(5) Investment in Charter Accounted for Using the Equity Method

Through a number of prior years’ transactions, Liberty Broadband has acquired an interest in Charter. The investment in Charter is accounted for as an equity method affiliate based on our ownership interest and the board seats held by individuals appointed by Liberty Broadband. As of September 30, 2018, the carrying value of Liberty Broadband’s ownership in Charter was approximately $11,977 million. The market value of Liberty Broadband’s ownership in Charter as of September 30, 2018 was approximately $17,621 million, which represented an approximate economic ownership of 23.6% of the outstanding equity of Charter as of that date.

Pursuant to proxy agreements with GCI Liberty (see below) and A/N (the “GCI Liberty Proxy” and “A/N Proxy”, respectively), Liberty Broadband has an irrevocable proxy to vote certain shares of Charter common stock owned beneficially or of record by GCI Liberty and A/N, for a five year term expiring May 18, 2021, subject to extension upon the mutual agreement of both parties, subject to certain limitations.

In March 2018, Qurate Retail completed its previously announced transactions with GCI Liberty and, in connection with the completion of these transactions, the proxy agreement with Qurate Retail was assigned to GCI Liberty.

As a result of the A/N Proxy and the GCI Liberty Proxy, Liberty Broadband controls 25.01% of the aggregate voting power of Charter following the completion of the Time Warner Cable Merger and the Bright House Transaction and is Charter’s largest stockholder.

Additionally, so long as the A/N Proxy is in effect, if A/N proposes to transfer common units of Charter Communications Holdings, LLC (which units are exchangeable into Charter shares and which will, under certain circumstances, result in the conversion of certain shares of Class B Common Stock into Charter shares) or Charter shares, in each case, constituting either (i) shares representing the first 7.0% of the outstanding voting power of Charter held by A/N or (ii) shares representing the last 7.0% of the outstanding voting power of New Charter held by A/N, Liberty Broadband will have a right of first refusal (“ROFR”) to purchase all or a portion of any such securities A/N proposes to transfer. The purchase price per share for any securities sold to Liberty Broadband pursuant to the ROFR will be the volume-weighted average price of Charter shares for the two trading day period before the notice of a proposed sale by A/N, payable in cash. Certain transfers are permitted to affiliates of A/N, subject to the transferee entity entering into an agreement assuming the transferor’s obligations under the A/N Proxy.

Investment in Charter

The excess basis in our investment in Charter has increased to $3,213 million as of September 30, 2018 allocated within memo accounts used for equity accounting purposes as follows (amounts in millions):

 

Upon acquisition, Liberty Broadband ascribed remaining useful lives of 7 years and 13 years to property and equipment and customer relationships, respectively, and indefinite lives to franchise fees, trademarks and goodwill. The excess basis of outstanding debt is amortized over the contractual period using the effective interest rate method. The increase in excess basis for the nine months ended September 30, 2018, was primarily due to Charter’s share buyback program. The Company’s share of earnings (losses) of affiliates line item in the accompanying condensed consolidated statements of operations includes expenses of $30.2 million and $15.3 million, net of related taxes, for the three months ended September 30, 2018 and 2017, respectively, and expenses of $88.1 million and $44.0 million, net of related taxes, for the nine months ended September 30, 2018 and 2017, respectively, due to the amortization of the excess basis related to assets with identifiable useful lives and debt. 

The Company had a dilution loss of $3.2 million and $3.7 million during the three months ended September 30, 2018 and 2017, respectively, and a dilution loss of $35.2 million and $42.5 million during the nine months ended September 30, 2018 and 2017, respectively. The dilution losses for the periods presented were attributable to stock option exercises by employees and other third parties at prices below Liberty Broadband’s book basis per share.

 

Accounting Changes

 

Charter adopted several new accounting standards as of January 1, 2018, including the new revenue guidance.  Charter adopted the new revenue guidance, as described in note 2, on January 1, 2018 using the modified retrospective transition method with a cumulative-effect adjustment to equity. The January 1, 2018 adoption cumulative-effect adjustment consisted of an increase to other noncurrent assets of $120 million, an increase to accounts payable and accrued liabilities of $71 million, an increase to deferred income tax liabilities of $11 million and an increase to total shareholders’ equity of $38 million.  Charter applied the cumulative-effect method to all contracts as of January 1, 2018.  Operating results for the three and nine months ended September 30, 2018 are not materially different than results that would have been reported under previous guidance.

 

Also on January 1, 2018, Charter adopted guidance which requires both the selling entity and the buying entity in an intra-entity asset transfer (other than the transfer of inventory) to immediately recognize the current and deferred income tax consequences of the transaction. Income tax effects of intra-entity transfers of inventory will continue to be deferred until the inventory has been sold to a third party.  Charter adopted this guidance using a modified retrospective approach, with the cumulative-effect adjustment recognized directly to shareholders equity for the income tax effects of intra-entity asset transfers (other than transfers of inventory) that happened before the adoption date. Charter identified a $31 million increase to total shareholders' equity and corresponding increase to deferred tax assets related to the adoption, which was recorded during the three months ended September 30, 2018.

 

Summarized unaudited financial information for Charter is as follows (amounts in millions):

Charter condensed consolidated balance sheets

 

Charter condensed consolidated statements of operations