Fair Value Measures and Disclosures

6 Months Ended

Jun. 30, 2023

Financial Instruments

Amounts designated below as kmt are thousand metric tons, MMBtu are million British thermal units, and MWh are megawatt hours.

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.

The respective carrying value and fair value of Arconic’s financial instruments were as follows:


	June 30, 2023				December 31, 2022
	Carrying value		Fair value		Carrying value		Fair value
Cash and cash equivalents	$	266	$	266	$	261	$	261
Hedging instruments and derivatives - assets	53		53		21		21
Hedging instruments and derivatives - liabilities	14		14		8		8
Long-term debt	1,598		1,620		1,597		1,539

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

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

Hedging instruments and derivatives. Arconic is exposed to certain risks relating to its ongoing business operations, including financial, market, political, and economic risks. Information regarding the Company’s exposure to risks of changing commodity prices is described below.

Arconic’s commodity and hedging 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 Company’s chief executive officer and chief financial officer. The remaining member(s) are other Arconic officers and/or employees as the chief executive officer may designate from time to time. Currently, the only other member of the SRMC is the Company’s treasurer. The SRMC meets on a periodic basis to review hedging positions and strategy and reports to the Audit and Finance Committee of Arconic’s Board of Directors on the scope of its activities.

The Company’s hedging instruments are held for purposes other than trading. They are used primarily to mitigate uncertainty and volatility, and to cover underlying exposures. Specifically, these instruments hedge forward sale commitments for aluminum and forward purchase commitments for aluminum, natural gas, and certain alloying materials. Arconic is not involved in trading activities for energy, weather derivatives, or other nonexchange commodity trading activities.

The fair value of the Company’s hedging instruments was based on quoted market prices (e.g., aluminum prices on the 10-year London Metal Exchange forward curve) and were classified in Level 1 of the fair value hierarchy. Most of these instruments are comprised of those that were designated as cash flow hedges while the remainder are marked-to-market as they do not qualify for hedge accounting.

Separately, Arconic has several energy supply contracts that are treated as derivatives for accounting purposes as they failed to qualify for the normal purchase normal sale exception due to net settlement provisions. These derivatives also do not qualify for hedge accounting. The Company does not have a regular practice of entering into contracts that are treated as derivatives for accounting purposes.

The following table presents the fair value and amount of underlying by type for all hedging instruments and derivatives:


	June 30, 2023				December 31, 2022
Assets
Cash flow hedges
Aluminum	$	48	242	kmt	$	—	17	kmt
Alloying materials*	(1)		1	kmt	(1)		1	kmt
Marked-to-market
Aluminum	9		33	kmt	6		60	kmt
Energy	(3)		4.7	MMBtu	16		12.1	MMBtu
	$	53			$	21

Liabilities
Cash flow hedges
Aluminum*	$	—	29	kmt	$	(14)	368	kmt
Energy	9		7.5	MMBtu	5		6.3	MMBtu
Alloying materials	1		6	kmt	1		3	kmt
Marked-to-market
Aluminum	2		1	kmt	12		53	kmt
Energy
Natural Gas	2		2.7	MMBtu	4		0.6	MMBtu
Electricity	—		8,314	MWh	—
	$	14			$	8

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*The hedging instruments are classified as assets or liabilities based on the overall position of all instruments held with respective counterparties.

The following table presents the unrealized and realized gains and losses associated with those hedging instruments designated as cash flow hedges:


	Second quarter ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Unrealized
Other comprehensive income (loss)
Aluminum	$	58	$	203	$	49	$	47
Energy	(1)		—		(14)		13
Alloying materials	(2)		(2)		(1)		(2)
	$	55	$	201	$	34	$	58

Realized*
Sales
Aluminum	$	18	$	(53)	$	17	$	(107)
Cost of goods sold
Aluminum	—		—		—		(1)
Energy	6		(7)		11		(7)
Alloying materials	1		—		1		—
	$	11	$	(46)	$	5	$	(99)

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*In all periods presented, these amounts were reclassified from Accumulated other comprehensive loss (see Note K).

The following table presents the unrealized and realized gains and losses associated with those hedging instruments that do not qualify for hedge accounting and derivatives:


	Second quarter ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
Unrealized
Sales
Aluminum	$	19	$	4	$	14	$	6
Cost of goods sold
Energy*	1		(20)		16		(23)
	$	18	$	24	$	(2)	$	29
Realized
Sales
Aluminum	$	(10)	$	4	$	(6)	$	2
Cost of goods sold
Energy	4		—		5		—
	$	(14)	$	4	$	(11)	$	2

__________________

*In the 2022 first quarter, the Company recorded a net gain of $3 in Cost of goods sold related to the unrealized impact associated with the change in the estimated fair value of natural gas supply contracts determined to be derivatives. This amount was comprised of an unrealized loss of $5 for the 2022 first quarter, an unrealized gain of $6 for the 2021 annual period, and an unrealized gain of $2 for the 2020 fourth quarter. The out-of-period amounts were not material to any interim or annual period.

The disclosures with respect to commodity price risk do not consider the underlying commitments or anticipated transactions. If the underlying items were included, the gains or losses on the hedging instruments may be offset. Actual results will be determined by several factors that are not under Arconic’s control and could vary significantly from those factors disclosed.

The Company 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. Arconic does not anticipate nonperformance by any of these parties. Contracts are with creditworthy counterparties and may be further supported by cash or irrevocable letters of credit issued by carefully chosen banks. In addition, master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts.

Long-term debt. The fair value was based on quoted market prices for public debt and was 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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