Financial Analysts' Meeting
New York, NY - July 26, 2006

Questions and Answers

(Mr. Moorman) Thank you Don.� Well, let me open it up for questions here, and I’ll start in the very back. Scott?

(Question)� Yes. Scott Flowers, B of A Securities. Probably a question for Hank, but I wonder if you can give us some color on what we should expect for the effective tax rate, whether the run rate in the second quarter is what we should see in the second half, what might cause the reversal of that 9 million of net accrual? Is that already going to happen second half from what you already accrued, I guess, in first quarter? And then lastly, maybe a little color on what oil prices, effect, some of the implications on what the syn fuel credits may or may not be? You mentioned there were some oil price clip levels in the legislation. I know that’s complicated, but maybe there are some oil price clip levels that matter.

(Mr. Wolf)� I would say that going forward for the second half, a reasonable expectation would be that the effective rate will certainly be between 36 and 37 percent, probably closer to 37. We have a $9 million benefit that has been accrued in the first half of the year. With respect to the $9 million of benefit that has been accrued, that is on the basis of prices that we've experienced in the first half of the year, and a projection based on the forward curve looking out. If oil prices remain at current high levels or increase, we may have to reverse some or all of the tax benefit that we accrued in the first half.

So to the extent that actual prices deviate from today's forward curve, that could cause either that $9 million to be reduced, so that we are in essence reducing the tax benefit, or to the extent prices fall and are more favorable, we may have a pick-up there. And we just can't forecast this at this time because we don't know what the oil prices are. The phase out for those credits begins at about $60 a share --

(Mr. Moorman)� -- A barrel.

(Mr. Wolf)� Excuse me, a barrel, and at probably $75, they're completely gone.

(Mr. Moorman)� Tom.

(Question)� Good morning. Tom Wadewitz from JP Morgan. Question, I guess two questions, for Wick or Don. When you look at the economy right now, and you look at the pace of volume growth in first quarter, do you think it is reasonable to believe that you could continue to see that kind of 4 to 5 percent type of all-line unit growth, and then also on the yield growth, there’s a couple different components of that with the price and fuel surcharge and so forth, and is there any color you can give us on what the pace of yield growth might be in second quarter? Is that going to fall a lot as the fuel comparison, is you know fuel prices were higher, maybe less fuel surcharge, or do you think that the yield growth can kind of continue roughly around where we are?

(Mr. Moorman)� Let me take a stab at the first half, and then Don, if you want to talk about the fuel. You know, we do, as we've all discussed, watch our volumes very closely and try and determine where any potential weaknesses are. One of the things I would think is fair to say is that, we're sorting through for ourselves today and don't really have the answers for, is the discussion that we’ve all been having for the past couple of years as to how much of our volume growth right now is because of underlying changes in the transportation marketplace and is secular rather than cyclical.

So, I think it’s fair to say that even if there is an economic slow down, it’s not clear to us what we're going to see in terms of potential traffic slowdown. In fact, there’re some arguments that, in fact, a lot of our traffic will remain very good, regardless of some issues in the economy, but our best evaluation right now based on what we're currently seeing, and what Don and all of his people are hearing in the marketplace, is that we don't anticipate a substantial difference in volume growth in the second half than we've seen in the first half.

That's where we are, Don, and why don't you comment on fuel.

(Mr. Seale)� I am very comfortable with that, Wick. In terms of the second half, looking at the third and fourth quarters, volume appears to be poised to be at a run rate of what we've seen in the second quarter. Certainly coal business will continue in terms of the utility and metallurgical market with its growth and intermodal is poised for further growth in the second half.
Our metals and construction business will continue to grow; order books at the steel manufacturers look pretty good. They're telling us they're at capacity or close to capacity in terms of the run rate for the second half. So, volumes of 4 percent or in that range we feel fairly comfortable with.

With respect to the second part of your question, with regarding yield, obviously as we continue to lap year-over-year comparisons with the impact of fuel surcharges and the timing of renegotiation of quotes and new contracts, we will start to see some moderation year-over-year. We're at 90 percent coverage on fuel. That tells us we’re higher up in the tree to pick the fruit, -- that will be a little bit more difficult for us to continue to move that needle, but we're committed to moving the needle. But I would say the impact of fuel will moderate year-over-year.

(Question) Just one follow up and I’ll pass along, but there is a question out there, I think, about if natural gas prices fall, you know, they've fallen somewhat and bounced back recently, but you know, if the storage is filled up, and you've seen in the cash market a meaningful decline, and say September, October, do you think your utility coal will have sensitivity to that, or given the outlook now you think that really won't be a meaningful impact in terms of the natural gas?

Thank you.

(Mr. Seale)� The current price of the natural gas is about 6 dollars, and January futures project a range of $9.50 to $10. So, with those prices for natural gas, we feel coal will be the choice, the fuel of choice for utilities. Now, that's notwithstanding anything that's going to happen with the disruption of gas supply with the upcoming hurricane season. Hopefully we won't have disruption, but it looks like the forward curve on gas at $10 to $11 by January puts it way out of range with respect to being competitive to coal for utilities.

(Mr. Moorman) �And to build on that, I think that the sense we get from our utility customers in terms of their leaning towards coal versus gas is that very few, if any, of them are convinced that there is going to be any sustained lower level of natural gas prices, and even if you saw a month or two where it dipped below 6 bucks, I don't think that's going to influence the coal buying patterns of the utilities in any real way.

(Question)� Wick, it is Tony Hatch. You, I don’t know, Don or you were talking about the breakdown in yield and how the fuel surcharge percentage, and I was scribbling. So, I don't know if you talked about where rate, pure price, came in on that, and if you did and I missed it, could you repeat it? But specifically, I would also like some color on where within the good intermodal story that’s going on, what's happening in year-over-year pricing on that and where you expect to see that? And then, if Steve could talk a little about what's going on with the derailment story for the Harriman winner? You didn't think you were going to get away with it, did you?

(Mr. Moorman)� Steve’s poised, but, Don, why don't you–

(Mr. Seale)� Tony, the first part of your question with respect to fuel for the quarter, it was 60 percent of the revenue per unit growth. Now, that was somewhat impacted by the year-over-year comparison, again by the $55 million.� So, you’ll need to take a look at that.

The second part of your question on intermodal, we continue to see good demand, strong demand, for intermodal; the truckload numbers that I showed you support that. Our international business continues to be very strong up 16 percent for the quarter and for the half. We see that continuing, and as far as demand goes, we price to the market and with the demand like that, obviously we're looking at yield improvement as we go forward.

(Mr. Moorman) �We continue to see a good pricing environment there as well. Steve, come on up and because there is a story about what we kind of think is somewhat of an anomaly versus what is actually happened with our statistics on things like train accidents.

(Mr. Tobias) Tony, I’m not sure I can put your question in exact context because the references that we've made to derailments is different than the Harriman configuration, which is based on personal injury. All right. I want to be sure I was clear on which direction you wish to go. Our view is we still, from a personal injury standpoint, our employees are doing quite well, and we feel comfortable with the position that we're in today on our personal injury experience and the safety effort that goes on on our property.�

To Hank's commentary about derailments and the impact on the casualty line, we have had some derailments in, and I would say not an extraordinary number by any stretch of the imagination, we have had some derailments that occurred in what I would describe as key areas. Those derailments, unfortunately, embodied some high revenue, high value commodities which further exacerbated the impact of the cost. There was nothing systemic in the causes. In fact, in the last fifteen years, and I am doing this off the top of my head, in accidents per million train miles, I think you will find that NS far and away has led the industry in derailments, train accidents per million train miles category, and I think the numbers will reflect, at the end of the year, that we'll still be in that type of position.

(Mr. Moorman)� Now I think we've actually shown a little decline --

(Mr. Tobias) Actually, year-over-year thus far to date, we have a decline in train accidents per million train miles this year versus last.

(Mr. Moorman)� Sometimes we have an accident with a bunch of empties, and sometimes we have a few accidents that have some automobiles or things like that, and that just kind of is an anomaly.

(Question)� I just want a couple of clarifications on previous answers.

(Mr. Moorman) And who might you be?

(Question)� I’m sorry. Ken Hoexter from Merrill Lynch. Hank, on the tax rate line, you know, obviously the tax rate jumps up maybe to 37 percent, but do we get a reduction in the other income expense line that offsets a portion of that? Does that completely go away as well?

(Mr. Wolf)� There will be some reduction in the other income line. The second quarter was $18 million, but there is also a $7 million tax benefit from the deduction that's associated with that expense, so the net is $11 million for the quarter. And on the go-forward basis, there will be some reduction there, but all in the major effect is on the tax line.

(Question)� Okay. And to just clarify what you're saying on that last answer, 60 percent of the 7 percent average revenue per car increase was fuel related, so pure pricing was up, pure pricing on mix was up 3 percent, and does that same 60 percent then apply to the 9.5 percent if you normalize for the coal, and you’re still up then, what, 5.5, 6 percent on fuel and that means still 3 percent on pure pricing?

(Mr. Moorman)� Don is going to sort that out for you.

(Mr. Seale)� That was a very complicated question you just asked there, Ken.

We had a negative mix effect in the quarter. And when we look at fuel again, we're looking at that delta between '05 and '06 quarter to quarter, in terms of RPU, so we had the volume increase, and we had that RPU increase, of which 60 percent was fuel, but mix was negative – mix was negative to the tune of about 3 percent.

(Question)� Perfect. All right. Now my question on the comp and benefits line, I understand there were options in the first quarter, but if you look at the, so the growth on the comp and benefits per employee was up quite significantly in the first quarter. If I look this quarter, Hank noted it was up 3 percent. Last year you kind of sustained about a 2 percent increase. I am just wondering if that reduction in life insurance costs, which I’m sorry, last year it ran into 3 percent rate, now it’s up only 2 percent. I’m just wondering if that reduction in life insurance costs is kind of a one-timer, and we should expect comp benefits per employee to jump back up to that kind of 3 percent run rate?

(Mr. Moorman)� Hank, why don't you comment on the insurance issue?

(Mr. Wolf)� Last year we had a “one-time” expense for the life insurance. This year we didn't.

But I think that there are a lot of moving parts in comp and benefit. The largest moving part is the stock price, and obviously, there was some significant increase in stock price in the first quarter that helped to drive that which we did not have in the second quarter.

(Mr. Moorman) �We're always, and we will try to help with this, you know, because of the effects of new accounting effects, we're always going to have an erratic first quarter it looks like, and we will continue as Hank says to have a little volatility in comp and benefits based on the stock price, which is nothing new. We've always had it. That in fact will continue.

(Question)� Just one last one, we saw pretty decent deceleration in the coal and ag yields. Just wondering if there is anything specific there, or if that’s just more a fuel comp year over year deceleration on the growth from first quarter?

(Mr. Seale) �Ken, again, on a quarter-over-quarter basis, take into account the rate case effect from 2005. On the ag side, I mentioned the FEMA traffic, and we had that moving at a heavier rate actually through almost all of April, so it was the first quarter and a portion of April, almost 14,000 cars at a higher RPU than the average in ag. So, take that into account. There’s nothing really different within ag.

Coal, other than the rate case, there’s nothing there in terms of changing in yield. The business mix was pretty much the same, although we did have a little bit more traffic to the river on utility side.

(Mr. Moorman)� And a little less export.

(Mr. Seale)� And a little less export which impacted RPU, as well with export being down 26 percent.

(Mr. Moorman) �We didn't see any signs of weakness in either one of those sectors.

(Mr. Seale) �No.

(Question)� It’s Tom Wadewitz. Just a follow-up question for Don, I guess. You're the popular guy today. You mentioned ethanol plants -- I think you said 14 to potentially come online -- I don't know if that’s '07 or '08. But can you give us any kind of a broad brush sense of what that might translate to in terms of revenue or cars for Norfolk Southern, and whether we should think of it as more of an '07 or '08 type of impact?

(Mr. Seale)� I would say the 14 are the ones with the higher probability. We’ve got more projects than that on the drawing boards. Most of these plants are capable of building a facility and bringing it up to production within an 18-month period, and they're well along. The Montpelier, Indiana plant that I mentioned for Central States Grain is already permitted – it’s already announced, and they've started construction. So, I would say a mix over the next 18 months that you can take into account. On the 850 million gallons that I mentioned, the run rate generally on ethanol is about 20,000 gallons per tank car.

(Question)� So, the 14 plants is 850 million gallon?

(Mr. Seale) Million gallons.

(Question)� And you said about 14,

(Mr. Seale) About 20,000 gallons per car, per tank car.

(Question)� 20,000 per tank car.

(Mr. Seale)� Now that assumes it would all move rail, which it may not.� There might be some local trucking to a plant facility, but generally these ethanol plants ship predominantly rail.

(Question)� And what comes on at ethanol tends to be relatively higher revenue per car versus your average for ag. Is that fair?

(Mr. Seale)� It depends on the length of haul and the market that it’s going to. I really can't give you a good answer on that.

(Mr. Moorman)� And that's because it’s in the state of transition. The markets for ethanol are expanding and changing, and we're going to have some ethanol that moves longer distances and shorter distances, and it is somewhat dependent on where these 14 plants decide to market their product.

(Mr. Seale) That’s right.

(Question)� Okay. Thank you.

(Question)� Just a real quick minor point, but on your share repurchase plan, is your goal to actually reduce shares outstanding or just to replace all the options dilution?

(Mr. Moorman)� Well, let me answer that. Our goal, as we have said, is we've announced a program and our goal is to try and, right now, is to buy shares at a consistent rate. I would say we will consider taking advantage of anything that we perceive in terms of weakness in the share price to maybe buy a few more, and our long-term goal initially is to control dilution as we've told a lot of people, and to bring the number of shares back down to hopefully over a reasonable period of time to about a 400 million level and control it there. That's our initial thought with the program, but we have a lot of flexibility in it and if we change our goals, we'll talk about it.

Hank, did I leave anything out?

(Question)� Thanks, I forgot to mention that I was Ken Hoexter from Merrill Lynch.

(Mr. Moorman)� All right. Well, I don't see any more hands. Thank you very much for coming. It’s a pleasure to see all of you. Thanks to everyone for listening in, and we look forward to talking to you again in about three months.

Prepared Remarks