Norfolk Southern Reports Fourth-Quarter and 2006 Results

Financial Statements

• Income
Fourth Quarter
Twelve Months
• Balance Sheets
• Cash Flow
• Notes
• PDF version of statements

NS set the following fourth-quarter records:

Railway operating revenues increased 3 percent to $2.3 billion.
Income from railway operations rose 3 percent to $614 million.
Net income increased 6 percent to $385 million.
Diluted earnings per share climbed 9 percent to $0.95.

NS set the following records for the year:

Railway operating revenues climbed 10 percent to $9.4 billion.
Income from railway operations rose 21 percent to $2.6 billion.
Net income increased 16 percent to $1.5 billion, or $3.57 per diluted share.

NORFOLK, VA – Norfolk Southern Corporation (NYSE: NSC) today reported record fourth-quarter 2006 net income of $385 million, an increase of 6 percent compared with $362 million for fourth-quarter 2005. Earnings per diluted share were a record $0.95, up 9 percent compared with the $0.87 per diluted share earned in the fourth quarter of 2005.

Net income for 2006 was a record $1.5 billion, or $3.57 per diluted share, an increase of 16 percent compared with net income of $1.3 billion, or $3.11 per diluted share, for 2005. 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 2006 would have been 25 percent higher than the $1.2 billion, or $2.88 per diluted share, earned in 2005.

“Our financial performance continues to showcase the strength and dedication of our people and this company. We are handling business demands unimaginable only a few years ago, and doing it safely and efficiently, often in the face of considerable challenges. And we continue to set historically good results that benefit our customers and investors,” said Chief Executive Officer Wick Moorman.

“We’re clearly facing a softer economy, at least in terms of some of our important markets and the overall surface transportation marketplace, but our traffic volumes are still at levels close to our all-time highs, evidence that the railroad renaissance is still alive and well.”

Railway operating revenues set a fourth-quarter record, reaching $2.3 billion, a 3 percent increase over the same period a year earlier. For 2006, railway operating revenues of $9.4 billion were the highest of any year in Norfolk Southern’s history, improving 10 percent compared with 2005 results.

General merchandise revenues rose 2 percent to $1.2 billion, setting a fourth-quarter record, and climbed 11 percent to a record $5.1 billion for the year compared with the same periods of 2005. For both periods, all commodity groups, except automotive, reported revenue growth. The quarterly increase reflected higher average revenues, which offset lower volume. For the year, the increase resulted from higher average revenues, including increased fuel surcharges.

Coal revenues set records for both the fourth quarter and the year, rising 13 percent to $592 million for the quarter and growing 10 percent to $2.3 billion for the year, compared with the same periods of 2005. The revenue increases during both periods primarily were driven by higher average revenues, including fuel surcharges, and increased traffic volume due to demand for utility coal.

Intermodal revenues for the fourth quarter were $493 million, a 5 percent decrease compared to the same quarter of 2005, reflecting a 3 percent decline in traffic volume. For the year, intermodal revenues reached a record $2.0 billion, up 8 percent compared to 2005, principally the result of higher fuel surcharges and increased traffic volume.

Railway operating expenses were $1.7 billion for the quarter, up 3 percent compared to fourth-quarter 2005, and $6.9 billion for 2006, an increase of 7 percent over 2005. The increases were primarily the result of higher compensation and benefits, increased maintenance activities and, for the year, higher diesel fuel prices and volume-related expenses.

Income from railway operations set records for the fourth quarter and the year, increasing 3 percent to $614 million for the quarter and climbing 21 percent to $2.6 billion for the year, compared with the same periods of 2005.

The fourth-quarter operating ratio improved to 73.5 percent, compared with 73.7 percent for the same period of 2005. For the year, the operating ratio improved 2.4 percentage points to 72.8 percent.

Norfolk Southern Corporation is one of the nation’s premier transportation companies. Its Norfolk Southern Railway subsidiary operates approximately 21,000 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.

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For further information contact:
(Media) Bob Fort, 757-629-2710 (rcfort@nscorp.com)
(Investors) Leanne Marilley, 757-629-2861 (leanne.marilley@nscorp.com)

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
($ millions except per share)

	Three Months Ended Dec. 31,
	2006		2005

Railway operating revenues:
Coal	$	592	$	524
General merchandise		1,234		1,214
Intermodal		493		519
Total railway operating revenues		2,319		2,257

Railway operating expenses:
Compensation and benefits		655		636
Materials, services and rents		481		465
Conrail rents and services		33		32
Depreciation		187		192
Diesel fuel		229		226
Casualties and other claims		52		47
Other		68		65
Total railway operating expenses		1,705		1,663

Income from railway operations		614		594

Other income – net		40		31
Interest expense on debt		115		121

Income before income taxes		539		504

Provision for income taxes:
Current		120		69
Deferred		34		73
Total income taxes		154		142

Net income	$	385	$	362

Earnings per share:
Basic	$	0.97	$	0.89
Diluted	$	0.95	$	0.87

Average shares outstanding (000's):
Basic		395,952		407,481
Diluted		404,320		416,953

See notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
($ millions except per share)

	Years Ended Dec. 31,
	2006		2005

Railway operating revenues:
Coal	$	2,330	$	2,115
General merchandise		5,106		4,586
Intermodal		1,971		1,826
Total railway operating revenues		9,407		8,527

Railway operating expenses:
Compensation and benefits (note 1)		2,637		2,493
Materials, services and rents		1,895		1,809
Conrail rents and services		126		129
Depreciation		738		774
Diesel fuel		977		727
Casualties and other claims (note 5)		220		224
Other		257		254
Total railway operating expenses		6,850		6,410

Income from railway operations		2,557		2,117

Other income – net		149		74
Interest expense on debt		476		494

Income before income taxes		2,230		1,697

Provision for income taxes:
Current		757		336
Deferred (note 3)		(8)		80
Total income taxes		749		416

Net income (note 2)	$	1,481	$	1,281

Earnings per share:
Basic	$	3.63	$	3.17
Diluted	$	3.57	$	3.11

Average shares outstanding (000's):
Basic		405,988		404,170
Diluted		414,700		412,291

See notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
($ millions)

	As of Dec. 31,
	2006		2005
Assets
Current assets:
Cash, cash equivalents and short-term investments	$	918	$	1,257
Accounts receivable – net (note 5)		992		931
Materials and supplies		151		132
Deferred income taxes		186		167
Other current assets		153		163
Total current assets		2,400		2,650

Investments		1,787		1,590

Properties less accumulated depreciation		21,068		20,705

Other assets (notes 4 and 5)		775		916
Total assets	$	26,030	$	25,861

Liabilities and stockholders' equity
Current liabilities:
Accounts payable (note 5)	$	1,181	$	1,163
Income and other taxes		205		231
Other current liabilities		216		213
Current maturities of long-term debt		491		314
Total current liabilities		2,093		1,921

Long-term debt		6,109		6,616

Other liabilities (notes 4 and 5)		1,767		1,415

Deferred income taxes		6,433		6,620
Total liabilities		16,402		16,572

Stockholders' equity:
Common stock $1.00 per share par value		418		431
Additional paid-in capital		1,303		992
Unearned restricted stock		--		(17)
Accumulated other comprehensive loss (note 4)		(369)		(77)
Retained income		8,296		7,980
		9,648		9,309

Less treasury stock at cost, 20,780,638 and
20,833,125 shares, respectively		(20)		(20)
Total stockholders' equity		9,628		9,289

Total liabilities and stockholders' equity	$	26,030	$	25,861

See notes to consolidated financial statements.

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
($ millions)

	Years Ended Dec. 31,
	2006		2005

Cash flows from operating activities:
Net income	$	1,481	$	1,281
Reconciliation of net income to net cash provided by
operating activities:
Depreciation		750		787
Deferred income taxes		(8)		80
Equity in earnings of Conrail		(25)		(37)
Gains on properties and investments		(54)		(51)
Changes in assets and liabilities affecting operations:
Accounts receivable		(60)		(94)
Materials and supplies		(19)		(28)
Other current assets		(11)		20
Current liabilities other than debt		38		55
Other – net		114		92
Net cash provided by operating activities		2,206		2,105

Cash flows from investing activities:
Property additions		(1,178)		(1,025)
Property sales and other transactions		119		110
Investments, including short-term		(1,804)		(1,822)
Investment sales and other transactions		2,179		910
Net cash used for investing activities		(684)		(1,827)

Cash flows from financing activities:
Dividends		(278)		(194)
Common stock issued – net		297		194
Purchase and retirement of common stock (note 6)		(964)		--
Proceeds from borrowings		--		433
Debt repayments (note 7)		(339)		(889)

Net cash used for financing activities		(1,284)		(456)

Net increase (decrease) in cash and cash equivalents		238		(178)

Cash and cash equivalents:
At beginning of year		289		467

At end of year		527		289

Short-term investments at end of year		391		968

Cash, cash equivalents and short-term investments at end of year	$	918	$	1,257

Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest (net of amounts capitalized)	$	473	$	485
Income taxes (net of refunds)	$	692	$	271

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1. REQUIRED ACCOUNTING CHANGE – SHARE-BASED PAYMENTS –
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 for the year included $23 million for the accelerated recognition of awards granted to retirement eligible employees and $13 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 rail 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. REQUIRED ACCOUNTING CHANGE – PENSION AND OTHER POSTRETIREMENT BENEFITS –
As of Dec. 31, 2006, NS adopted Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). This statement requires an employer to recognize in its statement of financial position the overfunded or underfunded status of defined benefit pension and postretirement plans measured as the difference between the fair value of plan assets and the benefit obligation. As a result of adopting this standard, NS reduced its pension asset by $217 million and increased its pension and postretirement liabilities by $294 million in its Consolidated Balance Sheet, with a corresponding reduction to stockholders’ equity of $314 million (net of tax) reflected as an increase to accumulated other comprehensive loss. The adoption of SFAS 158 had no impact on years prior to 2006 and had no effect on the calculation of expenses for pensions and postretirement benefits.

5. 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 2005 include approximately $41 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.

6. 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. In 2006, NS purchased and retired 21.8 million shares of common stock at a cost of $964 million under this program.

7. 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.