulatory framework establishes various classes of service with its corresponding tariffs. The Gas Act and our License establish the mechanism for setting the tariffs for each service class. The Gas Act provides that the tariff for natural gas, which we may charge to end users, includes the following: (i) the price of gas purchased; (ii) the transportation tariff for transferring gas from the production area to the distribution system; and (iii) the distribution tariff established by ENARGAS.

A distribution company may offer discounts, which reflect a reduction in its rate of return, provided that these discounts are not offered in an unduly discriminatory manner and that they are not below the distribution company's cost. Revenues lost due to discounting may not be recovered from other customers. See "-Bypass Rights and Competition."

On 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. Rather, they have been converted to Pesos at the rate of Ps.1.00 per US$1.00. Adjustments of tariffs, in order 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, and continue to be, subject to, adverse tariff adjustments determined by the Argentine Government."

We currently have two different tariffs, one for the city of Buenos Aires and the other for the Province of Buenos Aires, because, as of July 1998, gas tariffs are issued by ENARGAS, net of the turnover tax that is imposed by the provinces. The turnover tax, which was a set rate included in the original tariff as of January 1, 1993 and was payable by the gas distribution companies. Subsequent to January 1, 1993, different provincial jurisdictions varied the turnover tax rate and in some cases, the basis on which it was payable. In accordance with the Gas Act, which provides for the pass-through to customers of any changes in taxes, ENARGAS authorized the billing of turnover taxes to customers as a separate line item in their invoices. The net incomes of gas distribution companies are not affected by the above-mentioned modification.

On December 3, 2002, the Executive Power issued Decree No. 2,437, increasing the temporary tariffs, issued by ENARGAS in May 2002 pursuant to Resolution No. 2,611, "until the conclusion of the renegotiation process" for the Electricity and Gas sectors. Additionally, this tariff schedule introduced the "social tariff," which excluded the low-income residential customer from the initial adjustment. Shortly thereafter, the court suspended this Decree in response to the precautionary measure filed by the Ombudsman of the city of Buenos Aires and other advocacy organizations.

In addition, the Executive Power, by Decree No. 146/03 (published in the official Gazette on January 30, 2003), mandated a new temporary tariff increase for Electricity and Gas services effective from January 30, 2003. These increases and the "social tariff," which applies to certain sectors, were the same as those established by Decree No. 2437/02 and did not implement additional increases.

On January 30, 2003, ENARGAS issued Resolutions Nos. 2,787 and 2,788, providing for new tariffs applicable to Distribution and Transportation services in accordance with the adjustment established by Decrees Nos. 120/03 and 146/03. These tariff schedules were identical to those established in December 2002 by Resolutions 2,763 and 2,764, which were based on Decree No. 2,437. On February 27, 2003, ENARGAS issued a precautionary measure in court order "Customers and Users Union and Others vs. Ministry of Economy," which suspended the effects and application of Decree No. 146/03 and Resolutions No. 2,787 and 2,788.

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 consuming less than 90% or 95%, depending on the type of user and 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. Users whose consumption was above 90% or 105%, depending on the type of user, will pay a surcharge on the gas they consumed over those levels. The program will be effective from April 15 until September 30 each year, and this period could be modified by the Energy Secretariat as the program evolves.

On May 1, 2005, ENARGAS established a new tariff schedule, which continued with the same prices established for residential users, SGP 1, and SGP 2; for SGP 3, larger users, and CNG, a third increase was set for the prices of gas at wellhead. As per the daily differences, the high rebate established for R, P1, and P2 remained; the gain increased for the rest of the clients.

The new schedule also included two different gas tariffs, distinguishing between residential and business customers. The producers' initial invoices were based on estimates. After the gas was supplied, those invoices were adjusted for actual deliveries and the prices to be paid. This normalization scheme for residential customers was suspended for future implementation. Even if there is no negative impact on our economic situation as a result of the daily differences accumulated up to December 31, 2005, a financial gap has been generated along with negative balance in the gas purchase and sales current account for residential clients. This gap stems from a delay in the bi-annual reestablishment of the pass-through effect mandated by the regulating entity as stated in the distribution license and as a result of the political situation. Thus, there is no guarantee that this effect will continue in the future. We cannot guarantee that we will receive another temporary tariff increase or that, if we do, this will not result in an increase of our tariffs. Moreover, if we do get the approval to increase the proposed tariffs, we cannot guarantee that such increases will not result in an increase of past due accounts from our clients.

On March 21, 2006, ENARGAS issued Resolution No. 3,462, through which the increase of the price of natural gas at wellhead, was incorporated into our tariffs. This increase took effect on July 1st, 2005, with the understanding that the increases that arise from the application of these tariff charts for the period between July 1st, 2005 and February 28, 2006, should be invoiced to the users in eight monthly payments, with two months' grace as of March 1st, 2006, without interests or surcharges. This retroactive charge was invoiced between May 1st and December 31, 2006. For consumptions after March 1, 2006, the new tariffs were applied directly to the respective invoice.

The tariff established through Resolution No. 3,462 maintained the daily differences which were previously in force. This situation had not been updated by ENARGAS at the beginning of every seasonal period, as established in the License, and was generating important imbalances in our gas purchase and sale current account, to be charged to R, P 1, and P 2 clients, and to be returned to the industrial customers.

However, on September 19, 2008, ENARGAS issued Resolution 409/2008, which establishes new tariff segments for residential customers, effective from September 1, 2008. Residential customers were divided into eight new sub-categories (R1, R2-1 ^st , R2-2 ^nd , R2-3 ^rd , R3-1 ^st , R3-2 ^nd , R3-3 ^rd and R3-4 ^th ) according to their annual natural gas consumption.

On September 19, 2008, the Energy Secretariat issued Resolution 1,070/2008 which approved an agreement with natural gas producers. One of the key features of said agreement is an increase in the price of natural gas at wellhead.

On October 10, 2008, ENARGAS issued Resolution 446/2008, which approved new tariff schedules. These new tariff schedules incorporated the increase in the price of natural gas at wellhead approved by Energy Secretariat Resolution 1,070/08 into the tariffs for each of the different customer categories established under ENARGAS Resolution 409/2008. ENARGAS Resolution 446/2008 also eliminated the daily differences which were previously in force. However, as a result of lobbying by consumer associations, on October 20, 2008, ENARGAS issued Resolution 466/2008 which reinstated the daily differences for the R1, R2-1 ^st and R2-2 ^nd sub-categories of residential customers (less than 800CM /per annum) and sub-distributors.

On December 23, 2008, ENARGAS issued Resolution 566/2008 which approved a new tariff schedule, incorporating an additional increase in the price of natural gas at wellhead into the tariffs for the following customer categories: R3-1 ^st , R3-2 ^nd , R3-3 ^rd and R3-4 ^th .

On April 26, 2006, the Executive Power enacted Law No. 26,095, published in the official Gazette on May 15, 2006, which creates a specific charge destined to the repayment of the extension of Natural Gas Transport Capacity 2006-2008. On September 18, 2006, Decree No. 1,216/06, which regulates such law, was published in the official Gazette. On December 28, 2006, Resolution No. 2,008/06 of the Ministry of Federal Planning, Public Investment and Services approved the actions taken by the Energy Secretariat and ENARGAS in relation to the specific charge created by Law No. 26,095.

During 2005, the government implemented a fiduciary fund to expand the transmission capacity to 4.7 MMCM. In January 2007, through Resolution No. 3,689/07, ENARGAS stipulated that we are responsible for the invoicing, collection and settlement of another fiduciary fund, the fiduciary fund 2006-2008, and shall invoice and receive the above-mentioned charge from SGP3, and FD ("firm distribution")/FT ("firm transportation") clients from January 1, 2007. Residential, CNG, SGP1, and SGP2 customers are excluded from the fiduciary fund charge. With this second fund, the transmission capacity will be expanded by approximately 22.5 MMCM over the 4.7 MMCM capacity created by the first fund. Both fiduciary funds imply an increase in the transmission cost of, 411% for SGP3 and 462% for FD and FT customers with regard to the 2001 transport tariffs.

On November 27, 2008, the Executive Power approved Decree No.2,067/08 (published in the Official Gazette on December 3, 2008) which created the Trust Fund for Gas Imports (" Fondo Fiduciario para Atender a las Importaciones de Gas "), a fiduciary fund destined for the purpose of importing natural gas. This fund aims to complement the national gas program calling for a reduction in "cut days" and guaranteeing the supply of natural gas in the domestic market.

The following is the list of resources which comprise the fiduciary fund:

• Tariff charges currently being applied to gas transportation and distribution users within all categories
• Special credit programs to be entered into with national and international institutions
• Specific contribution amounts to be assigned to participants in the gas sector

The following table sets forth our maximum tariff in effect since November 1, 2008 and at December 31, 2008 for each class of service: