Blue Rhino Corporation

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Blue Rhino Corporation

104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
U.S.A.
Telephone: (336) 659-6900
Fax: (336) 659-6750
Web site: http://www.bluerhino.com

Public Company
Incorporated: 1994
Employees: 136
Sales: $205.6 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: RINO
NAIC: 454312 Liquefied Petroleum Gas (Bottled Gas) Dealers

Based in Winston-Salem, North Carolina, Blue Rhino Corporation runs America’s largest propane tank cylinder exchange service, mostly geared toward gas barbecue grills. Customers can either exchange like-for-like cylinders, upgrade to cylinders with additional safety features, or buy entirely new cylinders. The company essentially links local propane distributors with four types of retailers. Blue Rhino displays are found outside such home centers and hardware stores as Home Depot and Lowe’s. Mass merchants include the likes of Sears, Wal-Mart, and Kmart. Major regional supermarket chains carrying Blue Rhino propane tanks include Kroger, Food Lion, and Winn Dixie. Blue Rhino also targets such convenience store chains as SuperAmerica, Emro-Speedway, and Minit Mart Foods. Founded in 1994, Blue Rhino has expanded rapidly beyond its initial South and Southeastern coverage. In recent years it has also begun to diversify its business by selling other products, in particular patio heaters, which use the same 20-pound propane tanks as gas grills and provide additional cylinder sales during the cooler months when customers tend to do less outdoor barbecuing. In addition, Blue Rhino has taken steps to offer products not associated with propane, such as fireplace accessories and garden products.

The Rise of the Gas Grill

Interest in outdoor grilling in America accelerated after World War II with the growth of suburbs and the raising of the baby boomer generation. Two major causes were the invention of charcoal briquettes and the introduction of the Weber Kettle Grill. The former is attributed to legendary automaker Henry Ford, who wanted to make use of wood and sawdust left over from the manufacture of his Model T. He had the excess wood burned in order to form charcoal, which was then ground into powder, mixed with a starch binder, and compressed into briquettes. The Ford Charcoal Company was located in the Michigan town of Kingsford, which would eventually bear the name of Ford’s charcoal business.

Chicago native George Stephen invented the kettle grill in 1951 in the Weber Brothers Metal Works by welding together two half-spheres that were originally intended to make buoys to be placed in Lake Michigan. Once refined, “George’s Barbecue Kettle” featured a domed lid, to ward off wind and rain, and venting that allowed better temperature control for cooking. Gas grills began to appear around 1960, but they were tied to natural gas lines and anchored in place. In the early 1970s propane tanks were introduced, making gas grills portable and able to winter in the garage.

By the mid-1980s gas was beginning to seriously challenge charcoal as the preferred outdoor cooking fuel, and even charcoal stalwarts like Weber took notice and began manufacturing gas units. Clearly, the trend was moving toward gas, and it would only be a matter of time before gas grills outstripped charcoal grills. Moreover, Americans were increasing their reliance on the outdoor grill, in many cases using one all year round.

The Rise of the Propane Tank Exchange System

A major problem for people with gas grills, however, was refilling the propane tank, especially on weekends when most grilling took place. Thus, when the tank was most likely to run out, the local propane supplier would be closed. Overall, refilling the cylinders was a messy and time-consuming chore. Cylinder exchange services were already fairly advanced in Europe, where many homes relied on cabinet heaters, portable units that were fueled by small propane tanks. Advanced refilling plants were also being built overseas. In the meantime, only small local cylinder exchange programs were becoming available in America. The principal founder of Blue Rhino, Billy D. Prim, became involved in the exchange business in 1993 when an Elkin, North Carolina, Wal-Mart manager asked if his heating oil business could set up a national cylinder exchange program to service customers who bought gas grills from the mass merchandiser. Prim quickly recognized he had an opportunity to dominate a fledgling industry.

Prim became a businessman earlier than he had planned, dropping out as a freshman at North Carolina State University in 1975 when his father died. He took over the family farm-supply business, Moxley Store & Oil Co., but with the farm economy flagging, he soon changed the emphasis of the business to fuel. He bought a Booneville, North Carolina, heating-oil company, Quality Oil, then with the help of investors added other oil distributorships, which he combined under a holding company, American Oil & Gas Inc. He also bought a chain of Quik-Pik Food Marts convenience stores and an interstate trucking company. When the chance arose to establish a major propane cylinder exchange business, he turned to a friend, Andrew J. Filipowski, who was also married to his wife’s sister. They were already involved together in Filipowski’s venture-capital firm, Venture Partners LLP.

Like Prim, Filopowski was an aggressive entrepreneur. He grew up in Chicago, the son of Polish immigrants, and did not learn to speak English until he started school. He dropped out of college after a year and went to work as a computer operator at Time-Life, and also worked at Motorola before taking a job at Cullinet Software, a data firm where he excelled. Striking out on his own, he started up a company similar to Cullinet, which did not proved successful. Then in 1987 he established Platinum Technology, developing software for business and information technology clients. Platinum would grow into one of the largest software companies in the world. (In 1999 Filipowski would sell the business for $3.5 billion, pocketing almost $300 million for himself.) Filipowski would create a number of separate businesses under the Platinum banner. His ties to North Carolina resulted from a golfing trip to Myrtle Beach in the late 1980s, when he met his future wife, Veronica Long, the sister of Prim’s wife.

Blue Rhino Emerges in the Early 1990s

Prim developed a business plan for a cylinder exchange program, doing much of the work on a photo safari in Africa during February 1994. He was searching for a recognizable symbol for the company that could incorporate propane’s distinct blue flame. He returned home with the Blue Rhino concept, influenced in part by Owens-Corning’s use of the Pink Panther. In March 1994, he incorporated Blue Rhino in North Carolina, and later in the year reincorporated in Delaware. He raised $20 million from friends and family, including Filipowski who became vice-chairman of the board in May 1994.

The business originally set up shop in Prim’s Booneville American Oil & Gas facility and quickly lined up five major retail customers. Calls from retailers asking when Blue Rhino would become available in their part of the country reinforced Prim’s belief that the time was ripe for a national cylinder exchange business. His original plan called for a vertically integrated operation, which would require Blue Rhino to build and maintain an extensive operation—from the purchase of cylinders, refilling facilities, and delivery trucks, to the establishment of a sales, marketing, and MIS infrastructure. In March 1996 Blue Rhino began to switch to a business model that used independent distributors. Not only would this require less capital, it would allow Blue Rhino to spread its concept more quickly and claim a major market share. As a result, Blue Rhino hoped to become the dominant player in the inevitable consolidation of this new and highly fragmented business.

Federal laws prohibiting the indoor display of propane tanks also served to grow Blue Rhino’s business and name recognition. Because retailers did not have to give up valuable indoor retail space, the decision to set up a Blue Rhino display outside the store in unutilized space was generally an easy one. Moreover, the Blue Rhino display was prominently located near entrances, serving as a free but extremely valuable billboard for the company.

In the two years after abandoning the vertically integrated model, Blue Rhino had signed up 51 major distributors delivering to more than 6,500 locations in 41 states. A year later the company would be serving 12,000 locations in 47 states and Puerto Rico. Net sales, as a result, increased at a fast pace, growing from $2.7 million in fiscal 1995 to $8.2 million in 1996, and $14.2 million in 1997. Although Blue Rhino was not yet profitable, Prim took the company public in June 1998, raising enough money to pay off $29 million in debt and keep some $7.5 million available for general purposes and acquisitions.

Company Perspectives:

The company intends to leverage its name, reputation and distribution networks to build Blue Rhino brand into a multidimensional franchise.

Blue Rhino also began to test a line of propane-powered patio heaters in 1998. One of its distributors in San Diego, Mr. Propane, had been active in the patio heater business since 1992 and proved how potentially lucrative it could be. Mr. Propane’s founder, Chuck Dilts, had run a forklift cylinder exchange business, but when it failed he was forced to live on the streets for a spell. To feed himself he did odd jobs, one of which was to refill a restaurant’s patio heater. It sparked the inspiration for a cylinder exchange and patio heater service business. Taken in by a friend in the oil business who provided some financial backing, Dilts began Mr. Propane with a single contract with a pancake house. Word of mouth brought more customers and eventually he had a thriving business. California’s non-smoking legislation for public places added to the growth of patio heaters, as restaurants were eager to keep their smoking customers comfortable outside. With other areas of the country following California’s lead on smoking regulations, Blue Rhino recognized patio heaters as a complementary business with tremendous potential, both in cylinder service and heater sales. The company would later develop mosquito magnets, which could be used near restaurants or on golf courses, powered by propane with the capacity of clearing as much as an acre of space.

In 1998 Blue Rhino’s closest competitor, Amerigas Partners LP, lagged well behind with just 3,500 locations, and Prim was eager to press his advantage. His goal was to become a $500 million company by 2003, and in October 1998 he announced that Blue Rhino might issue another one million shares of stock to be used to acquire existing propane gas distributors. Blue Rhino’s momentum, however, was soon blunted when the company came into conflict with its auditor, Pricewaterhouse-Coopers. At issue was Blue Rhino’s connection to two companies. Blue Rhino paid $635,000 to Bison Valve LLC, which was developing an environmentally-sound safe valve for propane tanks. The accounting firm’s Greensboro office treated the money as a loan on the balance sheet, only to be later overruled by the national office that insisted the money be considered an equity investment. A second company, USA Leasing LLC, proved even more troubling, because Prim and Filipowski and another board member owned 74 percent of it. Formed in October 1998, USA Leasing purchased $6.5 million of Blue Rhino’s inventory of cylinders, with Blue Rhino guaranteeing 80 percent of the debt. Again the national office of Pricewater-houseCoopers overruled the local office, maintaining that USA Leasing’s financial statements should be consolidated into Blue Rhino’s.

Auditing Conflict Leads to Investor Concerns in 1999

Blue Rhino followed its auditor’s instructions and revised its earnings. Subsequently, a January 11, 1999, Wall Street Journal article questioned the company’s business practices. Robert McGough wrote that because of Blue Rhino’s sale of cylinders to USA Leasing, “skeptics argue that Blue Rhino is thereby moving some of the burden of growing its business off its balance sheet, and contend the stock is overpriced at 50 times projected earnings of 49 cents a share for the year ending July 1999.” The article also questioned the propriety of Prim and Filipowksi owning major stakes in distributorships. The controversy served to steadily drive down the price of Blue Rhino stock, which had been trading in the neighborhood of $25 per share, and resulted in Prim canceling a secondary stock offering.

Blue Rhino soon fired PricewaterhouseCoopers and sued, contending that the auditor’s action led to the collapse of Blue Rhino stock and the cancellation of a $42 million stock offering. Blue Rhino would eventually drop the suit in December 2000. In the meantime, as its stock bottomed out at the $2 level, the company took steps to reassure investors while continuing to grow its business despite the cloud cast over it. Blue Rhino took USA Leasing in-house by purchasing it, and then Prim and Filipowski sold their interests in distributorships.

Unlike investors, however, retailers were not scared off, as Blue Rhino continued to add customers at a fast clip. In particular it bolstered its representation at supermarkets, not only expanding on relationships with Kroger and Food Lion, but adding Lucky Stores and Bruno’s as well. On the product side, Blue Rhino introduced FuelCheck gas cylinders with a built-in gauge that indicated when a tank had less than two hours of fuel. Blue Rhino also announced a joint venture with Manchester Tank and Equipment Company to create an automated bottling plant, drawing on the experience of similar European efforts.

Blue Rhino had first-hand experience with the need for safe refilling facilities. At its Booneville facility in July 1995 a replenished cylinder fell off a conveyor belt, resulting in a leak that then ignited, causing considerable damage to the plant. When the automated plant eventually opened it would provide a consistent product at incredible speed. At Booneville the company had only been able to turn around 350 to 400 cylinders a day. The new facility was able to purge, fix, paint, fill, and test for leaks almost 10,000 cylinders each day.

Looking to diversify, in April 2000 Blue Rhino acquired two import and design companies. It paid $2.9 million in cash plus stock worth $1.1 million for International Propane Products, makers of patio heaters that Blue Rhino had exclusive North American rights to distribute. Prim hoped that the move would enable Blue Rhino to lower the price of patio heaters, thereby increasing the demand and creating a larger market for the company’s propane services. A day later, Blue Rhino acquired Uniflame, Inc. in a $13.3 million deal that included approximately $4.3 million in cash, $6.7 million in stock, and another $2.3 million in deferred cash payments. Uniflame products included barbecue grills, garden art, and fireplace accessories, sold by such major retailers as Home Depot, Lowes, Wal-Mart, and Sears. Uniflame’s import infrastructure would support Blue Rhino’s patio heater sales, especially to the Far East. In October 2000, Blue Rhino acquired QuickShip Inc. in an $8 million deal that included approximately $1.2 million in cash and deferred payments and the balance in stock. An in-store, retail shipping service company, QuickShip was available at 200 retail locations in 16 states. Because the business operated out of retail bases in a manner similar to Blue Rhino’s cylinder exchange service, Prim hoped to take advantage of his already existing infrastructure and retailer relationships to greatly expand upon the QuickShip concept.

Blue Rhino took a hit from high propane prices in late 2000, prompting the company to establish a hedging plan in order to protect it against future commodity price swings. Although the company was just reaching the break-even point, it was the unquestioned leader in its field, with the capacity to reach 90 percent of all gas grills in America and a patio heater business that also looked promising. In 2002, the company was able to report an increase in annual sales of some 47 percent, to $205.6 million, due in part to the acquisition of USA Cylinder Exchange from Suburban Propane. There was every reason to believe that Blue Rhino would continue to achieve profitability and expand its business.