July 26, 2006

Norfolk Southern Reports Record Revenues in Second Quarter

Financial Statements

• Income
Second Quarter
Six Months
• Balance Sheets
• Cash Flow
• Notes
• PDF version of statements

For second quarter 2006 vs. second quarter 2005:

Railway operating revenues increased 11 percent to a record $2.39 billion.
Income from railway operations rose 14 percent to a record $677 million.
Net income was $375 million, or $0.89 per diluted share.
The railroad operating ratio improved to 71.7 percent.
Carload shipments increased 4 percent to a record 2 million units.�

NORFOLK, VA. – For the second quarter of 2006, Norfolk Southern Corporation (NYSE: NSC) reported net income of $375 million, or $0.89 per diluted share, compared with $424 million, or $1.04 per diluted share, for the same period of 2005. Second-quarter 2005 results included a benefit from the effects of Ohio tax legislation as well as the effects of the settlement of two coal rate cases, which combined to increase 2005 reported results by $120 million, or $0.29 per diluted share. Second-quarter 2006 net income was 23 percent higher than the $304 million, or $0.75 per diluted share, earned in the same period of 2005, excluding those two items.

“I am pleased to report that Norfolk Southern produced record revenues and income from railway operations in the second quarter, reflecting the continuing strength of the market for our transportation products, as well as our sustained focus on providing a higher-value service product,” said CEO Wick Moorman. “Demand for rail transportation continues to grow in most sectors of our business, and our second-quarter results reflect strong volume growth and an improved operating ratio.”

For the first six months, net income was a record $680 million, or $1.61 per diluted share, an increase of 10 percent compared with $618 million, or $1.51 per diluted share, for the same period of 2005. Results for the first six months included a combined benefit from the tax legislation and settlement of the rate cases of $120 million, or $0.29 per diluted share. Excluding this $120 million, net income for the first six months of 2006 would have been 37 percent higher than the $498 million, or $1.22 per diluted share, earned in the same period of 2005.

Second-quarter railway operating revenues of $2.39 billion were the highest of any quarter in Norfolk Southern’s history and improved 11 percent compared with $2.15 billion for the same quarter a year earlier. Railway operating revenues for the first half of 2006 set a six-month record, increasing 14 percent to $4.7 billion compared with $4.1 billion for the first half of 2005. Traffic volume during both periods increased 4 percent, strengthened by an additional 77,000 carloads in the quarter and some 171,000 units year to date.

General merchandise revenues set records for both the second quarter and the first six months. The revenue increases during both periods primarily were due to higher average revenues, including fuel surcharges, as well as increased traffic volume. For the quarter, revenues climbed to $1.31 billion, up 14 percent compared with second quarter 2005. All commodity groups posted significant revenue increases during the period, led by metals and construction products, up 25 percent. For the first six months, revenues increased 16 percent to $2.59 billion.

In the quarter, coal revenues increased 1 percent to a record $584 million compared with the same period of 2005. For the first six months, coal revenues improved 9 percent to $1.14 billion compared with the same period last year. The revenue gains during both periods were the result of higher average revenues, including fuel surcharges, and strong demand for coal moving to utilities, which continue to experience increased demand for electricity generation. Coal revenues in 2005 benefited from the settlements of the two rate cases.

Intermodal revenues climbed 16 percent to $497 million, setting a second-quarter record, and rose 15 percent to a record $963 million for the first six months compared to the same periods of 2005. This primarily was the result of strong international business as well as higher average revenues, including fuel surcharges. Volume levels continued to increase in this sector, rising by more than 59,000 units, or 8 percent, in the second quarter, and by more than 115,000 units, or 8 percent, in the first six months compared to the same periods a year earlier.

Second-quarter railway operating expenses were $1.72 billion, up 10 percent compared with second-quarter 2005. For the first six months, railway operating expenses were $3.47 billion, up 11 percent over the same period a year earlier. The increases in both periods reflected higher diesel fuel prices, costs associated with increased traffic volume and, for the quarter, higher expenses related to casualties and other claims.

The second-quarter operating ratio of 71.7 percent, which was the lowest since the Conrail integration, was 0.8 of a percentage point better than the second quarter a year ago. For the first six months, the operating ratio was 73.8 percent, improving 2 percentage points compared to the same period a year earlier.

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

###

Norfolk Southern contacts:
(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 June 30,
�	2006		2005
�	�	�	�	�
Railway operating revenues:	�	�	�	�
�� Coal	$	584�	$	578�
�� General merchandise	�	1,311�	�	1,148�
�� Intermodal	�	497�	�	428�
�� Total railway operating revenues	�	2,392�	�	2,154�
�	�	�	�	�
Railway operating expenses:	�	�	�	�
�� Compensation and benefits	�	637�	�	624�
�� Materials, services and rents	�	471�	�	446�
�� Conrail rents and services	�	31�	�	31�
�� Depreciation	�	182�	�	194�
�� Diesel fuel	�	260�	�	162�
�� Casualties and other claims	�	65�	�	40�
�� Other	�	69�	�	65�
�� Total railway operating expenses	�	1,715�	�	1,562�
�	�	�	�	�
�� Income from railway operations	�	677�	�	592�
�	�	�	�	�
Other income – net	�	33�	�	9�
Interest expense on debt	�	121�	�	126�
�	�	�	�	�
�� Income before income taxes	�	589�	�	475�
�	�	�	�	�
Provision for income taxes:	�	�	�	�
�� Current	�	240�	�	122�
�� Deferred (note 2)	�	(26)	�	(71)
�� Total income taxes	�	214�	�	51�
�� Net income (note 1)	$	375�	$	424�
�	�	�	�	�
Earnings per share:	�	�	�	�
��Basic	$	0.91�	$	1.05�
��Diluted	$	0.89�	$	1.04�
�	�	�	�	�
Average shares outstanding (000's):	�	�	�	�
��Basic	�	413,507�	�	403,167�
��Diluted	�	422,780�	�	409,768�
�	�	�	�	�
See notes to consolidated financial statements.	�	�	�	�

�

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
($ millions except per share)
�	�	�	�		�
�	Six Months Ended June 30,
�	2006		2005
�	�	�	�	�
Railway operating revenues:	�	�	�	�
�� Coal	$	1,143�	$	1,045�
�� General merchandise	�	2,589�	�	2,234�
�� Intermodal	�	963�	�	836�
�� Total railway operating revenues	�	4,695�	�	4,115�
�	�	�	�	�
Railway operating expenses:	�	�	�	�
�� Compensation and benefits (note 3)	�	1,358�	�	1,228�
�� Materials, services and rents	�	942�	�	882�
�� Conrail rents and services	�	63�	�	66�
�� Depreciation	�	365�	�	387�
�� Diesel fuel	�	491�	�	312�
�� Casualties and other claims (note 4)	�	118�	�	118�
�� Other	�	130�	�	127�
�� Total railway operating expenses	�	3,467�	�	3,120�
�	�	�	�	�
�� Income from railway operations	�	1,228�	�	995�
�	�	�	�	�
Other income – net	�	68�	�	11�
Interest expense on debt	�	241�	�	254�
�	�	�	�	�
�� Income before income taxes	�	1,055�	�	752�
�	�	�	�	�
Provision for income taxes:	�	�	�	�
�� Current	�	402�	�	181�
�� Deferred (note 2)	�	(27)	�	(47)
�� Total income taxes	�	375�	�	134�
�	�	�	�	�
�� Net income (note 1)	$	680�	$	618�
�	�	�	�	�
Earnings per share:	�	�	�	�
��Basic	$	1.65�	$	1.54�
��Diluted	$	1.61�	$	1.51�
�	�	�	�	�
Average shares outstanding (000's):	�	�	�	�
��Basic	�	412,976�	�	402,469�
��Diluted	�	422,278�	�	409,938�
�	�	�	�	�
See notes to consolidated financial statements.	�	�	�	�

�

Norfolk Southern Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
($ millions)
�	�	�	�	�
�	June 30,		December 31,
�	2006		2005
Assets	�	�	�	�
Current assets:	�	�	�	�
�� Cash, cash equivalents and short-term investments	$	1,535�	$	1,257�
�� Accounts receivable – net (note 4)	�	990�	�	931�
�� Materials and supplies	�	146�	�	132�
�� Deferred income taxes	�	175�	�	167�
�� Other current assets	�	64�	�	163�
�� Total current assets	�	2,910�	�	2,650�
�	�	�	�	�
Investments	�	1,744�	�	1,590�
�	�	�	�	�
Properties less accumulated depreciation	�	20,886�	�	20,705�
�	�	�	�	�
Other assets (note 4)	�	1,019�	�	916�
�� Total assets	$	26,559�	$	25,861�
�	�	�	�	�
Liabilities and stockholders' equity	�	�	�	�
Current liabilities:	�	�	�	�
�� Accounts payable (note 4)	$	1,115�	$	1,163�
�� Income and other taxes	�	315�	�	231�
�� Other current liabilities	�	223�	�	213�
�� Current maturities of long-term debt	�	690�	�	314�
�� Total current liabilities	�	2,343�	�	1,921�
�	�	�	�	�
�Long-term debt	�	6,175�	�	6,616�
�	�	�	�	�
�Other liabilities (note 4)	�	1,497�	�	1,415�
�	�	�	�	�
�Deferred income taxes	�	6,593�	�	6,620�
�� Total liabilities	�	16,608�	�	16,572�
�	�	�	�	�
Stockholders' equity:	�	�	�	�
�Common stock $1.00 per share par value	�	435�	�	431�
�Additional paid-in capital	�	1,275�	�	992�
�Unearned restricted stock	�	--�	�	(17)
�Accumulated other comprehensive loss	�	(89)	�	(77)
�Retained income	�	8,350�	�	7,980�
�	�	9,971�	�	9,309�
�	�	�	�	�
Less treasury stock at cost, 20,813,125 and 20,833,125 ��shares, respectively	�	(20)	�	(20)
�� Total stockholders' equity	�	9,951�	�	9,289�
�	�	�	�	�
�� Total liabilities and stockholders' equity	$	26,559�	$	25,861�
�	�	�	�	�
See notes to consolidated financial statements.	�	�	�	�

�

Norfolk Southern Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
($ millions)
�	�	�		�	�
�	Six Months Ended June 30,
�	2006			2005
�	�		�	�	�
Cash flows from operating activities:	�		�	�	�
�� Net income	$		680�	$	618�
�� Reconciliation of net income to net cash provided by	�		�	�	�
�� operating activities:	�		�	�	�
�� Depreciation	�		372�	�	393�
�� Deferred income taxes	�		(27)	�	(47)
�� Equity in earnings of Conrail	�		(11)	�	(14)
�� Gains on properties and investments	�		(32)	�	(20)
�� Changes in assets and liabilities affecting operations:	�		�	�	�
�� Accounts receivable	�		(59)	�	(48)
�� Materials and supplies	�		(14)	�	(21)
�� Other current assets	�		60�	�	76�
�� Current liabilities other than debt	�		93�	�	(79)
�� Other – net	�		36�	�	2�
�� Net cash provided by operating activities	�		1,098�	�	860�
�	�		�	�	�
Cash flows from investing activities:	�		�	�	�
� Property additions	�		(579)	�	(357)
� Property sales and other transactions	�		78�	�	35�
� Investments, including short-term	�		(1,350)	�	(427)
� Investment sales and other transactions	�		877�	�	364�
�� Net cash used for investing activities	�		(974)	�	(385)
�	�		�	�	�
Cash flows from financing activities:	�		�	�	�
� Dividends	�		(133)	�	(88)
� Common stock issued – net	�		234�	�	72�
��Purchase and retirement of common stock (note 5)	�		(186)	�	--�
� Proceeds from borrowings	�		--�	�	332�
� Debt repayments (note 6)	�		(71)	�	(827)
�	�		�	�	�
�� Net cash used for financing activities	�		(156)	�	(511)
�	�		�	�	�
�� Net decrease in cash and cash equivalents	�		(32)	�	(36)
�	�		�	�	�
Cash and cash equivalents:	�		�	�	�
� At beginning of year	�		289�	�	467�
�	�		�	�	�
� At end of period	�		257�	�	431�
�	�		�	�	�
Short-term investments at end of period	�		1,278�	�	184�
�	�		�	�	�
Cash, cash equivalents and short-term investments at end of period	$		1,535�	$	615�
�	�		�	�	�
Supplemental disclosures of cash-flow information	�		�	�	�
� Cash paid during the period for:	�		�	�	�
�� Interest (net of amounts capitalized)	$		234�	$	248�
�� Income taxes (net of refunds)	$		221�	$	138�
�	�		�	�	�
See notes to consolidated financial statements.	�		�	�	�

�

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1. 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.

2.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.

3.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 six months of 2006 included $26 million for the accelerated recognition of awards granted to retirement eligible employees and $7 million for stock options granted to non-retirement eligible employees.

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 six months of 2005 include approximately $37 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 $23 million, or 5 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 six months of 2006, cash flows from financing activities included $186 million for the purchase and retirement of 3,610,314 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.

�