DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS:

Certain SJI subsidiaries, including SJG, 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. SJI and SJG use 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, 2017, SJI and SJG had outstanding derivative contracts as follows:

	SJI Consolidated	SJG
Derivative contracts intended to limit exposure to market risk to:
Expected future purchases of natural gas (in MMdts)	58.8	9.7
Expected future sales of natural gas (in MMdts)	60.3	0.7
Expected future purchases of electricity (in MMmWh)	2.6	—
Expected future sales of electricity (in MMmWh)	2.1	—
Basis and Index related net purchase (sales) contracts (in MMdts)	47.4	0.3

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 of SJI and SJG. For SJE and SJRG contracts, the net unrealized pre-tax gains (losses) for these energy-related commodity contracts are included with realized gains (losses) in Operating Revenues – Nonutility on the consolidated statements of income for SJI. These pre-tax (losses) gains were $(13.7) million, $26.9 million and $8.4 million for the years ended December 31, 2017, 2016 and 2015, respectively. For SJG's contracts, the costs or benefits are recoverable through the 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 consolidated balance sheets of both SJI and SJG. As of December 31, 2017 and 2016, SJG had $2.1 million of unrealized losses and $4.4 million of unrealized gains, respectively, included in its BGSS related to energy-related commodity contracts.

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.

SJI, including SJG, 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 had 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 prospectively for these derivatives. As a result, any unrealized gains and losses on these derivatives, that were previously included in Accumulated Other Comprehensive Loss (AOCL) on the consolidated balance sheets, are being recorded in earnings over the remaining life of the derivative.

In March 2017, SJI entered into a new interest rate derivative and amended the existing interest rate derivative linked to unrealized losses previously recorded in AOCL. SJI reclassified $2.4 million of pre-tax unrealized loss in AOCL to Interest Charges on the consolidated statements of income as a result of the prior hedged transactions being deemed probable of not occurring.

For SJG interest rate derivatives, the fair value represents the amount SJG would have to pay the counterparty to terminate these contracts as of those dates.

SJG previously used derivative transactions known as “Treasury Locks” to hedge against the impact on its 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 AOCL and is being amortized over the 30-year life of the associated debt issue. As of December 31, 2017 and December 31, 2016, the unamortized balance was approximately $0.8 million and $0.9 million, respectively.

As of December 31, 2017, SJI's active interest rate swaps were as follows:

Notional Amount		Fixed Interest Rate	Start Date	Maturity	Obligor
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	20,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	10,000,000	3.049%	3/15/2017	3/15/2027	SJI
$	12,500,000	3.530%	12/1/2006	2/1/2036	SJG
$	12,500,000	3.430%	12/1/2006	2/1/2036	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):

SJI (includes SJG and all other consolidated subsidiaries):
Derivatives not designated as hedging instruments under GAAP	December 31, 2017				December 31, 2016
	Assets		Liabilities		Assets		Liabilities
Energy-related commodity contracts:
Derivatives - Energy Related - Current	$	42,139	$	46,938	$	72,391	$	60,082
Derivatives - Energy Related - Non-Current	5,988		6,025		8,502		4,540
Interest rate contracts:
Derivatives - Other - Current			748		—		681
Derivatives - Other - Noncurrent			9,622		—		9,349
Total derivatives not designated as hedging instruments under GAAP	$	48,127	$	63,333	$	80,893	$	74,652
Total Derivatives	$	48,127	$	63,333	$	80,893	$	74,652

SJG:
Derivatives not designated as hedging instruments under GAAP	2017				2016
	Assets		Liabilities		Assets		Liabilities
Energy-related commodity contracts:
Derivatives – Energy Related – Current	$	7,327	$	9,270	$	5,434	$	1,372
Derivatives – Energy Related – Non-Current	5		170		373		—
Interest rate contracts:
Derivatives - Other - Current	—		389		—		386
Derivatives - Other - Non-Current	—		6,639		—		6,979
Total derivatives not designated as hedging instruments under GAAP	7,332		16,468		5,807		8,737
Total Derivatives	$	7,332	$	16,468	$	5,807	$	8,737

SJI and SJG enter into derivative contracts with counterparties, some of which are subject to master netting arrangements, which allow net settlements under certain conditions. These derivatives are presented at gross fair values on the consolidated balance sheets.

As of December 31, 2017 and2016, information related to these offsetting arrangements were as follows (in thousands):

As of December 31, 2017
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
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets	$	48,127		$	—	$	48,127		$	(24,849	)	(A)	$	—	$	23,278
Derivatives - Energy Related Liabilities	$	(52,963	)	$	—	$	(52,963	)	$	24,849		(B)	$	8,832	$	(19,282	)
Derivatives - Other	$	(10,370	)	$	—	$	(10,370	)	$	—			$	—	$	(10,370	)
SJG:
Derivatives - Energy Related Assets	$	7,332		$	—	$	7,332		$	(208	)	(A)	$	—	$	7,124
Derivatives - Energy Related Liabilities	$	(9,440	)	$	—	$	(9,440	)	$	208		(B)	$	1,543	$	(7,689	)
Derivatives - Other	$	(7,028	)	$	—	$	(7,028	)	$	—			$	—	$	(7,028	)

As of December 31, 2016
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
SJI (includes SJG and all other consolidated subsidiaries):
Derivatives - Energy Related Assets	$	80,893		$	—	$	80,893		$	(38,809	)	(A)	$	(3,474	)	$	38,610
Derivatives - Energy Related Liabilities	$	(64,622	)	$	—	$	(64,622	)	$	38,809		(B)	$	—		$	(25,813	)
Derivatives - Other	$	(10,030	)	$	—	$	(10,030	)	$	—			$	—		$	(10,030	)
SJG:
Derivatives - Energy Related Assets	$	5,807		$	—	$	5,807		$	(6	)	(A)	$	(3,587	)	$	2,214
Derivatives - Energy Related Liabilities	$	(1,372	)	$	—	$	(1,372	)	$	6		(B)	$	—		$	(1,366	)
Derivatives - Other	$	(7,365	)	$	—	$	(7,365	)	$	—			$	—		$	(7,365	)

(A) The balances at December 31, 2017 and 2016 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at December 31, 2017 and 2016 were related to derivative assets which can be net settled against derivative liabilities.

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

Derivatives in Cash Flow Hedging Relationships under GAAP	2017			2016			2015
SJI (includes SJG and all other consolidated subsidiaries):
Interest Rate Contracts:
Losses reclassified from AOCL into income (a)	$	(2,524	)	$	(333	)	$	(551	)
SJG:
Interest Rate Contracts:
Losses reclassified from AOCL into income (a)	$	(46	)	$	(46	)	(46		)

(a) Included in Interest Charges

Derivatives Not Designated as Hedging Instruments under GAAP	2017			2016		2015
SJI (no balances for SJG; includes all other consolidated subsidiaries):
(Losses) gains on energy-related commodity contracts (a)	$	(13,667	)	$	26,935	$	8,401
(Losses) gains on interest rate contracts (b)	(677		)	647		96
Total	$	(14,344	)	$	27,582	$	8,497

(a)  Included in Operating Revenues - Nonutility

(b)  Included in Interest Charges

Net realized gains (losses) associated with SJG’s energy-related financial commodity contracts of $0.7 million, $(3.0) million and $(9.1) million for the years ended 2017, 2016 and 2015, 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 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, 2017, is $1.5 million.  If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2017, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $0.6 million after offsetting asset positions with the same counterparties under master netting arrangements.