XWES_Initiation_Feb 2012 FINAL.pdf

7/27/2019 XWES_Initiation_Feb 2012 FINAL.pdf

http://slidepdf.com/reader/full/xwesinitiationfeb-2012-finalpdf 1/20See Important Disclosures and Disclaimer on Page 20

World Energy Solutions, Inc. (NASDAQ: XWES) February 6, 20Price ............................................................................................... $4.2552-Week Range ................................................................. $2.21 - $5.10Market Capitalization ($M)......................................................... $50.6Enterprise Value ($M).................................................................. $44.1Shares Outstanding (M) ................................................................. 11.9Float (Shares; M) .............................................................................. 7.8Insider Ownership (%) .................................................................. 23%Institutional Ownership (%).......................................................... 53%Daily Volume (3-Month Avg.) ................................................... 21,000Industry ...................................................................... Business Services Corporate Headquarters............................................... Worcester, MA

Company Description

World Energy Solutions, Inc. (“World Energy”) provides a range of energy management solutions to commercial and industbusinesses, institutions, utilities, and governments to reduce their overall energy costs. The Company comes to market with a holapproach to energy management helping customers a) contract for the lowest price for energy, b) engage in energy efficiency projto minimize quantity used, and c) maximize available rebate and incentive programs. The Company comes offers an innova

approach to procurement via its state-of-the-art online auction platforms, the World Energy Exchange®, the World Green Exchanand the World DR Exchange®. And with recent investments and acquisitions, World Energy is building out its energy efficiepractice, offering technology enabled solutions (such as online audits of facilities) and project management services.

Initiation of coverage: XWES: Technologically Advancing the Energy Management Space Significant potential to continue capturing market share - Per management, there currently are over 500 aggregators, brok

and consultants as potential candidates for acquistion, and the Company has recently completed three key acquistions. In addito significant roll-up opportunities in this highly fragmented yet sizable energy brokerage space, World Energy has the abilitycontinue adding to its customer base while simultaneously growing through channel partnerships. XWES is also expandingfootprint in the efficiency space through additional service offerings that will assist customers in reducing overall energy costs.

Offering state-of-the-art auction platforms for increased cost efficiency and transparency – The Company has developedonline auction environment that drives competition among bidders while providing heightened transparency for all participaThese state-of-the-art platforms are drawing attention within the energy management services marketplace as a superior appro

to transacting business over traditional pen and paper methodologies. XWES has an attractive business model with scalability and current backlog - To date, the Company is reporting in exces

2,000 customers, more than 30,000 sites (facilities being serviced), and over 500 suppliers to service those consumers. S2008, the Company has successfully grown its top line with minimal additions to both headcount (increased from 55 toemployees) and capital expenditures, and we believe that there will be no significant additions required over the next few years

Deregulation in the industry is a near-term driver – While both federal and state laws govern the sales of electricity and natgas, there is an overall trend in the industry towards deregulation. While the sale of natural gas is almost 100% deregulated inU.S., deregulation in the electricity marketplace has been passed in 23 states plus D.C. (although some states are phasing in thregulatory changes). The opportunity for increased competition in these markets is significant for World Energy.

Valuation – With an ability to offer customers advanced technology and tools to maximize their cost savings, significopportunity to continue gaining market share, and a compelling value proposition for investors, World Energy appears w

positioned. Our discounted cash flow model results in a value range of about $5.93 - $7.24/share.

FY Dec Revs Net Inc EPS P/E Rev Grw (000s) (0

2010 A 17,985$ (99)$ (0.01)$ nm 23% Cash & Cash Equivs 6,516 Working Capital $7

2011 E 21,855$ 1,879$ 0.18$ 24.1x 22% Cash/Share $0.55 Current Ratio

2012 E 32,798$ 4,487$ 0.37$ 11.5x 50% Equity (book value) 18,380 Total Debt/Equity

2013 E 38,232$ 5,605$ 0.45$ 9.4x 17% Equity/Share $1.54 Total Debt/Capital

Source: Company reports, Stonegate estimates

Condensed Income Statements (000s) Condensed Balance Sheet (09/30/11)

STONEGATE

S E C U R I T I E S

$0.00

$2.00

$4.00

$6.00

Feb-11 May-11 Aug-11 Nov-11 Feb-1


http://slidepdf.com/reader/full/xwesinitiationfeb-2012-finalpdf 2/20

STONEGATE S ECUR I T I E S 2

Investment Factors

Investment PositivesSignificant potential to continue capturing market share – Per management, there currently areover 500 aggregators, brokers and consultants as potential candidates for acquistion. XWES hasrecently completed three key acquisitions; these acquisitions add to the Company’s capabilities inthe energy efficiency arena in addition to providing World Energy access into a small to medium-

size customer base. In addition to significant roll-up opportunities in this highly fragmented yetsizable energy brokerage space, World Energy can expand its participant base both through itsinternal sales team as well as through channel partnerships - the Company has grown its number of channel partners from 29 to 172 over the last five years. And as part of the expansion of itsefficiency practice, XWES continues to develop the technology and know-how in this segment inorder to help customers implement equipment upgrades and retrofit projects with the goal of reducing a company’s total quantity of energy used. The energy efficiency market is a key areawhere management expects significant growth and the creation of cross-sell opportunities in thenear-term.

Online auctions offering advanced technology and supporting services attract newparticipants – The Company’s technology, principally internally developed, creates a highlysophisticated and automated environment where suppliers and consumers come together within theenergy management space. Significantly advanced as compared to the historical use of pen and

paper methodologies, the three online auction platforms are designed to drive competition among participants while at the same time providing transparency (management estimates that customerssave approximately 7 – 15% by joining the auction platform). The exchanges are built upon a seriesof software modules that facilitate the deal flow for both World Energy and the exchange

participants. The Company details the technology architecture as very scalable for processing as the business grows, and diligent steps have been taken to secure all client transactions. While there areno patents protecting the architecture, the true differentiator behind the platforms is the vast amountof data on market rules and industry know-how incorporated into the technology. We believe theadvanced functionality of the exchanges enables the Company to outperform the more traditionalcompetitors and should help World Energy continue to capture market share.

Scalable business model with current backlog driving expanding margins – To date, theCompany is reporting in excess of 2,000 customers, more than 30,000 sites, and over 500 suppliersto service those consumers. Management details the most recent contractual backlog and receivables number to be in excess of $23 million. Having executed upon long-term strategic planof investing in infrastructure for future growth, the Company today realizes gross margins in excessof 80% and has reported positive net income for five consecutive quarters. World Energy hasgenerated positive adjusted EBITDA for nine of the last eleven quarters as well. Since 2008, theCompany has successfully grown its top line with minimal additions to both headcount (increased from 55 to 65 employees) and capital expenditures, and we believe that there will be no significantadditions required in over the next few years. As the Company continues to gain market share, thisscalable business model drives attractive margins.

Deregulation is a near-term catalyst in the energy marketplace – As more and more federal and state legislatures allow for deregulation within the U.S. energy markets, new areas of opportunityopen for World Energy to attract these consumers looking to take part in competitive biddingenvironments. Historically there has been intense vertical integration in the States, so much thatutility providers kept near monopolies over the generation, transmission and distribution of electricity to retail consumers, now many of those end-users can select their electricity supplier themselves. Just recently, California, Michigan and Ohio have come into play through partial to fullderegulation on the sale of electricity, and Oregon is expected in the near-term, among others.While only a fraction of the states in the U.S. are fully deregulated with regards to electricitytransactions, the natural gas industry is significantly farther along in allowing true competitionamong suppliers.




Investment Challenges/RisksLister and bidder concentration – A small number of significant listers (government entities)make up a substantial portion of World Energy’s revenues. One government entity made up morethan 10% of the Company’s revenue for the year ended 2009, but none represented above 10% for the year ended 2010 (and none for the nine months ending 9/30/11). And while the governmentcontracts typically last multiple years, they are subject to cancellation clauses. Listers have nocommitment to make additional purchases beyond a specific auction event. World Energy also

depends on a small number of key bidders to participate within its auction platforms; for the year ending December 31, 2010, two bidders made up over 22% of the Company’s revenues (and two

bidders made up over 24% for the nine months ending 9/30/11). There is nothing contractual to prevent bidders from taking their resources to the competition.

The auction platform is newer technology – World Energy is operating auction platformsdesigned with state-of-the-art technology. This approach differs significantly from the moretraditional pen and paper methodologies and thus might meet with resistance from many market

participants. Additionally, the technology itself has been both developed internally as well alicensed from third-parties; the Company may face challenges in the future regarding technologicalrights (World Energy has no patents) as well as the threat of more advanced technologies.Disruptions and security breaches are also legitimate concerns in this operating environment.

Government regulation can significantly affect future results – While the trend in the electricityindustry is migrating towards deregulation and increased competition, and legislation has been

passed in 23 states plus D.C., only a little more than half of those offer truly competitiveenvironments today as deregulation is being phased in over a period of years, in some cases. Often,even in states technically deregulated, the local utility will be able to provide electricity atsubsidized rates that are too low to drive meaningful competition into the market in that area.Alternatively, in the natural gas market, the majority of states permit consumers to choose their ownnatural gas supplier.

Acquisitions must be successfully integrated – Part of World Energy’s growth strategy isdependent on successful acquisitions. The Company quickly made one acquisition in September 2011 and then two in October 2011. Management may not be as effective in identifying future

acquisition candidates and may not be able to quickly integrate and manage these newer businessoperations, which could negatively affect financial results.




Valuation Summary

World Energy is a recognized leader in the industry, operating technologically advanced auction platforms for the brokerage of energy and offering a range of services through its energy efficiency practice. We believe that there are no truly comparable publicly traded companies at this time for direct analysis. Therefore, we rely on a discounted cash flow analysis. Our DCF model shows avaluation range of approximately $5.93 - $7.24/share with the mid-point of the range at

approximately $6.50.

We believe the long-term growth rates are reasonable given the Company’s historical rates, the U.S.market sizes, and World Energy’s significant opportunities for organic growth going forward. And we note that no acquisition activity has been included other than the three recently announced acquisitions (Co-eXprise, Northeast Energy Solutions, and GSE Consulting LP). See page 16 for more details to our DCF.

Exhibit 1: Sensitivity Analysis

Source: Stonegate Securities

We outline the following catalysts for World Energy, each with the potential to add significantupside to our model:

Full integration of 3 recent acquisitions completed…………………………………1H 2012 Additional acquisitions of brokerage competitors….………………………2012 and beyond Expansion of energy efficiency business opportunities…………....………2012 and beyond

Additional deregulation across U.S. and/or other favorable legislation……2012 and beyond Increasing adoption of the online energy auction approach.……………….2012 and beyond

0% 1% 2% 3% 4%

11.9% $6.58 $6.89 $7.25 $7.70 $8.26

12.4% $6.27 $6.54 $6.86 $7.24 $7.7212.9% $5.98 $6.22 $6.50 $6.84 $7.25

13.4% $5.72 $5.93 $6.18 $6.47 $6.83

13.9% $5.47 $5.66 $5.88 $6.14 $6.46

Terminal Growth Rates

W A C C




Company Overview

Company Background

World Energy Solutions, Inc. provides energy management services utilizing state-of-the-arttechnology and the experience of a seasoned management team to bring lower energy costs to itscustomers. The Company uses the following equation to help customers understand the holisticnature of the energy management problem.

E = P * Q – i

Total energy costs (E) is a function of energy price (P) times quantity of energy consumed (Q)minus any rebates or incentives (i) that the customer can earn. By analyzing energy managementwith this simplified approach, World Energy believes that customers can more clearly see therelationships within the dynamic and complex issue of total energy management.

Through Q311, the Company’s business was focused on its retail and wholesale energy clientstransacting via the Company’s three online platforms, the World Energy Exchange®, the World Green Exchange® and the World DR Exchange®, where energy suppliers and consumers come

together in an auction environment to negotiate for the purchase or sale of:

electricity

natural gas

other energy resources

environmental commodities

demand response revenue share

In late Q311 and early Q411, XWES acquired two companies, Northeast Energy Solutions and GSEConsulting, as well as the book of business of Co-eXprise, an energy procurement business,expanding its capabilities and profile. These acquisitions add to the Company’s capabilities in theenergy efficiency arena in addition to providing World Energy access into a small to medium-size

customer base.

The Company was founded in September 1996 under the name Oceanside Energy, Inc. In June1999, World Energy Solutions, Inc. was incorporated, and later that October, Oceanside became awholly-owned subsidiary of World Energy Solutions, Inc. and was subsequently dissolved.Following an IPO in November 2006, the Company traded on the Toronto Stock Exchange for approximately 4 years. In April 2009 following a 1:10 reverse stock split, World Energy dual listed on the NASDAQ under the symbol “XWES”, and then the Company voluntarily delisted from theTSX in December 2010. The Company is headquartered in Worchester, MA, and employed aheadcount of approximately 65 as of October 31, 2011. With the acquisitions referenced above, weestimate headcount as of the end of 2011 at approximately 90.

Service OfferingsWorld Energy has historically operated as a leading online broker of energy in the U.S., bringingtogether buyers and sellers of energy and related commodities, including incentives such as“demand response”, in an online exchange. Here, World Energy can more efficiently broker energycontracts than historically has been possible via traditional paper RFP and phone methods. And ultimately, better pricing and higher incentives will result in reduced energy costs for World Energycustomers.




To achieve this, the Company has developed three online auction platforms to date.

World Energy Exchange® – As the Company’s first exchange and World Energy’s primarysource of revenue, this platform not only facilitates the brokering of electricity and natural gas butalso allows the brokering of green power (for example, electricity generated by renewableresources) and wholesale electricity. In this auction environment, “listers” are the retail and wholesale energy participants looking for the lowest bid from the energy suppliers, or “bidders”, for

their business.

World Green Exchange® – Launched in 2007, this exchange forum allows bidders and listers tonegotiate for the purchase or sale of environmental commodities, such as Renewable EnergyCertificates (RECs), Verified Emissions Reductions (VERs), Certified Emissions Reductions(CERs), and Regional Greenhouse Gas Initiative (RGGI) allowances.

World DR Exchange® – Brought online in January 2010, the World DR (demand response)Exchange® was the first of its kind. Here, energy consumers prepared to provide a ready source of curtailment in usage are brought together with demand response providers (DRPs) in sophisticated auctions designed specifically to increase price transparency and heighten competition.

For the majority of transactions on World Energy exchanges, bidders interested in participating inan auction must first sign an agreement consenting to pay the Company a fee should the auctionresult in a signed contract with the customer, or lister. The amount paid to World energy for itsservices is based upon a commission rate and is built into the price of the commodity that thecustomer receives within the auction. For example, when a contract is finalized between a bidder and a consumer following an auction for electricity, the fees to World Energy can be forecasted asthe total amount of the commodity to be supplied multiplied by the contractual commission rate.However, the Company recognizes this revenue based on actual usage figures typically provided bythe supplier on a monthly basis.

Technology ReviewWith the exception of a few licensed components, World Energy has spent years internally

developing the state-of-the-art technology required for its online exchanges where suppliers and consumers come together within the energy management space. These highly sophisticated and automated environments offered within its online auction platforms succeed in driving competitionfor business and ultimately improving the process flow for participants. The current technologyarchitecture is scalable for transaction processing as the business grows and has a web-based user interface.




The exchanges are built upon a series of software modules that facilitate the deal flow for bothWorld Energy and the exchange participants. The technology includes the following functionality:

A database of suppliers assists with sourcing management Lead management data tracks customers throughout the sales process One module enables deal and task management throughout procurement The market intelligence database details market rules and pricing trends RFPs (request for proposal) can be created with varying terms and parameters Online auctions manage bidding, timing, and display of results for participants A database of contracts in place, sites, accounts and usage allows for portfolio management Monitoring, triggering and messaging tools have been incorporated to minimize risk Forecasted and actual commissions due to channel partners are reported and analyzed A receivables management system uploads data from suppliers and tracks payments

As part of the expansion of its efficiency practice, the Company had both organic hires in Q311 aswell as additions through the acquisition of Northeast Energy Solutions. The technology and know-how in this segment help customers implement equipment upgrades and retrofit projects with thegoal of reducing a company’s total quantity of energy used. Expansion in the energy efficiencymarket is a key area where management expects significant growth and the creation of cross-sellopportunities.

Exhibit 2 - Online Auction Platform

Source: Company Reports




Market Listers % of XWES Revenues

Retail Energy Consumers Commerc ial

Industrial 80 - 85%

Government

Wholesale Energy Utilities

Electricity Retailers 10 - 15%

Intermediaries

Demand Response Curtailment Ready Customers <5%

Environmental Commodities Regulating Entities <5%

Exhibit 3 - Major Markets

Source: Company Reports, Stonegate Securities

Sales and MarketingWorld Energy currently services four major markets, including retail energy, wholesale energy,demand response and environmental commodities. In 2011, management began acquiring theresources to enter a fifth market – efficiency – and has rolled out an energy efficiency practice in tofurther reduce its customers’ energy costs. The Company offers online efficiency audits at customer facilities and will prioritize and execute retrofit options as part of the deliverables.

Management estimates that approximately 25% of new sales are generated by its internal sales team.In addition to having a regionally-structured salesforce courting customers to the online auctionenvironment and conducting educational webinars for prospects, channel partners frequently assistin bringing potential customers to the Company’s energy management platforms. By bringing their customers to the World Energy auction platform or by offering a private label version of the

platform, channel partners significantly increase transaction volume for the Company. They aremeanwhile enhancing their own service offerings to their customers via the automated functionality

and market intelligence accessed through the exchanges. Channel partners are compensated with a percentage of the revenue that World Energy receives from winning auction bidders.

To date, the Company is reporting in excess of 2,000 customers, more than 30,000 sites, and over 500 suppliers to service consumers.

Exhibit 4: Selection of World Energy Customers

General Services Administration*

State of Connecticut

State of Delaware

State of Rhode Island

Commonwealth of Massachusetts

General Dynamics

SAIC

Whirlpool Corporation

CenterPoint Energy

Consolidated Edison

Detroit Edison

*World Energy's largest customer





Growth StrategyWorld Energy currently transacts more volume on its platform than all its online competitorscombined, according to management’s disclosure. The Company anticipates continuing to add to itstop line in the near-term from both organic as well as non-organic growth.

Organic GrowthThe Company is showing significant growth from its current lines of business, rapidly adding

auction participants to its current platforms. And while approximately 20 – 30 have been added tothe salesforce headcount as a result of the recent acquisition activity, management remains mindfulof costs in order to balance any additional overhead being considered against the receipts of

payments over time as recognized under its business model. In addition to revenue driven by itsinternal sales team, World Energy has been able to consistently add to its list of channel partnersover the last five fiscal years, growing from 29 at the end of 2006 to 172 as of September 30, 2011.

While capitalizing on the significant opportunities in the retail electricity brokerage segment, World Energy additionally has initiatives in place to gain further share in the natural gas market as well asto increase its customer base in the wholesale market. On the environmental commodities front, theCompany continues to help customers “green” their portfolios through the purchase of renewableenergy. XWES also provides auction software and services for the Regional Greenhouse GasInitiative (RGGI) carbon cap and trade program, where RGGI cites that more than $950M in carbonallowances have been sold to date over the course of 14 quarterly auctions. Additionally, theCompany has been awarded a 5-year contract from the Massachusetts Department of EnergyResources to design, implement and manage the solar REC auction program for the State of Massachusetts.

Acquisition GrowthIn 2007, the Company acquired Energy Gateway and has since grown the book of businessapproximately 65% per World Energy figures, all while cutting costs and implementing efficiencies. With its available cash as well as access to an untapped line of credit, World Energy has continued looking for accretive acquisition opportunities within the highly fragmented yet sizable energy

brokerage space that it serves. Management is focusing on two key areas: rolling up brokers and their current books of business while also looking to expand into new areas that can further improveenergy efficiency and related business operations for its customers.

Exhibit 5 - Increase in Channel Partnerships


0

50

100

150

200

FY06 FY07 FY08 FY09 FY10 Q311

NUMBER OF PARTNERS




Hence, in July 2010, the Company made a strategic investment in Retroficiency, Inc., a companythat has developed software that can be utilized to perform efficiency audits of facilities at asignificantly lower cost than the traditional manual methodologies. World Energy provided fundingto Retroficiency in three equal installments totaling an investment of $650,000.

On September 13, 2011, XWES closed on its acquisition of Co-eXprise’s energy procurement business based out of Wexford, Pennsylvania. For $4M in cash, the Company purchased all of Co-

eXprise’s energy business contracts and assumed certain obligations with respect to the business.Co-eXprise is a provider of enterprise sourcing software solutions for discrete manufacturers and was a leading competitor in the energy auctions space, particularly in the government sector.

Subsequent to quarter-end, World Energy announced on October 13, 2011 that it had acquired essentially all of the assets and certain liabilities of Northeast Energy Solutions, LLC (NES) for a

purchase price of $4.8M. Based in Cromwell, Connecticut, NES is a regional provider of energyefficiency services with key relationships in place and expertise in the industry. The Company paid $1M in cash, signed a $3M promissory note, and issued 83,209 shares of common stock. The dealalso includes up to a $0.5M earn-out provision.

The most recent acquisition closed on October 31, 2011, where XWES acquired GSE Consulting,LP (GSE), an energy procurement firm with 3 offices in Texas (largest deregulated market in the

U.S.), over 25 professionals on staff, and in excess of 2,000 customers, principally in the mid-market range. The Company paid approximately $8.6M, comprised of $3.9M in cash, $1.5M paid to retire a GSE note payable, and 1M shares of World Energy’s common stock. Terms of theagreement included an additional earn-out of up to $4.5M in cash over a two-year period throughOctober 2013. The earn-out provisions are as follows:

The earn-outs will be based on GSE achieving a certain level of new bookings (annualized)as well as renewal rates.

The maximum payouts are $2M at 1/31/12, $1.5M at 1/15/13, and $1M at 1/15/14.

Per a press release dated 11/3/2011, management discloses that World Energy paid less than 6xEBITDA for the recent acquisitions but expects that these additions will help XWES grow revenuesin excess of historical levels (15 – 20%) to upwards of 40 – 60% in 2012. As a result of theseacquisitions, World Energy enters 2012 positioned to continue growing its base business while alsoadvancing its energy procurement service offerings.

CompetitionPer management, over 90% of the brokerage market still uses manual systems to transact their

business. While their advanced technology offers a significant competitive advantage throughincreased efficiency and transparency, World Energy can lose retail business to competitive energysuppliers, aggregators, brokers or consultants (ABCs), and online brokers. In the wholesalemarkets, the Company competes with generators, traders on financial exchanges, and traditional

brokers. And there are demand response providers that will negotiate directly with customers for their participation in demand response programs. Environmental commodities are moretraditionally sold through brokers or financial exchanges.




Under the current management team, we believe that the Company has developed a unique set of assets that would be hard to replicate at this point given the resources behind them. Two publiclytraded competitors, Comverge, Inc. (Nasdaq: COMV) and EnerNOC, Inc. (Nasdaq: ENOC), focus

principally upon the demand response markets, which is a very small portion of World Energy’s business (less than 5% of revenues). Usource is an energy services company that providescustomized energy management and procurement services but rolls up under the parent companyUnitil (NYSE: UTL), a $400 million energy company. As part of its limited public disclosure for

this segment, the 2010 Annual Report details earnings of approximately $1.5 million on revenues of $4.6 million (33%). Additional public comparables are limited.

World Energy’s chief retail competitor, Summit Energy (a privately-held company operating under the pen and paper approach to brokering energy), was bought in 2011 by Schneider Electric for $268 million, or approximately 4 times its expected 2011 revenue. Per the press release dated 3/24/11, Summit employed approximately 6 times more personnel than World Energy and onlygenerated approximately 3 times the revenue.

Financial Model Review REVENUE

The majority of monthly revenue comes from retail electricity transactions. Revenue recognized is based on actual usage data (when available) from the supplier. If actuals are not available, revenue

calculations will be based on the estimated amount of electricity delivered to the consumer for thatmonth and later reconciled with payments received. Fees are typically 1 to 2% from the supplier.So, while results can vary due to a number of factors (weather, etc.), the Company’s revenue streamis fairly predictable based on contracts in place. One year contracts are typical for commercial and industrial consumers, while government contracts can have two to three year terms, and occasionally up to five year terms. World Energy states that direct retail customers renew greater than 90% of the time, while contracts through channel partners generally renew greater than 70% of the time. With many channel partners, access to the auction platforms is an add-on service for their customers, so service levels and retention levels can vary.

Also in the retail space, World Energy receives monthly management fees for energy and auctionadministration services from certain natural gas customers. Additionally, the Company recognizes

revenue on transaction fees from certain natural gas suppliers upon completion of the procurement.Once awarded a contract as the result of an auction, the natural gas supplier is invoiced by World Energy for the estimated energy volume over the entire award term multiplied by its fee. Thesenatural gas transaction fees are typically paid within 30 days of invoice date and are not tied tofuture energy usage.

In the wholesale arena, total transaction fees are invoiced and recognized upon completion of theauction event based on a fixed fee (typically 1/10 of 1%) and are not tied to future energy usage.

Exhibit 6 - Customer Fees

Electricity Natural Gas Other

Retail Brokerage Commisions Transaction Fees

Management Fees

Wholesale Transaction Fees Transaction Fees

Demand Response Transaction Fees

Environmental Commodities Transaction Fees

Efficiency Transaction Fees

Source: Comp any Reports, Stonegate Securities




The following chart details the Company’s annual backlog, or revenue that will be recognized following a given date (shows year-end 2007 through 9/30/11) for a one year period after thereporting date of all retail electricity contracts in place at that time. For example, should World Energy have stopped adding any new business as of 9/30/11, the Company still would haveapproximately $14.2 million in revenue to recognize over the next twelve months, and approximately $23.3 million in total contract revenue going forward for contracts already in place(total backlog). World Energy cites that its historical collection rate is 100% as the Company is

paid by large, credit-worthy energy suppliers. In addition, actual energy usage tends to increase over time resulting in the Company collecting more than the backlog number, which is tied to historicalusage.

COST OF REVENUE AND OPERATING EXPENSES

The Company’s cost of revenue is fairly predictable, consisting mainly of personnel costs associated with the auction services and the related technology and support services. Additionally, applicablefacility and overhead costs are included in this line item as well as the amortization of certaincapitalized technological costs.

General and administrative costs are generally a fixed component of operating expenses while thesales and marketing line item has more variable components associated with sales commissions and commissions paid to channel partners. We note that World Energy made significant investment ininfrastructure in FY07 and prior, but has had minimal capex requirements since that time.

Having executed upon a long-term strategic plan to reach profitability, the Company today realizes

gross margins in excess of 80% and has reported positive net income for five consecutive quarters.World Energy has generated positive adjusted EBITDA for nine of the last eleven quarters as well.With no debt, positive cash flow from operations, and having $6.5M on its balance sheet as of 9/30/11 (although 2 acquisitions subsequent to quarter-end), we believe that World Energy has truly

passed through an inflection point within its business operations.

Exhibit 7 - Annual Backlog


$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

$16.0

FY07 FY08 FY09 FY10 Q311

REVENUES (in millions)




EARNINGS MODEL ASSUMPTIONS

We have modeled revenues for FY11, FY12 and FY13 of $21.8M, $32.8M and $38.2M,respectively. These numbers represent 21.5%, 50.1%, and 16.6% growth rates, respectively. Thesignificant increase in FY12 revenues is driven first by the recent acquisition activity; however, wehave also factored in organic growth potential in both 2012 and 2013 as World Energy continues toadd new auction participants, sees renewal business close at high rates, and increases its number of channel partnerships.

Within our total revenue numbers, we expect that management fees will continue to slowly declineas they have since 2008 (business gained through acquisition of Gateway Energy in 2007 and not

being pursued). It is key to also point out that we have not specifically incorporated additionalacquisitions into our model, but longer-term, organic growth plus buying books of business could enable World Energy to exceed our DCF growth range of 10 – 15% year-over-year to the top line.

We have modeled gross margins of 80.0%, 77.5% and 76.5% for FY2011, FY2012, and FY2013,respectively (lower margins resulting from growth in the energy efficiency business). While sales

and marketing and general and administrative expense levels do increase year-over-year, these lineitems decrease as a percentage of sales over time. World Energy has added approximately 20 – 30to its sales team as a result of the recent acquisitions, and we anticipate some additional staffing inthis area to continue driving top line growth in the near-term. We believe that current facilities and technology have real scalability to support healthy revenue growth over the next 3 to 5 years.

We note that in Q411, we expect significant transaction costs related to recent acquisition activity.Because these are one-time costs affecting the last quarter of FY2011, they have been excluded from our model.

Our assumptions lead to net income of $1.9M, $4.5M, and $5.6M for FY11, FY12 and FY13,respectively. EPS for 2011, 2012 and 2013 are $0.18, $0.37, and $0.45, respectively.

Exhibit 8 - Revenue Assumptions

Q1 Q2 Q3 Q4 E Q1 E Q2 E Q3 E Q4 E

Mar-11 Jun-11 Sep-11 Dec-11 FY 2011 E Mar-12 Jun-12 Sep-12 Dec-12 FY 2012 E FY 2013 E

Brokerage commissions and transaction fees 4,671$ 4,389$ 5,378$ 6,434$ $20,872 $7,644 $7,107 $8,128 $8,997 $31,878 $37,383

Growth rates Y/Y

Brokerage commissions and transaction fees 12.4% 16.6% 23.5% 38.4% 23.3% 63.7% 61.9% 51.1% 39.8% 52.7% 17.3%

As a % of total revenue

Brokerage commissions and transaction fees 95.0% 94.7% 95.6% 96.4% 95.5% 97.0% 96.8% 97.3% 97.6% 97.2% 97.8%

Management fees $247 $247 $247 $242 $983 $237 $232 $228 $223 $921 $849

Growth rates Y/Y

Management fees -1.6% 0.0% -16.3% -9.3% -7.3% -4.0% -5.9% -7.8% -7.8% -6.3% -7.8%

As a % of total revenue

Management fees 5.0% 5.3% 4.4% 3.6% 4.5% 3.0% 3.2% 2.7% 2.4% 2.8% 2.2%





Industry Background

Both federal and state laws govern the electricity industry. There is federal jurisdiction over the saleand transmission of electricity at the wholesale level via interstate commerce, and the respectivestates have jurisdiction over the sale and distribution at the retail level. Since the mid-1990s,restructuring of the electricity industry across the U.S. has taken place under certain statelegislatures with the goal of creating more competitive markets. Whereas there use to be intense

vertical integration -- so much so that utility providers kept near monopolies over the generation,transmission and distribution of electricity to retail consumers -- today in competitive deregulated regions end-users can select their electricity supplier themselves (or engage ABCs to assist in the

process). Today, many states continue to be involved in rate regulation where the functions of transmission and distribution remain as monopoly services provided by local utility incumbents.

Per www.deregulatedelectricitynow.com, electricity deregulation has been passed in 23 states plusD.C. with only a little more than half of those offering truly competitive environments today, asderegulation is being phased in over a period of years in some locations. Federal and stategovernance within the natural gas industry is similar; however, the natural gas markets have seenderegulation in most states, allowing for increased competition among suppliers across the U.S.

The majority of World Energy’s revenue comes from the sale of retail electricity (58% in FY10),

and the listers that comprise this segment are commercial, industrial and government entities.According to research from the International Energy Agency, total electricity consumption in theUS as of 2008 could be broken down as follows:

And as the chart details, when combined, these customers consume the majority of the electrical power in the U.S. And while prices for energy can vary greatly from state to state and year to year,the average retail price per kilowatt hour from 1998 – 2009 was $0.0983 (1,000 kWh = 1 MWh) per the Energy Information Administration (EIA). Demand for electricity in the U.S. is projected toincrease over the next 10 years by approximately 19% by the North American Electric ReliabilityCorporation, and 31% from 2009 – 2035 by the EIA’s Annual Energy Outlook 2011.

Source: International Energy Agency 2009 Statistics

Exhibit 9 - Consumption of Electricity in the U.S. (MWh)

917,442,063 7,780,5731,364,474,417

1,307,167,813 Industry

TransportResidential

Commercial and Public Services




The EIA estimates that total natural gas demand in the U.S. could be 24.36 Tcf by the year 2030(average price per cubic foot from 1998 - 2009 was $0.71). That is an increase in demand of 6%over 2007 levels, as compared to an expected total energy consumption increase from all sources of 12%. It is important to note that this increase in demand for natural gas could exceed expectationsas climate change legislation grows demand for low-carbon fuels such as clean natural gas. And aswith electricity, the biggest consumers of natural gas are from the commercial, industrial and governemnt sectors.

Both the trend in the U.S. towards deregulation and the expected increases in electricity and naturalgas consumption across the country long-term offer great opportunity for World Energy to broker this business and add commissions and transaction fees to the Company’s top line. As more and more consumers are allowed to seek competitive bids for their energy needs, we believe severalfactors will contribute to the migration towards the online auction environment and away from themore traditional RFP methodologies for the procurement of this vast amount of energy.

The auction environment drives competition and heightens transparency within theprocurement process – Numerous qualified bidders are brought to the auction through a structured

brokerage process. All participants can watch the bidding real-time as an auction takes place.Technological resources as well as the Company’s established relationships have reduced thehistorically lengthy timeframe true of the pen and paper approach in bringing consumers and

suppliers together. Human discretion as well as deals negotiated on the side are also removed fromthe cost equation (lowest cost wins on the World Energy Exchange).

Auctions can be tailored to a customer’s specific needs – The Company’s technologicallyadvanced platforms can create auctions incorporating various terms, quantities, load factors, and green power requirements. And results are immediate following the close of each auction.

Access to advanced technology attracts channel partners - The business automation platform isattractive to channel partners as a means to enhance their growth, profitability and customer satisfaction. The number of World Energy’s channel partners has more than quadrupled since 2006.






Balance Sheets

World Energy Solutions, Inc. (NASDAQ: XWES)

Consolidated Balance Sheets (in thousands $)

Fiscal Year: December

2010 Q1 Q2 Q 3 Q4 E 2011 E 2012 E 2013 E

ASSETS Mar-11 Jun-11 Sep-11 Dec-11

Current Assets

Cash and Cash Equivalents 3,559 2,729 9,217 6,516 3,174 3,174 6,268 13,652

T rade Accounts Receivables, net 3,124 3,359 3,037 3,688 3,921 3,921 4,858 5,436

Prepaid Expenses and Other Current Assets 229 306 339 410 754 754 738 855

Total Current Assets 6,912 6,394 12,593 10,614 7,849 7,849 11,864 19,943

Property and Equipment , net 287 257 228 203 360 360 256 161

Investment in Retroficiency - - - - 650 650 650 650

Not e Receivable 433 650 650 650 - - - -

Intangibles, net 3,724 3,484 3,245 4,740 14,008 14,008 11,808 9,608

Goodwill 3,179 3,179 3,179 5,010 11,885 11,885 11,885 11,885

Other Assets 192 181 185 175 175 175 175 175

Total Asse ts 14,727$ 14,145$ 20,080$ 21,392$ 34,926$ 34,926$ 36,638$ 42,422$

LIABILITIES AN D STOC KHOLDERS' EQUITY

Current Liabilities

Accounts Payable 263 449 294 319 647 647 764 903

Accrued Commissions 848 1,020 886 919 1,335 1,335 1,844 2,138

Accrued Compensation 1,971 734 1,190 1,332 2,136 2,136 2,951 3,421

Accrued Expenses* 187 143 191 258 4,553 4,553 2,638 1,255

Deferred Revenue and Customer Advances 230 140 160 179 267 267 369 428

Not e Pay able - - 0 0 3,000 3,000 0 0

Capital Lease Obligations 15 12 9 5 2 2 - -

Total Current Liabilities 3,514 2,498 2,730 3,012 11,940 11,940 8,565 8,145

Capit al Lease Obligat ions, net of curren t p ort io n 1 - - - - - - -

Total Liabilities 3,515 2,498 2,730 3,012 11,940 11,940 8,565 8,145

Stockholders' Equity

Preferred stock - - - - - - - -

Common Stock - Par Value 1 1 1 1 1 1 1 1

Additional Paid in Capital 33,502 33,691 39,208 39,384 43,407 43,407 44,007 44,607

Accumulated Deficit (22,081) (21,831) (21,640) (20,784) (20,201) (20,201) (15,714) (10,110)

T reasury Stock (210) (214) (219) (221) (221) (221) (221) (221)

Total Stockholders' Equity (deficit) 11,212 11,647 17,350 18,380 22,986 22,986 28,073 34,277

Total Li abi li ti es a nd Stock hol de rs ' Equ ity 14,727$ 14,145$ 20,080$ 21,392$ 34,926$ 34,926$ 36,638$ 42,422$

Ratios

Liquidity

Current Ratio 2.0x 2.6x 4.6x 3.5x 0.7x 0.7x 1.4x 2.4x

Quick Ratio 1.9x 2.4x 4.5x 3.4x 0.6x 0.6x 1.3x 2.3x

Working Capital $3,398.0 $3,896.0 $9,863.0 $7,602.0 ($4,091.8) ($4,091.8) $3,298.6 $11,798.1

Leverage

Debt To Equity 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Debt To Capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Capital Usage -Annualized

A/R Turns 6.0x 6.1x 5.8x 6.7x 7.0x 6.2x 7.5x 7.4x

A/P Turns 13.6x 11.2x 10.1x 12.7x 12.2x 9.6x 10.5x 10.8x

*Includes earn-outs from acquisitions

Source: Compa ny Reports, Stonegate Securities






Cash Flow Statements

World Energy Solu tions, Inc. (NASDAQ: XWES)

Consolidated Statements of Cash Flows - (in thousands $; cumulative)

Fiscal Year: December

2010 Q 1 Q 2 Q3 2011 E 2012 E 2013 E

Cash Flow from O perations Mar-11 Jun-11 Sep-11

Net inco me (lo ss) (99 ) 250 441 1,297 1,880 4,487 5,605

Adjustments to reconcile net income (loss) to net cash :

Depreciation and amortizat ion 1,434 314 622 946 1,394 2,324 2,315Share-based compensat ion 671 141 318 489 639 600 600

Loss on disposal of property and equipment - - - - - - -

Interest on note receivable - - (29) (44) (44) - -

Deferred taxes - - - - - - -

Changes in assets and liabilities:

Trade accounts receivable (215) (234) 88 (151) (384) (937) (578)

Prepaid expenses and other assets (16) (77) (110) (181) (305) 16 (118)

Accounts payable (22) 185 30 55 383 117 140

Accrued commissions 13 172 38 71 487 509 294

Accrued compensation 690 (1,236) (781) (638) 166 814 470

Accrued expenses (142) (44) 4 6 6 4 02 ( 1, 91 5) ( 1, 38 2)

Deferred revenue and customer advances (644) (89) ( 69 ) ( 50 ) 3 8 10 2 5 9

Ne t ca sh provi de d by (u se d i n) ope ra ti ng acti vi ti es 1,67 0$ (618)$ 552$ 1,860$ 4,657$ 6,117$ 7,403$

- - - - - -Cash Flow from Investing

Cost incurred in software development (467) - - - - - -

Purchases of property and equipment (56) (5) (8) (13) (18) (20) (20)

Cash received in sale of propert y and equipment - - - - - - -

Net cash p aid in ac quisition - - - (4,0 00 ) (1 0,40 0) - -

Advances and changes in other assets - (247) (259) (261) (261) - -

Ne t cash provi de d by (us ed i n) inve sti ng acti vi ti es (523)$ (252)$ (267)$ (4,274)$ (10,679)$ (20)$ (20)$

- - - - - -Cash Flow from Financing

Proceeds from exercise of stock options 44 48 85 89 89 - -

Proceeds from exercise of stock warrants 1 - - - - - -

Purchase of treasury stock (18) (4) (9) (11) (11) - -

Repayment of Note Payable - - - - - (3,000) -

P rincipal payment s on capit al lease obligat ions (16) (4) (8) (11) (14) (2) -

Proceeds from sale of common stock, net 354 - 5,304 5,304 5,304 - -

Ne t cash provi de d by (us ed i n) fi nan ci ng acti vi ti es 365$ 40$ 5,372$ 5,371$ 5,368$ (3,002)$ -$

Net increa se (decrease) i n cash 1,5 12 (830) 5,657 2,957 (654) 3,095 7,383

Cash and cash equivalents, beginning of year 2,047 3,559 3,559 3,559 3,559 2,905 5,999

Cash and cash equivalents, end of period 3,559 2,729 9,216 6,516 2,905 5,999 13,383




Important Disclosures and Disclaimer

(a) Stonegate Securities, Inc. (“Stonegate”) expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in thisreport in the next three months.

(b) The Research Analyst principally responsible for the preparation of this report has received compensation thatis based upon, among other things, Stonegate’s investment banking revenues.

(c)

Within the last twelve months, Stonegate has received compensation for investment banking services fromthe Company as the sole manager in a registered direct public offering to institutional investors in April 11,2011. Additionally, Stonegate is currently engaged to provide research and institutional investor awarenessfor the Company (agreement dated 12/1/11). As compensation, Stonegate receives $7,500 per month for 3months and thereafter, at the Company’s discretion.

(d) Within the last twelve months, Stonegate has not managed or co-managed a public offering for the Company.(e) Stonegate and/or its employees, officers, directors and owners do not own options, rights or warrants to

purchase this security.(f) Stonegate does not make a market in this security.(g) No employee of Stonegate serves on the Company’s Board of Directors.(h) A Research Analyst and/or a member of the Analyst’s household do not own shares of this security.(i) A Research Analyst and/or a member of the Analyst’s household do not serve as an officer, director, or

advisory board member of the Company.(j) This security is eligible for sale in one or more states.

(k) This security is subject to the Securities and Exchange Commission’s Penny Stock Rules, which may set forthsales practice requirements for certain low-priced securities.

(l) Stonegate or its affiliates do not beneficially own 1% or more of an equity security of the Company.(m) Stonegate does not have other actual, material conflicts of interest in the securities of the Company.

Meaning of Ratings - Stonegate does not rate the securities covered in its information memorandums.Distribution of Ratings - Stonegate does not rate the securities covered in its information memorandums.Price Chart - Stonegate does not have, nor has previously had, a rating for any securities of the Company.Price Targets - Stonegate does not have a price target for any securities of the Company.

Regulation Analyst Certification: I, Laura Engel, hereby certify that all views expressed in this report accurately reflect my personal views about thesubject company or companies and its or their securities. I also certify that no part of my compensation was, is, or

will be directly or indirectly related to the specific recommendations or views expressed in this report.

For Additional Information Contact:Stonegate Securities, Inc.Laura S. Engel, [email protected]

Please note that this report was originally prepared and issued by Stonegate for distribution to their market professional and institutionalinvestor customers. Recipients who are not market professional or institutional investor customers of Stonegate should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. Theinformation contained herein is based on sources which we believe to be reliable, but is not necessarily complete and its accuracy cannot beguaranteed. Because the objectives of individual clients may vary, this report is not to be construed as an offer or the solicitation of an offer tosell or buy the securities herein mentioned. This report is the independent work of Stonegate Securities and is not to be construed as having

been issued by, or in any way endorsed or guaranteed by, any issuing companies of the securities mentioned herein. The firm and/or its

employees and/or its individual shareholders and/or members of their families and/or its managed funds may have positions or warrants in thesecurities mentioned and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own accounts or for the accounts of other customers of the firm from time to time in the open market or otherwise. While we endeavor to update theinformation contained herein on a reasonable basis, there may be regulatory, compliance, or other reasons that prevent us from doing so. Theopinions or information expressed are believed to be accurate as of the date of this report; no subsequent publication or distribution of thisreport shall mean or imply that any such opinions or information remains current at any time after the date of this report. All opinions aresubject to change without notice, and we do not undertake to advise you of any such changes. Reproduction or redistribution of this reportwithout the expressed written consent of Stonegate Securities is prohibited. Additional information on any securities mentioned is available onrequest.

Documents

XWES_Initiation_Feb 2012 FINAL.pdf