DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2011

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), 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, 2011, SJG had outstanding derivative contracts intended to limit the exposure to market risk on 10.1 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 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 balance sheets.  As of December 31, 2011 and 2010, SJG had $10.2 million and $5.0 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 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 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 December 31, 2011, the unamortized balance is approximately $1.1 million.

As of December 31, 2011, SJG’s active interest rate swaps were as follows:

Notional Amount		Fixed Interest Rate		Start Date	Maturity	Type of Debt	Obligor
$	12,500,000	3.43	%	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, 2011 and 2010 are as follows (in thousands): 

Derivatives not designated as hedging instruments under GAAP	2011				2010
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	2,263	$	11,385	$	5,864	$	11,406
Derivatives – Energy Related – Non-Current	—		1,122		1,005		430
Interest rate contracts:
Derivatives - Other	—		8,146		—		3,150
Total derivatives not designated as hedging instruments under GAAP	$	2,263	$	20,653	$	6,869	$	14,986

The effect of derivative instruments on the statements of income for 2011, 2010 and 2009 are as follows (in thousands):

	Year ended December 31,
Derivatives in Cash Flow Hedging Relationships	2011			2010			2009
Interest Rate Contracts:
Gains recognized in OCI on effective portion	$	—		$	—		$	—
Losses reclassified from accumulated OCI into income (a)	$	(46	)	$	(46	)	$	(46	)

(a) Included in Interest Charges

Net realized losses associated with SJG’s energy related financial commodity contracts of $12.9 million , $23.5 million and $51.9 million for 2011, 2010 and 2009, 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.