Perpetual Energy : Management Information Circular Special Meeting of Noteholders and Shareholders

IMPORTANT DEADLINE AND IMMEDIATE ACTION REQUIRED

NOTICE OF SPECIAL MEETINGS OF NOTEHOLDERS AND SHAREHOLDERS

each to be held January 22, 2021

and

NOTICE OF ORIGINATING APPLICATION TO THE COURT OF QUEEN'S BENCH OF ALBERTA

and

MANAGEMENT INFORMATION CIRCULAR

with respect to a

PLAN OF ARRANGEMENT

involving

PERPETUAL ENERGY INC.

and

THE NOTEHOLDERS OF PERPETUAL ENERGY INC.

December 23, 2020

These materials are important and require your immediate attention and careful consideration. They require Perpetual Energy Inc. noteholders and shareholders to make important decisions. If you are in doubt as to how to make such decisions, please contact your investment, legal, financial, tax or other professional advisors. If you are a noteholder and have any questions or require more information, please contact Computershare Investor Services Inc. using the information provided on the back cover. If you are a shareholder and have any questions or require more information, please contact Odyssey Trust Company using the information provided on the back cover.

PERPETUAL ENERGY INC.

December 23, 2020

Dear Noteholder and Shareholder:

The Board of Directors of Perpetual Energy Inc. (the "Company") cordially invites you to attend:

1. a special meeting (the "Noteholder Meeting") of holders ("Noteholders") of its outstanding 8.75% senior unsecured notes due January 23, 2022 (the "Notes") if you are a Noteholder, to be held virtually via live audio cast that Noteholders will telephone into at 9:00 a.m. (Calgary time) on January 22, 2021; and
2. a special meeting (the "Shareholder Meeting") of holders ("Shareholders") of its outstanding common shares (the "Shares") if you are a Shareholder, to be held virtually via live audio cast that Shareholders will telephone into at 9:30 a.m. (Calgary time) on January 22, 2021,
   (unless the context otherwise requires, each of the Noteholder Meeting and Shareholder Meeting are referred to as the "Meeting").

REGISTERED NOTEHOLDERS AND THEIR DULY APPOINTED PROXYHOLDERS AND REGISTERED SHAREHOLDERS AND THEIR DULY APPOINTED PROXYHOLDERS SHALL CONNECT TO THE AUDIOCAST NOTEHOLDER MEETING AND SHAREHOLDER MEETING, RESPECTIVELY, BY DIALING EITHER ONE OF THE TELEPHONE NUMBERS BELOW WHERE THEY CAN PARTICIPATE AND VOTE BY LIVE AUDIOCAST:

PARTICIPANT / GUEST (TOLL-FREE):877-407-2991 INCOMM EVENT 14

PARTICIPANT / GUEST (TOLL): 201-389-0925 INCOMM EVENT 14

The same telephone numbers will be used for both of the Meetings.

At the Meetings, you will be asked to consider and vote upon a resolution (the "Arrangement Resolution") approving an arrangement (the "Arrangement") under the Business Corporations Act (Alberta), pursuant to which all of the Notes will be exchanged for new secured third-lien notes of the Company (the "New Notes") due January 23, 2025, such New Notes to be issued under a new trust indenture (the "New Indenture").

The Arrangement will, among other things, reduce annual cash interest payments by approximately $2.9 million if the PIK Interest (as defined below) is utilized by the Company for each semi-annual interest payment and improve the Company's overall capital structure and liquidity, as set out in greater detail in the accompanying management information circular (the "Circular").

In connection with the Company's strategic priority to improve its balance sheet and liquidity, the Company has, for a significant period of time, been reviewing and evaluating potential options, alternatives and transactions to improve its capital structure, reduce its debt and interest payment levels, extend the maturity of various debt instruments (including the Notes and second lien term loan), improve its liquidity and strengthen its financial position in order to achieve its business objectives and maximize value for all stakeholders.

Presently, the Company's $20 million reserve-based credit facility is due March 1, 2021, the Company's $45 million second-lien term loan is due March 14, 2021 and the Notes are due January 23, 2022. As a result of these pending debt maturities and significant reduction in the Company's cash flow in 2020, due to a combination of the ongoing COVID-19 pandemic and the global oil price war triggered in early March 2020 (which has subjected the global energy industry (including the Company) to an unprecedented level of uncertainty), the Company does not presently have the available liquidity to continue to make interest payments or repay the amount owing on its debt. Accordingly, in an effort to ensure the Company has adequate liquidity to support continued operations for the foreseeable future, the Company has been engaged in extensive discussions with parties across its capital structure in connection with advancing potential debt term extension and liquidity enhancing alternatives.

As described further in the Circular, the Company, supervised and directed by a special independent committee of the Company's board of directors (the "Special Committee"), and with the assistance of its legal and financial advisors, engaged in extended and detailed discussions and due diligence efforts with the holders of Notes and holders of "senior indebtedness", being its current first and second-lien lenders (the "Higher-RankingLenders"), with the aim of achieving a transaction that would, among other things, reduce the Company's cash interest payments, address certain upcoming debt maturities (including the Notes) and strengthen the Company's overall financial position. The Higher- Ranking Lenders have each provided the Company with their consent to the Arrangement.

Following the Company's strategic review efforts and detailed consultation and negotiations undertaken with key creditors, debt holders and other stakeholders in connection with a potential transaction, upon the recommendation of the Special Committee, the "independent" members of the Board of Directors (the "Board") determined that the proposed plan of arrangement outlined in the Circular involving the Company and the Noteholders and the Shareholders is the best available transaction for the Company in the circumstances and is in the best interest of the Company and its stakeholders in order to strengthen the Company's financial position and maximize value for all stakeholders (including the Noteholders).

Noteholders and Shareholders and their respective duly appointed proxyholders will not be able to attend the applicable Meeting in person, but will have an opportunity to attend, participate and vote at the applicable Meeting via telephone. If you cannot attend the applicable Meeting, please complete the enclosed form of proxy and submit it as soon as possible.

Pursuant to the Arrangement, Noteholders will receive $1,000 in principal amount of New Notes for each $1,000 principal amount of outstanding Notes held by such Noteholder. The accrued and unpaid interest outstanding on the Notes for the period prior to and subsequent to the exchange of their Notes for New Notes pursuant to the Arrangement will be paid under, and in accordance with the terms of, the New Indenture. Following the completion of the Arrangement, holders of the New Notes will receive accrued and unpaid interest on their New Notes in accordance with the terms of the New Indenture. In particular, holders of New Notes will receive $43.75 per $1,000 principal amount of New Notes in PIK Interest, representing all accrued and unpaid interest outstanding from July 23, 2020 up to, but excluding, January 23, 2021, being the first interest payment of the New Notes, which, for greater certainty, such amount will include all accrued and unpaid interest on the Notes.

The terms of the New Notes are set forth in the accompanying management information circular (the "Circular"). The current Notes are unsecured. Under the terms of the New Indenture, the New Notes will be secured third-lien notes, subordinate to the Company's Senior Indebtedness (as such term is defined in the Circular). Additionally, the New Notes will provide that interest on the New Notes may be payable in cash or, alternatively, payable in additional New Notes (the "PIK Interest") or any combination thereof at the Company's election upon ten business days prior written notice to the Trustee of the New Notes on January 23 and July 23 of each year (each an "Interest Payment Date") that the New Notes are outstanding, commencing on January 23, 2021 and thereafter up to, but excluding, January 23, 2025 to holders of record on the fifth business day immediately preceding the applicable "Interest Payment Date". The PIK Interest will be paid by the Company by issuing additional New Notes having the effect of increasing the principal amount of the outstanding New Notes, effective as of the applicable Interest Payment Date, by an amount equal to the amount of PIK Interest for the applicable interest period (rounded up to the nearest whole dollar), and the Trustee shall make a notation in the Register to record the payment of PIK Interest and corresponding increase in the principal amount of the outstanding New Notes. Following an increase in the principal amount of the outstanding New Notes as a result of the payment of PIK Interest, the New Notes will bear interest at 8.75% per annum on such increased principal amount from and after the Interest Payment Date in respect of which such PIK Interest was paid.

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Among other things, the exchange of the Notes, the ability of the Company to make PIK Interest Payments (which it intends to do for the January 23 and July 23, 2021 interest payments) and the extension of the maturity date is expected to enhance the Company's current liquidity.

In addition to strengthening the Company's overall financial position and maximizing value for all stakeholders, the primary purpose of the Arrangement is to provide the Noteholders with greater certainty that the Company will be able to repay the New Notes when due and continue to make regular semi-annual interest payments on the New Notes. Moreover, if the Company is involved in any bankruptcy, dissolution, liquidation or reorganization, the Noteholders would, to the extent of the value of the assets securing the secured debt, be paid before the holders of unsecured debt. In that event, a holder of New Notes has a greater ability to recover any principal or interest due to it under the New Notes.

A number of benefits to the Shareholders are anticipated to result from the Arrangement. In particular: the Shares are not being arranged pursuant to the Arrangement and the Shareholders will continue to hold the same number of Shares and ownership of the Company after the Arrangement is completed as no Share dilution will result from the Arrangement; the ability to pay interest on the New Notes in kind improves the Company's liquidity and immediate financial position and its ability to invest in its asset base to maintain production and adjusted funds flow; the extension of the maturity date of the New Notes improves Perpetual's immediate financial position and is necessary to facilitate a longer term extension of the First-Lien Credit Facility and the Second-Lien Credit Facility or other capital structure and liquidity improvement initiatives; given the equity nature of the Shares the security proposed to be granted under the New Notes does not negatively affect the Shareholders.

Please refer to "Comparison of Certain Terms of Outstanding Notes and New Notes" in the Circular for further information respecting these and other differences between the New Notes and the existing Notes.

For the Arrangement to proceed, the Arrangement Resolution must be approved by: (i) Noteholders representing at least 66⅔% of the outstanding principal amount of Notes represented and voting, in person or by proxy, at the Noteholder Meeting; and (ii) Shareholders representing at least 66⅔% of the votes cast by the Shareholders present in person or represented by proxy at the Shareholder Meeting.

The directors and executive officers of the Company as a group collectively beneficially own, control or direct, directly or indirectly, approximately 73% of the outstanding Notes and approximately 49% of the outstanding Shares. In addition, each of Ms. Riddell Rose and Mr. Maitland have declared their ownership position in the Notes and given such ownership positions have elected to recuse themselves from the Board's deliberations pertaining to the approval of the Arrangement and related matters. See "Interests of Certain Persons in the Arrangement" in the Circular.

The Board has concluded that the terms of the Arrangement are fair and reasonable to, and in the best interests of, the Company and the Noteholders, as more particularly set out in the enclosed Circular. The Board has therefore approved the Arrangement and authorized the submission of the Arrangement to the Noteholders and the Court for approval. The Board recommends that Noteholders and Shareholders each vote in favour of the Arrangement Resolution.

The Company is in financial difficulty and the Arrangement is designed to improve its financial position by addressing upcoming multiple maturity dates in respect of the Notes, the First-Lien Credit Facility and the Second- Lien Credit Facility and the Board, acting in good faith, has determined that the terms of the Arrangement are reasonable in the circumstances of the Company. If the Arrangement is not approved at the Meetings or not otherwise completed, the Company will not be able to extend the First-Lien Credit Facility and the Second-Lien Credit Facility.

We are enclosing a Notice of Special Meetings, the Circular for the Meetings, a form of proxy for each of the Noteholders and Shareholders and a letter of transmittal for the registered Noteholder. The Circular and the appendices attached to it, which we urge you to read carefully in consultation with your tax, financial, legal or other professional advisors, describe the Arrangement and include certain other information to assist you in considering the Arrangement.

Your vote is important regardless of how many Notes and/or Shares you own. The Board recommends that Noteholders and Shareholders each vote in favour of the Arrangement Resolution approving the Arrangement.

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