Perpetual Energy : 2021 Q4 Financial Statements

2021

CONSOLIDATED FINANCIAL STATEMENTS

MANAGEMENT'S REPORT

The consolidated financial statements of Perpetual Energy Inc. ("Perpetual" or the "Company") are the responsibility of Management and have been approved by the Board of Directors of the Company. These consolidated financial statements have been prepared by Management in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") and the Interpretations of the IFRS Interpretations Committee.

The consolidated financial statements are audited and have been prepared using accounting policies in accordance with IFRS. The preparation of Management's Discussion and Analysis is based on the Company's financial results which have been prepared in accordance with IFRS. It compares the Company's financial performance in 2021 to 2020 and should be read in conjunction with the consolidated financial statements and accompanying notes.

Management is responsible for establishing and maintaining adequate internal control over the Company's financial reporting. Management believes that the system of internal controls that have been designed and maintained at the Company provide reasonable assurance that financial records are reliable and form a proper basis for preparation of financial statements. The internal accounting control process includes Management's communication to employees of policies which govern ethical business conduct.

Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Board of Directors has appointed an Audit Committee consisting of unrelated, non-management directors which meets during the year with Management and independently with the external auditors and as a group to review any significant accounting, internal control and auditing matters in accordance with the terms of the charter of the Audit Committee as set out in the Annual Information Form. The Audit Committee reviews the consolidated financial statements and Management's Discussion and Analysis before the consolidated financial statements are submitted to the Board of Directors for approval. The external auditors have free access to the Audit Committee without obtaining prior Management approval.

With respect to the external auditors, the Audit Committee approves the terms of engagement and reviews the annual audit plan, the Auditors' Report and results of the audit. It also recommends to the Board of Directors the firm of external auditors to be appointed by the shareholders.

The independent external auditors, KPMG LLP, have been appointed by the Board of Directors on behalf of the shareholders to express an opinion as to whether the consolidated financial statements present fairly, in all material respects, the Company's financial position, financial performance and cash flows in accordance with IFRS. The report of KPMG LLP outlines the scope of their examination and their opinion on the consolidated financial statements.

/s/ Susan L. Riddell Rose	/s/ Ryan A. Shay
Susan L. Riddell Rose	Ryan A. Shay
President &	Vice President, Finance &
Chief Executive Officer	Chief Financial Officer
March 14, 2022

PERPETUAL ENERGY INC.

2021 Consolidated Financial Statements

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INDEPENDENT AUDITORS' REPORT

To the Shareholders of Perpetual Energy Inc.

Opinion

We have audited the consolidated financial statements of Perpetual Energy Inc. (the "Company"), which comprise:

• the consolidated statements of financial position as at December 31, 2021 and December 31, 2020
• the consolidated statements of income (loss) and comprehensive income (loss) for the years then ended
• the consolidated statements of changes in equity for the years then ended
• the consolidated statements of cash flows for the years then ended
• and notes to the consolidated financial statements, including a summary of significant accounting policies

Hereinafter referred to as the "financial statements".

In our opinion, the accompanying financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2021 and December 31, 2020, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the "Auditors' Responsibilities for the Audit of the Financial Statements" section of our auditors' report.

We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements for the year ended December 31, 2021. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

We have determined the matters described below to be the key audit matters to be communicated in our auditors' report.

Assessment of the recoverable amount of the West Central and Eastern Alberta cash generating units

Description of the matter

We draw attention to note 2, note 3, and note 5 to the financial statements. The carrying amounts of the Company's non-financial assets, other than E&E assets, are reviewed at each period end date to determine whether there are any internal or external indicators of impairment or impairment reversal. Significant judgement is required to assess when internal or external indicators of impairment or impairment reversal exist, and impairment testing is required. If any such indicator exists, then the recoverable amount is estimated. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. The Company identified an indicator of impairment reversal at June 30, 2021 for the West Central and Eastern Alberta cash generating units ("CGU") and additionally at December 31, 2021 for the Eastern Alberta CGU and performed impairment reversal tests to estimate the recoverable amount of each CGU. It was determined the recoverable amount of the West Central and Eastern Alberta CGUs exceeded each CGUs carrying value, resulting in all previous West Central impairment, net of depletion, of $22.6 million and Eastern Alberta impairment of $7.5 million, respectively being reversed.

The estimated recoverable amount of each CGU involves significant estimates including:

• The estimate of proved and probable oil and gas reserves and the related cash flows
• The discount rates.

The estimate of proved and probable oil and gas reserves and the related cash flows includes significant assumptions related to:

• Forecasted oil and gas commodity prices
• Forecasted production
• Forecasted operating costs
• Forecasted royalty costs
• Forecasted future development costs.

PERPETUAL ENERGY INC.

2021 Consolidated Financial Statements

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The estimated proved and probable oil and gas reserves and the related cash flows are evaluated by independent third party reserve evaluators at least annually.

Why the matter is a key audit matter

We identified the assessment of the recoverable amount of the West Central and Eastern Alberta cash generating units as a key audit matter. Significant auditor judgment was required in evaluating the results of our audit procedures regarding the estimate of proved and probable oil and gas reserves and the related cash flows and the discount rates.

How the matter was addressed in the audit

The following are the primary procedures we performed to address this key audit matter:

We independently developed the estimated recoverable amount of the West Central CGU as at December 31, 2021 and compared it to the carrying value to assess that the reversal of all previous impairment, net of depletion, recognized for the year ended December 31, 2021 was appropriate.

We examined management's impairment reversal test for the Eastern Alberta CGU as at December 31, 2021 by agreeing amounts to the underlying source documents and performing recalculations.

With respect to the estimate of proved and probable oil and gas reserves and the related cash flows for the West Central and Eastern Alberta CGUs as at December 31, 2021:

• We evaluated the competence, capabilities and objectivity of the independent third party reserve evaluators engaged by the Company
• We compared forecasted oil and gas commodity prices to those published by other independent third party reserve evaluators
• We compared the 2021 actual production, operating costs, royalty costs and development costs of the Company to those estimates used in the prior year's estimate of proved oil and gas reserves and the related cash flows to assess the Company's ability to accurately forecast
• We evaluated the appropriateness of forecasted production and forecasted operating costs, royalty costs and future development costs assumptions by comparing to 2021 historical results. We took into account changes in conditions and events affecting the Company to assess the adjustments or lack of adjustments made by the Company in arriving at the assumptions.

We involved valuation professionals with specialized skills and knowledge, who assisted in:

• Developing an independent estimate of the West Central CGU recoverable amount as at December 31, 2021 using proved and probable oil and gas reserves and related cash flows evaluated by independent third party reserve evaluators as at December 31, 2021 with an independently developed discount rate
• Evaluating the appropriateness of the Eastern Alberta CGU discount rate by comparing the discount rate to market and other external data
• Assessing the reasonableness of the Company's estimate of the recoverable amount of the Eastern Alberta CGU by comparing the Company's estimate to market metrics and other external data.

Other Information

Management is responsible for the other information. Other information comprises:

• the information included in Management's Discussion and Analysis filed with the relevant Canadian Securities Commissions.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit and remain alert for indications that the other information appears to be materially misstated.

We obtained the information included in Management's Discussion and Analysis filed with the relevant Canadian Securities Commissions as at the date of this auditors' report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in the auditors' report.

We have nothing to report in this regard.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS as issued by the IASB, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

PERPETUAL ENERGY INC.

2021 Consolidated Financial Statements

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In preparing the financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company's financial reporting process.

Auditors' Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion.

Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists.

Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion.

The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control.
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
• Conclude on the appropriateness of management's use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors' report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors' report. However, future events or conditions may cause the Company to cease to continue as a going concern.
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
• Communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
• Provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.
• Determine, from the matters communicated with those charged with governance, those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditors' report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our auditors' report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this auditors' report is Gregory Ronald Caldwell.

Chartered Professional Accountants

Calgary, Canada

March 14, 2022

PERPETUAL ENERGY INC.

2021 Consolidated Financial Statements

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