Norfolk Southern (NSC) 8-K Results of Operations and Financial Condition

 FOR IMMEDIATE RELEASE

October 25, 2006

 NORFOLK SOUTHERN NET INCOME INCREASES 38 PERCENT

For third-quarter 2006:

• Net income climbed 38 percent to $416 million, $1.02 per diluted share.

• Railway operating revenues increased 11 percent to a record $2.4 billion.

• Income from railway operations improved 35 percent to a record $715 million.

• The railway operating ratio improved 5.4 percentage points to 70.1 percent.

NORFOLK, VA. - - Norfolk Southern Corporation (NYSE: NSC) reported record third-quarter net income of $416 million, or $1.02 per diluted share, a 38 percent increase compared with $301 million, or $0.73 per diluted share, for the same period of 2005. Third-quarter income from railway operations increased 35 percent to a record $715 million.

             "We have consistently driven financial and operational performance to higher levels throughout each quarter this year," said Wick Moorman, Norfolk Southern's CEO. "In the third quarter our performance enabled us to produce excellent results and set records for railway operating revenues, income from railway operations and net income, while also significantly improving our operating ratio."

            For the first nine months, net income set a record at $1.1 billion, or $2.62 per diluted share, an increase of 19 percent compared with $919 million, or $2.24 per diluted share, for the same period of 2005. Nine-month results for 2005 included a benefit of $96 million from the effects of Ohio tax legislation, which increased diluted earnings per share by $0.23. Excluding this item, net income for the first nine months of 2006 would have been 33 percent higher than the $823 million, or $2.01 per diluted share, earned in the same period of 2005.

Record third-quarter railway operating revenues of $2.4 billion improved 11 percent compared with the same quarter a year earlier. For the first nine months, railway operating revenues increased 13 percent to a record $7.1 billion compared with the same period of 2005.  Both improvements were largely the result of higher average revenues, including fuel surcharges. All markets, with the exception of automotive, posted significant revenue gains, and several set new revenue highs.

            General merchandise revenues were $1.28 billion, an increase of 13 percent compared with the same period last year and a third-quarter record. For the first nine months, general merchandise revenues rose 15 percent to a record $3.87 billion compared with the year-earlier period.

            For the quarter, coal revenues increased 9 percent to a record $595 million and improved 9 percent to a record $1.74 billion during the first nine months compared with the same periods of the prior year. Intermodal revenues continued growth in both the quarter and for the first nine months, rising 9 percent to a third-quarter record of $515 million, and climbing 13 percent to a record $1.48 billion for the year-to-date compared with the same periods of 2005.

            Railway operating expenses were $1.68 billion for the quarter, an increase of 3 percent compared with third-quarter 2005, and $5.15 billion for the first nine months, up 8 percent compared with the same period a year earlier. Higher diesel fuel prices contributed to the increases during both periods.

            For the quarter, the railway operating ratio improved 5.4 percentage points to 70.1 percent. For the first nine months, the railway operating ratio improved 3.1 percentage points to 72.6 percent.

            Norfolk Southern Corporation is one of the nation's premier transportation companies. Its Norfolk Southern Railway subsidiary operates 21,200 route miles in 22 states, the District of Columbia and Ontario, Canada, serving every major container port in the eastern United States and providing superior connections to western rail carriers. NS operates the most extensive intermodal network in the East and is North America's largest rail carrier of metals and automotive products.

Norfolk Southern contacts:

(Media) Bob Fort, 757-629-2710, (rcfort@nscorp.com) 

(Investors) Bill Romig, 757-629-2780, (william.romig@nscorp.com) 

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
($ millions except per share)
	Three Months Ended
	Sept. 30,
			2006			2005
Railway operating revenues:
Coal	$	595		$	546
General merchandise		1,283			1,138
Intermodal		515			471
Total railway operating revenues		2,393			2,155
Railway operating expenses:
Compensation and benefits		624			629
Materials, services and rents		472			462
Conrail rents and services		30			31
Depreciation		186			195
Diesel fuel		257			189
Casualties and other claims		50			59
Other		59			62
Total railway operating expenses		1,678			1,627
Income from railway operations		715			528
Other income - net		41			32
Interest expense on debt		120			119
Income before income taxes		636			441
Provision for income taxes:
Current		235			86
Deferred		(15)			54
Total income taxes		220			140
Net income	$	416		$	301
Earnings per share:
Basic	$	1.04		$	0.74
Diluted	$	1.02		$	0.73
Average shares outstanding (000's):
Basic		402,048			404,261
Diluted		409,922			412,335
See notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
($ millions except per share)
	Nine Months Ended
	Sept. 30,
			2006			2005
Railway operating revenues:
Coal	$	1,738		$	1,591
General merchandise		3,872			3,372
Intermodal		1,478			1,307
Total railway operating revenues		7,088			6,270
Railway operating expenses:
Compensation and benefits (note 1)		1,982			1,857
Materials, services and rents		1,414			1,344
Conrail rents and services		93			97
Depreciation		551			582
Diesel fuel		748			501
Casualties and other claims (note 4)		168			177
Other		189			189
Total railway operating expenses		5,145			4,747
Income from railway operations		1,943			1,523
Other income - net		109			43
Interest expense on debt		361			373
Income before income taxes		1,691			1,193
Provision for income taxes:
Current		637			267
Deferred (note 3)		(42)			7
Total income taxes		595			274
Net income (note 2)	$	1,096		$	919
Earnings per share:
Basic	$	2.68		$	2.28
Diluted	$	2.62		$	2.24
Average shares outstanding (000's):
Basic		409,333			403,066
Diluted		418,160			410,737
See notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
($ millions)
	Sept. 30,		Dec. 31,
	2006		2005
Assets
Current assets:
Cash, cash equivalents and short-term investments	$	803	$	1,257
Accounts receivable - net (note 4)		1,027		931
Materials and supplies		158		132
Deferred income taxes		176		167
Other current assets		52		163
Total current assets		2,216		2,650
Investments		1,779		1,590
Properties less accumulated depreciation		20,970		20,705
Other assets (note 4)		1,013		916
Total assets	$	25,978	$	25,861
Liabilities and stockholders' equity
Current liabilities:
Accounts payable (note 4)	$	1,168	$	1,163
Income and other taxes		272		231
Other current liabilities		265		213
Current maturities of long-term debt		484		314
Total current liabilities		2,189		1,921
Long-term debt		6,141		6,616
Other liabilities (note 4)		1,489		1,415
Deferred income taxes		6,580		6,620
Total liabilities		16,399		16,572
Stockholders' equity:
Common stock $1.00 per share par value		418		431
Additional paid-in capital		1,240		992
Unearned restricted stock		--		(17)
Accumulated other comprehensive loss		(87)		(77)
Retained income		8,028		7,980
		9,599		9,309
Less treasury stock at cost, 20,790,517 and 20,833,125 shares, respectively		(20)		(20)
Total stockholders' equity		9,579		9,289
Total liabilities and stockholders' equity	$	25,978	$	25,861
See notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
($ millions)
	Nine Months Ended
	Sept. 30,
			2006		2005
Cash flows from operating activities:
Net income	$	1,096		$	919
Reconciliation of net income to net cash provided by
operating activities:
Depreciation		560			591
Deferred income taxes		(42)			7
Equity in earnings of Conrail		(20)			(28)
Gains on properties and investments		(40)			(26)
Changes in assets and liabilities affecting operations:
Accounts receivable		(96)			(112)
Materials and supplies		(26)			(33)
Other current assets		84			106
Current liabilities other than debt		146			93
Other - net		55			85
Net cash provided by operating activities		1,717			1,602
Cash flows from investing activities:
Property additions		(862)			(578)
Property sales and other transactions		86			55
Investments, including short-term		(1,504)			(1,232)
Investment sales and other transactions		1,739			553
Net cash used for investing activities		(541)			(1,202)
Cash flows from financing activities:
Dividends		(207)			(141)
Common stock issued - net		240			114
Purchase and retirement of common stock (note 5)		(916)			--
Proceeds from borrowings		--			332
Debt repayments (note 6)		(312)			(863)
Net cash used for financing activities		(1,195)			(558)
Net decrease in cash and cash equivalents		(19)			(158)
Cash and cash equivalents:
At beginning of year		289			467
At end of period		270			309
Short-term investments at end of period		533			741
Cash, cash equivalents and short-term investments at end of period	$	803		$	1,050
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	300		$	330
Income taxes (net of refunds)	$	483		$	161
See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1.         ADOPTION OF SFAS 123(R), "SHARE-BASED PAYMENT"

            Effective January 1, 2006, NS adopted Statement of Financial Accounting Standards, No. 123(R), "Share-Based Payment," [SFAS 123(R)].  This statement applies to awards granted, modified, repurchased or cancelled after the effective date as well as awards that are unvested at the effective date and includes, among other things, the requirement to expense the fair value of stock options.  As a result of the implementation of SFAS 123(R), compensation and benefits expense in the first nine months of 2006 included $24 million for the accelerated recognition of awards granted to retirement eligible employees and $10 million for stock options granted to non-retirement eligible employees.

2.         SETTLEMENTS OF COAL RATE CASES

            In the second quarter of 2005, NS entered into settlement agreements with two utility customers that resolved their rate transportation rate cases before the Surface Transportation Board (STB).  As a result of the settlements, NS recognized additional revenue related to the period in dispute, which net of associated expenses and income taxes increased second-quarter net income by $24 million, or 6 cents per diluted share.

3.         REDUCTION OF DEFERRED TAXES

            In the second quarter of 2005, Ohio enacted tax legislation that phases out its Corporate Franchise Tax, which was generally based on federal taxable income, and phases in a new gross receipts tax called the Commercial Activity Tax, which is based on current year sales and rentals.  The elimination of the Corporate Franchise Tax resulted in a reduction of NS' deferred income tax liability in the second quarter, as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which increased net income by $96 million, or 23 cents per diluted share.

4.         GRANITEVILLE DERAILMENT

In the first quarter of 2005, NS recorded a liability related to the Jan. 6, 2005, derailment in Graniteville, SC.  The liability, which includes a current and long-term portion, represents NS' best estimate based on current facts and circumstances.  The estimate includes amounts related to business property damage and other economic losses, personal injury and individual property damage claims as well as third-party response costs.  NS' commercial insurance policies are expected to cover expenses related to this derailment above NS' self-insured retention, including its own response costs and legal fees.  Accordingly, the Consolidated Balance Sheet reflects a current and long-term receivable for estimated recoveries from its insurance carriers.

Results for the first nine months of 2005 include approximately $39 million of expenses related to this incident, which represents NS' retention under its insurance policies and other uninsured costs, and which reduced net income by approximately $24 million, or 6 cents per diluted share.

While it is reasonable to expect that the liability for covered losses could differ from the amount recorded, such a change would be offset by a corresponding change in the insurance receivable.  As a result, NS does not believe that it is reasonably likely that its net loss (the difference between the liability and future recoveries) will be materially different than the loss recorded in 2005.  NS expects at this time that insurance coverage is adequate to cover potential claims and settlements above its self-insurance retention.

5.         STOCK REPURCHASE PROGRAM

In November 2005, NS' Board of Directors authorized the repurchase of up to 50 million shares of NS common stock through the end of 2015.  During the first nine months of 2006, cash flows from financing activities included $916 million for the purchase and retirement of 20.7 million shares of common stock under this program.

6.         DEBT EXCHANGE

            In the second quarter of 2005, NS issued $717 million of new unsecured notes ($350 million at 5.64% due 2029 and $367 million at 5.59% due 2025) and paid $218 million of premium in exchange for $717 million of its previously issued unsecured notes ($350 million at 7.8% due 2027, $200 million at 7.25% due 2031, and $167 million at 9.0% due 2021).  The $218 million cash premium payment is reflected as a reduction of debt in the Statement of Cash Flows and is being amortized as additional interest expense over the terms of the new debt.