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      March 31, 1999

                                       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:

                110,062,591 SHARES OUTSTANDING ON APRIL 30, 1999



<PAGE>


                           SONAT INC. AND SUBSIDIARIES

                                      INDEX


<TABLE>
<CAPTION>
                                                                                                             Page No.

PART I.           Financial Information

                  Item 1.      Financial Statements

                               Condensed Consolidated Balance Sheets--
                                   (Unaudited)--March 31, 1999 and
<S>                                                                                                          <C>
                                   December 31, 1998                                                          1

                               Condensed Consolidated Statements of Operations--
                                   (Unaudited)--Three Months Ended
                                   March 31, 1999 and 1998                                                    2

                               Condensed Consolidated Statements of Cash Flows--
                                   (Unaudited)--Three Months Ended
                                   March 31, 1999 and 1998                                                    3

                               Notes to Condensed Consolidated Financial
                                   Statements                                                                 4 - 14


                  Item 2.      Management's Discussion and Analysis of Financial
                                   Condition and Results of Operations                                       15 - 28


                  Item 3.      Quantitative and Qualitative Disclosure About    
                                   Market Risk                                                               29


PART II.          Other Information


                  Item 4.      Submission of Matters to a Vote of Security Holders                           30

                  Item 5.      Legal Proceedings                                                             30

                  Item 6.      Exhibits and Reports on Form 8-K                                              31
</TABLE>




<PAGE>


                                                            
                          PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
                           SONAT INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                March 31,              December 31,
                                                                                  1999                     1998
                                                                                          (In Thousands)
                                     ASSETS
Current Assets:
<S>                                                                                <C>                       <C>       
    Cash and cash equivalents                                                      $    5,337                $    7,104
    Notes receivable from affiliates                                                   49,980                    50,359
    Accounts receivable                                                               317,555                   388,075
    Inventories                                                                        45,386                    69,093
    Income tax refund receivable                                                       42,027                     1,714
    Gas imbalance receivables                                                          10,534                     7,673
    Assets from trading activities                                                    148,405                   229,801
    Other                                                                              20,054                    46,690
                                                                                   ----------                ----------
       Total Current Assets                                                           639,278                   800,509
                                                                                   ----------                ----------

Investments in Unconsolidated Affiliates and Other                                    686,648                   671,263
                                                                                   ----------                ----------

Plant, Property and Equipment                                                       8,348,647                 8,425,679
    Less accumulated depreciation, depletion
       and amortization                                                             5,884,407                 5,703,767
                                                                                   ----------                ----------
                                                                                    2,464,240                 2,721,912
                                                                                   ----------                ----------
Deferred Charges and Other:
    Assets from trading activities                                                     17,495                    25,694
    Other                                                                             158,581                   141,716
                                                                                   ----------                ----------
                                                                                      176,076                   167,410
                                                                                   ----------                ----------

Total Assets                                                                       $3,966,242                $4,361,094
                                                                                   ==========                ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Long-term debt due within one year                                             $  104,835                $  109,835
    Unsecured notes                                                                   847,938                   720,361
    Accounts payable                                                                  320,082                   401,357
    Accrued income taxes                                                               12,975                    21,700
    Accrued interest                                                                   49,047                    47,864
    Gas imbalance payables                                                             11,023                    11,497
    Liabilities from trading activities                                               124,335                   223,628
    Other                                                                              39,627                    40,357
                                                                                   ----------                ----------
       Total Current Liabilities                                                    1,509,862                 1,576,599
                                                                                   ----------                ----------

Long-Term Debt                                                                      1,098,420                 1,099,484
                                                                                   ----------                ----------

Deferred Credits and Other:
    Deferred income taxes                                                              90,126                   163,964
    Liabilities from trading activities                                                 7,660                    12,564
    Other                                                                             173,353                   179,232
                                                                                   ----------                ----------
                                                                                      271,139                   355,760
                                                                                   ----------                ----------
Commitments and Contingencies

Stockholders' Equity:
    Common stock and other capital                                                    179,157                   180,192
    Retained earnings                                                                 967,599                 1,209,527
                                                                                   ----------                ----------
                                                                                    1,146,756                 1,389,719
    Less treasury stock                                                                59,935                    60,468
                                                                                   ----------                ----------
       Total Stockholders' Equity                                                   1,086,821                 1,329,251
                                                                                   ----------                ----------

Total Liabilities and Stockholders' Equity                                         $3,966,242                $4,361,094
                                                                                   ==========                ==========
</TABLE>


                             See accompanying notes.

<PAGE>


                           SONAT INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                                 Three Months
                                                                                                Ended March 31,
                                                                                   1999                      1998*
                                                                                              (In Thousands, Except
                                                                                                Per-Share Amounts)

<S>                                                                                <C>                       <C>       
Revenues                                                                           $  773,740                $1,109,143
                                                                                   ----------                ----------

Costs and Expenses:
    Natural gas cost                                                                  487,915                   763,483
    Electric power cost                                                                76,002                    65,191
    Operating and maintenance                                                          39,682                    40,484
    General and administrative                                                         37,244                    30,146
    Depreciation, depletion and amortization                                           75,325                    97,069
    Ceiling test charges                                                              351,500                    39,692
    Taxes, other than income                                                           11,966                    13,604
                                                                                   ----------                ----------
                                                                                    1,079,634                 1,049,669
                                                                                   ----------                ----------

Operating Income (Loss)                                                              (305,894)                   59,474
                                                                                   ----------                ----------

Other Income (Loss), Net:
    Equity in earnings of
       unconsolidated affiliates                                                        7,719                     9,653
    Minority interest                                                                  (1,344)                     (542)
    Other income, net                                                                   2,156                       713
                                                                                   ----------                ----------
                                                                                        8,531                     9,824
                                                                                   ----------                ----------

Earnings (Loss) Before Interest and Taxes                                            (297,363)                   69,298
                                                                                   ----------                ----------

Interest:
    Interest income                                                                     1,939                     2,200
    Interest expense                                                                  (35,307)                  (32,130)
    Interest capitalized                                                                3,420                     1,424
                                                                                   ----------                ----------
                                                                                      (29,948)                  (28,506)
                                                                                   ----------                ----------

Income (Loss) Before Income Taxes                                                    (327,311)                   40,792

Income Tax Expense (Benefit)                                                         (115,095)                   12,842
                                                                                   ----------                ----------

Net Income (Loss)                                                                  $ (212,216)               $   27,950
                                                                                   ==========                ==========

Earnings (Loss) Per Share of Common Stock                                          $    (1.93)               $      .25
                                                                                   ==========                ==========

Earnings (Loss) Per Share of Common Stock-
    Assuming Dilution                                                              $    (1.93)               $      .25
                                                                                   ==========                ==========

Weighted Average Shares Outstanding                                                   110,046                   109,966
                                                                                   ==========                ==========

Weighted Average Shares Outstanding-
    Assuming Dilution                                                                 110,046                   111,134
                                                                                   ==========                ==========

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


*Restated, see Note 1
                             See accompanying notes.


<PAGE>


                           SONAT INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                  1999                       1998*
                                                                                           (In Thousands)
Cash Flows from Operating Activities:
<S>                                                                                 <C>                       <C>      
    Net income (loss)                                                               $(212,216)                $  27,950
    Adjustments to reconcile net income (loss) to net
       cash provided by operating activities:
          Depreciation, depletion and amortization,
              including ceiling test charges                                          426,825                   136,761
          Deferred income taxes                                                       (73,838)                   78,003
          Equity in earnings of unconsolidated
              affiliates, less distributions                                           (6,861)                   (7,406)
          Reserves for regulatory matters                                                 194                    (4,046)
          Gas supply realignment costs                                                 (1,832)                      353
          Change in:
              Accounts receivable                                                      70,487                   127,656
              Inventories                                                              23,707                    20,132
              Accounts payable                                                        (81,281)                 (100,200)
              Accrued interest and income taxes, net                                  (47,856)                  (63,247)
              Accrued long-term compensation                                             -                      (73,799)
              Other current assets and liabilities                                     22,611                   (26,314)
              Net change from trading activities                                      (14,603)                   (2,052)
          Net change in restricted cash                                                  -                      115,956
          Other, net                                                                  (29,563)                    8,918
                                                                                    ---------                 ---------

              Net cash provided by operating activities                                75,774                   238,665
                                                                                    ---------                 ---------

Cash Flows from Investing Activities:
    Plant, property and equipment additions                                          (139,628)                 (299,971)
    Disposal of assets                                                                (23,086)                    1,109
    Investments in unconsolidated affiliates and
       other                                                                           (6,822)                   (7,575)
                                                                                    ---------                 ---------

              Net cash used in investing activities                                  (169,536)                 (306,437)
                                                                                    ---------                 ---------

Cash Flows from Financing Activities:
    Proceeds from issuance of long-term debt                                             -                      400,000
    Payments of long-term debt                                                         (6,064)                 (535,851)
    Changes in short-term borrowings                                                  127,577                   216,997
                                                                                    ---------                 ---------
       Net changes in debt                                                            121,513                    81,146
    Dividends paid                                                                    (29,712)                  (29,689)
    Treasury stock purchases                                                             -                         (100)
    Other equity                                                                          194                     2,530
                                                                                    ---------                 ---------

              Net cash provided by financing activities                                91,995                    53,887
                                                                                    ---------                 ---------

Net Decrease in Cash and Cash Equivalents                                              (1,767)                  (13,885)

Cash and Cash Equivalents at Beginning of Year                                          7,104                    27,278
                                                                                    ---------                 ---------

Cash and Cash Equivalents at End of Period                                          $   5,337                 $  13,393
                                                                                    =========                 =========

Supplemental Disclosures of Cash Flow Information
Cash Paid for:
    Interest (net of amount capitalized)                                            $  26,405                 $  25,187
    Income taxes paid, net                                                              7,106                     2,129
</TABLE>


*Restated, see Note 1
                             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 of operations  for the interim  periods
presented herein.

         The 1998 period has been  restated for a change to the full cost method
of accounting for the Company's oil and gas operations. Certain other amounts in
the 1998  condensed  consolidated  financial  statements  and  notes  have  been
reclassified to conform with the 1999 presentation.

2.       Proposed Merger

         On March 13,  1999,  Sonat  and El Paso  Energy  Corporation  (El Paso)
entered into an Agreement and Plan of Merger, as amended (the Merger Agreement),
providing for, among other things, the merger of El Paso and the Company.  Under
the terms of the Merger Agreement,  the Company's  stockholders will receive one
share of El Paso common stock (El Paso Common  Stock),  for each share of common
stock of the Company (Company Common Stock),  they own. The merger is subject to
certain  customary  conditions,   including,   among  others,  approval  by  the
stockholders  of  the  Company  and  receipt  of  certain  required   government
approvals. In the event El Paso stockholder approval for the issuance of El Paso
Common  Stock in the  merger  is not  obtained,  El Paso has  agreed to issue an
amount of El Paso Common Stock not to exceed, in the aggregate,  19.9 percent of
the  outstanding  El  Paso  Common  Stock,   with  the  balance  of  the  merger
consideration to be paid in the form of depositary shares representing interests
in shares of a new  series of  non-convertible  long-term  preferred  stock (the
Preferred  Stock).  The  Preferred  Stock will bear a dividend  rate designed to
cause  the  Preferred  Stock  to have  an  initial  trading  value,  when  fully
distributed,  equal to the  greater  of $32 or the  value of the El Paso  Common
Stock as of the time of the  Company's  shareholder  vote,  subject  to a cap of
$44.50.  The  Preferred  Stock  will be  redeemable  in 21 years and will not be
convertible.

         In connection with the Merger Agreement, on March 13, 1999, the Company
and El Paso also entered into cross option agreements,  pursuant to which, among
other  things,  (i) El Paso has been  granted an option to  purchase  up to 19.9
percent of the Company's  Common Stock,  exercisable if the Merger  Agreement is
terminated under certain circumstances as set forth therein and (ii) the Company
has been  granted an option to purchase up to 19.9 percent of the El Paso Common
Stock,   exercisable  if  the  Merger  Agreement  is  terminated  under  certain
circumstances as set forth therein.



<PAGE>


3.       Trading Activities and Derivative Financial Instruments

Derivative Commodity Instruments Held or Issued for Trading Purposes

         The Company  maintains  active  trading  positions in energy  commodity
futures,  swap and option  contracts.  The Company manages its trading positions
with strict  policies and procedures and limits its risk to changes in the value
of its  outstanding  positions  through  the use of policy  limits on  portfolio
Value-at-Risk, the establishment of offsetting positions, and other methods. The
trading  operation  also  enters  into  natural  gas and  electricity  commodity
purchase and sale commitments.  These activities constitute its trading business
and are  essential  to provide  customers  with market  products at  competitive
prices.

         At March 31, 1999,  the Company's  trading  portfolio  had  outstanding
energy commodity futures,  swaps and options.  In the table below, buys of swaps
represent  either 1) payment of fixed price and receipt of NYMEX or index; or 2)
payment of NYMEX or index and receipt of index.  The absolute  notional  volumes
and terms are:

<TABLE>
<CAPTION>
                                                                       Notional Volume                 Maximum
Commodity                                                            Buy             Sell               Term
---------                                                            ---             ----            -------
<S>                                                                 <C>              <C>              <C>      
Natural Gas (TBtu)                                                  1,180            1,236            60 months
Crude Oil (Thousands of Barrels)                                    5,640            2,310            60 months
Electricity (Thousands of MWh)                                        240              135             2 months
</TABLE>

         The 60-month term deals begin in 2002 and end in 2006.

         The  amounts   disclosed  in  the   following   table   represent   the
end-of-period fair value and the average fair value of the trading portfolio.

<TABLE>
<CAPTION>
                                                            Fair Value              Average Fair Value
                                                         (Carrying Amount)         for the Three Months
                                                           as of 3/31/99               Ended 3/31/99
                                                                        (In Thousands)

         <S>                                                   <C>                      <C>     
         Assets                                                $165,900                 $229,525
         Liabilities                                            131,995                  198,452
</TABLE>

         Net trading gains for the first quarter of 1999 are $14.8 million.

Derivative Commodity Instruments Held or Issued for Purposes Other Than Trading

     In certain cases,  derivative  positions are taken specifically to mitigate
market price risk  associated with  significant  physical  transactions  and are
accounted  for  using  hedge  accounting  provided  they meet  hedge  accounting
criteria.  Sonat  Exploration  Company  hedges a portion  of its  production  by
entering  into  intercompany  swaps with Sonat  Marketing  Company  L.P.  (Sonat
Marketing).  The exposure that Sonat Marketing assumes from Sonat Exploration is
then hedged by entering into derivative  instruments  with third parties.  Sonat
Marketing also hedges third-party purchases and sales by entering into commodity
futures, swaps and options.

<PAGE>

3.       Trading Activities and Derivative Financial Instruments (Cont'd)

         At March  31,  1999,  the  Company  had  outstanding  energy  commodity
futures,  swaps and options for purposes other than trading. In the table below,
buys of swaps represent either 1) payment of fixed price and receipt of NYMEX or
index;  or 2)  payment  of NYMEX or index and  receipt  of index.  The  absolute
notional volumes and terms are:

<TABLE>
<CAPTION>
                                                                       Notional Volume                 Maximum
Commodity                                                            Buy             Sell               Term
<S>                                                                   <C>              <C>            <C>      
Natural Gas (TBtu)                                                    41               88             21 months
</TABLE>

         The deals end in 2000.

         The information in the following table represents the fair value, as of
March 31, 1999, of outstanding  financial derivative positions held for purposes
other than trading.  Not included are the related physical  positions that these
derivative positions hedge.
                                                            Fair Value
                                                          (In Thousands)
         Natural Gas:
              Futures                                         $    183
              Swaps                                            (11,525)

         Deferred amounts on open futures positions will mature through 2000.

Credit Risk from Derivative Activities

         NYMEX  traded  futures  are  guaranteed  by the NYMEX and have  nominal
credit risk. On all other  transactions  described above, the Company is exposed
to credit risk in the event of nonperformance by the counterparties. The Company
has established policies and procedures to evaluate potential counterparties for
creditworthiness   before  entering  into   over-the-counter   swap  and  option
agreements.  The credit risk resulting from in-the-money swaps is monitored on a
regular basis  against  established  collateralization  limits and credit limits
established  by the  Company.  Due to changes in market  conditions,  the market
value  of  swaps  and  options  and the  associated  credit  exposure  with  the
counterparties can change significantly.  At March 31, 1999, the market value of
the  Company's  in-the-money  swaps  and  options  was  $19.3  million,  and one
counterparty posted collateral in the amount of $.2 million. Reserves for credit
risk are established as necessary.


<PAGE>

4.       Unconsolidated Affiliates

         The following  table  presents the  components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                     1999                   1998
                                                                                           (In Thousands)
Company's Share of Reported Earnings (Losses):

<S>                                                                                   <C>                    <C>   
    Exploration and Production                                                        $   102                $  144
                                                                                      -------                ------

    Natural Gas Transmission:
       Citrus Corp.                                                                     6,261                 4,511
       Amortization of Citrus basis difference                                            346                   346
       Bear Creek Storage                                                               2,763                 2,089
       Destin Pipeline                                                                   (377)                2,060
       Other                                                                               39                   (24)
                                                                                      -------                ------
                                                                                        9,032                 8,982
                                                                                      -------                ------

    Energy Services                                                                    (1,835)                  225
                                                                                      -------                ------

    Other                                                                                 420                   302
                                                                                      -------                ------

                                                                                      $ 7,719                $9,653
                                                                                      =======                ======
</TABLE>

         Natural Gas  Transmission  Affiliates - Sonat owns 50 percent of Citrus
Corp. (Citrus), the parent company of Florida Gas Transmission Company. Southern
Natural Gas Company  (Southern)  owns a  one-third  interest in Destin  Pipeline
Company,  L.L.C.  (Destin) and a subsidiary  of Southern owns 50 percent of Bear
Creek Storage Company (Bear Creek).

         The following is summarized income statement information for Citrus:

<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                     1999                  1998
                                                                                           (In Thousands)

<S>                                                                                  <C>                   <C>     
    Revenues                                                                         $147,456              $133,581
    Expenses:
       Natural gas cost                                                                69,624                58,614
       Operating expenses                                                              23,530                23,987
       Depreciation and amortization                                                   12,812                12,722
       Interest and other                                                              21,030                23,420
       Income taxes                                                                     7,938                 5,816
                                                                                     --------              --------

    Income Reported                                                                  $ 12,522              $  9,022
                                                                                     ========              ========
</TABLE>


<PAGE>

4.       Unconsolidated Affiliates (Cont'd)

         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
                                                                                           Ended March 31,
                                                                                     1999                   1998
                                                                                           (In Thousands)

<S>                                                                                    <C>                   <C>   
    Revenues                                                                           $9,083                $9,029
    Expenses:
       Operating expenses                                                               1,211                 2,301
       Depreciation                                                                     1,362                 1,359
       Other expenses, net                                                                985                 1,192
                                                                                       ------                ------

    Income Reported                                                                    $5,525                $4,177
                                                                                       ======                ======
</TABLE>

         The  following  is  summarized  results of  operations  for Destin.  No
provision  for income  taxes has been  included  since its income taxes are paid
directly by joint venture participants.

<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                     1999                   1998
                                                                                           (In Thousands)

<S>                                                                                   <C>                   <C>    
    Revenues                                                                          $ 3,833               $ 1,872
    Expenses:
       Operating expenses                                                               1,625                  -
       Depreciation and amortization                                                    1,586                  -
       Interest and other                                                               1,755                (4,307)
                                                                                      -------               -------

    Income (Loss) Reported                                                            $(1,133)              $ 6,179
                                                                                      =======               =======
</TABLE>

5.       Debt and Lines of Credit

         Long-Term  Debt and Lines of Credit - At March  31,  1999,  Sonat had a
bank  revolving  credit  agreement  that  provided for periodic  borrowings  and
repayments  of up to  $500.0  million  through  June 30,  2001.  Borrowings  are
supported by unsecured promissory notes that, at the option of the Company, will
bear interest at the banks'  prevailing prime or international  lending rate, or
such rates as the banks may competitively bid. During the first quarter of 1999,
there were no  borrowings or repayments  under the revolving  credit  agreement,
resulting in no balance outstanding at March 31, 1999.



<PAGE>


5.       Debt and Lines of Credit (Cont'd)

         Unsecured Notes - Loans under all short-term  credit facilities are for
a duration of less than three months.

         At March  31,  1999,  Sonat  had  short-term  lines of credit of $400.0
million  available  through January 18, 2000.  Southern had short-term  lines of
credit of $50.0 million available through May 31, 1999. Borrowings are available
for a  period  of not  more  than  364  days  and are in the  form of  unsecured
promissory  notes that bear  interest  at rates  based on the banks'  prevailing
prime, international or money-market lending rates. At March 31, 1999, Sonat had
$24.1 million  outstanding  under its  agreement at a rate of 5.25  percent.  No
amounts were outstanding under Southern's agreement.

         In mid  April  1999,  Sonat  completed  a new  364-day  $900.0  million
revolving  credit  facility with 13 banks.  In  connection  with this new credit
facility,  the Company  terminated its $500.0 million revolving credit agreement
and its $400.0 million lines of credit.

         Sonat had $588.9 million in commercial paper  outstanding at an average
rate of 5.10 percent at March 31, 1999.  In addition,  Sonat had $235 million of
short-term  notes  borrowed  from a bank at an average  rate of 5.29  percent at
March 31, 1999.

6.       Rate Matters and Contingencies

         Periodically,  Southern  makes  general  rate  filings with the 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  provides  reserves  relating to
such amounts collected subject to refund, as appropriate, and makes refunds upon
establishment  of the final  rates.  At March  31,  1999,  Southern's  rates are
established by a settlement  that was approved by FERC orders issued in 1995 and
1996.  All of its  customers are parties to the  settlement,  and all revenue is
based on the final settlement rates and therefore is not being collected subject
to refund.



<PAGE>


7.       Comprehensive Income (Loss)

         Comprehensive income (loss), net of related tax, is as follows:

<TABLE>
<CAPTION>
                                                                                           Three Months
                                                                                          Ended March 31,
                                                                                    1999                    1998
                                                                                          (In Thousands)
<S>                                                                                 <C>                     <C>    
Net Income (Loss)                                                                   $(212,216)              $27,950
Unrealized Gains (Loss) on Securities                                                     (64)                1,274
Reclassification Adjustment                                                            (1,162)                   (9)
                                                                                    ---------               -------
Comprehensive Income (Loss)                                                         $(213,442)              $29,215
                                                                                    =========               =======
</TABLE>

         Common Stock and Other  Capital in the Condensed  Consolidated  Balance
Sheets  includes $.4 million at March 31, 1999, and $1.6 million at December 31,
1998, related to other  comprehensive  income,  which is comprised of unrealized
gains on securities.




<PAGE>


8.       Segment Information

         The Company's  consolidated  financial statements reflect operations in
three segments:  Exploration and Production, Natural Gas Transmission and Energy
Services.  The Company's  revenues and earnings before interest and taxes (EBIT)
by business segment are shown in the following tables.

<TABLE>
<CAPTION>
                                                                    Three Months Ended March 31, 1999
                                      Exploration            Natural
                                          and                  Gas             Energy
                                      Production          Transmission        Services         Other            Total
                                                                       (In Thousands)
Revenues from
<S>                                    <C>                    <C>              <C>            <C>              <C>     
    External Customers                 $  19,071              $94,023          $661,845       $(1,199)         $773,740

Intersegment Revenues                     72,620                6,680              -           14,554            93,854

Earnings (Loss) Before
    Interest and Taxes                  (350,302)              56,182            (1,592)       (1,651)         (297,363)
                                       ================================================================================


                                                                    Three Months Ended March 31, 1998
                                      Exploration            Natural
                                          and                  Gas             Energy
                                      Production          Transmission        Services         Other            Total
                                                                       (In Thousands)
Revenues from
    External Customers                   $79,798              $95,604          $937,055       $(3,314)       $1,109,143

Intersegment Revenues                     82,064                9,897              -           15,689           107,650

Earnings (Loss) Before
    Interest and Taxes                    (2,445)              68,915               836         1,992            69,298
                                         ==============================================================================
</TABLE>




<PAGE>


8.       Segment Information (Cont'd)

         The following  table  reconciles the total of the Company's  reportable
segments' EBIT to the Company's consolidated income before income taxes.

<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                     1999                   1998
                                                                                           (In Thousands)
Total Earnings (Loss) Before Interest and
<S>                                                                                 <C>                    <C>     
    Taxes for Reportable Segments                                                   $(295,712)             $ 67,306
Other Earnings (Loss) Before Interest and Taxes                                        (1,651)                1,992
Interest Income                                                                         1,939                 2,200
Interest Expense                                                                      (35,307)              (32,130)
Interest Capitalized                                                                    3,420                 1,424
                                                                                    ---------              --------

Income (Loss) Before Income Taxes                                                   $(327,311)             $ 40,792
                                                                                    =========              ========
</TABLE>

         Assets for the Company's three segments are as follows:

<TABLE>
<CAPTION>
                                                                                 March 31,            December 31,
                                                                                   1999                   1998
                                                                                          (In Thousands)
         <S>                                                                       <C>                   <C>
         Assets by Segment
             Exploration and Production                                            $1,388,912            $1,635,597
             Natural Gas Transmission                                               1,990,821             1,961,994
             Energy Services                                                          618,610               762,547
</TABLE>



<PAGE>


9.       Earnings Per Share

         The  calculation  of diluted  earnings  per share  differs from that of
basic  earnings  per share due to the  denominator  for the diluted  calculation
including common stock equivalents applicable to outstanding stock options.

         The  following  table  presents  the  computation  of basic and diluted
earnings (loss) per share of common stock:

<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                     1999                   1998
                                                                                        (In Thousands, Except
                                                                                         Per-Share Amounts)
Numerator:
<S>                                                                                 <C>                    <C>     
    Net income (loss)                                                               $(212,216)             $ 27,950
                                                                                    =========              ========

Denominator:

    Denominator for Basic Earnings Per Share:

    Weighted average number of shares of common
       stock outstanding                                                              110,046               109,966

    Effect of Dilutive Securities:

    Common stock equivalents applicable to
       outstanding stock options                                                           (a)                1,168
                                                                                    ---------              --------

    Denominator for Diluted Earnings Per Share:

    Adjusted weighted average shares using
       treasury stock method for assumed conversions                                  110,046               111,134
                                                                                    =========              ========


Earnings (Loss) Per Share of Common Stock                                           $   (1.93)            $    .25
                                                                                    =========             ========

Earnings (Loss) Per Share of Common Stock-
    Assuming Dilution                                                               $   (1.93)            $    .25
                                                                                    =========             ========
</TABLE>

(a)      The addition of 229,000  potential  common  shares for the  three-month
         period of 1999  would be  antidilutive  in the  computation  of diluted
         earnings per share, and are therefore not included.



<PAGE>


10.      Subsequent Event

         AGL  Resources,  Inc. (AGL) has exercised its right under the agreement
governing the Sonat  Marketing  joint venture to put its 35 percent  interest to
Sonat.  Under the terms of the agreement,  the Company is required to repurchase
AGL's  interest  at the  greater of fair market  value or a formula  price.  The
Company has exercised  its right under the  agreement  governing the Sonat Power
Marketing  joint venture to purchase the remaining 35 percent  interest in Sonat
Power  Marketing held by a subsidiary of AGL. The purchase price will be at fair
market  value.  The  Company's  ability  to  exercise  its right  arose when AGL
notified Sonat that AGL was exercising its right to sell its 35 percent interest
in the Sonat Marketing joint venture to Sonat.




<PAGE>



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

RESULTS OF OPERATIONS

         Business segment  operating results for Sonat Inc. and its subsidiaries
(the  Company) are  presented in the table below.  The table also shows  unusual
items that  affect  earnings  before  interest  and taxes  (EBIT) and net income
comparisons. The table is presented because management believes this information
enhances the analysis of results of operations.

<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                      1999                    1998
                                                                                        (In Millions, Except
                                                                                         Per-Share Amounts)
Earnings (Loss) Before Interest and Taxes:
<S>                                                                                <C>                    <C>    
    Exploration and production                                                     $(350.3)               $ (2.4)
    Natural gas transmission                                                          56.2                  68.9
    Energy services                                                                   (1.6)                   .8
    Other                                                                             (1.7)                  2.0
                                                                                   -------                ------
                                                                                    (297.4)                 69.3

Adjustment for Unusual Item:
    Exploration and production
       Ceiling test charges                                                         (351.5)                (39.7)
                                                                                   -------                ------
Earnings Before Interest and Taxes Excluding
    Unusual Item                                                                   $  54.1                $109.0
                                                                                   =======                ======

Net Income (Loss) As Reported                                                      $(212.2)               $ 28.0
Adjustment for Unusual Item:
    Exploration and production
       Ceiling test charges                                                         (228.5)                (25.8)
                                                                                   -------                ------
Net Income Excluding Unusual Item                                                  $  16.3                $ 53.8
                                                                                   =======                ======

Earnings (Loss) Per Share-Assuming Dilution                                        $ (1.93)               $  .25
                                                                                   =======                ======

Earnings Per Share-Assuming Dilution
    Excluding Unusual Items                                                        $   .15                $  .48
                                                                                   =======                ======
</TABLE>

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 and Sonat Exploration GOM (Sonat Exploration). Most of
Sonat  Exploration's  natural gas production is sold to Sonat Marketing  Company
L.P. (Sonat Marketing),  the Company's majority-owned affiliate operating in the
Energy Services segment.


<PAGE>

         During the first quarter of 1999, Sonat Exploration has been successful
on two of the five  exploratory  wells that it drilled in the Gulf of Mexico and
currently has three wells drilling in the Gulf.  Onshore,  Sonat Exploration has
been successful on three of the seven exploratory wells that it has drilled this
year. In the March Federal Lease Sale 172, Sonat  Exploration was the successful
bidder on 22 offshore tracts at a total cost of approximately $6 million.

         PennzEnergy Company, an unaffiliated company  (PennzEnergy),  and Sonat
Exploration recently announced that they have formed a joint venture for coalbed
methane  development  at the  700,000-acre  Vermejo Park Ranch in northeast  New
Mexico.  Under  the  terms of the  definitive  joint  venture  agreement,  Sonat
Exploration  will  pay  up to  $10  million  in  cash  and  fund  a  substantial
development  program  to earn a 36-year  lease  covering  part of  PennzEnergy's
mineral interest in Vermejo Park Ranch and adjacent  holdings.  PennzEnergy will
initially  participate with a 25-percent  working  interest in the venture,  and
will increase its working  interest  incrementally  to 50 percent as the project
reaches defined  milestones.  In addition to its working  interest,  PennzEnergy
will  retain  a  25-percent  royalty  in its  lease to  Sonat  Exploration.  The
landowner has waived its preferential  rights in exchange for an increase in its
royalty. The closing of this transaction has been set for May, 1999.

         In 1999 PennzEnergy and Sonat Exploration  expect to drill a minimum of
35 wells.  Plans  call for  drilling  80 wells in 2000 and 150  wells  each year
thereafter.  Reserves associated with the joint venture properties are estimated
to  exceed  one Tcf of  coalbed  methane.  To  accommodate  near-term  gas sales
generated by the development program,  Sonat Exploration has agreed to construct
at its own expense during 1999 a gathering line north from Vermejo Park Ranch to
interconnect with a regional transportation pipeline. Longer-term plans call for
Sonat Exploration to arrange for  transportation on a newly constructed  natural
gas pipeline that will connect to the national  pipeline grid. Sonat Exploration
has an option to discontinue participation in the joint venture beyond September
1, 2000. In that event,  however,  Sonat Exploration's  interest in the project,
including any related  improvements made, would be assigned to PennzEnergy at no
cost.

         In April 1999,  Sonat  Exploration  sold its  interest in certain  West
Texas properties for approximately $42 million.



<PAGE>


EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                    1999                      1998
                                                                                            (In Millions)
<S>                                                                               <C>                       <C>   
Revenues:                                                                         $  91.7                   $161.9
                                                                                  -------                   ------

Costs and Expenses:
    Operating and maintenance                                                        17.5                     19.4
    General and administrative                                                        8.9                      9.1
    Depreciation, depletion and
       amortization                                                                  57.9                     88.9
    Ceiling test charges                                                            351.5                     39.7
    Taxes and other                                                                   6.2                      7.4
                                                                                  -------                   ------
                                                                                    442.0                    164.5
                                                                                  -------                   ------
Operating Loss                                                                     (350.3)                    (2.6)
Other Income                                                                           -                        .2
                                                                                  -------                   ------

Loss Before Interest and Taxes                                                    $(350.3)                  $ (2.4)
                                                                                  =======                   ======


Net Sales Volumes:
    Gas (Bcf)                                                                          46                       63
    Oil and condensate (MBbls)                                                      1,258                    1,950
    Natural gas liquids (MBbls)                                                       201                      584
------------------------------------------------------------------------------------------------------------------

Average Sales Prices:
    Gas ($/Mcf)                                                                    $ 1.66                   $ 2.01
    Oil and condensate ($/Bbl)                                                      11.04                    14.76
    Natural gas liquids ($/Bbl)                                                      7.29                     9.73
------------------------------------------------------------------------------------------------------------------
</TABLE>



First Quarter 1999 to First Quarter 1998 Analysis

         EBIT decreased  $36.1 million after  excluding  ceiling test charges of
$351.5  million and $39.7  million in the 1999 and 1998  periods,  respectively,
primarily due to lower revenues from lower production volumes and energy prices,
partly  offset  by  lower  costs  and  expenses.  Production  volumes  decreased
approximately 18 billion cubic feet equivalent due to property sales in 1998.

         Natural gas and oil and condensate  production decreased 27 percent and
35  percent,  respectively,  from the first  quarter  of 1998  primarily  due to
property sales in 1998. Average realized natural gas prices decreased 17 percent
to $1.66 per thousand  cubic feet (Mcf) from $2.01 per Mcf in the first  quarter
of 1998.  Realized oil and condensate  prices decreased 25 percent to an average
of $11.04 per barrel from $14.76 per barrel in the 1998 period.


<PAGE>

         Costs and expenses were $34.3 million lower than the prior period after
excluding the ceiling test charges discussed  earlier.  Depreciation,  depletion
and  amortization  expense  decreased 35 percent due to lower  production  and a
lower  amortization  rate ($1.06 for the 1999  period  compared to $1.13 for the
1998 period).

Hedging Activities

         Sonat Exploration,  through Sonat Marketing,  uses derivative financial
instruments  to manage  the  risks  associated  with  price  volatility  for its
production,  which it sells in the spot  market.  (See Market Risk and Note 3 of
the  Notes to  Condensed  Consolidated  Financial  Statements.)  Gains or losses
experienced on Sonat  Exploration's  hedging  transactions offset the changes in
revenue recognized on the sale of the commodity.  Natural gas revenues increased
by $.8 million and $1.2 million in the 1999 and 1998 periods, respectively, as a
result of hedging activities.  There were no oil hedging activities reflected in
either period.

         A  portion  of Sonat  Exploration's  future  gas  production  is hedged
through the year 2012.  Sonat  Exploration's  hedged gas production at March 31,
1999 is as follows:

                                                                   Weighted
                                                                    Average
                                          Volumes                    Price
                                           (Bcf)                   (per Mcf)
Remainder of 1999                          60.6                      $2.06
2000                                       52.0                       2.16
2001                                        4.4                       2.30
2002                                        4.4                       2.34
2003-2012                                  41.4                       3.39
--------------------------------------------------------------------------
                                          162.8                      $2.45
==========================================================================


NATURAL GAS TRANSMISSION

         The Company is engaged in the natural gas transmission business through
Southern Natural Gas Company and its subsidiaries (Southern) and Citrus Corp. (a
50  percent-owned  company).  Southern  and Citrus  Corp.  (Citrus) are actively
pursuing  opportunities  to expand their pipeline  systems in their  traditional
market areas and to connect new gas supplies.

         Units of Shell Oil Company (Shell) and BP Amoco  Corporation (BP Amoco)
are equal  partners with Southern in the  ownership of Destin  Pipeline  Company
L.L.C. (Destin). Destin owns a 223-mile, 1 billion cubic feet per day interstate
pipeline  system that  transports  natural gas from the growing  eastern Gulf of
Mexico  production  area,  which was placed  fully in service in March 1999.  An
additional 31-mile extension is scheduled to go in service in the second quarter
of 1999.


<PAGE>

         Construction  is progressing on Southern's  expansion  project to North
Alabama. The 122-mile, 78 million-cubic-foot-per-day expansion is expected to be
in service early in 2000.

         On March 3, 1999,  Carolina  Power & Light Company  (CP&L) and Southern
announced  plans to form a 50/50 joint venture to construct,  own, and operate a
180-mile, 30-inch, natural gas pipeline from the terminus of Southern's pipeline
system in Aiken, South Carolina,  to an interconnect with North Carolina Natural
Gas  Corporation's  pipeline system in Robeson County,  North Carolina.  The new
Palmetto Interstate  Pipeline  (Palmetto) will provide a significant  interstate
natural gas pipeline connection in eastern North Carolina.

         Palmetto has a planned  initial  capacity of 200 million to 300 million
cubic feet of natural  gas per day and will be expanded  to  accommodate  future
growth.  CP&L plans to subscribe  for a  substantial  portion of the capacity in
Palmetto to fuel new electric  generation  being  developed for its customers in
the  Carolinas,  with the remainder to be used to increase the region's  natural
gas availability. An open season began April 1, 1999, for customers to subscribe
to firm  capacity on the pipeline and will  conclude on May 31, 1999.  Depending
upon the resulting firm subscription,  the capital cost for Palmetto is expected
to be $200 million to $250 million.

         The proposed  schedule  calls for the new pipeline to be operational in
April 2002.  Construction is scheduled to begin in the summer of 2001, following
the  completion of engineering  and  environmental  preparation  and federal and
state permitting. The exact route of the pipeline has not yet been determined. A
detailed   environmental   analysis   is  under  way  to   establish   the  most
environmentally sound path.

         As part of the project  Southern expects to undertake a major expansion
of its existing  interstate  pipeline system,  consisting of extensive  pipeline
looping and  additional  compression at points from  Mississippi  to Aiken.  The
extent of Southern's pipeline expansion will depend on capacity requirements and
the extent, if any, of existing capacity turned back by existing customers in an
open season for  turnback  expected  to occur in the second or third  quarter of
1999.  The maximum  costs  expected to be incurred by Southern for its expansion
are estimated at $430 million.  This expansion will provide significant rate and
operational benefits to Southern's existing customers.

         The  construction  of Palmetto and  expansion  of the  Southern  system
require  approval by the FERC as well as other federal and state agencies and is
likely to be challenged on both  environmental  grounds and economic  grounds by
certain of its competitors, environmental groups, or landowners. Construction is
also subject to execution of definitive agreements between CP&L and Southern.




<PAGE>


SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                    1999                      1998
                                                                                            (In Millions)
Revenues:
<S>                                                                                <C>                      <C>   
    Market transportation and storage                                              $ 86.2                   $ 83.5
    Supply transportation                                                            10.4                     11.6
    Other                                                                             4.1                     10.4
                                                                                   ------                   ------
       Total Revenues                                                               100.7                    105.5
                                                                                   ------                   ------

Costs and Expenses:
    Operating and maintenance                                                        19.5                     19.6
    General and administrative                                                       15.6                     15.5
    Depreciation and amortization                                                    14.0                      5.5
    Taxes, other than income                                                          6.0                      5.3
                                                                                   ------                   ------
                                                                                     55.1                     45.9
                                                                                   ------                   ------
Operating Income                                                                     45.6                     59.6
                                                                                   ------                   ------
Other Income:
    Equity in earnings of
       unconsolidated affiliates                                                      2.4                      4.1
    Other                                                                             1.9                       .7
                                                                                   ------                   ------
                                                                                      4.3                      4.8
                                                                                   ------                   ------

Earnings Before Interest and Taxes                                                 $ 49.9                   $ 64.4
                                                                                   ======                   ======

                                                                                        (Billion Cubic Feet)
Volumes:
    Market transportation                                                             177                      185
    Supply transportation                                                              89                       95
                                                                                   ------                   ------
       Total Volumes                                                                  266                      280
                                                                                   ======                   ======


CITRUS CORP.
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                    1999                      1998
                                                                                            (In Millions)
Equity in Earnings of
    Citrus Corp.                                                                   $  6.6                   $  4.9
                                                                                   ======                   ======

                                                                                        (Billion Cubic Feet)
Florida Gas Volumes (100%):
    Market transportation                                                              92                       95
    Supply transportation                                                              13                        7
                                                                                   ------                   ------
       Total Volumes                                                                  105                      102
                                                                                   ======                   ======
</TABLE>



<PAGE>


First Quarter 1999 to First Quarter 1998 Analysis

         Southern  Natural  Gas - EBIT for the first  quarter of 1999  decreased
$14.5 million  compared with the prior year. The decrease was primarily due to a
$7.0 million  pretax  adjustment of the salvage value on certain fixed assets in
the 1998  period and  higher  depreciation  expense as a result of higher  plant
balances in 1999.  The 1998 period also  includes the  recognition  of a royalty
reserve  reversal of $4.2  million.  Partially  offsetting  the decrease was the
effect of higher market transportation revenues due to recent expansions.

         Supply  transportation  revenues  declined due to lower  volumes at Sea
Robin  Pipeline  Company.  Equity  in  earnings  of  unconsolidated   affiliates
decreased  primarily due to lower  earnings at Destin  Pipeline as a result of a
high  allowance for funds used during  construction  (AFUDC)  capitalized in the
1998 period.  Other income  increased due to higher AFUDC equity and the sale of
certain facilities.

         Citrus - Equity in earnings of Citrus  increased  $1.7  million to $6.6
million. The increase is primarily due to lower ad valorem taxes, recognition of
credits on a gas supply  agreement,  higher prices for  transportation  capacity
held by Citrus  Trading,  and lower  interest  expense,  partly offset by higher
operating  expenses and an adjustment to revenues to reflect actual refunds made
for a rate case settlement recorded in 1998.

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 its  restructuring  pursuant  to FERC  directives  in past years,
Southern  terminated or renegotiated to market pricing  substantially all of its
gas supply contracts  through which it had  historically  obtained its long-term
gas supply.  Pending the  termination or expiration of the few remaining  supply
contracts,  Southern's  remaining  gas supply is being sold on a  month-to-month
basis.  Because  Southern is  primarily a gas  transporter  and does not realize
significant  margins on gas sales, the net of gas sales revenues and natural gas
cost are included in other revenue.

         Except  for the  sale of its  remaining  gas  supply  described  above,
Southern's  participation  in gas  supply  activities  will  be  limited  to the
purchase  and  sale of gas  from  time to time  as may be  required  for  system
management purposes.

         Southern's annual purchase  commitments total less than $21 million per
year for 1999 and subsequent  years.  Based on Southern's  current  expectations
with  respect  to  natural  gas  prices  in 1999  and the  years  following,  an
immaterial volume of gas is expected to be at prices above market.



<PAGE>


Rate Matters

         Under  terms of a  settlement  approved  by the FERC,  all of  Southern
Natural Gas' previously  pending rate proceedings and proceedings to recover gas
supply realignment and other transition costs associated with the implementation
of FERC Order No. 636 were resolved.  The settlement  requires  Southern Natural
Gas to file a new rate case no later than  September 1, 1999.  Southern  expects
the rates filed in that rate case to become effective after normal suspension by
the FERC on March 1, 2000, subject to refund upon conclusion of the rate case.

         In September  1997,  the FERC approved a rate case  settlement  between
Florida Gas and its customers.  The terms of the  settlement  provide for tiered
rates effective  beginning March 1, 1997, which, for a two-year period,  reflect
an increase over the rates in effect prior to the rate filing for transportation
through both the pre-expansion and Phase III expansion  systems.  The settlement
resolved all issues related to Phase III construction and the construction  cost
audit. The settlement terms require Florida Gas to file a new rate case no later
than October 1, 2001.

ENERGY SERVICES

         Sonat Energy Services, through its majority-owned  subsidiaries,  Sonat
Marketing  and Sonat Power  Marketing  L.P.  (Sonat Power  Marketing),  conducts
marketing activities in the natural gas and electric  industries,  respectively.
Sonat Marketing  purchases and resells  substantially all of Sonat Exploration's
natural  gas  production,  as well as  purchasing  and  reselling  gas for other
customers. Sonat Power Marketing has executed electric power purchase, sales and
transmission  agreements with numerous companies and is focused on expanding its
wholesale electric marketing business. Both of these subsidiaries use derivative
instruments.  (See  Market  Risk and  Notes 3 and 10 of the  Notes to  Condensed
Consolidated Financial Statements).




<PAGE>


ENERGY SERVICES

<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                    1999                      1998
                                                                                            (In Millions)

<S>                                                                                <C>                      <C>   
Revenues                                                                           $661.8                   $937.1
                                                                                   ======                   ======

Operating Margin                                                                   $ 17.4                   $ 13.1
                                                                                   ======                   ======

Operating Income                                                                   $  3.1                   $  1.1
                                                                                   ======                   ======

Earnings (Loss) Before Interest and Taxes                                          $ (1.6)                  $  0.8
                                                                                   ======                   ======

                                                                                        (Billion Cubic Feet)

Sonat Marketing Gas Sales Volumes (100%)                                              290                      360
                                                                                   ======                   ======

                                                                                    (Thousands of Megawatt Hours)

Sonat Power Marketing Sales Volumes (100%)                                          3,009                    3,170
                                                                                   ======                   ======

                                                                                        (Billion Cubic Feet)
Financial Volumes Notional Settlements
    Third Parties-Natural Gas                                                       1,875                      628
                                                                                   ======                   ======
</TABLE>


First Quarter 1999 to First Quarter 1998 Analysis

         EBIT for the first quarter of 1999 was a loss of $1.6 million  compared
with  income of $.8  million  in 1998  primarily  due to lower  margins at Sonat
Marketing and lower other income,  partially  offset by higher  margins at Sonat
Power  Marketing.  Sonat  Marketing's  physical sales volumes were lower in 1999
compared  to  1998.  However,  notional  volumes  from  natural  gas  derivative
settlements  increased  significantly  in 1999  compared to 1998,  reflecting an
increase in Sonat Marketing's financial  transactions on behalf of customers and
an increase in market making of  derivative  products for its own account and to
manage its basis positions.  Sonat Power  Marketing's first quarter 1999 margins
were  substantially  higher than the 1998 period.  Other income was $4.4 million
lower than the prior  period due to an  operating  loss at the 50  percent-owned
Mid-Georgia  Cogen L.P.  power plant and a write down of the  carrying  value of
certain investments.






<PAGE>


Other Income Statement Items
<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                    1999                      1998
                                                                                            (In Millions)

<S>                                                                               <C>                      <C>    
Interest Expense, Net                                                             $  29.9                  $  28.5
</TABLE>

         Net interest expense  increased in the 1999 period compared to the same
period last year due to higher  average  debt levels.  This  increase was partly
offset  by the  effect  of lower  interest  rates on debt  and  higher  interest
capitalized at Sonat Exploration and Sonat Energy Services.

<TABLE>
<S>                                                                               <C>                      <C>    
Income Tax Expense (Benefit)                                                      $(115.1)                 $  12.8
</TABLE>

         Income tax expense  decreased in the 1999 period compared with the same
period in 1998 due to a pretax loss in 1999 primarily  related to higher ceiling
test charges in the 1999 period. Excluding these charges, the effective tax rate
was essentially flat.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

<TABLE>
<S>                                                                               <C>                      <C>    
Operating Activities                                                              $  75.8                  $ 238.7
</TABLE>

         Cash flow from operations decreased $162.9 million compared to the 1998
period primarily due to lower operating  results at Sonat Exploration and Energy
Services, which were discussed earlier in the operating section.

         Depreciation,  depletion,  and  amortization  and deferred income taxes
include  a  charge  of  $351.5   million  and  a  benefit  of  $123.0   million,
respectively,  in the 1999 period and a charge of $39.7 million and a benefit of
$13.9 million, respectively, in the 1998 period for ceiling test charges related
to Sonat Exploration's oil and gas properties.  Absent the ceiling test charges,
the change in  deferred  income  taxes and  accrued  interest  and income  taxes
primarily  reflects the  capitalization of intangible  drilling costs for income
tax  purposes  in the current  period.  The change in  accounts  receivable  and
accounts  payable is  primarily  attributable  to lower  natural  gas prices and
volumes. The change in restricted cash, accrued long-term compensation and other
current  assets  and  liabilities  primarily  represent  the  payment of certain
expenses  associated  with the merger  between the Company and Zilkha  Energy in
January 1998. The change in Other primarily reflects deferrals related to Energy
Services' operating activities, which offset various working capital items.



<PAGE>


<TABLE>
<CAPTION>
                                                                                            Three Months
                                                                                           Ended March 31,
                                                                                    1999                      1998
                                                                                            (In Millions)

<S>                                                                               <C>                      <C>     
Investing Activities                                                              $(169.5)                 $(306.4)
</TABLE>

         Net cash used in investing  activities was $136.9 million lower in 1999
compared to 1998. The change was primarily due to lower capital  expenditures at
Sonat Exploration partly due to property sales during 1998.

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

<TABLE>
<S>                                                                                <C>                      <C>   
         Exploration and Production                                                $ 94.9                   $244.1
         Natural Gas Transmission                                                    20.1                     25.6
         Energy Services                                                             23.9                     27.9
         Other                                                                         .7                      2.4
                                                                                   ------                   ------

         Total                                                                     $139.6                   $300.0
                                                                                   ======                   ======
</TABLE>

     The Company's  investments in unconsolidated  affiliates were $10.0 million
and $32.6 million in the first quarter of 1999 and 1998, respectively.

<TABLE>
<S>                                                                                <C>                      <C>   
Financing Activities                                                               $ 92.0                   $ 53.9
</TABLE>

         Cash flow provided by financing  activities  increased by $38.1 million
compared  to the  1998  period.  The  change  was  primarily  due  to  increased
borrowings for various corporate expenditures.

CAPITAL RESOURCES

         At March 31, 1999, the Company had bank lines of credit and a revolving
credit agreement with banks with a total capacity of $950 million. The Company's
bank and  commercial  paper  borrowings in the  aggregate are not  authorized to
exceed the  maximum  amount  available  under its lines of credit and  revolving
credit  agreement.  As a result,  after giving  effect to the $588.9  million of
commercial  paper and $24.1 million of borrowings  from the short-term  lines of
credit  outstanding  at March 31,  1999,  $337.0  million was  available  to the
Company under such lines of credit and revolving  credit  agreement at March 31,
1999.

         In mid  April  1999,  Sonat  completed  a new  364-day  $900.0  million
revolving  credit  facility with 13 banks.  In  connection  with this new credit
facility,  the Company  terminated  existing lines of credit providing for up to
$900.0 million of borrowings. (See Note 5 of the Notes to Condensed Consolidated
Financial Statements.)

         Sonat  and  Southern  have  shelf  registration   statements  with  the
Securities and Exchange  Commission which provide for the issuance of up to $500
million in debt securities by both companies.  Southern issued $100.0 million in
debt under its registration statement in 1998.

         The Company's capital expenditures and other investing requirements for
1999 are expected to total $491 million.  This amount  reflects  investments  in
unconsolidated  affiliates  and proposed  expenditures  for oil and gas property
acquisitions,   exploration  and  development,   pipeline  expansion  and  other
projects.

         The Company  believes that cash flow from  operations and borrowings in
either the private or public  market will  provide the Company with the means to
fund operations and currently planned investment and capital expenditures.


<PAGE>

YEAR 2000 PROJECT

         The  following  disclosure  contains  forward-looking  statements.  The
Company's  ability to meet its  objectives  identified  below is dependent  upon
several factors that could cause actual results to differ  materially from those
set forth  below,  including  the timely  provision  of  necessary  upgrades and
modifications by suppliers. In addition, the Company cannot guarantee that third
parties on whom it depends for essential  services  will convert their  critical
systems and  processes in a timely  manner.  Each of the phases of the Company's
Year 2000 project is progressing and the Company  believes that it is taking all
reasonable  and  appropriate  steps  necessary to be able to operate in the Year
2000 and beyond.

         To  answer  the Year  2000  challenge,  the  Sonat  Board of  Directors
directed that a corporate-wide  initiative be undertaken.  A consulting firm was
engaged to assist in this effort.  The Company has divided its Year 2000 project
into assessment,  remediation,  testing, and contingency planning phases. During
the assessment  phase,  the Company  completed a  comprehensive  inventory of IT
systems, embedded systems, equipment,  computer hardware, and software that rely
on a computer  chip as well as service  providers  that could be impacted by the
Year 2000  problem.  For  vendor-supplied  items,  the Company has contacted its
vendors seeking written  verification of Year 2000 readiness.  In addition,  the
Company continues to contact entities with whom it has a material  relationship,
such as natural gas suppliers, pipelines, electric utilities,  telecommunication
service  providers,  banks,  and  other  suppliers  of goods  and  services,  to
determine  the extent to which the Company is vulnerable to the failure of those
third-parties to remediate their Year 2000 issue.

         The Company is currently  engaged in the remediation and testing phases
of the  Year  2000  project.  The  remediation  phase  includes  completing  the
replacement of mainframe  systems with Year  2000-ready  vendor  packages on new
client/server  platforms and performing any required  modifications and upgrades
identified  during the  assessment  phase.  The testing phase  involves  testing
systems  for Year 2000  readiness.  The Company has  completed  remediation  and
testing of its  critical  systems.  Non-critical  systems  are  scheduled  to be
remediated and tested by June 30, 1999.

         The Company relies on producers of natural gas,  natural gas pipelines,
natural gas distribution companies, natural gas marketing companies and electric
transmission providers to conduct its basic operations. External infrastructure,
such as electric,  telecommunication and water service is also necessary for the
Company's basic operations.  Should any third party with which the Company has a
material  relationship fail, the impact could become a significant  challenge to
the Company's ability to perform its basic operations.  Due to the nature of the
Company's business,  contingency plans are already in place,  including plans to
provide  pipeline system  reliability.  Because of the additional  uncertainties
caused  by  the  Year  2000  problem,  the  Company  is  developing   additional
contingency  plans as practicable for critical  systems,  service  providers and
business partners.  A consulting firm has been engaged to assist in this effort.
These plans involve  developing  contingencies for failures that may result from
the Year 2000  problem,  and  include  plans to  establish  control  centers  to
facilitate  communications  in the  event of a  telecommunications  failure  and
staffing at selected  locations on the Company's pipeline system. The Company is
scheduled to have these plans completed by June 30, 1999.

         The estimated  cost to the Company of the Year 2000 project for capital
as well as general  and  administrative  costs is  expected  to be less than $10
million.  As of March 31,  1999,  the Company has  incurred  approximately  $7.7
million  in Year 2000  project  costs.  The  Company  expects  to fund Year 2000
expenditures  from  normal  operations.   The  timing  of  expenditures  is  not
indicative of readiness efforts or progress to date.


<PAGE>

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

         This  Quarterly  Report  contains  certain  forward-looking  statements
regarding  the  Company's  business  plans  and  prospects,  objectives,  future
drilling plans,  expansion projects,  proposed capital expenditures and expected
performance  or  results.   These   forward-looking   statements  are  based  on
assumptions that the Company believes are reasonable,  but are subject to a wide
range of risks and uncertainties and, as a result, actual results and experience
may  differ  materially  from the  anticipated  results  or  other  expectations
expressed  in such  forward-looking  statements.  Such  statements  are  made in
reliance on the safe harbor  provisions  of the  Private  Securities  Litigation
Reform Act of 1995.

         Important  factors  that could cause actual  results to differ  include
changes  in oil and  gas  prices  and  underlying  demand,  which  would  affect
profitability  and might  cause the  Company to alter its plans;  the timing and
success of the Company's  exploration and development  drilling programs,  which
would  affect  production  levels and  reserves;  the  results of the  Company's
hedging activities;  risks incident to the drilling and operation of oil and gas
wells; future drilling, production and development costs, including drilling rig
rates;  the  success  of  the  Company's  cost-reduction   activities;  and  the
requirements to receive various governmental approvals to proceed with pipeline,
storage, and power generation projects, and unanticipated construction delays in
connection  with such  projects.  Realization  of the Company's  objectives  and
expected  performance can also be adversely affected by the actions of customers
and competitors, changes in governmental regulation of the Company's businesses,
and changes in general  economic  conditions  and the state of domestic  capital
markets.




<PAGE>

Item 3.  Quantitave and Qualitative Disclosure About Market Risk

         Financial  instruments of the Company expose it to both commodity price
risk and interest rate risk.

         Commodity  Price Risk - The Company's  primary  market risk exposure is
the volatility of energy commodity prices, relating to the portfolio position of
its  financial  instruments  and  physical  commitments,  which can  affect  the
operating  results of Sonat  Exploration and Sonat Energy Services.  The Company
uses commodity futures  contracts,  options and price swap agreements as well as
offsetting  physical  positions to hedge its commodity  price risk on crude oil,
natural gas and electricity. Sonat Energy Services performs all hedging activity
(non-trading)  for  both  its own  operations  and for the  operations  of Sonat
Exploration.  Sonat Energy Services,  through its subsidiaries,  Sonat Marketing
and Sonat Power  Marketing,  also uses derivative  instruments as a market maker
(trading  activity)  by  maintaining  active  trading  positions in natural gas,
electricity,  and crude oil commodity futures, swap and option contracts.  Sonat
Marketing and Sonat Power  Marketing limit their risk to changes in the value of
their   outstanding   positions   through  the  use  of  Value-at-Risk   models,
establishment of offsetting positions, and limit and monitoring procedures.

         The  Company's   non-trading   (hedging)  and  trading  activities  are
implemented  under  a set of  policies  approved  by  the  Board  of  Directors.
Established  procedures  and  processes are employed to manage and monitor these
activities  and all  derivative  activities  are  internally  reviewed by a Risk
Oversight Committee to ensure compliance with all policies. The Company's use of
derivative instruments to reduce the effect of market volatility is described in
Note 3 of the Notes to the Condensed Consolidated Financial Statements.

         Interest  Rate Risk - The Company's  entire  portfolio of interest rate
risk instruments is classified as non-trading. The Company's interest income and
expense are  sensitive to changes in the level of short-term  interest  rates in
the  United  States.  In  general,  the  Company  uses  excess  funds to  reduce
short-term debt levels and therefore has minimal cash equivalent investments. To
mitigate the impact of fluctuations in interest rates,  the Company  maintains a
balance among components of its capital structure, providing a mix of maturities
and pricing methods for its debt  obligations.  In the past the Company has used
derivative  instruments to aid in its management of interest rate risk, although
it is not currently doing so.


<PAGE>


                           PART II. OTHER INFORMATION

Item 4.  Submission of Matters to a Vote of Security Holders

         The Company held its 1999 Annual  Meeting of  Stockholders  in Houston,
Texas, on April 22, 1999. The stockholders  voted (1) to elect four Directors as
members of the Board of Directors of the Company, to serve until the 2002 Annual
Meeting of  Stockholders  and until their  respective  successors have been duly
elected and  qualified,  and (2) on a proposal to elect Ernst & Young LLP as the
Company's Auditor ("Proposal No. 1").

         The vote for the nominees for Director was as follows:

---------------------------------- --------------------- -------------------
Name of Nominee                         Voted For        Authority Withheld
---------------------------------- --------------------- -------------------
---------------------------------- --------------------- -------------------
Ronald L. Kuehn, Jr.                      98,077,566                928,875
---------------------------------- --------------------- -------------------
---------------------------------- --------------------- -------------------
Robert J. Lanigan                         98,235,373                771,068
---------------------------------- --------------------- -------------------
---------------------------------- --------------------- -------------------
Charles Marshall                          98,249,977                756,464
---------------------------------- --------------------- -------------------
---------------------------------- --------------------- -------------------
Michael S. Zilkha                         98,184,790                821,651
---------------------------------- --------------------- -------------------

     The terms of Jerome J.  Richardson,  Adrian M. Tocklin,  James B. Williams,
Joe B. Wyatt, Max L. Lukens,  Benjamin F. Payton, John J. Phelan, Jr., and Selim
K. Zilkha continued after the meeting.

         The vote on Proposal No. 1 was as follows:

----------------- -------------------- ----------------------- --------------
                       Voted For           Voted Against         Abstained
----------------- -------------------- ----------------------- --------------
----------------- -------------------- ----------------------- --------------
Proposal No. 1           98,480,448            280,171             245,822
----------------- -------------------- ----------------------- --------------

         There were no broker non-votes with respect to either matter voted upon
at the meeting.  The four  nominees for Director were duly elected as members of
the Board of Directors and Proposal No. 1 was approved by the stockholders.

Item 5.  Legal Proceedings

         In United  States of  America  ex rel.  Jack J.  Grynberg  v.  Southern
Natural  Gas  Company,  et al.,  which is  described  in Item 3 in Part I of the
Company's  Report on Form 10-K for the year ended December 31, 1998, the Justice
Department  notified  the  courts on April 9,  1999,  that it was  declining  to
intervene  in these  cases.  Grynberg  served his  complaint on Southern and its
affiliates on April 7, 1999.

         Team Invest, Inc. v. Sonat Energy Company, 12th Judicial District Court
of Leon County,  Texas,  Cause No. O-99-135.  Sonat  Exploration was served with
plaintiff's  petition on April 15, 1999. Sonat Exploration and plaintiff entered
into a Prospect  Agreement whereby Sonat  Exploration is contractually  bound to
acquire 3-D seismic data over an area of interest.  Sonat Exploration  exchanged
with  Texaco,  Inc.  certain 3-D seismic  data that Sonat  Exploration  acquired
within the area of interest  for other 3-D seismic  data owned by Texaco,  Inc.,
which was also within the area of interest.  Plaintiff contends this exchange of
3-D  data  violated  the  Prospect  Agreement,  because  Sonat  Exploration  was
obligated  actually to conduct a 3-D shoot to acquire all such data,  instead of
trading for data owned by others. Plaintiff also claims that Sonat Exploration's
exchange  of 3-D data  within the area of  interest  violated a  confidentiality
provision within the Prospect  Agreement.  Plaintiff seeks damages in the amount
of $3.2 million. Sonat Exploration will file a timely answer denying plaintiff's
claims and correct defendant's name to "Sonat Exploration  Company." Although it
is unable to predict the outcome of this litigation,  Sonat Exploration believes
that it has  meritorious  defenses to the claims  asserted and intends to defend
the suit vigorously.


<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

(a)      Exhibits(1)

Exhibit
Number                                      Exhibits


12*           Computation of Ratio of Earnings to Fixed Charges

27*           Financial Data Schedule for the period ended March 31, 1999
-------------
*   Filed herewith



(b)      Reports on Form 8-K

         The  Company  filed a report on Form 8-K on January 7, 1999,  reporting
certain  information under Item 5 restating the Company's  financial  statements
for the years 1997,  1996,  and 1995, as a result of the  conversion to the full
cost method of accounting for its exploration and production business segment.

         The  Company  filed a report  on Form 8-K on March 3,  1999,  reporting
certain  information  under Item 5 relating to the Company's  announcement  of a
joint venture to build a pipeline to North Carolina and the current  estimate of
an  expected  first  quarter  ceiling  test  charge  under full cost  accounting
provisions for  exploration  and  production  operations of  approximately  $200
million, after tax.

         The  Company  filed a report on Form 8-K on March 15,  1999,  reporting
certain  information  under Item 5 relating  to the  Company  and El Paso Energy
Corporation  entering  into an Agreement  and Plan of Merger  providing  for the
merger of the Company and El Paso.

         The  Company  filed a report on Form 8-K on April 22,  1999,  reporting
certain  information under Item 5 relating to the Company's  announcement of its
results of operations for the first quarter of 1999, which included, among other
things,  the effect of a $228.5  million,  after tax,  ceiling test charge under
full cost  accounting  provisions for its  exploration  and production  business
segment.


-------------------
(1)      The Company will furnish to requesting security holders the exhibits on
         this list upon the payment of a fee of $.10 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:         May 12, 1999                 By:      /s/ James E. Moylan, Jr.
       --------------------------                 --------------------------
                                                  James E. Moylan, Jr.
                                                  Senior Vice President and
                                                  Chief Financial Officer




Date:         May 12, 1999                 By:      /s/ Thomas W. Barker, Jr.
       --------------------------                 ---------------------------
                                                  Thomas W. Barker, Jr.
                                                  Vice President-Finance