Derivatives and Other Financial Instruments

6 Months Ended

Jun. 30, 2024

Fair Value Disclosures [Abstract]

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:

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

•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.

•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. 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):

	June 30, 2024				December 31, 2023
	Assets		Liabilities		Assets		Liabilities
Level 1 derivative instruments	$	4	$	11	$	16	$	9
Level 3 derivative instruments		34		1,191		16		1,297
Total	$	38	$	1,202	$	32	$	1,306
Less: Current		38		251		29		214
Noncurrent	$	—	$	951	$	3	$	1,092

	2024						2023
Second quarter ended June 30,	Unrealized 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	$	(7	)	$	—		$	42	$	28
Level 3 derivative instruments		(146	)		(75	)		197		(58	)
Noncontrolling and equity interest (Level 2)		—			1			2		3
Total	$	(153	)	$	(74	)	$	241	$	(27	)

For the second quarter of 2024, the realized gains and losses on Level 1 cash flow hedges were immaterial. For the second quarter of 2023, the realized gain of $28 on Level 1 cash flow hedges was comprised of a $32 gain recognized in Sales and a $4 loss recognized in Cost of goods sold.

	2024						2023
Six months ended June 30,	Unrealized 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	$	(10	)	$	4		$	31	$	44
Level 3 derivative instruments		(26	)		(132	)		23		(110	)
Noncontrolling and equity interest (Level 2)		—			1			—		2
Total	$	(36	)	$	(127	)	$	54	$	(64	)

For the six-month period of 2024, the realized gain of $4 on Level 1 cash flow hedges was recognized in Sales. For the six-month period of 2023, the realized gain of $44 on Level 1 cash flow hedges was comprised of a $48 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	June 30, 2024		June 30, 2023
Aluminum (in kmt)	Commodity buy forwards		133		187
Aluminum (in kmt)	Commodity sell forwards		80		206
Foreign currency (in millions of euro)	Foreign exchange buy forwards		61		86
Foreign currency (in millions of euro)	Foreign exchange sell forwards		16		18
Foreign currency (in millions of Norwegian krone)	Foreign exchange buy forwards		85		232
Foreign currency (in millions of Brazilian real)	Foreign exchange buy forwards		351		1,010
Foreign currency (in millions of Canadian dollar)	Foreign exchange buy forwards		22		—

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 uses Level 1 aluminum derivative instruments to manage LME exposures at certain locations with profitability improvement actions (expires December 2024), and 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):

	June 30, 2024		Unobservable Input	Unobservable Input Range
Asset Derivatives
Financial contract (undesignated)	$	34	Interrelationship of forward energy price, LME forward price, and the Consumer Price Index	Electricity (per MWh)	2024: $93.52 2024: $40.54
				LME (per mt)	2024: $2,491
					2024: $2,562
Total Asset Derivatives	$	34
Liability Derivatives
Power contract	$	180	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2024: $2,491 2027: $2,742
				Electricity	Rate of 4 million MWh per year
Power contracts		1,008	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2024: $2,491 2029: $2,734 2036: $2,934
				Midwest premium (per pound)	2024: $0.1999 2029: $0.2365 2036: $0.2365
				Electricity	Rate of 18 million MWh per year
Power contract		2	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2024: $2,491 2024: $2,524
				Midwest premium (per pound)	2024: $0.1999 2024: $0.2240
				Electricity	Rate of 2 million MWh per year
Power contract (undesignated)		1	Estimated spread between the 30-year debt yield of Alcoa and the counterparty	Credit spread	1.71%: 30-year debt yield spread 6.98%: Alcoa (estimated) 5.27%: counterparty
Total Liability Derivatives	$	1,191

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

Asset Derivatives	June 30, 2024		December 31, 2023
Derivatives not designated as hedging instruments:
Current—financial contract	$	34	$	16
Total derivatives not designated as hedging instruments	$	34	$	16
Total Asset Derivatives	$	34	$	16
Liability Derivatives
Derivatives designated as hedging instruments:
Current—power contracts	$	245	$	210
Noncurrent—power contracts		945		1,087
Total derivatives designated as hedging instruments	$	1,190	$	1,297
Derivatives not designated as hedging instruments:
Noncurrent—embedded credit derivative		1		—
Total derivatives not designated as hedging instruments	$	1	$	—
Total Liability Derivatives	$	1,191	$	1,297

Assuming market rates remain constant with the rates at June 30, 2024, a realized loss of $245 related to power contracts is expected to be recognized in Sales over the next 12 months.

At June 30, 2024 and December 31, 2023, the power contracts with embedded derivatives designated as cash flow hedges include hedges of forecasted aluminum sales of 1,344 kmt and 1,456 kmt, respectively.

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

	Assets
Second quarter ended June 30, 2024	Financial contracts
April 1, 2024	$	12
Total gains or losses included in:
Other income, net (unrealized/realized)		55
Settlements and other		(33	)
June 30, 2024	$	34
Change in unrealized gains or losses included in earnings    for derivative instruments held at June 30, 2024:
Other income, net	$	55

	Liabilities
Second quarter ended June 30, 2024	Power contracts			Embedded credit derivative
April 1, 2024	$	1,120		$	—
Total gains or losses included in:
Sales (realized)		(76	)		—
Other expenses, net (unrealized/realized)		—			1
Other comprehensive income (unrealized)		146			—
June 30, 2024	$	1,190		$	1
Change in unrealized gains or losses included in earnings    for derivative instruments held at June 30, 2024:
Other expenses, net	$	—		$	1

	Assets
Six months ended June 30, 2024	Financial contracts
January 1, 2024	$	16
Total gains or losses included in:
Other income, net (unrealized/realized)		50
Settlements and other		(32	)
June 30, 2024	$	34
Change in unrealized gains or losses included in earnings    for derivative instruments held at June 30, 2024:
Other income, net	$	50

	Liabilities
Six months ended June 30, 2024	Power contracts			Embedded credit derivative
January 1, 2024	$	1,297		$	—
Total gains or losses included in:
Sales (realized)		(133	)		—
Other expenses, net (unrealized/realized)		—			1
Other comprehensive income (unrealized)		26			—
June 30, 2024	$	1,190		$	1
Change in unrealized gains or losses included in earnings    for derivative instruments held at June 30, 2024:
Other expenses, net	$	—		$	1

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:

	June 30, 2024				December 31, 2023
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,396	$	1,396	$	944	$	944
Restricted cash		97		97		103		103
Short-term borrowings		31		31		56		56
Long-term debt due within one year		79		79		79		79
Long-term debt, less amount due within one year		2,469		2,477		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.