Teekay Q2 Restatement Call Transcript

123jump.com Staff
26 Nov, 2008
New York City

The bulk cargo ocean carrier in a preliminary restatement of statements revised accounting of derivatives, hedging of currencies and interest rate risks. The company is currently reviewing its long term incentives for management. The company will book higher liabilities related to joint ventures.

Teekay Corporation ((TK))
Q2 Restatement & Financial Position Update Call
November 25, 2008 11:00 a.m. ET

Executives

Kent Alekson – Investor Relations Officer
Bjorn Moller - President and Chief Executive Officer
Vincent Lok – Executive Vice President and Chief Financial Officer.

Analysts

Scott Burk – Oppenheimer & Co.
Justine Fisher – Goldman, Sachs & Co.
Martin Roher - MSR Capital Management
Milan Gupta - Southpoint Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Teekay Corporation Q2 Restatement & Financial Position Update conference call. During the call, all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. At that time, if you have a question participants will be asked to press “*1” to register for a question. For assistance during the call, please press “*0” on your touchtone phone. As a reminder, this call is being recorded.

Now for opening remarks and introductions I would like to turn the call over to Mr. Bjorn Moller, Teekay’s President and Chief Executive Officer and to Mr. Vincent Lok, Teekay’s Financial Officer. Please go ahead sir.

Kent Alekson

Before Mr. Moller begins, I would like to direct all participants to our website at www.teekay.com where you will find a copy of the presentation that Mr. Moller and Mr. Lok will review during today’s conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the Company’s preliminary restated earnings release and in the related presentation available on our website.

I will now turn the call over to Mr. Moller to begin.

Bjorn Moller

Thank you Kent and good morning everyone. Thank you for joining us on today’s call. With me here in Vancouver are Vince Lok, Chief Financial Officer and Brian Fortier, Corporate Controller, Peter Evensen, our Chief Strategy Officer is joining us from Connecticut.

On our call today, Vince will walk you through the restatement process that we have been focusing our efforts on for the past three months, discuss its preliminary results and why it has taken longer than previously anticipated, as well as highlight the procedural changes we have made as a result of this review. After Vince’s presentation, I will review Teekay’s financial condition and the reasons why we believe Teekay is strong and stable.

The foundations of our business model, substantial fixed rate revenue and cash flow with strong counterparties, a strong liquidity position and a favorable debt profile given our use of long duration amortizing liabilities put us in a strong competitive position in today’s tough economic and financial climate

Turning to slide 3, in our presentation I can update you that our accounting restatement process is now largely complete following what has been three long months of hard work by our accounting team. The restatements for our three daughter companies, Teekay Offshore Partners, Teekay LNG Partners and Teekay Tankers are finalized whereas the restatements for Teekay Corporation must still be described as preliminary. This is due to the fact that even though we had completed all of the restatement work for Teekay Corp. on each of the questions that had come up in our review over the past three months, one additional question relating to the expense accruals under our long-term incentive program was brought up at the last minute by our auditors, Ernst & Young this past Saturday. This item will take a number of days to finalize before we can file our final restated accounts with the SEC. Due to its pending status, statements made throughout the rest of today’s presentation exclude the impact of this item but I can’t confirm that any adjustments that this item may lead to would be non-cash in nature.

I am pleased to report to you that as expected and communicated when we announced our preliminary Q2 earnings back in August all of our reported changes are non-cash in nature and have not impacted our cash flow, liquidity, dividends or financial condition. This is probably best evidenced by the strong dividends and distribution growth declared by Teekay and its daughter companies over the past couple of months while this restatement process was ongoing. Also, our adjusted net earnings and EPS, which we present every quarter net of non-cash unrealized items typically excluded by equity analysts have not changed for any of the periods covered by the restatements. The underlying now for our use of hedging derivatives is still sound and is consistent with our risk management policies.

It is important to point out that the restatements do not relate to any accounting regularities and do not call into question the integrity of our core financial information rather they are strictly related to the accounting treatment or presentation of various complex, non-routine areas of accounting.

Lastly, as a result of this review we have made a number of changes to our financial statement preparation processes to avoid having this happen again in the future. Due to the extent of work required by our accounting team and our auditors to complete the restatements for all four companies our Q3 earnings release will be delayed until mid-December. I will therefore not be in a position to discuss our expected Q3 results on today’s call.

I’ll now turn the call over to Vince who will walk us through the accounting restatements. Vince.

Vincent Lok

Thank you Bjorn and good morning everyone. Turning to slide 4, I would briefly review the very thorough restatement process we have just completed before describing the restatements in more detail. This restatement process took longer than we anticipated in part because of the thrill of the thoroughness of the review process, the sheer volume of detail of audit work that was undertaken, and the expanded scope of the restatements. The audit process involved subject matter experts from Ernst & Young’s Vancouver office as well as their Canadian and US national offices. In addition, we engaged the services of another accounting firm to assist throughout the process. Together, we conducted a thorough review of all of our derivative transactions during the past five years to reassess whether our hedge documentation met the requirements of SFAS 133.

A standard audit usually involves testing of sample of transactions. However, during the restatement process Ernst & Young essentially performed a 100% audit of all derivative transactions across all four companies over the past five years. In addition to SFAS 133 we also reviewed other areas of complex or evolving accounting standards to ensure that they had been applied properly. From this review a few other related areas were unexpectedly brought into scope including the need to restate Teekay Tankers’ financials.

As expected and previously announced we have made changes to the way Teekay accounts for its derivative transactions, most of which are used to economically hedge our interest rate and foreign currency risks. In addition, we have made changes to our financial statement presentation for RasGas LNG joint ventures. Lastly, we are currently reviewing one outstanding item relating to the accounting treatment of our long-term incentive program. This item was brought up very recently and therefore, we are still in the process of reviewing the impact, if any from this. As a result, the restated results in our news release should be considered preliminary subject to resolution of this item and completion of Ernst & Young’s work on the final restated financial statements. I will now discuss each of these restatement items in more detail.

Turning to slide 5, I will briefly describe the changes in our hedge accounting treatment. As was previously communicated, certain derivative instruments we used to hedge interest rate, charter-rate and foreign exchange risks did not meet the strict technical requirements for hedge accounting treatment under the SFAS 133. I will provide a couple of examples of this to provide some perspective on this issue. One example is when we transferred some of our interest rate swaps from the parent company to one of our daughter companies upon its initial public offering. Our original hedge documentation did not anticipate that the swaps would one day be dropped down into a subsidiary and thus was not appropriate for that new situation.

Another example where our hedge documentation did not meet the SFAS 133 requirements is on the matching of foreign currency forward contracts against the foreign currency expenditures being hedged. For instance, we may enter into two separate FX forward contracts in equal amounts to hedge a basket of (inaudible) expenditures in a particular month. Although the hedge is economically effective, our hedge documentation did not specify which portion of the basket of expenditures it was supposed to hedge i.e. the first half of the month or the second half of the month. As can be seen from these examples the underlining risks are still economically hedged and the relevant cash flows are fixed. However, certain of our hedge documentation did not technically meet all the requirements of SFAS 133.

Just to summarize the difference in accounting treatment between applying hedge accounting and not applying hedge accounting. In both cases all derivative instruments are mark-to-market quarterly. However, under hedge accounting the unrealized portion of the change in fair value of the derivatives would be recorded directly to stockholders’ equity on the balance sheet, whereas unrealized gains or losses are recorded on the income statement when hedge accounting is not applied. This change in accounting treatment will lead to greater volatility of reported GAAP net income. However, the adjusted earnings and EPS, as reported by equity analysts will not change as non-cash unrealized adjustments are typically excluded from their earnings estimates.

An important point I’d like to make at this time is to explain why mark-to-market adjustments of derivatives is unrealized and non-cash. Some companies finance themselves with fixed-rate bonds while others including Teekay find a cheaper way to trade fixed-rate liabilities by borrowing from banks at floating rate LIBOR and then using an interest rate swap, a derivative to create a fixed rate.

We use derivatives to hedge our fixed-rate costs, which is prudent to do especially when you have fixed-rate revenues and want to lock in your operating margins. When we enter into derivative transactions we intend to hold a position until maturity as with the bond to lock in our costs. However, while the fair value of both the bond and the derivative may change each quarter, as the underlying market interest rates change accounting convention specifies that only the derivative must be mark-to-market. If we hold a derivative instrument from inception to maturity all the cumulative unrealized gains and losses would net to zero at maturity. Therefore, the change in fair value would only be realized if we were to unwind a derivative position before maturity. As a result the change in accounting treatment for derivatives does not impact the economic effectiveness of the hedging transactions nor our actual cash flows.

Turning to slide 6 and as mentioned earlier while performing a detailed review of our derivative portfolio we analyzed the transfer of certain interest rate swaps through our RasGas II and RasGas 3 joint ventures. During this review the contractual arrangements within the joint ventures were further analyzed and it was determined that certain of our company’s assets and liabilities relating to the RasGas joint ventures should be grossed up for accounting presentation purposes. The adjustment relating to the RasGas II LNG carriers only impacts the December 31, 2006 balance sheet resulting in an increase to both assets and liabilities by $295 million. This adjustment has no impact on the accounting treatment for these vessels in any period following delivery in the first quarter of 2007.

The gross up adjustment relating to the RasGas 3 joint venture has a similar effect but it’s grossed up for a different reason. While we only have a 40% interest in the RasGas 3 joint venture for accounting purposes we had to amend our balance sheet presentation to include the remaining 60% share of the debt and interest rate swap because each joint venture partner is a joint and several co-borrower of the associated term loan and interest rate swap. However, the grossing up in liabilities is equally offset by a receivable of the same amount. As a result, our net exposure hasn’t changed. It is 40% of the project. However, our gross debt balance has increased as we now must show 100% of the debt and interest rate swap. Similarly, our interest expense will increase to reflect the higher debt balance. However, this is equally offset by increased interest income and sort of net interest income will not change as a result of this presentation change.

In summary, our assets and liabilities have increased by equal amounts representing our joint venturer’s 60% share and accordingly our interest expense and interest income have also increased by equal amounts. Thus, our net exposure has resolved for this change and accounting presentation hasn’t changed, neither has our net income, cash flow, or stockholder’s equity. We are currently working with our joint venture partner and our banks to amend the RasGas 3 loan to avoid this accounting gross up going forward.

Turning to slide 7, as mentioned earlier we are currently reviewing an outstanding item relating to the accruals under our long-term incentive program, which is linked to shareholder value metrics. In particular we are reviewing the accounting methodology for determining the fair value of the future liability and the amortization period. Should there be any accounting changes relating to this item it will not affect the total amounts to be paid out under this plan but only impact the timing of the related accruals. Any accrual adjustments would be non-cash in nature.

Turning to slide 8, we have reproduced the summary of restated second quarter 2008 results from our earnings release to show that adjusted net income as reported by equity analysts hasn’t changed as a result of these restatements because the adjustments are non-cash in nature. The same is true for all the periods covered by these restatements. Earnings as reported and tracked by equity analysts have not changed.

Turning to slide 9, we have summarized the changes that we have taken and made in our accounting processes as a result of this restatement. We have implemented a more rigorous process to determine the accounting treatment for complex accounting issues and non-routine financial structures and arrangements, which includes the engagement of appropriately qualified external expertise. Additionally, we have decided to no longer apply hedge accounting treatment to all of our derivative instruments except for certain foreign currency exchange contracts. This will lead to greater volatility of reported GAAP earnings particularly to interest expense. However, we will provide sufficient information in future earnings releases to enable readers to identify the amount of the unrealized gains and losses from such derivative instruments. In addition to the changes made by the Company, our independent auditors Ernst & Young have also strengthened their team to include relevant subject matter experts going forward.

In summary, Teekay has always prided itself on the quality and integrity of its financial reporting, so we are obviously disappointed to have to go through an accounting restatement process. The amount of time this has taken however is testament to the robustness of the process and to underscore the point we all made at the outset the restatements did not relate to any accounting regularities nor calls into question the integrity of our core financial information.

I will now turn the call back over to Bjorn who will review Teekay’s financial position.

Bjorn Moller

Thank you Vince. As I am sure is the case with just about every company out there these past months we have received a number of questions recently regarding our financial condition not least due to our relatively complex corporate structure, our headline amount of consolidated debt, and our new building program.

The restatement process has kept us on the sidelines with respect to reporting to you on these and other matters but I welcome this opportunity to review with you now the highlights of Teekay’s financial condition.

Turning to slide 11, we believe that Teekay is well positioned in the current difficult economic and financial environment for a number of reasons. First, we have a strong liquidity position and have secured 100% financing for all of our current committed CapEx, a policy that we have had for at least a decade. Second, we have a favorable debt profile with no refinancing requirements through 2010. In addition, our debt profile is light on financial covenants which provides us the flexibility at a time when the credit markets are very restrictive. And third, our substantial long-term fixed-rate revenues and cash flow with counterparties we consider to be creditworthy comfortably support all of Teekay’s debt and I will address each of these topics on the following slides.

Turning to slide 12, as of June 30, 2008 we had current liquidity of more than $1.75 billion of which $500 million was cash and $1.25 billion was in the form of undrawn revolving credits. If we add our pre-arranged newbuilding financing of nearly $1.2 billion to our current liquidity our total available liquidity was over $2.9 billion dollars. In mid-December we will update this liquidity position through September 30, 2008 when we release our Q3 earnings but we do not expect it to be materially different.

Teekay’s well-established practice of matching long-term assets with long-term financing at the time of the newbuild orders are placed is proving to be quite prudent. Looking at our newbuilding commitments, as of June 30, 2008 we had total remaining CapEx payments of approximately $1.3 billion against which we had pre-arranged, committed newbuild financing of almost $1.2 billion leaving only $169 million to be funded from operating cash flow and/or current liquidity. This means that our available liquidity exceeds our required funding by $1.6 billion. It should also be noted that neither Teekay Corporation nor any of its daughters need to access the public capital markets to fund existing CapEx commitments. Also important in today’s difficult bank financing market is which financial institutions are our counterparties. Primarily, Teekay deals with European banks like Calyon, DnB NOR and Nordea for the commercial funding that represents the bulk of our undrawn facilities and as it relates to newbuilds we deal with Export Credit agencies like the Export-Import Bank of Korea, the Korea Export Insurance Corporation and the Export-Import Bank of China.

Turning to slide 13, Teekay has no significant near-term refinancing requirements over and above the normal amortization of its debt facilities. We have only $36 million in balloon payments due between now and mid-2010 and a $150 million due in the second half of 2010. Should we be unable to refinance these balloon payments when they become due our current liquidity of $1.75 billion is more than sufficient to meet these refinancing requirements.

Turning to slide 14, our debt is very light on covenants which provides significant flexibility. The primary financial covenant across all of our entities is to maintain a minimum liquidity level to fund as cash and undrawn revolving credit facilities and with ample cash and undrawn revolvers at each of our companies none of our publicly registered companies are facing covenant concerns. We will still be in a strong covenant position once we have paid all of our newbuild commitments and paid on to our near-term bullet payments with cash. In light of credit concerns affecting other shipping segments today it is very important to note that we have only three facilities representing $346 million which have a minimum hull value covenant. Currently the value of the ships as it relates to the total borrowings available under these facilities ranges from 175% to 480% compared with the minimum requirement under the covenants of 105% to 110%. As you can see from our sensitivity table the vessel values pertaining to these facilities would have to drop precipitously before we would have to even partly pay down any of the relevant debt to remain in compliance. For example, if values were to drop 50% from where they are today we would lose only $25 million of capacity.

Turning to slide 15, Teekay’s business model with over 70% of our assets operating under the long-term, fixed-rate contracts positions the company well even in the event the freight rates and the tanker spot market drop significantly. We have $12.2 billion of forward fixed-rate revenues and unlike any other shipping companies the average length of these contracts exceeds 10 years. However, in this tenuous financial market it is key that Teekay’s primary customers, some of whom are listed in the last column are leading all majors and national oil companies and in the case of seven of our LNGs, the Charterer is a joint venture between the Government of Qatar and Exxon. In addition, most of our shuttle tanker, LNG, FSO and FPSO assets are integral to our customer’s logistics chain because we serve as either the production unit or the floating pipeline linking their production facilities with the ultimate destination for the oil or LNG.

Turning to slide 16, our portfolio of fixed-rate contracts allows us to comfortably carry a higher debt level than other more spot oriented shipping companies. Our annualized $467 million of fixed cash flow from vessel operations or CFVO alone is $61 million higher than Teekay’s total current principal and interest payments of $406 million. Since this calculation excludes any of the cash flow generated by our 82 vessel spot fleet this means we would very comfortably service all of Teekay’s debt even if our spot fleet earns zero cash flow. To put this into context over the 12 months through the end of June 30, 2008 our spot fleet generated $223 million in CFVO. The ability to completely service our debt with our solid long-term contracts is a key reason why we are comfortable with Teekay’s debt balance.

Slide number 17 breaks down Teekay’s debt into more detail providing a very different perspective on our debt picture than just looking at the consolidated figure of $4.9 billion. This is important because as of June 30, 2008, 80% of our consolidated debt is at the subsidiary level and is non-recourse to Teekay Corp. As you can see from the table on the top half of the slide, net debt at Teekay parent is actually under $1 billion on a standalone basis including newbuilding installment payments already made.

Secondly, over two-thirds of our consolidated debt is serviced by assets operating under long-term, fixed-rate contracts. The subsidiary debt resides inside each individual company or partnership, each financially strong and each with debt levels that are well balanced in relation to the nature of its cash flows as illustrated by the financial ratios on the table shown on the slide. As an aside, we will be detailing the financial position of each of our publicly traded subsidiaries on separate previously announced conference calls later today.

Slide 18 is a busy slide but one we think is important to walk through in light of the accounting restatements. This table will be included in the commitments and contingencies note in Teekay’s June 30, 2008 6-K soon to be filed with the SEC. Due in parts of the (inaudible) LNG gross up restatement issue that Vince described earlier the accounting presentation of our principal payments is materially different from what we actually have to pay to the banks. Using the 2009 column as an illustration, as shown in the third line the accounting presentation shows an obligation of $524.8 million due during 2009. However, this number is much higher than the $245.8 million we are actually responsible for as shown at the bottom. The difference is made up of a number of separate elements. Firstly the gross up of our joint venturer’s portion of debt payments for the period amounts to $81.6 million but Teekay is not responsible for this amount as it will be funded with our venturer’s share of the associated cash flow.

Secondly, we have purchase obligations for three Suezmax’s, which are currently treated as capital leases on the balance sheet, to fund the purchase obligations no additional cash will be required as Teekay has agreed with the lending institution that we will simply assume the existing facility from the lessor. However, for accounting presentation purposes we are not able to net the $111.5 million relating to this transaction.

Thirdly, we have capital lease payments of $64.4 million that are offset by restricted cash already on deposit. However, again, we are not permitted under accounting presentation rules to net these amounts.

And lastly, the bullet payments we spoke of earlier are also included as current amounts due, in this case $21.5 million. Similar adjustments need to be made in each period to get to Teekay’s actual debt and capital lease obligations.

And finally, turning to slide 19 before we open it up to questions let me again summarize why we believe Teekay is well positioned in the current environment. We have a strong total available liquidity of nearly $3 billion of cash, undrawn lines and committed newbuilding finances representing 2-1/2 times our current CapEx commitments. We have a favorable debt profile with no near-term refinancing requirements, no covenant concerns, and we have no requirements to raise public capital.

And lastly, we have a very significant fixed-rate contract portfolio with strong counterparties which on its own fully supports Teekay’s debt.

I’d like to thank you for listening in this morning and operator we would like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, if you would like to ask a question, please press “*1” on your touchtone phone. To withdraw your question press the “#” sign. If you are using a speakerphone, please lift your handset before entering your request. Please stand by for the first question. And our first question comes from Scott Burk from Oppenheimer.

Scott Burk – Oppenheimer & Co.

Hi. Good morning Bjorn and Vince. How are you?

Bjorn Moller

Hi, good. Thank you.

Vincent Lok

Hi Scott.

Scott Burk – Oppenheimer & Co.

I just wanted to ask you about the – you mentioned on your slide that the vessel items could fall 35% to 50%. What’s the starting point for that calculation? Is that from the October 3rd values?

Vincent Lok

That’s based on today’s market values Scott.

Scott Burk – Oppenheimer & Co.

Okay. So based on kind of broker reports that values have already fallen some 15% or 30%.

Vincent Lok

That’s correct.

Scott Burk – Oppenheimer & Co.

Okay and just to kind of be clear on the covenants at the subsidiary or the dollar companies are similarly to 105, I forget the number, 130% of loan value.

Bjorn Moller

Yes, they are around 105 to 130%.

Scott Burk – Oppenheimer & Co.

Okay and that’s across all companies?

Vincent Lok

That’s correct.

Scott Burk – Oppenheimer & Co.

Okay.

Vincent Lok

But there’s very few loans, I mean to stress a very, very small part of our debt even have those covenants.

Scott Burk – Oppenheimer & Co.

Okay. And I appreciate the presentation just now. The questions that I had but then I wanted to ask you also about the status of the share buyback program that you talked about a month ago, a couple of months ago.

Vincent Lok

Right. Okay. Well, I guess the issue is that since we announced that stock buyback the insider trading window is being closed pending the restatements. So, we have to activate that program. We will be meeting with our Board again in December. Obviously Teekay has tremendous liquidity, we think Teekay has very compelling value but we want to take stock in light of the – the fact that the world has changed the last couple of months, so we certainly will be looking at that. We think we are going to use a lot of our cash flow to delev our balance sheet but we still think that Teekay’s ship rise is so compelling that it’s something that has to be on the radar screen. So we will look at that. So far none – no purchase – repurchase have been done and if we do activate it when the window opens then I guess it will be done in a measured fashion.

Scott Burk – Oppenheimer & Co.

Okay. Thanks.

Vincent Lok

Great. Thank you.

Operator

And our next question comes from Justine Fisher from Goldman Sachs.

Justine Fisher – Goldman, Sachs & Co.

Good morning.

Bjorn Moller

Good morning.

Vincent Lok

Good morning.

Justine Fisher – Goldman, Sachs & Co.

So, first of all, can I reiterate the thanks on a hugely detailed - probably the best presentation I have seen thus far this year. So thank you very much. We appreciate it. And the one question I have is on interest expense. I see in the Appendix that you go through what – the adjustments are for interest, and maybe we can take the modeling question offline but I don’t know if we can look at debt but amortization is going forward, as far as looking at interest expense going forward should we just assume that it’s going to be somewhat representative of I guess the second quarter’s net interest expense plus whatever, new debt or how should we be thinking about the interest expense in light of the adjustments.

Bjorn Moller

Justine, I guess you are looking at interest expense for the unrealized gains and losses on the swaps?

Justine Fisher – Goldman, Sachs & Co.

Yes, for debt going forward we can just take the current debt down, then assume what the amortizations are after taking out what’s in the slide presentation, but for interest it may be a bit more difficult because we don’t know exactly what the hedge positions are?

Bjorn Moller

Yes, if you look on slide 16 we showed the net interest expense but that is based on the second quarter annualized and I guess you could use that as a starting base and add on any vessel deliveries subsequent to the second quarter.

Justine Fisher – Goldman, Sachs & Co.

All right. Okay, so the 227 plus whatever is the debt that is going to be added down surely.

Bjorn Moller

That’s correct.

Justine Fisher – Goldman, Sachs & Co.

Okay and then can you just remind us what the assets are at Teekay Standalone after taking all the assets at the daughter companies?

Bjorn Moller

Most of the assets are conventional tankers and so most of those are assets operating in the spot market. We do have some fixed-rate charters on some other ships as well. Standalone I think, as we presented in the slides excludes Teekay Petrojarl. So Petrojarl is of course rounding all the FSO units.

Justine Fisher – Goldman, Sachs & Co.

Okay and the fair market value in there it says management estimates aside from what we would attach to the vessels that are in Teekay Standalone. Are there any other assets, maybe not Teekay assets or whatever that is going into the fair value management estimates for Teekay Standalone.

Vincent Lok

In terms of those assets there will be some newbuilding installments on conventional ships as well.

Justine Fisher – Goldman, Sachs & Co.

Okay, so those are included in the fair market value?

Vincent Lok

That’s correct.

Justine Fisher – Goldman, Sachs & Co.

Okay, great. Thank you very much and thanks again for the presentation.

Vincent Lok

Thank you.

Operator

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press “*1” on your touchtone phone. And our next question comes from Martin Roher with MSR Capital Management.

Martin Roher - MSR Capital Management

Thank you and thank you very much for the thorough presentation, it’s very, very helpful. And the question I have is does any of this accounting change affect the way you plan to manage and grow Teekay in the years ahead.

Bjorn Moller

Well Martin, I am glad you asked that question because I think clearly we have to take the integrity of our accounting, our financial statements extremely seriously and we do and this is why we have devoted a huge amount of energy and I really want to applaud the whole team here, Teekay full, a great effort. The reality is that it really doesn’t move the needle in terms of how we run our business which we obviously take equally seriously. So the fact that adjusted earnings and op with exactly the same numbers goes to show that this is all about very technical accounting issues and has no bearing on the value of this company so – but I think we have taken it very seriously and I am proud of the effort that has gone in. Vince, do you have anything to add?

Vincent Lok

I think that’s correct. Adjustments are again non-cash in nature and really don’t – I guess in some cases reflect the substance of the transactions and the effect on the economics of the company so I don’t think this will really impact how we grow the company going forward.

Martin Roher - MSR Capital Management

If I could just ask one follow on question, your long-term incentive program I think has very creative things at times, your motivation to the shareholders – totally aligned with the shareholders but over many years as I recall until the end of 2010. Do these non-cash adjustments that you are still working on have any effect on how that’s going to be structured or changed in any way?

Bjorn Moller

No, there is no impacts on how the plan is going to be structured. This is simply the timing of the accrual recognition for the plan. As you know the plan has two main components to it and one of which requires you to sort of estimate the future liability at the end of the plan in 2010 and of course there is a lot of subjectivity in determining what the liability would be. So all this is really determining the right timing of the expense recognitions so it doesn’t affect the total cost ultimately of the plan at the end of the day.

Martin Roher - MSR Capital Management

Terrific. Thanks again and good luck for future success.

Bjorn Moller

Thanks Martin for your support. It’s a pleasure.

Operator

Our next question comes from Milan Gupta with Southpoint Capital.

Milan Gupta - Southpoint Capital

Hey guys, thanks for the presentation. I just had a quick sort of housekeeping follow-up question. On slide 18, I just missed the adjustments that’s relating to the non-cash purchase obligations under capital leases. I didn’t quite follow what exactly that was.

Bjorn Moller

Yes that is relating to three of our Suezmax’s that are on charter to a Spanish customer and they are currently accounted for as capital leases on our books. However, under that capital lease arrangement we have a purchase obligation and in this case in 2009 whereby we would actually own the ships but we have to assume the existing debt at that time for an equal amount. So, it is really a non-cash item that would simply switch from being a capital lease obligation to a long-term debt at that point in time. So there’s a non-cash effect.

Milan Gupta - Southpoint Capital

But the capital lease you still incur it is still treated like that. You still incur interest in principal payments.

Bjorn Moller

That’s right. On an ongoing basis we are still incurring payments which would be principal and interest payments. It’s just that the purchase obligation for accounting purposes is shown as an additional debt item on the balance sheet in addition to the capital lease obligation. So to look at doubling up I suppose for accounting purposes but again it has a non-cash affect.

Milan Gupta - Southpoint Capital

Okay, got it. Thanks.

Operator

There are no further questions at this time. Please continue.

Bjorn Moller

Well, thank you very much. I guess we went into Thanksgiving Week so I appreciate you all taking the time to join us today. Thank you very much and happy holidays.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line and have a great day.