Fitch Affirms Norfolk Southern IDR at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed its ratings on Norfolk Southern Corporation (NYSE: NSC) as follows:

--Long-term Issuer Default Rating (IDR) at 'BBB+';

--Senior unsecured rating at 'BBB+';

--Unsecured credit facility rating at 'BBB+';

--Short-term IDR at 'F2';

--Short-term rating at 'F2'.

Fitch's ratings apply to approximately $6 billion in outstanding unsecured debt and a $1 billion unsecured revolving credit facility. The Rating Outlook is Stable.

Norfolk Southern's ratings reflect the railroad operator's ongoing strong financial performance and significant financial flexibility in the face of a weakening of the U.S. economy. Although overall carload and intermodal volumes have declined over the past year and are expected to decline further in the near term, Norfolk Southern continues to take advantage of industry pricing strength to drive further increases in revenue despite lower loads. The railroad also continues to post the lowest operating ratio (OR) among the four largest Class I railroads, leading to strong free cash flow generation. Although debt levels have risen slightly over the course of 2008, lease-adjusted leverage has declined as a result of EBITDAR growth. Although the economic environment likely will weaken near-term credit metrics somewhat from current levels, Fitch expects Norfolk Southern's credit profile to remain consistent with its 'BBB+' IDR over the medium term.

Overall industry volumes have declined throughout 2008, with the rate of decline accelerating in the fourth quarter. The pre-holiday shipping period has been very weak this year, following two years of virtually non-existent shipping peaks in 2006 and 2007, and expectations are for continued volume erosion in 2009. Although international intermodal volumes and carloads related to the housing and automotive industries are expected to remain especially weak, carloads related to less-cyclical products, like coal and agricultural commodities, should fare better. Domestic intermodal volumes will also benefit from ongoing truck-to-rail conversions. Pricing likely will remain strong, however, with base rate increases in-line with those seen in 2008. Over one-third of Norfolk Southern's book of business re-prices in the first half of next year, and pricing negotiations on those contracts have provided the railroad with relatively good visibility into the near-term pricing environment. Despite the rise in base rates, overall yield is expected to decline from the high levels seen in the third quarter of this year, however, as lower diesel fuel prices drive a reduction in fuel surcharge revenue.

Norfolk Southern's credit profile remains relatively strong, with ample liquidity and lease-adjusted leverage of 2.3 times (x) at Sept. 30, down from 2.5x at Dec. 31. Liquidity at Sept. 30 included $557 million in cash and cash equivalents, as well as access to an undrawn $1 billion revolving credit facility and $400 million in availability on the company's $500 million receivables securitization facility. Balance sheet debt rose by a net $103 million in the first nine months of the year, as the company augmented its free cash flow with additional borrowings in order to repurchase shares. The effect of this increase in debt was more than offset by an increase in EBITDAR, however, resulting in the reduction in leverage. Leverage could rise somewhat in the near term, particularly if Norfolk Southern taps its receivables securitization facility or its revolver to finance additional share repurchases and as weaker market conditions put some pressure on EBITDAR. However, even with an expected modest weakening in Norfolk Southern's metrics, the company's credit profile should remain generally consistent with the current ratings over the medium term.

In addition to the effects that the weakening U.S. economy could have on Norfolk Southern's credit profile, credit risks include the company's heavy share repurchase activity and the potential for increased industry regulation. Norfolk Southern has spent $3.1 billion on share repurchases since its current program was put into place three years ago, including $899 million spent in the first nine months of this year. The company currently has 14.5 million shares remaining under its current authorization, which runs until the end of 2010. Fitch expects that the company could complete the current program within the next 12 months, and it will likely begin a new program or extend the existing one after the current authorization is completed. Although most of the repurchases have been funded with free cash flow, the company also has funded some repurchases with borrowed funds, and management has indicated a willingness to increase the company's debt level in order to fund purchases. Current credit market conditions may preclude significant near-term borrowing, but the company could potentially accelerate borrowing to fund share repurchases when the credit environment eventually loosens.

On the regulatory front, the most significant risk is the potential for a meaningful increase in regulations tied to pricing. With the significant unit pricing increases put forth by the industry over the past five years, shippers have become increasingly vocal in their desire to see more forceful regulations put in place to govern industry pricing. Although Fitch does not expect a wholesale return to industry regulation in the near term, a meaningful change in pricing regulations could have a negative effect on Norfolk Southern's return on invested capital and free cash flow.

Norfolk Southern's ratings could be upgraded or the Rating Outlook revised to Positive if the company curtails its share repurchase activity and focuses its free cash flow deployment on leverage reduction, a scenario that Fitch believes is unlikely in the near term. On the other hand, ratings could be downgraded or the Rating Outlook revised to Negative if economic conditions deteriorate significantly more than currently anticipated, putting heavy pressure on free cash flow, or if the company elects to increase leverage significantly in order to fund more shareholder-friendly activities.

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, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The ratings above have been initiated by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.