LEASES

Leases as Lessor

We lease revenue earning equipment to customers for periods ranging from three to seven years for trucks and tractors and up to ten years for trailers. From time to time, we may also lease facilities to third parties. The majority of our leases are classified as operating leases. However, some of our revenue earning equipment leases are classified as direct financing leases and, to a lesser extent, sales-type leases. The net investment in direct financing and sales-type leases consisted of:



	December 31,
	2014			2013
	(In thousands)
Total minimum lease payments receivable	$	659,551		633,445
Less: Executory costs	(210,241		)	(198,755	)
Minimum lease payments receivable	449,310			434,690
Less: Allowance for uncollectibles	(288		)	(501	)
Net minimum lease payments receivable	449,022			434,189
Unguaranteed residuals	55,992			57,424
Less: Unearned income	(88,003		)	(91,499	)
Net investment in direct financing and sales-type leases	417,011			400,114
Current portion	(85,946		)	(79,787	)
Non-current portion	$	331,065		320,327

Our direct financing lease customers operate in a wide variety of industries, and we have no significant customer concentrations in any one industry. We assess credit risk for all of our customers including those who lease equipment under direct financing leases. Credit risk is assessed using an internally developed model which incorporates credit scores from third party providers and our own custom risk ratings and is updated on a monthly basis. The external credit scores are developed based on the customer’s historical payment patterns and an overall assessment of the likelihood of delinquent payments. Our internal ratings are weighted based on the industry that the customer operates, company size, years in business, and other credit-related indicators (i.e., profitability, cash flow, liquidity, tangible net worth, etc.). Any one of the following factors may result in a customer being classified as high risk: i) the customer has a history of late payments; ii) the customer has open lawsuits, liens or judgments; iii) the customer has been in business less than three years; and iv) the customer operates in an industry with low barriers to entry. For those customers who are designated as high risk, we typically require deposits to be paid in advance in order to mitigate our credit risk. Additionally, our receivables are collateralized by the vehicle’s fair value, which further mitigates our credit risk.

The following table presents the credit risk profile by creditworthiness category of our direct financing lease receivables at December 31, 2014:



	December 31,
	2014		2013
	(In thousands)
Very low risk to low risk	$	198,496	203,556
Moderate	158,790		164,761
Moderately high to high risk	92,024		66,373
	$	449,310	434,690

As of December 31, 2014 and 2013, the amount of direct financing lease receivables which were past due was not significant and there were no impaired receivables. Accordingly, there was no material risk of default with respect to the direct financing lease receivables. The allowance for credit losses was $0.3 million and $1 million as of December 31, 2014 and 2013, respectively.

Leases as Lessee

We lease vehicles, facilities and office equipment under operating lease agreements. Rental payments on certain vehicle lease agreements vary based on the number of miles run during the period. Generally, vehicle lease agreements specify that rental payments be adjusted periodically based on changes in interest rates and provide for early termination at stipulated values. None of our leasing arrangements contain restrictive financial covenants.

We periodically enter into sale and leaseback transactions to lower the total cost of funding our operations and to diversify our funding among different types of funding instruments. These sale-leaseback transactions are often executed with third-party financial institutions not deemed to be VIEs. In general, these sale-leaseback transactions result in a reduction in revenue earning equipment and debt on the balance sheet, as proceeds from the sale of revenue earning equipment are used primarily to repay debt. Sale-leaseback transactions accounted for as operating leases will result in reduced depreciation and interest expense and increased equipment rental expense. During 2014, we completed a sale-leaseback transaction of revenue earning equipment with third parties not deemed to be variable interest entities. The leaseback transaction qualified for off-balance sheet treatment. Proceeds from the sale-leaseback transaction totaled $126 million. We did not enter into any sale-leaseback transactions during 2013. During 2012, we completed a sale-leaseback transaction of revenue earning equipment with a third party and the leaseback was accounted for as an operating lease. Proceeds from the sale-leaseback transaction totaled $130 million.

Certain leases associated with sale-leaseback transactions contain purchase and/or renewal options, as well as limited guarantees for a portion of the lessor’s residual value. Certain residual value guarantees are conditional on termination of the lease prior to its contractual lease term. The amount of residual value guarantees expected to be paid is recognized as rent expense over the expected remaining term of the lease. Facts and circumstances that impact management’s estimates of residual value guarantees include the market for used equipment, the condition of the equipment at the end of the lease and inherent limitations in the estimation process. See Note 18, “Guarantees,” for additional information.

During 2014, 2013 and 2012, rent expense (including rent of facilities and contingent rentals) was $147 million, $152 million, and $146 million, respectively.

Lease Payments

Future minimum payments for leases in effect at December 31, 2014 were as follows:



	As Lessor ⁽¹⁾			As Lessee
	Operating Leases		Direct Financing Leases	Operating Leases
	(In thousands)
2015	$	974,684	108,433	103,624
2016	795,201		94,174	75,094
2017	627,594		75,385	51,096
2018	465,224		59,288	48,589
2019	296,028		41,929	35,874
Thereafter	219,924		70,101	65,646
Total	$	3,378,655	449,310	379,923

____________________

(1)

Amounts do not include contingent rentals, which may be received under certain leases on the basis of miles of used or changes in the Consumer Price Index. Contingent rentals from operating leases included in revenue during 2014, 2013 and 2012 were $318 million, $318 million, and $319 million, respectively. Contingent rentals from direct financing leases included in revenue during 2014, 2013, and 2012 were $11 million in all periods.

The amounts in the previous table related to the lease of revenue earning equipment are based upon the general assumption that revenue earning equipment will remain on lease for the length of time specified by the respective lease agreements. The future minimum payments presented above related to the lease of revenue earning equipment are not a projection of future lease revenue or expense; no effect has been given to renewals, new business, cancellations, contingent rentals or future rate changes.