UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549
                                   FORM 10-Q

(Mark One)
 X       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
---                                                         
         EXCHANGE ACT OF 1934

For the quarterly period ended    September 30, 1995     

                                       OR

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
---                                                                  
         EXCHANGE ACT OF 1934

For the transition period from                          to                     
                               ------------------------    --------------------
Commission file number      1-7179     

                                  SONAT INC. 
             (Exact name of registrant as specified in its charter)

           DELAWARE                                            63-0647939 
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                            Identification No.)

           AMSOUTH-SONAT TOWER          
           BIRMINGHAM, ALABAMA                                    35203   
(Address of principal executive offices)                       (Zip Code)

Registrant's telephone number:                              (205) 325-3800


                                   NO CHANGE                                   
     (Former name,  former address and former fiscal year, if changed since last
report)

     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                                Yes  X      No  _

     Indicate the number of shares  outstanding of each of the issuer's  classes
of common stock, as of the latest practicable date.

                         COMMON STOCK, $1.00 PAR VALUE:

               86,057,296 SHARES OUTSTANDING ON OCTOBER 31, 1995


<PAGE>



                          SONAT INC. AND SUBSIDIARIES

                                     INDEX

<TABLE>
<CAPTION>
                                                                                                                 Page No.


<S>                                                                                                              <C>
PART I.           Financial Information

                  Item 1.           Financial Statements

                                    Condensed Consolidated Balance Sheets--
                                       September 30, 1995 and December 31, 1994                                   1

                                    Condensed Consolidated Statements of Income--
                                       Three Months and Nine Months Ended
                                       September 30, 1995 and 1994                                                2

                                    Condensed Consolidated Statements of Cash Flows--
                                       Nine Months Ended September 30, 1995 and 1994                              3

                                    Notes to Condensed Consolidated Financial
                                       Statements                                                                 4 - 12

                  Item 2.           Management's Discussion and Analysis of Financial
                                       Condition and Results of Operations                                       13 - 28

PART II.          Other Information

                  Item 6.           Exhibits and Reports on Form 8-K                                             29

</TABLE>

<PAGE>


29

                                             PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
                                              SONAT INC. AND SUBSIDIARIES
                                         CONDENSED CONSOLIDATED BALANCE SHEETS
                                                      (Unaudited)
<TABLE>
<CAPTION>
                                                                                September 30,            December 31,
                                                                                    1995                     1994    
                                                                                             (In Thousands)
                                                           ASSETS
<S>                                                                                <C>                       <C> 
Current Assets:
    Cash and cash equivalents                                                      $   58,143                $    9,131
    Accounts and note receivable                                                      256,521                   279,553
    Inventories                                                                        26,116                    26,722
    Gas imbalance receivables                                                          17,116                    35,091
    Other                                                                              46,179                    36,344
                                                                                   ----------                   -------
       Total Current Assets                                                           404,075                   386,841
                                                                                   ----------                  --------
Investments in Unconsolidated Affiliates and Other                                    427,466                   704,308
                                                                                   ----------                  --------

Plant, Property and Equipment                                                       4,720,041                 4,741,296
    Less accumulated depreciation, depletion
       and amortization                                                             2,478,258                 2,497,691
                                                                                   ----------                ----------
                                                                                    2,241,783                 2,243,605
                                                                                   ----------                ----------
Deferred Charges:
    Gas supply realignment costs                                                      211,169                   160,850
    Other                                                                              52,407                    35,082
                                                                                   ----------                ----------
                                                                                      263,576                   195,932
                                                                                   ----------                ----------
                                                                                   $3,336,900                $3,530,686
                                                                                   ==========                ==========

                                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
    Long-term debt due within one year                                             $   18,875                 $  19,250
    Unsecured notes                                                                   100,000                   200,000
    Accounts payable                                                                  199,302                   208,751
    Accrued income taxes                                                               41,689                    22,029
    Accrued interest                                                                   32,252                    36,825
    Gas imbalance payables                                                             24,252                    42,975
    Other                                                                              45,691                    40,371
                                                                                   ----------                ----------
       Total Current Liabilities                                                      462,061                   570,201
                                                                                   ----------                ----------
Long-Term Debt                                                                        771,258                   963,378
                                                                                   ----------                ----------

Deferred Credits and Other:
    Deferred income taxes                                                             211,368                   187,957
    Reserves for regulatory matters                                                   177,013                   183,343
    Other                                                                             213,633                   233,921
                                                                                   ----------                  --------
                                                                                      602,014                   605,221
                                                                                   ----------                  --------
Commitments and Contingencies

Stockholders' Equity:
    Common stock and other capital                                                    127,913                   129,563
    Retained earnings                                                               1,402,887                 1,287,339
                                                                                   ----------                -----------
                                                                                    1,530,800                 1,416,902
    Less treasury stock                                                               (29,233)                  (25,016)
                                                                                   ----------                ---------- 
       Total Stockholders' Equity                                                   1,501,567                 1,391,886
                                                                                   ----------                ----------

                                                                                   $3,336,900                $3,530,686
                                                                                   ==========                ==========

</TABLE>


                            See accompanying notes.

                          SONAT INC. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF INCOME
                                  (Unaudited)
<TABLE>
<CAPTION>

                                                                 Three Months                          Nine Months
                                                              Ended September 30,                 Ended September 30,  
                                                            1995               1994              1995               1994
                                                                      (In Thousands, Except Per-Share Amounts)

<S>                                                         <C>                <C>              <C>                <C>       
Revenues                                                    $514,047           $419,183         $1,425,672         $1,330,887
                                                            --------           --------         ----------         ----------

Costs and Expenses:
    Natural gas cost                                         289,053            198,370            741,795            592,659
    Transition cost recovery                                  32,259             22,656             40,665             93,105
    Operating and maintenance                                 46,263             51,217            134,676            145,866
    General and administrative                                34,517             31,472            101,017            101,333
    Depreciation, depletion
       and amortization                                       67,110             55,903            208,161            188,547
    Taxes, other than income                                   9,641             10,362             31,294             30,970
                                                            --------           --------         ----------         ----------
                                                             478,843            369,980          1,257,608          1,152,480
                                                            --------           --------         ----------         ----------

Operating Income                                              35,204             49,203            168,064            178,407

Other Income (Loss), Net:
    Equity in earnings of
       unconsolidated affiliates                              11,037             13,230             35,920             29,612
    Sale of subsidiary stock                                 188,012               -               188,012               -
    Other                                                        137              5,410            (35,587)            12,287
                                                            --------           --------         ----------         ----------
                                                             199,186             18,640            188,345             41,899
                                                            --------           --------         ----------         ----------

Interest:
    Interest income                                            1,929                936              5,617              4,049
    Interest expense                                         (25,074)           (24,665)           (83,476)           (69,726)
    Interest capitalized                                       1,534              1,466              4,973              5,037
                                                            --------           --------         ----------         ----------
                                                             (21,611)           (22,263)           (72,886)           (60,640)
                                                            --------           --------         ----------         ---------- 

Income before Income Taxes                                   212,779             45,580            283,523            159,666

Income Taxes                                                  82,259             10,288             98,045             40,223
                                                            --------           --------         ----------         ----------

Net Income                                                  $130,520           $ 35,292         $  185,478         $  119,443
                                                            ========           ========         ==========         ==========

Earnings Per Share of Common Stock                          $   1.51           $    .40         $     2.15         $     1.37
                                                            ========           ========         ==========         ==========

Weighted Average Shares Outstanding                           86,273             87,192             86,332             87,187

Dividends Paid Per Share                                    $    .27           $    .27         $      .81         $      .81
                                                            ========           ========         ==========         ==========
</TABLE>










                                                See accompanying notes.

                          SONAT INC. AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
<TABLE>
<CAPTION>
                                                                                              Nine Months
                                                                                          Ended September 30,     
                                                                                    1995                     1994
                                                                                            (In Thousands)
<S>                                                                               <C>                       <C> 
Cash Flows from Operating Activities:   
    Net income                                                                    $   185,478               $   119,443
    Adjustments to reconcile net income to net
       cash provided by operating activities:
          Depreciation, depletion and amortization                                    208,161                   188,547
          Deferred income taxes                                                        34,094                    14,060
          Equity in earnings of unconsolidated
              affiliates, less distributions                                          (28,184)                  (21,298)
          Gain on sale of subsidiary stock and loss on
              disposal of assets, net                                                (147,807)                   (3,633)
          Reserves for regulatory matters                                              (6,330)                   48,377
          Gas supply realignment costs                                                (50,319)                   22,428
          Natural gas purchase contract settlement costs                               (1,328)                   18,360
          Change in:
              Accounts receivable                                                      23,057                   (26,774)
              Inventories                                                                 606                       777
              Accounts payable                                                         (9,448)                  (20,920)
              Accrued interest and income taxes, net                                   15,332                   (17,566)
              Other current assets and liabilities                                     (4,179)                   24,285
          Other                                                                       (58,018)                   27,052
                                                                                  -----------               -----------

              Net cash provided by operating activities                               161,115                   373,138
                                                                                  -----------               -----------

Cash Flows from Investing Activities:
    Plant, property and equipment additions                                          (357,441)                 (329,310)
    Net proceeds from sale of subsidiary stock and
       disposal of assets                                                             593,213                    18,206
    Advances to unconsolidated affiliates and other                                   (10,833)                 (265,377)
                                                                                  -----------               ----------- 

              Net cash provided by (used in)
                 investing activities                                                 224,939                  (576,481)
                                                                                  -----------               ----------- 

Cash Flows from Financing Activities:
    Proceeds from issuance of long-term debt                                        3,103,000                 3,391,000
    Payments of long-term debt                                                     (3,295,495)               (3,270,765)
    Changes in short-term borrowings                                                 (100,000)                  154,978
                                                                                  -----------               -----------
       Net changes in debt                                                           (292,495)                  275,213
    Dividends paid                                                                    (69,930)                  (70,606)
    Other                                                                              25,383                      (488)
                                                                                  -----------               ----------- 

              Net cash provided by (used in)
                 financing activities                                                (337,042)                  204,119
                                                                                  -----------               -----------

Net Increase in Cash and Cash Equivalents                                              49,012                       776

Cash and Cash Equivalents at Beginning of Period                                        9,131                    10,822
                                                                                  -----------               -----------

Cash and Cash Equivalents at End of Period                                        $    58,143               $    11,598
                                                                                  ===========               ===========

Supplemental Disclosures of Cash Flow Information
Cash Paid for:
    Interest (net of amount capitalized)                                          $    65,812               $    62,860
    Income taxes (refunds received), net                                               77,150                    35,607
</TABLE>

                            See accompanying notes.


<PAGE>


                                         SONAT INC. AND SUBSIDIARIES
                            NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                                 (Unaudited)


1.       Basis of Presentation

         The accompanying  condensed  consolidated financial statements of Sonat
Inc. (Sonat) and its subsidiaries (the Company) have been prepared in accordance
with the  instructions  to Form 10-Q and include the  information  and footnotes
required by such  instructions.  In the opinion of management,  all  adjustments
including those of a normal  recurring  nature have been made that are necessary
for a fair presentation of the results for the interim periods presented herein.

         In October  1995,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial  Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which will become effective for years beginning after December 15,
1995. The Company has not yet determined the effect of the new statement.

         Certain amounts in the 1994 condensed consolidated financial statements
have been reclassified to conform with the 1995 presentation.

2.       Changes in Operations

         Sonat Marketing  Company L.P. (Sonat Marketing) was formed in September
1995 and is jointly  owned and  operated  by the  Company  and Atlanta Gas Light
Company  (Atlanta).  Sonat's wholly owned subsidiary,  Sonat Marketing  Company,
contributed  all of its assets and  liabilities  except $32  million of accounts
receivable,  while Atlanta  contributed  $32 million in cash to the new venture.
Atlanta,  which owns 35 percent of the new entity,  has certain rights to resell
to the Company its interest in the new entity,  including a right for five years
to receive the greater of fair market value or a formula price. As a result, the
pre-tax gain on the transaction of approximately $23 million has been deferred.

         In June 1995,  the Company sold back to Baker Hughes  Incorporated  for
$167 million the four million shares of Baker Hughes convertible preferred stock
that Sonat  received as partial  consideration  for its sale of Teleco  Oilfield
Services  Inc. to Baker Hughes in 1992.  The sale resulted in an $8 million loss
after taxes, or $.09 per share.

3.       Derivative Financial Instruments

         At September 30, 1995, Sonat Exploration  Company, the Company's wholly
owned subsidiary, had three oil price swap agreements to exchange payments based
on a total notional volume of 720,000 barrels, which represents approximately 71
percent of its  remaining  1995  production.  The  average  market  price  Sonat
Exploration  was paying was $18.21 per barrel and the average  fixed price Sonat
Exploration  was receiving  was $18.50 per barrel at September  30, 1995.  These
agreements,  which are hedges of Sonat Exploration's production of oil reserves,
are made for the purpose of reducing  exposure to changes in spot-market  prices
on the amount of production covered in the agreement.



<PAGE>


3.       Derivative Financial Instruments (Cont'd)

         At September  30, 1995,  Sonat  Marketing had a total of 47 natural gas
price and basis swap  agreements to exchange  payments based on a total notional
volume of 39,500,000 MMBtu of natural gas over periods ranging from one month to
seven years. At September 30, 1995, the average price the Company was paying was
$1.58 per MMBtu and the average  price the Company was  receiving  was $1.55 per
MMBtu.  These  agreements,  which are hedges of Sonat  Marketing's  spot  market
natural gas  transactions,  are made for the purpose of locking in the margin on
the related transactions.

         The Company's credit exposure on swaps is limited to the value of swaps
that are in a favorable  position to the  Company.  At September  30, 1995,  the
market value of the Company's  fixed-price favorable swaps was $1.2 million. The
net position of all fixed-price swaps, both favorable and unfavorable,  was also
$1.2 million favorable. The market value of the basis swaps is not material.

         At September 30, 1995,  Sonat  Marketing had a total of 644 net futures
contracts  open,  with 2,661 purchase  (long)  contracts and 2,017 sales (short)
contracts.  At that date, the net market value of its contracts was favorable by
$84,000.



<PAGE>


4.       Unconsolidated Affiliates

         The following  table  presents the  components of equity in earnings of
unconsolidated affiliates.
<TABLE>
<CAPTION>
                                                               Three Months                       Nine Months
                                                            Ended September 30,               Ended September 30,
                                                           1995            1994              1995            1994
                                                                                   (In Thousands)

Company's Share of Reported Earnings (Loss):

<S>                                                       <C>              <C>              <C>              <C>    
    Exploration and Production                            $   140          $  (154)         $   475          $   157
                                                          =======          =======          =======          =======

    Natural Gas Transmission and Marketing:
       Citrus Corp.                                         7,290            9,771           19,475           17,455
       Amortization of Citrus basis
           difference                                         345              345            1,037            1,037
       Bear Creek Storage                                   2,385            2,158            7,307            6,653
       Other natural gas transmission
           and marketing affiliates                           (69)             (25)            (155)            (104)
                                                          -------          -------          -------          ------- 
                                                            9,951           12,249           27,664           25,041
                                                          -------          -------          -------          -------

    Other:
       Sonat Offshore Drilling                                606              822            6,735            3,383
       Other affiliates                                       340              313            1,046            1,031
                                                          -------          -------          -------          -------
                                                              946            1,135            7,781            4,414
                                                          -------          -------          -------          -------

                                                          $11,037          $13,230          $35,920          $29,612
                                                          =======          =======          =======          =======
</TABLE>

         Natural  Gas  Transmission  and  Marketing  Affiliates  - Sonat owns 50
percent  of Citrus  Corp.  (Citrus),  the  parent of  Florida  Gas  Transmission
Company.  Southern Natural Gas Company (Southern),  a wholly owned subsidiary of
the Company,  owns 50 percent of Bear Creek Storage  Company  (Bear  Creek),  an
underground gas storage company.



<PAGE>


4.       Unconsolidated Affiliates (Cont'd)

         The following is summarized income statement information for Citrus:
<TABLE>
<CAPTION>

                                                               Three Months                      Nine Months
                                                            Ended September 30,              Ended September 30,
                                                          1995             1994             1995            1994
                                                                               (In Thousands)

<S>                                                      <C>              <C>              <C>              <C>     
Revenues                                                 $186,104         $136,917         $505,959         $374,786
Expenses (Income):
    Natural gas cost                                      102,930           87,946          272,480          240,243
    Operating expenses                                     34,432           29,089           97,893           84,098
    Depreciation and amortization                          11,651            9,517           31,248           29,060
    Allowance for funds used
      during construction                                 (12,144)         (34,648)         (32,441)         (70,690)
    Interest and other                                     25,471           13,309           73,327           35,310
    Income taxes                                            9,184           12,162           24,502           21,856
                                                         --------         --------         --------         --------

    Income Reported                                      $ 14,580         $ 19,542         $ 38,950         $ 34,909
                                                         ========         ========         ========         ========
</TABLE>

         Allowance for funds used during  construction  decreased  significantly
due to Florida Gas' Phase III expansion going into service on March 1, 1995.

         The  following is  summarized  income  statement  information  for Bear
Creek.  No provision for income taxes has been  included  since its income taxes
are paid directly by the joint-venture participants.
<TABLE>
<CAPTION>

                                                               Three Months                      Nine Months
                                                            Ended September 30,              Ended September 30,
                                                          1995             1994             1995            1994
                                                                               (In Thousands)

<S>                                                      <C>               <C>              <C>              <C>    
Revenues                                                 $8,885            $8,825           $27,113          $26,698
Expenses:
    Operating expenses                                    1,206             1,385             3,732            3,950
    Depreciation                                          1,350             1,350             4,049            4,050
    Other expenses, net                                   1,560             1,774             4,718            5,393
                                                         ------            ------           -------          -------

    Income Reported                                      $4,769            $4,316           $14,614          $13,305
                                                         ======            ======           =======          =======
</TABLE>

         On October 31, 1995, Southern executed a Capital Contribution Agreement
in  connection  with the project  financing  for Bear Creek from The  Prudential
Insurance  Company of America.  In the event that Bear Creek does not  refinance
the remaining  principal,  this agreement provides that Southern and its partner
will  contribute  $21 million each to Bear Creek on October 31, 2000, to provide
funds to enable Bear Creek to make a principal payment due under the financing.


<PAGE>


4.       Unconsolidated Affiliates (Cont'd)

         Other  Affiliate - In June 1993,  the Company  reduced its ownership of
Sonat Offshore Drilling Inc., which provides offshore  drilling  services,  from
100 percent to  approximately  40 percent and subsequently has accounted for its
investment on the equity method.

         In July 1995, the Company made a capital  contribution of its remaining
shares of Sonat Offshore  common stock to Sonat  Exploration.  On July 26, 1995,
Sonat Exploration sold in an underwritten  public offering these shares of Sonat
Offshore  common  stock.  The net proceeds  after  underwriters'  discounts  and
commissions  were $326 million.  The Company  realized an after-tax gain of $110
million, or $1.27 per share on the transaction.

5.       Debt and Lines of Credit

         Long-Term  Debt - During the first nine months of 1995,  Sonat borrowed
$2.9  billion and repaid  $3.3  billion  under its  long-term  revolving  credit
agreement, resulting in no amounts outstanding at September 30, 1995.

         On June 12, 1995,  Sonat issued $200 million of 6 7/8 Percent Notes due
June 1,  2005.  The  proceeds  from the  sale of the  Notes  were  used to repay
floating rate debt.

     Short-Term Debt - Loans  outstanding under all short-term credit facilities
are for a duration of less than three months.

         On July  30,  1995,  Sonat's  $300  million  364-day  revolving  credit
agreement  with  several  banks  expired  in  accordance  with the  terms of the
agreement and was not renewed.  At September 30, 1995, Sonat had $100 million in
commercial paper borrowings outstanding at a rate of 6.27 percent.

         On May 29, 1995,  Sonat and Southern  renewed their short-term lines of
credit with  several  banks to provide for  borrowings  of $200  million and $50
million,  respectively.  Borrowings  are available  through May 28, 1996, in the
form of  unsecured  promissory  notes and bear  interest  at rates  based on the
banks'  prevailing  prime,  international  or money  market  lending  rates.  At
September 30, 1995, no amounts were outstanding under either agreement.

6.       Commitments and Contingencies

         Rate Matters - Periodically, Southern and its subsidiaries make general
rate filings with the Federal Energy Regulatory Commission (FERC) to provide for
the recovery of cost of service and a return on equity. The FERC normally allows
the filed rates to become  effective,  subject to refund,  until it rules on the
approved level of rates. Southern and its subsidiaries provide reserves relating
to such amounts collected  subject to refund,  as appropriate,  and make refunds
upon establishment of the final rates. 6. Commitments and Contingencies (Cont'd)

         Customer  Settlement - In an order  issued on  September  29, 1995 (the
Settlement  Order),  the FERC approved a comprehensive  settlement (the Customer
Settlement) that Southern had filed on March 15, 1995. The Customer  Settlement,
which  became  effective  on  October  9,  1995,  resolves,  as to  the  parties
supporting  the  settlement,  all of  Southern's  pending rate  proceedings  and
proceedings to recover gas supply  realignment  (GSR) and other transition costs
associated  with the  implementation  of Order No. 636  (described  below).  The
Customer  Settlement  provides for reduced rates that became  effective March 1,
1995, and a three-year rate moratorium on future rate increases by Southern. The
Customer  Settlement  was  supported  by  Southern,  the FERC  staff,  customers
representing  approximately  95 percent of the firm  transportation  capacity on
Southern's system, and other parties.

         Pursuant to the Customer  Settlement,  all issues in Southern's current
and prior rate cases have been settled as to the  supporting  parties.  Southern
will credit in the aggregate  the full amount of Southern's  rate reserves as of
February 28, 1995  (approximately  $155 million),  less certain amounts withheld
for potential rate refunds to contesting  parties, to reduce the GSR costs borne
by Southern's  customers.  Southern  implemented  reduced  settlement  rates for
parties that  supported the Customer  Settlement  on an interim basis  effective
March 1, 1995. The Customer  Settlement provides that, except in certain limited
circumstances,  Southern will not file a general rate case to be effective prior
to March 1, 1998. Southern's GSR costs are discussed below (see Order No. 636).

         The  Settlement  Order also  included  authorizations  for  Southern to
construct  approximately  $27 million of  additional  facilities  to improve its
existing  level of  transportation  service and to expand service to Atlanta Gas
Light Company and South Carolina  Pipeline  Corporation  and its affiliate under
firm contracts with terms of at least three years.

         The  Customer   Settlement   has  been   contested  by  firm  customers
representing  approximately  five percent of Southern's firm contract demand and
by certain interruptible customers.

     The Settlement  Order permits the contesting  parties to litigate the issue
of the recovery of Southern's GSR and other Order No. 636  transition  costs and
to litigate  various rate issues with respect to rate periods  prior to March 1,
1995, with the results to be applied only to such parties.  The Settlement Order
decided  the level of  Southern's  rates to  contesting  parties  for the period
beginning  March 1,  1995,  and ruled on  numerous  other  rate  issues  for the
pre-March  1,  1995,  periods.  These  rulings  included  a  reversal  of a 1994
administrative  law judge  determination  that Southern could not include in its
rates any  portion of the  approximately  $45  million  cost of a pipeline  that
Southern  constructed  in  1992 to  connect  gas  reserves  developed  by  Exxon
Corporation  (Exxon)  in the  Mississippi  Canyon  and Ewing  Bank Area  Blocks,
offshore  Louisiana.  Certain of the contesting parties have sought rehearing of
the Settlement Order by the FERC. After rehearing,  the Settlement Order will be
subject  to appeal to the  courts.  Although  there  can be no  assurances,  the
Company  believes that rehearing of the Settlement Order should be denied by the
FERC and that the Settlement Order should be upheld on any judicial appeal.

         In the fourth  quarter of 1994,  the Company  recognized  a $29 million
charge  associated  with the Customer  Settlement,  which  included  anticipated
amounts for GSR costs that Southern would not recover from its customers,  and a
$28 million charge for a provision relating to regulatory assets that may not be
recovered  as a result  of the  Customer  Settlement,  including  amounts  for a
corporate restructuring undertaken in 1994.

     Sea Robin - Several of the  shippers  on the  pipeline  system of Sea Robin
Pipeline Company, a subsidiary of Southern, filed with the FERC in February 1995
a complaint  against Sea Robin under  Section 5 of the Natural Gas Act  claiming
that Sea Robin's rates are unjust and unreasonable. Any reduction in Sea Robin's
rates as a result of this  complaint,  however,  could be implemented  only on a
prospective  basis.  In its  answer,  Sea Robin  asked the FERC to  dismiss  the
complaint or to find that its rates continue to be just and reasonable  based on
the data it  presented.  Sea Robin is  unable to  predict  the  outcome  of this
proceeding.

         Gas Purchase Contracts - Southern currently is incurring no take-or-pay
liabilities under its gas purchase  contracts.  Southern regularly evaluates its
position relative to gas purchase contract matters,  including the likelihood of
loss from asserted or unasserted take-or-pay claims or above-market prices. When
a loss is probable and the amount can be reasonably estimated, it is accrued.

         Order No. 636 - In 1992 the FERC issued its Order No. 636 (the  Order).
The Order  required  significant  changes in  interstate  natural  gas  pipeline
services.  Interstate  pipeline  companies,  including  Southern,  are incurring
certain  costs  (transition  costs) as a result of the Order,  the principal one
being  costs  related to  amendment  or  termination  of, or  purchasing  gas at
above-market prices under,  existing gas purchase contracts,  which are referred
to as GSR costs.  The Order  provided for the recovery of 100 percent of the GSR
costs and other  transition costs to the extent the pipeline can prove that they
are eligible, that is, incurred as a result of customers' service choices in the
implementation  of the Order, and were incurred  prudently.  The prudence review
will extend both to the prudence of the underlying gas purchase contracts, based
on the circumstances  that existed at the time the contracts were executed,  and
to the prudence of the amendments or  terminations  of the  contracts.  Numerous
parties have appealed the Order to the Circuit Courts of Appeal.

     As of September 30, 1995,  Southern had either paid or accrued $200 million
in GSR costs  (including  interest)  either to  reduce  significantly  the price
payable  under or to terminate a number of gas supply  contracts  providing  for
payment of  above-market  prices.  On February  17,  1995,  Southern  reached an
agreement to resolve its  remaining  high-cost  supply  contracts  with Exxon by
paying an additional  $45 million in GSR costs and foregoing a claim against $19
million  in price  differential  costs  that have  been  paid to Exxon  under an
interim  agreement  entered  into  between the  parties  pending  resolution  of
litigation contesting Southern's termination on March 1, 1994, of a gas purchase
contract  with  Exxon.   This  agreement  became  effective  upon  the  Customer
Settlement becoming effective. Additionally, at September 30, 1995, Southern was
a party to an agreement  under which another  high-cost  contract price would be
reduced in exchange for monthly payments having a present value of approximately
$42 million. Southern entered into a payment agreement on October 20, 1995, with
a financial  institution,  pursuant to which Southern made a one-time payment of
$42.3 million to the institution, which agreed to make these monthly payments.

         In addition to its GSR costs  relating to  termination  or amendment of
its  remaining  gas  purchase  contracts,  Southern  has incurred and expects to
continue to incur certain price differential GSR costs resulting from Southern's
continued  purchase of gas under its remaining supply contracts that provide for
prices in excess of current  market prices.  As of September 30, 1995,  Southern
had incurred $103 million in price differential costs.

         As  described  above,  Southern's  Customer  Settlement  resolves as to
supporting parties all of the proceedings  pursuant to which Southern is seeking
recovery  of its  GSR  costs  as  well  as all of  its  other  outstanding  rate
proceedings.  Additionally,  Southern will absorb an agreed-upon  portion of its
total GSR costs,  an estimate of which was  reflected in the  provision  for the
Customer Settlement noted above.

         In its  Customer  Settlement  discussions,  Southern  has  advised  its
customers that the amount of GSR costs that it actually  incurs will depend on a
number of variables,  including  future natural gas and fuel oil prices,  future
deliverability under Southern's existing gas purchase contracts,  and Southern's
ability to renegotiate certain of these contracts.  While the level of GSR costs
is impossible to predict with  certainty  because of these  numerous  variables,
based on current  spot-market prices, a range of estimates of future oil and gas
prices, contract renegotiations that have occurred, and price differential costs
actually incurred,  the amount of GSR costs was estimated at September 30, 1995,
to be approximately $349 million on a present-value basis.

         FERC Audit of Florida  Gas - The FERC's  Division  of Audits  (DOA) has
nearly  completed a compliance  review of Florida Gas' books and records for the
period January 1, 1991,  through December 31, 1994. Among other things, the FERC
auditors have proposed adjustments to the capitalization by Florida Gas of AFUDC
during  construction of its Phase III expansion  facilities that, if made, would
result in a charge to earnings of approximately $40 million  after-tax.  Florida
Gas intends to file  arguments as to why its accounting for such costs is proper
and to  request  the  dismissal  of the  audit  exception  by  the  DOA.  If not
dismissed,  Florida Gas will request that  resolution  of this issue be deferred
until its next regular rate case,  which will be filed in late 1996.  Management
of Florida  Gas has advised  the  Company  that it  believes  that its method of
capitalizing AFUDC on Phase III was proper and does not believe that the outcome
of this matter will have a material  adverse  effect on Florida  Gas' results of
operations.




<PAGE>



Item 2.  Management's Discussion and Analysis of Financial Condition and
              Results of Operations

                                         SONAT INC. AND SUBSIDIARIES
                              MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                                     CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

Operating Income

         Operating results for the Company's  business segments are in the table
below.  The table also shows the effect of four unusual  items  recorded in 1995
that affect operating income and net income comparisons.  The sale of properties
and  terminations of long-term gas sales contracts by Sonat  Exploration and the
sale of the Company's  investment in Baker Hughes  Incorporated  Preferred Stock
were  recorded  in the  second  quarter  of  1995.  The  sale  of the  remaining
investment in Sonat Offshore  common stock by Sonat  Exploration was recorded in
the third quarter of 1995.
<TABLE>
<CAPTION>

                                                            Three Months                        Nine Months
                                                         Ended September 30,                Ended September 30,
                                                        1995             1994              1995              1994
                                                                 (In Millions, Except Per-Share Amounts)
Operating Income (Loss):
<S>                                                     <C>              <C>               <C>              <C>  
    Exploration and production                          $ (3)            $ 16              $ 37             $  60
    Natural gas transmission
       and marketing                                      37               32               131               114
    Other                                                  1                1                -                 4
                                                        ----             ----             ----             -----

Operating Income                                          35               49               168               178

Less Unusual Items:
    Exploration and Production
       Termination of gas
           sales contracts                                 -                -                37                 -
                                                        ----             ----              ----             -----
Operating Income Excluding
    Unusual Items                                       $ 35             $ 49              $131             $ 178
                                                        ====             ====              ====             =====

Net Income As Reported                                  $131             $ 35              $185              $119
Less Unusual Items:
    Exploration and Production
       Termination of gas
           sales contracts                                 -                -                24                 -
       Property sales                                      -                -               (20)                -
       Sale of Offshore stock                            110                -               110                 -
    Other
       Sale of Baker Hughes Stock                          -                -                (8)                -
                                                        ----             ----              ----             -----

Net Income Excluding
    Unusual Items                                       $ 21             $ 35              $ 79             $ 119
                                                        ====             ====              ====             =====
Earnings Per Share of Common
    Stock Excluding Unusual
    Items                                               $.24             $.40             $.92             $1.37
                                                        ====             ====             ====             =====
</TABLE>


<PAGE>





EXPLORATION AND PRODUCTION

         The  Company  is engaged in the  exploration  for and the  acquisition,
development,  and production of oil and natural gas in the United States through
Sonat Exploration  Company.  Sonat Exploration's  strategy is to acquire oil and
gas properties  with  significant  development  potential.  Proved reserves have
grown to  approximately  1.7 trillion  cubic feet of natural gas  equivalent  at
September 30, 1995, from 250 billion cubic feet of natural gas equivalent  since
implementing this strategy in 1988.

         Sonat  Exploration  intends to continue to acquire domestic oil and gas
properties  with   significant   development   potential.   During  1995,  Sonat
Exploration  has acquired oil and gas  interests and  properties  for a total of
$169 million, which increased proved reserves by approximately 285 billion cubic
feet of natural gas equivalent.  Through these  acquisitions,  Sonat Exploration
bolstered its position in north Louisiana and the Texas Panhandle area.

         Developmental drilling programs continue to be very successful.  In the
first nine months of 1995,  Sonat  Exploration  completed 223 gross  development
wells.  These drilling  programs added net proved reserves of approximately  145
billion cubic feet of natural gas equivalent.

         In  order  to focus  its  exploration  and  production  efforts  and to
minimize  administrative and other costs, thus far during 1995 Sonat Exploration
has disposed of certain  non-strategic  oil and gas interests for  approximately
$105  million  in the states of  Arkansas,  Colorado,  Louisiana,  and Texas and
offshore  Louisiana.   These  sales,  which  included  net  proved  reserves  of
approximately 190 Bcf of natural gas equivalent,  were  substantially all closed
as of September  30, 1995.  Sonat  Exploration  expects that it will continue to
dispose of non-strategic oil and gas interests in the future.

         The decline in natural gas prices that began in 1994 has continued into
1995. As a consequence,  Sonat Exploration's earnings and cash flow in the first
nine months of 1995 have been  adversely  impacted.  This decline in natural gas
prices will continue to depress Sonat  Explorations's  earnings and cash flow in
the fourth quarter.

         Total  capital  expenditures  for Sonat  Exploration  are  expected  to
approximate  $380  million  in 1995,  which  would be down  slightly  from 1994.
Capital expenditures for 1995 are expected to include approximately $193 million
for producing property acquisitions.

         In early August 1995, Sonat Exploration and Taurus  Exploration Inc., a
wholly  owned  subsidiary  of Energen  Corporation,  entered  into an  agreement
pursuant to which Taurus will join Sonat  Exploration in its regular oil and gas
reserve  acquisition  program through December 31, 1998. Taurus has committed to
spend up to $30 million as its  proportionate  share of acquisitions that may be
made  during the  remainder  of 1995 and  expects  to invest $25  million to $50
million  annually in  subsequent  years.  Development  drilling on the  acquired
properties will involve additional  investment by Taurus. Sonat Exploration will
operate all properties acquired.

         Natural gas  production  is marketed  primarily in the  spot-market  by
Sonat Marketing  Company L.P. (Sonat  Marketing),  a jointly owned subsidiary of
the Company  operating in the Natural Gas  Transmission  and Marketing  Segment.
Sonat   Exploration,   through  Sonat  Marketing,   uses  derivative   financial
instruments  to manage  the  risks  associated  with  price  volatility  for its
production.  (See  Commodity  Price Risk  Management  and Note 3 of the Notes to
Condensed Consolidated Financial Statements.)

Exploration and Production Operations
<TABLE>
<CAPTION>
                                                            Three Months                           Nine Months
                                                         Ended September 30,                   Ended September 30,
                                                       1995                 1994             1995               1994
                                                                               (In Millions)
<S>                                                     <C>                 <C>              <C>                <C> 
Revenues:
    Sales to others                                     $31                 $ 42             $140               $110
    Intersegment sales                                   54                   64              163                210
                                                        ---                 ----             ----               ----
      Total Revenues                                     85                  106              303                320
                                                        ---                 ----             ----               ----

Costs and Expenses:
    Operating and maintenance                            15                   15               49                 46
    Exploration expense                                   3                    3                6                  8
    General and administrative                           13                   11               34                 36
    Depreciation, depletion and
      amortization                                       53                   56              163                154
    Taxes, other than income                              4                    5               14                 16
                                                        ---                 ----             ----               ----
                                                         88                   90              266                260
                                                        ---                 ----             ----               ----
      Operating Income (Loss)                           $(3)                $ 16             $ 37               $ 60
                                                        ===                 ====             ====               ====



Net Sales Volumes:
    Gas (Bcf)                                            45                   49              139                136
    Oil and condensate (MBbls)                          983                1,124            2,944              3,141
    Natural gas liquids (MBbls)                         302                  380            1,158                916
    ---------------------------                         ---                  ---            -----                ---

Average Sales Prices:
    Gas ($/Mcf)                                      $ 1.41               $ 1.71           $ 1.46             $ 1.92
    Oil and condensate ($/Bbl)                        17.78                16.97            17.48              15.71
    Natural gas liquids ($/Bbl)                        9.28                 8.53             8.82               8.77
    ---------------------------                        ----                 ----             ----               ----
</TABLE>

Quarter-to-Quarter Analysis

         Sonat Exploration's  operating income was down $19 million in the third
quarter of 1995 as compared to the same  period in 1994  primarily  due to lower
prices for natural gas and lower production.

         Natural  gas  prices  declined  18  percent  to an average of $1.41 per
thousand cubic feet for the third quarter of 1995 compared to the same period in
1994. Oil and condensate  prices improved from 1994,  increasing five percent to
$17.78 per  barrel.  Natural gas  production  volumes  were down 8 percent  from
levels  during the third quarter of 1994.  The decline in production  was due to
several factors,  including producing property sales, involuntary  interruptions
at two offshore production platforms,  and a lower level of development drilling
in response to lower natural gas prices.

         Operating  and  maintenance  expenses  remained  flat while general and
administrative  expenses  increased $2 million,  primarily due to an increase in
stock-based compensation.

Year-to-Date Analysis

         Operating  income  decreased from $60 million for the first nine months
of 1994 to $37 million for the first nine months of 1995 due to lower prices for
natural  gas offset by higher oil prices and a slight  increase  in natural  gas
production.

         The  average  price for  natural  gas has  averaged  24  percent  lower
year-to-date  1995 compared to the first nine months of 1994. Oil and condensate
prices improved 11 percent to an average price of $17.48 per barrel in 1995.
Production volumes for gas were higher in 1995 due to acquisitions.

         Operating and  maintenance  expenses were higher due to the acquisition
of additional properties in early 1995. General and administrative expenses were
slightly  lower than 1994 due to reduced  employee  benefit costs and an overall
effort to lower expenses.  Depreciation,  depletion and  amortization  increased
from 1994 due to slightly higher production and a production mix that includes a
greater  percentage of oil production in the Company's Austin Chalk  operations,
which have higher rates.

NATURAL GAS TRANSMISSION AND MARKETING

         The Company  participates in the natural gas transmission and marketing
business through Southern Natural Gas Company,  Citrus Corp. (a 50 percent-owned
company), and Sonat Marketing (see Note 2 of the Notes to Condensed Consolidated
Financial Statements).

         Southern  continues to pursue growth  opportunities to expand the level
of services in its traditional  market area and to connect new gas supplies.  On
April  26,  1995,  Southern  received  authorization  from  the  Federal  Energy
Regulatory  Commission  (FERC) to  construct a 21-mile  pipeline  extension to a
delivery point near Chattanooga,  Tennessee,  that will deliver natural gas to a
group of new customers who have signed 10-year contracts for firm transportation
volumes  totaling  approximately 11 million cubic feet per day. This project was
placed in service  November 1, 1995.  Southern also sought  approval in a filing
with the FERC made on May 19, 1995, to expand its north main pipeline  system to
provide  approximately  27  million  cubic  feet  per  day  of  additional  firm
transportation.   This  increase  in  capacity  is  supported  by  10-year  firm
transportation  agreements with 15 customers in Alabama, Georgia, and Tennessee.
If FERC  approval is received,  the  in-service  date is expected to be November
1996.

         In addition, on October 11, 1995, Southern received FERC approval for a
production area expansion  project with a capital cost of $15 million.  Southern
proposes to install  9,400  horsepower of  additional  compression  at its Toca,
Louisiana compressor station south of New Orleans and to install certain receipt
and delivery point facilities in order to increase its capacity to transport gas
supplies on the east leg of its offshore Louisiana supply system through Toca by
140 million cubic feet per day. The FERC issued an initial  determination on the
proposed project, which will become final upon Southern's filing of 10-year firm
transportation  agreements for 100 percent of the increased  capacity within 120
days from the initial  determination.  Southern  presently is in discussion with
potential customers  regarding such commitments,  although there is no assurance
that such commitments will be obtained.

         Southern  has  also  initiated  an  open  season  to  obtain   customer
commitments to expand its system in order to meet the growing demand for natural
gas in the  Southeast.  In the open  season,  Southern is seeking  requests  for
additional  firm  transportation  services and for a new  liquefied  natural gas
(LNG) service. The facilities to provide the firm transportation service will be
determined  based on the service  levels  requested.  The LNG  service  would be
provided at the existing LNG storage  terminal near Savannah,  Georgia,  that is
owned by Southern  Energy  Company,  a  subsidiary  of Southern.  If  sufficient
commitments  are obtained and the necessary  regulatory  approvals are received,
the  in-service  date for the firm  transportation  service  is  expected  to be
November  1997 and the  in-service  date for the LNG  service is  expected to be
sometime in 1998. The open season for the firm  transportation  service ended on
October 31, 1995, and requests for service are being evaluated.  The open season
for the LNG service will continue through November 17, 1995.

         Sea Robin  Pipeline  Company,  a wholly owned  subsidiary  of Southern,
filed a petition  with the FERC  requesting  it be declared an  unregulated  gas
gathering  system.  The FERC denied Sea Robin's  petition in an order  issued on
June 16,  1995.  Sea Robin filed for  rehearing of this denial on July 17, 1995,
but cannot predict the outcome of this proceeding.

         Southern's parent, Sonat Inc.,  transferred to Southern its investments
in three small unregulated companies effective January 1, 1995.

         Sonat  Marketing's  natural gas sales volumes have recently reached 2.4
billion  cubic feet per day.  Sonat  Marketing is expanding its presence in Gulf
Coast, Midwest, and Northeast markets. Sonat Marketing markets almost all of the
natural gas production of Sonat Exploration that is not sold under  pre-existing
term   dedications,   and  has   responsibility   for  the  execution  of  Sonat
Exploration's  risk  management  program.   Sonat  Marketing  is  seeking  other
customers for a similar type of service.

         Sonat Energy Services Company,  a subsidiary of Sonat and parent of one
of the partners of Sonat  Marketing,  recently  formed a new  subsidiary,  Sonat
Power  Marketing  Inc.,  to market  electric  power.  Sonat Power  Marketing has
received  permission  from  the  FERC to  purchase  and  resell  electricity  at
market-based  rates.  It will offer  services  in  electricity  similar to those
offered by Sonat Marketing in natural gas.

         Sonat  Marketing uses natural gas futures  contracts and options on gas
futures  and  oil and  gas  price  swap  agreements  to  hedge  the  effects  of
spot-market price volatility on operating results. An additional benefit of this
hedging is that Sonat  Marketing  is able to offer fixed price  contracts to its
suppliers and customers.  (See Commodity Price Risk Management and Note 3 of the
Notes to Condensed Consolidated Financial Statements.)

         Florida Gas, a  subsidiary  of Citrus,  placed its Phase III  expansion
project into  service on March 1, 1995,  increasing  its system  capacity by 530
million  cubic feet per day to 1.5 billion  cubic feet per day. As part of Phase
III,  Florida  Gas  contracted  for 100  million  cubic feet per day of new firm
transportation to be delivered from Southern's  system.  Also in connection with
this  expansion,  Florida Gas  acquired  an  interest  in an  existing  pipeline
connected to its system in the Mobile Bay area that has been expanded to provide
over 300 million cubic feet per day to Florida Gas.

         It has  been  announced  that  plans  by  other  companies  to  build a
competitive pipeline into peninsular Florida, which would have been known as the
Sunshine  Pipeline,  had been  abandoned  at present.  Florida Gas is  currently
planning a Phase IV  expansion  of its system  that would add  approximately  38
million  cubic feet per day of capacity  at an  estimated  cost of $32  million.
Florida Gas has tentative  commitments  from two customers for almost all of the
proposed capacity.




<PAGE>


                                        NATURAL GAS TRANSMISSION AND MARKETING

<TABLE>
<CAPTION>
                                                            Three Months                           Nine Months
                                                         Ended September 30,                   Ended September 30,
                                                         -------------------                   -------------------
                                                       1995                 1994          1995                  1994
                                                       ----                 ----          ----                  ----
                                                                               (In Millions)
<S>                                                     <C>                 <C>             <C>                 <C> 
Operating Income (Loss):
    Southern Natural Gas Company                        $ 37                $ 29            $128                $105
    Sonat Marketing Company                                1                   3               5                   9
    Other                                                 (1)                  -              (2)                  -
                                                        ----                ----            ----                ----

       Total Operating Income                           $ 37                $ 32            $131                $114
                                                        ====                ====            ====                ====


SOUTHERN NATURAL GAS COMPANY

Revenues:
    Gas sales                                           $ 45                $ 47            $139                $192
    Market transportation and
       storage                                            75                  63             244                 229
    Supply transportation                                 13                   8              39                  25
    Other                                                 46                  37              78                 138
                                                        ----                ----            ----                ----
       Total Revenues                                    179                 155             500                 584
                                                        ----                ----            ----                ----

Costs and Expenses:
    Natural gas cost                                      45                  47             137                 187
    Transition cost recovery                              32                  23              41                  93
    Operating and maintenance                             28                  34              78                  97
    General and administrative                            20                  18              61                  57
    Depreciation and amortization                         12                  (1)             40                  31
    Taxes, other than income                               5                   5              15                  14
                                                        ----                ----            ----                ----
                                                         142                 126             372                 479
                                                        ----                ----            ----                ----
       Operating Income                                 $ 37                $ 29            $128                $105
                                                        ====                ====            ====                ====

Equity in Earnings of
    Unconsolidated Affiliates                           $  2                $  2            $  7                $  7
                                                        ====                ====            ====                ====

                                                                              (Billion Cubic Feet)
Volumes:
    Intrastate gas sales                                   1                   -               5                   -
    Market transportation                                143                 118             448                 402
                                                         ---                 ---             ---                 ---
       Total Market Throughput                           144                 118             453                 402
    Supply transportation                                101                  87             288                 249
                                                         ---                 ---             ---                 ---
       Total Volumes (1)                                 245                 205             741                 651
                                                         ===                 ===             ===                 ===

    Transition gas sales                                  21                  23              67                  80
                                                         ===                 ===             ===                 ===
</TABLE>

(1)      Volumes for the three months and nine months ended  September 30, 1995,
         include 8 and 28 billion  cubic feet of gas,  respectively,  associated
         with new subsidiaries of Southern which were not included in Southern's
         1994  volumes.  These  companies  were  subsidiaries  of  Sonat  Energy
         Services in 1994.
<TABLE>
<CAPTION>

                                                            Three Months                           Nine Months
                                                         Ended September 30,                   Ended September 30,
                                                         -------------------                   -------------------
                                                       1995                 1994          1995                  1994
                                                       ----                 ----          ----                  ----
                                                                               (In Millions)
SONAT MARKETING COMPANY

<S>                                                     <C>                 <C>             <C>                 <C> 
Gas Sales Revenues                                      $318                $239            $845                $687
                                                        ====                ====            ====                ====

Operating Income                                        $  1                $  3            $  5                $  9
                                                        ====                ====            ====                ====

                                                                           (Billion Cubic Feet)
Gas Sales Volumes                                        201                 132             519                 341
                                                        ====                ====            ====                ====


CITRUS CORP.
                                                                               (In Millions)
Equity in Earnings of
    Citrus Corp.                                        $  8                $ 10            $ 21                $ 18
                                                        ====                ====            ====                ====

                                                                           (Billion Cubic Feet)
Florida Gas Volumes (100%):
    Market transportation                                129                  81             348                 224
    Supply transportation                                  6                   6              20                  15
                                                        ----                ----            ----                ----
       Total Volumes                                     135                  87             368                 239
                                                        ====                ====            ====                ====
</TABLE>


Quarter-to-Quarter Analysis

         Operating income for the Natural Gas Transmission and Marketing segment
increased  16  percent  in the third  quarter  of 1995  compared  with the third
quarter of 1994 due to the  improved  operating  results at  Southern  discussed
below.

         Southern Natural Gas - Operating  results for the third quarter of 1995
were higher primarily due to lower operating expenses and the sale of previously
unsubscribed firm transportation capacity.

         Market  transportation  and  storage  revenues  for 1994  include a $16
million adjustment relating to a retroactive  reduction in certain  depreciation
rates. Supply transportation revenues increased 63 percent due to Southern's new
transportation  contract with Florida Gas and increased  volumes under  existing
contracts at Sea Robin  Pipeline  Company.  Other  Revenue and  Transition  Cost
Recovery  increased  due to an $18 million  adjustment  related to the  Customer
Settlement. This adjustment did not impact operating income.

         Operating  and  maintenance  expense  decreased  18 percent in the 1995
period  reflecting  lower fuel costs and the impact of the 1994  fourth  quarter
restructuring,   which  reduced   Southern's   staffing   levels.   General  and
administrative expense increased 11 percent in the 1995 period, primarily due to
higher employee benefit  expenses.  Depreciation  and  amortization  expense was
higher in 1995 due to a $16 million retroactive  reduction in depreciation rates
in 1994.

         Sonat  Marketing  -  Sales  volumes  increased   significantly  due  to
expanding  activities on  non-affiliated  pipelines.  Operating income was lower
than 1994 third  quarter as the effect of higher sales  volumes did not entirely
offset lower unit margins, reflecting the competitiveness of the business.

         Citrus - Equity in earnings of Citrus  declined  from $10 million to $8
million.  1995 results reflect the operations of the Phase III expansion project
and the $3.7 million  effect of an adjustment to AFUDC on Phase III,  while 1994
results  include  AFUDC  related to Phase III.  Throughput  on the  Florida  Gas
Pipeline  system was up sharply,  reflecting  the Phase III  expansion  going in
service on March 1, 1995.

Year-to-Date Analysis

         Operating income for the Natural Gas Transmission and Marketing segment
increased 15 percent in the nine-month period ended September 30, 1995, compared
with the prior year due to the improved  operating results at Southern discussed
below.

         Southern Natural Gas - Operating results for the nine-month period were
up  primarily  due to  lower  operating  expenses  and the  sale  of  previously
unsubscribed firm  transportation  capacity.  The 1995 period also reflected the
positive  effect  on  revenue  of a $6  million  adjustment  to  reflect  actual
interruptible  transportation  revenue  and cost  recovery  in the first year of
post-Order No. 636 operations and the reduction of a take-or-pay liability.  The
1994 period included a favorable $6 million reduction in fuel gas liability.

         Market  transportation  and  storage  revenues  for 1994  include a $16
million adjustment relating to a retroactive  reduction in certain  depreciation
rates  and the  sale  of firm  transportation  capacity.  Supply  transportation
revenues  increased 56 percent due to increased volumes under existing contracts
at Sea Robin Pipeline Company and to Southern's new transportation contract with
Florida  Gas.  Other  Revenue and  Transition  Cost  Recovery  decreased  due to
declining  billings  and lower  recovery  rates for GSR  costs  during  the 1995
period.

         Operating  and  Maintenance  expense  decreased  20 percent in the 1995
period,  reflecting  lower fuel costs and the impact of the 1994 fourth  quarter
restructuring.  General and  administrative  expense  increased 7 percent in the
1995 period, primarily due to higher employee benefit expenses. Depreciation and
Amortization expense increased in the 1995 period due to the $16 million revenue
reserve  established in the 1994 period partially  offset by lower  depreciation
rates as a result of the Customer Settlement.

         Sonat  Marketing  -  Sales  volumes  increased   significantly  due  to
expanding  activities on  non-affiliated  pipelines.  Operating income decreased
compared  with the 1994 period as the effect of higher sales  volumes was offset
by lower unit margins, reflecting the competitiveness of the business.

         Citrus - Equity in  earnings  of Citrus  were  higher  than in 1994 due
principally  to higher  margins on a gas supply  contract  with one of its major
customers  that was  restructured  during the  second  quarter of 1994 and lower
depreciation  from an increase in the useful life of the  pre-Phase III pipeline
system,  partially offset by lower earnings on the Phase III expansion  project.
1995  results  reflect  the first  seven  months of  operation  of the Phase III
expansion project and the $3.7 million effect of an adjustment to AFUDC on Phase
III, while 1994 results include AFUDC related to Phase III.

Transportation Contracts

         Pursuant to the Customer  Settlement  (described in Note 6 of the Notes
to Condensed Consolidated  Financial  Statements),  Southern's largest customer,
Atlanta Gas Light Company,  and its subsidiary,  Chattanooga  Gas Company,  have
amended  their firm  transportation  contracts  for an  aggregate of 682 million
cubic feet per day to extend  their  primary  terms for a period of three  years
beginning  March 1, 1995.  An  additional  118  million  cubic feet per day will
remain under its current term to April 30, 2007.  Also  pursuant to the Customer
Settlement,  South  Carolina  Pipeline  Corporation  (SCPL) has amended its firm
transportation  contract for 28 million cubic feet per day to extend its primary
term for a period of three years beginning March 1, 1995. Such extension will be
in  addition  to the  remaining  160  million  cubic feet per day of SCPL's firm
transportation  services that remain in effect under terms  extending  from 1997
through 2003. Alabama Gas Corporation,  Southern's second largest customer,  had
earlier  executed firm  transportation  contracts for 393 million cubic feet per
day under terms extending  through October 31, 2008.  Southern's other customers
have contracted for firm  transportation  services for terms ranging from one to
ten or more years.  As a result,  substantially  all of the firm  transportation
capacity  currently  available  in  Southern's  largest  market  area  is  fully
subscribed.

Natural Gas Sales and Supply

         Sales by Southern of natural gas are anticipated to continue only until
Southern's  remaining supply contracts expire, are terminated,  or are assigned.
As a result of Order No. 636,  Southern is attempting to terminate its remaining
supply contracts through which it had  traditionally  obtained its long-term gas
supply.  Some of these contracts  contain clauses  requiring  Southern either to
purchase minimum volumes of gas under the contract or to pay for it (take-or-pay
clauses).  Although Southern  currently is incurring no take-or-pay  liabilities
under  these  contracts,  the annual  weighted  average  cost of gas under these
contracts is in excess of current spot-market prices. Pending the termination of
these remaining supply  contracts,  Southern has sold a portion of its remaining
gas supply to a number of its firm transportation customers under contracts that
are being  extended  through  November 30, 1997. The remainder of Southern's gas
supply will continue to be sold on a month-to-month basis.



<PAGE>


         Southern's   purchase   commitments  under  its  remaining  gas  supply
contracts  for the  remainder  of 1995  and the  years  1996  through  1999  are
estimated as follows:

                                                                 Estimated
                                                                  Purchase
                                                                Commitments
                                                               (In Millions)

         1995                                                       $ 30
         1996                                                        129
         1997                                                        127
         1998                                                         40
         1999                                                         36

         These estimates are subject to significant  uncertainty due both to the
number of  assumptions  inherent  in these  estimates  and to the wide  range of
possible  outcomes  for each  assumption.  None of the three major  factors that
determine purchase commitments (underlying reserves, future deliverability,  and
future price) is known today with  certainty.  These  estimates  include two new
contracts with Exxon with terms from November 1, 1995, to November 30, 1997, and
provide for market-based index prices.

         See Note 6 of the Notes to Condensed  Consolidated Financial Statements
for a discussion regarding Southern's rate proceedings to recover its GSR costs.

Rate Matters

         The Customer Settlement resolves all outstanding rate and Order No. 636
transition cost recovery proceedings with respect to the supporting parties. The
Customer  Settlement  will  result in  reducing  Southern's  filed rates to more
competitive  levels,  will reduce somewhat  reported  revenues,  and will reduce
depreciation  expense to approximately $40 million in 1995. Southern implemented
reduced  settlement  rates for  parties  that  support the  Customer  Settlement
effective  March 1,  1995.  (See Note 6 of the Notes to  Condensed  Consolidated
Financial  Statements for a discussion of the Customer Settlement and other rate
matters.)

Citrus Corp.

         The operating  results of the Florida Gas Phase III expansion  project,
combined with Florida Gas' Order No. 636 restructuring and resultant  conversion
to a SFV rate  methodology and Citrus'  successful  renegotiation  in 1994 of an
unfavorable  contract with one of its major  customers,  should result in stable
revenues,  earnings,  and cash flow at Citrus. The results are expected to be at
somewhat  lower  levels  than in 1994 due to the  completion  of the  Phase  III
expansion project and the resulting end of AFUDC recognition on the project.

         Florida  Gas  has  terminated  substantially  all of its  gas  purchase
contracts with a weighted average cost in excess of current  spot-market  prices
for aggregate  costs that are less than the $160 million  maximum amount that it
is entitled to recover  from its  customers  pursuant to its 1993  restructuring
settlement under Order No. 636.

         Citrus obtains its own financing  independent of its parent  companies.
Debt  financing by Citrus with outside  parties  generally is nonrecourse to its
parent companies.

                                    --------------------------------------------

<TABLE>
<CAPTION>

                                                      Three Months                              Nine Months
                                                   Ended September 30,                      Ended September 30,
                                                   -------------------                      -------------------
                                                1995                1994                  1995                  1994
                                                ----                ----                  ----                  ----
                                                                           (In Millions)
<S>                                              <C>                 <C>                  <C>                    <C>
Other Income - Equity in
    Earnings of Unconsolidated
    Affiliates
       Natural gas transmission
          and marketing                          $10                 $12                  $ 28                   $25
       Other                                       1                   1                     8                     5
                                                 ---                 ---                  ----                   ---

                                                 $11                 $13                  $ 36                   $30
                                                 ===                 ===                  ====                   ===
</TABLE>

         Equity in Earnings of  Unconsolidated  Affiliates  for the  three-month
period was  slightly  lower than last year due to a decrease in equity of Citrus
(discussed earlier in the Natural Gas Transmission and Marketing section).

         For  the  nine-month  period,  Equity  in  Earnings  of  Unconsolidated
Affiliates  increased in 1995 primarily due to an increase in equity of earnings
of Citrus  (discussed  earlier in the Natural  Gas  Transmission  and  Marketing
section) and Sonat Offshore. On July 26, 1995, the remaining investment in Sonat
Offshore common stock was sold in an underwritten  public offering.  (See Note 4
of the Notes to Condensed Consolidated Financial Statements.)
<TABLE>
<CAPTION>

<S>                                              <C>                 <C>                  <C>                    <C>
Other Income - Other                             $ -                 $ 5                  $(36)                  $12
</TABLE>

         For the three-month period,  Other Income in 1994 includes a $3 million
dividend on the Baker Hughes  Incorporated  preferred  stock,  which, due to the
sale of this investment, will no longer be received. (See Note 2 of the Notes to
Condensed  Consolidated Financial Statement.) 1994 also includes the recognition
of $2 million on gains from the sale of oil and gas properties.

         The decrease in Other Income for the nine-month period is due to losses
of $29 million on the sale of oil and gas  properties in 1995 versus gains of $3
million  in  1994,  and to a $13  million  loss  on the  sale  of the  Company's
investment  in  Baker  Hughes  Incorporated  preferred  stock in June  1995.  In
addition,  the 1995  nine-month  period  reflects $6 million of dividends on the
Baker  Hughes stock  versus $9 million in 1994,  which,  due to the sale of this
investment, is no longer being received.
<TABLE>
<CAPTION>

                                                      Three Months                              Nine Months
                                                   Ended September 30,                      Ended September 30,
                                                   -------------------                      -------------------
                                                1995                1994                  1995                  1994
                                                ----                ----                  ----                  ----
                                                                           (In Millions)

<S>                                             <C>                 <C>                   <C>                   <C>
Interest
    Interest income                             $  2                $  1                  $  6                  $  4
    Interest expense                             (25)                (25)                  (84)                  (70)
    Interest capitalized                           1                   2                     5                     5
                                                ----                ----                  ----                  ----
                                                $(22)               $(22)                 $(73)                 $(61)
                                                ====                ====                  ====                  ==== 
</TABLE>

         Net interest  expense was level for the three-month  period. A decrease
in  interest   expense  on  debt  from  the  lower  debt  levels  following  the
monetization of the oilfield  services  assets was offset by increased  interest
expense on federal income taxes and higher average rates on debt.

         For the nine-month period interest expense increased due to higher debt
levels and higher average rates,  increased  interest  expense on federal income
taxes, and higher revenue reserve balances.
<TABLE>
<CAPTION>

<S>                                             <C>                 <C>                   <C>                   <C> 
Income Taxes                                    $ 82                $ 10                  $ 98                  $ 40
</TABLE>

         Income  taxes  increased  for the three and  nine-month  periods due to
income taxes associated with the unusual items discussed  earlier.  Absent those
unusual items,  the effective tax rate was essentially  flat for the three-month
period,  and  decreased  for the  nine-month  period due to a higher  portion of
earnings in the current period derived from items that receive tax  preferential
rates, including joint venture earnings.

FINANCIAL CONDITION

CASH FLOWS
<TABLE>
<CAPTION>
                                                                                                Nine Months
                                                                                            Ended September 30,
                                                                                          1995                  1994
                                                                                                 (In Millions)

<S>                                                                                       <C>                   <C> 
Operating Activities                                                                      $161                  $373
</TABLE>

         Net cash  provided by  operating  activities  in 1995 was $212  million
lower than in 1994 due to lower cash from  operations at both Southern and Sonat
Exploration.  Southern's GSR expenditures were $73 million higher in 1995. Sonat
Exploration's  decrease in cash flow from operations was due to lower gas prices
in 1995, a gas  prepayment  received in 1994, and a large 1995 third quarter tax
payment  related to the sale of the remaining  shares of Sonat  Offshore  common
stock.


<PAGE>

<TABLE>
<CAPTION>

                                                                                                Nine Months
                                                                                            Ended September 30,
                                                                                          1995                  1994
                                                                                                 (In Millions)

<S>                                                                                      <C>                   <C>   
Investing Activities                                                                     $ 225                 $(576)
</TABLE>

         Net cash from  investing  activities  increased $801 million from 1994.
The  increase was  attributable  to the receipt of $326 million from the sale of
the Company's  remaining interest in Sonat Offshore stock, $167 million from the
sale of four million shares of Baker Hughes convertible preferred stock, and $99
million  in  proceeds  from  the  sale of  Sonat  Exploration  properties.  Also
contributing  to the increase  were net advances  made to Citrus in 1994 of $255
million.   Partially   offsetting  the  increase  was  an  increase  in  capital
expenditures of $28 million. (See Capital Expenditures below.)

<TABLE>
<CAPTION>
<S>                                                                                      <C>                   <C>  
Financing Activities                                                                     $(337)                $ 204
</TABLE>

         Net cash used in financing  activities increased $541 million primarily
due to repayments  under Sonat's  floating  rate  facilities.  Proceeds from the
Sonat  Offshore  stock  sale and the Baker  Hughes  stock  sale were used in the
repayments.

Capital Expenditures

         Capital  expenditures for the Company's  business  segments  (excluding
unconsolidated affiliates) were as follows:

<TABLE>
<CAPTION>
         <S>                                                                             <C>                   <C>  
         Exploration and Production                                                      $ 315                 $ 289
         Natural Gas Transmission and Marketing                                             38                    37
         Other                                                                               4                     3
                                                                                         -----                 -----

         Total                                                                           $ 357                 $ 329
                                                                                         =====                 =====
</TABLE>

         The  Company's  share of  capital  expenditures  by its  unconsolidated
affiliates  was $100  million and $342  million in the first nine months of 1995
and 1994, respectively.

Liquidity and Capital Resources

         At September 30, 1995,  the Company had lines of credit and a revolving
credit  agreement with a total capacity of $750 million.  Of this,  $650 million
was unborrowed and available. The amount available under the lines of credit has
been reduced by the amount of commercial  paper  outstanding  of $100 million to
reflect the Company's policy that credit line and commercial paper borrowings in
the aggregate  will not exceed the maximum amount  available  under its lines of
credit and revolving credit agreement.

         On July 26,  1995,  Sonat  Exploration  received  net  proceeds of $326
million for its remaining  investment in Sonat Offshore (see Note 4 of the Notes
to Condensed  Consolidated  Financial  Statements).  The Company's after-tax net
cash flow from this  transaction will be  approximately  $210 million.  Proceeds
from this transaction were used to repay floating rate debt.

         In 1993  Sonat  filed a shelf  registration  with  the  Securities  and
Exchange Commission (SEC) for up to $500 million in debt securities. On June 12,
1995,  Sonat  issued  $200  million  of 6 7/8  Percent  Notes  under  this shelf
registration,  leaving $300 million unissued.  The proceeds from the sale of the
Notes  were  used  to  repay  floating  rate  debt.  Southern  also  has a shelf
registration  with the SEC for up to $200 million in debt  securities,  of which
$100  million  has been  issued.  Sonat  expects  to  continue  to use cash from
operations  and  borrowings  on the  public or private  markets  to finance  its
capital and other corporate expenditures.

         In October 1995, Southern monetized a GSR obligation for $42.3 million.
Funds for this  transaction  were obtained by commercial  paper  borrowings  and
funds from operations.

         In October  1995 the Board of  Directors  of the Company  extended  the
Company's  stock  repurchase  program  to April 30,  1997,  and  authorized  the
purchase of an additional one million shares of the Company's common stock. This
brings the total number of shares  authorized  to  approximately  three  million
shares.  Through October 31, 1995, the Company has purchased  approximately  1.5
million  shares and will continue to purchase  shares from  time-to-time  on the
open market or in privately negotiated transactions.  Shares purchased under the
authorization  are expected to be reissued in  connection  with  employee  stock
option and restricted stock programs.

         Cash flow from  operations  and  borrowings  in the  public or  private
markets  provide the Company  with the means to fund  operations  and  currently
planned investment and capital expenditures.

Capitalization Information
<TABLE>
<CAPTION>

                                                                        September 30,               December 31,
                                                                            1995                        1994    

         <S>                                                                <C>                        <C>
         Debt to Capitalization                                                 37%                        46%
         Book Value Per Share                                               $17.41                     $16.11
</TABLE>

COMMODITY PRICE RISK MANAGEMENT

         Sonat Exploration and Sonat Marketing use natural gas futures contracts
and options on gas futures  and oil and gas price swap  agreements  to hedge the
effects of spot-market price volatility on operating results.

         The Company's use of these  instruments is  implemented  under a set of
policies   approved  by  the  Board  of  Directors.   These  policies   prohibit
speculation,  determine  approval  levels for each  transaction,  and set limits
regarding  volume  relative to budgeted  production  or sales  levels.  All swap
counterparties  are  approved  by the Board,  and volume  limits are set for any
single  counterparty.  Reports  detailing each  transaction  are  distributed to
management.  In addition, all hedge activities are internally reviewed to ensure
compliance with all policies. (See Note 3 of the Notes to Condensed Consolidated
Financial Statements.)

NEW ACCOUNTING PRONOUNCEMENT

         In October  1995,  the  Financial  Accounting  Standards  Board  issued
Statement of Financial  Accounting Standards No. 123, Accounting for Stock-Based
Compensation, which will become effective for years beginning after December 15,
1995. The Company has not yet determined the effect of the new statement.




<PAGE>


                                              PART II. OTHER INFORMATION


Item 6.  Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>

(a)  Exhibits (1)

Exhibit
Number                                               Exhibits

<S>                                         <C> 
3(b)*                                       By-Laws of Sonat Inc. as amended and in effect October 26, 1995

10*                                         Amendatory  Agreement dated June 1, 1995, to Service  Agreement No. 904460,
                                            effective  November  1, 1994  between  Southern  Natural  Gas  Company  and
                                            Atlanta Gas Light Company

11*                                         Computation of Earnings per Share

12*                                         Computation of Ratio of Earnings to Fixed Charges

27*                                         Financial  Data  Schedule for the period ended  September 30,  1995,  filed
                                            electronically with this Report

</TABLE>

*  Filed with this Report

(b)  Reports on Form 8-K

  The  Company  did not file any  Report on Form 8-K during  the  quarter  ended
September 30, 1995.

     (1) The Company will furnish to requesting security holders the exhibits on
this list upon the  payment  of a fee of  10(cent)  per page up to a maximum  of
$5.00 per  exhibit.  Requests  must be in  writing  and should be  addressed  to
Beverley T. Krannich, Secretary, Sonat Inc., P. O. Box 2563, Birmingham, Alabama
35202-2563.

<PAGE>




                                          SONAT INC. AND SUBSIDIARIES




                                                   SIGNATURES




        Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                                                SONAT INC.



Date:      November 13, 1995               By:        /s/ James A. Rubright     
       -------------------------                      --------------------------
                                                      James A. Rubright
                                                      Senior Vice President and
                                                      General Counsel




Date:      November 13, 1995               By:        /s/ Thomas W. Barker, Jr. 
       -------------------------                      --------------------------
                                                      Thomas W. Barker, Jr.
                                                      Vice President-Finance and
                                                      Treasurer