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:

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):


	September 30, 2023				December 31, 2022
	Assets		Liabilities		Assets		Liabilities
Level 1 derivative instruments	$	29	$	16	$	84	$	14
Level 3 derivative instruments		7		1,115		52		1,212
Total	$	36	$	1,131	$	136	$	1,226
Less: Current		33		204		134		200
Noncurrent	$	3	$	927	$	2	$	1,026


	2023						2022
Third quarter ended September 30,	Unrealized gain (loss) recognized in Other comprehensive loss			Realized gain (loss) reclassed from Other comprehensive loss to earnings			Unrealized gain recognized in Other comprehensive loss		Realized gain (loss) reclassed from Other comprehensive loss to earnings
Level 1 derivative instruments	$	(11	)	$	22		$	59	$	32
Level 3 derivative instruments		(110	)		(54	)		49		(67	)
Noncontrolling and equity interest (Level 2)		1			3			2		(2	)
Total	$	(120	)	$	(29	)	$	110	$	(37	)

For the third quarter of 2023, the realized gain of $22 on Level 1 cash flow hedges was recognized in Sales. For the third quarter of 2022, the realized gain of $32 on Level 1 cash flow hedges was comprised of a $34 gain recognized in Sales and a $2 loss recognized in Cost of goods sold.


	2023						2022
Nine months ended September 30,	Unrealized gain (loss) recognized in Other comprehensive loss			Realized gain (loss) reclassed from Other comprehensive loss to earnings			Unrealized gain recognized in Other comprehensive loss		Realized gain (loss) reclassed from Other comprehensive loss to earnings
Level 1 derivative instruments	$	20		$	66		$	158	$	12
Level 3 derivative instruments		(87	)		(164	)		62		(286	)
Noncontrolling and equity interest (Level 2)		1			5			11		(6	)
Total	$	(66	)	$	(93	)	$	231	$	(280	)

For the nine-month period of 2023, the realized gain of $66 on Level 1 cash flow hedges was comprised of a $70 gain recognized in Sales and a $4 loss recognized in Cost of goods sold. For the nine-month period of 2022, the realized gain of $12 on Level 1 cash flow hedges was comprised of a $16 gain recognized in Sales and a $4 loss recognized in Cost of goods sold.

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


	Classification	September 30, 2023		September 30, 2022
Aluminum (in kmt)	Commodity buy forwards		126		178
Aluminum (in kmt)	Commodity sell forwards		144		398
Foreign currency (in millions of euro)	Foreign exchange buy forwards		68		67
Foreign currency (in millions of euro)	Foreign exchange sell forwards		18		—
Foreign currency (in millions of Norwegian krone)	Foreign exchange buy forwards		185		87
Foreign currency (in millions of Brazilian real)	Foreign exchange buy forwards		734		1,216
Foreign currency (in millions of Brazilian real)	Foreign exchange sell forwards		—		17
Foreign currency (in millions of Canadian dollar)	Foreign exchange sell forwards		33		—

Alcoa 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 uses Level 1 aluminum derivative instruments to manage exposures to changes in the LME associated with the Alumar (Brazil) restart (expires December 2023) and the San Ciprián strike (expired October 2022). In the second quarter of 2023, as a result of a delay with the Alumar restart, it became probable that certain of the original forecasted transactions would not occur by the end of the originally specified time period and Alcoa dedesignated certain aluminum sell forwards. The Company reclassified the related unrealized gain of $11 included in Accumulated other comprehensive loss to Sales during the second quarter of 2023. In conjunction with the dedesignations, the Company entered into aluminum buy forwards for the same volume and periods which were also not designated. The unrealized and realized gains and losses on the aluminum buy and sell forwards that are not designated will offset resulting in no impact to Alcoa’s earnings.

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), krone capital expenditures in Norway (expires June 2025), U.S. dollar alumina and aluminum sales in Brazil (expires August 2025), and Canadian dollar capital expenditures in Canada (expires March 2025).

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


	September 30, 2023		Unobservable Input	Unobservable Input Range
Asset Derivatives
Financial contract (undesignated)	$	7	Interrelationship of forward energy price, LME forward price and the Consumer Price Index	Electricity (per MWh)	2023: $29.76 2024: $54.21
				LME (per mt)	2023: $2,339
					2024: $2,374
Power contract		—	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2023: $2,339 2023: $2,353
				Midwest premium (per pound)	2023: $0.1940 2023: $0.1950
				Electricity	Rate of 2 million MWh per year
Total Asset Derivatives	$	7
Liability Derivatives
Power contract	$	196	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2023: $2,339 2027: $2,707
				Electricity	Rate of 4 million MWh per year
Power contracts		919	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2023: $2,339 2029: $2,711 2036: $2,959
				Midwest premium (per pound)	2023: $0.1940 2029: $0.2200 2036: $0.2200
				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	1.55%: 30-year debt yield spread 7.37%: Alcoa (estimated) 5.82%: counterparty
Total Liability Derivatives	$	1,115

In addition to the instruments presented above, Alcoa had a financial contract that expired on February 28, 2023 that was designated as a cash flow hedge of forward sales of power.

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


Asset Derivatives	September 30, 2023		December 31, 2022
Derivatives designated as hedging instruments:
Current—financial contract	$	—	$	20
Total derivatives designated as hedging instruments	$	—	$	20
Derivatives not designated as hedging instruments:
Current—financial contract	$	7	$	32
Total derivatives not designated as hedging instruments	$	7	$	32
Total Asset Derivatives	$	7	$	52
Liability Derivatives
Derivatives designated as hedging instruments:
Current—power contracts	$	196	$	195
Noncurrent—power contracts		919		1,017
Total derivatives designated as hedging instruments	$	1,115	$	1,212
Total Liability Derivatives	$	1,115	$	1,212

Assuming market rates remain constant with the rates at September 30, 2023, a realized loss of $196 related to power contracts is expected to be recognized in Sales over the next 12 months.

At September 30, 2023 and December 31, 2022, the power contracts with embedded derivatives designated as cash flow hedges include hedges of forecasted aluminum sales of 1,513 kmt and 1,683 kmt, respectively.

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


	Assets
Third quarter ended September 30, 2023	Power contracts			Financial contracts
July 1, 2023	$	1		$	28
Total gains or losses included in:
Sales (realized)		(2	)		—
Other expenses, net (unrealized/realized)		—			(20	)
Other comprehensive income (unrealized)		1			—
Settlements and other		—			(1	)
September 30, 2023	$	—		$	7
Change in unrealized gains or losses included in earnings for derivative instruments held at September 30, 2023:
Other expenses, net	$	—		$	(20	)


	Liabilities
Third quarter ended September 30, 2023	Power contracts
July 1, 2023	$	1,060
Total gains or losses included in:
Sales (realized)		(56	)
Other comprehensive income (unrealized)		111
September 30, 2023	$	1,115


	Assets
Nine months ended September 30, 2023	Power contracts			Financial contracts
January 1, 2023	$	—		$	52
Total gains or losses included in:
Sales (realized)		(4	)		—
Cost of goods sold (realized)		—			(20	)
Other expenses, net (unrealized/realized)		—			(3	)
Other comprehensive income (unrealized)		4			—
Settlements and other		—			(22	)
September 30, 2023	$	—		$	7
Change in unrealized gains or losses included in earnings for derivative instruments held at September 30, 2023:
Other expenses, net	$	—		$	(3	)


	Liabilities
Nine months ended September 30, 2023	Power contracts
January 1, 2023	$	1,212
Total gains or losses included in:
Sales (realized)		(188	)
Other comprehensive income (unrealized)		91
September 30, 2023	$	1,115

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

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


	September 30, 2023				December 31, 2022
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	926	$	926	$	1,363	$	1,363
Restricted cash		104		104		111		111
Short-term borrowings		42		42		—		—
Long-term debt due within one year		1		1		1		1
Long-term debt, less amount due within one year		1,809		1,726		1,806		1,744

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.