Note 6—Property and Equipment

In accordance with our capitalization policy, expenditures made to expand the existing operating and/or earnings capacity of our assets, including related interest costs, are capitalized. For the years ended December 31, 2013, 2012 and 2011, capitalized interest was $38 million, $36 million and $25 million, respectively. We also capitalize expenditures for the replacement of partially or fully depreciated assets in order to maintain the operating and/or earnings capacity 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 as of the dates indicated (in millions):

	Estimated Useful	December 31,
	Lives (Years)	2013			2012
Pipelines and related facilities	10 - 70	$	6,113		$	5,305
Storage, terminal and rail facilities	30 - 70	4,704			4,354
Trucking equipment and other	3 - 15	150			136
Construction in progress	—	1,008			910
Office property and equipment	2 - 50	125			111
Land and other	N/A	373			326
		12,473			11,142
Accumulated depreciation		(1,654		)	(1,499		)
Property and equipment, net		$	10,819		$	9,643

Depreciation expense for the years ended December 31, 2013, 2012 and 2011 was approximately $259 million, $222 million and $196 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. See Note 3 for additional information regarding dispositions. See “Impairment of Long-Lived Assets” below for a discussion of our policy for the recognition of asset impairments.

We calculate our depreciation using the straight-line method, based on estimated useful lives and salvage values of our assets. During 2011, 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. For the year ended December 31, 2012, these extensions reduced depreciation expense by $13 million as compared to the year ended December 31, 2011.

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.

For the years ended December 31, 2013 and 2011, we recognized impairments of approximately $20 million and $5 million, respectively, related predominantly to assets taken out of service.

During the year ended December 31, 2012, we recognized losses on impairments of long-lived assets of approximately $168 million, primarily related to our Pier 400 terminal project, which is reflected in “Depreciation and amortization” on our Consolidated Statement of Operations. This project, which we acquired in late 2006 by virtue of our merger with Pacific, was to develop 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.

Also in 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 the 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. A portion of the transaction closed in July 2013 and we closed the balance of the transaction in November 2013.