DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS:

SJG is involved in buying, selling, transporting and storing natural gas and is subject to market risk on expected future purchases and sales due to commodity price fluctuations. The Company, through its affiliate South Jersey Resources Group (SJRG) and another counterparty, uses a variety of derivative instruments to limit this exposure to market risk in accordance with strict corporate guidelines. These derivative instruments include forward contracts, futures contracts, swap agreements and options contracts. As of September 30, 2013, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 6.5 MMdts of expected future purchases of natural gas. These contracts, which do not qualify for the normal purchase and sale exemption and 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 balance sheets. The costs or benefits of these short-term contracts are recoverable through SJG’s Basic Gas Supply Service (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 balance sheets. As of September 30, 2013 and December 31, 2012, SJG had $1.5 million and $1.9 million of unrealized losses, respectively, included in its BGSS related to open financial contracts.

The Company 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, which have not been designated as hedging instruments under GAAP, are measured at fair value and recorded in Derivatives-Other on the condensed balance sheets. The fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2012 which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K as of December 31, 2012. Subject to BPU approval, the market value upon termination of these interest rate derivatives can be recovered in rates and, therefore, these unrealized losses have been included in Regulatory Assets on the condensed balance sheets.

We previously used derivative transactions known as “Treasury Locks” to hedge against the impact on our 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 Accumulated Other Comprehensive Loss and is being amortized over the 30 year life of the associated debt issue.  As of September 30, 2013 and December 31, 2012, the unamortized balance was approximately $1.0 million and $1.1 million, respectively.

The fair values of all derivative instruments, as reflected in the condensed balance sheets as of September 30, 2013 and December 31, 2012, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP	September 30, 2013				December 31, 2012
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	239	$	1,606	$	464	$	2,615
Derivatives – Energy Related – Non-Current	67		179		302		80
Interest rate contracts:
Derivatives – Other	—		4,569		—		7,761
Total derivatives not designated as hedging instruments under GAAP	306		6,354		766		10,456
Total Derivatives	$	306	$	6,354	$	766	$	10,456

For derivative instruments disclosed in the table above, information as to the presentation on the condensed balance sheets is as follows (in thousands):

As of September 30, 2013
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
									Financial Instruments				Cash Collateral Posted
Derivatives - Energy Related Assets	$	306		$	—	$	306		$	(306	)	(A)	$	—	$	—
Derivatives - Energy Related Liabilities	(1,785		)	—		(1,785		)	306			(B)	1,160		(319		)
Derivatives - Other	(4,569		)	—		(4,569		)	—				—		(4,569		)

As of December 31, 2012
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
									Financial Instruments				Cash Collateral Posted
Derivatives - Energy Related Assets	$	766		$	—	$	766		$	(447	)	(A)	$	—	$	319
Derivatives - Energy Related Liabilities	(2,695		)	—		(2,695		)	447			(B)	1,136		(1,112		)
Derivatives - Other	(7,761		)	—		(7,761		)	—				—		(7,761		)

(A) The balances at September 30, 2013 and December 31, 2012 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at September 30, 2013 and December 31, 2012 were related to derivative assets which can be net settled against derivative liabilities.

The effect of derivative instruments on the condensed statements of income for the three and nine months ended September 30, 2013 and 2012 are as follows (in thousands):

	Three months ended September 30,						Nine months ended September 30,
Derivatives in Cash Flow Hedging Relationships	2013			2012			2013			2012
Interest Rate Contracts:
Losses reclassified from accumulated OCL into income (a)	$	(12	)	$	(12	)	$	(36	)	$	(36	)

(a) Included in Interest Charges

Net realized losses of $0.4 million and $3.0 million associated with SJG's energy related financial commodity contracts for the three months ended September 30, 2013 and 2012 and losses of $0.6 million and $13.7 million for the nine months ended September 30, 2013 and 2012, respectively, are not included in the above table.  These contracts are part of SJG’s regulated risk management activities that serve to mitigate BGSS costs passed on to its customers. As these transactions are entered into pursuant to, and recoverable through, regulatory riders, any changes in the value of SJG’s energy related financial commodity contracts are deferred in Regulatory Assets or Liabilities and there is no impact to earnings.