Exhibit 99.3







2011



consolidated
financial statements











MANAGEMENT’S REPORT



The consolidated financial statements
of Perpetual Energy Inc. (“Perpetual” or “the Corporation”) are the responsibility of Management and have
been approved by the Board of Directors of Perpetual. 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 International Financial Reporting 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 Perpetual’s financial results
which have been prepared in accordance with IFRS. It compares Perpetual’s financial performance
in 2011 to 2010 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 Perpetual’s financial reporting. Management
believes that the system of internal controls that have been designed and maintained at Perpetual
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.



Under the supervision and with the participation
of the Chief Executive Officer and Chief Financial Officer, Management conducted an evaluation of the effectiveness of its internal
control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment according to these criteria, Management
concluded that internal control over financial reporting is effective as of December 31, 2011 to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in
accordance with IFRS.



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 at least four times 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,
KPMG LLP, 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, Perpetual’s financial position,
results of operations 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/ Cameron R. Sebastian                                 
|------------------------------------------- | ---------------------------------------------------------
|                                            |                                                          
|Susan L. Riddell Rose                       | Cameron R. Sebastian                                     
|                                            |                                                          
|President &
        Chief Executive Officer | Vice President, Finance &
        Chief Financial Officer
|March 12, 2012                              |                                                          





Page 2







INDEPENDENT AUDITORS’ REPORT



To the Shareholders and Board of
Directors of Perpetual Energy Inc.



We have audited the accompanying
consolidated financial statements of Perpetual Energy Inc., which comprise the consolidated statements of financial position as
at December 31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of loss and comprehensive loss, changes
in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and notes, comprising a summary of significant
accounting policies and other explanatory information.



Management’s
Responsibility for the Consolidated Financial Statements



Management is responsible for the
preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting
Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due
to fraud or error.



Auditors’
Responsibility



Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian
generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free from material misstatement.



An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend
on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.



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



Opinion



In our opinion, the consolidated
financial statements present fairly, in all material respects, the consolidated financial position of Perpetual Energy Inc. as
at December 31, 2011, December 31, 2010 and January 1, 2010, and its consolidated financial performance and its consolidated cash
flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board.



/s/ KPMG LLP



KPMG LLP

Chartered Accountants

Calgary, Canada

March 12, 2012



Page 3







Independent
Auditors’ Report of Registered Public Accounting Firm



To the Shareholders and Board of Directors
of Perpetual Energy Inc.



We have audited the accompanying consolidated
financial statements of Perpetual Energy Inc., which comprise the consolidated statements of financial position as at December
31, 2011, December 31, 2010 and January 1, 2010, the consolidated statements of loss and comprehensive loss, changes in equity
(deficit) and cash flows for the years ended December 31, 2011 and December 31, 2010, and notes, comprising a summary of significant
accounting policies and other explanatory information.



Management’s Responsibility for
the Consolidated Financial Statements



Management is responsible for the preparation
and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards
as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary
to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud
or error.



Auditors’ Responsibility



Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free from material misstatement.



An audit involves performing procedures
to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend
on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether
due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation
and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the
circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.



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



Opinion



In our opinion, the consolidated financial
statements present fairly, in all material respects, the consolidated financial position of Perpetual Energy Inc. as at December
31, 2011, December 31, 2010 and January 1, 2010, and its consolidated financial performance and its consolidated cash flows for
the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards as issued
by the International Accounting Standards Board.



Other Matter



We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), Perpetual Energy Inc.’s internal control
over financial reporting as of December 31, 2011, based on the criteria established in Internal Control — Integrated Framework,
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2012 expressed
an unmodified (unqualified) opinion on the effectiveness of Perpetual Energy Inc.’s internal control over financial reporting.



/s/ KPMG LLP



KPMG LLP

Chartered Accountants

Calgary, Canada

March 12, 2012



Page 4







Report
of Independent Registered Public Accounting Firm



To the Shareholders and Board of Directors
of Perpetual Energy Inc.



We have audited Perpetual Energy Inc.’s
internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Perpetual Energy Inc.’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the accompanying Management’s Report. Our responsibility is to
express an opinion on the Corporation’s internal control over financial reporting based on our audit.



We conducted our audit in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.



A company’s internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. 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.



In our opinion, Perpetual Energy Inc.
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based
on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission”.



We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position
of Perpetual Energy Inc. as of December 31, 2011, December 31, 2010 and January 1, 2010, and the consolidated statements
of loss and comprehensive loss, changes in equity (deficit) and cash flows for the years ended December 31, 2011 and December
31, 2010, and notes, comprising a summary of significant accounting policies and other explanatory information, and our report
dated March 12, 2012 expressed an unqualified opinion on those consolidated financial statements.



/s/ KPMG LLP



KPMG LLP

Chartered Accountants

Calgary, Canada

March 12, 2012



Page 5







PERPETUAL ENERGY INC.

Consolidated Statements of Financial Position



|As at                                                         |  | December 31, 2011 |            |   | December 31, 2010 |   |            | January 1, 2010 | 
|------------------------------------------------------------- |  | ----------------- | ---------- | - | ----------------- | - | ---------- | --------------- | 
|(Cdn$ thousands)                                              |  |                   |            |   | (note 24)         |   |            | (note 24)       | 
|                                                              |  |                   |            |   |                   |   |            |                 | 
|Assets                                                        |  |                   |            |   |                   |   |            |                 | 
|Current assets                                                |  |                   |            |   |                   |   |            |                 | 
|Accounts receivable                                           |  | $                 | 35,604     |   |                   | $ | 35,459     |                 | 
|Prepaid expenses and deposits                                 |  |                   | 3,891      |   |                   |   | 5,028      |                 | 
|Marketable securities                                         |  |                   | 3,282      |   |                   |   | 6,007      |                 | 
|Derivatives (note 17)                                         |  |                   | 12,604     |   |                   |   | 4,271      |                 | 
|Assets held for sale (note 4)                                 |  |                   | 20,325     |   |                   |   | –          |                 | 
|                                                              |  |                   | 75,706     |   |                   |   | 50,765     |                 | 
|                                                              |  |                   |            |   |                   |   |            |                 | 
|Derivatives (note 17)                                         |  |                   | 7,692      |   |                   |   | 3,562      |                 | 
|Property, plant and equipment (note 5)                        |  |                   | 827,928    |   |                   |   | 859,465    |                 | 
|Exploration and evaluation (note 6)                           |  |                   | 106,763    |   |                   |   | 107,474    |                 | 
|Goodwill (note 7)                                             |  |                   | –          |   |                   |   | 6,000      |                 | 
|                                                              |  |                   | 942,383    |   |                   |   | 976,501    |                 | 
|Total assets                                                  |  | $                 | 1,018,089  |   |                   | $ | 1,027,266  |                 | 
|                                                              |  |                   |            |   |                   |   |            |                 | 
|Liabilities                                                   |  |                   |            |   |                   |   |            |                 | 
|Current liabilities                                           |  |                   |            |   |                   |   |            |                 | 
|Accounts payable and accrued liabilities                      |  | $                 | 50,404     |   |                   | $ | 73,979     |                 | 
|Dividends payable                                             |  |                   | –          |   |                   |   | 4,449      |                 | 
|Share based payment liability (note 14)                       |  |                   | 664        |   |                   |   | 2,130      |                 | 
|Bank debt (note 8)                                            |  |                   | –          |   |                   |   | –          |                 | 
|Convertible debentures (note 10)                              |  |                   | 74,250     |   |                   |   | –          |                 | 
|Derivatives (note 17)                                         |  |                   | 6,841      |   |                   |   | –          |                 | 
|Liabilities associated with assets held for sale (note
    4) |  |                   | 4,843      |   |                   |   | –          |                 | 
|                                                              |  |                   | 137,002    |   |                   |   | 80,558     |                 | 
|                                                              |  |                   |            |   |                   |   |            |                 | 
|Derivatives (note 17)                                         |  |                   | 10,865     |   |                   |   | –          |                 | 
|Long term bank debt (note 8)                                  |  |                   | 130,062    |   |                   |   | 182,612    |                 | 
|Senior notes (note 9)                                         |  |                   | 146,634    |   |                   |   | –          |                 | 
|Convertible debentures (note 10)                              |  |                   | 149,020    |   |                   |   | 219,689    |                 | 
|Derivative debenture liability (note 10)                      |  |                   | –          |   |                   |   | –          |                 | 
|Gas storage obligation (note 11)                              |  |                   | 41,630     |   |                   |   | 31,721     |                 | 
|Gas over bitumen royalty obligation (note 12)                 |  |                   | 74,705     |   |                   |   | 70,497     |                 | 
|Decommissioning obligations (note 15)                         |  |                   | 242,860    |   |                   |   | 236,163    |                 | 
|Deferred tax liability (note 20)                              |  |                   | 3,753      |   |                   |   | 2,122      |                 | 
|Unitholders’ liability (note 13)                              |  |                   | –          |   |                   |   | –          |                 | 
|                                                              |  |                   | 799,529    |   |                   |   | 742,804    |                 | 
|Total liabilities                                             |  |                   | 936,531    |   |                   |   | 823,362    |                 | 
|                                                              |  |                   |            |   |                   |   |            |                 | 
|Equity                                                        |  |                   |            |   |                   |   |            |                 | 
|Share capital (note 13)                                       |  |                   | 1,254,273  |   |                   |   | 1,257,462  |                 | 
|Equity component of convertible debentures                    |  |                   | 13,988     |   |                   |   | 13,988     |                 | 
|Contributed surplus (note 14)                                 |  |                   | 15,496     |   |                   |   | 9,868      |                 | 
|Deficit                                                       |  |                   | (1,202,199 | ) |                   |   | (1,077,414 | )               | 
|Total equity attributable to shareholders                     |  |                   | 81,558     |   |                   |   | 203,904    |                 | 
|Non-controlling interests                                     |  |                   | –          |   |                   |   | –          |                 | 
|Total equity                                                  |  |                   | 81,558     |   |                   |   | 203,904    |                 | 
|Total liabilities and equity                                  |  | $                 | 1,018,089  |   |                   | $ | 1,027,266  |                 | 



See accompanying notes. The notes are an integral part of the
Corporation’s annual consolidated financial statements.



|/s/ Robert A. Maitland | /s/ Geoffrey C. Merritt
|---------------------- | -----------------------
|                       |                        
|Robert A. Maitland     | Geoffrey C. Merritt    
|Director               | Director               



Page 6







PERPETUAL ENERGY INC.

Consolidated Statements of Loss and Comprehensive Loss



|                                                               |  | Year Ended December 31 |        
|-------------------------------------------------------------- |  | ---------------------- | -------
|                                                               |  | 2011                   |        
|(Cdn$ thousands, except per share amounts)                     |  |                        |        
|                                                               |  |                        |        
|Revenue                                                        |  |                        |        
|Oil and natural gas                                            |  | $                      | 247,809
|Royalties                                                      |  |                        | (20,624
|                                                               |  |                        | 227,185
|Change in fair value of derivatives (note 17)                  |  |                        | (4,019 
|Gas over bitumen (note 12)                                     |  |                        | 6,739  
|                                                               |  |                        | 229,905
|                                                               |  |                        |        
|Expenses                                                       |  |                        |        
|Production and operating                                       |  |                        | 89,322 
|Transportation                                                 |  |                        | 10,350 
|Exploration and evaluation (note 6)                            |  |                        | 15,997 
|General and administrative                                     |  |                        | 35,712 
|Gain on dispositions of property, plant and equipment (note 5) |  |                        | (12,033
|Impairment losses (note 5)                                     |  |                        | 25,607 
|Depletion and depreciation (note 5)                            |  |                        | 116,050
|                                                               |  |                        | 281,005
|Loss from operating activities                                 |  |                        | (51,100
|                                                               |  |                        |        
|Financial items                                                |  |                        |        
|Unrealized loss on derivative debenture liability (note 10)    |  |                        | –      
|Unrealized gain on gas storage obligation derivative (note 11) |  |                        | (4,117 
|Unrealized loss on marketable securities                       |  |                        | 2,625  
|Interest on Trust Units (note 13)                              |  |                        | –      
|Interest on convertible debentures                             |  |                        | 19,879 
|Interest on senior notes                                       |  |                        | 10,866 
|Interest on debt and gas storage obligation                    |  |                        | 6,645  
|Accretion on decommissioning obligations (note 15)             |  |                        | 7,291  
|                                                               |  |                        | 43,189 
|Loss before income tax                                         |  |                        | (94,289
|                                                               |  |                        |        
|Deferred income taxes (note 20)                                |  |                        | 1,631  
|Net loss and comprehensive loss                                |  |                        | (95,920
|                                                               |  |                        |        
|Net loss and comprehensive loss attributable to:               |  |                        |        
|Shareholders of the Corporation                                |  |                        | (95,920
|Non-controlling interests                                      |  |                        | –      
|                                                               |  | $                      | (95,920
|                                                               |  |                        |        
|Loss per share (note 13)                                       |  |                        |        
|Basic and diluted                                              |  | $                      | (0.65  



See accompanying notes. The notes are an integral part of the
Corporation’s annual consolidated financial statements.



Page 7







PERPETUAL ENERGY INC.

Consolidated Statements of Changes in Equity



|                                              |  | Share
    Capital |           |   | Equity
    Component of Convertible Debentures |   |        | Contributed
    Surplus |  |   | Deficit |   |  | Total Equity |           
|--------------------------------------------- |  | ----------------- | --------- | - | ---------------------------------------------- | - | ------ | ----------------------- |  | - | ------- | - |  | ------------ | ----------
|(Cdn$ thousands)                              |  |                   |           |   |                                                |   |        |                         |  |   |         |   |  |              |           
|                                              |  |                   |           |   |                                                |   |        |                         |  |   |         |   |  |              |           
|Balance at January 1, 2011 (note 24)          |  | $                 | 1,257,462 |   |                                                | $ | 13,988 |                         |  | $ | 9,868   |   |  | $            | (1,077,414
|Net loss                                      |  |                   | –         |   |                                                |   | –      |                         |  |   | –       |   |  |              | (95,920   
|Dividends to shareholders (note 13)           |  |                   | –         |   |                                                |   | –      |                         |  |   | –       |   |  |              | (28,865   
|Common shares issued – Restricted Rights Plan |  |                   | 1,043     |   |                                                |   | –      |                         |  |   | (1,043  | ) |  |              | –         
|Common shares issued – Share Option Plan      |  |                   | 494       |   |                                                |   | –      |                         |  |   | (413    | ) |  |              | –         
|Common shares repurchased                     |  |                   | (4,718    | ) |                                                |   | –      |                         |  |   | –       |   |  |              | –         
|Issue fees incurred                           |  |                   | (8        | ) |                                                |   | –      |                         |  |   | –       |   |  |              | –         
|Share based payment expense                   |  |                   | –         |   |                                                |   | –      |                         |  |   | 5,618   |   |  |              | –         
|Share based payment liability                 |  |                   | –         |   |                                                |   | –      |                         |  |   | 1,466   |   |  |              | –         
|Balance at December 31, 2011                  |  | $                 | 1,254,273 |   |                                                | $ | 13,988 |                         |  | $ | 15,496  |   |  | $            | (1,202,199



|                                                          |  | Share
    Capital |           |   | Equity
    Component of Convertible Debentures |   |        | Contributed
    Surplus |  |   | Deficit |   |  | Non-controlling
    Interests |            |   | Total Equity |  
|--------------------------------------------------------- |  | ----------------- | --------- | - | ---------------------------------------------- | - | ------ | ----------------------- |  | - | ------- | - |  | ----------------------------- | ---------- | - | ------------ | -
|(Cdn$ thousands)                                          |  |                   |           |   |                                                |   |        |                         |  |   |         |   |  |                               |            |   |              |  
|                                                          |  |                   |           |   |                                                |   |        |                         |  |   |         |   |  |                               |            |   |              |  
|Balance at January 1, 2010 (note 24)                      |  | $                 | –         |   |                                                | $ | –      |                         |  | $ | –       |   |  | $                             | (939,165   | ) |              | $
|Net loss                                                  |  |                   | –         |   |                                                |   | –      |                         |  |   | –       |   |  |                               | (100,169   | ) |              |  
|Severo common share issue                                 |  |                   | –         |   |                                                |   | –      |                         |  |   | –       |   |  |                               | –          |   |              |  
|Dividends to shareholders (note 13)                       |  |                   | –         |   |                                                |   | –      |                         |  |   | –       |   |  |                               | (38,080    | ) |              |  
|Share based payment expense                               |  |                   | –         |   |                                                |   | –      |                         |  |   | 2,606   |   |  |                               | –          |   |              |  
|Share based payment liability                             |  |                   | –         |   |                                                |   | –      |                         |  |   | (1,778  | ) |  |                               | –          |   |              |  
|Common shares issued – Restricted Rights Plan             |  |                   | 675       |   |                                                |   | –      |                         |  |   | (240    | ) |  |                               | –          |   |              |  
|Common shares issued – Share Option Plan                  |  |                   | 15        |   |                                                |   | –      |                         |  |   | (373    | ) |  |                               | –          |   |              |  
|Common shares issued – Premium Dividend Reinvestment Plan |  |                   | 19,535    |   |                                                |   | –      |                         |  |   | –       |   |  |                               | –          |   |              |  
|Issue fees incurred                                       |  |                   | (258      | ) |                                                |   | –      |                         |  |   | –       |   |  |                               | –          |   |              |  
|Acquisition of non-controlling interests                  |  |                   | 1,479     |   |                                                |   | –      |                         |  |   | –       |   |  |                               | –          |   |              |  
|Transferred upon conversion (note 24)                     |  |                   | 1,236,016 |   |                                                |   | 13,988 |                         |  |   | 9,653   |   |  |                               | –          |   |              |  
|Balance at December 31, 2010 (note 24)                    |  | $                 | 1,257,462 |   |                                                | $ | 13,988 |                         |  | $ | 9,868   |   |  | $                             | (1,077,414 | ) |              | $



See accompanying notes. The notes are an integral part of the
Corporation’s annual consolidated financial statements.



Page 8







PERPETUAL ENERGY INC.

Consolidated Statements of Cash Flows



|                                                                 |  | Year Ended December 31 |         
|---------------------------------------------------------------- |  | ---------------------- | --------
|                                                                 |  | 2011                   |         
|(Cdn$ thousands)                                                 |  |                        |         
|                                                                 |  |                        |         
|Cash flows from operating activities                             |  |                        |         
|                                                                 |  |                        |         
|Net loss                                                         |  | $                      | (95,920 
|Adjustments to add (deduct) non-cash items:                      |  |                        |         
|Change in fair value of derivatives                              |  |                        | 9,360   
|Exploration and evaluation                                       |  |                        | 8,201   
|Share based payment expense                                      |  |                        | 5,618   
|Gain on disposition of property, plant and equipment             |  |                        | (12,033 
|Impairment losses                                                |  |                        | 25,607  
|Depletion and depreciation                                       |  |                        | 116,050 
|Unrealized loss on derivative debenture liability                |  |                        | –       
|Unrealized gain on gas storage obligation derivative             |  |                        | (4,117  
|Unrealized loss on marketable securities                         |  |                        | 2,625   
|Interest expense on convertible debentures                       |  |                        | 3,581   
|Interest expense on senior notes                                 |  |                        | 403     
|Accretion on decommissioning obligations                         |  |                        | 7,291   
|Deferred income tax expense                                      |  |                        | 1,631   
|Gas over bitumen royalty obligation adjustments                  |  |                        | 4,772   
|Gas over bitumen royalty obligation adjustments not yet received |  |                        | (564    
|Gas over bitumen royalty obligation adjustments on dispositions  |  |                        | –       
|Expenditures on decommissioning obligations                      |  |                        | (2,514  
|Change in non-cash working capital (note 16)                     |  |                        | (9,563  
|Net cash from operating activities                               |  |                        | 60,428  
|                                                                 |  |                        |         
|Cash flows from financing activities                             |  |                        |         
|                                                                 |  |                        |         
|Change in bank debt                                              |  |                        | (52,550 
|Senior notes issued net of issue fees                            |  |                        | 146,231 
|Gas storage arrangement receipt net of issue fees                |  |                        | 9,909   
|Dividends to shareholders                                        |  |                        | (28,865 
|Proceeds from Premium Dividend Reinvestment Plan                 |  |                        | –       
|Repayment of convertible debentures                              |  |                        | –       
|Convertible debenture issue net of issue fees                    |  |                        | –       
|Common shares issued net of issue fees                           |  |                        | 73      
|Commons share repurchased                                        |  |                        | (4,718  
|Severo common share issue                                        |  |                        | –       
|Change in non-cash working capital (note 16)                     |  |                        | (6,904  
|Net cash from financing activities                               |  |                        | 63,176  
|                                                                 |  |                        |         
|Cash flows from investing activities                             |  |                        |         
|                                                                 |  |                        |         
|Acquisitions                                                     |  |                        | (8,295  
|Capital expenditures                                             |  |                        | (146,504
|Proceeds on dispositions                                         |  |                        | 41,660  
|Proceeds on sale of marketable securities                        |  |                        | 100     
|Change in non-cash working capital (note 16)                     |  |                        | (10,565 
|Net cash used in investing activities                            |  |                        | (123,604
|                                                                 |  |                        |         
|Change in cash                                                   |  |                        | –       
|Cash, beginning of year                                          |  |                        | –       
|Cash, end of year                                                |  | $                      | –       
|                                                                 |  |                        |         
|Interest paid                                                    |  | $                      | 30,291  
|Taxes paid                                                       |  | $                      | –       

See accompanying notes. The notes are an integral part of the
Corporation’s annual consolidated financial statements.



Page 9







|PERPETUAL ENERGY INC.                                                    
|-------------------------------------------------------------------------
|Notes to Consolidated Financial Statements                               
|(All tabular amounts are in Cdn$ thousands, except where otherwise noted)
|                                                                         



| | 1. | REPORTING ENTITY AND FUTURE
                                                                  OPERATIONS
| | -- | --------------------------------------------------------------------------------------------------------



| | a) | Reporting
                                                                       entity
| | -- | ---------------------------------------------------------------------------------------



Perpetual Energy Inc.
(“Perpetual” or the “Corporation”) is a corporation domiciled in Canada. The address of the Corporation’s
registered office is 3200, 605 – 5 Avenue S.W., Calgary, Alberta. The consolidated financial statements of the Corporation
as at December 31, 2011 comprise the Corporation and its subsidiaries (note 21).



Perpetual is principally
engaged in the acquisition, exploration and development of oil and gas properties in Alberta. Historically the Corporation has
concentrated on conventional shallow gas properties as a basis for stable production. The Corporation also takes advantage of
other energy opportunities which present themselves, including tight gas, light oil and natural gas storage.



The Corporation formerly
operated as Paramount Energy Trust (“PET” or the “Trust”), an unincorporated trust formed under the laws
of the Province of Alberta pursuant to a trust indenture dated June 28, 2002. On June 30, 2010, the Trust completed a conversion
(the "conversion") from an income trust to a corporation through a distribution of Trust Units for shares of Perpetual
on a one-for-one basis pursuant to a plan of arrangement under the Business Corporations Act (Alberta) and related transactions.
Perpetual’s Board of Directors and management team are the former Board of Directors and management team of the Trust’s
administrator. Immediately subsequent to the conversion, Perpetual effected an internal reorganization whereby, among other things,
the Trust was dissolved and the Corporation received all of the assets and assumed all of the liabilities of the Trust. As the
conversion arose from a transfer of interests that were under control of the same Unitholders/Shareholders immediately before
and after the conversion, the assets and liabilities acquired were recognized at the carrying amounts recognized previously in
the Trust’s consolidated financial statements. References to the Corporation in these consolidated financial statements
for periods prior to June 30, 2010 are references to the Trust and for periods on or after June 30, 2010 are references to Perpetual.
Additionally, references to shares, Shareholders and dividends are comparable to units, Unitholders and distributions previously
under the Trust.



| | b) | Future operations
| | -- | -----------------



The Corporation’s
$75 million 6.50% convertible unsecured subordinated debentures (“6.50% Convertible Debentures”) mature on June 30,
2012. While the Corporation may settle all or a portion of the outstanding 6.50% Convertible Debentures through the issuance of
Common Shares by giving notice of such intent to debenture holders not more than 30 and not less than 15 days prior to the maturity
date, it is the intention of the Corporation to settle the 6.50% Convertible Debentures in cash.



To
date in 2012, the Corporation has disposed of non-core oil and gas assets for total proceeds of approximately $60.9 million. In
addition, as described in note 23, the Corporation has identified the Warwick gas storage facility as an asset held for sale subsequent
to December 31, 2011. The Corporation anticipates that cash flows including cash flow from operating activities, proceeds from
closed and future asset dispositions and available credit facilities will provide the required funds to discharge
the Corporation’s existing obligations, carry out exploration and development programs and fund ongoing operations for the
foreseeable future, including the cash settlement of the 6.50% Convertible Debentures on the maturity date. The Corporation expects
a downward adjustment to the borrowing base under the revolving credit facility (“Credit Facility”) pursuant to the
semi-annual redetermination of the borrowing base in April 2012, which relates principally to lower natural gas prices and the
effects of asset dispositions. If available liquidity is not sufficient to meet the Corporation’s operating and debt servicing
obligations as they come due, management’s plans include reducing expenditures as necessary or pursuing alternative financing
arrangements for the foreseeable future.



| | 2. | BASIS OF PRESENTATION
| | -- | ---------------------



| | a) | Statement
                                                                       of compliance
| | -- | ----------------------------------------------------------------------------------------------



These consolidated financial
statements present the Corporation’s first consolidated annual financial statements in accordance with International Financial
Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These
are Perpetual’s first consolidated financial statements prepared in accordance with IFRSs and IFRS 1 First-time Adoption
of International Financial Reporting Standards. Previously, the Corporation prepared its consolidated annual consolidated financial
statements in accordance Canadian generally accepted accounting principles (“GAAP”). An explanation of how the transition
from Canadian GAAP to IFRS has affected Perpetual’s reported financial position, financial performance and cash flows is
provided in note 24.



The consolidated financial
statements of the Corporation were approved and authorized for issue by the Board of Directors on March 12, 2012.



Page 10







| | b) | Basis of measurement
| | -- | --------------------



The consolidated financial
statements have been prepared on the historical cost basis except for financial assets or liabilities measured at fair value through
profit or loss and liabilities for cash-settled share based payment arrangements measured at fair value.



| | c) | Functional and presentation
                                                                       currency
| | -- | -----------------------------------------------------------------------------------------------------------



These consolidated financial
statements are presented in Canadian dollars, which is the functional currency of the Corporation and its subsidiaries.



| | d) | Use of estimates and
                                                                       judgments
| | -- | -----------------------------------------------------------------------------------------------------





The preparation of the
consolidated financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that
affect the application of accounting policies and reported amounts of assets, liabilities, revenue and expenses.



Estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimates
are revised and in any future periods affected. Actual results may differ from estimates.



Information about the
significant estimates and judgments made by management in preparing these consolidated financial statements are outlined below.



The Corporation uses
estimates of natural gas and liquids reserves in the calculation of depreciation and depletion and also for value in use and fair
value less costs to sell (“FVLCS”) calculations of non-financial assets. By their nature, the estimates of reserves,
including estimates of price, costs, discount rates and the related future cash flows, are subject to measurement uncertainty.



The Corporation allocates
its oil and natural gas properties to cash generating units (“CGUs”) based on management’s judgment of the CGU’s
ability to generate independent cash flows and for impairment testing.



The transfer of exploration
and evaluation (“E&E”) assets to property, plant and equipment is based on estimated reserves used in the determination
of an asset’s technical feasibility and commercial viability.



Amounts recorded for
decommissioning obligations and the associated accretion are calculated based on estimates of asset retirement costs, site remediation
and related cash flows.



Derivatives are measured
at fair value which is subject to management uncertainty.



The determination of
fair value of share based payments is based on estimates of future consideration using a binomial lattice option pricing model
which requires assumptions such as volatility, dividend yield, risk free interest rate and expected term.



The Corporation uses
estimates to allocate the debenture proceeds from convertible debenture issuances between debt and the derivative debenture liability
or equity components, as appropriate.



The calculation of the
gas storage obligation requires estimates and judgment to determine the estimated net present value of the future delivery obligation
for cushion gas under the gas storage obligation.



| | 3. | SIGNIFICANT ACCOUNTING POLICIES
| | -- | -------------------------------



The accounting policies
set out below have been applied consistently to all periods presented in these annual consolidated financial statements, and have
been applied consistently by the Corporation and its subsidiaries.



| | a) | Basis of consolidation
| | -- | ----------------------



| | i) | Subsidiaries
| | -- | ------------



Subsidiaries are entities
controlled by the Corporation. Control exists when the Corporation has the power to govern the financial and operating policies
of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that currently are exercisable
are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the
date that control commences until the date that control ceases.



Page 11







| | ii) | Business combinations
| | --- | ---------------------



The acquisition method
of accounting is used to account for acquisitions of subsidiaries and assets that meet the definition of a business under IFRS.
The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred
or assumed at the date of acquisition of control. Identifiable assets acquired and liabilities and contingent liabilities assumed
in a business combination are measured at their recognized amounts (generally fair value) at the acquisition date. The excess
of the cost of acquisition over the recognized amounts of the identifiable assets, liabilities and contingent liabilities acquired
is recorded as goodwill. If the cost of acquisition is less than the recognized amount of the net assets acquired, the difference
is recognized as a bargain purchase gain in net earnings or loss.



| | iii) | Jointly
                                                                                                          controlled operations
                                                                                                          and jointly controlled
                                                                                                          assets
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Many of the Corporation’s
oil and natural gas activities involve jointly controlled assets. The consolidated financial statements include the Corporation’s
proportionate share of these jointly controlled assets, liabilities, revenue and expenses.



| | iv) | Transactions
                                                                                                         eliminated on consolidation
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------



Intercompany balances
and transactions, and any unrealized income and expenses arising from intercompany transactions, are eliminated in preparing the
annual consolidated financial statements.



| | b) | Financial instruments
| | -- | ---------------------



Financial instruments
are initially recognized at fair value on the statement of financial position. Subsequent measurement of financial instruments
is based on their initial classification into one of the following categories: financial assets and liabilities measured at fair
value through profit or loss, loans and receivables, held to maturity investments, available-for-sale financial assets, or other
financial liabilities.



| | i) | Non-derivative
                                                                                                        financial assets
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------



|Financial
    Instrument |  | Category                          |  | Subsequent
    Measurement
|------------------------ |  | --------------------------------- |  | --------------------------
|Accounts receivable      |  | Loans and receivables             |  | Amortized cost            
|Marketable securities    |  | Fair value through profit or loss |  | Fair value                



The Corporation’s
accounts receivable are initially recognized on the date they originate and are measured at amortized cost using the effective
interest method, less any impairment losses.



Marketable securities
are classified at fair value through profit or loss as the Corporation manages such investments and makes purchase and sale decisions
based on their fair value in accordance with the Corporation’s risk management or investment strategy. Upon initial recognition,
all transaction costs are recognized in net earnings or loss when incurred. At the period end date, marketable securities are
measured at fair value derived from exchange traded values in active markets, any changes in the fair value are recognized in
net earnings or loss.



| | ii) | Derivative
                                                                                                         assets and liabilities
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------



The Corporation has
entered into certain financial derivative contracts in order to manage the exposure to market risks from fluctuations in commodity
prices and currency rates. The Corporation has not designated its financial derivative contracts as effective accounting hedges,
and thus not applied hedge accounting, even though the Corporation considers all commodity and currency contracts to be economic
hedges. As a result, all financial derivative contracts are classified as fair value through profit or loss and recorded as derivatives
on the statement of financial position at fair value. Changes in the fair value of the commodity price and currency rate derivatives
are recognized in net earnings or loss.



The Corporation has
accounted for its forward physical delivery fixed-price sales contracts as derivative financial instruments, as the Corporation
has settled such arrangements from time to time. Accordingly, such forward physical delivery fixed-price sales contracts are classified
as fair value through profit or loss and recorded as derivatives on the statement of financial position at fair value.



Transaction costs on
derivatives are recognized in net earnings or loss when incurred.



Embedded derivatives
are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract
and the embedded derivative are not closely related, a separate instrument with the same terms as the embedded derivative would
meet the definition of a derivative, and the combined instrument is not measured at fair value through profit or loss. Changes
in the fair value of separable embedded derivatives are recognized immediately in net earnings or loss.



Page 12







With respect to the
gas storage obligation, the Corporation recognizes a derivative separate from the obligation relating to the change in the fair
value of the natural gas to be delivered on maturity of the arrangement based on inputs including the forward price curves for
natural gas. The corresponding change in the fair value of the embedded derivative is recognized in net earnings or loss.



| | iii) | Non-derivative
                                                                                                          financial liabilities
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------



|Financial
    Instrument                 |  | Category              |  | Subsequent
    Measurement
|---------------------------------------- |  | --------------------- |  | --------------------------
|Accounts payable and accrued liabilities |  | Financial liabilities |  | Amortized cost            
|Dividends payable                        |  | Financial liabilities |  | Amortized cost            
|Long term bank debt                      |  | Financial liabilities |  | Amortized cost            
|Senior notes                             |  | Financial liabilities |  | Amortized cost            
|Convertible debentures                   |  | Financial liabilities |  | Amortized cost            
|Gas storage obligation                   |  | Financial liabilities |  | Amortized cost            
|Unitholders’ liability                   |  | Financial liabilities |  | Amortized cost            



Accounts payable and
accrued liabilities, dividends payable, long term bank debt and Senior Notes are recognized initially at fair value and are subsequently
measured at amortized cost using the effective interest method.



The Corporation’s
convertible debentures are classified as debt with a portion of the proceeds allocated to equity representing the conversion feature.
As the debentures are converted, a portion of debt and conversion feature components are transferred to share capital. The debt
component associated with the convertible debentures accretes over time to the amount owing on maturity and such increases in
the debt component are reflected as non-cash interest expense in net earnings or loss. The convertible debentures are carried
net of issue costs on the statement of financial position. The issue costs are amortized to net earnings
or loss using the effective interest rate method.



The Corporation has a forward
sales arrangement with a counterparty to fund the development of the Warwick gas storage facility, whereby the Corporation received
cash in exchange for agreeing to deliver natural gas to the counterparty in the future. Upon receiving cash, a gas storage obligation
is recorded. The obligation is accreted until its maturity using the effective interest method.



| | iv) | Share
                                                                                                         capital and Unitholders’
                                                                                                         liability
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Prior to June 30, 2010,
the Corporation was a Trust. The redeemable feature of the Trust Units along with the unavoidable requirement for distributions
to be paid out according to the provisions of the trust indenture caused the Trust Units to be classified as a Unitholders’
liability until the Trust’s conversion. The Trust Units were recorded at amortized cost.



Due to the Trust Units
being classified as a liability the conversion feature of the convertible debentures was recorded as a derivative debenture liability.
The derivative debenture liability was measured at fair value at each period end date while the Corporation was a trust.



Upon conversion, the
Unitholders’ liability was reclassified to equity at its June 30, 2010 carrying amount. Similarly to the Trust Units, the
derivative debenture liability component of the convertible debentures was reclassified to equity upon the conversion at its June
30, 2010 carrying amount.



Incremental
costs directly attributable to the issue ofcommon shares and share options are recognized
as a deduction from equity, net of any tax effects.



| | c) | Property, plant and equipment
| | -- | -----------------------------



| | i) | Production
                                                                                                        and development costs
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------



The technical feasibility
and commercial viability of extracting oil and natural gas is considered to be determinable when commercial reserves are determined
to exist. Upon determination of commercial reserves, E&E assets attributable to those reserves are first tested for impairment
and then reclassified from E&E assets to a separate category within tangible assets referred to as oil and natural gas properties.



Items of property, plant
and equipment, which include oil and natural gas development and production assets, are measured at cost less accumulated depletion
and depreciation and accumulated impairment losses. Development and production assets are grouped into CGUs for impairment testing.
The Corporation has grouped its development and production assets into CGUs of oil and natural gas properties in geographical
areas in Alberta, including the Warwick gas storage facility and shut-in fields under the Government of Alberta’s gas over
bitumen royalty regime. There are no significant parts of an item of property, plant and equipment, including oil and natural
gas properties, that have different useful lives from the life of the area or facility in general, that had to be accounted for
as separate items.



Page 13







Gains and losses on
disposition of an item of property, plant and equipment, including oil and natural gas properties, are determined by comparing
the proceeds from disposition with the carrying amount of property, plant and equipment and are recognized in net earnings or
loss. The carrying amount of any replaced or disposed component is derecognized.



| | ii) | Subsequent
                                                                                                         costs
| | --- | -------------------------------------------------------------------------------------------------------------------------



Costs incurred subsequent
to the determination of technical feasibility and commercial viability and the costs of replacing parts of property, plant and
equipment are recognized as property, plant and equipment only when they increase the future economic benefits embodied in the
specific asset to which they relate. All other expenditures are recognized in net earnings or loss as incurred. Such capitalized
property, plant and equipment generally represent costs incurred in developing proved and/or probable reserves and bringing in
or enhancing production from such reserves, and are accumulated on a field or geotechnical area basis. The costs of the day-to-day
servicing of property, plant and equipment are recognized in net earnings or loss incurred.



| | iii) | Depletion
                                                                                                          and depreciation
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------



The net carrying amount
of development or production assets is depleted using the unit of production method by reference to the ratio of production in
the period to the related proved and probable reserves, taking into account estimated future development and decommissioning costs
necessary to bring those reserves into production. Future development and decommissioning costs are estimated taking into account
the level of development required to produce the reserves. The future development cost estimates are reviewed by independent reserve
engineers at least annually.



The Corporation revised
its estimate of the depletion and depreciation rate of its oil and gas properties on January 1, 2011 to include probable reserves
and associated future development and decommissioning costs. The effect of this change reduced
depletion and depreciation expense by $119.8 million compared to depletion and depreciation expense as would have been calculated
using proved reserves and associated future development and decommissioning costs for the year ended December 31, 2011.
The amount of the effect on future periods has not been disclosed because estimating it is impracticable.



The Corporation’s
oil and natural gas properties are depleted on the unit of production method over expected field lives ranging from five to 15
years.



The Corporation’s
corporate assets are depreciated on a straight line basis at rates ranging from ten to 33 percent. Gas storage assets are depreciated
using a five percent declining balance method.



Depreciation methods,
useful lives and residual values are reviewed at each period end date.



| | d) | Exploration and evaluation expenditures
| | -- | ---------------------------------------



Pre-license costs, geological
and geophysical costs and lease rentals of undeveloped properties are recognized in net earnings or loss as incurred.



E&E costs, consisting
of the costs of acquiring oil and natural gas licenses, are capitalized initially as E&E assets according to the nature of
the assets acquired. Costs associated with drilling exploratory wells in an undeveloped area will be capitalized. The costs are
accumulated in cost centers by well, field or exploration area pending determination of technical feasibility and commercial viability.
When technical feasibility and commercial viability is determined, the relevant expenditure is transferred to oil and gas properties
after impairment is assessed and any resulting impairment loss if applicable is recognized to net earnings or loss. In addition,
the Corporation tests for impairment if facts and circumstances suggest that the carrying amount exceeds the recoverable amount.
The Corporation’s E&E assets consist solely of undeveloped land and bitumen evaluation assets. Gains and losses on disposition
of E&E assets are determined by comparing the proceeds from disposition with the carrying amount and are recognized in net
earnings or loss.



| | e) | Goodwill
| | -- | --------



Goodwill arises on the
acquisition of businesses, subsidiaries, associates and joint ventures and represents the excess of the cost of the acquisition
over the recognized amounts (generally fair value) of the identifiable assets, liabilities and contingent liabilities of the acquiree.
Goodwill is measured at cost less accumulated impairment losses. If the cost of acquisition is less than the recognized amount
of the net assets acquired, the difference is recognized as a bargain purchase gain in net earnings or loss.



Page 14







| | f) | Assets held for sale
| | -- | --------------------



Non-current assets,
or disposal groups consisting of assets and liabilities (“disposal groups”), are classified as held for sale if their
carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Assets and liabilities
qualifying as held for sale must be available for immediate sale in its present condition subject to normal terms and conditions
and its sale must be highly probable.



Non-current assets,
or disposal groups, are measured at the lower of the carrying amount and FVLCS, with impairments recognized in net earnings or
loss. Non-current assets or disposal groups held for sale are presented in current assets and liabilities within the Statement
of Financial Position. Assets held for sale are not subject to depletion and depreciation.



| | g) | Impairment
| | -- | ----------



| | i) | Financial
                                                                                                        assets
| | -- | ------------------------------------------------------------------------------------------------------------------------



Financial assets are
assessed at each period end date to determine whether there is any objective evidence that it is impaired. A financial asset is
considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated
future cash flows of that asset.



An impairment loss in
respect of a financial asset measured at amortized cost is calculated as the difference between its carrying amount and the present
value of the estimated future cash flows discounted at the original effective interest rate.



Individually significant
financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in
groups that share similar credit risk characteristics.



All impairment losses
are recognized in net earnings or loss.



An impairment loss is
reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. For financial
assets measured at amortized cost the reversal is recognized in net earnings or loss.



| | ii) | Non-financial
                                                                                                         assets
| | --- | -----------------------------------------------------------------------------------------------------------------------------



The carrying amounts
of the Corporation’s non-financial assets, other than E&E assets, are reviewed at each period end date to determine
whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
An impairment test is completed each year for goodwill and other intangible assets that have indefinite lives or that are not
yet available for use. E&E assets are assessed for impairment when they are reclassified to property, plant and equipment,
as oil and natural gas properties, and also if facts and circumstances suggest that the carrying amount exceeds the recoverable
amount.



For the purpose of impairment
testing, assets are grouped together at a CGU level which is the smallest group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or groups of assets. The recoverable amount of an asset or
a CGU is determined based on the higher of its FVLCS and its value in use.



FVLCS is determined
as the amount that would be obtained from the sale of a CGU in an arm’s length transaction between knowledgeable and willing
parties. The FVLCS of oil and gas properties is generally determined as the net present value of estimated future cash flows expected
to arise from the continued use of the CGU and its eventual disposition, using assumptions that an independent market participant
may take into account. These cash flows are discounted by an appropriate discount rate which would be applied by such a market
participant to arrive at a new present value of the CGU.



In determining value
in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset. Value in use is generally determined by reference
to the present value of the future cash flows expected to be derived from production of proved and probable reserves.



Goodwill acquired in
a business combination, for the purpose of impairment testing, is allocated to the CGUs that are expected to benefit from the
synergies of the combination. E&E assets are allocated to related CGUs when they are assessed for impairment, both at the
time of any triggering facts and circumstances as well as upon their eventual reclassification to oil and natural gas properties
in property, plant and equipment.



An impairment loss is
recognized if the carrying amount of an asset or its CGU, including the related decommissioning obligation, exceeds its estimated
recoverable amount. Impairment losses recognized in respect of CGUs are allocated first to reduce the carrying amount of any goodwill
allocated to the CGUs and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis.
Impairment losses are recognized in net earnings or loss.



An impairment loss in
respect of goodwill is not reversed. In respect of other assets, impairment losses recognized in prior years are assessed at each
period end date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has
been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that
the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depletion and depreciation,
if no impairment loss had been recognized.



Page 15







| | h) | Share based payments
| | -- | --------------------



Options to purchase common
shares issued under the Share Option Plan are treated as equity-settled share based payments and are measured at grant date fair
value by means of a binomial lattice option pricing model which takes the exercise price of the option to purchase a share, the
price of the share at the grant date, the expected life of the grant based on the vesting date and expiry date, estimates of volatility
and interest rates over its expected life. A forfeiture rate is estimated on the grant date and is subsequently adjusted to reflect
the actual number of options that vest. The grant date fair value of Share Options granted is recognized as share based payments,
within general and administrative expenses, with a corresponding increase in contributed surplus over the vesting period. When
Share Options are exercised for common shares, consideration paid by the option holder and associated contributed surplus is recorded
to share capital.



The Dividend Bonus Arrangement
is treated as a cash-settled share based payment plan, and as such the fair values of estimated dividend bonus obligations are
adjusted at each period end date until settled. The fair value of the Dividend Bonus Arrangement for Share Options outstanding
at June 30, 2010, is recorded as a share based payment liability and the increase or decrease in the fair value during the period,
up to a maximum of the original grant date fair value, is charged or credited to contributed surplus. Any fair value calculated
in excess of the original grant date fair value of the share options at June 30, 2010 and the fair value for the Dividend Bonus
Arrangement related to the Share Options issued subsequent to June 30, 2010 is recorded to share based payments, within general
and administrative expenses.



Restricted Rights issued under
the Restricted Rights Plan and Performance Share Rights issued under the Performance Share Rights Plan are treated as equity-settled
share based payments and are measured at grant date fair value and charged to net earnings or loss in the period they vest, within
general and administrative expenses, with a corresponding increase to contributed surplus.



| | i) | Gas over bitumen royalty obligation
| | -- | -----------------------------------



Royalty adjustments
received related to the Corporation’s gas over bitumen properties are recorded as a liability as the Corporation cannot
determine if, when or to what extent the royalty adjustment may be repayable through incremental royalties if and when gas production
recommences. Therefore, these royalty adjustments will be included in net earnings or loss when such determination can be made.
For certain wells which have been disposed to a third party, the Corporation continues to receive the gas over bitumen royalty
adjustments although the ownership of the natural gas reserves and responsibility for paying royalties on future production has
been transferred to the buyer and as a result the obligation is extinguished. Adjustments received for these wells are recorded
as gas over bitumen revenue.



| | j) | Decommissioning obligations
| | -- | ---------------------------



The Corporation’s
activities give rise to dismantling, decommissioning and site disturbance remediation activities. A provision is made for the
estimated cost of site restoration and capitalized in the relevant asset category.



Decommissioning obligations
are measured at the present value of management’s estimate of expenditures required to settle the present obligation at
the statement of financial position date and using a risk free interest rate not adjusted for credit risk (“risk free rate”).
Subsequent to the initial measurement, the obligation is adjusted at the end of each period to reflect the passage of time, changes
in the estimated future cash flows underlying the obligation and changes in the risk free rate. The accretion of the provision
due to the passage of time is recognized in net earnings or loss whereas changes in the provision arising from the changes in
estimated cash flows or changes in the risk free rate are capitalized. Actual costs incurred upon settlement of the decommissioning
obligations are charged against the provision to the extent the provision was established.



| | k) | Revenue
| | -- | -------



Revenue and royalty
expense from the sale of oil and natural gas is recorded when the significant risks and rewards of ownership of the product are
transferred to the buyer which is usually when legal title passes to the external party. This is generally at the time product
enters the pipeline.



The Corporation recognizes
revenue for storage services, including gas injection, storage and withdrawal in accordance with the terms of the storage contracts.
The Corporation does not hold title to third party storage gas and does not store proprietary gas.



Royalty income is recognized
as it accrues in accordance with the terms of the overriding royalty agreements.



Page 16







| | l) | Foreign
                                                                       currency translation
| | -- | ---------------------------------------------------------------------------------------------------



Monetary
assets and liabilities denominated in a foreign currency are translated at the rate of exchange in effect at period end while
non-monetary assets and liabilities are translated at historical rates of exchange. Revenues and expenses are translated at monthly
average rates of exchange. Translation gains and losses are reflected in net earnings or loss in the period in which they arise.



| | m) | Borrowing costs
| | -- | ---------------



Borrowing costs incurred
for the construction of qualifying assets are capitalized during the period of time that is required to complete and prepare the
assets for their intended use or sale. All other borrowing costs are recognized in net earnings or loss using the effective interest
method. The capitalization rate used to determine the amount of borrowing costs to be capitalized is the weighted average interest
rate applicable to the Corporation’s outstanding long-term bank debt during the period.



| | n) | Income tax
| | -- | ----------



Income tax expense comprises
current and deferred components. Income tax expense is recognized in net earnings or loss except to the extent that it relates
to items recognized directly in equity, in which case it is recognized in equity.



Current tax is the expected
tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the period end date, and any
adjustment to tax payable in respect of previous years.



Deferred tax is recognized
in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for taxation purposes. Deferred tax is not recognized on the initial recognition of assets or liabilities in
a transaction that is not a business combination. In addition, deferred tax is not recognized for taxable temporary differences
arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary
differences when they reverse, based on the laws that have been enacted or substantively enacted by the period end date. Deferred
tax assets and liabilities are offset if there is a legally enforceable right to offset, and they relate to income taxes levied
by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities
and assets on a net basis or their tax assets and liabilities will be realized simultaneously.



A deferred tax asset
is recognized to the extent that it is probable that future taxable profits will be available against which the temporary difference
can be utilized. Deferred tax assets are reviewed at each period end date and are reduced to the extent that it is no longer probable
that the related tax benefit will be realized.



| | o) | Earnings
                                                                                                         or loss per share amounts
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------



Basic earnings or loss per
share is calculated by dividing the net earnings or loss by the weighted average number of common shares outstanding during the
period. For the dilutive net earnings or loss per share calculation, the weighted average number of share outstanding is adjusted
for the potential number of shares which may have a dilutive effect on net earnings or loss.



Diluted earnings or loss per
share is calculated given the effect of the potential dilution that would occur if outstanding Share Options, Restricted Rights
or potential dilutive convertible debentures were exercised or converted into common shares. The weighted average number of diluted
shares is calculated in accordance with the treasury stock method for Share Options and Restricted Rights and the if-converted
method for potentially issuable commons shares through the convertible debentures. The treasury stock method assumes that the
proceeds received from the exercise of all potentially dilutive instruments are used to repurchase common shares at the average
market price. The if-converted method assumes conversion of convertible securities at the beginning of the reporting period.



From
January 1, 2010 until the June 30, 2010 conversion, the Corporation included the Trust Units classified as liability in the denominator
for basic and diluted per share calculations.



| | p) | New
                                                                                                         pronouncements adopted
| | -- | -----------------------------------------------------------------------------------------------------------------------------------



Accounting
standards effective for periods beginning on January 1, 2011 have been adopted as part of the transition to IFRS.



| | q) | Recent pronouncements
                                                                       issued
| | -- | ---------------------------------------------------------------------------------------------------



In May 2011, the IASB issued
IFRS 11, Joint Arrangements, to replace International Accounting Standard (“IAS”) 31, Interests in Joint Ventures,
IFRS 10, Consolidated Financial Statements, IFRS 12, Disclosure of Interests in Other Entities, and IFRS 13, Fair Value Measurements,
effective for years beginning on or after January 1, 2013 with earlier application permitted. IFRS 11 eliminates the accounting
policy choice between proportionate consolidation and equity method accounting for joint ventures available under IAS 31 and,
instead, mandates one of these two methodologies based on the economic substance of the joint arrangement. IFRS 10 establishes
principles for the presentation and preparation of consolidated financial statements. IFRS 12 requires entities to disclose information
about the nature of their interests in joint ventures and IFRS 13 defines, and establishes a framework for measuring, fair value.



Page 17







In June 2011, the IASB issued
an amendment to IAS 19, Employee Benefits, to address the accounting and disclosure of defined benefit pension plans effective
for years beginning on or after January 1, 2013 with earlier application permitted.



Perpetual has not applied any
of these new standards as of December 31, 2011. Perpetual continues to assess their impact and, at this time, does not anticipate
any of them to result in significant accounting or disclosure changes.



| | 4. | ASSETS HELD FOR SALE
| | -- | --------------------



Assets and liabilities held for sale at December 31, 2011 were
as follows:



|Assets held for sale                             |  |  |       
|------------------------------------------------ |  |  | ------
|                                                 |  |  |       
|Exploration and evaluation (note 6)              |  |  | 4,836 
|Property, plant and equipment (note 5)           |  |  | 15,489
|                                                 |  |  | 20,325
|                                                 |  |  |       
|Liabilities associated with assets held for sale |  |  |       
|                                                 |  |  |       
|Decommissioning obligations (note 15)            |  |  | 4,843 



During the fourth quarter of 2011, Perpetual
had announced plans to dispose of non-core assets. At December 31, 2011, assets of $20.3 million and associated liabilities of
$4.8 million represent a disposal group within the Corporation’s West Central and Other South CGU’s and are presented
as held for sale as at December 31, 2011. Further details concerning the sale of these and other assets sold in 2012 are provided
in note 23.



| | 5. | PROPERTY, PLANT AND EQUIPMENT
| | -- | -----------------------------



|                                                          |  | Oil and Gas 
    Properties |            |   | Corporate Assets |  |        | Total | 
|--------------------------------------------------------- |  | --------------------------- | ---------- | - | ---------------- |  | ------ | ----- | 
|                                                          |  |                             |            |   |                  |  |        |       | 
|Cost                                                      |  |                             |            |   |                  |  |        |       | 
|                                                          |  |                             |            |   |                  |  |        |       | 
|January 1, 2010                                           |  |                             | 2,338,883  |   |                  |  | 4,854  |       | 
|Additions                                                 |  |                             | 158,120    |   |                  |  | 707    |       | 
|Transferred from exploration and evaluation               |  |                             | 13,730     |   |                  |  | –      |       | 
|Acquisitions                                              |  |                             | 123,348    |   |                  |  | –      |       | 
|Capitalized borrowing costs                               |  |                             | 305        |   |                  |  | –      |       | 
|Dispositions                                              |  |                             | (59,618    | ) |                  |  | –      |       | 
|December 31, 2010                                         |  |                             | 2,574,768  |   |                  |  | 5,561  |       | 
|Additions                                                 |  |                             | 137,066    |   |                  |  | 588    |       | 
|Transferred from exploration and evaluation               |  |                             | 9,538      |   |                  |  | –      |       | 
|Acquisitions                                              |  |                             | 7,098      |   |                  |  | –      |       | 
|Dispositions                                              |  |                             | (28,681    | ) |                  |  | –      |       | 
|Reclassification to assets held for sale (note 4)         |  |                             | (59,317    | ) |                  |  | –      |       | 
|December 31, 2011                                         |  |                             | 2,640,472  |   |                  |  | 6,149  |       | 
|                                                          |  |                             |            |   |                  |  |        |       | 
|Accumulated depletion, depreciation and impairment losses |  |                             |            |   |                  |  |        |       | 
|                                                          |  |                             |            |   |                  |  |        |       | 
|January 1, 2010                                           |  |                             | (1,468,418 | ) |                  |  | (3,163 | )     | 
|Depletion and depreciation                                |  |                             | (224,284   | ) |                  |  | (738   | )     | 
|Impairment losses                                         |  |                             | (24,261    | ) |                  |  | –      |       | 
|December 31, 2010                                         |  |                             | (1,716,963 | ) |                  |  | (3,901 | )     | 
|Depletion and depreciation                                |  |                             | (115,139   | ) |                  |  | (911   | )     | 
|Impairment losses                                         |  |                             | (25,607    | ) |                  |  | –      |       | 
|Reclassification to assets held for sale (note 4)         |  |                             | 43,828     |   |                  |  | –      |       | 
|December 31, 2011                                         |  |                             | (1,813,881 | ) |                  |  | (4,812 | )     | 
|                                                          |  |                             |            |   |                  |  |        |       | 
|Carrying amount                                           |  |                             |            |   |                  |  |        |       | 
|                                                          |  |                             |            |   |                  |  |        |       | 
|January 1, 2010 (note 24)                                 |  |                             | 870,465    |   |                  |  | 1,691  |       | 
|December 31, 2010 (note 24)                               |  |                             | 857,805    |   |                  |  | 1,660  |       | 
|December 31, 2011                                         |  |                             | 826,591    |   |                  |  | 1,337  |       | 



Page 18







At December 31, 2011, property, plant
and equipment included $4.5 million (December 31, 2010 – $4.5 million) of costs currently not subject to depletion and $23.8
million (December 31, 2010 – $23.8 million) of costs related to shut-in gas over bitumen reserves which are not being depleted
due to the non-producing status of the wells in the affected properties.



During the year ended December 31, 2011,
the Corporation disposed of non-core oil and natural gas properties for cash proceeds of $41.7 million (2010 – $84.2 million).
Gain on dispositions totaling $12.0 million (2010 – $41.8 million) was recorded in net loss.



For the year ended December 31, 2011,
the Corporation recognized impairment losses of $25.6 million on natural gas assets geographically located within the Birchwavy
West and Other South CGU’s (2010 – $24.3 million on Birchwavy West, West Central and Other South CGU’s). The
impairments resulted from the decline in forecast natural gas prices. The impairments recognized were based on the difference
between the carrying amount of the CGU’s (including decommissioning costs) and the value in use. In assessing value in use,
the estimated future cash flows were discounted to their present value using a pre-tax discount rate of 10.0 percent (2010 –
10.0 percent). The amount in value in use is computed by reference to the present value of the future cash flows expected to be
derived from production of proved and probable reserves.



On April 1, 2010, the Corporation closed
an acquisition of certain petroleum and natural gas properties and related assets located in the Edson area of the Corporation’s
West Central CGU. The acquisition was partially financed with the proceeds of a bought deal subscription receipt financing, which
closed on March 30, 2010, as well as through available credit facilities. Under the bought deal financing, Perpetual issued 12.1
million common shares at a price of $4.75 per common share for gross proceeds of $57.5 million. The remainder of the $123.3 million
consideration consisted of a cash payment. Perpetual assumed $4.4 million of decommissioning obligations in the transaction. The
purchase price was allocated to property, plant and equipment and E&E assets with no consideration assigned to goodwill, intangible
assets or deferred tax assets or liabilities and no working capital involved in the acquisition.



| | 6. | EXPLORATION AND EVALUATION
| | -- | --------------------------



|Cost                                              |  |  |        
|------------------------------------------------- |  |  | -------
|                                                  |  |  |        
|January 1, 2010 (note 24)                         |  |  | 111,604
|Additions                                         |  |  | 13,790 
|Acquisitions (note 5)                             |  |  | 21,014 
|Dispositions                                      |  |  | (15,380
|Transferred to property, plant and equipment      |  |  | (13,730
|Non-cash exploration and evaluation expense       |  |  | (9,824 
|December 31, 2010 (note 24)                       |  |  | 107,474
|Additions                                         |  |  | 25,787 
|Acquisitions                                      |  |  | 609    
|Dispositions                                      |  |  | (4,532 
|Transferred to property, plant and equipment      |  |  | (9,538 
|Non-cash exploration and evaluation expense       |  |  | (8,201 
|Reclassification to assets held for sale (note 4) |  |  | (4,836 
|December 31, 2011                                 |  |  | 106,763



The Corporation’s E&E assets
consist of undeveloped land and bitumen evaluation assets.



During the year ended December 31, 2011,
$7.8 million (2010 – $8.5 million) in costs were charged directly to E&E expense in net loss.



| | 7. | GOODWILL
| | -- | --------



Goodwill was recognized as a result of
the Corporation acquiring an oil and gas exploration and production company in 2004 which was assigned entirely to the Athabasca
CGU. During the year ended December 31, 2011, the Corporation derecognized the remaining goodwill of $6.0 million to loss on disposition
of property, plant and equipment as the Corporation disposed the remaining assets in the Athabasca CGU associated with this previous
acquisition.



| | 8. | BANK DEBT
| | -- | ---------



The Corporation’s Credit Facility
is with a syndicate of Canadian chartered banks. The revolving nature of the Credit Facility expires on May 29, 2012. Upon expiry
of the revolving feature of the facility, should it not be extended, amounts outstanding as of the expiry date will have a term
to maturity date of one additional year. On December 9, 2011, the Corporation completed its semi-annual review of the borrowing
base with its lenders. The borrowing base was reduced from $210.0 million to $190.0 million. On March 1, 2012, the borrowing based
was further reduced due to asset sales from $190.0 million to $171.0 million, consisting of a demand loan of $156.0 million and
a working capital facility of $15.0 million (note 23). The next redetermination of the Corporation’s borrowing base is scheduled
for April 30, 2012.



Page 19







The Corporation has covenants that require
twelve month trailing earnings before interest, taxes and depletion and depreciation to consolidated debt and consolidated senior
debt to be less than 4:0 to 1:0 and 3:0 to 1:0, respectively. Consolidated debt is defined as the sum of the Corporation’s
period end balance of the Credit Facility, Senior Notes and outstanding letters of credit (“consolidated debt”). Consolidated
senior debt is defined as the sum of consolidated debt less the period end balance of the Senior Notes. The Corporation was in
compliance with the lenders’ covenants at December 31, 2011. In addition to amounts outstanding under the Credit Facility,
the Corporation has outstanding letters of credit in the amount of $7.7 million (December 31, 2010 – $6.1 million). Collateral
for the Credit Facility is provided by a floating-charge debenture covering all existing and acquired property of the Corporation,
as well as unconditional full liability guarantees from all subsidiaries in respect of amounts borrowed under the Credit Facility.



Advances under the Credit Facility
are made in the form of Banker’s Acceptances (“BA”), prime rate loans or letters of credit. In the case of BA
advances, interest is a function of the BA rate plus a margin based on the Corporation’s current ratio of debt to cash flow.
In the case of prime rate loans, interest is charged at the lenders’ prime rate plus margin. The effective interest rate
on outstanding amounts at December 31, 2011 was 5.5 percent (December 31, 2010 – 4.2 percent).



| | 9. | SENIOR NOTES
| | -- | ------------



On March 15, 2011, the Corporation issued
$150.0 million in Senior Notes. The Senior Notes are direct senior unsecured obligations of Perpetual, ranking pari passu with
all other present and future unsecured and unsubordinated indebtedness of the Corporation. The Senior Notes have a cross-default
provision with the Corporation’s Credit Facility. The Corporation was in compliance with the lenders’ covenants at
December 31, 2011. The Senior Notes mature on March 15, 2018 and bear interest at 8.75 percent, payable semi-annually on September
15 and March 15 of each year beginning on September 15, 2011. The Corporation can redeem at a premium to face value, with equity
proceeds from common share offerings, up to 35 percent of the principal amount of the Senior Notes prior to March 15, 2015. The
Corporation can repay the Senior Notes at any time on or after March 15, 2015 to maturity date at a premium to face value based
on date of repayment. The Senior Notes are presented net of $3.8 million in issue costs which are amortized using an effective
interest rate of 9.1 percent.



| | 10. | CONVERTIBLE DEBENTURES
| | --- | ----------------------



The Corporation’s 6.50% Convertible
Debentures issued on June 20, 2007 under the symbol PMT.DB.C mature on June 30, 2012, bear interest at 6.50% per annum paid semi-annually
on June 30 and December 31 of each year and are subordinated to substantially all other liabilities of the Corporation including
the Credit Facility and Senior Notes. The 6.50% Convertible Debentures are convertible at the option of the holder into common
shares at any time prior to the maturity date at a conversion price of $14.20 per common share.



The Corporation’s 7.25% convertible
unsecured subordinated debentures amended on December 17, 2009 under the symbol PMT.DB.D (“7.25% Convertible Debentures”)
mature on January 31, 2015, bear interest at 7.25% per annum paid semi-annually on January 31 and July 31 of each year and are
subordinated to substantially all other liabilities of the Corporation including the Credit Facility and Senior Notes. The 7.25%
Convertible Debentures are convertible at the option of the holder into common shares at any time prior to the maturity date at
a conversion price of $7.50 per common share.



The Corporation’s 7.00% junior convertible
unsecured subordinated debentures issued on May 26, 2010 under the symbol PMT.DB.E (“7.00% Convertible Debentures”)
mature on December 31, 2015, bear interest at 7.00% per annum paid semi-annually on June 30 and December 31 of each year and are
subordinated to substantially all other liabilities of the Corporation including the Credit Facility, Senior Notes and all other
series of convertible debentures. The 7.00% Convertible Debentures are convertible at the option of the holder into common shares
at any time prior to the maturity date at a conversion price of $7.00 per common share.



At the option of the Corporation, the
repayment of the principal amount of the convertible debentures may be settled in common shares. The number of common shares to
be issued upon redemption by the Corporation will be calculated by dividing the principal by 95 percent of the weighted average
trading price for ten trading days prior to the date of redemption. The interest payable may also be settled with the issuance
of sufficient common shares to satisfy the interest obligation.



Prior to Perpetual’s conversion
on June 30, 2010, the convertible debentures were classified as debt on the consolidated statement of financial position with
a portion of the debentures allocated to derivative debenture liability to reflect the value of the conversion option to the holders.
At January 1, 2010, the derivative debenture liability was $8.4 million and was adjusted for changes in fair value at each subsequent
period end date until the June 30, 2010 conversion. The derivative debenture liability of the convertible debentures was reclassified
to equity upon the conversion at its June 30, 2010 carrying amount of $8.5 million. The debt component is measured at amortized
cost, after initial recognition at fair value.



Page 20







|                                        |  |          |         |   | Series   |  |        |          |  |  |          |   |  |       |       
|--------------------------------------- |  | -------- | ------- | - | -------- |  | ------ | -------- |  |  | -------- | - |  | ----- | ------
|                                        |  | 6.25%    |         |   | 6.50%    |  |        | 7.25%    |  |  | 7.00%    |   |  | Total |       
|                                        |  | PMT.DB.B |         |   | PMT.DB.C |  |        | PMT.DB.D |  |  | PMT.DB.E |   |  |       |       
|Carrying amount                         |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|                                        |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|Balance, January 1, 2010                |  |          | 55,271  |   |          |  | 71,927 |          |  |  | 92,999   |   |  |       | –     
|Issue of debentures                     |  |          | –       |   |          |  | –      |          |  |  | –        |   |  |       | 60,000
|Issue fees for debentures               |  |          | –       |   |          |  | –      |          |  |  | (203     | ) |  |       | (2,724
|Equity component of issued debentures   |  |          | –       |   |          |  | –      |          |  |  | –        |   |  |       | (5,460
|Accretion                               |  |          | –       |   |          |  | 551    |          |  |  | 885      |   |  |       | 505   
|Amortization of debenture issue fees    |  |          | –       |   |          |  | 551    |          |  |  | 430      |   |  |       | 228   
|Repayment of principal on maturity      |  |          | (55,271 | ) |          |  | –      |          |  |  | –        |   |  |       | –     
|Long term balance, December 31, 2010    |  |          | –       |   |          |  | 73,029 |          |  |  | 94,111   |   |  |       | 52,549
|Accretion                               |  |          | –       |   |          |  | 591    |          |  |  | 807      |   |  |       | 790   
|Amortization of debenture issue fees    |  |          | –       |   |          |  | 630    |          |  |  | 407      |   |  |       | 356   
|Balance, December 31, 2011              |  |          | –       |   |          |  | 74,250 |          |  |  | 95,325   |   |  |       | 53,695
|Current                                 |  |          | –       |   |          |  | 74,250 |          |  |  | –        |   |  |       | –     
|Long term                               |  |          | –       |   |          |  | –      |          |  |  | 95,325   |   |  |       | 53,695
|                                        |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|Market Value                            |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|                                        |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|December 31, 2010                       |  |          | –       |   |          |  | 75,674 |          |  |  | 101,971  |   |  |       | 60,240
|December 31, 2011                       |  |          | –       |   |          |  | 72,543 |          |  |  | 79,987   |   |  |       | 45,690
|                                        |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|Principal amount outstanding            |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|                                        |  |          |         |   |          |  |        |          |  |  |          |   |  |       |       
|December 31, 2010 and December 31, 2011 |  |          | –       |   |          |  | 74,925 |          |  |  | 99,972   |   |  |       | 60,000



| | 11. | GAS STORAGE OBLIGATION
| | --- | ----------------------



To provide funding for the development
of a natural gas storage facility, the Corporation entered into a forward sales arrangement with a counterparty, whereby the Corporation
received $31.6 million on June 30, 2010 and an additional $10 million in 2011. In exchange for the funds received, the Corporation
agreed to deliver 8.0 billion cubic feet of natural gas to the counterparty during the first quarter of 2013. During the year
ended December 31, 2011, the maturity of the obligation was extended to the first quarter of 2016. The Corporation incurred $0.5
million in issue fees pertaining to the gas storage arrangement, which are netted against the gas storage obligation.



The gas storage obligation on the statement
of financial position, in combination with the related derivative asset, represents the estimated net present fair value of the
future delivery obligation and as such, the liability will be accreted until its maturity, using the effective interest rate method.



For the year ended December 31, 2011,
the Corporation recorded an unrealized gain of $4.1 million (2010 – $3.7 million) on the derivative gas storage asset due
to the change in the forward price curves for natural gas used in the determination of the obligation to be repaid. As at December
31, 2011, the fair value of the derivative gas storage asset was $7.8 million (December 31, 2010 – $3.7 million)



A reconciliation of the gas storage obligation is provided
below:



|Balance, January 1, 2010   |  |  | –      |  
|-------------------------- |  |  | ------ | -
|Receipt of funds           |  |  | 31,569 |  
|Issue fees                 |  |  | (418   | )
|Accretion                  |  |  | 570    |  
|Balance, December 31, 2010 |  |  | 31,721 |  
|Receipt of funds           |  |  | 10,000 |  
|Issue fees                 |  |  | (91    | )
|Balance, December 31, 2011 |  |  | 41,630 |  



| | 12. | GAS OVER BITUMEN ROYALTY OBLIGATION
| | --- | -----------------------------------



On October 4, 2004, the Government of
Alberta enacted amendments to the royalty regulation with respect to natural gas which provides a mechanism whereby the Government
may prescribe a reduction in the royalty calculated through the Crown royalty system for operators of gas wells which have been
denied the right to produce by the Alberta Energy and Utilities Board as a result of bitumen conservation decisions. Such royalty
reduction was initially prescribed in December 2004, retroactive to the date of shut-in of the gas production.



Page 21







If production recommences from zones previously
ordered to be shut-in, gas producers may pay an incremental royalty to the Crown on production from the reinstated pools, along
with Alberta Gas Crown Royalties otherwise payable. The incremental royalty will apply only to the pool or pools reinstated to
production and will be established at one percent after the first year of shut-in increasing at one percent per annum based on
the period of time such zones remained shut-in to a maximum of ten percent. The incremental royalties payable to the Crown would
be limited to amounts recovered by a gas well operator through the reduced royalty.



Gas over bitumen royalty adjustments are
not paid to Perpetual in cash, but are a deduction from the Corporation’s monthly natural gas royalty invoices. In periods
of very low gas prices the Corporation’s net crown royalty expenses are lower than the monthly royalty adjustment, and as
such the royalty adjustments are not received immediately. As of December 31, 2011, the Corporation has accumulated $9.1 million
(December 31, 2010 – $8.5 million) of gas over bitumen adjustments receivable which have been netted against the gas over
bitumen royalty obligation on the statement of financial position.



A reconciliation of the gas over bitumen royalty obligation
is provided below:



|Balance, January 1, 2010             |  |  | 77,167  |  
|------------------------------------ |  |  | ------- | -
|Royalty adjustments on dispositions  |  |  | (13,767 | )
|Royalty adjustments                  |  |  | 10,454  |  
|Royalty adjustments not yet received |  |  | (3,357  | )
|Balance, December 31, 2010           |  |  | 70,497  |  
|Royalty adjustments                  |  |  | 4,772   |  
|Royalty adjustments not yet received |  |  | (564    | )
|Balance, December 31, 2011           |  |  | 74,705  |  



In 2006 and 2010, the Corporation disposed
of certain shut-in gas wells in the gas over bitumen area. As part of the disposition agreements, the Corporation continues to
receive the gas over bitumen royalty adjustments related to the wells disposed, although the ownership of the natural gas reserves
was transferred to the buyers. As such, any overriding royalty payable to the Crown when gas production recommences from the affected
wells is no longer the Corporation’s responsibility. As a result of these dispositions, the gas over bitumen royalty adjustments
received by the Corporation for the affected wells are considered revenue since they will not be repaid to the Crown. For the
year ended December 31, 2011, the Corporation recognized $6.7 million (2010 – $15.6 million) in revenue respectively, related
to previous gas over bitumen royalty obligations for wells disposed.



| | 13. | SHARE CAPITAL
| | --- | -------------



| | a) | Authorized
| | -- | ----------



Authorized capital consists
of an unlimited number of common shares.



| | b) | Trust
                                                                                                              conversion
| | -- | ------------------------------------------------------------------------------------------------------------------------------



At January 1, 2010, the Corporation
was a trust. Under IAS 32 Financial Instruments: Presentation, the redeemable feature of the trust units along with the unavoidable
requirement for distributions to be paid out according to the provisions of the trust indenture required the trust units to be
classified as a liability. Upon the June 30, 2010 conversion, the trust unit liability was reclassified to equity at its carrying
amount.



| | c) | Issued
                                                                                                               and outstanding
| | -- | -------------------------------------------------------------------------------------------------------------------------------------



The following is a summary
of changes in Unitholders’ liability:

|                                                              |  | Number   |              |   |            | 
|------------------------------------------------------------- |  | -------- | ------------ | - | ---------- | 
|                                                              |  | of Units |              |   | Amount ($) | 
|Balance, January 1, 2010                                      |  |          | 126,223,517  |   |            | 
|Trust Units issued pursuant to Restricted Rights Plan         |  |          | 141,760      |   |            | 
|Trust Units issued pursuant to Unit Incentive Plan            |  |          | 114,625      |   |            | 
|Trust Units issued pursuant to Distribution Reinvestment Plan |  |          | 5,033,838    |   |            | 
|Trust Units issued pursuant to Unit offering                  |  |          | 12,109,500   |   |            | 
|Issue fees incurred                                           |  |          | –            |   |            | 
|Transfer to share capital upon conversion                     |  |          | (143,623,240 | ) |            | 
|Balance, June 30, 2010                                        |  |          | –            |   |            | 



Page 22















The following is a summary
of changes in share capital:

|                                                                    |  |  | Number                                                                                                   |   |  |  |                                                                                                           |  
|------------------------------------------------------------------- |  |  | -------------------------------------------------------------------------------------------------------- | - |  |  | --------------------------------------------------------------------------------------------------------- | -
|                                                                    |  |  | of
                                                                                               Shares |   |  |  | Amount
                                                                                               ($) |  
|Balance, June 30, 2010                                              |  |  | –                                                                                                        |   |  |  | –                                                                                                         |  
|Transfer from Unitholders’ liability upon conversion                |  |  | 143,623,240                                                                                              |   |  |  | 1,236,016                                                                                                 |  
|Common shares issued pursuant to Restricted Rights Plan             |  |  | 27,802                                                                                                   |   |  |  | 175                                                                                                       |  
|Common shares issued pursuant to Share Option Plan                  |  |  | 76,145                                                                                                   |   |  |  | 515                                                                                                       |  
|Common shares issued pursuant to Premium Dividend Reinvestment Plan |  |  | 4,270,007                                                                                                |   |  |  | 19,535                                                                                                    |  
|Common shares issued pursuant to Severo acquisition                 |  |  | 287,086                                                                                                  |   |  |  | 1,479                                                                                                     |  
|Issue fees incurred                                                 |  |  | –                                                                                                        |   |  |  | (258                                                                                                      | )
|Balance, December 31, 2010                                          |  |  | 148,284,280                                                                                              |   |  |  | 1,257,462                                                                                                 |  
|Common shares issued pursuant to Restricted Rights Plan             |  |  | 246,766                                                                                                  |   |  |  | 1,043                                                                                                     |  
|Common shares issued pursuant to Share Option Plan                  |  |  | 46,313                                                                                                   |   |  |  | 494                                                                                                       |  
|Common shares repurchased                                           |  |  | (1,611,100                                                                                               | ) |  |  | (4,718                                                                                                    | )
|Issue fees incurred                                                 |  |  | –                                                                                                        |   |  |  | (8                                                                                                        | )
|Balance, December 31, 2011                                          |  |  | 146,966,259                                                                                              |   |  |  | 1,254,273                                                                                                 |  



| | d) | Per
                                                                                                               share information
| | -- | ------------------------------------------------------------------------------------------------------------------------------------



For
the year ended December 31, 2011, basic per share amounts are calculated using the weighted average number of common shares outstanding
of 147,693,782 (2010 – 140,623,543). From January 1, 2010 until the June 30,
2010 conversion, the Corporation included the Trust Units classified as liability in the denominator for basic and diluted per
share calculations.The Corporationuses the treasury stock method for Share Options
and Restricted Rights in instances where market price exceeds exercise price thereby impacting the diluted calculations. The Corporation
uses the if-converted method for potentially issuable commons shares through the convertible debentures. In computing diluted
per share amounts for the year ended December 31, 2011, nil common shares were added to the basic weighted average number of common
shares outstanding (2010 – nil) for the dilutive effect of Share Options,
Restricted Rights and convertible debentures. In computing diluted per share amounts for the year endedDecember 31, 2011,12,297,100Share Options,1,365,107Restricted Rights,276,200Performance Share Rights and 27,177,437 potentially issuable
common shares through the convertible debentures were excluded as the Corporation had a net loss (2010– 12,075,300, 250,102 and nil Share Options, Restricted Rights and Performance Share Rights respectively and 27,177,437
potentially issuable through the convertible debentures).



| | e) | Dividends
| | -- | ---------



Dividends
of $0.03 per common share per month were declared by the Corporation for the months of January through April, 2011. The Corporation
announced a reduction to the dividend to $0.015 per common share per month for the months of May through September 2011. Total
dividends declared for the year ended December 31, 2011 were $28.9 million. For the year ended December 31, 2010, the Corporation
declared distributions of $0.05 per Trust unit/common share per month for the months of January through October 2010 followed
by a reduction to $0.03 per Trust unit/common share per month for the months of November and December 2010 for total distributions
declared of $78.6 million consisting of $40.5 million in interest on Trust Units prior to Perpetual’s conversion to a corporation
on June 30, 2010 and $38.1 million in dividends post conversion.



On October
19, 2011 the Corporationannounced that future dividend payments would be suspended until further notice.



| | 14. | SHARE BASED PAYMENTS
| | --- | --------------------



| | a) | Share Option
                                                                                    Plan
| | -- | -----------------------------------------------------------------------------------------------------



In conjunction with the conversion
on June 30, 2010, the Corporation replaced the previous Unit Incentive Plan with the Share Option Plan, which permits the Board
of Directors to grant Share Options to the Corporation and affiliated entities' employees, officers, directors and other direct
and indirect service providers. All outstanding Incentive Rights were replaced with Share Options on a one for one basis, with
the same exercise price and vesting conditions. The purpose of the Share Option Plan is to provide an effective long-term incentive
to eligible participants and to reward them on the basis of the Corporation’s long-term performance. The Board of Directors
administers the Share Option Plan and determines participants, numbers of Share Options and terms of vesting. The exercise price
of the Share Options shall not be less than the value of the weighted average trading price for Perpetual common shares for the
five trading days immediately preceding the date of the grant.



Prior to the June 30, 2010 implementation
of the Share Option Plan, the Unit Incentive Plan provided for a reduction of the exercise price of the Incentive Rights by the
aggregate amounts of all distributions on a per Trust Unit basis that the Trust paid its Unitholders after the date of grant.
This exercise price reduction was discontinued at the time of the implementation of the Share Option Plan. Prior to the conversion,
the Unit Incentive Plan was accounted for as a cash-settled plan. Unit Incentive Rights outstanding under the Unit Incentive Plan
were fair valued at each period end date, with changes in the fair value being recognized in net earnings or loss as shared based
compensation within general and administrative expense.



Page 23







Share Options outstanding under the Share
Option Plan are accounted for as equity-settled awards fair valued at the grant date and expensed over the expected lives of the
options. The participants of the Share Option Plan may offer to surrender their options to the Corporation in exchange for a cash
payment not to exceed the in-the-money value of the Share Options, and the Corporation has the right to accept or refuse such
offers. For the year ended December 31, 2011 the Corporation recorded $3.7 million in share based payment expense related to Share
Options (2010 – $1.9 million).



At December 31, 2011, the Corporation
had 13.7 million Share Options and Restricted Rights (December 31, 2010 – 12.3 million) issued and outstanding relative
to the 14.7 million (ten percent of total common shares outstanding) reserved under the Share Option and Restricted Rights Plans
(December 31, 2010 – 14.8 million). As at December 31, 2011, 4.2 million Share Options granted under the Share Option Plan
had vested but were unexercised (December 31, 2010 – 2.5 million).



The Corporation used the binomial lattice
option pricing model to calculate the estimated fair value of the outstanding Share Options. During the year ended December 31,
2011, the Corporation granted 2.9 million Share Options under the Share Option Plan. The following assumptions were used to arrive
at the estimate of fair value as at the date of grant:



|Period of grant                        |  | 2011 |             |  | 2010 |  
|-------------------------------------- |  | ---- | ----------- |  | ---- | -
|Dividend yield (%)                     |  |      | 0.0 – 5.9   |  |      |  
|Forfeiture rate (%)                    |  |      | 2.6 – 8.0   |  |      |  
|Expected volatility (%)                |  |      | 41.2 – 50.6 |  |      |  
|Risk-free interest rate (%)            |  |      | 0.9 – 2.2   |  |      |  
|Expected life (years)                  |  |      | 2.5 – 4.5   |  |      |  
|Vesting period (years)                 |  |      | 3.0 – 4.0   |  |      |  
|Contractual life (years)               |  |      | 4.0 – 5.0   |  |      |  
|Weighted average grant date fair value |  | $    | 0.58        |  |      | $



|                           |  | Average Exercise Price |      |  | Share Options(1) | 
|-------------------------- |  | ---------------------- | ---- |  | ---------------- | 
|Balance, December 31, 2009 |  | $                      | 4.72 |  |                  | 
|Granted                    |  |                        | 4.78 |  |                  | 
|Forfeited                  |  |                        | 4.84 |  |                  | 
|Exercised                  |  |                        | 3.68 |  |                  | 
|Balance, December 31, 2010 |  |                        | 4.55 |  |                  | 
|Granted                    |  |                        | 2.14 |  |                  | 
|Forfeited                  |  |                        | 4.62 |  |                  | 
|Exercised                  |  |                        | 2.09 |  |                  | 
|Balance, December 31, 2011 |  | $                      | 4.00 |  |                  | 

(1)On June 30, 2010, the Corporation’s outstanding
Unit Incentive Rights were exchanged for Perpetual Share Options on a one-for-one basis and equivalent terms.



The following table summarizes information about Share Options
outstanding at December 31, 2011:



|                         |  | Options Outstanding |            |  | Options Exercisable                  | 
|------------------------ |  | ------------------- | ---------- |  | ------------------------------------ | 
|Range of Exercise Prices |  | Number (#)          |            |  | Average Contractual Life
    (years) | 
|$1.19 to $2.44           |  |                     | 1,481,700  |  |                                      | 
|$2.45 to $4.49           |  |                     | 5,999,650  |  |                                      | 
|$4.50 to $6.99           |  |                     | 4,226,500  |  |                                      | 
|$7.00 to $8.99           |  |                     | 183,500    |  |                                      | 
|$9.00 to $11.00          |  |                     | 405,750    |  |                                      | 
|Total                    |  |                     | 12,297,100 |  |                                      | 



| | b) | Restricted
                                                                                    Rights Plan
| | -- | ----------------------------------------------------------------------------------------------------------



The Corporation has a Restricted Rights
Plan for certain officers, employees and direct and indirect service providers. Restricted Rights granted under the Restricted
Rights Plan may be exercised during a period (the “Exercise Period”) not exceeding five years from the date upon which
the Restricted Rights were granted. The Restricted Rights typically vest on a graded basis over two years. At the expiration of
the Exercise Period, any Restricted Rights which have not been exercised shall expire and become null and void. Upon vesting,
the plan participant is entitled to receive the vested common shares at no cost plus an additional number of common shares equal
to the value of dividends on the Corporation’s shares as if the shares were invested in the Premium Dividend Reinvestment
Plan accrued since the grant date.



For the year ended December 31, 2011,
$1.8 million in share based payments were recorded in respect of Restricted Rights (2010 – $0.9 million).



Page 24







The following table shows changes in the Restricted Rights
outstanding under the Restricted Rights Plan:



|Balance, January 1, 2010                |  |  | 288,629   |  
|--------------------------------------- |  |  | --------- | -
|Exercised                               |  |  | (169,564  | )
|Granted                                 |  |  | 106,067   |  
|Forfeited                               |  |  | (7,112    | )
|Additional grants for accrued Dividends |  |  | 32,082    |  
|Balance, December 31, 2010              |  |  | 250,102   |  
|Exercised                               |  |  | (250,433  | )
|Granted                                 |  |  | 1,389,348 |  
|Forfeited                               |  |  | (55,385   | )
|Additional grants for accrued Dividends |  |  | 31,475    |  
|Balance, December 31, 2011              |  |  | 1,365,107 |  



| | c) | Performance
                                                                                      share rights plan
| | -- | -------------------------------------------------------------------------------------------------------------------



The Corporation has a Performance Share
Rights Plan for the Corporations senior management team. Performance Share Rights granted under the Performance Share Rights Plan
may be exercised two years after the date upon which the Performance Share Rights were granted. The Performance Share Rights vest
on a graded basis over two years. The amount of Performance Share Rights that vest is a multiple of the Performance Share Rights
granted contingent upon the achievement of certain performance metrics over the vesting period. Vested Performance Share Rights
can be settled in cash or Restricted Rights, at the discretion of the Board of Directors. Upon vesting, Performance Share Rights
Plan participants are entitled to receive an additional number of Performance Share Rights equal to the value of dividends on
the Corporation’s shares as if the shares were invested in the Premium Dividend Reinvestment Plan accrued since the grant
date. Should participants of the Performance Share Rights Plan leave the organization other than through retirement or termination
without cause prior to the vesting date, the Performance Share Rights would be forfeited.



At December 31, 2011, the Corporation
had 276,200 Performance Share Rights issued and outstanding under the Performance Share Rights Plan (December 31, 2010 –
nil).



For the year ended December 31, 2011,
$0.1 million in share based payments were recorded in respect of the Performance Share Rights granted (2010 – nil).



| | d) | Dividend
                                                                                      bonus agreement
| | -- | --------------------------------------------------------------------------------------------------------------



On July
17, 2010, the Corporation introduced a Dividend Bonus Arrangement, which provides for participants in the Share Option Plan to
receive a payment in cash or Restricted Rights, at the discretion of the Board of Directors, upon the exercise, surrender or expiry
of vested options. The amount of dividend bonus is based on aggregate dividends accumulated commencing with the July 2010 dividend.
Plan participants are entitled to 25 percent of such aggregate dividend for vested options which expire out of the money. The
Dividend Bonus Arrangement is accounted for as a cash-settled plan. The fair value of this liability has been estimated by calculating
the net present value of the dividend streams that would come into effect under different share prices at estimated exercise and
expiry dates. These discounted dividend streams are then multiplied by the probability of prices being within a certain range.
A liability of $0.7 million has been calculated as at December 31, 2011 (December 31, 2010
– $2.1 million) to reflect the value outstanding under the Dividend Bonus Arrangement.



| | 15. | DECOMMISSIONING OBLIGATIONS
| | --- | ---------------------------



The total future asset decommissioning
obligations are estimated based on the Corporation’s net ownership interest in all wells and facilities, estimated costs
to reclaim and abandon these wells and facilities and the estimated timing of the costs to be incurred in future periods.



The Corporation adjusts the decommissioning
obligations on each period end date for changes in the risk free rate. Accretion is calculated on the adjusted balance after taking
into account additions and dispositions to property, plant, and equipment. Decommissioning obligations are also adjusted annually
for revisions to the future liability cost and the estimated timing of costs to be incurred in future years.



The Corporation has estimated the
net present value of its total decommissioning obligations to be $247.7 million as at December 31, 2011 (December 31, 2010 –
$236.2 million) based on an undiscounted inflation-adjusted total future liability of $326.3million (December 31, 2010
– $349.6 million). These payments are expected to be made over the next 25 years with the majority of costs incurred between
2015 and 2025. At December 31, 2011, the Corporation used an average risk free rate of 2.6 percent (December 31, 2010 –
2.7 percent) to calculate the present value of the decommissioning obligations.



Page 25







The following table reconciles the Corporation’s decommissioning
obligations:



|Balance at January 1, 2010                                                        |  |  | 253,344 |  
|--------------------------------------------------------------------------------- |  |  | ------- | -
|Obligations acquired                                                              |  |  | 12,996  |  
|Obligations incurred                                                              |  |  | 2,725   |  
|Obligations disposed                                                              |  |  | (33,259 | )
|Change in risk free rate                                                          |  |  | 18,232  |  
|Change in estimates                                                               |  |  | (20,643 | )
|Obligations settled                                                               |  |  | (4,880  | )
|Accretion                                                                         |  |  | 7,648   |  
|Balance at December 31, 2010 (note 24)                                            |  |  | 236,163 |  
|Obligations acquired                                                              |  |  | 474     |  
|Obligations incurred                                                              |  |  | 4,922   |  
|Obligations disposed                                                              |  |  | (9,587  | )
|Change in risk free rate                                                          |  |  | 16,268  |  
|Change in estimates                                                               |  |  | (5,314  | )
|Obligations settled                                                               |  |  | (2,514  | )
|Accretion                                                                         |  |  | 7,291   |  
|Reclassification to liabilities associated with assets held for sale (note
    4) |  |  | (4,843  | )
|Balance at December 31, 2011                                                      |  |  | 242,860 |  



| | 16. | NON-CASH WORKING CAPITAL INFORMATION
| | --- | ------------------------------------





|                                         |  | Years ended December 31, |        
|---------------------------------------- |  | ------------------------ | -------
|                                         |  | 2011                     |        
|Accounts receivable                      |  |                          | (145   
|Prepaid expenses and deposits            |  |                          | 1,137  
|Accounts payable and accrued liabilities |  |                          | (23,575
|Dividends payable                        |  |                          | (4,449 
|Change in non-cash working capital       |  |                          | (27,032





The change in non-cash working capital has been allocated to
the following activities:





|                                   |  | Years ended December 31, |        
|---------------------------------- |  | ------------------------ | -------
|                                   |  | 2011                     |        
|Operating                          |  |                          | (9,563 
|Financing                          |  |                          | (6,904 
|Investing                          |  |                          | (10,565
|Change in non-cash working capital |  |                          | (27,032





| | 17. | FINANCIAL RISK MANAGEMENT
| | --- | -------------------------



The Corporation has exposure to
credit risk, liquidity risk and market risk from its use of financial instruments.



This note presents information
about the Corporation’s exposure to each of the above risks, the Corporation’s objectives, policies and processes
for measuring and managing risk, and the Corporation’s management of capital. Further quantitative disclosures are included
throughout these annual consolidated financial statements.



The Board of Directors has overall
responsibility for the establishment and oversight of the Corporation’s risk management framework. The Board of Directors
has implemented and monitors compliance with risk management policies.



The Corporation’s risk management
policies are established to identify and analyze the risks faced by Perpetual, to set appropriate risk limits and controls, and
to monitor risks and adherence to market conditions and the Corporation’s activities.



| | a) | Credit risk
| | -- | -----------



Credit risk is the risk of financial
loss to the Corporation if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and
arises principally from the Corporation’s receivables from joint venture partners, oil and natural gas marketers and derivative
contract counterparties.



Page 26







Receivables from oil and natural
gas marketers are normally collected on the 25th day of the month following production. The Corporation’s policy to mitigate
credit risk associated with these balances is to establish marketing relationships with large, well established purchasers. The
Corporation historically has not experienced any significant collection issues with its oil and natural gas marketing receivables.
Joint venture receivables are typically collected within one to three months of the joint venture bill being issued to the partner.
The Corporation attempts to mitigate the risk from joint venture receivables by obtaining partner approval of significant capital
expenditures prior to expenditure. However, the receivables are generally from participants in the oil and natural gas sector,
and collection of the outstanding balances is dependent on industry factors such as commodity price fluctuations, escalating costs,
the risk of unsuccessful drilling and oil and gas production; in addition, further risk exists with joint venture partners as
disagreements occasionally arise that increase the potential for non-collection. The Corporation does not typically obtain collateral
from oil and natural gas marketers or joint venture partners, however, the Corporation does have the ability in some cases to
withhold production or amounts payable to joint venture partners in the event of non-payment.



The Corporation manages the credit
exposure related to marketable securities by monitoring the performance and financial strength of the investments and the liquidity
of the securities being held.



The Corporation manages the credit
exposure related to derivatives by engaging in economic hedging transactions with counterparties with investment grade credit
ratings, and periodically monitoring the changes in such credit ratings.



During the year ended December
31, 2011, credit risk did not have any impact on the change in fair value of financial assets and liabilities classified as fair
value through profit or loss.



The carrying amount of accounts receivable,
marketable securities and fair value of derivatives represents the Corporation’s maximum credit exposure. The Corporation’s
allowance for doubtful accounts as at December 31, 2011 is $0.6 million (December 31, 2010 – $0.1 million). The amount of
the allowance was determined by assessing the probability of collection for each past due receivable. The Corporation is currently
involved in negotiations with the joint venture partners involved to recover the full amount of the receivables in question. The
total amount of accounts receivables 90 days past due amounted to $3.9 million as at December 31, 2011 (December 31, 2010 –
$2.3 million). As at December 31, 2011, as a partial mitigating factor to the credit exposure, the Corporation has $1.9 million
(December 31, 2010 – $0.8 million) payable to counterparties from which the Corporation holds 90 days past due receivables.



| | b) | Liquidity risk
| | -- | --------------



Liquidity risk is the risk that
the Corporation will not be able to meet its financial obligations as they are due. The Corporation’s approach to managing
liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when due, under both
normal and stressed conditions, without incurring unacceptable losses or risking harm to the Corporation’s reputation.



The Corporation prepares annual
capital expenditure budgets which are regularly monitored and updated as considered necessary. Further, the Corporation utilizes
authorizations for expenditures on both operated and non-operated projects to further manage capital expenditures. To facilitate
the capital expenditure program, the Corporation has a Credit Facility, as outlined in note 8. The Corporation’s Credit
Facility and borrowing base are subject to review by its lenders on a semi-annual basis.



The following are the contractual maturities of financial liabilities
and associated interest payments as at December 31, 2011:



|Contractual repayments of financial liabilities |  | Total |         |  | 2012 |  |         | 2013 |  |  | 2014-2016 |  |  | Thereafter |        
|----------------------------------------------- |  | ----- | ------- |  | ---- |  | ------- | ---- |  |  | --------- |  |  | ---------- | -------
|Accounts payable and accrued liabilities        |  |       | 50,404  |  |      |  | 50,404  |      |  |  | –         |  |  |            | –      
|Derivative liability                            |  |       | 17,706  |  |      |  | 6,841   |      |  |  | 3,064     |  |  |            | 7,801  
|Long term bank debt – principal (1)             |  |       | 130,062 |  |      |  | –       |      |  |  | 130,062   |  |  |            | –      
|Senior notes – principal                        |  |       | 150,000 |  |      |  | –       |      |  |  | –         |  |  |            | –      
|Convertible debentures – principal (2)          |  |       | 234,897 |  |      |  | 74,925  |      |  |  | –         |  |  |            | 159,972
|Gas storage obligation                          |  |       | 41,630  |  |      |  | –       |      |  |  | –         |  |  |            | 41,630 
|Total                                           |  |       | 624,699 |  |      |  | 132,170 |      |  |  | 133,126   |  |  |            | 209,403

| | (1) | The revolving feature of the
                                                                  Credit Facility expires on May 29, 2012 if not extended. 
                                                                  Upon expiry of the revolving feature of the Credit Facility,
                                                                  should it not be extended, amounts outstanding as of the expiry
                                                                  date will have a term to maturity date of one additional year.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Assuming repayment of principal
                                                                  is not settled in common shares, at the option of the Corporation.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 27









|Interest payments on financial liabilities |  | Total |         |  | 2012 |  |        | 2013 |  |  | 2014-2016 |  |  | Thereafter |       
|------------------------------------------ |  | ----- | ------- |  | ---- |  | ------ | ---- |  |  | --------- |  |  | ---------- | ------
|Long term bank debt(1)                     |  |       | 10,133  |  |      |  | 7,153  |      |  |  | 2,980     |  |  |            | –     
|Senior notes                               |  |       | 81,411  |  |      |  | 13,125 |      |  |  | 13,125    |  |  |            | 39,375
|Convertible debentures(2)                  |  |       | 41,595  |  |      |  | 13,883 |      |  |  | 11,448    |  |  |            | 16,264
|Total                                      |  |       | 133,139 |  |      |  | 34,161 |      |  |  | 27,553    |  |  |            | 55,639

| | (1) | Assuming revolving feature of the Credit Facility is
                                                                     not extended and calculated at the December 31, 2011 effective
                                                                     interest rate of 5.5% assuming a constant debt level equivalent
                                                                     to the balance at December 31, 2011.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(2)Assuming
payment of interest is not settled in common shares at the option of the Corporation.



| | c) | Market risk
| | -- | -----------



Market risk is the risk that changes
in market prices such as foreign exchange rates, equity prices, commodity prices and interest rates will affect the Corporation’s
net earnings or loss or the value of financial instruments. The objective of market risk management is to manage and control market
risk exposures within acceptable limits, while maximizing returns.



The Corporation utilizes both financial
derivatives and fixed-price physical delivery sales contracts to manage market risks related to commodity prices and currency
rates. All such transactions are conducted in accordance with the Corporation’s Hedging and Risk Management Policy, which
has been approved by the Board of Directors.



| | i) | Foreign currency exchange rate risk
| | -- | -----------------------------------



Foreign currency exchange
rate risk is the risk that the fair value or future cash flows of the Corporation will fluctuate as a result of changes in foreign
exchange rates. The majority of the Corporation’s oil and natural gas sales are denominated in Canadian dollars. Due to
the fact that the demand for oil and natural gas is substantially driven by the demand in the United States, the Corporation’s
exposure to US dollar foreign exchange risk is indirectly driven by the price of oil and natural gas. From time to time the Corporation
also uses foreign exchange contracts to mitigate the effects of fluctuations in exchange rates on the Corporation’s cash
flows. The Corporation does not consider its direct exposure to foreign currency exchange rate risk to be significant; refer to
commodity price risk analysis below.



| | ii) | Commodity price risk
| | --- | --------------------



Commodity price risk
is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices
for oil and natural gas are impacted by the world economic events that dictate the levels of supply and demand. The Corporation
has attempted to mitigate commodity price risk through the use of various financial derivative and physical delivery sales contracts.
The Corporation’s policy is to enter into financial and forward physical gas sales contracts up to a maximum of 60 percent
of the trailing quarter’s production including gas over bitumen deemed production, as outlined in the Corporation’s
Hedging and Risk Management Policy.



As at December 31, 2011,
the Corporation has variable priced physical natural gas sales contracts based on future market prices. These contracts are not
classified as non-financial derivatives due to the fact that the settlement price corresponds directly with fluctuations in natural
gas prices.



Realized gains on commodity
price derivatives recognized in net loss for the year ended December 31, 2011 were $2.2 million (2010 – $155.0 million).
The realized gains on commodity price derivatives for the year ended December 31, 2011, included nil in respect of settlement
of contracts prior to maturity (2010 – $134.2 million).



Natural gas contracts



At December 31, 2011, the Corporation
had entered into forward gas sales arrangements at AECO as follows:



|Type of Contract |  | Perpetual  Sold/Bought |        |  | Volumes at AECO (GJ/d) |  |         | Price ($/GJ) |  |   | Term | 
|---------------- |  | ---------------------- | ------ |  | ---------------------- |  | ------- | ------------ |  | - | ---- | 
|Financial        |  |                        | sold   |  |                        |  | 60,000  |              |  | $ | 3.21 | 
|Financial        |  |                        | bought |  |                        |  | (46,365 | )            |  | $ | 3.00 | 
|Financial (1)    |  |                        | sold   |  |                        |  | 30,000  |              |  | $ | 3.63 | 
|Financial (2)    |  |                        | sold   |  |                        |  | 15,250  |              |  | $ | 3.90 | 
|Financial        |  |                        | sold   |  |                        |  | 10,000  |              |  | $ | 2.85 | 
|Financial        |  |                        | sold   |  |                        |  | 7,500   |              |  | $ | 3.60 | 

| | (1) | These derivative transactions
                                                                 are part of paired transactions in which the proceeds from the
                                                                 sale of 2014 oil call options were used to fund the 2012 natural
                                                                 gas contract at the price indicated.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Page 28







| | (2) | This derivative transaction is
                                                                 part of paired transaction in which the proceeds from the sale
                                                                 of a December 31, 2011 oil swaption were used to fund the 2012
                                                                 natural gas contract at the price indicated.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2011, the Corporation had entered
into forward gas sales arrangements at NYMEX as follows:



|Type of Contract |  | Perpetual  Sold/Bought |      |  | Volumes at AECO (MMBTU/d) |  |        | Price ($/MMBTU) |  |   | Term | 
|---------------- |  | ---------------------- | ---- |  | ------------------------- |  | ------ | --------------- |  | - | ---- | 
|Financial        |  |                        | sold |  |                           |  | 50,000 |                 |  | $ | 3.51 | 
|Financial        |  |                        | sold |  |                           |  | 25,000 |                 |  | $ | 3.00 | 



At December 31, 2011,
the Corporation had entered into financial forward gas sales arrangements to fix the basis differential between the NYMEX and
AECO trading hubs as follows. The price at which these contracts settle is equal to the NYMEX index less a fixed basis amount.



|Type of Contract |  | Perpetual Sold/Bought |        |  | Volumes at NYMEX (MMBTU/d) |  |         | Price
(US$/MMBTU) |  |   | Term  |  
|---------------- |  | --------------------- | ------ |  | -------------------------- |  | ------- | ----------------- |  | - | ----- | -
|Financial        |  |                       | sold   |  |                            |  | 50,000  |                   |  | $ | (0.46 | )
|Financial        |  |                       | bought |  |                            |  | (12,500 | )                 |  | $ | (0.60 | )
|Financial        |  |                       | sold   |  |                            |  | 62,500  |                   |  | $ | (0.57 | )



Oil contracts



At December 31, 2011,
the Corporation had entered into a financial and forward physical oil sales arrangement to fix the basis differential between
the WTI and WCS trading hubs as follows. The price at which this contract settles is equal to the WTI index less a fixed basis
amount.



|Type of Contract |  | Perpetual Sold/Bought |      |  | Volumes at WTI (bbls/d) |  |     | Price (US$/bbls) |  |   | Term   |  
|---------------- |  | --------------------- | ---- |  | ----------------------- |  | --- | ---------------- |  | - | ------ | -
|Financial        |  |                       | sold |  |                         |  | 400 |                  |  | $ | (17.35 | )



At December 31, 2011
the Corporation had entered into the following costless collar oil sales arrangements:



|Type of Contract |  | Perpetual Sold/Bought |        |  | Volumes at WTI (bbls/d) |  |      | Price (US$/bbls) |  |   | Term  | 
|---------------- |  | --------------------- | ------ |  | ----------------------- |  | ---- | ---------------- |  | - | ----- | 
|Call             |  |                       | sold   |  |                         |  | 500  |                  |  | $ | 89.00 | 
|Put              |  |                       | bought |  |                         |  | (500 | )                |  | $ | 80.00 | 
|Call             |  |                       | sold   |  |                         |  | 500  |                  |  | $ | 91.00 | 
|Put              |  |                       | bought |  |                         |  | (500 | )                |  | $ | 82.00 | 
|Call             |  |                       | sold   |  |                         |  | 500  |                  |  | $ | 97.00 | 
|Put              |  |                       | bought |  |                         |  | (500 | )                |  | $ | 85.00 | 



At December 31, 2011,
the Corporation had entered into financial call option oil sales arrangements, whereby the Corporation’s counterparty has
the right to settle specified volumes of oil at specified prices in the future periods. Any subsequent changes in the fair values
of the call options are included in change in fair values of commodity derivatives in net loss.



|Type of Contract |  | Perpetual Sold/Bought |      |  | Volumes at WTI (bbls/d) |  |       | Price (US$/bbls) |  |   | Term   | 
|---------------- |  | --------------------- | ---- |  | ----------------------- |  | ----- | ---------------- |  | - | ------ | 
|Financial        |  |                       | sold |  |                         |  | 1,000 |                  |  | $ | 105.00 | 
|Financial (1)    |  |                       | sold |  |                         |  | 1,000 |                  |  | $ | 105.00 | 
|Financial (1)    |  |                       | sold |  |                         |  | 1,000 |                  |  | $ | 105.00 | 

| | (1) | These oil call options are part
                                                                 of paired transactions in which the proceeds from the sale of
                                                                 the call options were used to fund the 2012 natural gas contract
                                                                 price.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Corporation has entered into a financial
                                                         oil call swaption, whereby the Corporation’s counterparty has the
                                                         right to exercise the call option on December 31, 2012 or it expires.
                                                         If exercised, the Corporation will be entered into a forward oil sales
                                                         arrangement for 1,000 bbls/d at a WTI price of US$95.00/bbls for a term
                                                         of January 2013 – December 2013.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Page 29







Power contracts



At December 31, 2011,
the Corporation had entered into the following forward financial contracts to mitigate the risk associated with fluctuations in
power prices:



|Type of Contract |  | Perpetual  Sold/Bought |        |  | Volume (MWh) |  |           | Price (CAD$/MWh) |  |   | Term  | 
|---------------- |  | ---------------------- | ------ |  | ------------ |  | --------- | ---------------- |  | - | ----- | 
|Financial        |  |                        | bought |  |              |  | (2,745.36 | )                |  | $ | 49.60 | 
|Financial        |  |                        | bought |  |              |  | (2,157.60 | )                |  | $ | 49.60 | 
|Financial        |  |                        | bought |  |              |  | (2,209.68 | )                |  | $ | 49.60 | 
|Financial        |  |                        | bought |  |              |  | (4,516.08 | )                |  | $ | 72.39 | 
|Financial        |  |                        | bought |  |              |  | (3,793.20 | )                |  | $ | 72.39 | 
|Financial        |  |                        | bought |  |              |  | (2,923.92 | )                |  | $ | 72.39 | 
|Financial        |  |                        | bought |  |              |  | (6,480.00 | )                |  | $ | 76.00 | 



Foreign exchange contracts



At December 31, 2011,
the Corporation had entered into the following $US forward sales arrangements to limit the Corporation’s exposure to the
effects of strength in the Canadian dollar on natural gas prices.



|Type of Contract |  | Perpetual Sold/Bought |        |  | Notional $USD/month |   |            | Exchange rate (CAD$/USD$) |  |   | Term   | 
|---------------- |  | --------------------- | ------ |  | ------------------- | - | ---------- | ------------------------- |  | - | ------ | 
|Financial        |  |                       | bought |  |                     | $ | (1,000,000 | )                         |  | $ | 1.0019 | 
|Financial        |  |                       | bought |  |                     | $ | (1,000,000 | )                         |  | $ | 1.0085 | 
|Financial        |  |                       | bought |  |                     | $ | (1,000,000 | )                         |  | $ | 1.0125 | 
|Financial        |  |                       | bought |  |                     | $ | (2,000,000 | )                         |  | $ | 1.0535 | 



The following table
reconciles the Corporation’s derivative assets and liabilities:



|                                                      |  | Current |         |   | Non Current |  |         | Total | 
|----------------------------------------------------- |  | ------- | ------- | - | ----------- |  | ------- | ----- | 
|Balance, January 1, 2010                              |  |         | 46,152  |   |             |  | 21,167  |       | 
|Unrealized gain on gas storage obligation derivative  |  |         | –       |   |             |  | 3,729   |       | 
|Unrealized loss on forward natural gas contracts      |  |         | (41,881 | ) |             |  | (21,334 | )     | 
|Balance, December 31, 2010                            |  |         | 4,271   |   |             |  | 3,562   |       | 
|Unrealized gain on gas storage obligation derivative  |  |         | –       |   |             |  | 4,117   |       | 
|Unrealized gain on natural gas and oil contracts      |  |         | 4,983   |   |             |  | 531     |       | 
|Unrealized loss financial oil call swaption           |  |         | (4,242  | ) |             |  | –       |       | 
|Unrealized loss on oil call options                   |  |         | –       |   |             |  | (11,396 | )     | 
|Unrealized gain on power contracts                    |  |         | 424     |   |             |  | 13      |       | 
|Unrealized gain on forward foreign exchange contracts |  |         | 327     |   |             |  | –       |       | 
|Balance, December 31, 2011                            |  |         | 5,763   |   |             |  | (3,173  | )     | 
|                                                      |  |         |         |   |             |  |         |       | 
|Assets                                                |  |         | 12,604  |   |             |  | 7,692   |       | 
|Liabilities                                           |  |         | (6,841  | ) |             |  | (10,865 | )     | 
|Balance, December 31, 2011                            |  |         | 5,763   |   |             |  | (3,173  | )     | 



Page 30







The following
table reconciles the Corporation’s change in fair value of commodity derivatives:



|                                                        |  | Years ended December 31, |        
|------------------------------------------------------- |  | ------------------------ | -------
|                                                        |  | 2011                     |        
|Realized gain on natural gas and oil contracts          |  |                          | 2,217  
|Call option premiums received                           |  |                          | 3,124  
|Unrealized gain (loss) on natural gas and oil contracts |  |                          | 5,514  
|Unrealized loss financial oil call swaption             |  |                          | (4,242 
|Unrealized loss on oil call options                     |  |                          | (11,396
|Unrealized gain on power contracts                      |  |                          | 437    
|Unrealized gain on forward foreign exchange contracts   |  |                          | 327    
|                                                        |  |                          | (4,019 



Commodity and currency price sensitivity
analysis



As at December 31, 2011, if future natural gas prices changed
by $0.25 per GJ for AECO contracts and $0.25 per MMBTU for NYMEX contracts, with all other variables held constant, the fair value
of commodity price derivatives and after tax net loss for the period would have changed by $3.0 million. Fair value sensitivity
was based on published forward AECO and NYMEX prices. Gains and losses on NYMEX contracts were calculated based on the $US foreign
exchange rate as at December 31, 2011.



As at December 31, 2011, if the $US to $CAD foreign exchange
rate changed by $0.025 for foreign exchange contracts, with all other variables held constant, the fair value of currency price
derivatives and after tax net loss for the period would have changed by $1.2 million.



| | iii) | Interest rate risk
| | ---- | ------------------



The Corporation utilizes
a Credit Facility which bears a floating rate of interest and as such is subject to interest rate risk. Increased future interest
rates will decrease future cash flows and net earnings or loss, thereby potentially affecting the Corporation’s future dividends
and capital investments.



The Corporation’s
Senior Notes and convertible debentures were issued at a fixed interest rate and as such the debentures are not materially impacted
by market interest rate fluctuations. To ensure accounts payable, accrued liabilities and dividends payable are settled on a timely
basis, the Corporation manages liquidity risk as previously outlined in this note, thus limiting exposure to interest rate fluctuations
and other penalties potentially resulting from past due payables.



The Corporation had
no interest rate swap or financial contracts in place as at or during the year ended December 31, 2011 (December 31, 2010 –
nil).



Interest
rate sensitivity analysis



For the year ended December
31, 2011, if interest rates had been one percent lower or higher the impact on net loss would be as follows:



|Interest rate sensitivity ($ thousands) |  | 1% increase |        |   | 1% decrease | 
|--------------------------------------- |  | ----------- | ------ | - | ----------- | 
|(Increase) decrease in net loss         |  |             | (1,094 | ) |             | 



The impact on net loss
as a result of interest rate fluctuations is based on the assumption that the lender increases or decreases the fixed term BA
rate consistently, based on a market interest rate change of one percent.



| | d) | Fair value of financial assets
                                                                  and liabilities
| | -- | ----------------------------------------------------------------------------------------------------------------



Fair value measurements are required to
be classified into one of the following levels of the fair value hierarchy:



Level
1 – Quoted prices (unadjusted) in active markets for identical assets and liabilities.



Level 2 – Inputs other
than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.



Level
3 – Inputs for the asset or liability that are not based on observable market data.



The fair value of accounts receivable,
accounts payable and accrued liabilities and dividends payable approximate their carrying amounts due to their short terms to
maturity.



The fair value of the gas storage
obligation is captured through the recording of a derivative asset or liability based on changes in the forward price curve for
natural gas.

Page 31









Bank debt bears interest at a floating
market rate and accordingly the fair market value approximates the carrying amount.



The fair values of marketable securities
and convertible debentures are based on Level 1, in reference to IFRS requirements, and as such these fair values are derived
from exchange traded values in active markets as at the period end date.



The fair values of derivative contracts
and the gas storage obligation are based on Level 2, in reference to IFRS requirements, and as such these fair values are derived
from the difference between the fixed contract price or fixed basis differential and readily observable estimated, external forward
market price curves as at the period end date, based on natural gas and power volumes in executed contracts.



The fair value of the Senior Notes
are based on Level 2 and is calculated based on the present value of future principal and interest cash flows, discounted at the
market rate of interest on the period end date of similar note offerings.



The fair value of financial assets and liabilities were as
follows:



|                                         |  | December 31, 2011 |         |  | December 31, 2010 | 
|---------------------------------------- |  | ----------------- | ------- |  | ----------------- | 
|                                         |  | Carrying Amount   |         |  | Fair Value        | 
|Financial assets:                        |  |                   |         |  |                   | 
|Loans and receivables at amortized cost  |  |                   |         |  |                   | 
|Accounts receivable                      |  |                   | 35,604  |  |                   | 
|Fair value through profit and loss       |  |                   |         |  |                   | 
|Marketable securities                    |  |                   | 3,282   |  |                   | 
|Derivatives                              |  |                   | 20,296  |  |                   | 
|Financial liabilities:                   |  |                   |         |  |                   | 
|Financial liabilities at amortized cost  |  |                   |         |  |                   | 
|Accounts payable and accrued liabilities |  |                   | 50,404  |  |                   | 
|Dividends payable                        |  |                   | –       |  |                   | 
|Derivatives                              |  |                   | 17,706  |  |                   | 
|Long term bank debt                      |  |                   | 130,062 |  |                   | 
|Senior notes                             |  |                   | 146,634 |  |                   | 
|Convertible debentures                   |  |                   | 223,270 |  |                   | 
|Gas storage obligation                   |  |                   | 41,630  |  |                   | 



| | 18. | CAPITAL MANAGEMENT
| | --- | ------------------



The Corporation's policy is to
maintain a strong capital base so as to retain investor, creditor and market confidence and to sustain the future development
of the business. The Corporation manages its capital structure and makes adjustments in light of changes in economic conditions
and the risk characteristics its underlying oil and natural gas assets. The Corporation considers its capital structure to include
share capital, bank debt, Senior Notes, convertible debentures and adjusted working capital. In order to maintain or adjust the
capital structure, the Corporation may from time to time issue shares or debt securities and adjust its capital spending to manage
current and projected debt levels.



The Corporation monitors capital
based on the ratio of net debt to trailing twelve months funds flow, calculated as follows for the year ended December 31, 2011:



|Bank debt                                               |  |  | 130,062 | 
|------------------------------------------------------- |  |  | ------- | 
|Senior notes, measured at principal amount              |  |  | 150,000 | 
|Convertible debentures, measured at principal amount    |  |  | 234,897 | 
|Adjusted working capital deficiency (3)                 |  |  | 7,627   | 
|Net debt (1)                                            |  |  | 522,586 | 
|Cash flow provided by operating activities              |  |  | 60,428  | 
|Exploration and evaluation costs (4)                    |  |  | 3,917   | 
|Expenditures on decommissioning obligations             |  |  | 2,514   | 
|Gas over bitumen royalty adjustments not yet received   |  |  | 564     | 
|Changes in non-cash operating working capital           |  |  | 9,563   | 
|Trailing twelve months funds flow (2)                   |  |  | 76,986  | 
|Net debt to annualized funds flow ratio (times) (1,2,5) |  |  | 6.8:1   | 



Page 32







As at December 31, 2011, the Corporation’s
ratio of net debt to funds flow was 6.8 to 1. This ratio is monitored continuously by the Corporation, and the targeted range
of net debt to funds flow varies based on such factors as: acquisitions, commodity prices, forecasts of future commodity prices,
price management contracts, projected cash flows, dividends, capital expenditure programs and timing of such programs. As a part
of the management of this ratio, the Corporation prepares annual capital expenditure budgets, which are updated as necessary depending
on varying factors including current and forecast prices, successful capital deployment and general industry conditions. Capital
spending budgets are approved by the Board of Directors.



The Corporation’s share capital,
convertible debentures and adjusted working capital are not subject to external restrictions. The Corporation’s Credit Facility
and Senior Notes are subject to lenders’ covenants with which the Corporation was in compliance at December 31, 2011.



The capital structure at December 31, 2011 was as follows:



|Bank debt                                            |  |  | 130,062 | 
|---------------------------------------------------- |  |  | ------- | 
|Senior notes, measured at principal amount           |  |  | 150,000 | 
|Convertible debentures, measured at principal amount |  |  | 234,897 | 
|Adjusted working capital deficiency (3)              |  |  | 7,627   | 
|Net debt (1)                                         |  |  | 522,586 | 
|Total equity (net of deficit)                        |  |  | 81,558  | 
|Total capital                                        |  |  | 604,144 | 

| | (1) | Net debt is used by management
                                                                       to analyze leverage. Net debt does not have any standardized
                                                                       meaning prescribed by IFRS and therefore these terms may
                                                                       not be comparable with the calculation of similar measures
                                                                       for other entities.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Management uses funds flow
                                                                       from operations before changes in non-cash working capital
                                                                       (“funds flow”), funds flow per common share
                                                                       and annualized funds flow to analyze operating performance
                                                                       and leverage. Funds flow as presented does not have any
                                                                       standardized meaning prescribed by IFRS and therefore it
                                                                       may not be comparable to the calculation of similar measures
                                                                       for other entities. Funds flow as presented is not intended
                                                                       to represent operating cash flow or operating profits for
                                                                       the period nor should it be viewed as an alternative to
                                                                       cash flow provided by operating activities, net earnings
                                                                       or loss or other measures of financial performance calculated
                                                                       in accordance with IFRS.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Adjusted working capital
                                                                       deficiency excludes assets held for sale, liabilities associated
                                                                       with assets held for sale, the share based payment liability,
                                                                       current portion of convertible debentures, and the current
                                                                       portion of derivative assets.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Certain
                                                                                                         exploration and evaluation
                                                                                                         costs are added back
                                                                                                         to funds flow in order
                                                                                                         to be more comparable
                                                                                                         to other corporations
                                                                                                         that capitalize some
                                                                                                         of these costs. Exploration
                                                                                                         and evaluation costs
                                                                                                         that are added back to
                                                                                                         funds flow include geological
                                                                                                         and geophysical expenditures
                                                                                                         and dry hole expenditures
                                                                                                         and are more closely
                                                                                                         related to investing
                                                                                                         activities than operating
                                                                                                         activities.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Net debt to annualized
                                                                       funds flow ratio is not comparable with the calculation
                                                                       of the Corporations debt covenant ratios of twelve months
                                                                       trailing earnings before interest, taxes, and depletion
                                                                       and depreciation to consolidated debt and consolidated
                                                                       senior debt.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 19. | COMMITMENTS
| | --- | -----------



| | a) | Operating lease commitments
| | -- | ---------------------------



As of December 31, 2011, the future minimum
payments under office lease costs and related sublease recoveries under contractual agreements consisted of:



|2012       |  |  | 2,275  | 
|---------- |  |  | ------ | 
|2013       |  |  | 2,015  | 
|2014       |  |  | 1,959  | 
|2015       |  |  | 1,959  | 
|2016       |  |  | 1,959  | 
|After 2017 |  |  | 2,449  | 
|Total      |  |  | 12,616 | 



| | b) | Pipeline commitments
| | -- | --------------------



The Corporation has long-term commitments
to pay for gas transportation on certain major pipeline systems in western Canada. As of December 31, 2011, the future minimum
payments under pipeline commitments under contractual agreements consisted of:



|2012       |  |  | 8,451  | 
|---------- |  |  | ------ | 
|2013       |  |  | 4,900  | 
|2014       |  |  | 2,095  | 
|2015       |  |  | 527    | 
|2016       |  |  | 36     | 
|After 2017 |  |  | 70     | 
|Total      |  |  | 16,079 | 



Page 33











| | 20. | DEFERRED INCOME TAXES
| | --- | ---------------------



The provision for income taxes in the financial
statements differs from the result that would have been obtained by applying the combined federal and provincial tax rate to the
Corporation’s loss before income tax. This difference results from the following items:



|                                                            |  | Years ended December 31, |        
|----------------------------------------------------------- |  | ------------------------ | -------
|                                                            |  | 2011                     |        
|Loss before income tax, including non-controlling interests |  |                          | (94,289
|Combined federal and provincial tax rate (%)                |  |                          | 26.5   
|Computed income tax benefit                                 |  |                          | (24,987
|Increase in income taxes resulting from:                    |  |                          |        
|Non-deductible expenses                                     |  |                          | 3,079  
|Unrecognized tax asset                                      |  |                          | 23,172 
|Change in tax rate                                          |  |                          | 367    
|Deferred income taxes                                       |  |                          | 1,631  



Income tax rates changed from 28.0 percent
in 2010 to 26.5 percent in 2011 due to a reduction in federal statutory income tax rates.



The components of the Corporation’s
and its subsidiaries’ deferred income tax liabilities are as follows:



|                              |  | Years ended December 31, |        
|----------------------------- |  | ------------------------ | -------
|                              |  | 2011                     |        
|Property, plant and equipment |  |                          | 58,493 
|Other                         |  |                          | 3,688  
|Decommissioning obligations   |  |                          | (58,428
|                              |  |                          | 3,753  



The temporary deductible differences included
in the Corporation’s unrecognized deferred income tax assets are as follows:



|                                    |  | Years ended December 31, |        
|----------------------------------- |  | ------------------------ | -------
|                                    |  | 2011                     |        
|Non-capital losses                  |  |                          | 169,007
|Capital losses                      |  |                          | 219,174
|Gas over bitumen royalty obligation |  |                          | 73,415 
|Decommissioning obligation          |  |                          | 13,989 
|Other                               |  |                          | 4,452  
|                                    |  |                          | 480,037



The tax losses
expire up to 2031. The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not
been recognized in respect of the tax losses and the gas over bitumen royalty obligation because it is not probable that future
taxable profit will be available against which the Corporation can utilize the benefits. The petroleum and natural gas properties
and facilities owned by the Corporation and its subsidiaries have an approximate tax basis of $888.0 million (December 31,
2010 – $843.0 million) available for future use as deductions from taxable income.



| | 21. | RELATED PARTIES
| | --- | ---------------



| | a) | Subsidiaries
| | -- | ------------



The consolidated financial statements of
the Corporation include the accounts of the Corporation and its following directly wholly-owned subsidiaries incorporated in Canada:



| | · | Perpetual Energy Operating Corp.
| | - | --------------------------------

| | · | Warwick Gas Storage Inc.
| | - | ------------------------

| | · | Perpetual Operating Trust
| | - | -------------------------



Page 34







| | b) | Key management personnel
| | -- | ------------------------



The Corporation has defined key management personnel as executive
officers and vice presidents, as well as the Board of Directors, as they have the collective authority and responsibility for planning,
directing and controlling the activities of the Corporation. The following table outlines the total compensation expense for key
management personnel:



|                                              |  | Years ended December 31, |      
|--------------------------------------------- |  | ------------------------ | -----
|                                              |  | 2011                     |      
|Short-term fees and other short-term benefits |  |                          | 2,717
|Share-based payment expense                   |  |                          | 2,189
|                                              |  |                          | 4,906



| | 22. | SUPPLEMENTAL DISCLOSURE
| | --- | -----------------------



The Corporation’s consolidated statements
of loss and comprehensive loss are prepared primarily by nature of expense, with the exception of employee compensation costs which
are included in both production and operating and general and administrative expenses.



The following table details the amount
of total employee compensation costs included in production and operating and general and administrative expenses in the consolidated
statements of loss and comprehensive loss.



|                           |  | Years ended December 31, |       
|-------------------------- |  | ------------------------ | ------
|                           |  | 2011                     |       
|Production and operating   |  |                          | 10,193
|General and administrative |  |                          | 29,428
|                           |  |                          | 39,621



During the year ended December 31, 2011, total employee compensation
costs included share based payment expense of $5.6 million (2010 – $5.3 million) with the remainder being short-term fees
and other short-term benefits.



| | 23. | SUBSEQUENT EVENTS
| | --- | -----------------



During the first quarter of 2012, The Corporation
disposed of multiple non-core oil and natural gas properties geographically located in the Corporations West Central and Other
South CGU’s for net proceeds of $60.9 million of which $23.9 million related to assets classified as held for sale at December
31, 2011 (note 4). On March 1, 2012, the sale of these assets resulted in a reduction to the borrowing base of the Credit Facility
from $190.0 million to $171.0 million (note 8). In addition, the Corporation is currently in negotiations with respect to the sale
of all or a portion of its Warwick gas storage facility. The sales of these assets are in response to the Corporations asset disposition
program.



| | 24. | FIRST TIME ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS
| | --- | ------------------------------------------------------------------



The accounting policies in note
3 have been applied in preparing the consolidated financial statements for the year ended December 31, 2010, the statement of financial
position as at December 31, 2010 and the preparation of an opening IFRS statement of financial position on January 1, 2010.



In preparing the consolidated financial
statements for the year ended December 31, 2010, the statement of financial position as at December 31, 2010 and the preparation
of an opening IFRS statement of financial position on January 1, 2010, balances have been adjusted from the amounts reported previously
in the consolidated financial statements prepared in accordance with Canadian GAAP.



An explanation of how the transition
from Canadian GAAP to IFRS has affected the Corporation’s financial position, financial performance and cash flows is set
out in the following notes.



Key first time adoption exemptions
applied



| | i) | Business combinations
| | -- | ---------------------



The Corporation applied
the IFRS 1 exemption for business combinations. This allows the Corporation not to restate its previously recorded business combinations
incurred under Canadian GAAP before January 1, 2010. In applying this exemption the Corporation has reviewed its statements of
financial position and operations for any items that would require additional recognition or reclassification, namely property,
plant, and equipment, E&E assets, leases and provisions.



Page 35







| | ii) | Borrowing costs
| | --- | ---------------



The Corporation elected
to apply IAS 23 borrowing costs and capitalized borrowing costs from an effective date of August 1, 2009, the first day of construction
of the Warwick gas storage facility. Borrowing costs associated with this facility and certain other developments after August
1, 2009 have been capitalized.



| | iii) | Embedded derivative in convertible debentures
| | ---- | ---------------------------------------------



The Corporation has elected
to apply the exemption in IFRS 1 not to restate the embedded derivative portion of the convertible debentures no longer outstanding
as of January 1, 2010.



| | iv) | Leases
| | --- | ------



The Corporation has not
reassessed any arrangements to determine whether they contain a lease if they have already been assessed under Canadian GAAP. Additionally,
any arrangements that have not been assessed under Canadian GAAP have been assessed under IFRIC 4, Determining Whether an Arrangement
Contains a Lease, based on terms and conditions existing at January 1, 2010.



| | v) | Share based payments
| | -- | --------------------



IFRS 2 Share Based Payments
has not been applied to equity instruments related to share based payment arrangements that were granted on or before November
7, 2002, nor has it been applied to equity instruments granted after November 7, 2002 that vested before January 1, 2010. For cash-settled
share based payment arrangements, the Corporation has not applied IFRS 2 to liabilities that were settled before January 1, 2010.



Page 36







PERPETUAL ENERGY INC.

IFRS Reconciliation of Equity

As at January 1, 2010



|                                              |  |          |           |   | IFRS
    adjustments |   |          |             | 
|--------------------------------------------- |  | -------- | --------- | - | -------------------- | - | -------- | ----------- | 
|                                              |  | Canadian |           |   |                      |   |          | Financial   | 
|                                              |  | GAAP     |           |   | E&E                  |   |          | Liabilities | 
|(Cdn$ thousands)                              |  | Note     |           |   | (24a)                |   |          | (24c)       | 
|                                              |  |          |           |   |                      |   |          |             | 
|Assets                                        |  |          |           |   |                      |   |          |             | 
|Current assets                                |  |          |           |   |                      |   |          |             | 
|Accounts receivable                           |  | $        | 34,079    |   |                      | $ | –        |             | 
|Prepaid expenses and deposits                 |  |          | 12,910    |   |                      |   |          |             | 
|Marketable securities                         |  |          | 163       |   |                      |   |          |             | 
|Derivatives                                   |  |          | 46,152    |   |                      |   |          |             | 
|                                              |  |          | 93,304    |   |                      |   | –        |             | 
|                                              |  |          |           |   |                      |   |          |             | 
|Derivatives                                   |  |          | 21,167    |   |                      |   |          |             | 
|Property, plant and equipment                 |  |          | 921,705   |   |                      |   | (111,604 | )           | 
|Exploration and evaluation                    |  |          | –         |   |                      |   | 111,604  |             | 
|Goodwill                                      |  |          | 29,129    |   |                      |   |          |             | 
|                                              |  |          | 972,001   |   |                      |   | –        |             | 
|Total assets                                  |  | $        | 1,065,305 |   |                      | $ | –        |             | 
|                                              |  |          |           |   |                      |   |          |             | 
|Liabilities                                   |  |          |           |   |                      |   |          |             | 
|Current liabilities                           |  |          |           |   |                      |   |          |             | 
|Accounts payable and accrued liabilities      |  | $        | 41,722    |   |                      | $ | –        |             | 
|Distributions payable                         |  |          | 6,311     |   |                      |   |          |             | 
|Share based payment liability                 |  |          | –         |   |                      |   |          |             | 
|Bank debt                                     |  |          | 7,569     |   |                      |   |          |             | 
|Convertible debentures                        |  |          | 55,271    |   |                      |   |          |             | 
|                                              |  |          | 110,873   |   |                      |   | –        |             | 
|                                              |  |          |           |   |                      |   |          |             | 
|Long term bank debt                           |  |          | 262,393   |   |                      |   |          |             | 
|Convertible debentures                        |  |          | 164,926   |   |                      |   |          |             | 
|Derivative debenture liability                |  |          | –         |   |                      |   |          |             | 
|Gas over bitumen royalty obligation           |  |          | 77,167    |   |                      |   |          |             | 
|Decommissioning obligations                   |  |          | 194,588   |   |                      |   |          |             | 
|Unitholders’ liability                        |  |          | –         |   |                      |   |          |             | 
|                                              |  |          | 699,074   |   |                      |   | –        |             | 
|Total liabilities                             |  |          | 809,947   |   |                      |   | –        |             | 
|                                              |  |          |           |   |                      |   |          |             | 
|Unitholders’ equity                           |  |          |           |   |                      |   |          |             | 
|Unitholders’ capital                          |  |          | 1,156,245 |   |                      |   |          |             | 
|Equity component of convertible debentures    |  |          | 10,844    |   |                      |   |          |             | 
|Contributed surplus                           |  |          | 19,470    |   |                      |   |          |             | 
|Deficit                                       |  |          | (932,680  | ) |                      |   |          |             | 
|Total equity attributable to unitholders      |  |          | 253,879   |   |                      |   | –        |             | 
|Non-controlling interests                     |  |          | 1,479     |   |                      |   |          |             | 
|Total unitholders’ equity                     |  |          | 255,358   |   |                      |   | –        |             | 
|Total liabilities and unitholders’
    equity |  | $        | 1,065,305 |   |                      | $ | –        |             | 



Page 37







PERPETUAL ENERGY INC.

IFRS Reconciliation of Equity

As at December 31, 2010



|                                           |  |          |            |   | IFRS
    adjustments |   |          |             | 
|------------------------------------------ |  | -------- | ---------- | - | -------------------- | - | -------- | ----------- | 
|                                           |  | Canadian |            |   |                      |   |          | Financial   | 
|                                           |  | GAAP     |            |   | E&E                  |   |          | Liabilities | 
|(Cdn$ thousands)                           |  | Note     |            |   | (24a)                |   |          | (24c)       | 
|                                           |  |          |            |   |                      |   |          |             | 
|Assets                                     |  |          |            |   |                      |   |          |             | 
|Current assets                             |  |          |            |   |                      |   |          |             | 
|Accounts receivable                        |  | $        | 35,459     |   |                      | $ | –        |             | 
|Prepaid expenses and deposits              |  |          | 5,028      |   |                      |   |          |             | 
|Marketable securities                      |  |          | 6,007      |   |                      |   |          |             | 
|Derivatives                                |  |          | 4,271      |   |                      |   |          |             | 
|                                           |  |          | 50,765     |   |                      |   | –        |             | 
|                                           |  |          |            |   |                      |   |          |             | 
|Derivatives                                |  |          | 3,562      |   |                      |   |          |             | 
|Property, plant and equipment              |  |          | 954,750    |   |                      |   | (106,607 | )           | 
|Exploration and evaluation                 |  |          | –          |   |                      |   | 107,474  |             | 
|Goodwill                                   |  |          | 29,129     |   |                      |   |          |             | 
|                                           |  |          | 987,441    |   |                      |   | 867      |             | 
|Total assets                               |  | $        | 1,038,206  |   |                      | $ | 867      |             | 
|                                           |  |          |            |   |                      |   |          |             | 
|Liabilities                                |  |          |            |   |                      |   |          |             | 
|Current liabilities                        |  |          |            |   |                      |   |          |             | 
|Accounts payable and accrued liabilities   |  | $        | 73,979     |   |                      | $ | –        |             | 
|Dividends payable                          |  |          | 4,449      |   |                      |   |          |             | 
|Share based payment liability              |  |          | 803        |   |                      |   |          |             | 
|                                           |  |          | 79,231     |   |                      |   | –        |             | 
|                                           |  |          |            |   |                      |   |          |             | 
|Long term bank debt                        |  |          | 182,612    |   |                      |   |          |             | 
|Convertible debentures                     |  |          | 219,689    |   |                      |   |          |             | 
|Gas storage obligation                     |  |          | 31,721     |   |                      |   |          |             | 
|Gas over bitumen royalty obligation        |  |          | 70,497     |   |                      |   |          |             | 
|Decommissioning obligations                |  |          | 199,191    |   |                      |   |          |             | 
|Deferred tax liability                     |  |          | 2,122      |   |                      |   |          |             | 
|                                           |  |          | 705,832    |   |                      |   | –        |             | 
|Total liabilities                          |  |          | 785,063    |   |                      |   | –        |             | 
|                                           |  |          |            |   |                      |   |          |             | 
|Equity                                     |  |          |            |   |                      |   |          |             | 
|Share capital                              |  |          | 1,257,480  |   |                      |   |          |             | 
|Equity component of convertible debentures |  |          | 15,836     |   |                      |   |          |             | 
|Contributed surplus                        |  |          | 19,131     |   |                      |   |          |             | 
|Deficit                                    |  |          | (1,039,304 | ) |                      |   | 867      |             | 
|Total equity                               |  |          | 253,143    |   |                      |   | 867      |             | 
|Total liabilities and equity               |  | $        | 1,038,206  |   |                      | $ | 867      |             | 







Page 38







PERPETUAL ENERGY INC.

IFRS Reconciliation of Total Comprehensive Loss

For the year ended December 31, 2010



|                                                         |  |                   |         |   | IFRS
    adjustments |   |        |                           | 
|-------------------------------------------------------- |  | ----------------- | ------- | - | -------------------- | - | ------ | ------------------------- | 
|                                                         |  | Canadian
    GAAP |         |   | PP&E,

    E&E       |   |        | Financial
    Liabilities | 
|(Cdn$ thousands, except per share
    amounts)           |  | Note              |         |   | (24a,b)              |   |        | (24c)                     | 
|                                                         |  |                   |         |   |                      |   |        |                           | 
|Revenue                                                  |  |                   |         |   |                      |   |        |                           | 
|Oil and natural gas                                      |  | $                 | 260,217 |   |                      | $ | –      |                           | 
|Royalties                                                |  |                   | (22,131 | ) |                      |   |        |                           | 
|Change in fair value of commodity price derivatives      |  |                   | 93,661  |   |                      |   |        |                           | 
|Gas over bitumen                                         |  |                   | 15,616  |   |                      |   |        |                           | 
|                                                         |  |                   | 347,363 |   |                      |   | –      |                           | 
|                                                         |  |                   |         |   |                      |   |        |                           | 
|Expenses                                                 |  |                   |         |   |                      |   |        |                           | 
|Production and operating                                 |  |                   | 91,161  |   |                      |   |        |                           | 
|Transportation                                           |  |                   | 11,888  |   |                      |   |        |                           | 
|Exploration and evaluation                               |  |                   | 19,160  |   |                      |   | (867   | )                         | 
|General and administrative                               |  |                   | 36,250  |   |                      |   |        |                           | 
|Gain on disposition of property, plant and
    equipment |  |                   | (37,727 | ) |                      |   |        |                           | 
|Impairment losses                                        |  |                   | –       |   |                      |   |        |                           | 
|Depletion and depreciation                               |  |                   | 209,181 |   |                      |   | 2,425  |                           | 
|                                                         |  |                   | 329,913 |   |                      |   | 1,558  |                           | 
|Earnings (loss) from operating
    activities            |  |                   | 17,450  |   |                      |   | (1,558 | )                         | 
|                                                         |  |                   |         |   |                      |   |        |                           | 
|Finance items                                            |  |                   |         |   |                      |   |        |                           | 
|Unrealized loss on derivative debenture liability        |  |                   | –       |   |                      |   |        |                           | 
|Unrealized gain on gas storage obligation derivative     |  |                   | (3,729  | ) |                      |   |        |                           | 
|Unrealized loss on marketable securities                 |  |                   | 1,257   |   |                      |   |        |                           | 
|Interest on Trust Units                                  |  |                   | –       |   |                      |   |        |                           | 
|Interest on convertible debentures                       |  |                   | 19,492  |   |                      |   |        |                           | 
|Interest on debt and gas storage obligation              |  |                   | 12,460  |   |                      |   |        |                           | 
|Accretion
    on decommissioning obligations             |  |                   | 14,394  |   |                      |   |        |                           | 
|                                                         |  |                   | 43,874  |   |                      |   | –      |                           | 
|Loss before income tax                                   |  |                   | (26,424 | ) |                      |   | (1,558 | )                         | 
|                                                         |  |                   |         |   |                      |   |        |                           | 
|Deferred income taxes                                    |  |                   | 2,122   |   |                      |   |        |                           | 
|Net loss and comprehensive
    loss                      |  |                   | (28,546 | ) |                      |   | (1,558 | )                         | 
|                                                         |  |                   |         |   |                      |   |        |                           | 
|Net loss and comprehensive loss attributable
    to:     |  |                   |         |   |                      |   |        |                           | 
|Shareholders of the Corporation                          |  |                   | (27,996 | ) |                      |   | (1,558 | )                         | 
|Non-controlling interests                                |  |                   | (550    | ) |                      |   | –      |                           | 
|                                                         |  | $                 | (28,546 | ) |                      | $ | (1,558 | )                         | 
|                                                         |  |                   |         |   |                      |   |        |                           | 
|Loss per share                                           |  |                   |         |   |                      |   |        |                           | 
|Basic and diluted                                        |  | $                 | (0.20   | ) |                      |   |        |                           | 



Page 39







Notes to the Reconciliations of Equity and Comprehensive
income from Canadian GAAP to IFRS



| | a) | IFRS 6 Adjustments – exploration for and evaluation of
mineral resources
| | -- | ------------------------------------------------------------------------



Under previous Canadian GAAP,
the Corporation followed the successful efforts method of accounting for oil and natural gas operations. Under this method, the
Corporation capitalized only those costs that resulted directly in the discovery of oil and natural gas reserves. Exploration expenses,
including geological and geophysical costs, lease rentals and exploratory dry hole costs, were charged to net earnings or loss
as incurred. Leasehold acquisition costs, including costs of drilling and equipping successful wells, were capitalized. Unproved
properties were carried at cost, amortized over the average lease term and tested for impairment annually, with any carrying amount
in excess of fair value charged to net earnings or loss. The net cost of unproductive wells, abandoned wells and surrendered leases
were charged to net earnings or loss in the year of abandonment or surrender.



In accordance with IFRS 6, the
Corporation assessed the classification of activities designated as E&E which then determines the appropriate accounting treatment
and classification of the costs incurred.



| | b) | IFRS 16 Adjustments – property, plant and equipment
| | -- | ---------------------------------------------------



The cost of property, plant
and equipment at January 1, 2010, the date of transition to IFRS, remained the same under IFRS as Canadian GAAP, adjusted only
to segregate E&E assets, to adjust asset cost for revised decommissioning obligations and to record gains (losses) on dispositions
under IFRS.



Under Canadian GAAP, proceeds
from dispositions were deducted from the successful efforts cost pool without recognizing a gain or loss unless the deduction resulted
in a change to the depletion rate of 20 percent or greater, in which case a gain or loss was recorded.



Under IFRS, gains or losses
are recorded on dispositions and are calculated as the difference between the proceeds and the net book value of the assets disposed.



| | c) | IAS 32 Adjustments – Financial instruments: presentation
| | -- | --------------------------------------------------------



The classification of certain
equity items under Canadian GAAP was reviewed for conformity with the provisions of IAS 32. As a result, the Trust Units classified
as equity under Canadian GAAP prior to conversion were reclassified to liabilities and recorded at amortized cost. The reclassification
of Trust Units to Unitholders’ liability also resulted in the reclassification of subscription receipts to liabilities and
the conversion feature of convertible debentures to a derivative debenture liability. The derivative debenture liability is recorded
at fair value on January 1, 2010 and the fair value is determined at each financial period end date until the conversion on June
30, 2010. The reclassification of the Trust Units to Unitholders’ liability also resulted in distributions being recorded
as interest on Trust Units during the six months ended June 30, 2010.



On June 30, 2010, the Trust
completed its conversion and as a result the original carrying amount of the Unitholders’ liability and derivative debenture
liability were reclassified from liabilities to equity. In addition, the Corporation recorded adjustments to Unitholders’
capital due to differences in the valuation of exercised options under IFRS compared to Canadian GAAP. These differences were charged
to contributed surplus at June 30, 2010. Under IFRS the repayment of convertible debentures required the equity component on the
convertible debenture to be allocated to deficit on January 1, 2010 whereas under Canadian GAAP it was allocated to contributed
surplus.



| | d) | IAS 37 Adjustments – Provisions
| | -- | -------------------------------



Decommissioning obligations
(asset retirement obligations) had been measured under Canadian GAAP based on the estimated future cost of decommissioning, discounted
using a credit-adjusted risk free rate, however under IFRS the liability was required to be re-measured based on changes in estimates
including discount rates. The Corporation has chosen a risk free rate as the appropriate discount rate for calculating all decommissioning
obligations under IFRS. The Corporation restated the amount of decommissioning obligations as of the IFRS transition date of January
1, 2010 to reflect a risk free interest rate which varied from 1.92 to 4.08 percent over the period of time since the inception
of the Corporation. The corresponding increase to the decommissioning liability at the transition date resulted in higher depletion
and depreciation expense and lower accretion expense as well as adjustments to the gain on dispositions of property, plant, and
equipment in 2010.



| | e) | IAS 23 Adjustments – Borrowing costs
| | -- | ------------------------------------



Under IAS 23, the Corporation
has elected to commence capitalization borrowing costs as of August 1, 2009 on the Warwick gas storage facility. This increased
the value of property, plant, and equipment and decreased interest expense in 2010.



Page 40







| | f) | IAS 36 Adjustments – Impairment
| | -- | -------------------------------



| | i) | Goodwill
| | -- | --------



As part of its transition
to IFRS, the Corporation elected to restate only those business combinations that occurred on or after January 1, 2010. In respect
of acquisitions prior to January 1, 2010, goodwill represents the amount recognized under the Corporation’s previous accounting
framework. At January 1, 2010, the Corporation carried out an impairment test on its goodwill at the CGU level with no resulting
impairment loss identified. The Corporation derecognized $23.1 million of goodwill previously recorded on an acquisition assigned
to properties disposed prior to January 1, 2010.



| | ii) | Property, plant and equipment
| | --- | -----------------------------



For the year ended December 31,
2010, the Corporation recognized an impairment of $24.3 million on the Birchwavy West, West Central and other South CGUs. The impairments
recognized were based on the difference between the carrying value of the assets and the value in use. In assessing value in use,
the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. Value in use is computed by reference to the present
value of the future cash flows expected to be derived from production of proved and probable reserves. Under previous Canadian
GAAP, the CGU’s were included in the successful efforts ceiling test which and were not impaired at December 31, 2010.



| | g) | IFRS 2 Adjustments – Share based payments
| | -- | -----------------------------------------



The application of IAS 32 caused
the Corporation’s share based payment plans in place on transition to be recorded as cash-settled share based payments up
to the date of conversion. Under Canadian GAAP, the plans were considered to be equity-settled. As of January 1, 2010, both the
Unit Incentive and Restricted Rights plan were fair-valued and recorded as liabilities. On January 1, 2010, the fair value amount
was transferred from contributed surplus to the liability account and the remainder of contributed surplus was charged to deficit.



Upon conversion, the Share Option
Plan was modified; the reduction in exercise price of the options was discontinued and replaced with a cash-settled Dividend Bonus
Arrangement whereby upon exercise the employees receive cash for aggregate dividends accumulated subsequent to June 30, 2010 upon
exercise and 25 percent of such dividends should the options expire unexercised. Under IFRS, the Dividend Bonus Arrangement is
treated as a cash-settled share based payment arrangement measured at fair value, whereas under Canadian GAAP, this plan was classified
as a liability but measured at intrinsic value.



| | h) | Reclassifications
| | -- | -----------------



Certain amounts have been reclassified to
conform with current presentation.



| | i) | Adjustments to the Corporation’s Cash Flow Statement under IFRS
| | -- | ---------------------------------------------------------------



Adjustments to borrowing costs under IAS 23 as noted
in note 24(e) have the effect of increasing cash flows from operating activities and decreasing cash flow from investing activities
by $0.3 million for the year ended December 31, 2010.



The remaining highlighted reconciling items above
between Canadian GAAP and IFRS policies have no net impact on cash flows generated by the Corporation.





Page 41