Norfolk Southern Reports Record Revenues, Income from Railway Operations

Financial Statements

• Income
Third Quarter
Nine Months
• Balance Sheets
• Cash Flow
• Notes
• PDF version of statements (212k)

For the third quarter 2004:

Railway operating revenues increased 16 percent and set an all-time record of $1.9 billion.
Income from railway operations improved 51 percent to a record $469 million.
Net income was $288 million, $0.72per diluted share.
Operating ratio improved 5.8 percentage points to 74.7 percent.

NORFOLK , VA. – For the third-quarter of 2004, Norfolk Southern Corporation (NYSE: NSC) reported record revenues of $1.9 billion, up 16 percent compared with the same period last year, and record third-quarter income from railway operations of $469 million, up 51 percent compared with the third-quarter in 2003.

Third-quarter reported net income was $288 million, or $0.72 per diluted share, which included a non-cash gain of $53 million, or $0.13 per diluted share, from the Conrail corporate reorganization. Excluding the gain, net income was $235 million, or $0.59 per diluted share, an increase of 72 percent, compared with $137 million, or $0.35 per diluted share, in the same period last year.

The railway operating ratio for the third quarter improved 5.8 percentage points to 74.7 percent compared with 80.5 percent in the same period of 2003.

“By any measure, this was an extremely strong quarter for our company,” said David R. Goode, chairman and chief executive officer. “We demonstrated uniform strength in the face of a robust peak traffic season, and our people and network performed well.”

For the first nine months, reported net income was $659 million, or $1.66 per diluted share, which included the $53 million, or $0.13 per diluted share, gain on the Conrail reorganization. Excluding the gain, net income was $606 million, or $1.53 per diluted share, an increase of 25 percent, compared with $483 million, or $1.24 per diluted share, for the same period of last year. Net income for the first nine months of 2003 included a $114 million, or $0.29 per diluted share, gain due to a required industry-wide accounting change to account for the cost of removing railroad crossties, and a gain of $10 million, or $0.03 per diluted share, from discontinued motor carrier operations.

Railway operating revenues for the first nine months of 2004 increased 12 percent to a record $5.4 billion compared with $4.8 billion for the same period a year earlier.

The railway operating ratio for the first nine months improved 5.6 percentage points to 76.9 percent compared with 82.5 percent in the same period of 2003.

Third-quarter general merchandise revenues reached $1.0 billion, an increase of 10 percent over the same quarter last year. For the first nine months, general merchandise revenues improved 8 percent to a record $3.0 billion compared with the year-earlier period. All merchandise markets reported revenue gains compared with the same periods a year earlier.

Coal revenues increased 20 percent to $447 million in the third quarter and improved 14 percent to $1.3 billion for the first nine months of 2004 compared with the same periods last year. This growth principally was driven by increases in export and utility coal revenues.

Intermodal revenues grew 28 percent to a record $404 million in the third quarter and improved 21 percent to a record $1.1 billion for the first nine months compared to the same periods of 2003. Significantly increased traffic volumes and higher average revenues helped drive the growth.

Third-quarter railway operating expenses were up $101 million, or 8 percent, compared with third quarter last year. For the first nine months, railway operating expenses rose $171 million, or 4 percent, over the same period in 2003. Both increases were primarily related to the higher business volumes.

Norfolk Southern Corporation is one of the nation’s premier transportation companies. Its Norfolk Southern Railway subsidiary operates 21,500 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 automotive parts and finished vehicles.

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For further information contact:

(Media) Bob Fort, 757-629-2710
(Investors) Leanne Marilley, 757-629-2861

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

	Three Months Ended Sept. 30,
	2004		2003

Railway operating revenues:
Coal	$	447	$	372
General merchandise		1,006		911
Intermodal		404		315
Total railway operating revenues		1,857		1,598

Railway operating expenses:
Compensation and benefits		570		531
Materials, services and rents		411		346
Conrail rents and services		79		105
Depreciation		150		128
Diesel fuel		98		86
Casualties and other claims		31		44
Other		49		47
Total railway operating expenses		1,388		1,287

Income from railway operations		469		311

Other income – net (note 1)		40		12
Interest expense on debt		(121)		(123)

Income before income taxes		388		200

Provision for income taxes:
Current		76		(6)
Deferred		24		69
Total income taxes		100		63
Net income	$	288	$	137

Earnings per share:
Basic	$	0.73	$	0.35
Diluted	$	0.72	$	0.35

Average shares outstanding (000's)		394,449		389,910

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,
	2004		2003

Railway operating revenues:
Coal	$	1,269	$	1,115
General merchandise		2,998		2,773
Intermodal		1,096		904
Total railway operating revenues		5,363		4,792

Railway operating expenses:
Compensation and benefits		1,680		1,592
Materials, services and rents		1,165		1,083
Conrail rents and services		282		314
Depreciation		409		384
Diesel fuel		311		283
Casualties and other claims		109		142
Other		167		154
Total railway operating expenses		4,123		3,952

Income from railway operations		1,240		840

Other income – net (note 1)		50		57
Interest expense on debt		(363)		(373)

Income from continuing operations before income taxes and accounting changes		927		524

Provision for income taxes:
Current		156		49
Deferred		112		116
Total income taxes		268		165

Income from continuing operations before accounting changes		659		359

Discontinued operations – taxes of sale of motor carrier (note 2)		--		10

Cumulative effect of changes in accounting principles, net of taxes (note 3)		--		114
Net income	$	659	$	483

Earnings per share:
Income from continuing operations before accounting changes
Basic	$	1.68	$	0.92
Diluted	$	1.66	$	0.92
Net Income
Basic	$	1.68	$	1.24
Diluted	$	1.66		1.24

Average shares outstanding (000's)		392,693		389,598

See notes to consolidated financial statements.

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

	September 30,		December 31,
	2004		2003
Assets
Current assets:
Cash and cash equivalents	$	475	$	284
Short-term investments		55		2
Accounts receivable – net		806		695
Materials and supplies		102		92
Deferred income taxes		191		189
Other current assets		177		163
Total current assets		1,806		1,425

Investment in Conrail (note 1)		735		6,259
Properties less accumulated depreciation (note 1)		20,464		11,779
Other assets		1,462		1,133
Total assets	$	24,467	$	20,596

Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	1,004	$	948
Income and other taxes		245		199
Due to Conrail		68		81
Other current liabilities		276		213
Current maturities of long-term debt		529		360
Total current liabilities		2,122		1,801

Long-term debt (note 1)		7,019		6,800

Other liabilities		1,116		1,080

Due to Conrail (note 1)		--		716

Deferred income taxes (note 1)		6,522		3,223
Total liabilities		16,779		13,620

Stockholders' equity:
Common stock $1.00 per share par value		417		412
Additional paid-in capital		620		521
Unearned restricted stock		(9)		(5)
Accumulated other comprehensive income (loss)		11		(44)
Retained income		6,669		6,112
		7,708		6,996

Less treasury stock at cost, 20,938,125 and 21,016,125 shares, respectively		(20)		(20)
Total stockholders' equity		7,688		6,976

Total liabilities and stockholders' equity	$	24,467	$	20,596

See notes to consolidated financial statements.

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

	Nine Months Ended Sept. 30,
	2004		2003

Cash flows from operating activities:
Net income	$	659	$	483
Reconciliation of net income to net cash provided by
operating activities:
Net cumulative effect of changes in accounting principles (note 3)		--		(114)
Depreciation		417		395
Deferred income taxes		112		116
Equity in earnings of Conrail		(45)		(41)
Gain on Conrail corporate reorganization (note 1)		(53)		--
Gains on properties and investments		(15)		(16)
Income from discontinued operations (note 2)		--		(10)
Changes in assets and liabilities affecting operations:
Accounts receivable		(110)		(96)
Materials and supplies		(10)		5
Other current assets		70		86
Current liabilities other than debt		162		23
Other – net		24		(31)
Net cash provided by operating activities		1,211		800

Cash flows from investing activities:
Property additions		(669)		(536)
Property sales and other transactions		45		40
Investments, including short-term		(146)		(83)
Investment sales and other transactions		5		1
Net cash used for investing activities		(765)		(578)

Cash flows from financing activities:
Dividends		(102)		(86)
Common stock issued – net		71		5
Proceeds from borrowings (note 4)		202		218
Debt repayments		(426)		(385)

Net cash used for financing activities		(255)		(248)

Net increase (decrease) in cash and cash equivalents		191		(26)

Cash and cash equivalents:
At beginning of year		284		184
At end of period	$	475	$	158

Supplemental disclosures of cash-flow information
Cash paid during the period for:
Interest (net of amounts capitalized)	$	311	$	334
Income taxes	$	78	$	62

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1. CONRAIL CORPORATE REORGANIZATION -

On August 27, 2004 , NS, CSX and Conrail completed a corporate reorganization of Conrail that resulted in the direct ownership and control by Norfolk Southern Railway Company (NSR) of routes and assets that had previously been operated by NSR under operating and lease agreements with a Conrail subsidiary. As a part of the reorganization, NSR issued new unsecured debt obligations, which were exchanged for unsecured debt obligations Consolidated Rail Corporation (CRC), a Conrail subsidiary. In addition, NSR entered into new lease and sublease arrangements with CRC to support CRC’s secured debt and lease obligations, and the long-term note due to Conrail was eliminated. The reorganization did not affect the Shared Assets Areas, which continue to be owned and operated by CRC, and are reflected in NS’ remaining Investment in Conrail as shown in the Consolidated Balance Sheet.

This distribution was accounted for at fair value, resulting in a net gain of $53 million, which is included in Other income – net on the Consolidated Statement of Income. The gain increased net income by $53 million, or 13 cents per diluted share.

2. DISCONTINUED OPERATIONS IN 2003 -

First-quarter 2003 results included an additional after-tax gain of $10 million, or 3 cents per share (basic and diluted), related to the 1998 sale of NS’ motor carrier subsidiary, North American Van Lines, Inc. This non-cash gain resulted from the resolution of tax issues related to the transaction.

3. CHANGES IN ACCOUNTING PRINCIPLES IN 2003 -

NS adopted Financial Accounting Standards Board ( FASB) Statement No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143), effective Jan. 1, 2003, and recorded a $110 million net adjustment ($182 million before taxes) for the cumulative effect of this change in accounting on years prior to 2003. Pursuant to SFAS No. 143, the cost to remove crossties must be recorded as an expense when incurred; previously these removal costs were accrued as a component of depreciation.

NS also adopted FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN No. 46), effective Jan. 1, 2003, and recorded a $4 million net adjustment ($6 million before taxes) for the cumulative effect of this change in accounting on years prior to 2003. Pursuant to FIN No. 46, NS has consolidated a special-purpose entity that leases certain locomotives to NS.

The cumulative effect of these changes amounted to $114 million, or 29 cents per share (basic and diluted).

4. PAYMENTS TO CONRAIL -

Payments made to Conrail in accordance with the operating and lease agreements in place before the Conrail corporate reorganization (see note 1) reduce NS’ “Net cash provided by operating activities.” A significant portion of these payments was borrowed back from a Conrail subsidiary. The net borrowings are included in NS’ “Net cash used for financing activities” and totaled $118 million in the first nine months of 2004 and $174 million in the first nine months of 2003.