Note 6—Property and Equipment

In accordance with our capitalization policy, costs associated with acquisitions and improvements that expand our existing capacity, including related interest costs, are capitalized. For the years ended December 31, 2012, 2011 and 2010, capitalized interest was $36 million, $25 million and $16 million, respectively. We also capitalize expenditures for the replacement of partially or fully depreciated assets in order to maintain the service capability, level of production and/or functionality of our existing assets. Repair and maintenance expenditures incurred in order to maintain the day to day operation of our existing assets are expensed as incurred.

Property and equipment, net is stated at cost and consisted of the following (in millions):

	Estimated Useful	December 31,
	Lives (Years)	2012			2011
Pipelines and related facilities	10 - 70	$	5,305		$	4,467
Storage, terminal and rail facilities	30 - 70	4,354			3,385
Trucking equipment and other	3 - 15	136			110
Construction in progress	—	910			693
Office property and equipment	2 - 50	111			99
Land and other	N/A	326			275
		11,142			9,029
Accumulated depreciation		(1,499		)	(1,289		)
Property and equipment, net		$	9,643		$	7,740

Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was approximately $222 million, $196 million and $235 million, respectively.

We calculate our depreciation using the straight-line method, based on estimated useful lives and salvage values of our assets. During 2011 and 2010, we extended the depreciable lives of several of our crude oil and other storage facilities and pipeline systems based on a review to assess the useful lives of our property and equipment and to adjust those lives, if appropriate, to reflect current expectations given actual experience and current technology. These depreciable life extensions have reduced depreciation expense prospectively as various phases of the review were completed. For the years ended December 31, 2012, 2011 and 2010, these extensions reduced depreciation expense by $73 million (incrementally $13 million more than the previous year), $60 million (incrementally $37 million more than the previous year) and $23 million, respectively.

We also classify gains and losses on sales of assets and asset impairments as a component of “Depreciation and amortization” in our Consolidated Statements of Operations. During the years ended 2012, 2011 and 2010, we recognized gains of approximately $6 million, losses of approximately $6 million and a gain of less than $1 million, respectively, on disposition of certain assets. See “Impairment of Long-Lived Assets” below for a discussion of our policy for the recognition of asset impairments.

Impairment of Long-Lived Assets

Long-lived assets with recorded values that are not expected to be recovered through future cash flows are written down to estimated fair value in accordance with FASB guidance with respect to the accounting for the impairment or disposal of long-lived assets. Under this guidance, a long-lived asset is tested for impairment when events or circumstances indicate that its carrying value may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset is recognized.

We periodically evaluate property and equipment and other long-lived assets for impairment when events or circumstances indicate that the carrying value of these assets may not be recoverable. The evaluation is highly dependent on the underlying assumptions of related cash flows. The subjective assumptions used to determine the existence of an impairment in carrying value include:

· whether there is an indication of impairment;

· the grouping of assets;

· the intention of “holding,” “abandoning” or “selling” an asset;

· the forecast of undiscounted expected future cash flow over the asset’s estimated useful life; and

· if an impairment exists, the fair value of the asset or asset group.

During the year ended 2012, we recognized losses on impairments of long-lived assets of approximately $168 million, primarily related to our Pier 400 terminal project and the anticipated sale of certain refined products pipeline systems and related assets. The Pier 400 project, which we acquired in late 2006 by virtue of our merger with Pacific Energy Partners, was to develop a deepwater petroleum import terminal at Pier 400 and Terminal Island in the Port of Los Angeles to handle marine receipts of crude oil and refinery feedstock. During the third quarter of 2012, we decided not to proceed with the development of this project. A number of factors contributed to the uncertainties with respect to financial returns and the determination not to proceed with the project, including project delays, the economic downturn, regulatory and permitting hurdles, a challenging refining environment in California and an industry shift in the outlook for availability of domestic crude oil. We assessed the recoverability of these long-lived assets and, where necessary, performed further analysis based on a projected discounted cash flow methodology. As a result of this impairment review, we wrote off a substantial portion of the carrying amount of these long-lived assets, except for the portion that we anticipate we will recover. These project assets were included in our Facilities segment.

During the fourth quarter of 2012, we recognized a loss on impairment as a result of our decision to sell certain refined products pipeline systems and related assets included in our Transportation segment. At December 31, 2012, these assets were classified as held for sale on our Consolidated Balance Sheet (in “Other current assets”). In accordance with GAAP, we wrote their book value down to their expected sales price. In February 2013, we signed a definitive agreement to sell these systems and related assets, and expect the transaction to close during the second quarter of 2013. During 2011 and 2010, impairments of approximately $5 million and $13 million, respectively, were recognized related predominately to assets that were taken out of service. These assets did not support spending the capital necessary to continue service and, in most instances, we utilized other assets to handle these activities.