October 25, 2006

Norfolk Southern Net Income Increases 38 Percent

Financial Statements

• Income
Third Quarter
Nine Months
• Balance Sheets
• Cash Flow
• Notes
• PDF version of statements

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.