Free translation from the original prepared in Spanish for publication in Argentina

METROGAS S.A.

FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2001 AND 2000

Free translation from the original prepared in Spanish for publication in Argentina

METROGAS S.A.

FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2001 AND 2000

INDEX

Annual report

Report of Independent Accountant

Balance Sheets

Income Statements

Statements of Changes in Shareholders' Equity

Statements of Cash Flows

Notes to Financial Statements

Exhibits A, B, C, D, E, F, G and H

Summary of Activity

ANNUAL REPORT

To the Shareholders:

Pursuant to applicable legal provisions and to the Company’s bylaws, we submit for your consideration the documentation related to the Company’s financial statements for the tenth fiscal year, ended on December 31, 2001, which is the Company’s ninth full fiscal year of operations.

MACROECONOMIC CONTEXT

During the year 2001, the economic crisis that had begun in 1988 became even more serious due to the constant lack of saving and productivity, which was made even worse by the prevailing political uncertainty.

In May, the new Economy Minister made Congress give special powers to the Executive Branch of Government in order to enhance economic competitiveness.

In June, a voluntary public debt swap (“Mega Canje”) was carried out in order to clear maturities for the coming years, but this did not manage to bring country risk premiums down. This was followed by a set of measures aimed at increasing revenue and relaunching the economy, among them the “convergence factor”, which involved application of a variable tariff and refund to foreign trade transactions, which was determined by the exchange rate of the euro relative to the US dollar. On the other hand, a bill was passed which provided for inclusion of the euro in the Argentine currency board (“convertibility”) system as from the time when the euro/US dollar exchange rate reached one to one.

In July 2001, country risk premiums hit record levels as a result of the doubts regarding the fiscal solvency of the Argentine State, which completely sealed off capital markets for Argentina. As a result, the Federal Government was forced to implement the “Zero Deficit Law”, which involved budget cuts that included public sector salaries and pensions, in order to achieve a balanced fiscal result every month.

In November 2001, after a new collapse in economic activity, subsequent sovereign risk rating downgrades and new country risk premium records, the Federal Government launched a new economic package that included a restructuring of debt held by domestic creditors, capped interest rates and rescheduled maturities over a longer term.

In early December, the political and economic crisis forced the Federal Government to restrict the free availability of bank deposits in order to prevent a financial system collapse and eventually led to the resignation of President Fernando De la Rua. The Legislative Assembly then appointed Adolfo Rodríguez Saá, who formally declared sovereign debt default and made an attempt to maintain convertibility. A new political crisis was then triggered and, after the resignation of Rodriguez Saá, Eduardo Duhalde was made President until December 2003.

The new administration repealed the convertibility law and first fixed an official exchange rate of $1.40 per US dollar and introduced an open market, the prices of which would be determined by supply and demand, in addition to adopting measures aimed at converting the economy into pesos (“pesification”). On the other hand, Law No. 25,561 (the Public Emergency and Exchange Regime reform Law -Emergency Law-) made clauses providing for adjustments in dollars or other foreign currency ineffective, as well as indexation clauses based on the price indexes of other countries and any other indexation mechanisms, in addition to fixing a one peso/one dollar rate for tariffs, among other provisions.

In early 2002, amidst a critical economic and social situation, the Federal Government continued issuing executive orders and circulars in order to regulate the financial system. The main changes introduced were the elimination of the Official Exchange Rate and adoption of an Open Market Exchange Rate, as well as new Bankruptcy Law provisions restricting the rights of creditors in view of the economic emergency.

Additionally, the Federal Government is trying to secure the support of the International Monetary Fund and of other international agencies, while at the same time is discussing, in Congress and with the provincial Governors, preparation of a sustainable budget. As regards the financial system and the chain of payment, the Federal Government is seeking to introduce flexibility in the use of funds which, in addition to having been rescheduled, have been pesified and/or converted into bonds, by allowing them to be used for the purchase of registrable property.

Finally, the government is doing everything it can to prevent the transfer to prices of the effects of devaluation, by monitoring the exchange rate and attempting to stop it from being higher than $2/US$1, apart from closely following the evolution of fuel and commodity prices, among others. This is the background against which renegotiation with privatized utility companies, which also required a sustainable tariff structure, is due to begin.

LICENCE CONTRACT RENEGOTIATION

On January 6, 2002, the Argentine Congress passed the Emergency Law, which had an impact on the legal framework applicable to public utility concession or licence contracts.

The main provisions of the Law that have an impact on the original contract entered into with the Federal Government and which modify express provisions of Law 24,076 (the Gas Law) are the following: pesification of tariffs originally fixed in convertible dollars at the exchange rate set forth in the Convertibility Law (Law 23,928) and the prohibition of tariff adjustments based on any foreign indexes, thereby preventing application of the international index specified in the Regulatory framework (Producer Price Index -PPI-).

The Law also provides for a renegotiation process to begin in connection with public utility contracts awarded by the Executive Branch of government, which is set to begin during the first quarter of 2002.

On February 12, 2002, the Executive Branch of Government issued Executive Order No. 293, which entrusted the Economy Minister with the renegotiation, and on February 22, 2002, it issued Executive Order No. 370, which appointed the members of the Renegotiation Committee. MetroGAS has not yet been called to formally begin the renegotiation process.

Although the provisions described above modify the MetroGAS Regulatory Framework, it will not be possible to assess the main economic and financial implications to the Company until the negotiations announced by the Government begin.

COMPANY PROFILE

Introduction

MetroGAS is the largest gas distributor in Argentina in terms of distributed gas volumes and number of customers. The Company distributes approximately 25.3% (*) of the total natural gas supplied by the nine distribution companies licenced after the privatization of Gas del Estado in late 1992 and currently has over 1.9 million customers in its service area (Buenos Aires City and eleven municipalities in the south of Greater Buenos Aires), a densely populated area including major power plants and other industrial and commercial users.

During its ninth full fiscal year of operations, the Company continued to consolidate the major changes implemented since the Takeover Date, thus achieving greater operational efficiency and updating its strategic plan in order to attain its objectives.

Outlook for the Industry

Natural gas consumption in Argentina has trebled since 1980. In that year, consumption was approximately 9.3 billion cubic meters and in 2001 it increased to over 29.4 billion cubic meters (*). This increase reflects energy substitution by end users, an abundant supply of natural gas, relatively low prices compared to other energy sources and increased capacity of major gas pipelines. The Company believes that the demand for natural gas will grow in proportion to the growth of Argentina’s economy.

Furthermore, Argentina has an 11,472-kilometer-long network of high pressure pipelines with capacity for transporting approximately 108 million cubic meters per day. It should be noted that Latin American countries have begun to develop a pipeline network in order to meet growing demand in the region.

Argentina’s proven gas reserves arise to 777.6 billion cubic meters, with 17 years supply guaranteed. Most of these reserves have been discovered as a result of oil exploration activities. There are 19 known sedimentary basins in the country, ten of which are fully on-shore; three are off-shore and six are both on- and off-shore. Production is concentrated in five basins: the Northwest basin in northern Argentina, the Neuquén and Cuyo basins in central Argentina and the Gulf of San Jorge and Austral basins in the south of Argentina. In 2001 (**), estimated annual production of natural gas reached almost 45.6 billion cubic meters, mainly from the Neuquén basin. Approximately 64.5% of the gas purchased by MetroGAS during 2001 came from the Neuquén basin and the remaining 35.5% from the Austral and Gulf of San Jorge basins.

(*) According to the latest available information supplied by the National Gas Regulatory Authority (ENARGAS) - October 2000/September 2001 Quarterly Report.

(**) According to the latest available information supplied by the Energy and Mining Secretariat - October 2001 Monthly Bulletin.

DESCRIPTION OF OPERATIONS

Supply and Transportation of Gas

During 2001 the Company continued managing and exercising, when recommendable, the existing options on contracts for the purchase of natural gas, in order to adjust the contracted volumes to the demand for natural gas, optimize the service offered to customers and encourage the intensive use of gas in multiple applications.

The Company keep on purchasing in the spot market, and since 1999 it has taken advantage of Executive Order 1,020, under which, depending on the purchase price and on the basin prices published by ENARGAS, it shares with customers 50% of the profit or loss resulting from differences in such prices. The volume purchased in the spot market during 2001 accounts for approximately 27% of the total volume of gas purchased by MetroGAS.

The Emergency Law and its regulatory orders contain provisions dealing with private contracts existing as of the time of its passage which had been entered into in foreign currency or contained clauses providing for adjustments in foreign currency. The Law converts all obligations into pesos at a $1 per US$1 parity and provides for application of a Benchmark Stabilization Coefficient (CER) to them. Should the obligations become too burdensome and the parties be unable to reach agreement, the matter may be referred to court in order for an equitable value to be fixed. Obligations arising after the passage of the Law may not be subject to adjustment clauses.

MetroGAS natural gas purchase contracts have the above features. Although negotiations with gas producers have begun, it is not yet possible to predict their outcome.

Contracted firm transportation capacity up to the Buenos Aires City gate was 22.4 million cubic meters per day as from June 2001. Contracted firm transportation capacity up to Bahía Blanca, which is used to recover calorific power after the by-product obtainment process was 0.40 million cubic meters per day as from June 2000.

The contracts entered into by MetroGAS with gas transportation companies could be subject to modifications due to Emergency Law provisions applicable to utility services, which include natural gas transportation, although it is not as yet possible to assess their impact.

Customers and Market

The Company’s main business aims are to consolidate and increase current business levels and to increase the Company’s share in the energy consumption pattern of its customers (electric power generation, industrial use of gas and use of compressed natural gas (CNG) as fuel in public transport and private vehicles).

MetroGAS sales and profits are highly sensitive to weather conditions. The demand for natural gas is, and accordingly, MetroGAS sales and profits are, significantly higher during the winter months (from May to September).

Set forth below is a summary of the Company’s Income Statements for each quarter of the fiscal years ending on December 31, 2001 and 2000, which reflect the seasonal variations in sales and earnings levels of MetroGAS during the course of the fiscal year.


	2001 (thousands of pesos)
	For the quarters ended on
	03-31	06-30	09-30	12-31	Total fiscal year
Net sales	118,442	193,281	214,181	131,777	657,681
Gross profit	26,610	62,358	69,349	31,206	184,523
Operating income	3,491	41,438	48,086	10,733	103,748
Income before tax	(3,243)	35,575	41,736	3,257	77,325
Ordinary income	(3,243)	22,743	26,446	2,834	48,780
Net (loss) income	(3,243)	22,743	26,446	(18,819)	27,127


	2000 (thousands of pesos)
	For the quarters ended on
	03-31	06-30	09-30	12-31	Total fiscal year
Net sales	141,363	199,112	246,076	131,899	718,450
Gross profit	25,062	60,098	78,776	30,268	194,204
Operating income	6,206	36,955	54,693	5,695	103,549
Income before tax	(1,573)	31,207	49,052	788	79,474
Ordinary income	(2,391)	19,422	28,515	2,497	48,043
Net (loss) income	(2,391)	19,422	28,515	2,497	48,043

As mentioned above, MetroGAS provides distribution services to over 1.9 million customers within its service area, of whom approximately 69% are in Buenos Aires City. A partial census taken by the Argentine Government in 1991 showed that 77% of the households within the MetroGAS service area were connected to the distribution system (95% within Buenos Aires City).

As a result of (i) the Argentine financial crisis (Note 2 to financial statements), which limited the ability of the Federal Government to honour its obligations as well as access to credit facilities and led to a formal sovereign debt default declaration in December 2001 and (ii) the subsequent passing of the Emergency Law, which, among other provisions, and specifically as regards contracts for public works and services, made clauses providing for adjustments in dollars or other foreign currency ineffective, as well as indexation clauses based on the price indexes of other countries and any other indexation mechanisms, in addition to fixing a one peso/one dollar rate for tariffs and ordering renegotiation of utility contracts, (the scope of which has not been accurately defined), passing PPI on to tariffs, as rightfully claimed by the company, becomes impracticable. Both a transfer to the tariffs as well as the possibility of recovery through the Federal Government, which endorsed the related credits, are contingent on future events that are beyond the Company’s control.

In view of the current scenario, the net effect of income accrued during 2001 and 2000 in connection with the deferral of PPI adjustments, has been reversed in these financial statements in the “Extraordinary Loss” item (see Relationship with Regulatory Authority and Note 9.3 to the financial statements).

Sales to residential customers in 2001 and 2000 totalled 28.1% and 26.4%, respectively, of the Company’s total sales volume and approximately 61.5 % and 55.5% of the Company’s revenues.

Residential customer gas consumption in 2001 was lower than in the previous year, due to the higher average temperatures recorded in the winter period 2001 compared to 2000.

The winter months from May through September were a total of 35 degree days warmer in 2001 than in 2000. A degree day represents the number of degrees centigrade that the average temperature, on a given day, is lower than 10° centigrade.

MetroGAS relies, to a considerable extent, on sales to power plants to maintain high utilization of its firm transportation capacity (load factor), especially during the warmer months of low residential demand. MetroGAS’ power plant customers hold 46.5% of the wholesale electric market of Argentina.

The trend for the year 2001 in the electricity market was toward the introduction of new combined-cycle plants and the strategy of MetroGAS was to work in cooperation with the units in its service area.

Since 1993, power plants have begun implementing an investment program, which involves the replacement of generating units by new combined-cycle technologies with a much lower generation cost.

Combined-cycle turbines have a lower specific demand for natural gas. The effect of the lower volume required by such customers will be offset by the increased activity level of these plants, due to their greater energy-dispatching capacity as a result of lower marginal costs compared to other plants outside the Company’s service area.

This is a major technological leap in the electricity generation sector. Argentina thus becomes one of the countries with the lower electricity cost in the wholesale electricity market. It should be highlighted that Central Costanera and Central Puerto plants, customers of the Company, are two of the electricity providers for the interconnection of the Argentine Network and the Brazilian Electric Network.

As a result of the program, the following combined-cycle plants are operating within the Company’s service area: Buenos Aires (since 1995), Costanera (since 1998), Puerto (since 1999) and Dock Sud (since March 2001). Since 1997, MetroGAS has assigned part of its firm transportation capacity to the Genelba Plant, a combined-cycle plant located outside its service area, pursuant to agreements under which the Company may repurchase part of such firm transportation capacity during peak demand periods. A.E.S. Paraná launched its combined-cycle plant to the market during November 2001. MetroGAS provides transportation to the marketer serving the plant, thus improving utilization of its transportation capacity.

During 2001, the increase in hydraulic power generation in most basins generated lower gas consumption due to the abundant supply of hydroelectric power.

In 2001 and 2000 sales of gas and transportation and distribution services to power plants accounted for 42.4% and 42.0%, respectively of the total volume delivered by the Company, providing, in a highly competitive energy market, approximately 9.3% and 14.0% of the Company’s net sales during such years.

Sales of gas and transportation and distribution services to industrial, commercial and governmental customers accounted for approximately 19.7% and 20.5% of the Company’s sales volume and approximately 19.6% and 18.3% of its net sales during 2001 and 2000, respectively. Volumes delivered to such customers were lower compared to the previous year; this was consistent with the lower level of economic activity and the weather conditions recorded.

During 2001, all contracts with industrial customers due to expire during the year, which accounted for approximately 75% of the agreements in force, were successfully renewed. This action was undertaken in an increasingly competitive environment, a highlight of which was the drive shown by the Regulatory Authority in issuing measures aimed at increasing commercial by-pass alternatives.

Likewise, in spite of the recessive context which mark the year 2001, the Company continued its efforts also focused on finding energy solutions based on natural gas, especially distributed generation (electric energy generation through natural gas).

Compressed Natural Gas market represented approximately 8.1% and 6.9% of the Company´s sales volume and 8.2% and 6.9% of the Company’s net sales during 2001 and 2000, respectively.

In 2001, CNG consumption in the Company’s service area maintained an increasing trend due to the favourable price of gas against other fuels and a larger variety of full-warranted models converted to CNG.

In the light vehicle and small utility vehicle segments, commercial efforts focused on finding new CNG-propelled unit alternatives, through constant contacts with car assembly plants. In order to promote this, a testing program was implemented among our main fleet-owning customers, which enabled them to try at least four different light utility vehicle options in their daily operations.

As regards heavy-duty transport, technical and commercial efforts were aimed at overcoming the main penetration barrier in the public passenger transport segment, by obtaining a CNG-dedicated bus that is reliable and competitive in terms of purchase price and operating costs. In this connection, projects began with a view to developing two alternative products that will be tested by transportation companies in their daily operations during the year 2002.

The start-up of new Gas Processing Plants, Cañadon Alfa and MEGA, caused a significant change in the performance of Transportadora Gas del Sur (TGS) gas processing plant, in General Cerri. In order to mitigate this effect MetroGAS and TGS agreed on certain modifications to the terms of their commercial agreement, through which MetroGAS obtained reduced costs related to such activity. The gross income of this activity, for the year 2001 compared to the year 2000, decreased 56.5%, as a consequence of the above mentioned impact and the decrease of the oil international prices.

During 2001, the Company continued with the commercialization of gas and carbon monoxide detectors and with the offering to its residential customers Home Insurance and Home General Services so-called “Solutions”. The receptivity of these products and services was in line with the expectations.

Additionally, in 2001, MetroGAS launched the “Social Marketing campaign”, which involved the use of non-traditional means in order to achieve more surprising, recallable and easier to control communication. The aim of the campaign was to stress the social role of MetroGAS through “Tips” based on awareness and prevention in the use of natural gas. The Company also pursued additional goals, such as increased brand identification, continuing to position itself as a dynamic and visible company and coming closer to its customers.

The Operation of the Distribution System

The Company continued making the “K” Factor Investments approved by ENARGAS for the period from 1998 to 2002, which include: (i) expanding the supply system, building 2,400 km of distribution pipelines and approximately 97,000 services, i.e. some 480 km of pipeline per year; (ii) internal movements, replacement of the current system in order to increase capacity and ensure reliable supply, with a 26-km target for the five-year period; and (iii) construction of a high-pressure back-up pipeline of approximately 60 km by 24 inches diameter.

During the year 2001, 522 km of distribution pipelines and 11,825 services, tending to the spread of gas supplies have been commissioned and notified to the ENARGAS. The total figures as from January 1, 1998 to December 31, 2001 are 1,954 km and 59,818 services.

As regards the pipeline, MetroGAS has agreed with ENARGAS on a new 58 km line with 30” diameter. Although the required building permits have been obtained, commencement of the works has been suspended on account of the Company´s decision to reduce its investments due to the impact of the Emergency Law.

This project will strengthen the high-pressure system ring and improve safety, in addition to making it possible to satisfy growing customer demand.

In order to ensure distribution system integrity, the Company’s actions focused on optimizing preventive and corrective maintenance processes. Corrective maintenance is fully integrated to the Service Centre, together with a number of activities related to customer service. The Service Centre is the main contact with customers, particularly when emergencies are dealt with, so cost, quality and speed of service are the key aspects of this function.

During 2001, through ABM (Activity Based Management), which is used to monitor the economic and financial results of leak repair process operations, the Company increased the productivity of its own resources and reduced unit costs per leak.

On the other hand, during 2001 the Company installed 46 pressure profilers at the regulating stations, which enabled better control and regulation in the low-pressure system. As a result, MetroGAS was able to improve the quality of its service, as the number of leaks reported by customers decreased.

Additionally, a MetroGAS team formed by Commercial and Operations Department personnel was able to optimize, through joint effort, the operation of the 22 bar system, achieving improvements in natural gas supply pressures.

MetroGAS continues to carry out a substantial amount of multifunction training in Safety and Operations, with a view to building a work team that improves service to customers in a business-efficient manner.

During 2001, MetroGAS continued its supply chain review work. In this new project stage, the main objectives were the development of a contracting strategy to be adopted for contracts expiring in 2002 and a comprehensive review of Logistics area processes.

Capital investments

In 2001, the Company made approximately $ 63 million capital investments, including the “K” Factor Investments required by the Regulatory Authority. Detailed information on such investments is set forth in Exhibit A of the financial statements.

The total amount of capital investments made by MetroGAS during its first nine years of operation is of approximately $ 525 million.

These investments have been made not only to comply with the Mandatory and “K” Factor Investments but have also included improvements, such as the replacement of primary pipelines and services, which will help the Company meet its goals of expanding the distribution system and increasing its efficiency.

Customer Service

In 2001, MetroGAS continued developing and introducing best practices as regards the quality of service offered to customers. The Barracas Commercial Office was refurbished and there are plans to relocate other offices in 2002 in order to expand the current service offer and improve MetroGAS service and presence in its service area.

During 2001, the Company implemented a new “Callers” and “Customer Classification” system at the Centro, Floresta, Belgrano and Quilmes Commercial Offices. This system provides a tool for management of offices and improvement of service standards as it offers online information on what is happening at an office, as well as statistical information on service times and on the number of requests processed.

As regards the CAT (Telephone Customer Service), the new telephone exchange began to operate in March 2001, and new technological tools went into production with a view to improving overall efficiency in the CAT service process.

During 2001, the Company experienced an average increase of 7% in the number of incoming calls, which were mostly calls for making payments. In order to improve the standards of this service and meet growing demand in this channel, the Company began to work with a telephone collection company in order to channel, together with the CAT service, collection of non-overdue invoices through credit card payment.

The Company also created e-mail address [email protected]. Received messages are reviewed and dealt with by the CAT itself.

Also as regards CAT, a Claims Centre was set up with a team formed by CAT personnel and personnel from other areas, in order to provide improved solutions to claims made over the phone.

In the early months of the year, MetroGAS began to distribute Braille System invoices for blind customers. Forty-seven customers have adopted this service.

In 2001, the Customer Incorporation, Internal Installations and New Customers areas reengineered their processes in order to identify improvement opportunities and solution alternatives to redirect operations and resources towards highest-impact areas. As a result, the process to add new customers achieved a 30% time reduction.

Within the framework of the Five-Year Technological Plan, MetroGAS carried out changes in its commercial system, which were implemented for Buenos Aires Province customers in April and for Buenos Aires city customers in July.

During 2001, the Company completed the review of contracts related to the residential customer area and carried out the bidding and award process for outsourcing of the Printing and Enveloping process, which had previously been handled separately. As a result, the price per unit decreased by approximately 40%, which is a significant saving for future contract years.

As to the incorporation of new customers, during 2001 21,064 were added in Buenos Aires city and 23,504 in Buenos Aires Province.

In connection with the “MetroGAS at your home” project, which facilitates access to new customers by financing the construction of internal installations, with MetroGAS acting as the link between financial institutions and customers, since the beginning of the project, in November 2000, 7,795 financing applications were processed, 3,986 of which (3,894 in 2001) led to customer incorporation; 1,085 have been approved (construction of internal installations started or about to start); 369 are still in the assessment process and 2,355 have been rejected or disregarded.

Human Resources

As from the 4th Biannual Personnel Opinion Survey taken in 2000, the Human Resources development area developed an action plan validated by level and speciality-segmented groups during the first two months of 2001. The plan focused on several specific work proposals in line with MetroGAS defined cultural values.

This plan also enabled inclusion of a number of suggestions arising out of the First Campaign for personnel-generated ideas. This led to implementation of Management Internships and Monthly Breakfasts with personnel.

The internships seek to strengthen customer focus within the organization, facilitating learning and the identification and implementation of improvement opportunities through firsthand experience with operations procedures in the streets, telephone or customer service at our Commercial Offices.

Additionally, the breakfasts organized every month by the Company Managers with a group of employees were highly valued by the attendants, as they provide an opportunity for an active exchange with regard to different aspects of the business, conveying updated information between sectors and between different personnel levels.

At the same time, human resources development actions continued for organization leaders, including Training Programs on Coaching, Supervision Development and Training of High-Performance Professionals.

As regards performance measures, the Supervisors population was added to the usual Feed Back 360 management tool used among managers, and personnel subject to a Collective Bargaining Agreement were included in the Personnel Performance Assessment process. This enabled a full and consistent inclusion of all personnel in the measurement of expected behaviour.

The Annual Training Program incorporated open activities for which any person interested in self-improvement and development could register, with a focus on learning Statistics, Finance, Accounting and Project Assessment tools which could be applied immediately to the business. Training activities were strongly focused on Technical Operation education and on Safety, Health and Environment. A response was also given to other needs arising out of new commercial, IT implementation and customer management projects.

For the second consecutive year, the Technical Training Centre. (CET) dealt with training requests from the leading water distribution company of Argentina regarding safe work in the streets and damage prevention. The experts at the Centre also received a request from one of the world’s most prestigious international companies for seminars to be offered including firefighting practice at compressed natural gas stations. CET personnel also offered its assistance to community support programs sponsored by non-profit organizations, giving advice to young people looking for their first job.

In the last quarter of 2001, the Company began to work on reviewing the criticalness of management positions and the individual potential of management levels, in order to have a succession program for all management positions. This program will be completed during the first half of 2002, and an annual review and update is planned.

As regards Employment Management, the review and approval of the relevant Policy should be highlighted, which in its Internal Employment chapter improved and sped up the communication of openings for the Company’s own personnel, as a tool to enable development of the Company’s own resources. This area showed acceptable performance in terms of filling times, selection costs and satisfaction levels related to recruitments generated.

The number of personnel employed by the Company remained stable at 1,033 employees as of December 31, 2001.

The Medical Service continued campaigns for vaccination and for cardiovascular disease prevention, with a focus on preventing accidents and diseases. Absenteeism was low within forecast levels.

During 2001, security systems for the Company’s employees and assets were strengthened, and a new identification and access control system was implemented at all MetroGAS buildings.

As regards Remuneration, the Company continued applying incentive schemes and systematically reviewing positions and salaries. In the second half of the year the “We all sell” program was launched, which consisted of a detector sales program for personnel that do not have frequent access to customers, in addition to the second personnel Suggestions Plan campaign, which focused on “savings”, in connection with which 170 suggestions were received.

As to Safety, Health and Environment, the Company received the Chairman’s Award, which BG Group distributes among its subsidiaries in recognition of their efforts to promote a culture for accident prevention and preservation of the environment. The Company made three presentations in two of the three contest categories and received the Chairman’s Award and a Special Recognition.

The work that won the award was also presented by BG on behalf of MetroGAS at the Institute of Petroleum in London, where it received the Community Initiative Award in November 2001.

Along the lines of corporate environmental responsibility and with the corporate objective of reducing greenhouse effect gas emissions by 15% by 2008, the first stage of natural gas emission surveys in the Company’s distribution system began.

Finance

In May 2001, under the US$ 600 million Global Program, the Company issued US$ 130 million Series C Notes at a price equal to 100% of face value, out of which US$ 115 million were placed at the moment of the issuance and the remaining US$ 15 million were placed on August 2001, maturing in 2004. These Notes accrue a floating rate of LIBOR plus 2.625% up to 3.25%. The Series C Notes were authorized for listing on the Buenos Aires Stock Exchange on June 15, 2001.

The proceeds obtained under these Series were applied to refinance maturing debts and short-term liabilities.

Additionally, the agreement signed by the Company in June 2000 with the European Investment Bank amounting to US$ 50 millions for financing of the Buchanan-Retiro pipeline is still in force.

It should be noted that the devaluation introduced by the Emergency Law and its regulatory decrees, the future impact of which cannot yet be determined in full, will adversely affect the financial situation and results of MetroGAS, as most of its obligations have been previously agreed in foreign currency, mainly with foreign lending institutions

Relationship with the Regulatory Authority

ENARGAS Resolution No. 2,347 fixed the Company’s rates as from July 1, 2001 but did not include in them the PPI adjustment provided for in the Regulatory Framework, as was the case in the previous year (See Note 9.3. to the financial statements). This was due to an injunction by a district court ordering that the effects of Executive Order No. 669/00 be suspended in a case which seeks to secure a declaration of the unconstitutionality of the adjustment on the grounds that it would be incompatible with the convertibility law.

In October 2001, Division V of the Federal Administrative Appeals Court upheld the injunction that had been appealed against by MetroGAS, and by the Federal Government, the Regulator and most Gas Licencees. The Federal Government and some gas licencees have turned to the Supreme Court. It is not possible to estimate how long it will take for the court to issue a ruling. On the other hand, a decision on the substance of the disputed matter is still pending.

The reversal should not be understood as a waiver of rights arising out of the Regulatory Framework that governs the Company’s activities or as an abandonment of any of the actions filed by the Company so far.

In 2001, the Infrastructure and Housing Ministry, through the Energy Secretariat, sent a circular letter to licencees, which contained two draft Executive Orders on Gas Market deregulation. After an individual review by the Company and a joint review with the other Licencees, a number of comments were submitted on the drafts in connection with the importance of respecting rights arising out of legislation in force that governs the gas industry.

Generally, steps were taken to further develop communication channels with the Regulatory Authority, in order to enable actions resulting in improved customer service, taking account of the different interest and rights of the parties falling within the scope of the Regulatory Framework.

Five-Year Tariffs Review

The Distribution Licence provides for a Tariff Review to be conducted every five years. The first Tariff Review established the tariff structure that would apply from January 1, 1998 to December 31, 2002 based on a calculation of the Efficiency Factor (Factor X) and of the Investment Factor (Factor K).

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

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

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

On April 6, 2001, ENARGAS informed Licencees on the Methodology, in connection with which ENARGAS considers that it is advisable to carry out the following regulatory adjustments during the RQT II:

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

In May, ENARGAS released a document on the methodology for determination of the cost of capital that would be used to discount the cash flows of income and expenses related to the new five-year period. This rate is the “reasonable profit” of Licencees for the period 2003-2007.

MetroGAS, for its part, submitted comments on the methodology and requested clarification on guidelines established at that time. In addition to this, it submitted information on the Tariff Base, which involves investments made from the beginning of operations until the year 2000, as well as itemized information on demand, sales and expenses during the year 2000.

On November 13, 2001, ENARGAS informed the Licencees on the cost of capital rates that would apply to distribution and transportation activities (12.1% and 10.4% respectively). The Company has appealed against the rate fixed by ENARGAS, which is based on a methodology that the Company does not agree with.

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

Towards year end, ENARGAS asked for expenditure projections for the period 2003/2007 to be sent, which led to a request for an extension, as it was impossible to determine the impact that changes in the Argentine economy as a result of the passing of law 25,561 and of regulations about to be issued could have on the price-forming mechanisms of domestic and imported goods and services.

Finally, in a note dated February 8, 2002, ENARGAS declared the suspension of terms fixed for the Second Five-Year Tariffs Review until the renegotiation process provided for in Section 9 of the Emergency Law was conducted.

2002 will be a year requiring definitions in the process and there is not doubt that the changes introduced will affect originally anticipated growth and expansion forecasts. Keeping profit levels that are consistent with the long-term investment required by the industry will depend on the evolution of the country’s financial and economic context and on the efficacy of the tariff structure defined either in the concession contract renegotiation process or in the (for the time being suspended) Five-Year Tariffs Review, if the latter resumes.

Evolution of the Company’s Image

During 2001, the Company complied with all guidelines of the Corporate Communication Plan, the central objectives of which were to “keep MetroGAS on the axis of leading Argentine companies, highlighting the fact that it offers high-quality service at appropriate rates and with high safety standards”, also specifying that “MetroGAS is an interface between the gas sector and the electricity market”.

Compliance with this plan again earned the Company good results in surveys conducted by Centro de Estudios Nueva Mayoría, which positioned MetroGAS as the company with the best image among companies providing essential public utility services.

The surveys resulted in positive image ratings of 91.25% and 91.65% in public opinion and among opinion leaders respectively.

MetroGAS Foundation

During 2001, the MetroGAS Foundation was able to carry out in full its community Action Program, the main actions of which are detailed below:

The Foundation carried out the Educational Program at Schools, which trained over 37,000 pupils attending schools at different locations, among them Buenos Aires City, Bernal, Ezeiza, Monte Grande, Lanús, Piñeiro, Quilmes and Wilde.

Through this program, children were taught prevention skills related to the use of natural gas and they also learnt about the dangers of carbon monoxide, as well as the advantages of using CNG in terms of transportation and environmental preservation.

In March 2001, the Foundation took over responsibility for maintenance, upkeep and cleaning operations at the “Quinquela Martín” square in Barracas.

In an action in support of culture, the Foundation supplied the Benito Quinquela Martìn Museum with professional photographic equipment, which the Museum Directors used to take the First Photographic Inventory of its works and which will enable publication on its Internet page.

The First Employment Program, offered to young non professionals of Greater Buenos Aires,

started in July, with the presence of the mayor of Esteban Echeverría Municipality.

Likewise, the Foundation carried out the internal installation pipework of natural gas supply at the Community Shelter of the “Carasucias” Foundation, which receive over 300 “home-less kids” in the Mataderos district.

Finally, the Foundation continued doing community activities in several institutions, among which are: Fleni Foundation, Florencio Varela Association “Volver a Vivir”, the Roca Hospital Children’s School, Berazategui Interzonal Hospital, Social Action Department of Pedro de Elizalde Children’s Hospital and FUNDALEU (Fight Leukaemia Foundation).

COMPOSITION OF THE CAPITAL STOCK

The Capital Stock as of December 31, 2001 consisted of 569,171,208 common shares of three classes: Class A, Class B and Class C, each having a par value of one peso and entitling holders to one vote per share.


Classes of outstanding shares	Subscribed, registered and paid-in capital Thousands of $

Class A	290,277
Class B	221,977
Class C	56,917

Capital stock as of December 31, 2001	569,171

All Class A shares, representing 51% of the Company’s capital stock, are owned by Gas Argentino S.A. (GASA) and their transfer is subject to the approval of the regulatory authority.

Class B shares represent 39% of the Company’s capital stock. Of such shares, 19% has been owned by GASA since the privatization of Gas del Estado. The remaining 20% of Class B shares was sold by means of a public offering and is owned by approximately 700 investors.

Class C shares, which represent 10% of the capital stock, were earmarked at the time of privatization for the Employee Stock Ownership Plan (Programa de Propiedad Participada), to benefit the employees of Gas del Estado who were transferred to MetroGas and continued to be employees of the Company as of July 31, 1993, and who decided to participate in the ESOP.

INCOME ALLOCATION PROPOSAL

The following is a breakdown of the income allocation proposal submitted at the Shareholders’ Meeting for approval:


	Thousand of $
Unappropiated Retained Earnings from 2000	-
2001 net income	27,127

Total to be allocated	27,127

Allocation proposal:
to the Legal Reserve	1,356
to Cash Dividends (including $33,915 thousand interim cash dividend)	33,915

Total Allocated	35,271

Based on the financial statements as of September 30, 2001, which recorded a net income of $ 45,946 thousand, MetroGAS' Board of Directors approved on November 15, 2001, an interim dividend of $34,150 thousands equivalent to 74% of the “Unappropiated Retained Earnings” as of that day, maintaining the Company’s dividend’s policy since the beginning of operations, and equivalent to $ 0.06 per share and 6% of capital stock; which was placed at the disposal of shareholders as from November 23, 2001. The dividend was paid out of the "Reserve for future dividends" totalling $235 thousands and $33,915 thousands out of MetroGAS' “Unappropriated Retained Earnings”.

Further to the distribution of cash dividends and as a result of: i) the Argentine economic crisis which affected the Federal Government’s ability to meet its obligations and the possibility of getting credit facilities from banks, subsequently declaring the suspension of foreign debt service payments, and ii) after the Emergency Law was enacted, that among other regulations, suspended the application of indexation adjustment clauses based on price indexes in other countries; the Company had to reverse the U.S. PPI adjustment that had been deferred from January 2000, as per an agreement signed with Government and ratified by an Executive Order, which guaranteed collection through the adjustment of future tariffs, totalling an extraordinary loss of $ 21,653 thousand.

These events made that the Company’s financial statements include a loss of $ 6,788 thousand in its “Unappropiated Retained Earnings” as of December 31, 2001.

MetroGAS' Board of Directors proposes to ratify the interim dividend payment, and taking into consideration that interim dividend distributed constitutes a dividend paid in advance of net income for the year 2001, they shall transfer the balance not absorbed by unappropiated retained earnings as a credit in favour of the Company, balanced with future earnings.


Approval of Charges Against 2001 Earnings	Thousand of $

Directors’ Fees	24

Employee Participating Bonds	135

Acknowledgement

The Board of Directors would like to express its deep appreciation to the Company’s personnel for its efforts and for the spirit of co-operation it showed in 2001, as well as to its suppliers and customers for their support and for their confidence in MetroGAS.

Buenos Aires, March 6, 2002

William Harvey Adamson

President

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of

MetroGAS S.A.

We have audited the balance sheets of MetroGAS S.A. as of December 31, 2001 and 2000, the related income statements, and the statements of changes in shareholders' equity and of cash flows for the years then ended, and the complementary notes and exhibits. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in Argentina. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In accordance with Resolution No. 01/2002 of the Professional Council in Economic Sciences of the Autonomous City of Buenos Aires and Resolution
No. 392 of the National Securities Commission, as of December 31, 2001 assets and liabilities denominated in foreign currencies were valued at the exchange rate of 1 peso per 1 US dollar or its equivalent in any other foreign currency. Note 2 summarizes the conditions prevailing in Argentine exchange markets at the end of the year and the economic measures being taken by the Government in response to existing negative economic conditions, some of which have not been implemented at the date of issuance of these financial statements. The same Note summarizes the impact that the measures of the National Government have had on the financial condition of the Company as of December 31, 2001, in accordance with assessments and estimates made by management at the date of preparing these financial statements. The main effects of those measures were as follows: a) elimination of the tariff indexing clauses based on price indices from other countries; b) setting of an exchange rate for tariffs of one peso equivalent to one US dollar; c) renegotiation of contracts with public utilities; and d) devaluation of the Argentine peso. These circumstances gave rise to uncertainties regarding the Company’s ability to generate future cash flows to repay and/or refinance its financial liabilities at their original maturity. Actual results could differ from current management assessments and such differences could be material. Therefore, the Company’s financial statements may not include all the effects that might ultimately result from these adverse conditions. Future economic developments and related effects on the Company’s economic and financial position, or the future development of its cash flows cannot presently be determined. Therefore, the Company’s financial statements should be read in light of the uncertain circumstances herein described.
In our opinion, subject to the effect on the financial statements that might result from the situations described in paragraph 3., these financial statements present fairly, in all material respects, the financial position of MetroGas S.A. as of December 31, 2001 and 2000, the results of its operations, the changes in its shareholders' equity and cash flows for the years then ended, in conformity with accounting principles generally accepted in Argentina.
In Note 3 to the financial statements, the Company presents the pro-forma balance sheet as of December 31, 2001 and the pro-forma statement of income for the year then ended, considering the effects of the devaluation in accordance with the guidelines described in the note above-mentioned, applying the deferred tax method, which is an accounting criteria not used to prepare the financial statements as of December 31, 2001 and 2000.
The accompanying financial statements are presented on the basis of accounting principles generally accepted in Argentina, which differ from the accounting principles generally accepted in other countries, including the United States of America.

Buenos Aires, Argentina

March 6, 2002


PRICE WATERHOUSE & CO. By (Partner)
Miguel A. Urus

Free translation from the original prepared in Spanish for publication in Argentina

METROGAS S.A.

Legal address: Gregorio Araoz de Lamadrid 1360 - Buenos Aires

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000

Fiscal years Nº 10 and 9 commenced January 1, 2001 and 2000

Principal activity: Provision of natural gas distribution services

Date of registration with the Public Registry of Commerce: December 1, 1992

Duration of Company: Until December 1, 2091

By-laws amendments:

Approved by Shareholders' Extraordinary Meeting held on February 3, 1993

Approved by Shareholders' Ordinary and Extraordinary Meeting held on April 18, 1994

Approved by Shareholders' Extraordinary Meeting held on June 29, 1994

Approved by Shareholders' Ordinary and Extraordinary Meeting held on April 19, 1995

Approved by Shareholders' Extraordinary Meeting held on February 7, 1996

Parent company: Gas Argentino S.A.

Legal address: Gregorio Araoz de Lamadrid 1360 - Buenos Aires

Principal activity: Investment

Percentage of votes held by the parent company: 70%

Composition and changes in capital stock as of December 31, 2001

Composition


Classes of shares	Subscribed, registered and paid-in
Outstanding:	Thousands of $

Ordinary certified shares of $ 1 par value and 1 vote each:
Class A	290,277
Class B	221,977
Class C	56,917

Capital stock as of December 31, 2001	569,171

Free translation from the original prepared in Spanish for publication in Argentina

METROGAS S.A.

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000

Changes in Capital Stock


	Subscribed, registered and paid-in
	Thousands of $
Capital as per charter of November 24, 1992 registered with the Public Registry of Commerce on December 1, 1992 under No. 11,670, Corporations Book 112, Volume A	12
Capital increase approved by the Shareholders' Meeting held on December 28, 1992 and registered with the Public Registry of Commerce on April 19, 1993 under No. 3030, Corporations Book 112, Volume A	388,212
Capital increase approved by the Shareholders' Meeting held on June 29, 1994 and registered with the Public Registry of Commerce on September 20, 1994 under No. 9566, Corporations Book 115, Volume A	124,306
Capitalization of the capital adjustment approved by the Shareholders’ Meeting held on March 12, 1997 and registered with the Public Registry of Commerce on June17, 1997 under No. 6,244, Corporations Book 121, Volume A	56,641
Capital stock as of December 31, 2001	569,171


William Harvey Adamson
President

Free translation from the original prepared in Spanish for publication in Argentina

METROGAS S.A.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000

NOTE 1 - THE COMPANY’S BUSINESS

MetroGAS S.A. (the "Company" or "MetroGAS"), a local gas distribution company, was incorporated on November 24, 1992 and began operations on December 29, 1992, when the privatization of Gas del Estado S.E. ("GdE") (an Argentine Government-owned enterprise) was completed.

The Argentine Government, by Executive Decree No. 2,459/92 dated December 21, 1992, granted MetroGAS an exclusive license to provide the public service of natural gas distribution in the area of the Federal Capital and southern and eastern Greater Buenos Aires, by operating the assets allocated to the Company by GdE for a period of 35 years from the Takeover Date (December 28, 1992), plus an optional renewal period of 10 years under certain conditions.

The conditions under which the Company develops its activity and its regulatory framework have been significantly modified according to Note 2.

NOTE 2 – THE ARGENTINE ECONOMIC SCENARIO AND ITS IMPACT ON THE COMPANY’S ECONOMIC AND FINANCIAL SITUATION

Argentina is in a complex economic situation, the main indicators of which are high internal and external indebtedness, high interest rates, a significant reduction in the amount of deposits, a country risk premium that has reached levels that exceed the usual averages, and an economic recession which is already over three years old. This situation has led to a significant fall in demand for goods and services and a significant rise in unemployment levels. On the other hand, the Federal Government’s ability to meet its obligations and the possibility of getting credit facilities from banks have suffered the impact of the current situation.

Since December 3, 2001, a number of measures were adopted with a view to restricting the free availability and circulation of cash as well as the transfer of funds to other countries. As from December 21, 2001, all business days until the end of the fiscal year were declared “exchange holidays”. The Government subsequently declared the suspension of foreign debt service payments.

On January 6, 2002, following a political crisis which had led to the resignation of two presidents, the government passed Law 25,561 (the Public Emergency and Exchange Regime Reform Law -“The Emergency Law”-), which brought profound changes in the economic structure that had existed until then and modified the Convertibility Law that had been in force since March 1991. On February 3, 2002, the Government announced new economic measures which were implemented through Executive Order No. 214 (Financial system restructuring) of February 3, 2002 and Executive Order No. 260 (Exchange Regime) of February 8, 2002, which introduced some substantial modifications to certain measures that had been adopted through the Emergency Law. These executive orders are being supplemented by regulations issued by different control agencies, some of which may still be pending approval as of the date of submission of these financial statements.

The following are some of the measures adopted by the Government which are still in force as of the date of approval of these financial statements and their effect on the economic and financial position of the Company.

Exchange regime

On January 6, 2002, a new exchange regime was created by establishing an official exchange market and a free exchange market. In general terms, the official market would channel export activities, goods import operations and a number of financial activities subject to a prior restructuring which would extend the original maturities. Other transactions related to the transfer or collection of foreign currency to or from other countries would take place on the free market. The initial exchange rate fixed for the official market was $1.40 per US$1. Free market rates would be determined freely by supply and demand. On January 11, 2002, the date on which exchange operations resumed, Banco Nación Argentina published the first free market exchange rate as being $1.6 per US$1 (sell) and $1.4 per US$1 (buy).

On February 8, 2002, Executive Order No. 260 (Exchange regime) was issued, providing that as from February 11, 2002, there would be a single free exchange market that would channel all foreign currency exchange transactions, to be made at the rates agreed between the parties, pursuant to Argentine Central Bank requirements.

Foreign currency-denominated debts owed to the financial system

Executive Order No. 214 provides that debts denominated in US dollars or other foreign currencies owed to Argentine financial system institutions will be converted into pesos at a rate of $1 per US$1 or the equivalent amount in a different currency. A benchmark stabilization coefficient (“CER”) and interest rate will be applied to these debts as from February 3, 2002. On December 31, 2001, the financial debt of MetroGAS, to be valued as described above, amounted to US$44,015 thousand.

Regulatory Framework

In connection with contracts for public works and services, the Emergency Law provides that clauses providing for price adjustments in dollars or other foreign currencies, as well as indexation clauses based on the price indexes of other countries and any other indexation mechanisms will no longer be in effect; a one peso/one US dollar exchange rate is fixed for tariffs; the Law further provides for the renegotiation of public utility contracts and specifies that these provisions will not prevent companies from normally complying with their obligations. The Executive Branch of Government is authorized to renegotiate public service contracts taking account of the following: (a) The impact of the tariffs on the competitiveness of the economy and on income distribution; (b) the quality of the services and the investment programs, contractually provided for; (c) the interest of users, as well as service access conditions; (d) the safety of the systems involved and (e) company profitability.

On February 12, 2002, the Executive Branch of Government issued Executive Order No. 293, which entrusts the Economy Ministry with the renegotiation of contracts with public utility companies and creates a Committee for the Renegotiation of Contracts for Public Works and Services, the members of which were appointed by Executive Order Nº 370 of February 22, 2002; including a consumer representative. This Committee will provide advice and assistance to the Economy Ministry, which must submit a renegotiation proposal or termination recommendation to the Executive within 120 days as from the effective date of Executive Order No. 293, for subsequent submission to the competent bicameral committees of Congress.

The Economy Ministry has not yet contacted the companies in order to conduct the renegotiation, so the impact these measures may have on the Company cannot be determined.

Based on the mentioned events, the recovery of receivables resulting from the deferral of the invoicing of tariff adjustments according to the variation in the US producer price index (PPI), which the Company had booked based on its prevailing rights arisen from the license basic rules and from the agreement signed with the Government and ratified by an Executive Order, which guaranteed collection through the adjustment of future tariff, has been affected (see Note 9.3).

Contracts denominated in US dollars or containing dollar adjustment clauses

The Emergency Law also contains provisions governing contracts between private parties existing as of the effective date of the Law and providing for payment in foreign currencies or for foreign currency adjustment clauses. In this regard, the Law provides for conversion into pesos of all obligations, at an exchange rate of $1 per US$1, applying the CER to them. Should the obligations become too burdensome and the parties fail to reach agreement, the matter may be referred to the courts in order for an equitable value to be established. Obligations arising after the passing of the law may not be subject to adjustment clauses.

The Company has entered into contracts of this type, being the most important ones those corresponding to the purchase of natural gas, which are essential in order to provide the licensed service. Although negotiations with gas producers have begun, as of the date of approval of these financial statements it is not possible to predict their outcome.

Deferral of the exchange difference deduction for income tax purposes

Net losses originated from the application of the relevant exchange rates to foreign currency-denominated assets and liabilities existing as of the effective date of the Emergency Law are only deductible for income tax purposes by up to 20% per annum in each of the first five fiscal years ended after the effective date of the Law.

Impact on the Company’s financial and economic position

The provisions of the Emergency Law modify Regulatory Framework rules applicable to the transportation and distribution of natural gas, in principle the ones providing for tariffs to be calculated in US dollars and stated in pesos and including an adjustment by reference to international indexes.

The measures adopted by the Government and the application of the exchange rates effective as of March 4, 2002 (the latest ones available as of the date of approval of these financial statements) are estimated to have an impact on the Company’s financial and economic position as of December 31, 2001 which would lead to an exchange difference of $ 399,825 thousand (loss). The effects of the devaluation and the other measures adopted will be taken into account in the financial statements for the subsequent periods, according to the regulations that professional accounting bodies and supervisory authorities may issue in the future.

The Company’s action plan

The Company’s management is currently defining and implementing an action plan in order to reverse the major impact of the scenario on the results of the Company’s operations. Some of the main steps under way include the following:

To begin the review process in connection with the renegotiation of Licence agreements;
To prepare a detailed list of contractual obligations payable and receivable in order to assess the level of legal, economic and financial exposure and to determine the action plan for renegotiating and adjusting contracts to the reality of the economy;
To undertake a plan for reducing investments and expenses without thereby affecting normal and reliable gas supply.
To ensure business continuity by means of a strict financial control, in order to adjust financial expenditure to the actual availability of funds, until financial system liquidity is restored;
To secure any necessary tax advice in order to make the best possible tax use of tax losses arising out of the impact on the Company’s results;

The impact of the set of measures adopted by the Government on the Company’s financial statements as of December 31, 2001, has been calculated on the basis of assessments and estimations made by MetroGAS management as of the date of preparation of these statements. Actual future results could differ from the assessments and estimations made as of the date of preparation of these financial statements and such differences could be significant. Consequently, the Company’s financial statements cannot state all adjustments that could result from these adverse circumstances. On the other hand, at present it is not possible to predict the evolution of the Argentine economy or its consequences on the Company’s financial and economic position. Accordingly, any decisions to be made on the basis of these financial statements should take account of the effects of these measures as well as their future evolution, and the financial statements should be read in light of such uncertain circumstances.

NOTE 3 – PROFORMA FINANCIAL STATEMENTS AND SUMMARY OF ACCOUNTING

POLICIES

The Company has prepared its pro forma balance sheet and income statement as of December 31, 2001 and for the period then ended (the pro forma financial statements), considering the effects of devaluation as of December 31, 2001, in order to conform to international accounting standards, as well as the tax deferral for net negative results of the devaluation based on application of the Emergency Law and its regulatory decrees, which are shown below:

PRO FORMA BALANCE SHEET

PRO FORMA INCOME STATEMENT

The main valuation criteria used to prepare the pro forma financial statements have been the following:

Exchange rates used:
Non-secured overdrafts with Argentine financial institutions: $1 = US$ 1
Secured overdrafts with foreign financial institutions: $1.60 = US$ 1 (*)
Notes: $ 1.60 = US$ 1 (*)
Accounts payable in foreign currency: as the original contracts are being renegotiated, they have been kept at $1 = US$ 1
Other foreign currency-denominated assets and liabilities: they have been kept at $1 = US$ 1

(*) First open market trade closing (sell) rate published by Banco Nación Argentina. .

Treatment of exchange differences:

Negative net results arising from the application of the above exchange rates to foreign currency-denominated assets and liabilities existing as of the date of passing of the Emergency Law were considered deductible for income tax purposes, as set forth in the Law, by up to 20% p.a. in each of the first five fiscal years ended after the entry into force of the law (see Note 2).

As the Company capitalizes the net costs generated by the external financing of works whose construction spreads over time, until the work is ready for start-up (see Note 4.2.c), the pro forma financial statements take account of the capitalization of exchange differences generated by the devaluation resulting from application of the Emergency Law and its regulatory orders.

Future treatment of exchange differences may differ from the above according to future regulations issued by professional accounting and control bodies.

NOTE 4 - SUMMARY OF ACCOUNTING POLICIES IN ACCORDANCE WITH GENERAL

RESOLUTIONS Nº368 AND 392 OF THE CNV

The financial statements have been prepared in accordance with generally accepted accounting principles in Argentina ("Argentine GAAP") and in accordance with the requirements of the Comisión Nacional de Valores ("CNV").

In accordance with General Resolution Nº 392 of the CNV, as of December 31, 2001 the assets and liabilities denominated in foreign currencies have been valued converted at a rate of $1 per US$1 or or its equivalent in the case of a different foreign currency.

The ENARGAS issued some resolutions listing certain guidelines for information disclosure in the financial statements to be considered by the gas transportation and distribution companies as from January 1, 2001. According to the application of the above-mentioned resolutions, the Company has made significant changes to the disclosure of its financial statements.

The financial statements as of December 31, 2000 are included for comparative purposes as required under the Argentine GAAP. Certain reclassifications, as a consequence of the above-mentioned disclosure changes, have been made to these financial statements for the information to be consistent to the financial statements as of December 31, 2001.

4.1. Recognition of the effects of inflation

The financial statements have been prepared in constant Argentine pesos reflecting the overall effects of inflation through August 31, 1995. In accordance with the General Resolution No. 272 of the CNV which instruments Decree No. 316/95 of the National Executive Branch, restatement of financial statements has been discontinued as from September 1, 1995. Moreover, Resolution No. 140/96 of the Argentine Federation of Professional Councils of Economic Science ("FACPCE") dated March 29, 1996 stipulates that adjustment for inflation of financial statements would be applicable only if the annual variation in the General Level Wholesale Price Index ("GLWPI") exceeds 8%. The variation in this index for the years ended December 31, 2001 and 2000 did not exceed 8%, and therefore, the financial statements as of December 31, 2001 and 2000 recognized the effects of inflation only through August 31, 1995.

4.2. Valuation criteria

The principal valuation criteria used in the preparation of the financial statements are as follows:

a) Cash, investments, trade and other receivables and liabilities

Amounts in Argentine pesos without principal adjustment clauses have been valued at nominal value, which include accrued interest through the end of each year, if applicable.

Amounts in foreign currencies have been valued at nominal value converted at appropriate year-end exchange rates in accordance with Resolution Nº 392 of the CNV, including accrued interest, if applicable.

Trade receivables include accrued but unbilled services as of the end of each year. As of December 31, 2000, trade receivables include the amounts resulting from the deferral of the billing of the tariff adjustments related to the changes in the US Producer Price Index (“PPI”) (see Note 9.3). Trade receivables are stated net of the allowance for doubtful accounts, which is based on the Company's estimates of collections.

Treasury bills issued by Buenos Aires Province named “Patacones” have been valued at nominal value (see Note 6).

b) Inventories

Warehouse material has been valued at weighted average price since July 1998 as a result of the change of accounting system. Those values do not differ significantly from replacement costs at December 31, 2001 and 2000.

c) Fixed assets

For fixed assets received at the time of the granting of the License, their original value has been based on the global transfer value defined in the Transfer Agreement, which was the equivalent of the shareholders' contributions and the liabilities transferred.

Based on the special work performed by independent experts, the global original value mentioned above has been assigned to the transferred assets based on their respective fair value. The remaining useful life has been determined based on the years of service estimated by the Company according to the type, current condition and renewal and maintenance programs of the assets.

Assets acquired or constructed after the granting of the License have been valued at their acquisition cost or construction cost restated on constant Argentine pesos as of August 31, 1995, except for distribution networks constructed by third parties (several associations and cooperative organizations). As established by ENARGAS these distribution networks are valued at the amounts equivalent to specific gas cubic meters.

Fixed assets are depreciated under the straight-line method, using annual rates sufficient to extinguish asset values by the end of their estimated useful lives.

The Company capitalized the net cost of external financing of construction work in "Fixed assets" until such construction is ready to be put into service. As mentioned in Note 10, the capitalized interest during the years ended December 31, 2001 and 2000 amounted to $ 3,399 thousand and $ 2,860 thousand, respectively.

The Company capitalized during the years ended December 31, 2001 and 2000 $ 5,851 thousand and $ 7,778 thousand, respectively, corresponding to the portion of operating costs attributable to the planning, execution and control of investments in fixed assets.

Pipeline gas inventories have been valued at their respective replacement costs.

Aggregate fixed assets value does not exceed recoverable value.

d) Intangible assets

Intangible assets represent organization costs, which amortization was estimated over a five-year term, the issuance of debt pursuant to the Medium-Term Note Program, which amortization was estimated in accordance with the debt maturity of the corresponding series and certain projects related to future income generation, which amortization was estimated over a three-year term.

e) Severance indemnities

Severance indemnities are expensed when paid.

f) Income tax

Income tax is recorded on the basis of the estimated tax liability for each fiscal year. The income tax rate applied to the years ended December 31, 2001 and 2000 is 35% of net taxable income, calculated pursuant to the procedures set forth by applicable tax provisions.

g) Shareholders' equity accounts

These accounts have been restated on a constant Argentine peso basis as mentioned in Note 4.1.

h) Recognition of revenues

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

4.3. Earnings and dividends per share

Earnings per share were calculated on the basis of weighted average shares outstanding at December 31, 2001 and 2000, which amounted to 569,171,208.

4.4. Financial instruments

The Company has used a financial instrument to manage its exposure to fluctuations in the euro exchange rate. This instrument, as stated in Note 10, corresponds to future foreign currency purchase agreement. The corresponding amounts payable are accrued in “Financial debt - Current” and the related charges are included in “Financial and holding results from liabilities”.

MetroGAS has not used any other financial instruments to manage its exposure to fluctuations in foreign currency exchange or interest rates and, accordingly, has not entered into transactions that create off-balance sheet risks associated with such financial instruments.

The Company does not use financial instruments for trading purposes.

NOTE 5 - ANALYSIS OF THE MAIN ACCOUNTS OF THE FINANCIAL STATEMENTS

Details regarding the significant amounts included in the accompanying financial statements are as follows:

NOTE 6 - BREAKDOWN OF DUE DATES OF INVESTMENTS, RECEIVABLES AND PAYABLES

The due dates of investments, receivables and payables break down as follows:

(*) As of December 31, 2001 balances resulted from the deferral of the invoicing of the PPI tariff adjustments were included (see Note 9.3).

As of December 31, 2001, investments corresponded to “Patacones” which accrued at an annual interest rate of 7%; the Company has recorded these investments at their par value as they are used to cancel taxes payable. Additionally, as of December 31, 2000 investments comprised saving account deposits, accruing interest at an average rate of 3% per annum. Pursuant to the terms of the License, in the case of invoices for services not paid on their due date, the Company will be entitled to collect interest on late payment at a rate equivalent to 150% of the 30-day interest rate in local currency, collected by the Banco de la Nación Argentina, as from the due date through the date of payment. As these are overdue receivables, and following standards of prudence, the Company recognizes this income at the time of actual collection. These conditions could be modified according to which is stated in Note 2.

The receivable corresponding to changes in turnover tax in the Province of Buenos Aires accrues interest at an annual 9.5% rate. Payables do not accrue interest, except for the Financial Debts, which are set forth in Note 10.

NOTE 7 - TRANSACTIONS AND BALANCES WITH AFFILIATE COMPANIES

Gas Argentino S.A. (“Gas Argentino”), as owner of 70% of the Company's capital stock, is the controlling shareholder of MetroGAS. MetroGAS carries out certain transactions with the shareholders of Gas Argentino who as of December 31, 2001 were as follows: British Gas International B.V. (a wholly owned subsidiary of BG Group plc.) (“British Gas”) (54.67%) and YPF S.A. (“YPF”) (45.33%) or with their affiliates.

On April 4, 2001, the Inspección General de Justicia approved the merger of Astra Compañía Argentina de Petróleo S.A. (“Astra”) and YPF, in force as from January 1, 2001.

On December 21, 2001 Argentina Private Development Company Ltd. (subsidiary of YPF) transferred its interest in Gas Argentino to YPF.

The financial statements include the expenses derived from the following transactions with affiliate parties:

Direct or indirect gas supply contracts with Astra (as of December 31, 2000) and YPF (during the year end December 31, 2001).
Management fees accrued pursuant to the Technical Assistance Agreement with BG International Limited (member of British Gas holding).
Fees under the Manpower Supply Agreement with BG International Limited (member of British Gas holding).

Significant transactions with affiliate parties are as follows:


	December 31,
	2001	2000
	Thousands of $

Gas purchases	38,328	4,091
Technical operator's fees	5,183	8,218
Manpower supply	1,351	1,478

The outstanding balances as of December 31, 2001 and 2000 from transactions with affiliate companies are as follows:


	December 31,
	2001	2000
	Thousands of $
Current Liabilities
a) Affiliate companies
BG International Limited	3,109	6,627
Astra	-	344
YPF	4,061	-
	7,170	6,971

NOTE 8 - RESTRICTED ASSETS

The conditions mentioned below have been and/or could be modified in accordance with the provisions in Note 2. As of the date of submission of these financial statements it is not yet possible to assess the impact of these modifications.

A substantial portion of the assets transferred by GdE has been defined in the License as "Essential Assets" for the performance of licensed service. Therefore, the Company is obliged to segregate and maintain them together with any future improvements in accordance with certain standards defined in the License.

The Company should not, for any reason, dispose of, encumber, lease, sublease or loan Essential Assets for purposes other than providing licensed service, without prior authorization from the Ente Nacional Regulador del Gas ("ENARGAS"). Any extensions and improvements that the Company may make to the gas distribution system after the Takeover Date may only be encumbered to secure credits maturing after a period of one year, used to finance new extensions of and improvements to licensed service.

Upon expiration of the License, the Company will be obliged to transfer to the Argentine Government, or its designee, the Essential Assets listed in the updated inventory as of the expiration date, free of any debt, encumbrance or attachment.

As a general rule, upon expiration of the License, the Company will be entitled to collect the lesser of the following two amounts:

a) The net book value of the Company's property, plant and equipment determined on the basis of the price paid by Gas Argentino, and the original cost of subsequent investments carried in US Dollars and adjusted by the PPI, net of the accumulated depreciation.

b) The proceeds of a new competitive bidding, net of costs and taxes paid by the successful bidder (See Note 9.1.).

NOTE 9 - REGULATORY FRAMEWORK

The natural gas distribution system is regulated by Law No. 24,076 (the "Gas Act"), which, together with Executive Decree No. 1,738/92, other regulatory decrees, the specific bidding rules (“Pliego”), the Transfer Agreement and the License establish the legal framework for the Company's business.

The License, the Transfer Agreement and regulations promulgated pursuant to the Gas Act contain requirements regarding quality of service, capital expenditures, restrictions on transfer and encumbrance of assets, restrictions on cross ownership among production, transmission and distribution of gas and restrictions on transfer of capital stock of MetroGAS.

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

Tariffs for gas distribution services were established in the License and are regulated by ENARGAS.

The tariff formula is subject to adjustment as from December 31, 1997, and thereafter every five years, according to the criteria that the ENARGAS will establish. The ratemaking methodology contemplated by the Gas Act and the License is the so-called "price cap with periodic review" methodology, a type of incentive regulation which allows regulated companies to retain a portion of the economic benefits arising from efficiency gains.

In addition, the Company’s tariffs are subject to semi-annual adjustments as a result of changes in the PPI and other factors and periodic adjustments in the Company’s costs of purchasing and transporting gas.

9.1. Distribution License

The License authorizes MetroGAS to provide natural gas distribution service for 35 years. Upon expiration of the original 35-year term, MetroGAS may apply to ENARGAS for a renewal of the License for an additional ten-year term. ENARGAS is required at that time to evaluate the Company's performance and make a recommendation to the Argentine Executive Power. MetroGAS would be entitled to such ten-year extension of its License unless ENARGAS can prove that MetroGAS is not in substantial compliance with all its obligations stated in the Gas Act and its regulations and in the 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 bidding be held for the License, in which MetroGAS would have the option, if it had complied with its obligations, to match the best bid offered to the Argentine Government by any third party.

As a general rule, upon termination of the License, MetroGAS will be entitled to receive the lower of the net book value of certain specified assets of MetroGAS or the proceeds, net of costs and taxes, paid by the successful bidder in a new competitive bidding process (see Note 8).

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

The License details further obligations of MetroGAS, which include the obligation to provide distribution service, to maintain continuous service, to operate the system in a prudent manner, to maintain the distribution network, to carry out the Mandatory Investment program, to keep certain records and to provide periodic reports to ENARGAS.

9.2. “K” Investment Factor

Under the tariffs tables effective as from July 1, 1998 to July 1, 2001, ENARGAS reported the Company’s compliance, in 1998, 1999, 2000 and the first semester of 2001, with works related to network extension and granted the Company the “K” Investment Factor. However, the Company has requested to the ENARGAS, to reconsider the procedure regarding the K factor application, as a result of not applying the “K” factor to homogeneous distribution margins as stated when originally determined.

9.3. US PPI semi-annual adjustment

ENARGAS through Resolution No. 1,477 adjusted MetroGAS' tariffs as of January 1, 2000, without including the tariffs variation pursuant to the PPI, which would have resulted in a 3.78% increase in the transportation and distribution components of the tariffs as of that date. This was due to the fact that in negotiations with ENARGAS and the Argentine Government, the Distribution and Transportation Companies agreed to defer the collection of the amounts related to the PPI adjustment corresponding to the first six months of 2000. Moreover, ENARGAS established, through the same resolution, the methodology to recover the accrued revenues corresponding to the application of the PPI during the first half of 2000, as from July 1, 2000 and through a ten-month period.

On July 17, 2000, the Distribution and Transportation Companies, ENARGAS and the Argentine Government agreed to pass through to the tariffs, as from July 1, 2000 of: a) the PPI adjustment deferred for the first six months of 2000; and b) prospectively increasing the tariff by the PPI increase (3.78%). Additionally, they agreed to defer the billing of the amounts related to the PPI adjustments corresponding to the period from July 1, 2000 through June 30, 2002. The accumulated amounts during the deferral period were guaranteed by the National Government, and therefore the corresponding accrued revenues would be recovered through the tariffs as from July 1, 2002 to June 30, 2004.

On August 4, 2000, Decree No. 669 was issued by the Executive National Government, confirming the terms of this Agreement.

On August 29, 2000 MetroGAS was notified of a court order, suspending Decree No. 669, refering principally to the unconstitutionality of the tariff adjustment according to a mechanism of indexation based on a foreign index within the applicability of the Convertibility Law. Accordingly, ENARGAS informed the Company that the tariffs should be reduced to exclude the PPI adjustment. MetroGAS, as well as most distribution and transportation companies appealed this ruling and the corresponding ENARGAS resolution. Additionally, ENARGAS and the Executive Power also appealed the court order. On October 5, 2001 this appeal was rejected by the Chamber of Appeals. The Argentine Government, as well as several gas companies have bought to appeal the decision before the Supreme Court. It is impossible to estimate when the Court will rule on this matter. On the other hand, the merits of the question under discussion are still pending.

As a result of (i) the Argentine financial crisis (see Note 2), which limited the ability of the Federal Government to honour its obligations as well as access to credit facilities and led to a formal sovereign debt default declaration in December 2001 and (ii) the subsequent passing of the Emergency Law, which, among other provisions, and specifically as regards contracts for public works and services, made clauses providing for adjustments in dollars or other foreign currency ineffective, as well as indexation clauses based on the price indexes of other countries and any other indexation mechanisms, in addition to fixing a one peso/one dollar rate for tariffs and ordering renegotiation of utility contracts, (the scope of which has not been accurately defined), passing PPI on to tariffs, as rightfully claimed by the company, becomes impracticable. Both a transfer to the tariffs as well as the possibility of recovery through the Federal Government, which endorsed the related credits, are contingent on future events that are beyond the Company’s control.

In view of the current scenario, the net effect of income accrued during 2001 and 2000 in connection with the deferral of PPI adjustments has been reversed in these financial statements in the “Extraordinary Loss” item (see Note 5. m).

9.4. General Matters

The License could be revoked by the Argentine Government upon the recommendation of ENARGAS in the following circumstances:

Serious and repeated failure by the Company to meet its obligations.
Total or partial interruption of noninterruptible service for reasons attributable to the Company of a duration in excess of the periods stipulated in the License within a calendar year.
Sale, assignment or transfer of the Company's essential assets or encumbrances thereon without ENARGAS' prior authorization, unless such encumbrances serve to finance extensions and improvements to the gas pipeline system.
Bankruptcy, dissolution or liquidation of the Company.
Ceasing and abandoning the provision of the licensed service, attempting to assign or unilaterally transfer the License in full or in part (without ENARGAS’ prior authorization) or giving up the License, other than as permitted therein.
Transfer of the technical assistance agreement mentioned above or delegation of the functions granted in that agreement without ENARGAS' prior authorization.

With regard to restrictions, the License stipulates that the Company may not assume the debts of Gas Argentino or grant loans, encumber assets to secure debt or grant any other benefit to creditors of Gas Argentino.

NOTE 10 - FINANCIAL DEBT

The following table sets forth a breakdown of the Company's Financial Debt as of December 31, 2001 and 2000, indicating the average interest rates and maturity date for each credit line:


		December 31,
		2001			2000
Financial Debt	Interest Rate		Maturity	Interest Rate		Maturity

Medium-Term Negotiable Bonds - 1998 Global Program: Series A Series B Series C	9 7/8 % 7.375 % Libor + 2.625%		04/01/2003 09/27/2002 05/07/2004	9 7/8% 7.375% -		04/01/2003 09/27/2002 -
Medium-Term Negotiable Bonds - 1994 Global Program: Series B	-		-	10 7/8%		05/15/2001
Overdrafts	7.07%-33.00%		01/02/2001-06/14/2002	9.20%-11.75%		01/02/2001- 06/19/2001

Details regarding the amount of the nominal interest and the effect of the capitalized interest for the years ended December 31, 2001 and 2000 are as follows:


	December 31,
	2001		2000
	Thousands of $
- Nominal financial cost	34,888	34,095
- Net financial results of other debts	261		364
Total interest	35,149		34,459
- Capitalized interest (Note 4.2.c))	(3,399)		(2,860)
Total interest charged to the results of operations	31,750		31,599

10.1. Short and Medium-Term Negotiable Bonds

1994 Global Program:

The Shareholders' Ordinary and Extraordinary Meeting held on April 1994 approved the creation of a Global Program for issuing simple non-convertible Short and Medium-Term Negotiable Corporate Bonds, for an amount of up to US$350 million (or the equivalent in other currencies or currencies combination) over a five-year term as from the date of authorization of the program by the CNV.

On March 23, 1995, the CNV, pursuant to Resolution No. 10,877, admitted to public offering the mentioned Global Program of Issuance of Negotiable Corporate Bonds of MetroGAS.

On May 8, 1996, MetroGAS placed and issued US$100 million Series B Notes, maturing in 2001, for a price equivalent to 99.786% of the face value, which shall earn interest at the rate of 10 7/8% per annum, payable semiannually. The Series B Notes were registered with the SEC on May 8, 1996 and authorized for listing on the BCBA on May 29, 1996. On October 22, 1997 and September 16, 1998, MetroGAS repurchased Negotiable Corporate Bonds, Series B, for US$13.196 million and US$2 million par value, respectively. The Series B Notes matured in May 2001 and were totally cancelled with the funds obtained from the Series C issued under 1998 Global Program.

The offering of the Series B was made in full compliance with the Fund Allocation Plan. The funds obtained were allocated to the refinancing of short-term indebtedness.

1998 Global Program:

The Shareholders' Extraordinary Meeting held on December 22, 1998 approved the creation of a Global Program for issuing simple non-convertible Short and Medium-Term Negotiable Corporate Bonds, for an amount of up to US$600 million (or the equivalent in other currencies or currencies combination) over a five-year term as from the date of authorization of the Program by the CNV.

On August 19, 1999, the CNV, pursuant to Resolution No. 12,923, admitted to public offering the mentioned Global Program of Issuance of Negotiable Corporate Bonds of MetroGAS.

On March 27, 2000, MetroGAS has placed and issued US$100 million Series A Notes, maturing in 2003, for a price equivalent to 99.677% of the face value, which shall earn interest at the rate of 9.875% per annum, payable semiannually. The Series A Notes were authorized for listing on the BCBA on March 24, 2000 and on Luxembourg Stock Exchange on April 3, 2000.

On September 27, 2000, MetroGAS has placed and issued Euros 110 million Series B Notes (equivalent to approximately US$94.4 million, at the exchange rate from the date of the issuance), maturing in 2002, for a price equivalent to 99.9% of the face value, which shall earn interest at the rate of 7.375% per annum, payable annually. The Series B Notes were authorized for listing on the Luxembourg Stock Exchange on September 27, 2000. The Company has entered into a future euro purchase agreement in order to manage its exposure to the devaluation of the US dollar with respect to the euro. Accordingly, in such agreement an exchange rate was fixed (0.8585 Euros per dollar) at the interests’ cancellation date and the maturity date of the Series.

On May 7, 2001, MetroGAS issued US$130 million Series C Notes, out of which US$115 million were placed at the moment of the issuance and the remaining U$S 15 million were placed on August 7, 2001, maturing in 2004, at a price equal to 100% of the face value with a floating rate of LIBOR plus 2.625% up to 3.25%. The Series C Notes were authorized for listing on the BCBA on June 15, 2001.

After year end, and due to the restrictions on the transfer of foreign currency to other countries ordered by the Argentine Government (see Note 2), the Company was unable to pay interest on C Series Notes when due. On February 15, 2002, following the relaxation of Argentine Central Bank rules governing the transfer of foreign currency to other countries for certain transactions, the Company was finally able to pay off the interest due.

The offering of the Series A, B and C were made in full compliance with the Fund Allocation Plan. The funds obtained were allocated to the refinancing of short-term indebtedness.

10.2 Non-current financial debt

Maturities of principal amounts of non-current financial debt in US dollars or in other foreign currency converted at a rate of $1 per US$1 (see Note 4.2.a), as of December 31, 2001 are as follows:


	2003	2004	Total
	Thousands of $
Medium-term Negotiable Bonds
	100,000	130,000	230,000
	100,000	130,000	230,000

NOTE 11 - CAPITAL STOCK

As of December 31, 2001, the Company's capital stock amounted to $569,171 thousand, all of which is fully subscribed, paid-in and registered.

The latest capital increase to $569,171 thousand was approved by the Shareholders’ Extraordinary Meeting held on March 12, 1997. This increase was authorized by the CNV on April 8, 1997 and by the BCBA on April 10, 1997 and was registered with the Public Registry of Commerce on June 17, 1997 under No. 6,244, Corporations Book 121, Volume A.

Gas Argentino, the holding company, owns 70% of the total Company's capital stock, the 20% originally held by the Government was subject to an Initial Public Offering as specified below, and 10% is hold by the Employee Stock Ownership Plan (Programa de Propiedad Participada or "PPP") (See Note 14).

In accordance with the Transfer Agreement, in 1994 the Argentine Government offered to sell, through an initial public offering, its 20% holding in the Company's capital stock, represented by 102,506,059 Class B shares, which were transferred to private entities.

On November 2, 1994, the CNV, pursuant to Resolution No. 10,706, admitted to public offering all the Company's outstanding shares at such date. The ADSs issued in the United States were registered with the SEC. The Class B shares and the ADSs were approved for listing on the BCBA and the NYSE, respectively.

The Company is required to keep in effect the authorization to offer the Company's capital stock to the public and the authorization for the shares to be listed on the Argentine Republic's authorized securities markets for a minimum period of 15 years as of the respective dates on which such authorizations are granted.

Once this first five years after the Take Over Date have elapsed, any decrease, redemption or distribution of the Company’s shareholders’ equity will require prior authorization by ENARGAS.

The Shareholders Meeting held on April 27, 2001, ratified the interim cash dividend of $34,150 thousand, equivalent to $0.06 per share and 6% of capital stock, which was placed at the disposal of shareholders as from November 29, 2000. In addition, it was proposed the setting up of a Reserve for future dividends amounting to $11,618 thousand.

On May 16, 2001 the Company's Board of Directors resolved to allocate the Reserve for future dividends set up on April 27, 2001 to the distribution of cash dividends amounting to $ 11,383 thousand ($ 0.02 per share, equivalent to 2% of the capital stock) placed at the disposal of shareholders as from May 30, 2001.

Based on the financial statements as of September 30, 2001 which recorded a net income of $ 45,946 thousand, MetroGAS' Board of Directors approved on November 15, 2001, an interim dividend of $34,150 thousands equivalent to 74% of the “Unappropiated Retained Earnings” as of that day, maintaining the Company’s dividend’s policy since the beginning of operations and equivalent to $ 0.06 per share and 6% of capital stock; which was placed at the disposal of shareholders as from November 23, 2001. The dividend was paid out of the "Reserve for future dividends" totaling $235 thousands and $33,915 thousands out of MetroGAS' “Unappropriated Retained Earnings”.

NOTE 12 - RESTRICTIONS ON THE DISTRIBUTION OF PROFITS

In accordance with the Argentine Corporations Law and the Company's by-laws, 5% of the Company's net income for the year must be transferred to the Company's Legal Reserve, until it reaches 20% of the subscribed capital including the adjustments to capital stock.

The Company's by-laws provide for issuing a Profit Sharing Bonus, equivalent to 0.5% of the Company's net income, to be paid annually to all the Company's employees (see Note 14). The amount corresponding to this caption, calculated on the basis of income for the year, has been deducted as an expense in the Income Statements for the years ended December 31, 2001 and 2000.

Additionally, according to the offering of the Series C of Negotiable Bonds (see Note 10), the Company will not be able to declare or pay dividends while existing an event of default. As of December 31, 2001, MetroGAS has not incurred in any event of default according to the offering above-mentioned.

NOTE 13 - LIMITATION ON THE TRANSFERABILITY OF GAS ARGENTINO

The Pliego stipulates that Gas Argentino can sell part of its participation in the Company under the condition that it must maintain 51% of MetroGAS' equity.

In addition, the Company's by-laws provide that ENARGAS' approval must be obtained prior to transfer of the Class A shares (representing 51% of capital stock). The Pliego states that such prior approval will be granted three years after the Takeover Date provided that:

The sale covers 51% of capital stock or, if the proposed transaction is not a sale, the act of reducing the shareholding will result in the acquisition of a shareholding of not less than 51% by another investing company,
The applicant provides evidence that the transaction will not affect the operating quality of the licensed service, and
The existing technical operator, or a new technical operator approved by ENARGAS, retains at least 15% of the new investor company's shares and the technical assistance contract remains in force.

Shareholders of Gas Argentino are subject to the same restrictions as those set forth in the preceding paragraph.

NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN

Executive Decree No. 1,189/92 of the Argentine Government, which provided for the creation of the Company, established that 10% of the capital stock represented by Class C shares was to be included in the PPP, as required under Chapter III of Law No. 23,696, the instrumentation of which was approved on February 16, 1994 by means of Decree No. 265/94 of the National Executive Power. The Class C shares are held by a trustee for the benefit of GdE employees transferred to MetroGAS who remained employed by MetroGAS on July 31, 1993 and who elected to participate in the PPP.

In addition, the Company's by-laws provide for the issuance of profit sharing bonuses as defined in Article 230 of Law No. 19,550, in favor of all regular employees so as to distribute 0.5% of the net income of each year among the beneficiaries of this program. The accrued amounts have been expensed on the Income Statement of each year (See Note 12).

Participants in the PPP purchased their shares from the Argentine Government for $1.10 per share, by either paying cash for them or by applying dividends on such shares and 50% of their profit sharing voucher to the purchase price. The trustee will retain custody of the Class C shares until they are fully paid.

Once the Class C shares are fully paid, they may be converted at the request of the holders thereof into freely disposable Class B shares. This decision is to be taken by the Class C shareholders, acting as a single class. While the PPP is in effect, neither the by-laws of the Company nor the proportions of the various shareholdings may be changed until the requirements set forth in the PPP are fully complied with.

NOTE 15 - LONG-TERM CONTRACTS

In order to satisfy gas demand, MetroGAS entered into long-term contracts to assure reasonable amounts of gas supply and gas transportation services. In order to efficiently provide the license service, MetroGAS entered into a long-term contract for the administration of the business at international standards through the Technical Assistance Agreement.

15.1. Gas supply

As a consequence of the Emergency Law provisions (see Note 2), the Company has begun renegotiations with gas producers. As of the date of submission of these financial statements it is not yet possible to predict their outcome.

Under different long-term contracts with YPF, Perez Companc, Total Austral/Pan American Energy/Wintershall Energía joint venture and other producers of Tierra del Fuego, Neuquén and Santa Cruz Provinces, the Company is entitled to purchase a major portion of its natural gas needs as follows:

Volumes - Daily averages for the years


	2001	2002	2003	2004	2005

MMCM/d (1)	13.5	12.3	11.8	7.3	5.6
MMCF/d (2)	475.5	434.1	414.8	259.3	196.2

According to the long-term contract provisions, the natural gas volumes and amounts that MetroGAS is obligated to pay for regardless of whether or not they are taken ("take-or-pay amounts") are as follows:

Volumes - Daily averages for the years


	2001	2002	2003	2004	2005

MMCM/d (1)	10.3	9.3	8.8	5.0	4.0
MMCF/d (2)	361.8	327.5	310.2	177.5	139.8
Amount committed/year (3)	183.8	153.6	144.1	86.4	72.7

(1) Millions of cubic meters per day

(2) Millions of cubic feet per day

(3) Millions of dollars

The gas supply contracts also entitle MetroGAS to certain reductions of its take-or-pay amounts in the event that demand from power plants in the Company's service area falls below certain volumes of gas per day or in the event of any direct purchase of gas from a supplier or intermediaries and of transportation services for the purchased gas (avoiding MetroGAS network). Management does not consider it likely that the Company will incur in a material take-or-pay liability for volumes of gas not taken as of December 31, 2001.

15.2. Gas transportation

The contracts entered into by MetroGAS with gas transportation companies could be subject to modifications due to Emergency Law provisions (see Note 2) applicable to utility services, which include natural gas transportation. As of the date of submission of these financial statements it is not yet possible to assess the impact of these modifications.

MetroGAS has entered into a number of transportation contracts, with expiration dates ranging between 2004 and 2016, with TGS, Transportadora de Gas del Norte S.A. and other companies, which provide for firm transportation capacity of 22.8 MMCM per day, considering the transportation capacity contracted as of December 31, 2001.

The Company is obligated to pay approximately $389,420 thousand for the entire period between 2001 and 2002, $553,450 thousand for the entire period between 2003 and 2005 and $1,422,170 thousand for the entire period between 2006 and 2016, for firm transportation capacity under such contracts.

15.3. Gas delivery commitments

In order to compete with fuel oil as an alternative energy source for power plants and to prevent the bypass of its distribution system by major customers, MetroGAS has agreements in place with certain dual-fuel power plants whereby it commits to deliver during the winter months minimum volumes of gas on an interruptible basis. If minimum volumes are not met, MetroGAS is required to refund a portion of any excess of fuel oil price over gas prices on undelivered volumes.

15.4. Technical assistance agreement

Under this agreement, BG International Limited (member of British Gas holding) provides technical assistance to the Company for the payment of an annual technical assistance fee equal to the greater of US$3,000 thousand or 7% of the amount obtained after substracting US$3,000 thousand from pre-tax income before financing results. The original contract was in force for a term of eight years as from Takeover Date. Provided that the contract is renewable with the consent of both parties, they agreed its renewal for an additional eight-year term in force as from December 28, 2000. The terms and conditions of the original agreement were maintained. The expenses resulting from this contract, the technical operator's fees, are disclosed in Note 7.

NOTE 16 - FISCAL AND LEGAL MATTERS

16.1. Transfer to tariff - Turnover Tax

On November 17, 1997, the ENARGAS issued Resolution No. 544/97 authorizing the passing through to tariff of the variation in the taxable base for the Turnover Tax within the jurisdiction of the Province of Buenos Aires from January 1993 to December 31, 1997, for an amount of $16,824 thousand. In addition the resolution established a term for the recovery of the above mentioned amounts of 96 months.

In view of the term for recovery established by ENARGAS for the amount accumulated at December 31, 1997, the Regulator laid down in Note No.108 dated January 12, 1998 that such amounts accrue interest at an annualized percentage rate of 9.5%.

Consequently, as of December 31, 2001 and 2000 the financial statements of the Company included a current receivable of $ 2,721 thousand and $ 2,140 thousand and a non-current receivable of $ 7,634 thousand and $ 9,819 thousand, respectively. Interest accrued at December 31, 2001 and 2000 amounts to $ 1,016 thousand and $ 1,189 thousand and has been recognized as financial and holding results from assets in the income statements for these periods.

On March 20, 1998, the Company requested ENARGAS to transfer to tariff the cost variations derived from the increase in turnover tax in the jurisdiction of the Federal Capital. On July 14, 2000 ENARGAS issued Resolution N° 1,787 rejecting MetroGAS´ claim. On August 23, 2000 the Company filed an administrative recourse. At the date of approval of these financial statements, the claim made by MetroGAS was pending resolution by ENARGAS.

16.2. Income tax on gas network extensions constructed by third parties

Pursuant to ENARGAS Resolution No. 283 issued in 1996, the distribution network extensions that had been partially or completely financed by third parties and incorporated to the Company’s equity from the Takeover Date must be paid off by the Company through a bonus of gas cubic meters as established by the regulatory entity.

In July 1999, the Federal Administration of Public Revenue (“AFIP”) notified MetroGAS of an ex-officio ruling challenging income tax returns corresponding to fiscal years 1994 and 1995 and determining tax adjustments which lead to a reduction in the tax credit balances from those fiscal years amounting to $2,017 thousand and $453 thousand, respectively.

Those adjustments derive from the tax authorities’ decision to attempt to tax the increase in net worth as a result of the incorporation of gas networks assigned by third parties during the above mentioned periods, according to Resolution No. 7/81 issued by the DGI.

The AFIP considers that the transfer of networks does not constitute assignment at no cost since, although no price has been determined, the obligation undertaken by the Company is to provide the service committed in exchange for a fixed price established in the tariff regime.

The resolution of the tax authorities establishes that the increase in net worth generated by the incorporation of the transferred assets is to be considered as taxable income and cannot be treated as tax exempt income as it does not constitute gratuitous enrichment.

MetroGAS filed an appeal with the National Tax Court against the ruling of the AFIP claiming lack of contributory capacity based on the fact that MetroGAS did not record taxable income, either because the net worth increase derived from the incorporation of the networks (free assignment) is tax-free or because the operation corresponds to an acquisition of fixed assets in installments (assignment for a consideration). On November 29, 2001 the National Tax Court confirmed the tax adjustment determined by AFIP. As a result of the National Tax Court decision, MetroGAS estimates that it will not have any economic damage.

16.3 Stamp Tax

On April 4, 2001, the tax authorities of Neuquén notified MetroGAS of the final determination with respect to contracts transferred by GdE to the Company and entered into before the privatization of GdE, of which MetroGAS is liable for an amount to $ 48.1 million (including fine and interests).

Additionally, Neuquén asserted that MetroGAS is liable for stamp tax of $ 23.8 million (including fine and interests) in respect of transportation contracts entered into after the privatization of GdE.

Besides, on January 26, 2000, the tax authorities of Neuquén informed MetroGAS that it was liable for stamp taxes of $14.5 million with respect to Tacit Acceptance Contracts between several gas companies and MetroGAS executed after the privatization of Gas del Estado.

Furthermore, on April 6, 2001 TGS informed MetroGAS the final determination made by Rio Negro, regarding the contracts transferred by GdE and entered into by MetroGAS before and after the privatization of GdE, respectively. MetroGAS is responsible for an amount of $ 148.2 million (including fine and interests). Accordingly, TGS filed a declaratory action against Rio Negro with the Supreme Court of Justice of Argentina and obtained an injunction as a consequence of which Rio Negro has suspend all the collection proceedings until the final ruling is issued.

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

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

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

The Company believes the application of this tax is illegitimate because, according to the instrumental nature of the stamp tax, it applies only to written documents (i) that contain an offer and an express acceptance by the other party in the same document or (ii) that are documented by means of an exchange of letters whereby the acceptance letter contains or restates the terms of the agreement.

Based on the above-mentioned MetroGAS operates with different gas and transportation companies through the exchange of letters with tacit acceptance, considering that these are not taxable.

16.4. Others

At the date of approval of these financial statements, there are discrepancies between the Company and the regulatory authorities as to the interpretation of various matters. After an in depth study of such discrepancies, the Company considers that the final resolution of these situations will not have any material impact that has not been taken into consideration in the financial statements as of December 31, 2001.


William Harvey Adamson
President

METROGAS S.A.

FINANCIAL STATEMENTS AS OF DECEMBER 31, 2001 AND 2000

SUMMARY OF ACTIVITY REQUIRED BY RESOLUTION No. 368/01 ISSUED BY THE COMISION NACIONAL DE VALORES

Significant accounting policies

The information contained in this Summary of Activity Report has been prepared in accordance with Resolution No. 368/01 issued by the Comisión Nacional de Valores (“CNV”) and should be read together with the attached financial statements as of December 31, 2001 and 2000, which have been prepared in accordance with Argentine GAAP.

The Argentine Economic Scenario and its impact on the Company

As from the sanction of the Emergency Law and subsequent decrees, MetroGAS activity has been significantly affected. According to Note 2 to the financial statements, the Company’s management is currently defining and implementing an action plan in order to reverse the severe impact of the scenario on the results of the Company’s operations. The above-mentioned Note 2 to the financial statements describes the economic scenario, the impacts of the Emergency Law and subsequent decrees and the uncertainties caused on the Company’s future results.

General

MetroGAS sales and earnings are highly sensitive to weather conditions in Argentina. Demand for natural gas and, consequently, MetroGAS sales and earnings, are significantly higher during the winter months (May through September), owing to the larger gas sales volume and the tariff mix that affects revenues and gross profit.

Additionally, as a result of (i) the Argentine financial crisis which limited the ability of the Federal Government to honour its obligations as well as access to credit facilities and led to a formal sovereign debt default declaration in December 2001, and (ii) the subsequent passing of the Emergency Law, passing PPI on to tariffs (see Note 9.3.), as rightfully claimed by the company, becomes impracticable. Both a transfer to the tariffs as well as the possibility of recovery through the Federal Government, which endorsed the related credits, are contingent on future events that are beyond the Company’s control.

In view of the current scenario, the net effect of income accrued during 2001 and 2000 in connection with the deferral of PPI adjustments has been reversed in the financial statements attached in the “Extraordinary Loss” item.

The above mentioned reversal should not be understood as a waiver of rights arising out of the Regulatory Framework that governs the Company’s activities or as an abandonment of any of the actions filed by the Company so far.

Analysis of Operations for the years ended December 31, 2001 and 2000

The year ended December 31, 2001 was characterized by changes in the mix sales to power plants, increasing volumes delivered under transportation and distribution services and decreasing volumes of sales of gas. Furthermore, higher temperatures were recorded during the second and third quarter of 2001 compared to the same quarters of 2000.

On June 30, 1997 ENARGAS issued Resolution No. 464/97 approving the maximum tariffs for MetroGAS corresponding to the 1998/2002 period.

This Regulatory Authority established the percentage variation of the “X” Efficiency Factor at 4.7% and the “K” Factor. Under the tariff tables effective as from July 1, 1998 to July 1, 2001, the “K” Factor was applied to residential, small and medium-sized commercial and industrial consumers (general P and general G), sub-distributors and natural compressed gas tariffs. As of December 31, 2001 the accumulated “K” Factor included in tariffs amounted to an average rate of 3.1% for each customer category.

The Company’s net sales during the year ended December 31, 2001 decreased by 8.5% and operating costs decreased by 9.7% compared to the previous year resulting in a $9,681 thousand reduction in the gross income, decreasing to $184,523 thousand compared to $194,204 thousand in the previous year. An operating income of $103,748 thousand was recorded in the year ended December 31, 2001 compared to $103,549 thousand recorded in the previous year.

Although the Company’s ordinary income corresponding to the year ended December 31, 2001 amounted to $ 48,780 thousand, totaling an increase of 1,5% compared to $ 48,043 thousand recorded in the previous year; the Company’s net income decrease 43.5% from $ 48,043 thousand recorded in the year 2000 to $ 27,127 thousand recorded in the year 2001, due to the extraordinary loss recorded as a consequence of the reversal above mentioned in “General” section.

Operating results and financial condition

Net sales

Total net sales decreased by 8.5% during the year ended December 31, 2001 to $657,681 thousand from $718,450 thousand during 2000. This reduction was mainly due to a decrease in net sales to power plants, net sales to industrial, commercial and governmental customers and liquid gas processing sales amounting to $39,746 thousand, $1,726 thousand and $28,769 thousand, respectively. These reductions were partially offset by an increase in net sales to residential customers and net sales of compressed natural gas (“CNG”), amounting to $5,028 thousand and $4,444 thousand, respectively.

Under the tariff tables, effective from July 1998 to July 1, 2001, the “K” Factor was included in tariffs, representing an accumulated average rate of 3.1% over the distribution margins. This increase percentage in distribution margins is applied only to residential, small and medium-sized commercial and industrial consumers, sub-distributors and CNG consumers.

Net sales to residential customers increased by 1.3%, from $398,834 thousand during the year ended December 31, 2000 to $403,862 thousand during the year 2001. Sales volume delivered to residential customers decreased by 5.9% during the year ended December 31, 2001 compared to the previous year. This decrease is due to lower daily consumption per capita resulted from higher temperatures recorded during 2001 winter. The increase in net sales was due to the increase in tariff resulted from “K” Factor adjustment applied to this category of customers and to the increase in the U.S. Producer Price Index (“PPI”) applied to tariffs on January 1 and July 1, 2001.

Net sales of gas and transportation and distribution services to power plants decreased by 39.4% compared to the previous year. Volumes delivered to these customers decreased by 10.8% during the year 2001 compared to the previous year. This decrease was mainly due to the increase in hydraulic power generation in most basins, which generated lower gas consumption due to the abundant supply of hydroelectric power during the year 2001, compared to the previous year. Furthermore, the major decrease recorded in net sales to this category of customers is due to the change in mix of sales, decreasing the volumes of sales of gas and increasing the volumes delivered under transportation and distribution services which are sold at a lower tariff.

Due to the lower level of economic activity in Argentina since the beginning of 1999, volumes delivered to industrial, commercial and governmental customers decreased by 15.1% during the year 2001 compared to the previous year. Nevertheless, net gas sales and transportation and distribution services to this users category only decreased by 1.3% during the year 2001 compared to the previous year, due to the PPI increase applied to the tariff on January 1 and July 1, 2001.

Net sales of CNG increased by 9.0% during the year ended December 31, 2001 compared to the previous year as a consequence of above mentioned “K” Factor and the PPI variation, which increased the tariff applied to these consumers. Volumes of CNG delivered during the year 2001 increased by 2.9% compared to the previous year due to an increase in the number of CNG-converted vehicles as a result of the repeatedly increases in the prices of competing fuels.

The start-up of an important Gas Processing Plant in the province of Neuquen, at the beginning of 2001, caused a significant change in the liquids processing industry. Consequently, according to the Contract entered into between MetroGAS and Transportadora Gas del Sur (“TGS”) for gas processing through a plant of its own, MetroGAS suffered a reduction in the assignment of products extracted. In order to mitigate this effect MetroGAS and TGS agreed on certain modifications to the terms of their commercial agreement, through which MetroGAS obtained reduced costs related to such activity. Net sales, as well as volumes available for processing during the year 2001, were reduced by 75.2% and 65.1%, respectively, compared to the year 2000. Additionally the gross income of this activity decreased 56.5% basically as a consequence of the decrease of the oil international prices.

During the year 2001, the accrued revenues corresponding to the deferral of the billing of the PPI adjustment to tariffs (see Note 9.3.) amounted to $42,784 thousand.

The following table shows the Company’s net sales by customer category for the years ended December 31, 2001 and 2000, in thousands of pesos:


	For the year ended December 31, 2001	% of Net Sales	For the year ended December 31, 2000	% of Net Sales
Gas sales:
Residential	403,862	61.5	398,834	55.5
Power Plants	18,670	2.8	66,992	9.3
Industrial, Commercial and Governmental	111,361	16.9	114,070	15.9
Compressed Natural Gas	53,938	8.2	49,494	6.9
Subtotal	587,831	89.4	629,390	87.6
Transportation and Distribution Services
- Power plants	42,509	6.5	33,933	4.7
- Industrial, Commercial and Governmental	17,853	2.7	16,870	2.4
Subtotal	60,362	9.2	50,803	7.1
Processed Natural Gas	9,488	1.4	38,257	5.3
Net sales	657,681	100.0	718,450	100.0

The following table shows the Company’s natural gas sales volume by customer category for years ended December 31, 2001 and 2000, in millions of cubic meters:


	For the year ended December 31, 2001		% of Volume of Gas Delivered		For the year ended December 31, 2000		% of Volume of Gas Delivered
Gas sales:
Residential	1,774.8	28.1		1,886.1		26.4
Power Plants	274.4	4.3		1,077.5		15.1
Industrial, Commercial and Governmental	826.2	13.1		943.6		13.2
Compressed Natural Gas	508.4	8.1		494.1		6.9
Subtotal	3,383.8	53.6		4,401.3		61.6
Transportation and Distribution Services
- Power plants	2,406.3	38.1		1,928.3		26.9
- Industrial, Commercial and Governmental	417.0	6.6		519.9		7.3
Subtotal	2,823.3	44.7		2,448.2		34.2
Processed Natural Gas	104.5	1.7		299.5		4.2
Total volume of gas delivered	6,311.6	100.0		7,149.0		100.0

Operating Costs

Operating costs totaled $473,158 thousand during the year ended December 31, 2001, representing a 9.7% decrease compared to $524,246 thousand registered in the previous year. This decrease was primarily due to a decrease in volumes of gas purchases and the lack of liquid processing costs during the year 2001 due to the modifications to the terms of their in the commercial agreement with TGS, as mentioned above, partially offset by an increase in transportation costs.

During the year ended December 31, 2001, 3,803 million of cubic meters were acquired representing a decrease of 27.4% with respect to the gas volumes purchased in the year 2000. This decrease in volumes purchased is due to the change in mix of sales to power plants, increasing volumes delivered under transportation and distribution services and decreasing volumes of sales of gas which are sold at a higher tariff as a consequence of the cost of gas included in it. Furthermore, the decrease in volumes purchased is due to the decrease in volumes delivered to residential customers as a consequence of the higher temperatures recorded during the second and third quarters of 2001. Consequently, gas costs decreased by 21.3%.

Gas transportation costs increased 9.3% from $206,438 thousand during the year ended December 31, 2000 to $225,736 thousand during the year 2001. This increase was mainly due to the increase in firm transportation volumes contracted and higher transportation costs due to the increase in the PPI applied on January 1, 2001 and July 1, 2001. During the year 2001, accrued transportation costs corresponding to the deferral of the billing of the PPI adjustment to tariffs (see Note 9.3.) amounted to $ 21,301 thousand.

During the year ended December 31, 2001 and 2000, the Company capitalized $ 5,851 thousand and $ 7,778 thousand, respectively, corresponding to the portion of operation costs attributable to the planning, execution and control of investments in fixed assets.

The following chart shows the Company’s operating costs by type of expense for the years ended December 31, 2001 and 2000, in thousands of pesos:


	For the year ended December 31, 2001	% of Total Operating Expenses	For the year ended December 31, 2000	% of Total Operating Expenses

Gas purchases	191,812	40.5	243,689	46.4
Gas transportation	225,736	47.7	206,438	39.4
Depreciation of Fixed Assets	27,361	5.8	26,542	5.0
Payroll and social contributions	16,389	3.5	15,715	3.0
Operations and maintenance	5,666	1.2	6,129	1.1
Technical operator’s fee	5,183	1.1	8,218	1.6
Sundry Materials	1,670	0.3	2,656	0.5
Fees for sundry services	1,235	0.3	841	0.2
Liquid processing	-	0.0	10,719	2.1
Other operating costs	3,957	0.8	11,077	2.1
Capitalization of Operating Costs in Fixed Assets	(5,851)	(1.2)	(7,778)	(1.5)
Total	473,158	100.0	524,246	100.0

Administrative Expenses

Administrative expenses decreased by 16.7% from $ 59,384 thousand during the year ended December 31, 2000 to $ 49,471 thousand recorded in the year 2001. This decrease was mainly due to the reduction in the amortization of intangible assets, mainly due to the complete amortization of voluntary retirement in December 2000, the reduction in taxes, rates and contributions and the decrease in fees for sundry services.

Selling Expenses

Selling expenses remained stable amounted to $ 31,304 thousand and $ 31,271 thousand during the year ended December 31, 2001 and 2000, respectively. During 2001, the increase in payroll and social security contributions was partially offset by a decrease in fees for professional services and publicity.

Financing and Holding Results

Net financing and holding results totaled a loss of $ 25,735 thousand during the year ended December 31, 2001 compared to $ 24,545 thousand during the previous year.

This increase mainly derived from an increase in loss from financial and holding results generated by liabilities amounting to $ 861 thousand compared to the year 2000, principally resulting from a higher indebtedness recorded during the year 2001, additionally affected by higher rates for short term financing compared to the previous year.

Other Income and Expenses

Other income and expenses decrease during the year ended December 31, 2001, recording a loss of $688 thousand compared to a gain of $470 thousand recorded during the year ended December 31, 2000 mainly due to higher fines and lower results from the sale of fixed assets.

Income Tax on ordinary income

During the year ended December 31, 2001, $28,545 thousand was accrued for income tax related for the ordinary income, resulting in an effective tax rate of 36.9%. During the year ended December 31, 2000, the Company accrued an income tax charge for $31,431 thousand, resulting an effective tax rate of 39.5%. The decrease in the effective rate is due to certain allowances and provisions that were non-deductible for tax purposes during the year ended December 31, 2000.

Extraordinary income

According to what is above mentioned in the “General” section, this item includes the reversal of the net effect of the income accrued during the years 2001 and 2000 related to the deferral of the PPI adjustments, as it is described in Note 9.3. to the financial statements. This result includes the reversal of the net effect of PPI adjustment to be billed amounted to $ 33,313 thousand, partially offset by the effect of the income tax adjustment amounted to $ 11,660 thousand.

Net cash provided by operating activities

Net cash provided by operating activities amounted to $ 29,224 thousand during the year ended December 31, 2001 and $ 85,602 thousand during the previous year. This decrease in funds provided by operating activities is mainly due to the decrease in the net income of the year 2001 resulted from the reversal of the US PPI adjustment (see Note 9.3 to the financial statements), the decrease in trade receivables due to the above mentioned reversal and in other receivables, mainly due to the volumes of take or pay to be recovered as at December 31, 2001.

Net cash used in investing activities

Net cash used in investing activities totaled $ 62,897 thousand during the year ended December 31, 2001 compared to $ 45,083 thousand used during the previous year, representing an increase in the investment level in fixed assets.

Net cash provided by (used in) financing activities

Net cash provided by financing activities amounted to $ 34,374 thousand during the year ended December 31, 2001, compared to $ 53,821 thousand used in during the previous year. This variation was mainly due to a lower payment of loans during the year 2001, partially offset by a lower issuance of debt as compared with the year 2000.

Liquidity and capital resources

Financing

As of December 31, 2001, the total indebtedness of the Company was $ 424,865 thousand.

The Shareholders' Extraordinary Meeting held on December 22, 1998 approved the creation of a Global Program for issuing simple non-convertible Short and Medium-Term Negotiable Corporate Bonds, for an amount of up to US$ 600 million (or the equivalent in other currencies or currencies combination) over a five-year term as from the date of authorization of the Program by the CNV.

On August 19, 1999, the CNV, pursuant to Resolution No. 12,923, admitted to public offering the mentioned Global Program of Issuance of Negotiable Corporate Bonds of MetroGAS.

On March 27, 2000, the Company has placed and issued, under the new Negotiable Corporate Bonds Global Program, its Series A Notes with a face amount of US$ 100.0 million, at a price equivalent to 99.677% of the face value, with an interest rate of 9.875% per annum, payable semiannually and maturity on April 2003. The Series A Notes have been authorized for listing on the Buenos Aires Stock Exchange on March 24, 2000 and on the Luxembourg Stock Exchange on April 3, 2000.

On September 27, 2000, MetroGAS has placed and issued euros 110 million Series B Notes (equivalent to approximately US$ 94.4 million, at the exchange rate from the date of the issuance), maturing in 2002, for a price equivalent to 99.9% of the face value, which shall earn interest at the rate of 7.375% per annum, payable annually. The Series B Notes were authorized for listing on the Luxembourg Stock Exchange on September 27, 2000. The Company has entered into a future euro purchase agreement in order to manage its exposure to the devaluation of the US dollar with respect to the euro. Accordingly, in such agreement an exchange rate was fixed (0.8585 Euros per dolar) at the interests cancellation date and the maturity date of the Series.

The offering of the Series A, B and C were made in full compliance with the Fund Allocation Plan. The funds obtained were allocated to the refinancing of short-term indebtedness.

Capitalization

The Company’s total capitalization at December 31, 2001 amounted to $1,006,488 thousand, consisting of $194,865 thousand short-term debt, $230,000 thousand long-term debt and shareholders’ equity of $581,623 thousand. Financial debt as a percentage of total capitalization amounted to 42.2% at December 31, 2001 and to 36.4% at December 31, 2000.

Comparative Balance Sheet

In order to appraise the development of the Company’s activities, the table below sets forth comparative balance sheet information from the Company’s financial statements as of December 31, 2001, 2000, 1999, 1998 and 1997.


	12.31.01	12.31.00	12.31.99	12.31.98	12.31.97
	Balance Sheet
	Thousands of $

Current Assets	165,764	142,193	158,648	141,489	137,155
Non-current Assets Assets	921,781	906,233	892,065	889,966	872,664
Total Assets	1,087,545	1,048,426	1,050,713	1,031,455	1,009,819

Current Liabilities	275,922	251,754	368,390	180,311	140,480
Non-current Liabilities	230,000	196,643	84,804	264,304	269,304
Total Liabilities	505,922	448,397	453,194	444,615	409,784

Shareholders’ Equity	581,623	600,029	597,519	586,840	600,035

Total	1,087,545	1,048,426	1,050,713	1,031,455	1,009,819

Comparative Results

The table below contains a summary of the income statements for the years ended December 31, 2001, 2000, 1999, 1998 and 1997.


	12.31.01			12.31.00		12.31.99		12.31.98		12.31.97
	Thousands of $

Gross Profit		184,523	194,204		174,589		138,102		139,413
Administration and Commercialization		(80,775)	(90,655)		(82,335)		(74,626)		(71,357)
Operating Income		103,748	103,549		92,254		63,476		68,056
Financial results		(25,735)	(24,545)		(25,962)		(26,524)		(22,048)
Other (Expenses) Income		(688)	470		(60)		201		16,932
Income before tax		77,325	79,474		66,232		37,153		62,940
Income tax Income tax		(28,545)	(31,431)		(24,191)		(13,921)		(17,925)
Ordinary income		48,780	48,043		42,041		23,232		45,015
Extraordinary loss		(21,653)	-		-		-		-
Net Income		27,127	48,043		42,041		23,232		45,015

Comparative Statistical Data

The table below shows a summary of operating data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997.



	12.31.01		12.31.00	12.31.99	12.31.98	12.31.97
Volumes	Balance Sheet
	Thousands of cubic meters
Gas purchased by MetroGAS	3,803,240	5,240,731		5,928,176	4,799,369	4,504,523
Gas contracted by third parties	3,193,506	2,664,282		1,230,146	1,104,809	2,503,941
	6,996,746	7,905,013		7,158,322	5,904,178	7,008,464
Volume of gas withheld:
- Transportation	(490,597)	(506,587)		(417,990)	(358,869)	(468,733)
- Loss in distribution	(187,977)	(232,366)		(208,440)	(183,779)	(185,375)
- Transportation and processing gas production	(6,539)	(17,035)		(20,840)	(28,415)	(24,801)
Volume of gas delivered	6,311,633	7,149,025		6,511,052	5,333,115	6,329,555

Comparative ratios

The table below contains certain financial ratios as of December 31, 2001, 2000, 1999, 1998 and 1997.


	12.31.01	12.31.00	12.31.99	12.31.98	12.31.97

Liquidity	0.60	0.57	0.43	0.78	0.98

Indebtedness	0.87	0.75	0.76	0.76	0.68

Earnings before income tax	0.14	0.14	0.12	0.07	0.11

Other information

The table below contains information regarding the price per share of the Company’s Common Shares and its ADSs:


		Share Price on the Buenos Aires Stock Exchange (1)	Share Price of ADSs on the New York Stock Exchange (1)
		$	US$
Closing price		1.30	13.00
December	1994	1.03	10.12
March	1995	0.90	9.38
June	1995	0.86	8.62
September	1995	0.92	9.12
December	1995	0.98	9.75
March	1996	0.97	9.50
June	1996	1.05	10.62
September	1996	0.95	9.87
December	1996	0.94	9.38
March (2)	1997	1.05	11.38
June	1997	1.01	10.00
September	1997	0.86	8.50
December	1997	0.77	7.75
March	1998	0.93	9.25
June	1998	0.90	8.81
September	1998	0.80	7.88
December	1998	0.85	8.13
March	1999	0.79	8.00
June	1999	0.88	8.44
September	1999	0.93	9.25
December	1999	0.89	8.75
March	2000	0.91	8.63
June	2000	0.88	8.75
September	2000	0.91	9.25
December	2000	0.84	8.06
March	2001	0.79	8.00
June	2001	0.69	6.80
September	2001	0.58	6.30
December	2001	0.68	6.50

(1) Prices on the last business day of the month.

(2) On March 12, 1997, the Shareholders’ Extraordinary Meeting of the Company approved the capitalization of the capital stock adjustment, and the number of listed shares was increased from 199,886,815 to 221,976,771.

Outlook of MetroGAS

Based on the economic situation and the provisions issued by the National Government, which include the modification of MetroGAS’ Regulatory Framework, the Company will concentrate its efforts towards ensuring business continuity, maintaining the quality of gas supplies and meeting the Basic Licence Rules. Finally, and depending on the outcome of the renegotiations of the Licence, MetroGAS will define its future strategy.

Buenos Aires, March 6, 2002


William Harvey Adamson
President

AI assistant

Metrogas S.A. Annual Report 2001

Annual report

Income Statements

LICENCE CONTRACT RENEGOTIATION

REPORT OF INDEPENDENT ACCOUNTANTS

NOTE 11 - CAPITAL STOCK

NOTE 13 - LIMITATION ON THE TRANSFERABILITY OF GAS ARGENTINO

SHARES

NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN

NOTE 15 - LONG-TERM CONTRACTS

NOTE 16 - FISCAL AND LEGAL MATTERS

Operating Costs

Extraordinary income

Liquidity and capital resources

Financing

Comparative Statistical Data

AI assistant

Metrogas S.A. — Annual Report 2001

Annual report

Income Statements

LICENCE CONTRACT RENEGOTIATION

REPORT OF INDEPENDENT ACCOUNTANTS

NOTE 11 - CAPITAL STOCK

NOTE 13 - LIMITATION ON THE TRANSFERABILITY OF GAS ARGENTINO

SHARES

NOTE 14 - EMPLOYEE STOCK OWNERSHIP PLAN

NOTE 15 - LONG-TERM CONTRACTS

NOTE 16 - FISCAL AND LEGAL MATTERS

Operating Costs

Extraordinary income

Liquidity and capital resources

Financing

Comparative Statistical Data

More from Metrogas S.A.

Metrogas S.A. Annual Report 2001