Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	($ in millions, except per share amounts)
Railway operating revenues:
Coal	$	701	$	899	$	2,222	$	2,608
General merchandise		1,425		1,439		4,477		4,191
Intermodal		567		551		1,657		1,576
Total railway operating revenues		2,693		2,889		8,356		8,375
Railway operating expenses:
Compensation and benefits		724		736		2,234		2,240
Purchased services and rents		403		403		1,186		1,191
Fuel		379		385		1,182		1,186
Depreciation		230		217		683		641
Materials and other (note 1)		226		210		661		704
Total railway operating expenses		1,962		1,951		5,946		5,962
Income from railway operations		731		938		2,410		2,413
Other income - net		33		60		93		121
Interest expense on debt		124		114		366		339
Income before income taxes		640		884		2,137		2,195
Provision for income taxes:
Current		97		159		522		345
Deferred		141		171		279		414
Total income taxes (note 2)		238		330		801		759
Net income	$	402	$	554	$	1,336	$	1,436
Earnings per share (note 3)
Basic	$	1.26	$	1.61	$	4.12	$	4.09
Diluted		1.24		1.59		4.07		4.03
Weighted average shares outstanding (note 4)
Basic		317.7		343.2		322.9		349.8
Diluted		321.8		349.0		327.4		355.6

See accompanying notes.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2012		2011		2012		2011
	($ in millions)
Net income	$	402	$	554	$	1,336	$	1,436
Other comprehensive income, before tax:
Pension and other postretirement benefits		33		28		97		85
Other comprehensive loss of equity investees		-		-		(4)		-
Other comprehensive income, before tax		33		28		93		85
Income tax expense related to items of other
comprehensive income		(13)		(11)		(38)		(33)
Other comprehensive income, net of tax		20		17		55		52
Total comprehensive income	$	422	$	571	$	1,391	$	1,488

See accompanying notes.

Norfolk Southern Corporation and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

	September 30,			December 31,
	2012			2011
	($ in millions)
Assets
Current assets:
Cash and cash equivalents		$	693		$	276
Short-term investments			15			25
Accounts receivable – net			1,078			1,022
Materials and supplies			236			209
Deferred income taxes			144			143
Other current assets			33			76
Total current assets			2,199			1,751
Investments			2,315			2,234
Properties less accumulated depreciation of $9,859 and
$9,464, respectively			25,260			24,469
Other assets			66			84
Total assets		$	29,840		$	28,538
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	1,260		$	1,092
Short-term debt			-			100
Income and other taxes			150			207
Other current liabilities			362			252
Current maturities of long-term debt			52			50
Total current liabilities			1,824			1,701
Long-term debt			8,428			7,390
Other liabilities			2,018			2,050
Deferred income taxes			7,803			7,486
Total liabilities			20,073			18,627
Stockholders’ equity:
Common stock $1.00 per share par value, 1,350,000,000 shares
authorized; outstanding 316,043,185 and 330,386,089 shares,
respectively, net of treasury shares			317			332
Additional paid-in capital			1,909			1,912
Accumulated other comprehensive loss			(971)			(1,026)
Retained income			8,512			8,693
Total stockholders’ equity			9,767			9,911
Total liabilities and stockholders’ equity		$	29,840		$	28,538

See accompanying notes.

Norfolk Southern Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

	Nine Months Ended
	September 30,
	2012		2011
	($ in millions)
Cash flows from operating activities:
Net income	$	1,336	$	1,436
Reconciliation of net income to net cash provided by operating activities:
Depreciation		688		646
Deferred income taxes		279		414
Gains and losses on properties and investments		(4)		(30)
Changes in assets and liabilities affecting operations:
Accounts receivable		(56)		(222)
Materials and supplies		(27)		(43)
Other current assets		43		60
Current liabilities other than debt		183		402
Other – net		34		101
Net cash provided by operating activities		2,476		2,764
Cash flows from investing activities:
Property additions		(1,522)		(1,433)
Property sales and other transactions		47		70
Investments, including short-term		(14)		(88)
Investment sales and other transactions		37		246
Net cash used in investing activities		(1,452)		(1,205)
Cash flows from financing activities:
Dividends		(467)		(432)
Common stock issued – net		77		95
Purchase and retirement of common stock (note 4)		(1,150)		(1,611)
Proceeds from borrowings – net		1,291		396
Debt repayments		(358)		(592)
Net cash used in financing activities		(607)		(2,144)
Net increase (decrease) in cash and cash equivalents		417		(585)
Cash and cash equivalents:
At beginning of year		276		827
At end of period	$	693	$	242
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of amounts capitalized)	$	297	$	296
Income taxes (net of refunds)		536		121

See accompanying notes.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:

1.MATERIALS AND OTHER 

During the first quarter of 2011, NS received an unfavorable ruling for an arbitration claim with an insurance carrier, and was denied recovery of the contested portion ($43 million) of the claim.  As a result, NS recorded a $43 million charge during the first quarter of 2011 for the receivables associated with the contested portion of the claim and a $15 million charge for other receivables affected by the ruling for which recovery was no longer probable. 

2.INCOME TAXES

During the second quarter of 2011, the Internal Revenue Service (IRS) completed its examination of NS' 2008 tax return and review of certain claims for refund for prior years that resulted in a decrease in income tax expense of $40 million.  Also during the second quarter of 2011, three states enacted tax law changes that decreased deferred income tax expense by $19 million. 

3.EARNINGS PER SHARE

For basic earnings per share, income available to common stockholders reflects reductions for the effect of dividend equivalent payments made to holders of stock options and restricted stock units as follows:  for the third quarter, $3 million in 2012 and $2 million in 2011; and for the first nine months, $7 million in 2012 and $6 million in 2011.       

For diluted earnings per share, income available to common stockholders reflects reductions for the effect of dividend equivalent payments made to holders of stock options and restricted stock units as follows:  for the third quarter, $1 million in 2012 and less than $1 million in 2011; and for the first nine months, $3 million in 2012 and $2 million in 2011.

4.STOCK REPURCHASE PROGRAM

NS repurchased and retired 16.5 million shares of Common Stock in the first nine months of 2012, at a cost of $1.2 billion, and 23.8 million shares at a cost of $1.6 billion for the same period of 2011.  On August 1, 2012, NS’ Board of Directors authorized the repurchase of up to an additional 50 million shares of Common Stock through December 31, 2017.  The timing and volume of purchases is guided by management's assessment of market conditions and other pertinent factors.  Any near-term share repurchases are expected to be made with internally generated cash, cash on hand, or proceeds from borrowings.  Since the beginning of 2006, NS has repurchased and retired 126.1 million shares at a total cost of $7.4 billion.