XML 32 R17.htm IDEA: XBRL DOCUMENT v3.10.0.1
DERIVATIVE INSTRUMENTS
 9 Months Ended
Sep. 30, 2018
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 September 30, 2018, SJI and SJG had outstanding derivative contracts as follows (1 MMdts = one million decatherms; 1 MMmWh = one million megawatt hours): 
 
SJI Consolidated
SJG
Derivative contracts intended to limit exposure to market risk to:
 
 
    Expected future purchases of natural gas (in MMdts)
74.5

8.9

    Expected future sales of natural gas (in MMdts)
53.8

0.3

    Expected future purchases of electricity (in MMmWh)
1.9

—

    Expected future sales of electricity (in MMmWh)
1.5

—

 
 
 
Basis and Index related net purchase (sale) contracts (in MMdts)
87.6

1.1



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 unaudited condensed 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 unaudited condensed consolidated statements of income for SJI. These pre-tax gains (losses) were $(11.2) million and $(4.6) million for the three months ended September 30, 2018 and 2017, respectively, and $6.0 million and $2.2 million for the nine months ended September 30, 2018 and 2017, respectively. For ETG's and 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 unaudited condensed consolidated balance sheets of SJI (ETG and SJG) and SJG. As of September 30, 2018 and December 31, 2017, SJI had $4.7 million and $(2.1) million, respectively, and SJG had $5.1 million and $(2.1) million, respectively, of unrealized gains (losses) included in its BGSS related to energy-related commodity contracts.

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 unaudited condensed 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 unaudited condensed 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 unaudited condensed consolidated statements of income as a result of the prior hedged transactions being deemed probable of not occurring.

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

As of September 30, 2018, 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 in the condensed consolidated statements of income. 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 condensed consolidated balance sheets.

The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, are as follows (in thousands):

SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under GAAP
 
September 30, 2018
 
December 31, 2017
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy-related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives - Energy Related - Current
 
$
27,414

 
$
23,469

 
$
42,139

 
$
46,938

Derivatives - Energy Related - Non-Current
 
8,014

 
3,997

 
5,988

 
6,025

Interest rate contracts:
 
 
 
 
 
 

 
 

Derivatives - Other - Current
 
—

 
339

 
—

 
748

Derivatives - Other - Noncurrent
 
—

 
5,125

 
—

 
9,622

Total derivatives not designated as hedging instruments under GAAP
 
$
35,428

 
$
32,930

 
$
48,127

 
$
63,333

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
35,428

 
$
32,930

 
$
48,127

 
$
63,333



SJG:
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments under GAAP
 
September 30, 2018
 
December 31, 2017
 
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Energy-related commodity contracts:
 
 
 
 
 
 
 
 
Derivatives – Energy Related – Current
 
$
7,951

 
$
2,804

 
$
7,327

 
$
9,270

Derivatives – Energy Related – Non-Current
 
2

 
68

 
5

 
170

Interest rate contracts:
 
 
 
 
 
 
 
 
Derivatives – Other Current
 
—

 
291

 
—

 
389

Derivatives – Other Noncurrent
 
—

 
4,751

 
—

 
6,639

Total derivatives not designated as hedging instruments under GAAP
 
$
7,953

 
$
7,914

 
$
7,332

 
$
16,468

 
 
 
 
 
 
 
 
 
Total Derivatives
 
$
7,953

 
$
7,914

 
$
7,332

 
$
16,468



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 condensed consolidated balance sheets.
As of September 30, 2018 and December 31, 2017, information related to these offsetting arrangements were as follows (in thousands):
As of September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
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
 
$
35,428

 
$
—

 
$
35,428

 
$
(9,872
)
(A)
$
—

 
$
25,556

Derivatives - Energy Related Liabilities
 
$
(27,466
)
 
$
—

 
$
(27,466
)
 
$
9,872

(B)
$
3,070

 
$
(14,524
)
Derivatives - Other
 
$
(5,464
)
 
$
—

 
$
(5,464
)
 
$
—

 
$
—

 
$
(5,464
)
SJG:
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives - Energy Related Assets
 
$
7,953

 
$
—

 
$
7,953

 
$
(287
)
(A)
$
—

 
$
7,666

Derivatives - Energy Related Liabilities
 
$
(2,872
)
 
$
—

 
$
(2,872
)
 
$
287

(B)
$
—

 
$
(2,585
)
Derivatives - Other
 
$
(5,042
)
 
$
—

 
$
(5,042
)
 
$
—

 
$
—

 
$
(5,042
)


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
)

(A) The balances at September 30, 2018 and December 31, 2017 were related to derivative liabilities which can be net settled against derivative assets.

(B) The balances at September 30, 2018 and December 31, 2017 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 nine months ended September 30, 2018 and 2017 are as follows (in thousands):

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Derivatives in Cash Flow Hedging Relationships under GAAP
 
2018
 
2017
 
2018
 
2017
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
 
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Losses reclassified from AOCL into income (a)
 
$
(11
)
 
$
(12
)
 
$
(35
)
 
$
(2,511
)
 
 
 
 
 
 
 
 
 
SJG:
 
 
 
 
 
 
 
 
Interest Rate Contracts:
 
 
 
 
 
 
 
 
Losses reclassified from AOCL into income (a)
 
$
(11
)
 
$
(12
)
 
(35
)
 
(36
)

(a) Included in Interest Charges

 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
Derivatives Not Designated as Hedging Instruments under GAAP
 
2018
 
2017
 
2018
 
2017
SJI (includes SJG and all other consolidated subsidiaries):
 
 
 
 
 
 
 
 
(Losses) Gains on energy-related commodity contracts (a)
 
$
(11,225
)
 
$
(4,632
)
 
$
5,950

 
$
2,200

Gains (Losses) on interest rate contracts (b)
 
673

 
52

 
2,921

 
(1,332
)
 
 
 
 
 
 
 
 
 
Total
 
$
(10,552
)
 
$
(4,580
)
 
$
8,871

 
$
868


(a)  Included in Operating Revenues - Nonutility
(b)  Included in Interest Charges

Certain of SJI’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 SJI. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2018, is $0.7 million. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2018, SJI would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $0.5 million after offsetting asset positions with the same counterparties under master netting arrangements.