Ballard Power and the Quest for Profitability

After effectively walking away from the money-sucking automobile market, Ballard Power is now staking its future on a series of niche uses for its hydrogen fuel-cell technology. But will it be enough to survive? ?

John Sheridan, who has also served as president of Bell Canada and CEO of British cable operator Encom, has his biggest challenge yet at Ballard.

After effectively walking away from the money-sucking automobile market, Ballard Power is now staking its future on a series of niche uses for its hydrogen fuel-cell technology. But will it be enough to survive? 

In late February of this year, I joined a group of about 20 investors and analysts in the atrium of the Exchange Tower on King Street West in Toronto. We were there to hear a presentation, but the location of the meeting had a certain emblematic power. The atrium is on the main floor of a 36-floor skyscraper built in 1981 and named for its highest profile tenant, the TSX. It also serves as a mini museum of stock-exchange technology. In a long glass case down one side of the room sit stock-ticker machines as they have evolved through the ages: a series of black boxes, from hand-crank to dial tickers, from clunky computers to the decimal trading systems of the late ’90s and beyond, each box sleeker and smaller and exponentially more powerful than the one that came before.

The fact that we were gathered to hear a presentation from the management of Ballard Power Systems Inc., then, seemed only appropriate, as the company itself is the creator and manufacturer of a black-box technology that has been evolving over the years: the hydrogen fuel cell. This “Investor and Analyst Day,” like a similar one in New York City the day before, wasn’t intended to introduce markets to

that technology, however; it’s been around for many years. What CEO John Sheridan wanted markets to know instead was that this technology has a new future as a result of a new Ballard Power, radically overhauled in structure, in market focus and in value proposition. Having abandoned its 15-year quest to commercialize the hydrogen fuel cell for use in automobiles, Ballard Power, under Sheridan’s leadership since 2005, has reoriented itself toward four strategic niche uses for hydrogen fuel-cell technology: forklifts, backup power units, fuel stacks for buses, and “distributed” power units aimed at industrial settings where there is a local supply of hydrogen.

More crucially – given that Ballard has never reported an annual net profit since Geoffrey Ballard and Firoz Rasul founded the company in 1987, and has racked up just shy of a billion dollars in losses over that period – John Sheridan wanted all of us to know that Ballard Power, in pursuing these four niches, was finally approaching profitability. Specifically, the company would be able to report positive adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization adjusted to exclude the effects of non-recurring and/or non-cash revenue gains or expense losses) by the fourth quarter of fiscal 2011. In fiscal 2012, moreover, Sheridan predicted Ballard Power would report net positive adjusted EBITDA across all four quarters.

That certainly would be a big deal. To put it in perspective, Ballard Power has made various predictions about its profitability from virtually the beginning. You may recall that the “hydrogen economy” – as heralded by U.S. President George W. Bush in 2003 and heavily touted by his secretary of energy, Spencer Abraham – seemed to be perennially just around the corner. By 2005 we were all going to be powering our cars and industrial applications with these miracle black boxes. Or was it 2008? Or was it 2010? Now, in Toronto, in February 2011, Ballard Power was predicting that it would actually be selling its fuel cells in commercial quantities, for more money than it costs to make them, in just six or seven months’ time.

That prediction was clearly a big part of what the 2011 Investor and Analyst Day was all about. But there was another pivotal moment in the presentation. After Sheridan and CFO Tony Guglielmin had spoken, it was chief technology officer Christopher Guzy’s turn. His job was to talk about the real heart of the matter: the technology, the fuel cell itself on which Ballard and all its predictions ultimately relied, just as the machinery of the TSX had once depended on those ticker-machines in the glass case running the length of the room. 

What was the hydrogen fuel cell? How did it work? And how was Ballard planning to reduce its production costs by another 20 to 25 per cent in the next year?

A big man with a handlebar mustache, exuding the same aura of bedrock common sense you might associate with his look-alike, actor Wilford Brimley, Guzy hefted a fuel-cell stack in his hands and turned to the small audience. After seeming to measure up the different things that might be said about this trim and mysterious box, he said, “You put hydrogen in here, you blow air across here. And you get electricity.”


Geoffrey Ballard
Geoffrey Ballard stands next to one of the many
glossy publications that in the ’90s declared his
technology the “future of transportation.”

Of course, Guzy had many other things to say as well. There’s a lot that has to be said if you’re pitching Ballard to investors at this particular point in history. From its peak at $189 in March 2000, after all, the stock has since lost 98.96 per cent of its value. At the time of writing, it was trading at under $2 and the market clearly remained cautious. What Guzy’s summary description of the fuel cell seemed designed to highlight is that questions about the technology itself are not the critical ones at this point. Technically speaking, the black box is proven. What’s not proven is that anybody can make any money selling it.

And that is where Sheridan would like to devote his efforts in educating the market. “There’s tremendous skepticism and cynicism about this whole sector,” he acknowledges in a conversation at Ballard’s Burnaby headquarters, weeks after the Toronto presentation. “Long before my time, people in fuel cells promised the world . . . so I think the marking on us is much harsher.”

Sheridan admits “frustration” that the roller-coaster history of Ballard’s stock is so frequently brought up. After all, he points out, the stock reached those heady values during the same era when Nortel Networks Ltd. and Newbridge Networks Corp. had sky-high market capitalizations. Virtually any technology company was getting bid up in the market. Ballard didn’t create the tech bubble and it arguably shouldn’t be held against the company.

Yet on another level, comparisons to history (to what you might think of as the “old” Ballard) are complimentary to the Sheridan regime and provide a backdrop against which the “new” Ballard can be assessed.

Firoz Rasul, Ballard Power
Ballard’s co-founder Firoz Rasul.

Probably nobody was a louder critic of the “old” Ballard than David Baines, long-time business columnist for the Vancouver Sun. In an interesting parallel, it was an Investor and Analyst Day that Baines attended in the late ’90s, just as the stock was climbing to its peak, that focused his sense of what was wrong with the picture. In column after column from 1992 onward, long before Sheridan’s time, Baines had been detailing for readers how various senior Ballard executives had been selling their stock and pocketing millions of dollars, all while tens of millions in federal and provincial money was flowing the other way, into Ballard research projects. Yet at that investors conference, Baines heard no hard questions from the floor. Instead, he described the atmosphere as being like a “pep rally.” 

“It was indicative of a culture,” Baines says now, distaste evident. “Ballard was just like a Howe Street speculation with more zeros added.” 

Baines was soon joined by other critics, who came at Ballard from different angles. In 2004, an analyst with BMO Nesbitt Burns named Brian Piccioni, who had an engineering and biology background, published the white paper The Hydrogen Economy. It concluded, “Although optimism for the hydrogen economy is virtually universal, we believe and respectfully submit that it is improbable hydrogen will become a major fuel source within the next 25 years, or even, potentially, this century.”

Aerospace engineer and alternative- fuel-source researcher Robert Zubrin was even more scathing in his 2007 article “The Hydrogen Hoax,” published in The New Atlantis: A Journal of Technology and Society. In that influential piece, later published in book form, Zubrin referred to the proponents of the hydrogen economy (including Bush and Abraham) as “the new energy charlatans.”

As Baines had been before them, Zubrin and Piccioni were lightning rods for hostile reaction. Zubrin describes it politely as “flak.” Piccioni is less guarded. “Death threats, nasty stuff,” he recalls, came from so-called “green” interest groups. He stresses that these did not come from Ballard itself, which may have had something to do with the fact that Ballard leadership was in the process of changing their own minds about the hydrogen economy at this time. The automobile fuel-cell product Ballard had been trying to develop since the company’s inception was nowhere near commercialization. Losses in the company continued to mount while cash reserves dwindled. In 2005, stepping in from his role as chair of Ballard’s board, John Sheridan took over at a point when the company, he says now, was facing a “liquidity crisis.” Without a dramatic change in strategy, “the company would have been gone.”

“They didn’t read my report and see the light,” Piccioni says. “But things were crystallizing at the time and I was one of the early ones to connect the dots.”

Piccioni now rates Ballard a speculative buy, an assessment based in large part on what Sheridan did after taking over. It was a two-part strategy. The first involved a complete market repositioning, away from automobiles and focused instead on those four specific niche applications of the fuel- cell technology. The second involved raising money to bolster cash reserves.

[pagebreak] Corporate repositioning depended on extracting Ballard from what Sheridan describes as the “stranglehold” of its relationship with Daimler and Ford. The two auto giants held 32 per cent of Ballard Power, with minority veto rights over business plans and budgets. The net effect of that arrangement was that Ballard Power funded about 60 cents on every dollar of research into fuel-cell cars. Realizing that commercialization of fuel-cell cars was not going to happen quickly enough to justify the ongoing investment, Sheridan negotiated the sale of automobile-related technologies and patents to a new company, Auto Fuel Cell Corp. (AFCC), owned 50.1 per cent by Daimler AG, 30 per cent by Ford and 19.9 per cent by Ballard Power. As a critical part of that deal, Ballard Power negotiated a January 2013 call option on Ford stock in return for its investment in AFCC. Sheridan was then able to sell that position for approximately $40 million. In one deft move, Ballard Power was effectively out of the auto-fuel-cell research business with money in the bank. (While AFCC remains a client of Ballard Power’s, using Ballard cells in its development work, at the time of writing Mercedes-Benz had just announced its intent to sublease 21,000 feet of Ballard’s plant and assume the manufacture of fuel cells for AFCC. The move leaves Ballard with no exposure to automobile fuel-cell research other than its interest in AFCC, with no ongoing cash- flow obligation.)

Piccioni was impressed. “You almost never see a tech company reinvent itself. You never see a company realize they’re in the wrong business, put together a plan, and execute.”

Ballard Power

Ballard Power
They’re not as sexy as cars that emit only water
vapour, but buses and forklifts could offer the
reincarnated Ballard Power profitability,
something cars never did.

The business areas that Ballard has since turned to aren’t exotic, but they’re chosen for what Sheridan insists are their near-term commercial potential. There are tens of thousands of forklifts in the massive distribution centres that increasingly dominate the retail trade in everything from books to food to hardware to computers. Backup power units are necessary in various applications, notably in mobile telecom infrastructure. Distributed power units, meanwhile, can be used to generate electricity in industrial processes (such as the manufacture of chlorine) that produce waste hydrogen, which would be flared otherwise. And, as residents of B.C. know well, fuel-cell buses are still being 
purchased even if fuel-cell cars aren’t. 

Sheridan has also worked over this same time period to overhaul the company’s internal finances. From 2007 to 2010, he oversaw a 47 per cent reduction in cash operating expenses – that is, the cost base the company must cover annually in addition to the cost of goods manufactured – from around $75 million to $40 million, largely achieved by a reduction in R&D expenses. He reduced product cost, meanwhile, by 45 per cent, mostly through patented techniques for reducing the amount of platinum catalyst in Ballard’s fuel cell. The further 20 to 25 per cent reduction in product cost in 2011, announced in Toronto, will be sought via the automation of manufacturing processes, investment in which was made at the end of 2010. In addition, Sheridan has bolstered the company’s cash position, raising $60 million (on top of the Ford share-purchase agreement) without going to capital markets. Approximately $21 million of that was raised via the sale and leaseback of Ballard’s real estate assets in Burnaby. The remainder came from an inventive manoeuvre involving the sale of Ballard’s tax loss carry-forward (a deferred-tax asset on the company’s balance sheet) to Calgary-based Superior Plus Income Trust.

Taken in total, then, Sheridan can be credited with transforming the company. He’s driven the numbers in the direction of profitability, although not yet to that point. And having attended the investors conference in Toronto, I’d say that he’s reshaped the culture of Ballard as well. No pep rally, that gathering was a more sober affair, with almost every question from the floor directly relating to profitability.

Leaving the important question: can they do it? Can Ballard turn it around?

One thing seems clear: the company is running out of time. Having inventively monetized $100 million for its war chest, Sheridan has $74 million on hand today. The company would already be underwater were it not for those transactions, which are one-offs and can’t be repeated. Ballard Power now has less than two years of cash operating cost base on hand. So, as Sheridan himself says, hitting those profitability targets this year and next has become “critical.”

Piccioni is cautiously optimistic. He considers distributed power – using in-place industrial hydrogen sources and a Ballard fuel-cell rig to generate electricity – to be an emerging field, largely unproven. But backup power and forklift applications both have commercial potential, he says. Mobile telecommunications networks need to assure customers continued service even in the event of grid failure. Diesel generators, a common and cheap solution, are inefficient and maintenance-heavy when they’re run at the low loads required. Lead-acid batteries, meanwhile, have the disadvantages of being heavy, giving off heat, and discharging even when they’re not in use. Although Ballard Power’s own estimates show a 5-kW backup-power fuel -cell installation costing 148 per cent what a battery alternative might cost, the company estimates net payback to the customer over three years. 

Piccioni notes further that Wind Mobile, which is using Ballard backup power for its cell infrastructure, has not even been advertising the “green” benefits. “Which means they’re doing it because it makes economic sense.” 

Piccioni feels the numbers also make sense for fuel cells in forklifts used in very large-scale distribution warehouses. The alternative indoors is typically lead-acid battery setups, which tend not to hold a charge for a full shift, meaning forklift operators must lose warehouse time swapping battery packs mid-shift. Batteries also give off heat, requiring ventilation and air conditioning in the facilities where they are recharged. They also give off less and less power as they discharge, meaning forklifts steadily lose speed and productivity over the life of one battery charge.


Hydrogen Fuel Cell
System integration – in other words, all the
complex packaging and plumbing it takes before
a fuel cell can easily be dropped into a bus or
forklift – remains a nagging challenge for Ballard

Fuel cells offer improvement in each of these areas. They last an entire shift. They run cool. They output a steady amount of power over the entire period between refuels. But you have to pay for these benefits. Ballard Power estimates that across a large fleet it would cost about 136 per cent of the battery alternative. And the fuelling station required would be on top of that. Piccioni estimates it would cost as much as a million dollars to set up a hydrogen fuel-storage and refuel facility at a large distribution facility, although he notes that this expense is often financed or covered by industrial hydrogen suppliers. Asked about financial payback periods, a Ballard Power spokesperson estimates that Wal-Mart Stores Inc., which has started using fuel cells in some of its facilities, will be ahead in three years.

Yet in both of these areas, Piccioni says, the market needs to be expanded. Purchase orders need to start rolling in in truly commercial volumes. In the meantime, he’s alive to certain risks. If Ballard Power had an “Achilles heel,” he says, it would be in the area of system integration. Having a deep patent well of fuel-cell technologies is one thing, but you have to be able to plumb the thing and package it so it can slot into an application – like a forklift or a backup-power installation or a bus – just as easily as the battery option. That requires partners to take your fuel cell, engineer it to the specific application, and then sell it, making for the broad-based commercialization that Ballard Power needs. 

How a Fuel Cell Works

Fuel cells are simpler than you might imagine. (Think more hydrogen-powered battery than cold fusion.) H2 is on one side and O2 is on the other. When the electrons and ions in the hydrogen are separated by the proton exchange membrane, the electrons start flowing toward the oxygen. What comes out the other side? 100% pure H2O.

But since fuel cells are still new technology, these partners are necessarily smaller companies like Plug Power Inc., with whom Ballard Power is working in the materials handling area, or Idatech LLC., an Oregon company packaging Ballard cells for backup-power usage. Ballard Power has already learned the hard way that these arrangements don’t always work. Piccioni tells me that Idatech “dropped the ball” on a contract Ballard Power had with Acme Tele Power Ltd. in India, making cost promises it was unable to achieve. And in a higher-profile case, a California startup, ISE Corp, acting as Ballard Power’s system integrator on the famous Whistler fuel-cell buses, went bankrupt mid-process.

“Is there a vulnerability there?” Sheridan asks when discussing the failure of ISE. “Yes, a very stark one.” But he forecasts that over time, as the markets develop, we’ll see Ballard working with bigger companies. And in buses, that’s already happening, as Ballard has begun to partner with the likes of BAE Systems and Van Hool NV, both major players.

Which brings us to buses, a niche market of Ballard’s that might point to another vulnerability: dependency on government funding. There are subsidies for fuel-cell forklift conversion in the U.S. There are subsidies to chlorine manufacturers to encourage their investment in power generation such as Ballard’s distributed power units. These subsidies muddy the water to some extent in terms of establishing the economic viability of these markets, but they are relatively small distortions.

Buses are a different story.

“The bus business I feel very icky talking about,” Piccioni tells me, “because as soon as you enter the domain of mass transit, you enter the domain of political decisions. To be honest with you, these are usually public dollars. And you can get all kinds of info about the latest fuel-cell-powered bus in Dusseldorf with its ribbon-cutting ceremony. But it’s really hard to get a post-mortem. Like, You’ve been running this bus for two years – what are the actual costs? The only [study] I ever saw came out of California . . . and it didn’t paint a pretty picture.”

Capital cost is a driving factor here. A diesel hybrid bus sells for $750,000. Ballard says a fuel-cell-equipped bus costs around $1.5 million. “I was astonished to find out the cost of a diesel hybrid bus,” Piccioni tells me. “But if a fuel-cell bus is double that, then we’re in wacky world. So why not?” 

For Ballard Power shareholders, it may not matter if it’s wacky world or otherwise, as long as governments keep paying for buses. Potential trouble arises only from the fact that political climates do change. Politicians make political decisions for political reasons. And any company dependent on those decisions assumes some risk. That would certainly include Ballard Power, whose CFO, Tony Guglielmin, candidly stated at the February investors conference that government funding of Ballard’s R&D going forward was “a very important part of our program.”

That risk becomes arguably most acute where mass transportation is involved, including either cars or buses. In North America, it’s a new way of powering our vehicles that politicians are most tuned to, as improvements in this area are thought to hold out the greatest promise of alleviating Western dependency on oil. To date, hydrogen has not proven effective in this regard. And as Robert Zubrin points out, other alt-energy solutions are vying for public attention. He is himself part of a lobby group trying to introduce an “open fuel standard” in the U.S. that would see auto manufacturers forced to produce flex-fuel cars – internal combustion engines that, with what Zubrin claims would be a $100 modification, would run on a variety of fuels including methanol. Despite past criticism of methanol – including the fact that it might divert food production into fuel production – were it widely available, it might just be the political silver bullet in mass transportation that hydrogen has not been. It can be made economically from biomass. It can be easily transported as a liquid and therefore distributed to pumps. And it can compete on price with gasoline.

[pagebreak]It isn’t anticipated that hydrogen will be able to do any of these things in the near term, which is precisely why Sheridan smartly manoeuvred Ballard out of the fuel-cells-for-cars research business. However, were another automobile-friendly alt-energy source to reach that tipping point – as Zubrin says methanol quickly could if proposed open fuel standard legislation is approved – the question would have to be asked: Would governments continue to buy $1.5-million fuel-cell buses and robustly invest in hydrogen fuel-cell research generally? 

Given that Premier Christy Clark showed up smiling for the photo-op when Mercedes-Benz announced its sublease from Ballard in March, clearly the political appeal of hydrogen is still there. But if government attentions turn elsewhere, that “very important part” of the Ballard R&D funding plan (and therefore their profitability plan) might be jeopardized. In that case, those fully commercialized niche markets would become all that much more important.

Forklifts and backup power hold promise, but Piccioni says they’re not quite there yet: “Ballard is close. They have everything they need except bona fide commercial markets.”

David Baines had an experience a couple of years ago that made him shake his head, but that might just point to Ballard Power’s ultimate upside. Baines was profiled in Vancouver magazine. As it happens, I wrote the piece, and in it I quoted Baines saying exactly what he said to me in our more recent conversation: in his opinion, “old” Ballard (pre-Sheridan, pre-restructuring and pre-repositioning of the company) was like a Howe Street speculation with a few more zeros attached.

“How ironic to leaf through that issue of the magazine and see my quote about Ballard,” Baines tells me. “Then to find another feature a few pages later called ‘The Fifty Things We Love about Vancouver.’ And midway down that list: Ballard Power.” 

The media and the public have tended to be kind toward Ballard Power, in other words, because the story is one that we’d really like to tell about ourselves: we brought the world a box that you pour hydrogen into, blow some air across, and electricity comes out the other end.

I thought of that last thing before leaving Ballard headquarters, as I got a mini tour of the company’s own museum in the lobby. Just like the TSX museum with its ticker-tape machines and trading computers, this was a series of boxes of increasing sophistication, the product of increasing research and increasing knowledge. The black boxes in Burnaby have become sleeker and smaller and oddly more beautiful with each passing year.

In the fourth quarter of this fiscal year, however – that’s October, November and December – the harder question will be answered, one way or the other. Are fuel cells also like ticker machines in that they’re boxes out of which net profits will reliably flow?

Stay tuned. In the meantime, I’ll give John Sheridan the courtesy last word. When asked about the critical nature of this final challenge for Ballard Power, he says simply: “We’re up for it.”