Note 6. Property, Plant and Equipment


December 31	2015		2014

(In millions)

Pipeline equipment (net of accumulated DD&A of $1,887 and $1,620)	$	7,462	$	7,491
Offshore drilling equipment (net of accumulated DD&A of $3,335 and $4,159)		6,071		6,459
Other (net of accumulated DD&A of $811 and $730)		1,450		1,083
Construction in process		494		578

Property, plant and equipment, net	$	15,477	$	15,611

DD&A expense and capital expenditures are as follows:


Year Ended December 31	2015				2014				2013

	DD&A		Capital Expend.		DD&A		Capital Expend.		DD&A		Capital Expend.

(In millions)

CNA Financial	$	74	$	123	$	69	$	72	$	72	$	90
Diamond Offshore		494		812		457		2,050		389		987
Boardwalk Pipeline		327		390		292		378		275		305
Loews Hotels		54		389		37		289		32		369
Corporate and other		6		4		6		24		6		4

Total	$	955	$	1,718	$	861	$	2,813	$	774	$	1,755

Capitalized interest related to the construction and upgrade of qualifying assets amounted to approximately $36 million, $80 million and $92 million for the years ended December 31, 2015, 2014 and 2013.

Offshore Drilling Equipment

Purchase of Assets

In 2015, Diamond Offshore took delivery of one ultra-deepwater drillship. The net book value of this newly constructed rig was $655 million at December 31, 2015, of which $225 million was reported in Construction in process at December 31, 2014. At December 31, 2015, Construction in Process included $270 million related to one rig still under construction.

In 2014, Diamond Offshore took delivery of three ultra-deepwater drillships and two deepwater floaters. The aggregate net book value of these newly constructed rigs was $2.7 billion at December 31, 2014, of which $1.3 billion was reported in Construction in process at December 31, 2013. At December 31, 2014, Construction in process included $439 million related to two rigs still under construction.

Sale of Assets

At December 31, 2015, $14 million net book value of five jack-up rigs held for sale was included in Other assets on the Consolidated Balance Sheets. One of these jack-up rigs held for sale was sold in February 2016 for $8 million. In addition, during 2015, nine rigs with an aggregate net book value of $5 million were sold at a nominal gain.

In 2014, Diamond Offshore sold a jack-up rig for $17 million, resulting in a gain of $9 million ($3 million after tax and noncontrolling interests). This gain was recorded in Other revenues on the Consolidated Statements of Income.

Asset Impairments

During 2015, in response to a continued deterioration of the market fundamentals in the oil and gas industry, including the dramatic decline in oil prices, significant cutbacks in customer capital spending plans and contract cancellations by customers, as well as pending regulatory requirements in the U.S. Gulf of Mexico, Diamond Offshore evaluated 25 of its drilling rigs for impairment. Based on this evaluation, Diamond Offshore determined that 17 of these rigs, consisting of two ultra-deepwater, one deepwater and nine mid-water floaters and five jack-up rigs, were impaired.

Diamond Offshore utilizes an undiscounted projected probability-weighted cash flow analysis in testing an asset for potential impairment. A matrix of assumptions is developed for each rig under evaluation using multiple utilization/dayrate scenarios, to each of which Diamond Offshore assigns a probability of occurrence. Diamond Offshore arrives at a projected probability-weighted cash flow for each rig based on the respective matrix and compares such amount to the carrying value of the asset to assess recoverability.

The underlying assumptions and assigned probabilities of occurrence for utilization and dayrate scenarios are developed using a methodology that examines historical data for each rig, which considers the rig’s age, rated water depth and other attributes and then assesses its future marketability in light of the current and projected market environment at the time of assessment. Other assumptions, such as operating, maintenance and inspection costs, are estimated using historical data adjusted for known developments and future events that are anticipated by management at the time of the assessment.

Diamond Offshore estimated the fair value of 16 of the impaired rigs utilizing a market approach, which required it to estimate the value that would be received for each rig in the principal or most advantageous market for that rig in an orderly transaction between market participants. Such estimates were based on various inputs, including historical contracted sales prices for similar rigs in the fleet, nonbinding quotes from rig brokers and/or indicative bids, where applicable. The fair value of the one remaining rig impaired in 2015 is estimated using an income approach, as Diamond Offshore has determined that the most likely use for this rig would be to cold stack the rig and reintroduce it into the market at a later date. The fair value of this rig was determined by discounting its future cash flows and includes assumptions which utilize significant unobservable inputs, including those related to estimated dayrate revenue, rig utilization, estimated equipment upgrade and regulatory survey costs, as well as estimated proceeds that may be received on ultimate disposition of the rig. The fair value estimates are representative of Level 3 fair value measurements due to the significant level of estimation involved and the lack of transparency as to the inputs used.

Diamond Offshore recognized aggregate impairment losses of $861 million ($341 million after tax and noncontrolling interests) for the year ended December 31, 2015. Of the rigs impaired in 2015, five mid-water rigs were sold during 2015 and five jack-up rigs are included in Other assets on the Consolidated Balance Sheets at December 31, 2015. Six rigs impaired in 2015 were cold stacked at the end of 2015, and the remaining impaired rig is expected to be sold for scrap after completion of its contract in 2016. The $175 million aggregate carrying value of these impaired rigs is reported in Property, plant and equipment on the Consolidated Balance Sheets at December 31, 2015.

In the third quarter of 2014, Diamond Offshore determined it would retire and scrap six rigs, including a rig upon completion of its contract term in 2015. Diamond Offshore performed an impairment analysis to determine whether the carrying amount of these assets was recoverable. Based on this analysis, an impairment loss was recognized aggregating $109 million ($55 million after tax and noncontrolling interests) for the year ended December 31, 2014. The fair value was determined through discussions and a quote from a rig broker, and for the rig under contract using an internally developed income approach, which are Level 3 inputs of the fair value hierarchy. In the fourth quarter of 2014, two of the rigs were scrapped and at December 31, 2014, the carrying value of the remaining rigs amounted to $9 million. The remaining rigs impaired in 2014 were sold in 2015.

The impairment losses recorded during the years ended December 31, 2015 and 2014 are reported within Other operating expenses on the Consolidated Statements of Income. No impairment loss was recorded during the year ended December 31, 2013.

Diamond Offshore’s assumptions are necessarily subjective and are an inherent part of the asset impairment evaluation. If market fundamentals in the oil and gas industry deteriorate further or if Diamond Offshore is unable to secure new or extend existing contracts for its current, actively-marketed drilling fleet or reactivate any of its cold stacked rigs or if Diamond Offshore experiences unfavorable changes to actual dayrates and rig utilization, additional impairment losses may be required to be recognized in future periods.