Derivatives and Other Financial Instruments

3 Months Ended

Mar. 31, 2022

Fair Value Disclosures [Abstract]

Derivatives and Other Financial Instruments

L. 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 primarily 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, energy, 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) income.

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

	March 31, 2022				December 31, 2021
	Assets		Liabilities		Assets		Liabilities
Level 1 derivative instruments	$	70	$	285	$	19	$	29
Level 3 derivative instruments		14		2,024		2		1,293
Total	$	84	$	2,309	$	21	$	1,322
Less: Current		64		514		14		274
Noncurrent	$	20	$	1,795	$	7	$	1,048

	2022						2021
First quarter ended March 31,	Unrealized loss recognized in Other comprehensive loss			Realized loss reclassed from Other comprehensive loss to earnings			Unrealized loss recognized in Other comprehensive loss			Realized loss reclassed from Other comprehensive loss to earnings
Level 1 derivative instruments	$	(233	)	$	(6	)	$	(14	)	$	-
Level 3 derivative instruments		(837	)		(104	)		(300	)		(55	)
Noncontrolling and equity interest (Level 2)		7			(4	)		11			3
Total	$	(1,063	)	$	(114	)	$	(303	)	$	(52	)

For the quarter ended March 31, 2022, the realized loss of $6 on Level 1 cash flow hedges was comprised of a $5 loss recognized in Sales and a $1 loss recognized in Cost of goods sold. For the quarter ended March 31, 2021, the realized gains and losses on Level 1 cash flow hedges were immaterial.

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

	Classification	March 31, 2022		March 31, 2021
Aluminum (in kmt)	Commodity forwards		481		21
Foreign currency (in millions of euro)	Foreign exchange forwards		80		124
Foreign currency (in millions of A$)	Foreign exchange forwards		—		94
Foreign currency (in millions of R$)	Foreign exchange forwards		1,323		354

Alcoa routinely uses Level 1 aluminum derivative instruments to manage exposures to changes in the fair value of firm customer 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 (April 2022 through December 2023) and the San Ciprián (Spain) strike (expires April 2022).

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 Australia (expired June 2021), and U.S. dollar alumina sales in Brazil (expires December 2024).

In March 2021, Alcoa entered into four financial contracts (Financial contracts (undesignated), below) with three counterparties to hedge the anticipated power requirements at one of its smelters for the period from August 1, 2021 through June 30, 2026. A fifth financial contract (undesignated) was entered into in November 2021 with an effective date of September 30, 2022 through 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, net on the accompanying Statement of Consolidated Operations.

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, 2022		Unobservable Input	Unobservable Input Range
Asset Derivatives
Financial contract		14	Interrelationship of	Electricity (per MWh)	2022: $61.49
(undesignated)			forward energy price, LME		2022: $59.25
			forward price and the	LME (per mt)	2022: $3,484
			Consumer Price Index
Total Asset Derivatives	$	14
Liability Derivatives
Power contract	$	436	MWh of energy needed	LME (per mt)	2022: $3,484
			to produce the forecasted		2027: $2,868
			mt of aluminum	Electricity	Rate of 4 million MWh per year
Power contracts		1,587	MWh of energy needed to produce the forecasted mt of aluminum	LME (per mt)	2022: $3,484 2029: $2,917 2036: $3,213
				Midwest premium (per pound)	2022: $0.4000 2029: $0.3700 2036: $0.3699
				Electricity	Rate of 18 million MWh per year
Power contract (undesignated)	1		Estimated spread between the 30-year debt yield of Alcoa and the counterparty	Credit spread	1.13%: 30-year debt yield spread 5.15%: Alcoa (estimated) 4.02%: counterparty
Total Liability Derivatives	$	2,024

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

Asset Derivatives	March 31, 2022		December 31, 2021
Derivatives not designated as hedging instruments:
Current—financial contract	$	14	$	2
Total derivatives not designated as hedging instruments	$	14	$	2
Total Asset Derivatives	$	14	$	2
Liability Derivatives
Derivatives designated as hedging instruments:
Current—power contracts	$	386	$	262
Noncurrent—power contracts		1,637		1,028
Total derivatives designated as hedging instruments	$	2,023	$	1,290
Derivatives not designated as hedging instruments:
Current—embedded credit derivative	$	—	$	1
Noncurrent—embedded credit derivative		1		2
Total derivatives not designated as hedging instruments	$	1	$	3
Total Liability Derivatives	$	2,024	$	1,293

Assuming market rates remain constant with the rates at March 31, 2022, a realized loss of $386 related to power contracts is expected to be recognized in Sales over the next 12 months.

At March 31, 2022 and December 31, 2021, the power contracts with embedded derivatives designated as cash flow hedges hedge forecasted aluminum sales of 1,849 kmt and 1,905 kmt, respectively.

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

	Assets			Liabilities
Three months ended March 31, 2022	Financial contract			Power contracts			Embedded credit derivative
January 1, 2022	$	2		$	1,290		$	3
Total gains or losses included in:
Sales (realized)		—			(104	)		—
Other income, net (unrealized/realized)		13			—			(2	)
Other comprehensive income (unrealized)		—			837			—
Other		(1	)		—			—
March 31, 2022	$	14		$	2,023		$	1
Change in unrealized gains or losses included in earnings    for derivative instruments held at March 31, 2022:
Other income, net	$	13		$	—		$	(2	)

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, 2022				December 31, 2021
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	1,554	$	1,554	$	1,814	$	1,814
Restricted cash		111		111		110		110
Short-term borrowings		75		75		75		75
Long-term debt due within one year		1		1		1		1
Long-term debt, less amount due within one year		1,727		1,797		1,726		1,865

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 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 Long-term debt were classified in Level 2 of the fair value hierarchy.