DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2013

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 June 30, 2013, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 17.8 MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas, 24.2 MMdts of expected future sales of natural gas, 1.3 MMmwh (1 MMmwh = one million megawatt hours) 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 77.4 MMdts.  The value of these contracts are not significant as of June 30, 2013. 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 condensed 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.

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 condensed 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 condensed consolidated balance sheets, will be reclassified into earnings over the remaining life of the derivative. These derivatives are expected to mature in 2026.

There have been no other significant changes to the Company’s active interest rate swaps since December 31, 2012 which are described in Note 16 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2012.

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

Derivatives not designated as hedging instruments under GAAP	June 30, 2013				December 31, 2012
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	33,826	$	37,979	$	24,242	$	23,828
Derivatives – Energy Related – Non-Current	14,642		25,563		12,297		5,403
Interest rate contracts:
Derivatives - Other - Non-Current	—		9,091		—		13,462
Total derivatives not designated as hedging instruments under GAAP	48,468		72,633		36,539		42,693
Total Derivatives	$	48,468	$	72,633	$	36,539	$	42,693

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 consolidated balance sheets. As of June 30, 2013 and December 31, 2012, information related to these offsetting arrangements were as follows (in thousands):

As of June 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	$	48,468		$	—	$	48,468		$	(10,162	)	(A)	$	—	$	38,306
Derivatives - Energy Related Liabilities	$	(63,542	)	$	—	$	(63,542	)	$	10,162		(B)	$	24,078	$	(29,302	)
Derivatives - Other	$	(9,091	)	$	—	$	(9,091	)	$	—			$	—	$	(9,091	)

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	$	36,539		$	—	$	36,539		$	(12,975	)	(A)	$	—	$	23,564
Derivatives - Energy Related Liabilities	$	(29,231	)	$	—	$	(29,231	)	$	12,975		(B)	$	6,347	$	(9,909	)
Derivatives - Other	$	(13,462	)	$	—	$	(13,462	)	$	—			$	—	$	(13,462	)

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

(B) The balances at June 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 consolidated statements of income for the three and six months ended June 30, 2013 and 2012 are as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
Derivatives in Cash Flow Hedging Relationships	2013			2012			2013			2012
Interest Rate Contracts:
Losses recognized in AOCL on effective portion	$	—		$	(888	)	$	—		$	(752	)
Losses reclassified from AOCL into income (a)	$	(112	)	$	(183	)	$	(224	)	$	(370	)
Gains (losses) recognized in income on ineffective portion (a)	—			—			—			—

(a) Included in Interest Charges

	Three Months Ended June 30,					Six Months Ended June 30,
Derivatives Not Designated as Hedging Instruments under GAAP	2013			2012		2013			2012
(Losses) gains on energy related commodity contracts (a)	$	(16,722	)	$	3,308	$	(23,771	)	$	10,279
Gains on interest rate contracts (b)	1,250			84		1,775			220
Total	$	(15,472	)	$	3,392	$	(21,996	)	$	10,499

(a)  Included in Operating Revenues - Non Utility

(b)  Included in Interest Charges

Net realized gains of $1.3 million and losses of$5.7 million for the three months ended June 30, 2013 and 2012, respectively, and losses of $0.2 million and $10.7 million for the six months ended June 30, 2013 and 2012, respectively, associated with SJG’s energy-related financial commodity contracts 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.

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 June 30, 2013, is $29.5 million.   If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2013, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $25.1 million after offsetting asset positions with the same counterparties under master netting arrangements.