Fitch Affirms Norfolk Southern IDR at 'BBB'; Revises Outlook to Positive.

CHICAGO -- Fitch Ratings has affirmed the issuer default rating of 'BBB' on Norfolk Southern Corporation (NYSE:NSC). Fitch has also affirmed NSC's senior unsecured rating of 'BBB', the unsecured bank facility rating of 'BBB', and the short term rating of 'F2'. The senior unsecured rating applies to approximately $6.4 billion in debt. Fitch has revised the Rating Outlook for NSC to Positive from Stable.

NSC's ratings reflect the Class I railroad operator's strong operating performance and cash flow potential, offset against a relatively high, but declining, debt load. Although improvements in the U.S. economy over the past several years have given all major railroads a level of pricing power not seen in 20 years, NSC has been able to leverage its relatively fluid network to produce one of the best operating ratios in the industry. This, in turn, has led to increasing levels of operating cash flow that are sufficient to fund NSC's capital spending needs and cover its other financial obligations. Despite the issuance of a $300 million century bond in March 2005, NSC has reduced its debt load from $7.53 billion at the end of 2004 to $6.96 billion at Sept. 30, 2005. Fitch expects to see further opportunities for debt reduction over the near term as continued high demand for rail transportation keeps the company's free cash flow strong. Operating cash flow could be pressured somewhat in 2006, however, as the percentage of NSC's fuel covered by hedges falls to 3% in the second quarter and runs out completely after that.

NSC's operating ratio in the first nine months of 2005 was 75.7%, the best showing among the four largest Class I railroads. This level of profitability is largely due to investments that NSC made several years ago to improve the efficiency of its network. The company has used this network efficiency to its advantage as the strong U.S. economy has driven record volumes onto the nation's railroads. High demand for rail shipping has resulted in increased industry freight rates and allowed the railroads to offset higher fuel costs with revenue surcharges. NSC's profitability has translated a significant portion of this higher revenue into operating cash flow, which was 32% higher in the first three quarters of 2005 than in the comparable period of 2004, at $1.60 billion versus $1.21 billion. Although Hurricanes Katrina and Rita negatively affected NSC's operations by damaging property, forcing the rerouting of trains, and shutting some customer facilities, the financial impact of the storms did not have a significant effect on the company's credit quality.

NSC continues to have adequate liquidity to meet its projected cash obligations, with a cash and equivalents balance of $1.05 billion as of Sept. 30 and access to a $1.0 billion unsecured revolving credit facility, from which no funds were drawn at the end of the third quarter. Free cash flow in the first nine months of the year was $883 million. At Sept. 30, total balance sheet debt stood at $6.96 billion (including discounts and premiums) and largely consisted of unsecured notes, secured equipment obligations, and capital leases. Maturities over the next three years are relatively smooth, ranging between $300 million and $500 million. In addition to its balance-sheet debt, NSC also has significant off-balance-sheet obligations, primarily operating leases on locomotives, rail cars, lines of track, and real estate.

In addition to debt maturities, other cash obligations include capital expenditures and dividend payments. Capital spending in 2005 is expected to be about equal to what the company spent in 2004, or approximately $1.05 billion. The current estimate is above the company's initial 2005 estimate of $938 million and includes $84 million in locomotive and other equipment purchases that NSC committed to in the first quarter of this year. In addition, the company expects to spend approximately $30 million in capital to rebuild properties that were damaged by Hurricane Katrina. However, much of this $30 million figure will be covered by insurance. In addition to capital expenditures, NSC is using its increasing operating cash flow to cover rising dividend payments. Since early 2002, NSC's dividend payment per share has more than doubled, from $0.06 to $0.13 per share. The most recent increase was declared in July. At the current level, Fitch estimates that full-year dividend payments could rise past $210 million in 2006.

Looking out toward the remainder of 2005 and into 2006, Fitch expects continued high demand for rail transportation. Trucking capacity continues to be relatively tight, which will likely push some shipments over to the rails, while high fuel costs will continue to favor railroads over trucks for some long-haul shipments. Coal volumes and pricing are expected to remain robust, as utilities work to replenish low stockpiles and natural gas prices remain high. Intermodal volumes are also expected to remain strong, with robust imports of consumer goods, particularly from China, driving volume in this sector. Strong demand coupled with relatively modest capacity growth should drive continued unit price increases for rail transportation. Fitch believes NSC is well positioned to benefit from a continued healthy demand environment and expects to see the company's free cash flow remain relatively strong, even in the event that the U.S. economy begins to cool somewhat.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflict of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.