DERIVATIVE INSTRUMENTS

3 Months Ended

Mar. 31, 2015

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 March 31, 2015, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 55.9 MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas, 45.7 MMdts of expected future sales of natural gas, 2.7 MMmwh (1 MMmwh = one million megawatt hours) of expected future purchases of electricity and 2.7 MMmwh of expected future sales of electricity. In addition to these derivative contracts, the Company has basis and index related purchase and sales contracts totaling 315.3 MMdts.  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 (AOCL) 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.

There have been no significant changes to the Company’s active interest rate swaps since December 31, 2014 which are described in Note 16 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K for the year ended December 31, 2014.

The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of March 31, 2015 and December 31, 2014, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP	March 31, 2015				December 31, 2014
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	52,441	$	81,779	$	85,368	$	109,744
Derivatives – Energy Related – Non-Current	15,402		24,522		13,905		19,926
Interest rate contracts:
Derivatives - Other	—		12,036		—		10,732
Total derivatives not designated as hedging instruments under GAAP	67,843		118,337		99,273		140,402
Total Derivatives	$	67,843	$	118,337	$	99,273	$	140,402

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 March 31, 2015 and December 31, 2014, information related to these offsetting arrangements were as follows (in thousands):

As of March 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	$	67,843		$	—	$	67,843		$	(24,796	)	(A)	$	—	$	43,047
Derivatives - Energy Related Liabilities	$	(106,301	)	$	—	$	(106,301	)	$	24,796		(B)	$	42,770	$	(38,735	)
Derivatives - Other	$	(12,036	)	$	—	$	(12,036	)	$	—			$	—	$	(12,036	)

As of December 31, 2014
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	$	99,273		$	—	$	99,273		$	(39,747	)	(A)	$	—	$	59,526
Derivatives - Energy Related Liabilities	$	(129,670	)	$	—	$	(129,670	)	$	39,747		(B)	$	53,897	$	(36,026	)
Derivatives - Other	$	(10,732	)	$	—	$	(10,732	)	$	—			$	—	$	(10,732	)

(A) The balances at March 31, 2015 and December 31, 2014 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at March 31, 2015 and December 31, 2014 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 months ended March 31, 2015 and 2014 are as follows (in thousands):

	Three Months Ended March 31,
Derivatives in Cash Flow Hedging Relationships under GAAP	2015			2014
Interest Rate Contracts:
Losses recognized in AOCL on effective portion	$	—		$	—
Losses reclassified from AOCL into income (a)	$	(23	)	$	(112	)
Gains (losses) recognized in income on ineffective portion (a)	$	—		$	—

(a) Included in Interest Charges

	Three Months Ended March 31,
Derivatives Not Designated as Hedging Instruments under GAAP	2015			2014
Losses on energy related commodity contracts (a)	$	(6,707	)	$	(28,601	)
Losses on interest rate contracts (b)	(298		)	(214		)
Total	$	(7,005	)	$	(28,815	)

(a)  Included in Operating Revenues - Non Utility

(b)  Included in Interest Charges

Net realized loss of $2.6 million and net realized gain of $2.4 million associated with SJG's energy-related financial commodity contracts for the three months ended March 31, 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 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 March 31, 2015, is $36.3 million.  If the credit risk-related contingent features underlying these agreements were triggered on March 31, 2015, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $30.2 million after offsetting asset positions with the same counterparties under master netting arrangements.