DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2016

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 a 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 June 30, 2016, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 10.4 million decatherms (MMdts) of expected future purchases of natural gas and 1.1 MMdts of expected future sales of natural gas. In addition to these derivative contracts, SJG had basis and index related purchase contracts of 2.4 MMdts and sales contracts of 7.4 MMdts for net contracted volumes of 5.0 MMdts. 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 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 June 30, 2016 and December 31, 2015, SJG had $0.6 million and $4.7 million of unrealized gains, 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, 2015, which are described in Note 1 to the Financial Statements in Item 8 of SJG’s Annual Report on Form 10-K for the year ended December 31, 2015. 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 both June 30, 2016 and December 31, 2015, the unamortized balance was approximately $0.9 million.

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The fair values of all derivative instruments, as reflected in the condensed balance sheets as of June 30, 2016 and December 31, 2015, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP	June 30, 2016				December 31, 2015
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	3,573	$	4,694	$	1,077	$	5,489
Derivatives – Energy Related – Non-Current	554		3		64		351
Interest rate contracts:
Derivatives – Other Current	—		529		—		—
Derivatives – Other Noncurrent	—		9,834				7,631
Total derivatives not designated as hedging instruments under GAAP	4,127		15,060		1,141		13,471
Total Derivatives	$	4,127	$	15,060	$	1,141	$	13,471

The Company enters into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. The Company presents derivatives at gross fair values on the condensed balance sheets.

As of June 30, 2016, and December 31, 2015, information related to these offsetting arrangements were as follows (in thousands):

As of June 30, 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
									Financial Instruments				Cash Collateral Posted
Derivatives - Energy Related Assets	$	4,127		$	—	$	4,127		$	(933	)	(A)	$	(1,801	)	$	1,393
Derivatives - Energy Related Liabilities	(4,697		)	—		(4,697		)	933			(B)	—			(3,764		)
Derivatives - Other	(10,363		)	—		(10,363		)	—				—			(10,363		)

As of December 31, 2015:
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	$	1,141		$	—	$	1,141		$	(399	)	(A)	$	—	$	742
Derivatives - Energy Related Liabilities	(5,840		)	—		(5,840		)	399			(B)	5,025		(416		)
Derivatives - Other	(7,631		)	—		(7,631		)	—				—		(7,631		)

(A) The balances at June 30, 2016 and December 31, 2015 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at June 30, 2016 and December 31, 2015 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 six months ended June 30, 2016 and 2015 are as follows (in thousands):

	Three months ended June 30,						Six months ended June 30,
Derivatives in Cash Flow Hedging Relationships	2016			2015			2016			2015
Interest Rate Contracts:
Losses reclassified from Accumulated Other Comprehensive Loss into income (a)	$	(12	)	$	(12	)	$	(24	)	$	(24	)

(a) Included in Interest Charges

Net realized loss of $1.6 million and $2.1 million associated with SJG's energy-related financial commodity contracts for the three months ended June 30, 2016 and 2015, and loss of $4.4 million and $4.8 million for the six months ended June 30, 2016 and 2015, 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, as applicable, and there is no impact to earnings.