Income Taxes

The Company files income tax returns in the United States ("U.S.") federal jurisdiction and in the states of Texas, New Mexico and Arizona. The Company is no longer subject to tax examination by the taxing authorities in the federal, Arizona and New Mexico jurisdictions for years prior to 2012. In August 2017, the Company reached an agreement with the Texas Comptroller of Public Accounts and settled audits in Texas for tax years 2007 through 2011.

For the three months ended September 30, 2017 and 2016, the Company’s effective tax rate was 35.3% and 36.6%, respectively. For the nine months ended September 30, 2017 and 2016, the Company's effective tax rate was 35.3% and 36.1%, respectively. For the twelve months ended September 30, 2017 and 2016, the Company's effective tax rate was 35.0% and 35.8%, respectively. The Company's effective tax rate for all periods differs from the federal statutory tax rate of 35.0% primarily due to capital gains in the decommissioning trusts which are taxed at the federal rate of 20.0%, the allowance for equity funds used during construction ("AEFUDC"), state taxes, changes in tax reserves discussed below and the issue discussed in the following paragraph.

In the third quarter of 2016, the Company changed its accounting for state income taxes from the flow-through method to the normalization method in accordance with the PUCT's and NMPRC's most recent final orders. Under the flow-through method, the Company previously recorded deferred state income taxes and regulatory liabilities and assets offsetting such deferred state income taxes at the expected cash flow to be reflected in future rates. Upon implementation of normalization, the Company began amortizing the net regulatory asset for deferred state income taxes to deferred income tax expense over a 15 year period as allowed by the regulators. In the third quarter of 2016, the Company began recording deferred state income tax expense as required by normalization, retroactive to January 2016 as provided in the final orders. The impact of the change was additional deferred income tax expense of $0.1 million, $1.4 million and $2.2 million for the three, nine and twelve months ended September 30, 2017, respectively.

FASB guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recorded a reduction in the unrecognized tax position of $1.5 million in the three months ended September 30, 2017, $1.7 million in the nine months ended September 30, 2017, and $0.9 million in the three months ended September 30, 2016, related to transmission and distribution costs and other amounts deducted in prior year Texas franchise tax returns. The Company recorded an increase of $0.4 million in the three months ended September 30, 2017 related to depreciation issues in the current year Texas franchise tax return. The Company recorded a decrease of $0.3 million in the first quarter of 2016 related to tax credits taken and apportionment factors used in prior year Arizona income tax returns, which have been settled through audit. A reconciliation of the September 30, 2017 and 2016 amounts of unrecognized tax benefits are as follows (in thousands):



		2017			2016
Balance at January 1		$	5,300		$	6,000
	Additions for tax positions related to the current year	400			—
	Reductions for tax positions related to the current year	—			—
	Additions for tax positions related to prior years	—			—
	Reductions for tax positions related to prior years	(1,700		)	(1,200		)
Balance at September 30		$	4,000		$	4,800