DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries 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. 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, swap agreements, options contracts and futures contracts. As of December 31, 2012, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 20.6 MMdts of expected future purchases of natural gas, 23.4 MMdts of expected future sales of natural gas, 1.2 MMmwh of expected future purchases of electricity and 1.2 MMmwh of expected future sales of electricity.  In addition to these derivative contracts, the Company had basis and index related purchase and sales contracts totaling 107.2 MMdts.  The value of these contracts are not significant as of December 31, 2012.  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 consolidated balance sheets. The net unrealized pre-tax gains and losses for these energy related commodity contracts are included with realized gains and losses in Operating Revenues – Nonutility.

SJI structured its subsidiaries so that SJG and SJE transact commodities on a physical basis and typically do not directly enter into positions that financially settle. SJRG performs this risk management function for these entities and enters into the types of financial transactions noted above. As part of its gas purchasing strategy, SJG uses financial contracts through SJRG to limit exposure to forward price risk. The costs or benefits of these short-term contracts are recoverable through SJG's BGSS clause, subject to BPU approval.

Management takes an active role in the risk management process and has developed policies and procedures that require specific administrative and business functions to assist in identifying, assessing and controlling various risks. Management reviews any open positions in accordance with strict policies to limit exposure to market risk.

SJI presents revenues and expenses related to its energy trading activities on a net basis in Operating Revenues - Nonutility in the consolidated statements of income consistent with GAAP. This net presentation has no effect on operating income or net income.

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, some of which have been designated as hedging instruments under GAAP are measured at fair value and recorded in Derivatives - Other on the consolidated balance sheets. Beginning in July 2012, hedge accounting was discontinued for these derivatives. As a result, unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss on the consolidated balance sheets, will be reclassified into earnings over the remaining life of the derivative. These derivatives are expected to mature in 2026. As of December 31, 2012, SJI's active interest rate swaps were as follows:

Notional Amount		Fixed Interest Rate	Start Date	Maturity	Type of Debt	Obligor
$	3,900,000	4.795%	12/1/2004	12/1/2014	Taxable	Marina
$	8,000,000	4.775%	11/12/2004	11/12/2014	Taxable	Marina
$	14,500,000	3.905%	3/17/2006	1/15/2026	Tax-exempt	Marina
$	500,000	3.905%	3/17/2006	1/15/2026	Tax-exempt	Marina
$	330,000	3.905%	3/17/2006	1/15/2026	Tax-exempt	Marina
$	7,100,000	4.895%	2/1/2006	2/1/2016	Taxable	Marina
$	12,500,000	3.430%	12/1/2006	2/1/2036	Tax-exempt	SJG
$	12,500,000	3.430%	12/1/2006	2/1/2036	Tax-exempt	SJG

The unrealized gains and losses on interest rate derivatives that are not designated as cash flow hedges are included in Interest Charges. 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 consolidated balance sheets.

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

Derivatives not designated as hedging instruments under GAAP	2012				2011
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	24,242	$	23,828	$	37,461	$	38,738
Derivatives – Energy Related – Non-Current	12,297		5,403		8,135		7,367
Interest rate contracts:
Derivatives - Other	—		13,462		—		10,684
Total derivatives not designated as hedging instruments under GAAP	36,539		42,693		45,596		56,789
Derivatives designated as hedging instruments under GAAP
Interest rate contracts:
Derivatives - Other	—		—		—		3,362
Total derivatives designated as hedging instruments under GAAP	—		—		—		3,362
Total Derivatives	$	36,539	$	42,693	$	45,596	$	60,151

The effect of derivative instruments on the consolidated statements of income and comprehensive income for the year ended December 31 is as follows (in thousands):

Derivatives in Cash Flow Hedging Relationships	2012			2011			2010
Interest Rate Contracts:
Losses recognized in OCI on effective portion	$	(752	)	$	(2,773	)	$	(1,063	)
Losses reclassified from accumulated OCI into income (a)	$	(594	)	$	(1,435	)	$	(1,486	)
Losses recognized in income on ineffective portion (a)	—			—			—

(a) Included in Interest Charges

Derivatives Not Designated as Hedging Instruments under GAAP	2012			2011			2010
(Losses) gains on energy related commodity contracts (a)	$	(193	)	$	5,377		$	(22,624	)
Gains (losses) on interest rate contracts (b)	660			(149		)	(641		)
Total	$	467		$	5,228		$	(23,265	)

(a)  Included in Operating Revenues - Non Utility

(b)  Included in Interest Charges

Net realized losses associated with SJG’s energy related financial commodity contracts of $15.4 million, $12.9 million and $23.5 million for the years ended 2012, 2011 and 2010, respectively, are not included in the above table. As of December 31, 2012 and 2011, SJG had $1.9 million and $10.2 million of unrealized losses on energy related financial commodity contracts, respectively, included in its BGSS which are also 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.

Certain of the Company’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 the Company. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on December 31, 2012, is $7.2 million.   If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2012, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $3.7 million after offsetting asset positions with the same counterparties under master netting arrangements.