DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 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 December 31, 2015, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 82.1 MMdts of expected future purchases of natural gas, 70.1 MMdts of expected future sales of natural gas, 3.2 MMMWh of expected future purchases of electricity and 3.0 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 179.0 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 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.

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.

The retail gas operations of SJE transact commodities on a physical basis and typically does not directly enter into positions that financially settle. SJRG performs this risk management function for SJE and enters into the types of financial transactions noted above. The retail electric operations of SJE use forward physical and financial contracts to mitigate commodity price risk on fixed price electric contracts.

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.

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. Hedge accounting has been discontinued for these derivatives. As a result, unrealized gains and losses on these derivatives, that were previously recorded in Accumulated Other Comprehensive Loss (AOCL) on the consolidated balance sheets, are being recorded into earnings over the remaining life of the derivative. These derivatives are expected to mature in 2026.

As of December 31, 2015, SJI's active interest rate swaps were as follows:

Notional Amount		Fixed Interest Rate	Start Date	Maturity		Type of Debt	Obligor
$	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	(A)	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

(A) The Company currently does not have any plans to renew this interest rate swap.

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	2015				2014
	Assets		Liabilities		Assets		Liabilities
Energy-related commodity contracts:
Derivatives – Energy Related – Current	83,093		90,708		$	85,368	$	109,744
Derivatives – Energy Related – Non-Current	16,238		21,697		13,905		19,926
Interest rate contracts:
Derivatives - Other	—		10,943		—		10,732
Total derivatives not designated as hedging instruments under GAAP	99,331		123,348		99,273		140,402
Total Derivatives	$	99,331	$	123,348	$	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 consolidated balance sheets. As of December 31, 2015 and2014, information related to these offsetting arrangements were as follows (in thousands):

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	99,331		—	$	99,331		(35,491	)	(A)	—	$	63,840
Derivatives - Energy Related Liabilities	(112,405	)	—	$	(112,405	)	35,491		(B)	23,045	$	(53,869	)
Derivatives - Other	(10,943	)	—	$	(10,943	)	—			—	$	(10,943	)

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 December 31, 2015 and 2014 were related to derivative liabilities which can be net settled against derivative assets.

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

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

Derivatives in Cash Flow Hedging Relationships	2015			2014			2013
Interest Rate Contracts:
Losses recognized in AOCL on effective portion	$	—		$	—		$	—
Losses reclassified from AOCL into income (a)	$	(551	)	$	(419	)	$	(448	)
Losses recognized in income on ineffective portion (a)	—			—			—

(a) Included in Interest Charges

Derivatives Not Designated as Hedging Instruments under GAAP	2015		2014			2013
Gains (losses) on energy-related commodity contracts (a)	$	8,401	$	(6,592	)	$	(25,823	)
Gains (losses) on interest rate contracts (b)	96		(467		)	2,760
Total	$	8,497	$	(7,059	)	$	(23,063	)

(a)  Included in Operating Revenues - Nonutility

(b)  Included in Interest Charges

Net realized (losses) gains associated with SJG’s energy-related financial commodity contracts of $(9.1) million, $1.7 million and $(0.4) million for the years ended 2015, 2014 and 2013, 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 on 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, 2015, is $48.7 million.  If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2015, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $45.0 million after offsetting asset positions with the same counterparties under master netting arrangements.