FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

9 Months Ended

Sep. 30, 2020

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

FAIR VALUE OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES:

GAAP establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques. The levels of the hierarchy are described below:

•Level 1: Observable inputs, such as quoted prices in active markets for identical assets or liabilities.

•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions.

Assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of financial assets and financial liabilities and their placement within the fair value hierarchy.

For financial assets and financial liabilities measured at fair value on a recurring basis, information about the fair value measurements for each major category is as follows (in thousands):


As of September 30, 2020	Total		Level 1		Level 2		Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets
Available-for-Sale Securities (A)	$	40	$	40	$	—	$	—
Derivatives – Energy Related Assets (B)	46,948		18,953		16,876		11,119
	$	46,988	$	18,993	$	16,876	$	11,119
SJG:
Assets
Derivatives – Energy Related Assets (B)	$	6,485	$	2,181	$	—	$	4,304
	$	6,485	$	2,181	$	—	$	4,304
SJI (includes SJG and all other consolidated subsidiaries):
Liabilities
Derivatives – Energy Related Liabilities (B)	$	29,457	$	8,393	$	16,354	$	4,710
Derivatives – Other (C)	19,715		—		19,715		—
	$	49,172	$	8,393	$	36,069	$	4,710
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)	$	817	$	338	$	479	$	—
Derivatives – Other (C)	10,872		—		10,872		—
	$	11,689	$	338	$	11,351	$	—


As of December 31, 2019	Total		Level 1		Level 2		Level 3
SJI (includes SJG and all other consolidated subsidiaries):
Assets
Available-for-Sale Securities (A)	$	40	$	40	$	—	$	—
Derivatives – Energy Related Assets (B)	60,135		16,931		17,841		25,363
	$	60,175	$	16,971	$	17,841	$	25,363
SJG:
Assets
Derivatives – Energy Related Assets (B)	$	16,909	$	11,860	$	—	$	5,049
	$	16,909	$	11,860	$	—	$	5,049

SJI (includes SJG and all other consolidated subsidiaries):
Liabilities
Derivatives – Energy Related Liabilities (B)	$	50,171	$	34,446	$	7,936	$	7,789
Derivatives – Other (C)	12,660		—		12,660		—
	$	62,831	$	34,446	$	20,596	$	7,789
SJG:
Liabilities
Derivatives – Energy Related Liabilities (B)	$	14,766	$	14,565	$	187	$	14
Derivatives – Other (C)	7,856		—		7,856		—
	$	22,622	$	14,565	$	8,043	$	14

(A) Available-for-Sale Securities include securities that are traded in active markets and securities that are not traded publicly. The securities traded in active markets are valued using the quoted principal market close prices that are provided by the trustees and are categorized in Level 1 in the fair value hierarchy.

(B) Derivatives – Energy Related Assets and Liabilities are traded in both exchange-based and non-exchange-based markets. Exchange-based contracts are valued using unadjusted quoted market sources in active markets and are categorized in Level 1 in the fair value hierarchy - established by FASB ASC Topic 820 - “Fair Value Measurements and Disclosures.” Certain non-exchange-based contracts are valued using indicative price quotations available through brokers or over-the-counter, on-line exchanges and are categorized in Level 2. These price quotations reflect the average of the bid-ask mid-point prices and are obtained from sources that management believes provide the most liquid market. Management reviews and corroborates the price quotations with at least one additional source to ensure the prices are observable market information, which includes consideration of actual transaction volumes, market delivery points, bid-ask spreads and contract duration. Derivative instruments that are used to limit our exposure to changes in interest rates on variable-rate, long-term debt are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment, as a result, these instruments are categorized in Level 2 in the fair value hierarchy. For non-exchange-based derivatives that trade in less liquid markets with limited pricing information, model inputs generally would include both observable and unobservable inputs. In instances where observable data is unavailable, management considers the assumptions that market participants would use in valuing the asset or liability. This includes assumptions about market risks such as liquidity, volatility and contract duration. Such instruments are categorized in Level 3 in the fair value hierarchy as the model inputs generally are not observable. Counterparty credit risk and the credit risk of SJI are incorporated and considered in the valuation of all derivative instruments as appropriate. The effect of counterparty credit risk and the credit risk of SJI on the derivative valuations is not significant.

Significant Unobservable Inputs - Management uses the discounted cash flow model to value Level 3 physical and financial forward contracts, which calculates mark-to-market valuations based on forward market prices, original transaction prices, volumes, risk-free rate of return and credit spreads. Inputs to the valuation model are reviewed and revised as needed, based on historical information, updated market data, market liquidity and relationships, and changes in third party pricing sources. The validity of the mark-to-market valuations and changes in these values from period to period are examined and qualified against historical expectations by the risk management function. If any discrepancies are identified during this process, the mark-to-market valuations or the market pricing information is evaluated further and adjusted, if necessary.

(C) Derivatives – Other are valued using quoted prices on commonly quoted intervals, which are interpolated for periods different than the quoted intervals, as inputs to a market valuation model. Market inputs can generally be verified and model selection does not involve significant management judgment.

The following table provides quantitative information regarding significant unobservable inputs in Level 3 fair value measurements (in thousands, except for ranges):

SJI (includes SJG and all other consolidated subsidiaries):

Type

Fair Value at September 30, 2020

Valuation Technique

Significant Unobservable Input

Range
[Weighted Average]

Assets

Liabilities

Forward Contract - Natural Gas

$10,403

$4,050

Discounted Cash Flow

Forward price (per dt)

$0.72 - $7.09 [$3.18]

(A)

Forward Contract - Electric

$716

$660

Discounted Cash Flow

Fixed electric load profile (on-peak)

40.34% - 100.00% [60.14%]

(B)

Fixed electric load profile (off-peak)

0.00% - 59.66% [39.86%]

(B)

Type

Fair Value at December 31, 2019

Valuation Technique

Significant Unobservable Input

Range
[Weighted Average]

Assets

Liabilities

Forward Contract - Natural Gas

$21,645

$4,333

Discounted Cash Flow

Forward price (per dt)

$1.57 - $7.28 [$2.38]

(A)

Forward Contract - Electric

$3,718

$3,456

Discounted Cash Flow

Fixed electric load profile (on-peak)

0.00% - 100.00% [55.46%]

(B)

Fixed electric load profile (off-peak)

0.00% - 100.00% [44.54%]

(B)

SJG:

Type

Fair Value at September 30, 2020

Valuation Technique

Significant Unobservable Input

Range
[Weighted Average]

Assets

Liabilities

Forward Contract - Natural Gas

4,304

—

Discounted Cash Flow

Forward price (per dt)

$1.05 - $5.47 [$4.03]

(A)

Type

Fair Value at December 31, 2019

Valuation Technique

Significant Unobservable Input

Range
[Weighted Average]

Assets

Liabilities

Forward Contract - Natural Gas

5,049

Discounted Cash Flow

Forward price (per dt)

$1.85 - $3.61 [$3.02]

(A)

(A) Represents the range, along with the weighted average, of forward prices for the sale and purchase of natural gas.

(B) Represents the range, along with the weighted average, of the percentage of contracted usage that is loaded during on-peak hours versus off-peak.

The changes in fair value measurements of Derivatives – Energy Related Assets and Liabilities, using significant unobservable inputs (Level 3), are as follows (in thousands):


	Three Months Ended September 30, 2020		Nine Months Ended September 30, 2020
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period	$	12,251	$	17,574
Other Changes in Fair Value from Continuing and New Contracts, Net	(3,198)		3,819
Settlements	(2,644)		(14,984)

Balance at end of period	$	6,409	$	6,409

SJG:
Balance at beginning of period	$	4,365	$	5,035
Other Changes in Fair Value from Continuing and New Contracts, Net	(61)		4,304
Settlements	—		(5,035)

Balance at end of period	$	4,304	$	4,304


	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
SJI (includes SJG and all other consolidated subsidiaries):
Balance at beginning of period	$	9,959	$	16,061
Other Changes in Fair Value from Continuing and New Contracts, Net	6,046		10,331
Settlements	(4,144)		(14,531)

Balance at end of period	$	11,861	$	11,861

SJG:
Balance at beginning of period	$	1,708	$	4,928
Other Changes in Fair Value from Continuing and New Contracts, Net	6,533		8,241
Settlements	—		(4,928)

Balance at end of period	$	8,241	$	8,241

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details