DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 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 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 December 31, 2016, SJG had outstanding NYMEX contracts intended to limit the exposure to market risk on 8.5 MMdts of expected future purchases of natural gas and 0.6 MMdts of expected future sales of natural gas. In addition to these derivative contracts, SJG had basis related purchase and sales contracts totaling 1.3 MMdts. These contracts, which do not qualify for the normal purchase normal 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 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 balance sheets. As of December 31, 2016 and December 31, 2015, SJG had $4.4 million of unrealized gains and $(4.7) million of unrealized losses, respectively, included in its BGSS related to open financial contracts.

The Company has also entered into interest rate derivatives to manage 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 balance sheets. The fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates. 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 balance sheets.

We previously used derivative transactions known as “Treasury Locks” to mitigate 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 December 31, 2016 and 2015, the unamortized balance was approximately $0.9 million.

As of December 31, 2016, SJG’s active interest rate swaps were as follows:

Notional Amount		Fixed Interest Rate		Start Date	Maturity	Type of Debt	Obligor
$	12,500,000	3.53	%	12/1/2006	2/1/2036	Tax-exempt	SJG
$	12,500,000	3.43	%	12/1/2006	2/1/2036	Tax-exempt	SJG

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

Derivatives not designated as hedging instruments under GAAP	2016				2015
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	5,434	$	1,372	$	1,077	$	5,489
Derivatives – Energy Related – Non-Current	373		—		64		351
Interest rate contracts:
Derivatives – Other Current			386				—
Derivatives – Other Noncurrent	—		6,979		—		7,631
Total derivatives not designated as hedging instruments under GAAP	$	5,807	$	8,737	$	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 balance sheets.

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

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
									Financial Instruments				Cash Collateral Posted
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	)

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 December 31, 2016 and 2015 were related to derivative liabilities which can be net settled against derivative assets.

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

The effect of derivative instruments on the statements of income for 2016 , 2015 and 2014 are as follows (in thousands):

	Year ended December 31,
Derivatives in Cash Flow Hedging Relationships	2016			2015			2014
Interest Rate Contracts:
Losses reclassified from accumulated OCI into income (a)	$	(46	)	$	(46	)	$	(46	)

(a) Included in Interest Charges

Net realized (losses) gains associated with SJG’s energy-related financial commodity contracts of $(3.0) million, $(9.1) million and $1.7 million for 2016, 2015 and 2014, 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 on earnings.