Fair Value. The Company follows a fair value hierarchy to measure its assets and liabilities. As of December 31, 2021 and 2020, respectively, the assets and liabilities measured at fair value on a recurring basis were primarily derivative instruments. In addition, the Company measures its pension plan assets at fair value (see Note O). 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:

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 commodities.

Alcoa Corporation’s commodity and derivative activities are subject to the management, direction, and control of the Strategic Risk Management Committee (SRMC), which consists of at least three members, including the chief executive officer, the chief financial officer, and the chief commercial officer. The remaining member(s) are other officers and/or employees of the Company as the chief executive officer may designate from time to time. As of December 31, 2021, the other member of the SRMC is Alcoa Corporation’s treasurer. The SRMC meets on a periodic basis to review derivative positions and strategy and reports to the Audit Committee of Alcoa Corporation’s Board of Directors on the scope of its activities.

Alcoa Corporation’s aluminum, energy, and foreign exchange contracts are predominately 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. 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) income.

The following tables present the detail for Level 1, 2 and 3 derivatives (see additional Level 3 information in further tables below):

	2021				2020
Balance at December 31,	Assets		Liabilities		Assets		Liabilities
Level 1 derivative instruments	$	19	$	29	$	21	$	7
Level 3 derivative instruments		2		1,293		-		838
Total	$	21	$	1,322	$	21	$	845
Less: Current		14		274		21		103
Noncurrent	$	7	$	1,048	$	-	$	742

	2021						2020
Year ended December 31,	Unrealized loss recognized in Other comprehensive (loss) income			Realized loss reclassed from Other comprehensive (loss) income to earnings			Unrealized loss recognized in Other comprehensive (loss) income			Realized loss reclassed from Other comprehensive (loss) income to earnings
Level 1 derivative instruments	$	(28	)	$	(10	)	$	8		$	(19	)
Level 3 derivative instruments		(759	)		(279	)		(374	)		(88	)
Noncontrolling and equity interest (Level 2)		5			(6	)		21			1
Total	$	(782	)	$	(295	)	$	(345	)	$	(106	)

The 2021 realized loss of $10 on Level 1 cash flow hedges was comprised of a $7 loss recognized in Sales and a $3 loss recognized in Cost of goods sold. The 2020 realized loss of $19 on Level 1 cash flow hedges was comprised of a $9 loss recognized in Sales and a $10 loss recognized in Cost of goods sold.

During 2019, Alcoa recognized a realized loss of $26 on Level 1 cash flow hedges comprised of an $18 loss recognized in Sales and an $8 loss recognized in Cost of goods sold.

Derivative instruments classified as Level 3 in the fair value hierarchy represent those in which management has used at least one significant unobservable input in the valuation model. Alcoa Corporation uses a discounted cash flow model to fair value all Level 3 derivative instruments. Inputs in the valuation models for Level 3 derivative instruments are composed of the following: (i) quoted market prices (e.g., aluminum prices on the 10-year LME forward curve and energy prices), (ii) significant other observable inputs (e.g., information concerning time premiums and volatilities for certain option type embedded derivatives and regional premiums for aluminum contracts), and (iii) unobservable inputs (e.g., aluminum and energy prices beyond those quoted in the market, and estimated credit spread between Alcoa and the counterparty). For periods beyond the term of quoted market prices for aluminum, Alcoa Corporation estimates the price of aluminum by extrapolating the 10-year LME forward curve. For periods beyond the term of quoted market prices for the Midwest premium, management estimates the Midwest premium based on recent transactions. Where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads, and credit considerations. Such adjustments are generally based on available market evidence (Level 2). In the absence of such evidence, management’s best estimate is used (Level 3). If a significant input that is unobservable in one period becomes observable in a subsequent period, the related asset or liability would be transferred to the appropriate classification (Level 1 or 2) in the period of such change (there were no such transfers in the periods presented). There were no purchases, sales, or settlements of Level 3 derivative instruments in the periods presented.

Level 3 derivative instruments outstanding as of December 31, 2021 are described in the table below:

Description	Designation	Contract Termination	Unobservable Inputs Impacting Valuation	Sensitivity to Inputs
Power contracts
Embedded derivative that indexes the price of power to the LME price of aluminum plus the Midwest premium	Cash flow hedge of forward sales of aluminum	March 2026 December 2029 February 2036	LME price, Midwest premium and MWh per year	Increase in LME price and/or the Midwest premium results in a higher cost of power and an increase to the derivative liability
Embedded derivative that indexes the price of power to the LME price of aluminum	Cash flow hedge of forward sales of aluminum	September 2027	LME price and MWh per year	Increase in LME price results in a higher cost of power and an increase to the derivative liability
Embedded derivative that indexes the price of power to the credit spread between the Company and the counterparty	Not designated	October 2028	Estimated credit spread	Wider credit spread results in a higher cost of power and increase in the derivative liability

Financial contract
Hedge power prices	Not designated	June 2026	LME price and power price	Lower prices in the power market or higher LME prices result in an increase in the derivative liability

In addition to the instruments presented above, Alcoa had a financial contract that expired in July 2021 that hedged the anticipated power requirements at one of its smelters and was designated as a cash flow hedge of future purchases of electricity. In March 2021, Alcoa entered into four new financial contracts (Financial contracts (undesignated), below) with three counterparties to hedge the anticipated power requirements at this smelter for the period from August 1, 2021 through June 30, 2026. A fifth financial contract (undesignated) was entered into in November 2021; its effective date is dependent on power consumption associated with the restart of capacity at the smelter, will be effective during the period from July 1, 2022 through November 1, 2022, and expires June 30, 2026. Two of these financial contracts include LME-linked pricing components and do not qualify for hedge accounting treatment. Management elected not to apply hedge accounting treatment for the other three financial contracts as the value of these contracts is not significant. Unrealized and realized gains and losses on these financial contracts are included in Other (income) expenses, net on the accompanying Statement of Consolidated Operations.

At December 31, 2021, the outstanding Level 3 instruments are associated with seven smelters. At December 31, 2021 and 2020, the power contracts with embedded derivatives designated as cash flow hedges hedge forecasted aluminum sales of 1,905 kmt and 2,130 kmt, respectively.

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

	December 31, 2021		Unobservable Input	Unobservable Input Range
Asset Derivatives
Financial contracts	$	2	Interrelationship of	Electricity (per MWh)	2022: $41.30
(undesignated)			forward energy price, LME		2022: $47.44
			forward price and the	LME (per mt)	2022: $2,803
			Consumer Price Index		2022: $2,803
Power contract		—	MWh of energy needed to produce the forecasted	LME	2022: $2,803 2022: $2,808
			mt of aluminum	Midwest premium	2022: $0.3015 2022: $0.2915
				Electricity	Rate of 2 million MWh per year
Total Asset Derivatives	$	2
Liability Derivatives
Power contract	$	284	MWh of energy needed	LME (per mt)	2022: $2,803
			to produce the forecasted		2027: $2,287
			mt of aluminum	Electricity	Rate of 4 million MWh per year
Power contracts		1,006	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2022: $2,803 2029: $2,364 2036: $2,660
				Midwest premium (per pound)	2022: $0.3015 2029: $0.2715 2036: $0.2715
				Electricity	Rate of 18 million MWh per year
Power contract (undesignated)	3		Estimated spread between the 30-year debt yield of Alcoa and the counterparty	Credit spread	1.30%: 30-year debt yield spread 4.10%: Alcoa (estimated) 2.80%: counterparty
Total Liability Derivatives	$	1,293

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

Asset Derivatives	December 31, 2021		December 31, 2020
Derivatives not designated as hedging instruments:
Current—financial contract	$	2	$	—
Total derivatives not designated as hedging instruments	$	2	$	—
Total Asset Derivatives	$	2	$	—
Liability Derivatives
Derivatives designated as hedging instruments:
Current—power contracts	$	262	$	94
Current—financial contract		—		1
Noncurrent—power contracts		1,028		720
Total derivatives designated as hedging instruments	$	1,290	$	815
Derivatives not designated as hedging instruments:
Current—embedded credit derivative	$	1	$	4
Noncurrent—embedded credit derivative		2		19
Total derivatives not designated as hedging instruments	$	3	$	23
Total Liability Derivatives	$	1,293	$	838

The following table shows the net fair values of the Level 3 derivative instruments at December 31, 2021 and the effect on these amounts of a hypothetical change (increase or decrease of 10%) in the market prices or rates that existed as of December 31, 2021:

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

	Assets			Liabilities
2021	Financial contract			Power contracts			Financial contract			Embedded credit derivative
January 1, 2021	$	—		$	814		$	1		$	23
Total gains or losses included in:
Sales (realized)		—			(277	)		—			—
Cost of goods sold (realized)		(6	)		—			(8	)		—
Other expenses, net (unrealized/realized)		7			—			—			(20	)
Other comprehensive (loss) income (unrealized)		—			753			6			—
Other		1			—			1			—
December 31, 2021	$	2		$	1,290		$	—		$	3
Change in unrealized gains or losses included in earnings for derivative instruments held at December 31, 2021:
Other expenses, net	$	5		$	—		$	(1	)	$	(19	)

	Assets			Liabilities
2020	Financial contract			Power contracts			Financial contract		Embedded credit derivative
January 1, 2020	$	74		$	598		$	—	$	17
Total gains or losses included in:
Sales (realized)		—			(74	)		—		—
Cost of goods sold (realized)		14			—			—		—
Other expenses, net (unrealized/realized)		—			—			—		7
Other comprehensive (loss) income (unrealized)		(83	)		290			1		—
Other		(5	)		—			—		(1	)
December 31, 2020	$	—		$	814		$	1	$	23
Change in unrealized gains or losses included in earnings for derivative instruments held at December 31, 2020:
Other, net	$	—		$	—		$	—	$	11

Assuming market rates remain constant with the rates at December 31, 2021, a realized loss of $262 related to power contracts is expected to be recognized in Sales over the next 12 months.

The disclosures with respect to commodity prices and foreign currency exchange risk do not consider the underlying commitments or anticipated transactions. If the underlying items were included in the analysis, the gains or losses on the futures contracts may be offset. Actual results will be determined by several factors that are not under Alcoa Corporation’s control and could vary significantly from those factors disclosed.

Alcoa Corporation is exposed to credit loss in the event of nonperformance by counterparties on the above instruments, as well as credit or performance risk with respect to its hedged customers’ commitments. Alcoa Corporation does not anticipate nonperformance by any of these parties. Contracts are with creditworthy counterparties and are further supported by cash, treasury bills, or irrevocable letters of credit issued by carefully chosen banks. In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts.

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

	2021				2020
December 31,	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,814	$	1,814	$	1,607	$	1,607
Restricted cash		110		110		3		3
Short-term borrowings		75		75		77		77
Long-term debt due within one year		1		1		2		2
Long-term debt, less amount due within one year		1,726		1,865		2,463		2,692

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 amount 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.