Overview

New SEC Corporate New SEC Corporate Disclosures Disclosures

Southern Gas Southern Gas Association Accounting & Association Accounting & Financial Executives Financial Executives ConferenceConference

April 28, 2003April 28, 2003

Robert E. JensenRobert E. JensenTrinity UniversityTrinity UniversitySan Antonio, TX 78212San Antonio, TX 78212

New SEC Corporate New SEC Corporate Disclosures Disclosures

Southern Gas Southern Gas Association Accounting & Association Accounting & Financial Executives Financial Executives ConferenceConference

April 28, 2003April 28, 2003

Robert E. JensenRobert E. JensenTrinity UniversityTrinity UniversitySan Antonio, TX 78212San Antonio, TX 78212

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OverviewOverview

Overview of Sarbanes-Oxley Act of 2002Overview of Sarbanes-Oxley Act of 2002

Disclosure in MD&A About Off-Balance Sheet Disclosure in MD&A About Off-Balance Sheet Arrangements and Aggregate Contractual Arrangements and Aggregate Contractual ObligationsObligations

Conditions for Use of Non-GAAP Financial Conditions for Use of Non-GAAP Financial MeasuresMeasures

Disclosure in MD&A About the Application of Disclosure in MD&A About the Application of Critical Accounting PoliciesCritical Accounting Policies

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Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002

OverviewOverview 2001-2002 news dominated by corporate 2001-2002 news dominated by corporate

scandals and financial reporting restatementsscandals and financial reporting restatements

Several Congressional committees held Several Congressional committees held hearings on Enron and other corporate hearings on Enron and other corporate misdeedsmisdeeds

Culminated in Sarbanes-Oxley Act of 2002Culminated in Sarbanes-Oxley Act of 2002

Signed into law July 30, 2002 by President BushSigned into law July 30, 2002 by President Bush Required significant rulemaking activities on the part Required significant rulemaking activities on the part

of the Commissionof the Commission

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Components of the SOAComponents of the SOA Title I – Public Company Accounting Oversight BoardTitle I – Public Company Accounting Oversight Board

Title II – Auditor IndependenceTitle II – Auditor Independence

Title III – Corporate ResponsibilityTitle III – Corporate Responsibility

Certifications by CEO and CFOCertifications by CEO and CFO

Audit committee standardsAudit committee standards

Improper influence of auditorsImproper influence of auditors

Insider trading during pension fund blackoutsInsider trading during pension fund blackouts

Conduct standards for attorneysConduct standards for attorneys

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Components of the SOA - ContinuedComponents of the SOA - Continued Title IV – Enhanced Financial DisclosuresTitle IV – Enhanced Financial Disclosures

MD&A disclosuresMD&A disclosures

Non-GAAP financial measuresNon-GAAP financial measures

Reporting on internal controlsReporting on internal controls

Disclosures about code of ethicsDisclosures about code of ethics

Disclosures of audit committee financial expertDisclosures of audit committee financial expert

Accelerated reporting deadlines Accelerated reporting deadlines

Title V – Analysts Conflict of InterestTitle V – Analysts Conflict of Interest

Regulation Analyst Certification (Reg AC)Regulation Analyst Certification (Reg AC)

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Components of the SOA - ContinuedComponents of the SOA - Continued Title VI – Commission Resources and AuthorityTitle VI – Commission Resources and Authority

Title VII – Studies and ReportsTitle VII – Studies and Reports

Title VIII – Corporate and Criminal Fraud and Title VIII – Corporate and Criminal Fraud and AccountabilityAccountability

Title IX – White Collar Crime Penalty EnhancementsTitle IX – White Collar Crime Penalty Enhancements

Title X – Corporate Tax ReturnsTitle X – Corporate Tax Returns

Title XI – Corporate Fraud AccountabilityTitle XI – Corporate Fraud Accountability

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MD&A Disclosure MD&A Disclosure

Disclosure in MD&A About Off-Balance Disclosure in MD&A About Off-Balance Sheet Arrangements and Aggregate Sheet Arrangements and Aggregate Contractual ObligationsContractual Obligations Related to Section 401(a) of Sarbanes-OxleyRelated to Section 401(a) of Sarbanes-Oxley

Built on FRR 61Built on FRR 61

Adopted by Commission January 22, 2003Adopted by Commission January 22, 2003

Effective April 7, 2003Effective April 7, 2003

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Off-Balance Sheet Arrangement Off-Balance Sheet Arrangement Disclosure ThresholdDisclosure Threshold

Disclose arrangements “that have, or are Disclose arrangements “that have, or are reasonably likely to have, a current or reasonably likely to have, a current or future effect . . . that is material . . . “future effect . . . that is material . . . “

Identify off-balance sheet arrangements Identify off-balance sheet arrangements Assess likelihood of occurrence of Assess likelihood of occurrence of

known trend, demand, uncertainty, etcknown trend, demand, uncertainty, etcAssessment must be objectively reasonable Assessment must be objectively reasonable

at time determination is madeat time determination is made

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Definition of Off-Balance Sheet Definition of Off-Balance Sheet ArrangementArrangementAny contract to which an unconsolidated entity is Any contract to which an unconsolidated entity is

a party, under which the registrant may have:a party, under which the registrant may have: Any obligation under a guarantee contract (as Any obligation under a guarantee contract (as

referenced in FIN 45);referenced in FIN 45); A retained or contingent interest that serves as A retained or contingent interest that serves as

financial support for assets transferred;financial support for assets transferred; Any obligation under a derivative that has been Any obligation under a derivative that has been

classified as equity (as referenced in paragraph classified as equity (as referenced in paragraph 11a of SFAS 133); and11a of SFAS 133); and

Any obligation under a material variable Any obligation under a material variable interest (as referenced in FIN 46) held by the interest (as referenced in FIN 46) held by the registrant in certain entities. registrant in certain entities.

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Off-Balance Sheet Arrangement Off-Balance Sheet Arrangement Disclosure RequirementsDisclosure RequirementsRequired DisclosuresRequired Disclosures The nature and business purpose;The nature and business purpose; The importance to the registrant for liquidity, The importance to the registrant for liquidity,

capital resources, market or credit risk support, capital resources, market or credit risk support, or other benefits;or other benefits;

The financial impact on the registrant;The financial impact on the registrant; Known trends or events that affect the Known trends or events that affect the

availability or benefits of the arrangements; andavailability or benefits of the arrangements; and Any other information that the registrant Any other information that the registrant

believes is necessary for an understanding of believes is necessary for an understanding of its off-balance sheet arrangements.its off-balance sheet arrangements.

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Off-Balance Sheet Disclosure Off-Balance Sheet Disclosure TransitionTransitionTransition Transition Start in SEC filing that contains annual financial Start in SEC filing that contains annual financial

statements for fiscal year ending on or after statements for fiscal year ending on or after June 15, 2003June 15, 2003

Quarterly updates for material changes Quarterly updates for material changes (consistent with current MD&A)(consistent with current MD&A)

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Tabular Disclosure of Tabular Disclosure of Contractual ObligationsContractual ObligationsRequired DisclosuresRequired DisclosuresTabular disclosure requiredTabular disclosure required

Long-term debt obligations (SFAS 47)Long-term debt obligations (SFAS 47) Capital lease obligations (SFAS 13)Capital lease obligations (SFAS 13) Operating lease obligations (SFAS 13)Operating lease obligations (SFAS 13) Purchase obligationsPurchase obligations Other long-term liabilitiesOther long-term liabilities

Payments due by periodsPayments due by periods Less than year Less than year 1-3 years 1-3 years 3-5 years 3-5 years Greater than 5 yearsGreater than 5 years

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Contractual ObligationsContractual Obligations

DefinitionsDefinitionsPurchase obligation - Agreement to purchase Purchase obligation - Agreement to purchase

goods or services that is enforceable and goods or services that is enforceable and legally binding that specifies all significant legally binding that specifies all significant terms, including:terms, including: Fixed or minimum quantitiesFixed or minimum quantities

Fixed, minimum or variable price provisionsFixed, minimum or variable price provisions

Approximate timingApproximate timing

Other long term liabilities – As reflected on Other long term liabilities – As reflected on balance sheet under GAAPbalance sheet under GAAP

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Table of Contractual Table of Contractual Obligations TransitionObligations TransitionTransition Transition Start in SEC filing that contains annual financial Start in SEC filing that contains annual financial

statements for fiscal year ending on or after statements for fiscal year ending on or after December 15, 2003December 15, 2003

Quarterly updates for material changes Quarterly updates for material changes (consistent with current MD&A)(consistent with current MD&A)

Does not apply to small business issuers Does not apply to small business issuers

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Non-GAAP Financial Measures Non-GAAP Financial Measures

Conditions for Use of Non-GAAP Financial Conditions for Use of Non-GAAP Financial MeasuresMeasures Related to Section 401(b) of Sarbanes-OxleyRelated to Section 401(b) of Sarbanes-Oxley

Adopted by Commission January 15, 2003Adopted by Commission January 15, 2003

Effective March 28, 2003Effective March 28, 2003

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Non-GAAP Financial Measures Non-GAAP Financial Measures

Impact of Adopted RuleImpact of Adopted Rule

Adopts Regulation G which applies whenever a Adopts Regulation G which applies whenever a company publicly discloses or releases company publicly discloses or releases material information that includes a non-GAAP material information that includes a non-GAAP financial measurefinancial measure

Amends Item 10 of Regulations S-K and S-B to Amends Item 10 of Regulations S-K and S-B to address use of non-GAAP financial measure in address use of non-GAAP financial measure in filings with SECfilings with SEC

Adds Item 12 to Form 8-K related to releases Adds Item 12 to Form 8-K related to releases and announcements disclosing certain material and announcements disclosing certain material non-public informationnon-public information

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Definition of Non-GAAP Definition of Non-GAAP Financial Measures Financial Measures A non-GAAP financial measure is . . .A non-GAAP financial measure is . . .A numerical measure of historical or future A numerical measure of historical or future performance, financial position or cash flows that:performance, financial position or cash flows that:

Excludes amounts, or is subject to adjustments with Excludes amounts, or is subject to adjustments with effect of excluding amounts, that are included in the effect of excluding amounts, that are included in the most directly comparable GAAP measuremost directly comparable GAAP measure

Includes amounts, or is subject to adjustments with Includes amounts, or is subject to adjustments with effect of including amounts, that are excluded in the effect of including amounts, that are excluded in the most directly comparable GAAP measuremost directly comparable GAAP measure

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Regulation G Regulation G

General ProvisionsGeneral Provisions Information shall not contain an untrue Information shall not contain an untrue

statement of a material fact or omit to state a statement of a material fact or omit to state a material factmaterial fact

Present with and reconcile to the most directly Present with and reconcile to the most directly comparable GAAP measurecomparable GAAP measure

If made orally, telephonically, etc, can post If made orally, telephonically, etc, can post required information on website and disclose required information on website and disclose location and availability during presentationlocation and availability during presentation

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Item 10 Item 10

General ProvisionsGeneral Provisions Present most directly comparable GAAP Present most directly comparable GAAP

measure with equal or greater prominencemeasure with equal or greater prominence

Reconcile with most directly comparable GAAP Reconcile with most directly comparable GAAP measuremeasure

Disclose why management believes non-GAAP Disclose why management believes non-GAAP financial measure provides useful informationfinancial measure provides useful information

Disclose additional purposes for which Disclose additional purposes for which management uses the non-GAAP financial management uses the non-GAAP financial measure if not otherwise disclosedmeasure if not otherwise disclosed

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Item 10 Item 10

Prohibitions – Entity may not . . .Prohibitions – Entity may not . . . Exclude cash-settled charges or liabilities from a non-Exclude cash-settled charges or liabilities from a non-

GAAP liquidity measure (excluding EBIT and EBITDA)GAAP liquidity measure (excluding EBIT and EBITDA)

Adjust non-GAAP performance measure to eliminate or Adjust non-GAAP performance measure to eliminate or smooth items when nature of item is reasonably likely to smooth items when nature of item is reasonably likely to recur within two years or did occur within prior two recur within two years or did occur within prior two yearsyears

Present non-GAAP financial measure on face of financial Present non-GAAP financial measure on face of financial statements or in footnotesstatements or in footnotes

Present non-GAAP financial measure on face of pro Present non-GAAP financial measure on face of pro forma information required under Article 11 0f Reg S-Xforma information required under Article 11 0f Reg S-X

Use titles for non-GAAP financial measure the same as Use titles for non-GAAP financial measure the same as or confusingly similar to those used for GAAP measuresor confusingly similar to those used for GAAP measures

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Disclosure of Critical Disclosure of Critical Accounting Policies Accounting Policies

Disclosure in MD&A About the Application Disclosure in MD&A About the Application of Critical Accounting Policiesof Critical Accounting Policies Proposed May 10, 2002Proposed May 10, 2002

Approximately 85 comment letters receivedApproximately 85 comment letters received

Not mandated under Sarbanes-OxleyNot mandated under Sarbanes-Oxley

Continue to look to FR 60 and FR 61Continue to look to FR 60 and FR 61

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Conclusion Conclusion

A Few Final Thoughts On . . . A Few Final Thoughts On . . . International convergenceInternational convergence

Principles-based accounting standards Principles-based accounting standards

Documents

Overview