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, 1997

                                       OR

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

For the transition period from                          to

Commission file number      1-7179

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

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

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

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


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


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

                                   Yes X No _

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

                         COMMON STOCK, $1.00 PAR VALUE:

                 86,037,895 SHARES OUTSTANDING ON APRIL 30, 1997



<PAGE>


                           SONAT INC. AND SUBSIDIARIES

                                      INDEX

<TABLE>
<CAPTION>

                                                                                          Page No.

PART I.        Financial Information

               Item 1.    Financial Statements

                          Condensed Consolidated Balance Sheets--
<S>                                                                                       <C>
                            March 31, 1997 and December 31, 1996                           1

                          Condensed Consolidated Statements of Income--
                            Three Months Ended March 31, 1997 and 1996                     2

                          Condensed Consolidated Statements of Cash Flows--
                            Three Months Ended March 31, 1997 and 1996                     3

                          Notes to Condensed Consolidated Financial
                            Statements                                                     4 - 9


               Item 2.    Management's Discussion and Analysis of Financial
                            Condition and Results of Operations                           10 - 22

PART II.       Other Information

               Item 1.    Legal Proceedings                                               23

               Item 4.    Submission of Matters to a Vote of Security
                            Holders                                                       23

               Item 6.    Exhibits and Reports on Form 8-K                                24
</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,
                                                                   1997                 1996
                                                                         (In Thousands)
                                              ASSETS
Current Assets:
<S>                                                              <C>                  <C>       
   Cash and cash equivalents                                     $   21,856           $   29,639
   Accounts receivable                                              382,010              577,021
   Inventories                                                       29,669               30,500
   Gas imbalance receivables                                         20,600               21,694
   Other                                                             20,786               34,436
                                                                 ----------           ----------
      Total Current Assets                                          474,921              693,290
                                                                 ----------           ----------

Investments in Unconsolidated Affiliates and Other                  479,283              465,121
                                                                 ----------           ----------

Plant, Property and Equipment                                     5,200,306            5,084,283
   Less accumulated depreciation, depletion
      and amortization                                            2,671,139            2,650,419
                                                                 ----------           ----------
                                                                  2,529,167            2,433,864
                                                                 ----------           ----------
Deferred Charges and Other:
   Gas supply realignment costs                                       8,768               11,144
   Other                                                            156,381              171,240
                                                                 ----------           ----------
                                                                    165,149              182,384
                                                                 ----------           ----------

Total Assets                                                     $3,648,520           $3,774,659
                                                                 ==========           ==========

                               LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Long-term debt due within one year                            $   53,535           $   53,707
   Unsecured notes                                                  140,400              158,030
   Accounts payable                                                 369,947              510,130
   Accrued income taxes                                              42,484               26,726
   Accrued interest                                                  32,177               28,584
   Gas imbalance payables                                            16,166               20,290
   Other                                                             46,629               51,370
                                                                 ----------           ----------
      Total Current Liabilities                                     701,338              848,837
                                                                 ----------           ----------

Long-Term Debt                                                      861,382              872,255
                                                                 ----------           ----------

Deferred Credits and Other:
   Deferred income taxes                                            294,503              284,564
   Reserves for regulatory matters                                   14,933               14,644
   Other                                                            169,515              169,995
                                                                 ----------           ----------
                                                                    478,951              469,203
                                                                 ----------           ----------
Commitments and Contingencies

Stockholders' Equity:
   Common stock and other capital                                   118,163              118,881
   Retained earnings                                              1,538,784            1,495,186
                                                                 ----------           ----------
                                                                  1,656,947            1,614,067
   Less treasury stock                                              (50,098)             (29,703)
                                                                 ----------           ----------
      Total Stockholders' Equity                                  1,606,849            1,584,364
                                                                 ----------           ----------

Total Liabilities and Stockholders' Equity                       $3,648,520           $3,774,659
                                                                 ==========           ==========
</TABLE>



                             See accompanying notes.
<PAGE>

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

                                                                            Three Months
                                                                           Ended March 31,
                                                                    1997                 1996
                                                                         (In Thousands, Except
                                                                           Per-Share Amounts)

<S>                                                              <C>                    <C>     
Revenues                                                         $1,122,289             $734,406
                                                                 ----------             --------

Costs and Expenses:
   Natural gas cost                                                 822,979              500,340
   Transition cost recovery                                           2,265               (5,383)
   Electric power cost                                               32,886                4,796
   Operating and maintenance                                         41,935               39,258
   General and administrative                                        41,038               32,958
   Depreciation, depletion and amortization                          68,483               67,373
   Taxes, other than income                                           5,794               11,833
                                                                 ----------             --------
                                                                  1,015,380              651,175
                                                                 ----------             --------

Operating Income                                                    106,909               83,231

Other Income (Loss), Net:
   Equity in earnings of
      unconsolidated affiliates                                      10,122                8,955
   Minority interest                                                   (872)              (4,662)
   Other                                                              3,826                 (104)
                                                                 ----------             --------
                                                                     13,076                4,189
                                                                 ----------             --------

Interest:
   Interest income                                                      866                1,623
   Interest expense                                                 (21,771)             (24,219)
   Interest capitalized                                               1,125                1,359
                                                                 ----------             --------
                                                                    (19,780)             (21,237)
                                                                 ----------             --------

Income before Income Taxes                                          100,205               66,183

Income Tax Expense                                                   33,359               20,614
                                                                 ----------             --------

Net Income                                                       $   66,846             $ 45,569
                                                                 ==========             ========

Earnings Per Share of Common Stock                               $      .78             $    .53
                                                                 ==========             ========

Weighted Average Shares Outstanding                                  86,229               86,128
                                                                 ==========             ========

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









                             See accompanying notes.


<PAGE>


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

                                                                          Three Months
                                                                         Ended March 31,
                                                                   1997                  1996
                                                                         (In Thousands)
Cash Flows from Operating Activities:
<S>                                                             <C>                  <C>        
   Net income                                                   $    66,846          $    45,569
   Adjustments to reconcile net income to net
      cash provided by operating activities:
         Depreciation, depletion and amortization                    68,483               67,373
         Deferred income taxes                                        9,834               18,990
         Equity in earnings of unconsolidated
           affiliates, less distributions                           (10,117)              (8,949)
         Gas supply realignment costs                                 2,376               (9,684)
         Change in:
           Accounts receivable                                      195,011              (28,175)
           Inventories                                                  831               (6,676)
           Accounts payable                                        (140,183)              17,733
           Accrued interest and income taxes, net                    19,798                1,443
           Other current assets and liabilities                       5,443                5,123
         Other                                                       16,947                1,327
                                                                -----------          -----------

           Net cash provided by operating activities                235,269              104,074
                                                                -----------          -----------

Cash Flows from Investing Activities:
   Plant, property and equipment additions                         (163,539)            (124,269)
   Net proceeds from disposal of assets                                 468                3,638
   Investments in unconsolidated affiliates and
      other                                                          (5,129)              (2,370)
                                                                -----------          -----------

           Net cash used in investing activities                   (168,200)            (123,001)
                                                                -----------          -----------

Cash Flows from Financing Activities:
   Proceeds from issuance of long-term debt                         450,000                 -
   Payments of long-term debt                                      (461,045)              (5,945)
   Changes in short-term borrowings                                 (17,630)              22,140
                                                                -----------          -----------
      Net changes in debt                                           (28,675)              16,195
   Dividends paid                                                   (23,248)             (23,261)
   Treasury stock purchases and other                               (22,929)              (5,579)
                                                                -----------          -----------

           Net cash used in financing activities                    (74,852)             (12,645)
                                                                -----------          -----------

Net Decrease in Cash and Cash Equivalents                            (7,783)             (31,572)

Cash and Cash Equivalents at Beginning of Period                     29,639               37,289
                                                                -----------          -----------

Cash and Cash Equivalents at End of Period                      $    21,856          $     5,717
                                                                ===========          ===========
Supplemental Disclosures of Cash Flow Information
Cash Paid for:
   Interest (net of amount capitalized)                         $    16,236          $    15,136
   Income taxes, net                                            $     7,769          $       872

</TABLE>



                             See accompanying notes.


<PAGE>



                           SONAT INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)


1.      Basis of Presentation

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

        Certain amounts in the 1996 condensed  consolidated financial statements
have been reclassified to conform with the 1997 presentation.

2.      Derivative Financial Instruments

        The Company uses futures contracts, options and price swap agreements to
hedge its  commodity  price risk on crude oil and natural  gas.  Gains or losses
experienced  on hedging  transactions  are offset by the related gains or losses
recognized on the sale of the commodity.  Sonat  Marketing  Company L.P.  (Sonat
Marketing)  performs  all hedging  activity for both its own account and for the
account  of  Sonat  Exploration  Company.  To  date,  Sonat  Marketing  has used
derivatives to hedge only physical transactions.  In the second or third quarter
of 1997 Sonat Marketing intends to begin engaging in derivative  transactions to
meet its customer  needs,  subject to policies that limit the aggregate value at
risk and mark to market positions of its transactions.

        Futures - Natural  gas and oil futures  contracts  are traded on the New
York Mercantile  Exchange (NYMEX).  Natural gas contracts are for fixed units of
10,000 MMBtu and are  available  for up to 36 months in the future.  Oil futures
are for fixed units of 1,000  barrels and are  available  for up to 34 months in
the  future.  NYMEX  requires  both  parties  (buyers  and  sellers)  to futures
contracts to deposit cash or other assets (the margin) with a broker at the time
the  contract is  initiated.  Brokers  mark open  positions  to market daily and
require   additional  assets  to  be  maintained  on  deposit  when  significant
unrealized  losses  are  experienced  or  allow  deposits  to  be  reduced  when
unrealized  gains  are  experienced.  At March 31,  1997,  the  Company  had net
deposits  of $6.9  million  with  brokers  for margin  calls,  included in other
current  assets on the  Condensed  Consolidated  Balance  Sheet,  of which  $2.7
million  was  for  Sonat   Marketing's   account  and  $4.2  million  for  Sonat
Exploration's account.

        Sonat Marketing uses natural gas futures contracts to reduce exposure to
price  risk when gas is not bought and sold  simultaneously.  Sonat  Exploration
uses futures  contracts to lock in the price for portions of its expected future
natural gas production when it believes that prices are at acceptable levels.



<PAGE>


2.      Derivative Financial Instruments (Cont'd)

        At March 31, 1997, the Company had the following open futures positions:

<TABLE>
<CAPTION>

                                                                          Deferred Gain or
                                                Open Contracts                 (Loss)
                                                 Long (Short)              (In Thousands)
Natural Gas Futures:
<S>                                                <C>                         <C>     
    For Marketing's account                          1,120                     $(2,040)
    For Exploration's account                       (1,884)                       (272)
                                                   -------                     -------
        Total                                         (764)                    $(2,312)
                                                   =======                     =======

Oil Futures:
    For Marketing's account                           -                        $  -
    For Exploration's account                         (795)                       (280)
                                                   -------                     -------
        Total                                         (795)                    $  (280)
                                                   =======                     =======
</TABLE>


        The above contracts will mature over 1997 and 1998.

        Swaps  - Price  swap  agreements  call  for one  party  to make  monthly
payments to (or receive payments from) another party based upon the differential
between a fixed and a variable price  (fixed-price  swap) or two variable prices
(basis swap) for a notional  volume  specified by the contract.  Sonat Marketing
uses swaps to lock in a margin on its gas  transactions  or to hedge exposure on
swap agreements with Sonat  Exploration.  Sonat Exploration uses swap agreements
to hedge exposure to changes in  spot-market  prices on the amount of production
covered in the agreement.

        Sonat  Exploration has hedged various  portions of its 1997 through 2000
production  of oil and  gas by  entering  into  fixed  price  swaps  with  Sonat
Marketing.  Marketing has then hedged its risk from entering into these swaps by
putting on futures  positions  and  entering  into  offsetting  swaps with third
parties with aggregate volumes equal to its swaps with Sonat Exploration.

        At March 31, 1997, the Company had the following open swap positions:

<TABLE>
<CAPTION>

                                          Number of        Fair             Duration of
                                         Agreements        Value       Individual Contracts
                                                      (In Thousands)
Natural Gas Swaps:
<S>                                         <C>          <C>             <C>
    For Marketing's account                  70          $   (150)         1 month - 67 months
    For Exploration's account                34           (15,818)        6 months - 21 months
                                            ---          --------
                                            104          $(15,968)
                                            ===          ========
</TABLE>



<PAGE>


2.      Derivative Financial Instruments (Cont'd)

        Options - Options can be exchange traded on the NYMEX or traded over the
counter. Exchange traded options give the owner the right but not the obligation
to a futures contract. Over the counter options give the owner the right but not
the obligation to buy or sell an underlying commodity at a given price. At March
31, 1997, Sonat Marketing had only over the counter options.

        In order to meet the  requirements  of certain gas purchase  agreements,
Sonat Marketing has purchased puts of 28 TBtu and sold calls of 22.4 TBtu with a
counterparty at zero cost.  Marketing also has sold puts for notional volumes of
5.1 TBtu.  At March 31, 1997,  the market value of these options was a favorable
$.4 million.

        Credit Risk - Due to changes in market conditions the value of swaps and
options can change in relation to their value to the Company. At March 31, 1997,
the market  value of the  Company's  in-the-money  swaps was $1.8  million.  The
credit risk resulting from  in-the-money  swaps is monitored on a regular basis.
Sonat  Marketing has established  policies and procedures to evaluate  potential
counterparties  for credit worthiness before entering into over the counter swap
and option agreements.

3.      Unconsolidated Affiliates

        The  following  table  presents the  components of equity in earnings of
unconsolidated affiliates:
<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                      1997              1996
                                                                          (In Thousands)
Company's Share of Reported Earnings (Losses):

<S>                                                                  <C>                <C>   
   Exploration and Production                                        $   117            $   41
                                                                     -------            ------

   Natural Gas Transmission:
      Citrus Corp.                                                     6,295             5,644
      Amortization of Citrus basis difference                            346               346
      Bear Creek Storage                                               2,708             2,618
      Other                                                              (12)              (47)
                                                                     -------            ------
                                                                       9,337             8,561
                                                                     -------            ------

   Energy Marketing                                                      292              -
                                                                     -------            ------

   Other                                                                 376               353
                                                                     -------            ------

                                                                     $10,122            $8,955
                                                                     =======            ======
</TABLE>

<PAGE>

3.      Unconsolidated Affiliates (Cont'd)

        Natural Gas  Transmission  Affiliates  - Sonat owns 50 percent of Citrus
Corp., the parent company of Florida Gas Transmission  Company.  A subsidiary of
Southern  owns 50 percent of Bear Creek  Storage  Company,  an  underground  gas
storage company.

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

                                                                           Three Months
                                                                          Ended March 31,
                                                                      1997              1996
                                                                          (In Thousands)

   <S>                                                              <C>               <C>     
   Revenues                                                         $170,763          $184,082
   Expenses:
      Natural gas cost                                                83,436            97,673
      Operating expenses                                              22,446            22,395
      Depreciation and amortization                                   20,205            20,214
      Interest and other                                              24,239            25,396
      Income taxes                                                     7,847             7,117
                                                                    --------          --------

   Income Reported                                                  $ 12,590          $ 11,287
                                                                    ========          ========
</TABLE>


        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,
                                                                      1997              1996
                                                                          (In Thousands)

   <S>                                                                <C>               <C>   
   Revenues                                                           $9,346            $9,241
   Expenses:
      Operating expenses                                               1,241             1,166
      Depreciation                                                     1,356             1,353
      Other expenses, net                                              1,333             1,486
                                                                      ------            ------

   Income Reported                                                    $5,416            $5,236
                                                                      ======            ======
</TABLE>




<PAGE>


4.      Debt and Lines of Credit

        Long-Term  Debt -  Sonat  has a bank  revolving  credit  agreement  that
provides for periodic  borrowings and  repayments of up to $500 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 1997, $450 million was borrowed and $300 million was
repaid  under  the  revolving  credit  agreement,   resulting  in  $150  million
outstanding at March 31, 1997, at a rate of 5.58 percent.

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

        Sonat and Southern have available  short-term  lines of credit of $200.0
million and $50.0 million,  respectively,  through May 27, 1997.  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,
1997,  Sonat had $15.4  million  outstanding  at a rate of 7.40  percent  and no
amount was outstanding under Southern's agreement.

        Sonat had $125 million in  commercial  paper  outstanding  at an average
rate of 6.24 percent at March 31, 1997.

5.      Commitments and Contingencies

        Rate Matters - Periodically,  Southern and its subsidiaries make general
rate filings with the Federal Energy Regulatory Commission (FERC) to provide for
the recovery of cost of service and a return on equity. The FERC normally allows
the filed rates to become  effective,  subject to refund,  until it rules on the
approved level of rates. Southern and its subsidiaries provide reserves relating
to such amounts collected  subject to refund,  as appropriate,  and make refunds
upon  establishment of the final rates. At March 31, 1997,  Southern's rates are
established by a settlement with all of its customers  (except one  representing
approximately  2 percent of  Southern's  firm  transportation  volumes) that was
approved by a FERC order issued in 1995 and are not subject to refund. (See Rate
Matters in Item 2 of this report.)

        Sea Robin - In January 1995, Sea Robin Pipeline Company, a subsidiary of
Southern,  filed with the FERC a petition for a declaratory  ruling that the Sea
Robin  pipeline  system is  engaged  in the  gathering  of  natural  gas and is,
therefore,  exempt from FERC regulation under the Natural Gas Act. In June 1995,
the FERC denied Sea Robin's  petition on the basis that the primary  function of
the Sea Robin  system  is the  interstate  transportation  of gas.  Sea  Robin's
request for  rehearing  of that ruling was denied by the FERC on June 26,  1996.
Sea Robin filed on August 15, 1996,  for judicial  review of the orders  denying
its petition.

<PAGE>

5.      Commitments and Contingencies (Cont'd)

        Following the filing of Sea Robin's petition for a gathering  exemption,
several of the  shippers on the Sea Robin system filed with the FERC in February
1995 a  complaint  against  Sea Robin  under  Section 5 of the  Natural  Gas Act
claiming that Sea Robin's rates are unjust and unreasonable.  In its answer, Sea
Robin asked the FERC to dismiss the complaint or to find that its rates continue
to be just and reasonable based on the data it presented. On August 2, 1996, the
FERC issued an order on the complaint,  instituting an investigation and hearing
under Section 5 of the Natural Gas Act and requiring that an initial decision be
issued  by May 2,  1997.  On  December  31,  1996,  Sea Robin  filed a  proposed
settlement of the complaint  proceeding  pursuant to which it would  voluntarily
reduce its transportation  rates by $.0042 per decatherm (Dth),  calculated on a
100 percent load factor basis,  effective  January 1, 1997.  The  settlement was
supported by the staff of the FERC and one of two groups of active  intervenors,
but was opposed by the complainant shippers, which was the other group of active
intervenors.  By order dated April 16, 1997,  the FERC  approved the  settlement
with modifications, making a merits determination as to just and reasonable rate
levels to become effective for contesting and  non-contesting  parties as of May
1, 1997. Under the FERC Order, Sea Robin's  transportation rates were reduced an
additional $.006 per Dth,  calculated on a 100 percent load factor basis,  below
the proposed  settlement rate level.  Sea Robin intends to seek rehearing of the
settlement order on the grounds that it improperly modified the settlement terms
as to non-contesting  parties, and that it failed to properly consider the filed
case in making its merits determinations as to contesting parties.






<PAGE>





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

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

RESULTS OF OPERATIONS

Operating Income

        Business segment  operating  results for Sonat Inc. and its subsidiaries
(the Company) are presented in the table below. There were no unusual items that
affected operating income and net income comparisons in either period presented.

<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                    1997                 1996
                                                                           (In Millions)
Operating Income:
   <S>                                                              <C>                  <C>  
   Exploration and production                                       $ 56.7               $20.0
   Natural gas transmission                                           46.8                48.1
   Energy marketing                                                    1.5                12.4
   Other                                                               1.9                 2.7
                                                                    ------               -----

      Operating Income                                              $106.9               $83.2
                                                                    ======               =====
</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.  In 1996,  Sonat  Exploration  broadened its growth
strategy  by  increasing  its  focus  on  low-risk  exploration  and  aggressive
development  drilling  as opposed to only  property  acquisition.  Most of Sonat
Exploration's  natural gas  production is sold to Sonat  Marketing  Company L.P.
(Sonat  Marketing),  the Company's  affiliate  operating in the Energy Marketing
segment.

        Sonat  Exploration  maintained its active  development  and  exploration
drilling  program in the first quarter of 1997,  participating in the completion
of 86 gross development wells, of which 78 were successful, and five exploratory
wells, three of which were successful.  The Austin Chalk trend of east Texas and
west Louisiana was again a very active drilling area. Nine wells were drilled in
the Austin Chalk trend, of which eight were successful.

<PAGE>

Recent Discoveries

        Sonat Exploration's most important  exploratory program is in the Cotton
Valley Pinnacle Reef trend in the East Texas salt basin, one of the most active,
high-potential  onshore  exploratory  plays in the lower 48 states. In the first
quarter of 1997,  Sonat  Exploration  completed  drilling and testing its fourth
Cotton Valley Pinnacle Reef trend  discovery,  the Sonat  Exploration Cook No. 3
well, in the Bear Grass area of Leon County,  Texas. Based on these tests, Sonat
Exploration  believes  the Cook No. 3 has 60 to 70  billion  cubic feet (Bcf) of
recoverable  natural gas reserves.  Sonat  Exploration  has a 50 percent working
interest in the well.

        In its largest development  drilling program,  the Austin Chalk trend of
east  Texas and west  Louisiana,  Sonat  Exploration  had  excellent  completion
results from its first  company-operated  well in the  Hurricane  Branch area of
Vernon Parish,  Louisiana, the Scobee No. 1 well. The Scobee No. 1 exhibited the
highest  initial  hydrocarbon  production rate of any Sonat operated well in the
entire Eastern  Austin Chalk area,  flowing 3,840 barrels of oil and 9.5 million
cubic feet of natural gas per day. Sonat  Exploration  has a 60 percent  working
interest in this well.

EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                    1997                 1996
                                                                           (In Millions)
Revenues:
<S>                                                                 <C>                 <C>   
   Sales to others                                                  $ 39.9              $ 15.8
   Intersegment sales                                                114.3                95.8
                                                                    ------              ------
      Total Revenues                                                 154.2               111.6
                                                                    ------              ------

Costs and Expenses:
   Operating and maintenance                                          16.1                15.4
   Exploration expense                                                 6.0                 3.5
   General and administrative                                         13.9                11.9
   Depreciation, depletion and
      amortization                                                    54.4                54.9
   Taxes, other than income                                            6.4                 5.8
   Other expenses                                                       .7                  .1
                                                                    ------              ------
                                                                      97.5                91.6
                                                                    ------              ------
      Operating Income                                              $ 56.7              $ 20.0
                                                                    ======              ======


Net Sales Volumes:
   Gas (Bcf)                                                            50                  47
   Oil and condensate (MBbls)                                        1,042               1,078
   Natural gas liquids (MBbls)                                         362                 386
----------------------------------------------------------------------------------------------

Average Sales Prices:
   Gas ($/Mcf)                                                      $ 2.49              $ 1.92
   Oil and condensate ($/Bbl)                                        22.42               18.10
   Natural gas liquids ($/Bbl)                                       17.13                9.45
----------------------------------------------------------------------------------------------

</TABLE>


<PAGE>


First Quarter 1997 to First Quarter 1996 Analysis

        Operating income increased $36.7 million primarily due to higher natural
gas and oil prices.  Although  natural gas prices  weakened  somewhat during the
quarter,  average  realized  prices  increased to $2.49 per thousand  cubic feet
(Mcf) in the first  quarter of 1997 from  $1.92 per Mcf in the first  quarter of
1996,  a 30 percent  increase.  Realized  oil prices  increased 24 percent to an
average  of $22.42  per barrel  from  $18.10 per barrel in the first  quarter of
1996.  Higher  natural  gas  production  also  contributed  to the  increase  in
operating income.

        Costs and expenses were slightly higher in the first quarter of 1997 due
to  several  factors.  Exploration  expense  increased  $2.5  million  as  Sonat
Exploration  increased  its  exploration  activity.  Operating  and  maintenance
expense increased $.7 million and general and  administrative  expense increased
$2.0 million due to expanding operations. Lower allocations of corporate charges
slightly   offset  the   increase   in  general  and   administrative   expense.
Depreciation,  depletion and amortization expense decreased slightly as a result
of a lower amortization rate.

Hedging Activities

        Sonat Exploration,  through Sonat Marketing,  uses derivative  financial
instruments to manage the risks  associated  with price  volatility for both its
natural  gas  production  and its oil  production,  which  it  sells in the spot
market.  (See Market and Financial  Risk  Management  and Note 2 of the Notes to
Condensed  Consolidated  Financial  Statements.)  Gains or losses experienced on
Sonat  Exploration's  hedging  transactions  are offset by the related  gains or
losses  recognized  on the sale of the  commodity.  Natural  gas  revenues  were
reduced by $12.7  million and $16.1 million and oil revenues were reduced by $.9
million and $1.4 million in the 1997 and 1996 periods, respectively, relating to
hedging activities.

        A portion  of Sonat  Exploration's  future  production  is  hedged.  Gas
production for the last nine months of 1997 through 2000 in the aggregate amount
of 203.3 TBtus is hedged at a weighted average price of $2.03 per MMBtu. Of this
amount, 47.8 TBtu at a weighted average price of $2.03 relates to remaining 1997
production,  which represents  approximately 23 percent of expected  production.
Oil production of approximately 800 thousand barrels,  or 14 percent of expected
production,  is hedged for the remainder of 1997 at a weighted  average price of
$20.42 per barrel.

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 is  aggressively  seeking to expand its pipeline  system in its
traditional market area and to connect new gas supplies.

<PAGE>

        In April 1997, an amended application and tariff for the Destin Pipeline
was filed with the Federal Energy  Regulatory  Commission  (FERC) to reflect the
fact that units of Shell Oil  Company and Amoco  Corporation  have joined in the
ownership  of this 1 Bcf per day,  $300 million  pipeline  designed to transport
natural gas from the growing eastern Gulf of Mexico  production  area.  Southern
has a one-third interest in this pipeline. Shell and Amoco have made substantial
firm transportation  commitments to this pipeline,  and discussions are underway
with other prospective  shippers.  The pipeline,  which is still subject to FERC
approval, is expected to be completed in mid-1998.

        Also in April 1997,  the FERC issued an order that  permits  Southern to
begin  construction on a $36 million project that will add 46 million cubic feet
per day of firm capacity for customers in Georgia and Tennessee. Construction is
planned to begin in  mid-May,  and this  project is expected to be in service in
late 1997.  Southern is also moving  forward on expansions to eastern  Tennessee
and northern  Alabama that have a total estimated  capital cost of $107 million.
The  North  Alabama  expansion,  which  is  pending  before  the  FERC,  is  now
anticipated to go in service in the summer of 1998. The East Tennessee expansion
is anticipated to go in service in November 1998, subject to FERC approval of an
application that is expected to be filed in May.

NATURAL GAS TRANSMISSION
<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                    1997                 1996
                                                                           (In Millions)
Operating Income (Loss):
   Southern Natural Gas Company and
<S>                                                                 <C>                 <C>   
      subsidiaries                                                  $ 46.6              $ 48.2
   Other                                                               0.2                (0.1)
                                                                    ------              ------

      Total Operating Income                                        $ 46.8              $ 48.1
                                                                    ======              ======

</TABLE>



<PAGE>


SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                    1997                 1996
                                                                           (In Millions)
Revenues:
<S>                                                                 <C>                 <C>   
   Gas sales                                                        $ 51.0              $ 60.2
   Market transportation and storage                                  83.2                84.4
   Supply transportation                                              10.5                11.2
   Other                                                               7.8                 1.5
                                                                    ------              ------
      Total Revenues                                                 152.5               157.3
                                                                    ------              ------

Costs and Expenses:
   Natural gas cost                                                   51.1                57.6
   Transition cost recovery                                            2.3                (5.4)
   Operating and maintenance                                          17.6                19.9
   General and administrative                                         18.0                19.5
   Depreciation and amortization                                      11.7                12.4
   Taxes, other than income                                            5.2                 5.1
                                                                    ------              ------
                                                                     105.9               109.1
                                                                    ------              ------
      Operating Income                                              $ 46.6              $ 48.2
                                                                    ======              ======

Equity in Earnings of
   Unconsolidated Affiliates                                        $  2.7              $  2.6
                                                                    ======              ======

                                                                       (Billion Cubic Feet)
Volumes:
   Intrastate gas sales                                                  -                   2
   Market transportation                                               170                 208
                                                                       ---                 ---
      Total Market Throughput                                          170                 210
   Supply transportation                                                80                  85
                                                                       ---                 ---
      Total Volumes                                                    250                 295
                                                                       ===                 ===

   Transition gas sales                                                 18                  17
                                                                       ===                 ===


CITRUS CORP.
                                                                           (In Millions)
Equity in Earnings of
   Citrus Corp.                                                       $6.6                $6.0
                                                                      ====                ====

                                                                       (Billion Cubic Feet)
Florida Gas Volumes (100%):
   Market transportation                                                98                  91
   Supply transportation                                                 8                   8
                                                                       ---                 ---
      Total Volumes                                                    106                  99
                                                                       ===                 ===

</TABLE>



<PAGE>


First Quarter 1997 to First Quarter 1996 Analysis

        Southern  Natural Gas - Operating  results for the first quarter of 1997
were  down  slightly  compared  with  the  prior  year  primarily  due to  lower
throughput, partially offset by lower expenses.

        Gas sales revenue and natural gas cost  decreased in the 1997 period due
to lower  volumes  resulting  from the  transfer to Sonat of its  ownership of a
small intrastate pipeline,  which was immaterial to operating results, and sales
of storage gas in 1996. Market  transportation  revenues  decreased due to lower
volumes  resulting  primarily  from  warmer  weather.  The  decrease  in  supply
transportation  revenues  reflects  lower  transportation  volumes  at Sea Robin
Pipeline  Company,  a wholly owned  subsidiary of Southern.  Other  revenues and
transition cost recovery in the 1997 period were higher due to a $16 million gas
supply  realignment  (GSR) cost refund  made  pursuant  to  Southern's  approved
settlement.  Since the impact of this refund was offsetting in nature, operating
income was not affected.  Absent the GSR refund,  other  revenues and transition
cost  recovery  were lower in 1997 due to a higher GSR recovery rate in the 1996
period. Operating and maintenance expenses decreased in 1997 as a result of cost
cutting measures,  and general and administrative  expenses decreased  primarily
due to lower allocations of corporate charges.

        Citrus - Equity in  earnings  of Citrus  increased  $.6  million to $6.6
million.

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 FERC Order No. 636,  Southern has terminated or  renegotiated  to
market pricing  substantially  all of its gas supply contracts  through which it
had  historically  obtained  its  long-term  gas supply.  Southern  currently is
incurring  no  take-or-pay  liabilities  under  any  of  these  contracts.   Two
market-priced contracts entered into with Exxon Corporation in 1995 as part of a
settlement of certain other gas purchase contracts account for 85 percent of the
purchase  commitments  in 1997  described  below.  Based on  Southern's  current
expectations  with  respect to natural gas prices in the years  following  1997,
only a small amount of gas volumes are  expected to be at prices  above  market.
Pending the termination of these remaining supply contracts, Southern is selling
a portion of its  remaining  gas  supply to a number of its firm  transportation
customers under contracts that have been extended through November 30, 1997. The
remainder of Southern's gas supply will continue to be sold on a  month-to-month
basis.



<PAGE>


        Southern's purchase commitments under its remaining gas supply contracts
for the last nine months of 1997 and years 1998  through  2001 are  estimated as
follows:

                                                                  Estimated
                                                                  Purchase
                                                                 Commitments
                                                                (In Millions)

        1997                                                         $136
        1998                                                           19
        1999                                                           17
        2000                                                           15
        2001                                                           10

        These  estimates are subject to significant  uncertainty due both to the
number of  assumptions  inherent  in these  estimates  and to the wide  range of
possible  outcomes  for each  assumption.  None of the three major  factors that
determine purchase commitments  (underlying reserves,  future deliverability and
future price) is known today with certainty.

Rate Matters

        A settlement  approved by the FERC in 1995  resolved  all of  Southern's
previously  pending rate  proceedings  and  proceedings to recover GSR and other
transition  costs  associated  with the  implementation  of FERC Order No.  636,
except for one  contesting  party  that  represents  approximately  2 percent of
Southern's  firm  transportation  volumes.  That party has  appealed  the FERC's
approval of the  settlement  and orders in the  proceedings to the United States
Circuit  Court of  Appeals.  The  settlement  provides  that,  except in certain
limited  circumstances,  Southern  will  not  file a  general  rate  case  to be
effective prior to March 1, 1998, but requires  Southern to file a new rate case
no later than September 1, 1999.

ENERGY MARKETING

        Sonat Energy  Services,  through its  subsidiaries,  Sonat Marketing and
Sonat Power Marketing L.P. (Sonat Power Marketing),  conducts marketing business
in the  natural  gas and  electric  industries,  respectively.  Sonat  Marketing
purchases and resells  substantially all of Sonat Exploration  Company's natural
gas production.

        Sonat  Marketing's  business  has  continued  to  grow  rapidly.   Sonat
Marketing's  average  daily sales  volumes  increased to 3.5 billion  cubic feet
during the first  quarter of 1997, up 52 percent from the 2.3 billion cubic feet
reported  during the first  quarter of 1996.  This growth was  achieved in large
part by the Company's focus on its strategy of working closer with its customers
and delivering outstanding customer service.

<PAGE>

        Sonat Marketing uses natural gas and oil futures contracts, options, and
gas and oil  price  swap  agreements  to  hedge  the  effects  of  market  price
volatility  on its  operating  results.  These  instruments  are used to lock in
margins on Sonat Marketing's gas transactions. Sonat Marketing also uses futures
to  enable  it to hedge  fixed-price  contracts  to both its  suppliers  and its
customers.  (See Market and Financial Risk Management and Note 2 of the Notes to
Condensed Consolidated Financial Statements.)

        Sonat Power Marketing has executed  electric power  purchase,  sales and
transmission  agreements with numerous companies.  In the first quarter of 1997,
Sonat Power Marketing has remained  focused on expanding its wholesale  electric
business,  which is evidenced by the significant growth in sales volumes.  Sales
volumes grew to 1.4 million megawatt hours in the first quarter of 1997 from 210
thousand megawatt hours in the first quarter of 1996.

ENERGY MARKETING
<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                    1997                 1996
                                                                           (In Millions)

<S>                                                                 <C>                 <C>   
Revenues                                                            $959.7              $596.8
                                                                    ======              ======

Operating Income                                                    $  1.5              $ 12.4
                                                                    ======              ======

Sonat Marketing Gas Sales Volumes (100%)
   (Billion Cubic Feet)                                                304                 209
                                                                     =====                 ===

Sonat Power Marketing Sales Volumes (100%)
   (Thousands of Megawatt Hours)                                     1,397                 210
                                                                     =====                 ===
</TABLE>



First Quarter 1997 to First Quarter 1996 Analysis

        Although  revenues and sales  volumes grew  significantly,  Sonat Energy
Services'  operating  income declined $10.9 million in the first quarter of 1997
compared  to the 1996  period.  In the first  quarter of 1996,  increased  price
volatility and tight natural gas supplies in certain markets  created  excellent
trading opportunities for Sonat Marketing.  Similar conditions and opportunities
did  not  occur  in  the  first  quarter  of  1997.  Additionally,  general  and
administrative expense increased due to growth in operations.



<PAGE>


Other Income Statement Items
<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                    1997                 1996
                                                                           (In Millions)

Other Income (Loss), Net:
<S>                                                                 <C>                 <C>   
   Equity in earnings of unconsolidated affiliates                  $ 10.1              $  9.0
   Minority interest                                                  (0.9)               (4.7)
   Other                                                               3.9                (0.1)
                                                                    ------              ------
                                                                    $ 13.1              $  4.2
                                                                    ======              ======
</TABLE>


        The  increase  in equity in  earnings of  unconsolidated  affiliates  is
primarily  due to improved  results at Citrus.  Minority  interest  reflects AGL
Resource's  35 percent  share of  earnings  in Sonat  Marketing  and Sonat Power
Marketing  (operating  results were  discussed  earlier in the Energy  Marketing
section).  In  addition,  Other  in the  1997  period  includes  a  gain  on the
termination  of an interest rate swap and higher levels of allowances  for funds
capitalized at Southern.

<TABLE>
<S>                                                                 <C>                 <C>   
Interest Expense, Net                                               $ 19.8              $ 21.2
</TABLE>

        Net interest  expense  decreased in 1997 due to sharply  lower  interest
expense  resulting from lower average  regulatory  reserve  balances.  Partially
offsetting  the  reduction  was lower GSR  related  interest  income  and higher
interest expense related to higher average debt levels.

<TABLE>
<S>                                                                 <C>                 <C>   
Income Tax Expense                                                  $ 33.4              $ 20.6
</TABLE>

        Income tax expense  increased  in the 1997  period due to higher  pretax
income.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

<TABLE>
<S>                                                                 <C>                 <C>   
Operating Activities                                                $235.3              $104.1
</TABLE>

        Cash flow from  operations  increased  $131.2 million  compared with the
1996 period  primarily due to improved  operating  results at Sonat  Exploration
(discussed earlier in the Results of Operations section) and higher cash flow at
Southern.

        The change in deferred income taxes is primarily due to higher levels of
intangible  drilling costs at Sonat Exploration in the 1996 quarter.  The change
in net GSR costs represents net recoveries in the current period compared to net
payments in the prior  period.  The change in accounts  receivable  and accounts
payable is  primarily  attributable  to  improved  operating  results and to the
expanding business of Energy Marketing,  which had high receivables and payables
balances in December  1996 due to natural  gas prices.  The change in  inventory
resulted from Southern's purchase of materials for various expansion projects in
1996.  The change in interest and taxes  primarily  reflects  higher  intangible
drilling  costs in the prior  period and higher  taxable  income in the  current
period.  The  increase in Other is  primarily  due to the 1996  period's  higher
purchases of gas stored  underground by Southern and deferred  losses on hedging
transactions.
<PAGE>

<TABLE>
<CAPTION>

                                                                           Three Months
                                                                          Ended March 31,
                                                                    1997                 1996
                                                                           (In Millions)

<S>                                                                <C>                 <C>     
Investing Activities                                               $(168.2)            $(123.0)
</TABLE>

        Net cash used in investing  activities  was $45.2 million higher in 1997
compared  to  1996.   The  increase  was  primarily   attributable   to  capital
expenditures, which were higher due to increased developmental drilling at Sonat
Exploration and system expansions at Southern.

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

<TABLE>

        <S>                                                        <C>                 <C>    
        Exploration and Production                                 $ 128.0             $ 107.0
        Natural Gas Transmission                                      31.7                15.5
        Energy Marketing                                               2.8                 0.4
        Other                                                          1.0                 1.4
                                                                   -------             -------

        Total                                                      $ 163.5             $ 124.3
                                                                   =======             =======
</TABLE>


        The  Company's  share  of  capital  expenditures  by its  unconsolidated
affiliates  was $2.0 million and $2.5  million in the first  quarter of 1997 and
1996, respectively.

<TABLE>
<S>                                                                <C>                 <C>     
Financing Activities                                               $ (74.9)            $ (12.6)
</TABLE>

        Net cash used in financing  activities  was $62.3 million  higher in the
1997 period compared to the 1996 period.  The repayment of short term borrowings
by Sonat and the purchase of stock under the stock  repurchase  program were the
primary reasons for the increased cash requirements in the 1997 period.

CAPITAL RESOURCES

        At March 31,  1997,  the  Company  had lines of credit  and a  revolving
credit  agreement with a total capacity of $750 million.  Of this,  $460 million
was  available.  The  Company  has a  policy  that  bank  and  commercial  paper
borrowings in the aggregate will not exceed the maximum amount  available  under
its lines of credit and revolving credit  agreement,  and, as a result,  at that
date the Company would not have deemed  available  under the lines of credit and
the revolving credit agreement an amount equal to the $125 million of commercial
paper then outstanding.

<PAGE>

        Sonat  has  a  shelf  registration  with  the  Securities  and  Exchange
Commission  (SEC)  that  provides  for  issuance  of up to $500  million in debt
securities  of which $200  million has been  issued.  Southern  also has a shelf
registration  with the SEC for up to $200 million in debt  securities,  of which
$100 million has been issued.

        The Company has a stock repurchase  program in effect through the end of
1997.  As of March 31,  1997,  the Company had  remaining  authority to purchase
approximately 470,000 shares of the Company's common stock. Shares purchased are
intended for reissuance in connection with employee stock options and restricted
stock programs.

        The Company believes that cash flow from operations and borrowings under
its existing credit facilities and shelf registrations would provide the Company
with the means to fund operations and currently  planned  investment and capital
expenditures.

MARKET AND FINANCIAL RISK MANAGEMENT

        The  Company's  primary  market  risk  exposure  is  the  volatility  of
spot-market  natural gas and oil prices,  which affects the operating results of
Sonat  Exploration  and Sonat  Marketing.  The Company's use of  derivatives  to
reduce  the effect of this  volatility  is  described  in Note 2 of the Notes to
Condensed Consolidated Financial Statements.

        The Company's use of these derivative instruments is implemented under a
set of policies  approved by the Board of  Directors.  Speculative  transactions
using financial  derivatives are prohibited.  In the case of Sonat  Exploration,
these  policies  prohibit   transactions  not  matched  by  physical   commodity
positions.  For commodity  price  hedges,  these  policies set limits  regarding
volumes  relative to budgeted  production or sales levels.  Sonat Marketing uses
derivatives to hedge physical positions and is authorized to engage in financial
transactions  to support its customers needs subject to a policy that limits the
net positions to specific value at risk limits. Material forward rate agreements
and swap  counterparties  are approved by the Board, and volume limits for swaps
are set for any single counterparty. Reports detailing each transaction, mark to
market and value at risk positions, are reviewed by management. In addition, all
hedge activities are internally reviewed by a Risk Oversight Committee to ensure
compliance with all policies. (See Note 2 of the Notes to Condensed Consolidated
Financial Statements.)



<PAGE>


FORWARD LOOKING STATEMENTS

        From  time to time  the  Company  may  make or  publish  forward-looking
statements  relating  to such  matters  as  anticipated  financial  performance,
business plans and prospects,  objectives, future projects, and similar matters.
This report  contains such  forward-looking  statements.  These  forward-looking
statements are based on assumptions that the Company believes are reasonable.  A
variety of  factors,  however,  could  cause the  Company's  actual  results and
experience  to  differ   materially  from  the  anticipated   results  or  other
expectations expressed in the Company's forward-looking statements.

        Important  factors that could cause actual results to differ include the
timing and extent of 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  results of oil and gas  exploratory  and  development  drilling  and
acquisition  programs,  which are subject to all the  geologic  and  engineering
risks  typically  associated  with such  activities and which results  determine
production levels and reserves; the possibility that actual recoverable reserves
may vary adversely from the Company's  reserve  estimates due to factors outside
the  Company's  control or ability to  estimate;  the  results of the  Company's
hedging  activities;  the  pace  of  deregulation  of  retail  natural  gas  and
electricity  markets in the United States;  and the success of management's cost
reduction  activities.  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.  Any of the foregoing  circumstances may cause the Company's management
to change its operating or capital plans.

        The  success and growth of the  Company's  exploration  and  development
programs are  dependent  upon a number of factors that cannot be predicted  with
certainty. These factors include the Company's ability to expand its leased land
positions in desirable areas,  which often are subject to intensely  competitive
leasing  conditions such as currently exist in the Cotton Valley Reef Trend; the
results of future  wells,  especially  those in the Cotton Valley Reef Trend and
the Austin  Chalk,  which are key  prospective  areas for the  Company;  and the
ability of the Company to identify and  precisely  locate  prospective  geologic
structures and to drill and successfully complete wells in those structures.  In
addition,  the Company's  expectations for continued growth in the Cotton Valley
Reef Trend are based in part on seismic  surveys.  Some of the available data is
based on 2D seismic  surveys.  While 2D seismic  data is helpful in  identifying
prospects,  there is no basis to predict  how many  prospects  identified  by 2D
seismic data will be confirmed by 3D seismic surveys. The Company plans to drill
only Reef  prospects  that are  confirmed by 3D seismic  data.  Furthermore,  3D
seismic data alone cannot confirm that economically productive hydrocarbons will
be present in the reefs and current limitations on such technology are such that
there is no assurance  that the Company will be able to locate and penetrate the
reef formations.  In addition, in certain other areas, such as the Austin Chalk,
the Company's  exploratory and  development  activities are not aided by seismic
data because of the nature of the targeted reservoirs.

<PAGE>

        The  success of the  Company's  expansion  projects  in its  natural gas
transmission  segment is  dependent on obtaining  both the  necessary  number of
customer commitments for a project and regulatory approval of the project, which
may encounter opposition by the staff of the FERC,  environmental  groups, local
landowners,  and customers of the Company or its local  distribution  customers.
The  Company's   regulated   natural  gas  transmission   subsidiaries   recover
substantially all of their fixed costs, a return on equity,  and income taxes in
the capacity reservation component of their firm transportation rates. There can
be no assurance,  however,  that the existing customers of the Company's natural
gas transmission  subsidiaries will extend their firm service  agreements at the
same levels when their current service agreements expire.

        Competition in the Company's energy marketing segment is intense,  which
will affect the Company's  efforts to expand its presence into other natural gas
markets,  including  those in the north and  midwest.  There can be no assurance
that the Company will achieve any additional  strategic alliances with other gas
or electric marketers, producers, generators, or local distribution companies or
that any such additional alliances will be profitable.  A factor in the level of
margins  achieved by  marketers,  both gas and electric,  is market  volatility,
which cannot be predicted, and which may not recur in the future either with the
same frequency or at the same level as it has in the past.





<PAGE>



                                  PART II. OTHER INFORMATION


Item 1. Legal Proceedings

        In Jack J. Grynberg,  ex rel. v. Alaska Pipeline Company,  et al., which
is  described  in Part I, Item 3, of the  Company's  report on Form 10-K for the
year ended December 31, 1996, the court on March 27, 1997, granted the motion to
dismiss filed by the Combined  Defendants Group, which included Southern and Sea
Robin. The dismissal, which was without prejudice against refiling, was based on
two grounds:  (1) the defendants were improperly joined in a single action,  and
(2) the complaint failed to plead fraud with sufficient particularity to state a
claim.


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

        The Company  held its 1997 Annual  Meeting of  Stockholders  in Houston,
Texas, on April 24, 1997. The stockholders  voted (1) to elect five Directors as
members of the Board of Directors of the Company, to serve until the 2000 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
         --------------------------- --------------- -----------------------
         --------------------------- --------------- -----------------------
         Jerome J. Richardson        75,278,744             232,418
         --------------------------- --------------- -----------------------
         --------------------------- --------------- -----------------------
         Donald G. Russell           75,275,259             235,903
         --------------------------- --------------- -----------------------
         --------------------------- --------------- -----------------------
         Adrian M. Tocklin           75,278,245             232,917
         --------------------------- --------------- -----------------------
         --------------------------- --------------- -----------------------
         James B. Williams           75,274,126             237,036
         --------------------------- --------------- -----------------------
         --------------------------- --------------- -----------------------
         Joe B. Wyatt                75,282,584             228,578
         --------------------------- --------------- -----------------------

        The vote on Proposal No. 1 was as follows:

         ------------------- --------------- ------------------ -------------
                             Voted For         Voted Against    Abstained
         ------------------- --------------- ------------------ -------------
         ------------------- --------------- ------------------ -------------
         Proposal No. 1      75,188,097           148,288         174,777
         ------------------- --------------- ------------------ -------------

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





<PAGE>


Item 6. Exhibits and Reports on Form 8-K

(a)     Exhibits(1)

Exhibit
Number                       Exhibits


11*            Computation of Earnings per Share

12*            Computation of Ratio of Earnings to Fixed Charges

27*            Financial Data Schedules for the period ended March 31, 1997
-------------
*   Filed herewith

(b)     Reports on Form 8-K

        The Company did not file any report on Form 8-K during the quarter ended
March 31, 1997.












(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 9, 1997                       By:    /s/ James A. Rubright
       ------------------------                      -----------------------
                                                     James A. Rubright
                                                     Senior Vice President and
                                                     General Counsel




Date:         May 9, 1997                       By:    /s/ Thomas W. Barker, Jr.
       ------------------------                      ---------------------------
                                                     Thomas W. Barker, Jr.
                                                     Vice President-Finance and
                                                     Treasurer