DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2011

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 September 30, 2011, the Company had outstanding derivative contracts intended to limit the exposure to market risk on 17.0 MMdts (1 MMdts = one million decatherms) of expected future purchases of natural gas, 16.7 MMdts of expected future sales of natural gas, 1.3 MMmwh (1 MMmwh = one million megawatt hours) of expected future purchases of electricity and 0.1 MMmwh of expected future sales of electricity.  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. There have been no significant changes to the Company’s active interest rate swaps since December 31, 2010 which are described in Note 16 to the Consolidated Financial Statements in Item 8 of SJI’s Annual Report on Form 10-K as of December 31, 2010.

The fair values of all derivative instruments, as reflected in the condensed consolidated balance sheets as of September 30, 2011 and December 31, 2010, are as follows (in thousands):

Derivatives not designated as hedging instruments under GAAP	September 30, 2011				December 31, 2010
	Assets		Liabilities		Assets		Liabilities
Energy related commodity contracts:
Derivatives – Energy Related – Current	$	29,572	$	32,570	$	39,513	$	42,297
Derivatives – Energy Related – Non-Current	7,319		7,318		11,556		8,641
Interest rate contracts:
Derivatives - Other	—		10,513		—		5,539
Total derivatives not designated as hedging instruments under GAAP	36,891		50,401		51,069		56,477
Derivatives designated as hedging instruments under GAAP
Interest rate contracts:
Derivatives - Other	—		3,270		—		1,865
Total derivatives designated as hedging instruments under GAAP	—		3,270		—		1,865
Total Derivatives	$	36,891	$	53,671	$	51,069	$	58,342

The effect of derivative instruments on the condensed consolidated statements of income for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives in Cash Flow Hedging Relationships	2011			2010			2011			2010
Interest Rate Contracts:
Losses recognized in OCI on effective portion	$	(1,765	)	$	(391	)	$	(2,407	)	$	(705	)
Losses reclassified from accumulated OCI into income (a)	$	(385	)	$	(237	)	$	(1,122	)	$	(705	)
Gains or (losses) recognized in income on ineffective portion (a)	—			—			—			—

(a) Included in Interest Charges

	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments under GAAP	2011			2010			2011			2010
Losses on energy related commodity contracts (a)	$	(8,543	)	$	(1,173	)	$	(2,411	)	$	(19,090	)
Losses on interest rate contracts (b)	(309		)	(412		)	(298		)	(1,250		)
Total	$	(8,852	)	$	(1,585	)	$	(2,709	)	$	(20,340	)

(a)  Included in Operating Revenues - Non Utility

(b)  Included in Interest Charges

Net realized losses associated with SJG’s energy-related financial commodity contracts of $2.4 million and $5.5 million for the three months ended September 30, 2011 and 2010, respectively, and $9.5 million and $17.8 million for the nine months ended September 30, 2011 and 2010, 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 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 September 30, 2011, is $11.2 million.   If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2011, the Company would have been required to settle the instruments immediately or post collateral to its counterparties of approximately $8.1 million after offsetting asset positions with the same counterparties under master netting arrangements.