Cedar Fair aims to boost free cash flow, reduce debt, cut leverage ratio to 4.0 x

By Paul Deckelman

New York, Oct. 5 - The amusement park business can certainly have its ups and downs, particularly in times of constrained consumer discretionary spending - but Cedar Fair, LP, which runs a number of major theme parks and water parks in the U.S. Midwest, on the East Coast and in California, sees its financial measures continuing to climb, with no sickeningly sudden roller-coaster-like drops in sight.

Company executives on Tuesday unveiled Cedar Fair's long-term financial goals, which include double-digit percentage growth in revenues and adjusted EBITDA, achieving free cash flow of $120 million to $140 million annually starting in 2012, and using that extra cash to reduce debt and bring its consolidated leverage ratio down to 4.0 times by 2013 from current levels of about 4.9 times.

Cedar Fair's chairman, president and chief operating officer, Richard L. Kinzel, declared during the company's presentation to investors and analysts that "further reduction of debt, through the prudent use of excess cash flows" would be a priority, so that the company would have "balance sheet flexibility to take advantage of growth opportunities into the future."

Besides outlining the company's goals, Kinzel and Cedar Fair's vice president for finance and chief financial officer, Peter J. Crage, also announced the declaration of a 25-cent per limited partnership unit distribution, marking the 24th consecutive year in which Cedar Fair has paid a distribution to its unit holders.

The company hopes to be able to up that distribution to between $1.25 and $1.75 per unit by 2015, if it can meet its goal of bringing its senior secured leverage ratio down to under 3.0 times from current levels about 3.6 times, which would allow for greater use of excess cash for unit holder distributions under the terms of its credit facility.

A man with a plan

"We will reduce leverage ratios through growth in adjusted EBITDA and a reduction of debt through the use of excess cash flow," Crage said.

The company anticipates growing both its revenues and its adjusted EBITDA by between 10% and 14% by 2015, while also achieving its free cash flow targets, by steadily growing attendance and revenues at its various parks via continued investment in new rides and attractions and maintaining what Cedar Fair boasts as its "best-in-class" visitor experience. The company has received numerous "Golden Ticket" awards from industry trade paper Amusement Today, whose readers have voted its roller-coaster-laden flagship Cedar Point Park in Sandusky, Ohio, as the top amusement park in the world for the last 13 consecutive years.

Crage also stressed "strict cost-cutting" as another key tactic toward Cedar Fair's goal.

As a result of a debt refinancing in July, the company's balance sheet now includes $405 million of 9 1/8% senior notes due 2018, which priced at 98.613 on July 15 to yield 9 3/8%, as well as $1.175 billion of senior secured term loan debt, which matures in 2016. The senior secured credit agreement also provides for a revolving credit facility that matures in 2015, with up to $260 million of availability.

During the question-and-answer portion of the presentation, Crage told an analyst that over the remainder of this year and the early part of next year, "we need to focus on paying down our revolver," which the company had used earlier this year to pay down term debt.

Crage declined to put out a specific dollar amount of planned debt reductions, saying instead that Cedar Fair's stated goal of cutting the consolidated leverage ratio to 4.0 times by 2013 and then further reducing that to create flexibility on the balance sheet "is a pretty good indication of the direction we're going."

Limiting interest rate risk

Crage said that company guidelines envision a debt mix of 60% fixed rate and 40% variable rate. Cedar Fair makes extensive use of interest-rate swap agreements to limit its potential interest rate risks, effectively turning some of its variable-rate debt into the equivalent of fixed-rate debt.

The company on Tuesday reaffirmed previously issued company guidance for 2010, including a projection of $130 million in cash interest costs for the year. Interest costs - which Crage called "one of the most expensive items on our balance sheet - will rise to $160 million next year, due to the expiration of swaps currently in place, $1 billion in October 2011 and $268 million in February 2012.

However, the CFO noted that after that, annual interest costs should fall to between $110 and $120 million in 2012 and beyond.

Cedar Fair recently entered in agreements for $600 million of forward-starting swaps that begin in October 2011 and expire in December 2015. He said that "essentially, for that four-year period, we've locked in $600 million at 2.6%," fixing the Libor against which that variable-rate debt would normally float, "plus a spread of 400 basis points." With the bonds at 9 1/8% and the rest of the company's debt "left floating, for the time being," he said that the strategy has "successfully fixed" about 65% of the company's total debt at an aggregate rate of 7½% to 7.6%.

Distributions and debt ratios

An analyst noted that under the terms of Cedar Fair's senior secured credit agreement, given its current leverage ratios, it is permitted to pay out up to $20 million annually to its partnership unit holders via distributions, but the 25-cent per-unit distribution announced Tuesday only totals $14 million. He asked whether the difference could be rolled over into the following year and distributed then, but Kinzel said that the 25-cent figure was carefully calculated in order to help the unit holders "with some of the tax problems they may encounter this year," and said that the unused portion would be allocated to pay down debt.

The company said that looking forward, it could have an additional $20 million available for distributions next year if it can get its senior secured leverage ratio under 3.0 times from the current 3.6 times, and from 2012 onward, it plans to "steadily increase" its distributions on an annual basis.

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