10-QPeriod: Q2 FY2005

NORFOLK SOUTHERN CORP Quarterly Report for Q2 Ended Jun 30, 2005

Filed August 1, 2005For Securities:NSC

Summary

Norfolk Southern Corporation (NSC) reported a significant increase in net income for the second quarter of 2005, reaching $424 million, more than double the $213 million reported in the same period of 2004. This robust performance was driven by a 19% rise in railway operating revenues, totaling $2.2 billion, fueled by higher rates, increased fuel surcharges, and stronger traffic volumes across key segments like coal and intermodal. The company also benefited from a $96 million reduction in deferred income tax liability due to changes in Ohio tax legislation and a $24 million gain from the settlement of two coal rate cases. Despite a 13% increase in operating expenses, largely due to higher fuel prices and increased compensation and benefits, the company's improved revenue generation and a favorable tax impact led to substantial earnings growth. NSC's financial condition remains strong, with operating cash flow increasing significantly. The company also addressed its debt structure by issuing new notes and exchanging them for older, higher-interest debt, strengthening its capital position.

Key Highlights

  • 1Net income surged to $424 million in Q2 2005, a 99% increase year-over-year.
  • 2Railway operating revenues grew by 19% to $2.2 billion, driven by broad-based strength in coal, general merchandise, and intermodal segments.
  • 3Operating expenses increased by 13% to $1.6 billion, primarily due to higher fuel costs and compensation expenses.
  • 4A significant benefit of $96 million was recognized from Ohio tax law changes, reducing deferred tax liabilities.
  • 5Settlement of two coal rate cases provided a $24 million boost to net income.
  • 6The company actively managed its debt, issuing new notes and exchanging older, higher-interest debt.
  • 7Cash flow from operations significantly increased, indicating a strong liquidity position.

Frequently Asked Questions

The primary drivers were a substantial 19% increase in railway operating revenues, benefiting from higher rates, increased fuel surcharges, and strong traffic volumes, particularly in the coal and intermodal sectors. Additionally, a $96 million benefit from Ohio tax law changes and a $24 million gain from coal rate case settlements significantly boosted net income.

Operating expenses increased by 13%, largely due to higher diesel fuel prices and increased compensation and benefits. Norfolk Southern utilized a diesel fuel hedging program, which provided benefits of $40 million in the second quarter, partially offsetting the impact of higher fuel costs. The company also reported that no new fuel hedges had been entered into since May 2004.

Norfolk Southern actively managed its debt during the quarter by issuing $717 million in new unsecured notes and exchanging them for older notes with higher interest rates. This refinancing, along with strong operating cash flow, led to a decrease in the debt-to-total capitalization ratio from 48.5% at year-end 2004 to 44.8% at June 30, 2005. The company also has a $1 billion credit facility available.

The company is involved in ongoing litigation, including casualty claims and environmental matters. While management believes its recorded liabilities are adequate, the outcome of these matters is uncertain and could potentially impact future results. A notable event was the Graniteville, SC derailment in Q1 2005, with Q2 expenses reflecting the company's self-insured retention. Environmental liabilities are estimated at $62 million as of June 30, 2005, related to 201 known locations, with management not expecting a material adverse effect from known matters.