ASX Announcement 21 January 2014

Report to Shareholders for the Quarter Ended 31st December 2013

ACTIVITIES SUMMARY

During the quarter Carnegie Wave Energy Limited (ASX: CWE) focused primarily on its Perth Wave Energy Project (the Perth Project) with manufacturing progressing on schedule and a significant Project milestone achieved with the start of offshore works. Carnegie also completed a capital raise to fast track the design of the CETO 6 project.

Highlights from the quarter include:

More than half of the Perth Project milestones to construction are now completed with recent progress including award of pipeline installation and desalination construction contracts.

Commenced offshore construction activities for the Perth Project with the foundation installation currently underway.

Received a $2.3m Research and Development Tax Incentive cash rebate.

Received grant funding payments of $2.2m from the Federal Government and WA State Government for the Perth Project (including the Desalination Plant).

Completed a $4m convertible note capital raise to accelerate the development of the CETO 6 project.

Advanced assessment and negotiations over potential CETO 6 project sites.

1. Perth Wave Energy Project

Foundation Piles Manufacturing Completed

Victorian-based energy and resources sector supplier, Keppel Prince Engineering Ltd (Keppel), completed the manufacture of the structural pile foundations during this quarter. The piles were then shipped to Western Australia where they were loaded onto the foundation installation vessel.

Foundation piles delivered to site

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Offshore Construction Commences

In December, the foundation installation vessel, the Endeavour (previously named the Eunsung 1200), was mobilised with all foundations and installation equipment sea fastened on the vessel. The foundation installation vessel was then moved offshore to the Project site where installation activities are currently underway.

Foundation Installation Vessel Offshore

Pipeline Installation Contract Awarded

Carnegie announced the award of the pipeline installation contract to Total AMS Pty Ltd (TAMS) after a competitive tender process that compared cost, quality, schedule and health and safety. The contract awarded to TAMS includes the installation of a shore crossing conduit and the laying of approximately 6km of offshore pipelines. TAMS’ installation methodology is based on utilising the ASL96 Crane Barge, pictured below.

Pipeline installation crane barge in Fremantle Harbour

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Component Manufacturing Progress Updates

All components are on track for delivery in either first or second quarter 2014 with Project commissioning on track for Quarter 2, 2014.

The CETO Unit Buoyant Actuators (BAs) have progressed through the construction stage. Internal plumbing is now underway, as are preparations for the marine coating application.

CETO Buoyant Actuators under manufacture

The manufacture of the CETO unit pumps (hydraulic cylinders) is progressing at Douce Hydro, France.

CETO Hydraulic Cylinders (Pumps) under manufacture

Additionally, a range of other components are now being received into Perth and Fremantle ahead of assembly in early 2014. These include hydraulic motors (see photo below), valves and various data collection instruments. F

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Carnegie engineer Jack Jorgensen inspecting hydraulic motors upon delivery

During the quarter, the piping was shipped from Flexsteel’s manufacturing facility in Texas and is scheduled to arrive in Fremantle in January 2014.

Flexsteel Piping delivered to port for shipment to Fremantle

Desalination Plant Design and Manufacture

In October, Carnegie completed the detailed design of the wave powered desalination pilot plant which will be integrated into Carnegie’s Perth Wave Energy Project on Garden Island, Western Australia, and will demonstrate for the first time globally the production of both power and freshwater from the ocean’s waves. The plant will have the capacity to supply up to 1/3rd of the water needs of Australia’s largest naval base, HMAS Stirling, located on Garden Island.

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The detailed design of the desalination plant has been carried out by global engineering firm GHD, local Perth-based desalination manufacturer MAK Industrial Water Solutions (MAK Water) and Carnegie’s technical team. The plant leverages the CETO wave energy hydraulic system infrastructure being installed at the Garden Island site. The detailed design phase also involved environmental investigation which has been completed to provide baseline data to monitor on-going CWE site activity, as well as assisting and informing design and construction phases of the CWE project.

During the quarter, Carnegie announced the award of the manufacturing and construction contract for its wave powered Desalination Pilot Plant to Perth-based MAK Water. MAK Water is an experienced provider of reverse osmosis desalination solutions throughout Western Australia and nationally. It has a particular focus on containerised sea water reverse osmosis desalination plants.

Onshore Plant

Onsite works and construction for the Onshore Plant also commenced during the quarter. The Onshore Plant includes both the Power Generation facility and the Desalination Pilot Plant.

Perth Project onshore site works

2. CETO 6 Development

The design of the next generation CETO 6 unit has been underway for some time and further progress was made during the quarter. The CETO 6 unit will be at least twice the power capacity of the current 240kW CETO 5 unit being used in the Perth Project and feature efficiency improvements currently under development.

Additionally, progress was made on securing assessment and negotiations over potential CETO 6 project sites both in Australia and internationally. A further update on CETO 6 will be provided during this quarter.

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3. CETO Wave Energy Commercial Opportunities Canadian West Coast Wave Initiative

Carnegie is pleased to have become a technology partner in the West Coast Wave Initiative (WCWI) which is a multi-disciplinary group of academics and industry partners investigating the feasibility of wave energy on the west coast of Canada. WCWI is managed by the University of Victoria in Canada. WCWI’s Director, Dr Brad Buckham recently presented A Strategic Approach to Wave Energy Development at the Marine Renewables Canada 2013 Annual Conference.

4. Corporate Activities

Research and Development Tax Refund of $2.26m

Carnegie received a $2.26m Research and Development Tax Incentive cash rebate from the Australian Tax Office. The R&D Tax Incentive provides a tax rebate to support Australian companies to undertake research and development in Australia. During the year ended 30 June 2013 Carnegie incurred eligible R&D expenditure from which the tax rebate was calculated. The rebate received for the year ended 30 June 2013 of $2.26 million represents an increase from the previous year of $1.17 million.

Completed $4m Capital Raise

Carnegie completed a capital raise of $4 million by issuing convertible notes to provide early access to the expected R&D tax refund for the financial year ended 30 June 2014.

The funds will be used to fast track the design of the CETO 6 project and for general working capital purposes. The notes will be repaid with the proceeds from the expected R&D tax refund for the year ended 30 June 2014 unless otherwise converted to equity. CETO 6 will be a next generation CETO unit with at least twice the capacity of the current CETO 5 unit being manufactured for the Perth Wave Energy Project.

The capital raising comprises a placement of 4,000 convertible notes at an issue price of $1,000 each (“Notes”). The Notes have a 24 month expiry, pay a non-cash coupon of 6% p.a. and are convertible at any time at 5.5 cents per share which represents a 30% premium to the last closing share price prior to issue. The private placement of the Notes was undertaken with a select group of sophisticated investors in accordance with section 708 of the Corporations Act 2001.

Government Grant Payments

Australian Federal Government ARENA Grant Payments

Carnegie received grant payments totalling $805,041 from the Australian Federal Government for the completion of four milestones of the Perth Project. Carnegie received payments of:

$334,882 for progress on the CETO Units

$290,855 for progress on the Foundation system

$69,384 for progress on the Onshore Plant

$109,920 for progress on the Pipeline

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Western Australian State LEED Grant Payments

Carnegie received grant payments totalling $1,112,054 from the Western Australian State Government for the completion of four milestones of the Perth Project. Carnegie received payments of:

$324,439 for progress on the CETO Units

$411,575 for progress on the Foundation system

$376,040 for progress on the Pipeline

AusIndustry Desalination Grant Payment

In November, Carnegie received a quarterly grant payment of $278,690 as part of a $1.27m AusIndustry grant that supports the design, construction and operation of a CETO wave powered desalination pilot plant which will desalinate seawater to produce freshwater. This is the third quarterly payment received and takes the total funds received to date to $601,598, which is approximately half the total grant funding.

Total Grant Funding for Perth Project To Date

To date, the Perth Project has received $7,837,040 in grant payments from the Australian and Western Australian State Government under the ARENA, LEED and AusIndustry Grants with 50% of the milestones to construction now completed.

Carnegie Annual General Meeting

Carnegie held its Annual General Meeting on November 1, 2013 at which Carnegie’s Chief Executive Officer Dr Michael Ottaviano and the board of directors gave shareholders an update on the progress of the Perth Project. During the meeting, shareholders passed all resolutions.

Conference Presentations

Renewable UK

Carnegie’s Chief Executive Officer, Dr Michael Ottaviano delivered a presentation at the Renewable UK conference in Birmingham UK in November 2013.

All Energy Australia

Carnegie’s Chief Financial Officer, Aidan Flynn delivered a presentation at the All Energy Australia conference in Melbourne in October 2013.

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About Carnegie Carnegie Wave Energy Limited is an Australian, ASX-listed (CWE) wave energy developer. Carnegie is the 100% owner and developer of the CETO wave energy technology intellectual property. About CETO The CETO system distinguishes itself from other wave energy devices by operating out of sight and by generating electricity on shore. An array of submerged buoys is tethered to seabed pump units. The buoys move in harmony with the motion of the passing waves, driving the pumps which in turn pressurise water that is delivered ashore via a pipeline. On shore high-pressure water is used to drive hydroelectric turbines, generating zero-emission electricity. The high-pressure water can also be used to supply a reverse osmosis desalination plant, reducing electrical energy conversion losses and replacing greenhouse gas emitting electrically driven pumps usually required for such plants. The technology is also capable of generating power offshore should the specific characteristics of a project site require it.

CETO converts wave energy into zero-emission electricity and desalinated water.

CETO is environmentally friendly, has no visual impact and co-exists with marine life.

CETO is fully submerged, where it is safer from storms, and in deep water away from popular surf breaks and coastal activities.

Perth Wave Energy Project (‘PWEP’) Fact File

Upon completion, PWEP will be Australia’s first commercial-scale CETO grid-connected wave energy project.

The Project is supported by $13.1m in Australian Government funding through the Australian Renewable Energy Agency’s Emerging Renewables Program.

PWEP is supported by $7.3 million from the Government of Western Australia's Low Emissions Energy Development (LEED) Fund. This is part of a larger $10 million LEED grant, awarded to Carnegie by the WA Government, to support the development of the CETO technology from concept through to completion of PWEP.

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The Desalination Pilot is supported by a $1.27m AusIndustry grant from the Clean Technology Innovation Program.

Utilising Carnegie’s fully submerged CETO 5 wave energy device.

Providing clean, renewable energy to Australia’s largest naval base, HMAS Stirling, on Garden Island in Western Australia.

Providing potable desalinated water.

For more information: Dr Michael Ottaviano CEO & Managing Director Carnegie Wave Energy Limited Ph: +61 8 9486 4466 enquiries@carnegiewave.com Website: www.carnegiewave.com

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Appendix 4C

Quarterly report for entities

admitted on the basis of commitments

+ See chapter 19 for defined terms.

24/10/2005 Appendix 4C Page 1

bnRule 4.7B

Appendix 4C

Quarterly report for entities admitted

on the basis of commitments

Introduced 31/3/2000. Amended 30/9/2001, 24/10/2005.

Name of entity

CARNEGIE WAVE ENERGY LIMITED

ABN Quarter ended (“current quarter”)

69 009 237 736 31 December 2013

Consolidated statement of cash flows

Cash flows related to operating activities

Current quarter

$A’000

Year to date

(6 months)

$A’000

1.1 Receipts from customers

- -

1.2 Payments for (a) staff costs

(b) advertising and marketing

(c) research and development

(d) leased assets

(e) other working capital

(242)

(20)

(6,218)

-

(764)

(395)

(61)

(9,982)

-

(666)

1.3 Dividends received - -

1.4 Interest and other items of a similar nature received 74 126

1.5 Interest and other costs of finance paid - -

1.6 Income taxes refunded 2,264 2,264

1.7 Other (provide details if material) – ERP, LEED and

AusIndustry Grant Funding Receipts

2,257 5,599

Net operating cash flows

(2,649)

(3,115)

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Appendix 4C

Quarterly report for entities

admitted on the basis of commitments

+ See chapter 19 for defined terms.

Appendix 4C Page 2 24/10/2005

Current quarter

$A’000

Year to date

(6 months)

$A’000

1.8 Net operating cash flows (carried forward) (2,649) (3,115)

Cash flows related to investing activities

1.9 Payment for acquisition of:

(a) businesses (item 5)

(b) equity investments

(c) intellectual property

(d) physical non-current assets

(e) other non-current assets

-

-

-

-

(17)

-

-

-

-

-

(24)

-

1.10 Proceeds from disposal of:

(a) businesses (item 5)

(b) equity investments

(c) intellectual property

(d) physical non-current assets

(e) other non-current assets

-

-

-

-

-

-

-

-

-

1.11 Loans to other entities - -

1.12 Loans repaid by other entities - -

1.13 Other (provide details if material) - -

Net investing cash flows

(17) (24)

1.14 Total operating and investing cash flows (2,666) (3,139)

Cash flows related to financing activities

1.15 Proceeds from issues of shares, options, etc. - -

1.16 Proceeds from sale of forfeited shares - -

1.17 Proceeds from borrowings - -

1.18 Repayment of borrowings - -

1.19 Dividends paid - -

1.20 Other – Proceeds from issue of convertible notes

3,806 3,806

Net financing cash flows

3,806 3,806

Net increase (decrease) in cash held

1,140

667

1.21 Cash at beginning of quarter/year to date 11,724 12,197

1.22 Exchange rate adjustments to item 1.20 - -

1.23 Cash at end of quarter (see note a. below) 12,864 12,864

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Appendix 4C

Quarterly report for entities

admitted on the basis of commitments

+ See chapter 19 for defined terms.

24/10/2005 Appendix 4C Page 3

Payments to directors of the entity and associates of the directors

Payments to related entities of the entity and associates of the related entities

Current quarter

$A'000

1.24

Aggregate amount of payments to the parties included in item 1.2 300

1.25

Aggregate amount of loans to the parties included in item 1.11 -

1.26

Explanation necessary for an understanding of the transactions

Payments to Directors are consulting fees, salary and superannuation.

Non-cash financing and investing activities

2.1 Details of financing and investing transactions which have had a material effect on consolidated

assets and liabilities but did not involve cash flows

Nil

2.2 Details of outlays made by other entities to establish or increase their share in businesses in which

the reporting entity has an interest

Nil

Financing facilities available Add notes as necessary for an understanding of the position. (See AASB 1026 paragraph 12.2).

Amount available

$A’000

Amount used

$A’000

3.1 Loan facilities – Convertible note

4,000 4,000

3.2 Credit standby arrangements

- -

3.3 Australian Government grant funding facilities 24,318 10,526

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Appendix 4C

Quarterly report for entities

admitted on the basis of commitments

+ See chapter 19 for defined terms.

Appendix 4C Page 4 24/10/2005

Reconciliation of cash

Reconciliation of cash at the end of the quarter (as

shown in the consolidated statement of cash flows) to

the related items in the accounts is as follows.

Current quarter

$A’000

Previous quarter

$A’000

4.1 Cash on hand and at bank 6,262 9,358

4.2 Deposits at call 6,026 2,000

4.3 Bank overdraft - -

4.4 Other (provide details) – Guarantee facilities 576 366

Total: cash at end of quarter (item 1.23) 12,864 11,724

Acquisitions and disposals of business entities

Acquisitions

(Item 1.9(a))

Disposals

(Item 1.10(a))

5.1 Name of entity - -

5.2 Place of incorporation

or registration

- -

5.3 Consideration for

acquisition or disposal

- -

5.4 Total net assets - -

5.5 Nature of business -

-

Compliance statement

1 This statement has been prepared under accounting policies which comply with accounting

standards as defined in the Corporations Act (except to the extent that information is not

required because of note 2) or other standards acceptable to ASX.)

2 This statement does give a true and fair view of the matters disclosed.

Sign here:

Print name: GRANT J. MOONEY Company Secretary

Date: 20 January 2014

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Appendix 4C

Quarterly report for entities

admitted on the basis of commitments

+ See chapter 19 for defined terms.

24/10/2005 Appendix 4C Page 5

Notes

1. The quarterly report provides a basis for informing the market how the entity’s activities have

been financed for the past quarter and the effect on its cash position. An entity wanting to

disclose additional information is encouraged to do so, in a note or notes attached to this

report.

2. The definitions in, and provisions of, AASB 1026: Statement of Cash Flows apply to this

report except for the paragraphs of the Standard set out below.

6.2 - reconciliation of cash flows arising from operating activities to

operating profit or loss

9.2 - itemised disclosure relating to acquisitions

9.4 - itemised disclosure relating to disposals

12.1(a) - policy for classification of cash items

12.3 - disclosure of restrictions on use of cash

13.1 - comparative information

3. Accounting Standards. ASX will accept, for example, the use of International Accounting

Standards for foreign entities. If the standards used do not address a topic, the Australian

standard on that topic (if any) must be complied with.

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