10 AKITA DRILLING LTD.  ANNUAL REPORT While AKITA conducts many of its drilling operations via joint ventures, the drilling rigs used to conduct those  activities are owned jointly by AKITA and its joint venture partners, and not the joint ventures themselves. The increase in depreciation and amortization expense to $26,825,000 during 2013 from $24,342,000  during 2012 was mostly attributable to the higher average cost base for drilling rigs which more than offset the  decline in drilling activity. Drilling rig depreciation accounted for 96% of total depreciation and amortization  expense in 2013 (2012 – 97%). Drilling rigs are generally depreciated using the unit of production method. Depreciation is typically calculated  for each rig’s major components resulting in an average useful life of 3,600 operating days per rig, subject  to annual minimum imputed activity levels. Commencing in the fourth quarter of 2013, in certain instances  where rigs are inactive for extended periods, the Company’s depreciation rate is accelerated. Major rig  renovations are depreciated over the remaining useful life of the related component or to the date of the next  major renovation, whichever is sooner. Major rig inspection and overhaul expenditures are depreciated on a  straight-line basis over three years. $Millions 2013 2012 Change % Change Depreciation and amortization expense 26.8 24.3 2.5 10% Depreciation and Amortization Expense AKITA provided drilling services to 21 different customers in 2013 (2012 - 40 different customers), including  four customers that each provided more than 10% of AKITA’s revenue for the year (2012 – two customers). From time to time, the Company requires customers to make prepayments prior to the provision of services. In addition, from time to time, the Company records cost recoveries related to capital enhancements for  specific customer related projects. At December 31, 2013, deferred revenue related to these activities totalled  $334,000 (December 31, 2012 - $95,000). Revenue resulting from the supply of contracted services is recorded by the percentage of completion method. Work in progress on daywork contracts is measured based upon the passage of time in accordance with  the terms of the contract. All drilling revenue generated in 2013 and 2012 was generated under daywork  contracts. No significant losses were anticipated at either of these year-end dates and accordingly no provision  for material losses has been made. The Company’s adjusted operating margin for 2013 was $80,547,000, up marginally from $80,196,000 in  2012. AKITA’s higher level of pad rig activity, in an otherwise weaker drilling market, was sufficient to ensure  the adjusted operating margin was sustained. Pad rig contracts typically result in higher operating margins  than conventional rig contracts due to higher rig cost, complexity and associated ancillary services. On a “per  operating day” basis, AKITA’s operating margin rose in 2013 to $13,263 from $11,916 in 2012.  Adjusted operating and maintenance costs are tied to activity levels and amounted to $135,827,000 or  $22,366 per operating day during 2013 compared to $161,036,000 or $23,928 per operating day for the  prior year. Reduced activity levels, the reduction in construction costs and the actual mix of rigs including  the number and types of ancillary services provided resulted in lower operating and maintenance costs when  considered on both an annual as well as a “per operating day” basis. MANAGEMENT’S DISCUSSION AND ANALYSIS