1. New SEC Corporate Disclosures Southern Gas Association Accounting & Financial Executives Conference April 28, 2003 Robert E. Jensen Trinity University San Antonio, TX 78212

2. 2 Overview v Overview of Sarbanes-Oxley Act of 2002 v Disclosure in MD&A About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations v Conditions for Use of Non-GAAP Financial Measures v Disclosure in MD&A About the Application of Critical Accounting Policies

3. 3 Sarbanes-Oxley Act of 2002 Overview v 2001-2002 news dominated by corporate scandals and financial reporting restatements v Several Congressional committees held hearings on Enron and other corporate misdeeds v Culminated in Sarbanes-Oxley Act of 2002 v Signed into law July 30, 2002 by President Bush u Required significant rulemaking activities on the part of the Commission

4. 4 Sarbanes-Oxley Act of 2002 Components of the SOA v Title I – Public Company Accounting Oversight Board v Title II – Auditor Independence v Title III – Corporate Responsibility u Certifications by CEO and CFO u Audit committee standards u Improper influence of auditors u Insider trading during pension fund blackouts u Conduct standards for attorneys

5. 5 Sarbanes-Oxley Act of 2002 Components of the SOA - Continued v Title IV – Enhanced Financial Disclosures u MD&A disclosures u Non-GAAP financial measures u Reporting on internal controls u Disclosures about code of ethics u Disclosures of audit committee financial expert u Accelerated reporting deadlines v Title V – Analysts Conflict of Interest u Regulation Analyst Certification (Reg AC)

6. 6 Sarbanes-Oxley Act of 2002 Components of the SOA - Continued v Title VI – Commission Resources and Authority v Title VII – Studies and Reports v Title VIII – Corporate and Criminal Fraud and Accountability v Title IX – White Collar Crime Penalty Enhancements v Title X – Corporate Tax Returns v Title XI – Corporate Fraud Accountability

7. 7 MD&A Disclosure Disclosure in MD&A About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations v Related to Section 401(a) of Sarbanes-Oxley v Built on FRR 61 v Adopted by Commission January 22, 2003 v Effective April 7, 2003

8. 8 Off-Balance Sheet Arrangement Disclosure Threshold Disclose arrangements “that have, or are reasonably likely to have, a current or future effect... that is material... “  Identify off-balance sheet arrangements  Assess likelihood of occurrence of known trend, demand, uncertainty, etc  Assessment must be objectively reasonable at time determination is made

9. 9 Definition of Off-Balance Sheet Arrangement Any contract to which an unconsolidated entity is a party, under which the registrant may have:  Any obligation under a guarantee contract (as referenced in FIN 45);  A retained or contingent interest that serves as financial support for assets transferred;  Any obligation under a derivative that has been classified as equity (as referenced in paragraph 11a of SFAS 133); and  Any obligation under a material variable interest (as referenced in FIN 46) held by the registrant in certain entities.

10. 10 Off-Balance Sheet Arrangement Disclosure Requirements Required Disclosures  The nature and business purpose;  The importance to the registrant for liquidity, capital resources, market or credit risk support, or other benefits;  The financial impact on the registrant;  Known trends or events that affect the availability or benefits of the arrangements; and  Any other information that the registrant believes is necessary for an understanding of its off-balance sheet arrangements.

11. 11 Off-Balance Sheet Disclosure Transition Transition  Start in SEC filing that contains annual financial statements for fiscal year ending on or after June 15, 2003  Quarterly updates for material changes (consistent with current MD&A)

12. 12 Tabular Disclosure of Contractual Obligations Required Disclosures  Tabular disclosure required  Long-term debt obligations (SFAS 47)  Capital lease obligations (SFAS 13)  Operating lease obligations (SFAS 13)  Purchase obligations  Other long-term liabilities  Payments due by periods  Less than year  1-3 years  3-5 years  Greater than 5 years

13. 13 Contractual Obligations Definitions  Purchase obligation - Agreement to purchase goods or services that is enforceable and legally binding that specifies all significant terms, including:  Fixed or minimum quantities  Fixed, minimum or variable price provisions  Approximate timing  Other long term liabilities – As reflected on balance sheet under GAAP

14. 14 Table of Contractual Obligations Transition Transition  Start in SEC filing that contains annual financial statements for fiscal year ending on or after December 15, 2003  Quarterly updates for material changes (consistent with current MD&A)  Does not apply to small business issuers

15. 15 Non-GAAP Financial Measures Conditions for Use of Non-GAAP Financial Measures v Related to Section 401(b) of Sarbanes-Oxley v Adopted by Commission January 15, 2003 v Effective March 28, 2003

16. 16 Non-GAAP Financial Measures Impact of Adopted Rule v Adopts Regulation G which applies whenever a company publicly discloses or releases material information that includes a non-GAAP financial measure v Amends Item 10 of Regulations S-K and S-B to address use of non-GAAP financial measure in filings with SEC v Adds Item 12 to Form 8-K related to releases and announcements disclosing certain material non-public information

17. 17 Definition of Non-GAAP Financial Measures A non-GAAP financial measure is... A numerical measure of historical or future performance, financial position or cash flows that: v Excludes amounts, or is subject to adjustments with effect of excluding amounts, that are included in the most directly comparable GAAP measure v Includes amounts, or is subject to adjustments with effect of including amounts, that are excluded in the most directly comparable GAAP measure

18. 18 Regulation G General Provisions v Information shall not contain an untrue statement of a material fact or omit to state a material fact v Present with and reconcile to the most directly comparable GAAP measure v If made orally, telephonically, etc, can post required information on website and disclose location and availability during presentation

19. 19 Item 10 General Provisions v Present most directly comparable GAAP measure with equal or greater prominence v Reconcile with most directly comparable GAAP measure v Disclose why management believes non-GAAP financial measure provides useful information v Disclose additional purposes for which management uses the non-GAAP financial measure if not otherwise disclosed

20. 20 Item 10 Prohibitions – Entity may not... v Exclude cash-settled charges or liabilities from a non- GAAP liquidity measure (excluding EBIT and EBITDA) v Adjust non-GAAP performance measure to eliminate or smooth items when nature of item is reasonably likely to recur within two years or did occur within prior two years v Present non-GAAP financial measure on face of financial statements or in footnotes v Present non-GAAP financial measure on face of pro forma information required under Article 11 0f Reg S-X v Use titles for non-GAAP financial measure the same as or confusingly similar to those used for GAAP measures

21. 21 Disclosure of Critical Accounting Policies Disclosure in MD&A About the Application of Critical Accounting Policies v Proposed May 10, 2002  Approximately 85 comment letters received v Not mandated under Sarbanes-Oxley v Continue to look to FR 60 and FR 61

22. 22 Conclusion A Few Final Thoughts On... v International convergence v Principles-based accounting standards