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Derivatives and Other Financial Instruments

3 Months Ended

Mar. 31, 2024

Derivatives and Other Financial Instruments

M. Derivatives and Other Financial Instruments

Fair Value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy distinguishes between (i) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (ii) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below:

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Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

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Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

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Level 3 - Inputs that are both significant to the fair value measurement and unobservable.

Derivatives

Alcoa Corporation is exposed to certain risks relating to its ongoing business operations, including the risks of changing commodity prices, foreign currency exchange rates, and interest rates. Alcoa Corporation’s commodity and derivative activities include aluminum, energy, foreign exchange, and interest rate contracts which are held for purposes other than trading. They are used to mitigate uncertainty and volatility, and to cover underlying exposures. While Alcoa does not generally enter into derivative contracts to mitigate the risk associated with changes in aluminum price, the Company may do so in isolated cases to address discrete commercial or operational conditions. Alcoa is not involved in trading activities for energy, weather derivatives, or other nonexchange commodity trading activities.

Alcoa Corporation’s aluminum and foreign exchange contracts are predominantly classified as Level 1 under the fair value hierarchy. All of the Level 1 contracts are designated as either fair value or cash flow hedging instruments (except as described below). Alcoa Corporation also has several derivative instruments classified as Level 3 under the fair value hierarchy, which are either designated as cash flow hedges or undesignated. Alcoa includes the changes in its equity method investee’s Level 2 derivatives in Accumulated other comprehensive loss in the accompanying Consolidated Balance Sheet.

The following tables present the detail for Level 1 and 3 derivatives (see additional Level 3 information in further tables below):


	March 31, 2024				December 31, 2023
	Assets		Liabilities		Assets		Liabilities
Level 1 derivative instruments	$	11	$	10	$	16	$	9
Level 3 derivative instruments		12		1,120		16		1,297
Total	$	23	$	1,130	$	32	$	1,306
Less: Current		22		205		29		214
Noncurrent	$	1	$	925	$	3	$	1,092


	2024						2023
First quarter ended March 31,	Unrealized (loss) gain recognized in Other comprehensive loss			Realized gain (loss) reclassed from Other comprehensive loss to earnings			Unrealized loss recognized in Other comprehensive loss			Realized gain (loss) reclassed from Other comprehensive loss to earnings
Level 1 derivative instruments	$	(3	)	$	4		$	(11	)	$	16
Level 3 derivative instruments		120			(57	)		(174	)		(52	)
Noncontrolling and equity interest (Level 2)		—			—			(2	)		(1	)
Total	$	117		$	(53	)	$	(187	)	$	(37	)

For the first quarters of 2024 and 2023, the realized gains of $4 and $16 on Level 1 cash flow hedges were recognized in Sales, respectively.

The following table presents the outstanding quantities of derivative instruments classified as Level 1:


	Classification	March 31, 2024		March 31, 2023
Aluminum (in kmt)	Commodity buy forwards		101		316
Aluminum (in kmt)	Commodity sell forwards		44		398
Foreign currency (in millions of euro)	Foreign exchange buy forwards		79		55
Foreign currency (in millions of euro)	Foreign exchange sell forwards		17		—
Foreign currency (in millions of Norwegian krone)	Foreign exchange buy forwards		102		256
Foreign currency (in millions of Brazilian real)	Foreign exchange buy forwards		450		1,047
Foreign currency (in millions of Canadian dollar)	Foreign exchange buy forwards		26		—

Alcoa Corporation routinely uses Level 1 aluminum derivative instruments to manage exposures to changes in the fair value of firm commitments for the purchases or sales of aluminum. Additionally, Alcoa used Level 1 aluminum derivative instruments to manage exposures to changes in the LME associated with the Alumar (Brazil) smelter restart (expired December 2023).

Alcoa Corporation uses Level 1 foreign exchange forward contracts to mitigate the risk of foreign exchange exposure related to euro power purchases in Norway (expires December 2026), U.S. dollar aluminum sales in Norway (expires June 2025), U.S. dollar alumina and aluminum sales in Brazil (expires August 2025), and U.S. dollar aluminum sales in Canada (expires March 2025).

Additional Level 3 Disclosures

The following table presents quantitative information related to the significant unobservable inputs described above for Level 3 derivative instruments (megawatt hours in MWh):


	March 31, 2024		Unobservable Input	Unobservable Input Range
Asset Derivatives
Financial contract (undesignated)	$	12	Interrelationship of forward energy price, LME forward price, and the Consumer Price Index	Electricity (per MWh)	2024: $37.38 2024: $44.71
				LME (per mt)	2024: $2,307
					2024: $2,378
Power contract		—	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2024: $2,307 2024: $2,335
				Midwest premium (per pound)	2024: $0.1770 2024: $0.2040
				Electricity	Rate of 2 million MWh per year
Total Asset Derivatives	$	12
Liability Derivatives
Power contract	$	174	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2024: $2,307 2027: $2,705
				Electricity	Rate of 4 million MWh per year
Power contracts		946	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2024: $2,307 2029: $2,821 2036: $3,069
				Midwest premium (per pound)	2024: $0.1770 2029: $0.2150 2036: $0.2150
				Electricity	Rate of 18 million MWh per year
Power contract (undesignated)		—	Estimated spread between the 30-year debt yield of Alcoa and the counterparty	Credit spread	1.63%: 30-year debt yield spread 6.88%: Alcoa (estimated) 5.25%: counterparty
Total Liability Derivatives	$	1,120

The fair values of Level 3 derivative instruments recorded in the accompanying Consolidated Balance Sheet were as follows:


Asset Derivatives	March 31, 2024		December 31, 2023
Derivatives not designated as hedging instruments:
Current—financial contract	$	12	$	16
Total derivatives not designated as hedging instruments	$	12	$	16
Total Asset Derivatives	$	12	$	16
Liability Derivatives
Derivatives designated as hedging instruments:
Current—power contracts	$	200	$	210
Noncurrent—power contracts		920		1,087
Total derivatives designated as hedging instruments	$	1,120	$	1,297
Total Liability Derivatives	$	1,120	$	1,297

Assuming market rates remain constant with the rates at March 31, 2024, a realized loss of $200 related to power contracts is expected to be recognized in Sales over the next 12 months.

At March 31, 2024 and December 31, 2023, the power contracts with embedded derivatives designated as cash flow hedges include hedges of forecasted aluminum sales of 1,400 kmt and 1,456 kmt, respectively.

The following tables present the reconciliation of activity for Level 3 derivative instruments:


	Assets
First quarter ended March 31, 2024	Power contracts			Financial contracts
January 1, 2024	$	—		$	16
Total gains or losses included in:
Sales (realized)		(1	)		—
Other expenses, net (unrealized/realized)		—			(5	)
Other comprehensive income (unrealized)		1			—
Settlements and other		—			1
March 31, 2024	$	—		$	12
Change in unrealized gains or losses included in earnings for derivative instruments held at March 31, 2024:
Other expenses, net	$	—		$	(5	)


	Liabilities
First quarter ended March 31, 2024	Power contracts
January 1, 2024	$	1,297
Total gains or losses included in:
Sales (realized)		(58	)
Other comprehensive income (unrealized)		(119	)
March 31, 2024	$	1,120

There were no purchases, sales, or settlements of Level 3 derivative instruments in the periods presented.

Other Financial Instruments

The carrying values and fair values of Alcoa Corporation’s other financial instruments were as follows:


	March 31, 2024				December 31, 2023
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,358	$	1,358	$	944	$	944
Restricted cash		97		97		103		103
Short-term borrowings		52		52		56		56
Long-term debt due within one year		79		79		79		79
Long-term debt, less amount due within one year		2,469		2,473		1,732		1,702

The following methods were used to estimate the fair values of other financial instruments:

Cash and cash equivalents and Restricted cash. The carrying amounts approximate fair value because of the short maturity of the instruments. The fair value amounts for Cash and cash equivalents and Restricted cash were classified in Level 1 of the fair value hierarchy.

Short-term borrowings and Long-term debt, including amounts due within one year. The fair value of Long-term debt, less amounts due within one year was based on quoted market prices for public debt and on interest rates that are currently available to Alcoa Corporation for issuance of debt with similar terms and maturities for non-public debt. The fair value amounts for all Short-term borrowings and Long-term debt were classified in Level 2 of the fair value hierarchy.

- 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.

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