DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries, including SJG, are involved in buying, selling, transporting and storing natural gas and buying and selling retail electricity for their own accounts as well as managing these activities for third parties. These subsidiaries are subject to market risk on expected future purchases and sales due to commodity price fluctuations. SJI and SJG use a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, swap agreements, options contracts and futures contracts.

As of September 30, 2017, SJI had outstanding derivative contracts as follows (1 MMdts = one million decatherms; 1 MMmWh = one million megawatt hours):



	SJI Consolidated	SJG
Derivative contracts intended to limit exposure to market risk to:
Expected future purchases of natural gas (in MMdts)	51.7	9.3
Expected future sales of natural gas (in MMdts)	44.9	0.3
Expected future purchases of electricity (in MMmWh)	2.6	—
Expected future sales of electricity (in MMmWh)	1.9	—

Basis and Index related net purchase (sales) contracts (in MMdts)	73.8	0.8

These contracts, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Energy Related Assets or Derivatives - Energy Related Liabilities on the condensed consolidated balance sheets of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the condensed consolidated statements of income for SJI. These (losses) gains were $(4.6) million and $9.0 million for the three months ended September 30, 2017 and 2016, respectively, and $2.2 million and $6.3 million for the nine months ended September 30, 2017 and 2016, respectively. For SJG's contracts, the costs or benefits are recoverable through the BGSS clause, subject to BPU approval. As a result, the net unrealized pre-tax gains and losses for these energy-related commodity contracts are included with realized gains and losses in Regulatory Assets or Regulatory Liabilities on the condensed consolidated balance sheets of both SJI and SJG. As of September 30, 2017 and December 31, 2016, SJG had $3.1 million and $4.4 million of unrealized gains, respectively, along with a net realized gain of $1.0 million and a net realized loss of $2.8 million, respectively, included in its BGSS related to energy-related commodity contracts.

SJI, including SJG, has also entered into interest rate derivatives to hedge exposure to increasing interest rates and the impact of those rates on cash flows of variable-rate debt. These interest rate derivatives, some of which had been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives - Other on the condensed consolidated balance sheets. Hedge accounting has been discontinued prospectively for these derivatives. As a result, any unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss (AOCL) on the condensed consolidated balance sheets, are being recorded in earnings over the remaining life of the derivative.

In March 2017, SJI entered into a new interest rate derivative and amended the existing interest rate derivative linked to unrealized losses previously recorded in AOCL. SJI reclassified $2.4 million of pre-tax unrealized loss in AOCL to Interest Charges on the condensed consolidated statements of income as a result of the prior hedged transactions being deemed probable of not occurring.

For SJG interest rate derivatives, the fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates.

SJG previously used derivative transactions known as “Treasury Locks” to hedge against the impact on its cash flows of possible interest rate increases on debt issued in September 2005. The initial $1.4 million cost of the Treasury Locks has been included in AOCL and is being amortized over the 30-year life of the associated debt issue. As of September 30, 2017 and December 31, 2016, the unamortized balance was approximately $0.8 million and $0.9 million, respectively.

As of September 30, 2017, SJI’s active interest rate swaps were as follows:



Notional Amount		Fixed Interest Rate	Start Date	Maturity	Obligor
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	10,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	12,500,000	3.530%	12/1/2006	2/1/2036	SJG
$	12,500,000	3.430%	12/1/2006	2/1/2036	SJG

The unrealized gains and losses on interest rate derivatives that are not designated as cash flow hedges are included in Interest Charges in the condensed consolidated statements of income. However, for selected interest rate derivatives at SJG, management believes that, subject to BPU approval, the market value upon termination can be recovered in rates and, therefore, these unrealized losses have been included in Other Regulatory Assets in the condensed balance sheets.

The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of September 30, 2017 and December 31, 2016, are as follows (in thousands):



SJI (includes SJG and all other consolidated subsidiaries):
Derivatives not designated as hedging instruments under GAAP	September 30, 2017				December 31, 2016
	Assets		Liabilities		Assets		Liabilities
Energy-related commodity contracts:
Derivatives - Energy Related - Current	$	42,068	$	26,910	$	72,391	$	60,082
Derivatives - Energy Related - Non-Current	7,650		4,359		8,502		4,540
Interest rate contracts:
Derivatives - Other - Current	—		798		—		681
Derivatives - Other - Noncurrent	—		10,479		—		9,349
Total derivatives not designated as hedging instruments under GAAP	$	49,718	$	42,546	$	80,893	$	74,652

Total Derivatives	$	49,718	$	42,546	$	80,893	$	74,652



SJG:
Derivatives not designated as hedging instruments under GAAP	September 30, 2017				December 31, 2016
	Assets		Liabilities		Assets		Liabilities
Energy-related commodity contracts:
Derivatives – Energy Related – Current	$	7,608	$	4,467	$	5,434	$	1,372
Derivatives – Energy Related – Non-Current	58		69		373		—
Interest rate contracts:
Derivatives – Other Current	—		398		—		386
Derivatives – Other Noncurrent	—		6,881		—		6,979
Total derivatives not designated as hedging instruments under GAAP	$	7,666	$	11,815	$	5,807	$	8,737

Total Derivatives	$	7,666	$	11,815	$	5,807	$	8,737

SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the condensed consolidated balance sheets.

As of September 30, 2017 and December 31, 2016, information related to these offsetting arrangements were as follows (in thousands):



As of September 30, 2017
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Gross amounts not offset in the balance sheet						Net amount
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Financial Instruments				Cash Collateral Posted		Net amount
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets	$	49,718		$	—	$	49,718		$	(18,251	)	(A)	$	—	$	31,467
Derivatives - Energy Related Liabilities	$	(31,269	)	$	—	$	(31,269	)	$	18,251		(B)	$	—	$	(13,018	)
Derivatives - Other	$	(11,277	)	$	—	$	(11,277	)	$	—			$	—	$	(11,277	)
SJG:
Derivatives - Energy Related Assets	$	7,666		$	—	$	7,666		$	(475	)	(A)	$	—	$	7,191
Derivatives - Energy Related Liabilities	$	(4,536	)	$	—	$	(4,536	)	$	475		(B)	$	—	$	(4,061	)
Derivatives - Other	$	(7,279	)	$	—	$	(7,279	)	$	—			$	—	$	(7,279	)



As of December 31, 2016
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Gross amounts not offset in the balance sheet							Net amount
Description	Gross amounts of recognized assets/liabilities			Gross amount offset in the balance sheet		Net amounts of assets/liabilities in balance sheet			Financial Instruments				Cash Collateral Posted			Net amount
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets	$	80,893		$	—	$	80,893		$	(38,809	)	(A)	$	(3,474	)	$	38,610
Derivatives - Energy Related Liabilities	$	(64,622	)	$	—	$	(64,622	)	$	38,809		(B)	$	—		$	(25,813	)
Derivatives - Other	$	(10,030	)	$	—	$	(10,030	)	$	—			$	—		$	(10,030	)
SJG:
Derivatives - Energy Related Assets	$	5,807		$	—	$	5,807		$	(6	)	(A)	$	(3,587	)	$	2,214
Derivatives - Energy Related Liabilities	$	(1,372	)	$	—	$	(1,372	)	$	6		(B)	$	—		$	(1,366	)
Derivatives - Other	$	(7,365	)	$	—	$	(7,365	)	$	—			$	—		$	(7,365	)

(A) The balances at September 30, 2017 and December 31, 2016 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at September 30, 2017 and December 31, 2016 were related to derivative assets which can be net settled against derivative liabilities.

The effect of derivative instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2017 and 2016 are as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships under GAAP	2017			2016			2017			2016
SJI (includes SJG and all other consolidated subsidiaries):
Interest Rate Contracts:
Losses reclassified from AOCL into income (a)	$	(12	)	$	(82	)	$	(2,511	)	$	(250	)

SJG:
Interest Rate Contracts:
Losses reclassified from AOCL into income (a)	$	(12	)	$	(12	)	(36		)	(36		)

(a) Included in Interest Charges



	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments under GAAP	2017			2016		2017			2016
SJI (includes SJG and all other consolidated subsidiaries):
(Losses) Gains on energy-related commodity contracts (a)	$	(4,632	)	$	9,003	$	2,200		$	6,287
Gains (Losses) on interest rate contracts (b)	52			218		(1,332		)	(438		)

Total	$	(4,580	)	$	9,221	$	868		$	5,849

(a) Included in Operating Revenues - Nonutility

(b) Included in Interest Charges

Certain of SJI’s derivative instruments contain provisions that require immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions in the event of a material adverse change in the credit standing of SJI. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2017, is $3.8 million. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2017, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $2.4 million after offsetting asset positions with the same counterparties under master netting arrangements.