UNITED STATES SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D. C. 20549
                                    FORM 10-Q

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

For the quarterly period ended       September 30, 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:

                85,749,451 SHARES OUTSTANDING ON OCTOBER 31, 1997



<PAGE>



                           SONAT INC. AND SUBSIDIARIES


                                      INDEX
<TABLE>
<CAPTION>

                                                                                                              Page No.

PART I.       Financial Information

              Item 1.      Financial Statements

                           Condensed Consolidated Balance Sheets
                               (Unaudited)--September 30, 1997 and
<S>                                                                                                          <C>
                               December 31, 1996                                                               1

                           Condensed Consolidated Statements of Income
                               (Unaudited)--Three Months and Nine Months Ended
                               September 30, 1997 and 1996                                                     2

                           Condensed Consolidated Statements of Cash Flows
                               (Unaudited)--Nine Months Ended
                               September 30, 1997 and 1996                                                     3

                           Notes to Condensed Consolidated Financial
                               Statements (Unaudited)                                                          4 - 10

              Item 2.      Management's Discussion and Analysis of Financial
                               Condition and Results of Operations                                            11 - 24

PART II.      Other Information

              Item 6.      Exhibits and Reports on Form 8-K                                                   25

</TABLE>





<PAGE>




                          PART I. FINANCIAL INFORMATION
Item 1.  Financial Statements
                           SONAT INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                               September 30,                December 31,
                                                                                   1997                         1996
                                                                                           (In Thousands)
                                     ASSETS
Current Assets:
<S>                                                                                <C>                       <C>       
    Cash and cash equivalents                                                      $   96,555                $   29,639
    Accounts receivable                                                               515,494                   577,021
    Inventories                                                                        40,662                    30,500
    Gas imbalance receivables                                                          14,263                    21,694
    Income taxes                                                                       31,042                     2,163
    Assets from price risk management activities                                       55,305                     -
    Other                                                                              37,889                    32,273
                                                                                   ----------                ----------
       Total Current Assets                                                           791,210                   693,290
                                                                                   ----------                ----------

Investments in Unconsolidated Affiliates and Other                                    514,756                   465,121
                                                                                   ----------                ----------

Plant, Property and Equipment                                                       5,534,078                 5,084,283
    Less accumulated depreciation, depletion
       and amortization                                                             2,838,418                 2,650,419
                                                                                   ----------                ----------
                                                                                    2,695,660                 2,433,864
                                                                                   ----------                ----------
Deferred Charges and Other:
    Gas supply realignment costs                                                        5,156                    11,144
    Assets from price risk management activities                                        3,420                     -
    Other                                                                             174,902                   171,240
                                                                                   ----------                ----------
                                                                                      183,478                   182,384
                                                                                   ----------                ----------

Total Assets                                                                       $4,185,104                $3,774,659
                                                                                   ==========                ==========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
    Long-term debt due within one year                                             $    8,240                $   53,707
    Unsecured notes                                                                   235,197                   158,030
    Accounts payable                                                                  468,523                   510,130
    Accrued income taxes                                                               11,359                    26,726
    Accrued interest                                                                   32,399                    28,584
    Gas imbalance payables                                                             23,785                    20,290
    Liabilities from price risk management activities                                  53,159                     -
    Other                                                                              51,899                    51,370
                                                                                   ----------                ----------
       Total Current Liabilities                                                      884,561                   848,837
                                                                                   ----------                ----------

Long-Term Debt                                                                      1,160,597                   872,255
                                                                                   ----------                ----------

Deferred Credits and Other:
    Deferred income taxes                                                             352,240                   284,564
    Reserves for regulatory matters                                                     4,739                    14,644
    Liabilities from price risk management activities                                   2,637                     -
    Other                                                                             180,824                   169,995
                                                                                   ----------                ----------
                                                                                      540,440                   469,203
                                                                                   ----------                ----------
Commitments and Contingencies

Stockholders' Equity:
    Common stock and other capital                                                    124,874                   118,881
    Retained earnings                                                               1,541,590                 1,495,186
                                                                                   ----------                ----------
                                                                                    1,666,464                 1,614,067
    Less treasury stock                                                                66,958                    29,703
                                                                                   ----------                ----------
       Total Stockholders' Equity                                                   1,599,506                 1,584,364
                                                                                   ----------                ----------

Total Liabilities and Stockholders' Equity                                         $4,185,104                $3,774,659
                                                                                   ==========                ==========
</TABLE>

                             See accompanying notes.


<PAGE>


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

                                                                    Three Months                      Nine Months
                                                                Ended September 30,               Ended September 30,
                                                           1997             1996            1997              1996
                                                                   (In Thousands, Except Per-Share Amounts)

<S>                                                     <C>                 <C>            <C>               <C>       
Revenues                                                $1,023,531          $743,796       $2,910,978        $2,076,730
                                                        ----------          --------       ----------        ----------

Costs and Expenses:
    Natural gas cost                                       690,315           476,617        2,013,706         1,319,597
    Electric power cost                                     98,993            24,936          174,849            38,833
    Operating and maintenance                               49,953            46,012          140,443           128,289
    General and administrative                              32,790            34,089          108,098           108,202
    Depreciation, depletion
       and amortization                                    111,635            74,670          244,757           213,421
    Taxes, other than income                                11,308            12,312           28,210            35,756
                                                        ----------          --------       ----------        ----------
                                                           994,994           668,636        2,710,063         1,844,098
                                                        ----------          --------       ----------        ----------

Operating Income                                            28,537            75,160          200,915           232,632

Other Income (Expense), Net:
    Equity in earnings of
       unconsolidated affiliates                             8,876             8,832           28,443            25,285
    Minority interest                                         (448)              (87)          (1,244)           (5,196)
    Other                                                    1,049             4,697            5,662             6,586
                                                        ----------          --------       ----------        ----------
                                                             9,477            13,442           32,861            26,675
                                                        ----------          --------       ----------        ----------

Interest:
    Interest income                                          1,121               988            2,694             3,311
    Interest expense                                       (23,278)          (21,888)         (68,424)          (70,023)
    Interest capitalized                                       873             1,240            2,905             3,918
                                                        ----------          --------       ----------        ----------
                                                           (21,284)          (19,660)         (62,825)          (62,794)
                                                        ----------          --------       ----------        ----------

Income before Income Taxes                                  16,730            68,942          170,951           196,513

Income Tax Expense                                           3,760            20,908           54,912            62,315
                                                        ----------          --------       ----------        ----------

Net Income                                              $   12,970          $ 48,034       $  116,039        $  134,198
                                                        ==========          ========       ==========        ==========

Earnings Per Share of Common Stock                      $      .15          $    .56       $     1.35        $     1.56
                                                        ==========          ========       ==========        ==========

Weighted Average Shares Outstanding                         85,767            86,228           86,006            86,188

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









                             See accompanying notes.

<PAGE>

                           SONAT INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                             Nine Months
                                                                                         Ended September 30,
                                                                                   1997                      1996
                                                                                           (In Thousands)
Cash Flows from Operating Activities:
<S>                                                                               <C>                         <C>      
    Net income                                                                    $   116,039                 $ 134,198
    Adjustments to reconcile net income to net
       cash provided by operating activities:
          Depreciation, depletion and amortization                                    244,757                   213,421
          Deferred income taxes                                                        67,793                    72,851
          Equity in earnings of unconsolidated affiliates,
              less distributions                                                      (23,926)                  (18,324)
          Gain on disposal of assets                                                     (230)                   (3,390)
          Reserves for regulatory matters                                              (9,905)                 (167,440)
          Gas supply realignment costs                                                  5,988                   177,958
          Change in:
              Accounts receivable                                                      61,527                    10,605
              Inventories                                                             (10,162)                  (13,982)
              Accounts payable                                                        (41,607)                   40,766
              Accrued interest and income taxes, net                                  (40,431)                   (4,806)
              Other current assets and liabilities                                      3,707                    22,131
          Other                                                                        49,990                   (38,945)
                                                                                  -----------                 ---------

              Net cash provided by operating activities                               423,540                   425,043
                                                                                  -----------                 ---------

Cash Flows from Investing Activities:
    Plant, property and equipment additions                                          (537,197)                 (399,522)
    Net proceeds from disposal of assets                                                3,825                    10,270
    Advances to unconsolidated affiliates
       and other                                                                      (31,972)                  (13,883)
                                                                                  -----------                 ---------

              Net cash used in investing activities                                  (565,344)                 (403,135)
                                                                                  -----------                 ---------

Cash Flows from Financing Activities:
    Proceeds from issuance of long-term debt                                        1,500,000                   400,000
    Payments of long-term debt                                                     (1,257,125)                 (267,933)
    Changes in short-term borrowings                                                   77,167                   (90,780)
                                                                                  -----------                 ---------
       Net changes in debt                                                            320,042                    41,287
    Dividends paid                                                                    (69,635)                  (69,843)
    Treasury stock purchases                                                          (51,316)                  (26,773)
    Other                                                                               9,629                    16,140
                                                                                  -----------                 ---------

              Net cash provided by (used in)
                 financing activities                                                 208,720                   (39,189)
                                                                                  -----------                 ---------

Net Increase (Decrease) in Cash and Cash Equivalents                                   66,916                   (17,281)

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

Cash and Cash Equivalents at End of Period                                        $    96,555                 $  20,008
                                                                                  ===========                 =========

Supplemental Disclosures of Cash Flow Information
Cash Paid for:
    Interest (net of amount capitalized)                                          $    51,269                 $  49,381
    Income taxes paid (refunds received), net                                          22,717                    (5,907)
</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.

         The 1996 periods have been restated to reflect the  reclassification of
natural  gas sales,  natural  gas cost and  transition  cost  recovery  to other
revenues in the  Condensed  Consolidated  Statements  of Income.  Certain  other
amounts in the unaudited 1996 Condensed  Consolidated  Financial Statements have
also been reclassified to conform with the 1997 presentation.

2.       Derivative Financial Instruments

         Through May 1997,  the Company  through  Sonat  Marketing  Company L.P.
(Sonat  Marketing)  used futures  contracts,  options and price swap  agreements
solely to hedge its commodity  price risk on physical  transactions in crude oil
and natural gas. Gains or losses  experienced on such hedging  transactions  are
offset by the related gains or losses  recognized on the sale of the  commodity.
Sonat  Marketing  performs all hedging  activity for both its own operations and
for the operations of Sonat Exploration Company.

         In June  1997,  Sonat  Marketing  also  began  engaging  in  derivative
transactions that were not directly linked to physical  transactions to meet the
needs of its customers.  These derivative  transaction types,  together with any
physical  transactions  that are not  linked to either a  derivative  or another
physical  transaction,  are  included  in a risk  pool.  All  of  the  Company's
derivative  transactions,  including  those in the risk  pool,  are  subject  to
policies that limit the aggregate value at risk and mark-to-market  positions to
amounts approved by the Company's Risk Oversight Committee.  The transactions in
this risk pool have been accounted for using  mark-to-market  accounting.  Under
such method, all positions,  both derivative and physical,  are recorded at fair
value.  Changes in the market value of these  positions,  net of  reserves,  are
recognized  as unrealized  gains or losses in operating  income in the period of
change  offset  by other  assets  and  liabilities  related  to risk  management
activity on the balance sheet.  The market prices used to value the transactions
reflect  management's  estimates of market  value,  taking into account  closing
exchange and  over-the-counter  quotations,  time value and  volatility  factors
underlying  the  commitments.  These  market  prices are adjusted to reflect the
potential impact of liquidating Sonat Marketing's  position in an orderly manner
over a  reasonable  period  of  time  under  present  market  conditions.  As of
September  30,  1997,  the  results of  accounting  for such  derivatives  under
mark-to-market  accounting were not material.  Sonat Marketing  continues to use
hedge accounting on futures,  swaps, and option  transactions  that were entered
into prior to June 1997  because  such  transactions  qualified  and continue to
qualify for hedge accounting. In addition, certain

<PAGE>


2.       Derivative Financial Instruments (Cont'd)

significant  future physical  transactions  that are specifically  hedged with a
derivative and that meet the criteria of a hedged transaction in accordance with
Statement  of  Financial  Accounting  Standards  (SFAS) No. 80,  Accounting  for
Futures Contracts, will also continue to be accounted for in accordance with the
hedge accounting provisions of this standard.

         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 September 30, 1997,  the Company had net
deposits  of $27.1  million  with  brokers for margin  calls,  included in other
current  assets on the  Condensed  Consolidated  Balance  Sheet,  of which $25.1
million  was for Sonat  Marketing's  operations  and $2.0  million was for Sonat
Exploration's operations.

         At  September  30,  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 operations                                   1,484                           $13,119
     For Exploration's operations                                  (664)                           (7,015)
                                                                -------                           -------
         Total                                                      820                           $ 6,104
                                                                =======                           =======

Oil Futures:
     For Marketing's operations                                    -                              $  -
     For Exploration's operations                                  (225)                             (409)
                                                                -------                           -------
         Total                                                     (225)                          $  (409)
                                                                =======                           =======
</TABLE>

         The above contracts will mature during 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  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

<PAGE>


2.       Derivative Financial Instruments (Cont'd)

putting  on  futures   positions  and  entering  into   offsetting   swaps  with
third-parties with aggregate volumes equal to its swaps with Sonat Exploration.

         At  September  30,  1997,  the  Company  had the  following  open  swap
positions:
<TABLE>
<CAPTION>

                                                                        Fair               Remaining Term of
                                                     Volume             Value            Individual Contracts
                                                      (Bcf)        (In Thousands)
Natural Gas Swaps:
<S>                                                    <C>              <C>                     <C>       <C>      
     For Marketing's operations                        246              $ (5,648)               1 month - 60 months
     For Exploration's operations                      159               (49,865)               1 month - 14 months
                                                       ---              --------
                                                       405              $(55,513)
                                                       ===              ========
</TABLE>

         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 September 30, 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 17.7 TBtu and sold calls of 14.1 TBtu with
a counterparty  at zero cost.  Sonat  Marketing also has bought and sold options
for notional volumes of 8.2 TBtu. At September 30, 1997, the market value of all
these options was $4.1 million unfavorable.

         Credit  Risk - Due to changes in market  conditions  the value of swaps
and  options  can  change  in  relation  to their  value to the  Company.  Sonat
Marketing  has  established   policies  and  procedures  to  evaluate  potential
counterparties for creditworthiness  before entering into  over-the-counter swap
and option agreements.  At September 30, 1997, the market value of the Company's
in-the-money swaps was $4.5 million. The credit risk resulting from in-the-money
swaps is monitored on a regular basis.  Reserves for credit risk are established
as necessary.



<PAGE>


3.       Unconsolidated Affiliates

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

                                                                      Three Months                      Nine Months
                                                                  Ended September 30,               Ended September 30,
                                                                  -------------------               -------------------
                                                            1997              1996             1997              1996
                                                            ----              ----             ----              ----
                                                                                 (In Thousands)

Company's Share of Reported Earnings (Losses):

<S>                                                         <C>               <C>             <C>               <C>    
    Exploration and Production                              $   89            $  102          $   290           $   290
                                                            ------            ------          -------           -------

    Natural Gas Transmission:
       Citrus Corp.                                          5,241             5,770           17,343            15,779
       Amortization of Citrus basis
          difference                                           345               345            1,037             1,037
       Bear Creek Storage Company                            2,558             2,433            7,889             7,462
       Other                                                   158               (91)             224              (226)
                                                            ------            ------          -------           -------
                                                             8,302             8,457           26,493            24,052
                                                            ------            ------          -------           -------

    Energy Marketing                                           186              -                 669              -
                                                            ------            ------          -------           -------

    Other                                                      299               273              991               943
                                                            ------            ------          -------           -------

                                                            $8,876            $8,832          $28,443           $25,285
                                                            ======            ======          =======           =======
</TABLE>

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



<PAGE>


3.       Unconsolidated Affiliates (Cont'd)

         The following is summarized income statement information for Citrus:

<TABLE>
<CAPTION>
                                                                    Three Months                       Nine Months
                                                                Ended September 30,                Ended September 30,
                                                                --------------------               -------------------
                                                           1997             1996              1997              1996
                                                           ----             ----              ----              ----
                                                                                (In Thousands)

<S>                                                       <C>               <C>              <C>               <C>     
Revenues                                                  $213,594          $205,776         $574,062          $583,813
Expenses (Income):
    Natural gas cost                                       136,385           118,384          324,968           323,067
    Operating expenses                                      23,384            20,736           73,814            69,030
    Depreciation and amortization                           13,181            21,664           47,768            63,183
    Interest and other                                      23,422            26,152           71,904            77,000
    Income taxes                                             6,740             7,300           20,922            19,975
                                                          --------          --------         --------          --------

Income Reported                                           $ 10,482          $ 11,540         $ 34,686          $ 31,558
                                                          ========          ========         ========          ========
</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                       Nine Months
                                                                Ended September 30,                Ended September 30,
                                                                --------------------               -------------------
                                                           1997             1996              1997              1996
                                                           ----             ----              ----              ----
                                                                                (In Thousands)

<S>                                                         <C>               <C>             <C>               <C>    
Revenues                                                    $8,899            $8,924          $27,218           $27,117
Expenses:
    Operating expenses                                       1,157             1,262            3,519             3,797
    Depreciation                                             1,358             1,354            4,072             4,061
    Other expenses, net                                      1,269             1,441            3,849             4,335
                                                            ------            ------          -------           -------

Income Reported                                             $5,115            $4,867          $15,778           $14,924
                                                            ======            ======          =======           =======
</TABLE>

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 $500.0 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. At
January 1, 1997, there was an outstanding balance of $155.0 million.  During the
first nine months of 1997,  $1.3  billion was  borrowed  and $1.205  billion was
repaid  under the  revolving  credit  agreement,  resulting  in  $250.0  million
outstanding at September 30, 1997, at a rate of 5.76 percent.



<PAGE>


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

         In September 1997,  Sonat and Southern issued a total of $200.0 million
under their shelf registration  statements.  Sonat issued $100.0 million of 6.75
percent  Notes due October 1, 2007,  at 99.748  percent to yield 6.785  percent.
Southern  issued $100.0  million of 6.70 percent Notes also due October 1, 2007,
at 99.891  percent to yield 6.715  percent.  The net proceeds were  subsequently
used to repay amounts borrowed under Sonat's  commercial paper program and under
its revolving credit agreement.

     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 26, 1998.  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 September 30,
1997, there were no amounts outstanding for Sonat or Southern.

         Sonat had $234.7 million in commercial paper  outstanding at an average
rate of 5.77 percent at September 30, 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 September 30, 1997,  Southern's rates
are  established  by a  settlement  that was  approved by a FERC order issued in
1995.  All  of  its  customers  are  parties  to  the  settlement,   except  one
representing  approximately 2 percent of Southern's firm transportation volumes.
The  contesting  party has appealed the FERC's  approval of the  settlement  and
orders in the  proceedings to the United States  Circuit Court of Appeals.  (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.  By order dated  October 23,  1997,  the United  States  Court of
Appeals for the Fifth Circuit  vacated and remanded the FERC's  decision to deny
Sea

<PAGE>


5.       Commitments and Contingencies (Cont'd)

Robin's  petition  and found that the FERC did not give enough  attention to the
physical and  operational  characteristics  of Sea Robin in applying the primary
function test. The petition will return to the FERC for further consideration.

         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.  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. 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. On
October 29, 1997,  the FERC issued an order on rehearing of the initial order in
the proceedings and found that Sea Robin's  proposed  settlement  rates are just
and  reasonable.  The rates will  become  effective  for  consenting  parties on
January 1, 1997, and for contesting parties on May 1, 1997.

6.       Impairment of Assets

         Sonat  Exploration  Company's  1997  production  has  been  lower  than
expected  with  most  of the  shortfall  coming  from  certain  Gulf  of  Mexico
properties. Last year, Sonat Exploration completed two significant wells in High
Island  Block 39 that  together  initially  produced  89  million  cubic feet of
natural  gas  equivalent  per  day,  but have  recently  ceased  production.  In
addition, other wells drilled in this area during 1997 have not yielded material
reserves. As a result, it was determined in the third quarter that the remaining
reserves for these  properties  would not recover the associated book value, and
accordingly,  the properties were written down by $39.0 million. The impairment,
which is included in  depreciation,  depletion and amortization in the Condensed
Consolidated  Statement of Income,  reduced net income by $25.4 million, or $.30
per share. Fair value used in determining the impairment adjustment was based on
an estimate of future net cash flows discounted at a market rate of interest.



<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.  The table also shows the effect
of an unusual item recorded in the third quarter of 1997 that affects  operating
income and net income  comparisons.  The table is presented  because  management
believes this information enhances the analysis of results of operations.

<TABLE>
<CAPTION>
                                                                     Three Months                       Nine Months
                                                                 Ended September 30,                Ended September 30,
                                                                 -------------------                -------------------
                                                           1997               1996            1997              1996
                                                           ----               ----            ----              ----
                                                                    (In Millions, Except Per-Share Amounts)
Operating Income (Loss):
<S>                                                       <C>                <C>             <C>               <C>   
    Exploration and production                            $(12.6)            $38.2           $ 61.7            $ 97.2
    Natural gas transmission                                39.7              36.2            131.7             120.7
    Energy marketing                                         0.9              (0.7)             2.0              11.6
    Other                                                    0.5               1.4              5.5               3.1
                                                          ------             -----           ------            ------

       Operating Income                                     28.5              75.1            200.9             232.6

Adjustment for Unusual Item:
    Exploration and Production
       Impairment of oil and
          gas properties                                    39.0               -               39.0               -
                                                          ------             -----           ------            ------
Operating Income Excluding
    Unusual Item                                          $ 67.5             $75.1           $239.9            $232.6
                                                          ======             =====           ======            ======

Net Income As Reported                                    $ 13.0             $48.0           $116.0            $134.2
Adjustment for Unusual Item:
    Exploration and Production
       Impairment of oil and
          gas properties                                    25.4               -               25.4               -
                                                          ------             -----           ------            ------
Net Income Excluding
    Unusual Item                                          $ 38.4             $48.0           $141.4            $134.2
                                                          ======             =====           ======            ======
Earnings Per Share of Common Stock                        $  .15            $ .56            $ 1.35            $ 1.56
                                                          ======            =====            ======            ======
Earnings Per Share of Common Stock
    Excluding Unusual Item                                $  .45            $ .56            $ 1.65            $ 1.56
                                                          ======            =====            ======            ======
</TABLE>



<PAGE>


EXPLORATION AND PRODUCTION

         The  Company  is engaged in the  exploration  for and the  acquisition,
development  and  production of oil and natural gas in the United States through
Sonat  Exploration  Company.  In 1996,  Sonat  Exploration  broadened its growth
strategy by increasing  its focus on  exploration  and  development  drilling as
opposed to primarily property  acquisitions and exploitation  drilling.  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 is continuing an aggressive  exploration  program that is
highlighted  by its activity in the Cotton  Valley  Pinnacle  Reef trend in east
Texas,  where  it  operates  six of the 17 rigs  drilling  in the  trend.  Sonat
Exploration  recently  began  producing  the Laura Lee No. 1,  Blazek  No. 5 and
Fountain No. 2 wells at a combined gross initial  production  rate of 74 million
cubic feet per day (MMcf/D). The Morris Lazy K No. 1 well is being completed and
well results will be available  during the fourth quarter.  Two additional wells
are expected to be completed during the fourth quarter.

         The Austin Chalk trend of east Texas and west  Louisiana is also a very
active drilling area for the Company.  During the third quarter, nine wells were
completed in this trend, of which all are commercial.  The primary concentration
for the Company is in the Hurricane Branch area of the trend.

         Overall,  during  the  first  nine  months of 1997,  Sonat  Exploration
participated in the completion of 348 gross development wells, of which 322 were
successful,  and 11  exploratory  wells,  five  of  which  were  successful.  At
September  30, 1997,  total  proved  reserves  were 2.1  trillion  cubic feet of
natural gas equivalent.



<PAGE>


EXPLORATION AND PRODUCTION OPERATIONS
<TABLE>
<CAPTION>

                                                                   Three Months                        Nine Months
                                                                Ended September 30,                Ended September 30,
                                                                -------------------                -------------------
                                                           1997             1996              1997              1996
                                                           ----             ----              ----              ----
                                                                                 (In Millions)
Revenues:
<S>                                                       <C>               <C>              <C>               <C>   
    Sales to others                                       $ 40.5            $ 43.3           $116.5            $100.4
    Intersegment sales                                      89.9              97.6            279.8             291.2
                                                          ------            ------           ------            ------
       Total Revenues                                      130.4             140.9            396.3             391.6
                                                          ------            ------           ------            ------

Costs and Expenses:
    Operating and maintenance                               18.2              15.9             51.3              46.4
    Exploration expense                                     10.3               7.0             24.1              15.6
    General and administrative                              12.0              13.1             38.0              39.1
    Depreciation, depletion and
       amortization                                         97.2              61.5            202.9             175.6
    Taxes and other                                          5.3               5.2             18.3              17.7
                                                          ------            ------           ------            ------
                                                           143.0             102.7            334.6             294.4
                                                          ------            ------           ------            ------
Operating Income (Loss) as Reported                        (12.6)             38.2             61.7              97.2
Impairment of Oil and Gas Properties                        39.0               -               39.0               -
                                                          ------            ------           ------            ------
Operating Income Excluding
    Unusual Item                                          $ 26.4            $ 38.2           $100.7            $ 97.2
                                                          ======            ======           ======            ======


Net Sales Volumes:
    Gas (Bcf)                                                 51                54              148               152
    Oil and condensate (MBbls)                             1,144             1,366            3,108             3,748
    Natural gas liquids (MBbls)                              489               643            1,254             1,579
---------------------------------------------------------------------------------------------------------------------

Average Sales Prices:
    Gas ($/Mcf)                                           $ 2.01            $ 2.09           $ 2.13            $ 2.07
    Oil and condensate ($/Bbl)                             19.39             19.09            20.48             18.99
    Natural gas liquids ($/Bbl)                            10.93             11.10            11.93             10.77
---------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>


Third Quarter 1997 to Third Quarter 1996 Analysis

         Operating   income   decreased  $11.8  million,   after  excluding  the
recognition  of a $39.0 million charge for the impairment of certain oil and gas
properties in September 1997 (see Note 6 of the Notes to Condensed  Consolidated
Financial  Statements).   The  decrease  in  operating  income  is  attributable
primarily to lower natural gas and oil  production and lower natural gas prices.
These  unfavorable  items  were  partially  offset  by  $5.5  million  of  costs
associated  with the  settlement  of the Briggs  et.  al. v.  Sonat  Exploration
litigation  incurred  in the  third  quarter  of 1996.  Natural  gas  production
declined  to 51 billion  cubic  feet  (Bcf) from 54 Bcf in the third  quarter of
1996, a decrease of 6 percent,  and oil and  condensate  production  declined 16
percent.  The drop in production  primarily reflects declines in certain Gulf of
Mexico  properties (see impairment  discussion).  Average  realized  natural gas
prices for the third  quarter of 1997 were $2.01 per  thousand  cubic feet (Mcf)
compared with $2.09 per Mcf in the third quarter of 1996, a 4 percent decrease.

         Excluding  depreciation,  depletion and amortization expense, costs and
expenses were slightly higher in the 1997 period.  Exploration expense increased
$3.3  million  as a result of  increased  exploration  activity.  Operating  and
maintenance  expense  increased  $2.3  million as a result of a higher  level of
drilling  activity.  General  and  administrative  expenses  were lower due to a
decrease in employee related  expenses.  Excluding the $39.0 million  impairment
provision in 1997, depreciation, depletion and amortization expense decreased by
$3.3 million due to lower production volumes.

Nine Months 1997 to Nine Months 1996 Analysis

         Operating  income  increased  $3.5 million  after  excluding  the $39.0
million  provision  for the  impairment  of oil and gas  properties in the third
quarter of 1997 which was discussed  earlier.  The increase was primarily due to
higher natural gas and oil and  condensate  prices.  Additionally,  1996 results
include $12.0 million of costs  associated with the settlement of the Briggs et.
al. v.  Sonat  Exploration  litigation.  Average  realized  natural  gas  prices
increased  to $2.13 per Mcf  compared  with  $2.07 per Mcf in 1996,  a 3 percent
increase.  Realized  oil prices  increased 8 percent to an average of $20.48 per
barrel  in 1997  from  $18.99  per  barrel  in 1996.  Lower  oil and  condensate
production, which decreased 17 percent to 3.1 million barrels for the first nine
months of 1997, and lower natural gas production partly offset the higher prices
realized for oil and natural gas.

         Excluding  depreciation,  depletion and amortization expense, costs and
expenses  were higher for the first nine months of 1997 when  compared  with the
first nine  months of 1996.  Exploration  expense  increased  $8.5  million as a
result of increased  exploration  activity.  Operating and  maintenance  expense
increased  $4.9  million  due to a higher  level  of  drilling  activity.  After
excluding the impairment  provision,  depreciation,  depletion and  amortization
expense decreased $11.7 million as a result of a lower amortization rate as well
as lower production volumes.

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 changes in revenue
recognized  on the sale of the  commodity.  Natural gas revenues were reduced by
$19.7 million and $21.0 million and oil revenues were reduced by $.5 million and
$8.0 million in the 1997 and 1996 nine-month periods, respectively,  relating to
hedging activities.
<PAGE>

         A portion of Sonat  Exploration's  future  production  is  hedged.  Gas
production  for the  remainder of 1997 through 2000 in the  aggregate  amount of
175.5 TBtus is hedged at a weighted  average  price of $2.05 per MMBtu.  Of this
amount, 18.8 TBtu at a weighted average price of $2.11 relates to remaining 1997
production.  Oil production of approximately  275 thousand barrels is hedged for
the remainder of 1997 at a weighted average price of $20.27 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).

         In connection with Southern's Destin Pipeline project,  the FERC issued
its Draft  Environmental  Impact Statement in July 1997. The pipeline,  which is
still subject to final FERC approval,  is expected to be partially completed and
in service in mid-1998.

         In April 1997 the FERC issued an order that permitted Southern to begin
construction  on a project  with an  estimated  capital cost of $36 million that
would add 46  million  cubic  feet per day of firm  capacity  for  customers  in
Georgia and  Tennessee.  Construction  began in late June,  and this project was
placed in service  on  November  1, 1997.  Southern  is also  moving  forward on
expansions  to eastern  Tennessee  and northern  Alabama that have a total filed
capital cost of $105 million.  The North Alabama expansion,  which received FERC
approval in May 1997, is now  anticipated  to go in service in the fall of 1999,
subject to FERC approval of an  application  to change the route of the pipeline
as it crosses the Tennessee River.  The East Tennessee  expansion is anticipated
to go in service in November  1998,  subject to FERC approval of an  application
that Southern filed in May 1997.

         In October 1997 AGL Resources  Inc. and Southern  entered into a letter
of intent to jointly  construct,  own and  operate a new  liquefied  natural gas
peaking facility, Etowah LNG, in Polk County, Ga. Under the agreement,  which is
subject to the  execution of  definitive  documents,  AGL Resources and Southern
each will own 50 percent of Etowah LNG, which will be regulated by the FERC. The
proposed plant will connect directly into AGL Resources'  principal  natural gas
distribution  subsidiary,  Atlanta Gas Light Company,  and Southern's  pipeline.
Etowah LNG will provide natural gas storage and peaking  services to Atlanta Gas
Light and other Southeastern customers. The new facility will cost approximately
$90 million,  with 3 billion cubic feet of natural gas storage  capacity and 450
million cubic feet per day of vaporization capacity. Affiliates of AGL Resources
will manage the  construction  of the  facility  and operate it.  Southern  will
provide  administrative  services. The companies plan to hold an open season for
Etowah LNG  subscriptions for peaking services in December 1997 and January 1998
and expect to file a certificate application with FERC in March 1998. Subject to
receiving timely FERC approval,  construction  will begin in early 1999 in order
to provide peaking services during the 2001-02 winter heating season.



<PAGE>


SOUTHERN NATURAL GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
                                                                    Three Months                       Nine Months
                                                                Ended September 30,                Ended September 30,
                                                                -------------------                -------------------
                                                           1997             1996              1997              1996
                                                           ----             ----              ----              ----
                                                                                 (In Millions)
Revenues (1):
    Market transportation and
<S>                                                        <C>               <C>             <C>               <C>   
       storage                                             $74.9             $76.9           $232.7            $237.4
    Supply transportation                                   12.8              12.5             35.7              35.8
    Other                                                    5.4               6.3             27.3              23.6
                                                           -----             -----           ------            ------
       Total Revenues                                       93.1              95.7            295.7             296.8
                                                           -----             -----           ------            ------

Costs and Expenses (1):
    Operating and maintenance                               20.4              24.6             60.2              66.9
    General and administrative                              15.8              18.9             52.9              58.9
    Depreciation and amortization                           12.0              11.3             35.6              36.1
    Taxes, other than income                                 5.0               4.7             15.0              14.0
                                                           -----             -----           ------            ------
                                                            53.2              59.5            163.7             175.9
                                                           -----             -----           ------            ------
       Operating Income                                    $39.9             $36.2           $132.0            $120.9
                                                           =====             =====           ======            ======

Equity in Earnings of
    Unconsolidated Affiliates                              $ 2.7             $ 2.3           $  8.1            $  7.2
                                                           =====             =====           ======            ======

                                                                             (Billion Cubic Feet)
Volumes:
    Market transportation (2)                                133               135              439               489
    Supply transportation                                    109                77              289               242
                                                            ----              ----             ----              ----
       Total Volumes                                         242               212              728               731
                                                            ====              ====             ====              ====

CITRUS CORP.
                                                                                 (In Millions)
Allocated Expenses Included
    in Operating Income                                     $ .2              $ -             $  .3             $  .2
                                                            ====              ====            =====             =====

Equity in Earnings of
    Citrus Corp.                                            $5.6              $6.1            $18.4             $16.8
                                                            ====              ====            =====             =====

                                                                             (Billion Cubic Feet)
Florida Gas Volumes (100%):
    Market transportation                                    124               126              347               331
    Supply transportation                                      5                 6               18                22
                                                            ----              ----            -----              ----
       Total Volumes                                         129               132              365               353
                                                            ====              ====            =====              ====
</TABLE>

Notes:

(1)      The 1996 periods have been restated to reflect the  reclassification of
         natural gas sales,  natural gas cost and  transition  cost  recovery to
         other revenues.

(2)      Volumes for Southern  for 1996 include 9 billion  cubic feet of gas for
         the  three-month  period  and 28  billion  cubic  feet  of gas  for the
         nine-month period associated with a small intrastate  pipeline that was
         transferred to Sonat on January 1, 1997, and are therefore not included
         in Southern's 1997 volumes.
<PAGE>

Third Quarter 1997 to Third Quarter 1996 Analysis

         Southern  Natural Gas Company and  Subsidiaries - Operating  income for
Southern was $39.9 million  compared with $36.2 million in the  comparable  1996
period.  The improvement  was primarily due to the impact of recent  expansions,
lower operating expenses and improved results at Sea Robin Pipeline Company.

         Market  transportation  revenues decreased due primarily to a reduction
in  interruptible  volumes and the transfer of  Southern's  ownership of a small
intrastate  pipeline to Sonat, which was immaterial to operating results,  and a
favorable imbalance resolution in the 1996 period, partially offset by increased
revenue  from  expansions.  Supply  revenues  increased  due to higher  volumes.
Operating and  maintenance  expense  decreased  primarily due to cost  reduction
initiatives.  General and  administrative  expenses  decreased  primarily due to
lower  employee  benefit  expenses.  Sea Robin's  improved  results  were due to
increased throughput and lower operating and maintenance expense.

         Citrus - Equity in  earnings  of Citrus  declined  $.5  million to $5.6
million.  The  decline  was  primarily  due to lower  trading  margins at Citrus
Trading,  partly offset by higher rates at Florida Gas in  conjunction  with its
rate filing effective in March 1997.

Nine Months 1997 to Nine Months 1996 Analysis

         Southern  Natural Gas Company and  Subsidiaries - Operating  income for
Southern  was $132.0  million  for the nine months  ended  September  30,  1997,
compared with $120.9  million for the nine months ended  September 30, 1996. The
improvement was due to the impact of recent expansions, lower operating expenses
and improved results at Sea Robin Pipeline Company.

         Market transportation revenues decreased due to lower volumes resulting
primarily  from warmer  weather and the  transfer of  Southern's  ownership of a
small intrastate  pipeline to Sonat,  which was immaterial to operating results,
partially  offset by increased  revenue from expansions.  Supply  transportation
revenues were flat as increased  volumes offset the effect of lower rates at Sea
Robin.  Operating  and  maintenance  expense  decreased  primarily  due to  cost
reduction initiatives.  General and administrative  expenses decreased primarily
due to lower stock-based compensation and employee benefit expenses. Sea Robin's
improved results were primarily due to lower operating and maintenance expense.

         Citrus - Equity in earnings of Citrus  increased  $1.6 million to $18.4
million.  The increase was attributable to higher rates at Florida Gas mentioned
above, higher  interruptible  transportation  volumes and lower financing costs,
partly offset by lower trading margins at Citrus Trading.



<PAGE>


Natural Gas Sales and Supply

         As a result of FERC Order No. 636, 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 of
the remaining supply contracts,  Southern is selling a portion of its gas supply
to a number of its firm transportation  customers under contracts that expire on
November 30, 1997,  following which Southern's  remaining gas supply will either
be used by Southern or sold on a  month-to-month  basis.  Gas sales  revenue and
natural gas cost are included in other revenue.

         Southern currently is incurring no take-or-pay liabilities under any of
these contracts.  Southern is a party to two market-priced  contracts with Exxon
Corporation  entered into in 1995 as part of a settlement  of certain  other gas
purchase contracts.  These contracts,  which terminate in November 1997, account
for 80  percent  of  Southern's  estimated  purchase  commitments  in the fourth
quarter of 1997, which total $40 million. Annual purchase commitments total less
than  $25  million  for  each  subsequent  year.  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.

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. As a contesting party under the settlement, that party
has also  challenged at FERC the  collection by Southern of  approximately  $6.3
million  in GSR costs  allocable  to it under  Order  No.  636.  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  natural gas business has continued to grow rapidly.
Sonat  Marketing's  average  daily sales  volumes  increased 29 percent from the
third  quarter of 1996.  This growth was achieved in large part by the Company's
continuing  focus on its  strategy of working  closely  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.  Additionally,  in June 1997,  Sonat Marketing also began engaging in
derivative transactions that are not directly linked to physical transactions to
meet the needs of 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.  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 3.3
million  megawatt  hours in the third quarter of 1997 from 1.0 million  megawatt
hours in the third quarter of 1996.

ENERGY MARKETING OPERATIONS

<TABLE>
<CAPTION>
                                                                    Three Months                       Nine Months
                                                                Ended September 30,                Ended September 30,
                                                                -------------------                -------------------
                                                           1997             1996              1997              1996
                                                           ----             ----              ----              ----
                                                                                 (In Millions)

<S>                                                       <C>               <C>              <C>             <C>     
Revenues                                                  $912.7            $636.1           $2,568.2        $1,759.2
                                                          ======            ======           ========        ========

Operating Income (Loss)                                   $   .9            $ (0.7)          $    2.0        $   11.6
                                                          ======            ======           ========        ========

                                                                             (Billion Cubic Feet)
Sonat Marketing Gas Sales
    Volumes (100%)                                           339               262                942             685
                                                          ======            ======           ========        ========

                                                                         (Thousands of Megawatt Hours)
Sonat Power Marketing Sales
    Volumes (100%)                                         3,344             1,035              6,662           1,684
                                                          ======            ======           ========        ========
</TABLE>


Third Quarter 1997 to Third Quarter 1996 Analysis

         Revenues and  operating  income  increased  by $276.6  million and $1.6
million,  respectively. The increase in revenues is due to higher sales volumes.
Operating costs for the energy marketing  segment have increased due to business
growth.

Nine Months 1997 to Nine Months 1996 Analysis

         Revenues  increased for the  nine-month  period due to higher  volumes.
Operating  income for the energy  marketing  segment for the nine  months  ended
September 30, 1997,  declined $9.6 million  compared to the same period in 1996.
Although sales volumes increased, unit trading margins were lower. Additionally,
in the nine months ended  September 30, 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 nine months  ended  September  30,  1997.  Operating  costs for the
energy marketing segment increased due to business growth.


<PAGE>

Other Income Statement Items
<TABLE>
<CAPTION>

                                                                    Three Months                       Nine Months
                                                                Ended September 30,                Ended September 30,
                                                                -------------------                -------------------
                                                           1997             1996              1997              1996
                                                           ----             ----              ----              ----
                                                                                 (In Millions)

Other Income (Expense), Net:
    Equity in earnings of
<S>                                                        <C>               <C>              <C>               <C>  
       unconsolidated affiliates                           $ 8.8             $ 8.9            $28.4             $25.3
    Minority interest                                       (0.4)             (0.1)            (1.2)             (5.2)
    Other                                                    1.1               4.7              5.7               6.6
                                                           -----             -----            -----             -----
                                                           $ 9.5             $13.5            $32.9             $26.7
                                                           =====             =====            =====             =====
</TABLE>

         Equity  in  earnings  of  unconsolidated  affiliates  was  flat  in the
three-month  period.  The increase in the nine-month  period primarily  reflects
improved  results at Citrus  (discussed  earlier in the Natural Gas Transmission
section).  Minority  interest is 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).  Other in both of the 1996  periods
includes a $3.9 million net gain on the partial  termination of an interest rate
swap,  while the  nine-month  period of 1997 includes a $2.4 million net gain on
the  termination  of the remainder of the interest  rate swap. In addition,  the
nine-month  period of 1997  reflects  higher  levels of  equity  capitalized  at
Southern in its  construction  programs in the early part of the year, while the
same period of 1996 includes gains on the sale of oil and gas properties.

<TABLE>
<S>                                                        <C>               <C>              <C>               <C>  
Interest Expense, Net                                      $21.3             $19.7            $62.8             $62.8
</TABLE>

         Net  interest  expense  increased  in the  three-month  period  of 1997
compared to the  three-month  period of 1996 due to higher  average debt levels.
Net interest expense was flat for the nine-month  period of 1997 compared to the
nine-month  period of 1996 because the impact of higher  average debt levels was
offset by lower average reserve balances. Interest capitalized decreased in both
periods primarily due to lower interest  capitalized at Sonat  Exploration.  The
current nine-month period reflects lower GSR related interest income at Southern
due to the 1996 Customer Settlement.

<TABLE>
<S>                                                        <C>               <C>              <C>               <C>  
Income Tax Expense                                         $ 3.7             $20.9            $54.9             $62.3
</TABLE>

         Income tax expense  decreased  in both  periods due to lower  levels of
income before income taxes.  The effective tax rate was lower in the three-month
period because tax  preference  items had a greater impact at the lower level of
income before income taxes.
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows
<TABLE>
<CAPTION>
                                                                                                       Nine Months
                                                                                                   Ended September 30,
                                                                                              1997              1996
                                                                                                    (In Millions)

<S>                                                                                         <C>               <C>    
Operating Activities                                                                        $ 423.5           $ 425.0
</TABLE>

         Cash flow from  operations  was  essentially  flat compared to the 1996
period.  An increase in cash flows at Sonat  Exploration  and  Southern,  driven
primarily by improved operating results for the nine-month period, was offset by
the  unfavorable   impact  of  energy  prices  on  working  capital  for  Energy
Marketing's operations.

         The  1996  period  included  $34.0  million  of  cash  refunds  paid to
customers  at  Southern.  Other  than  those  refunds,  the change in gas supply
realignment  costs was attributable to the recording of the Customer  Settlement
in the second quarter of 1996. The change in reserves for regulatory matters and
other is primarily due to the Customer  Settlement  accounting.  Deferred income
taxes and accrued income taxes reflect the impact of higher intangible  drilling
costs at Sonat  Exploration in the current  period and the Customer  Settlement.
The unusual  entry to record an asset  impairment  at Sonat  Exploration  in the
current  period  had the  effect  of  increasing  depreciation,  depletion,  and
amortization  by $39.0  million and  decreasing  deferred  income taxes by $13.7
million.  The change in accounts  receivable  and accounts  payable is primarily
attributable  to high  receivable  and payable  balances in December 1996 due to
higher natural gas prices. The change in other current assets and liabilities is
primarily due to the change in the level of broker deposits at Energy Marketing.

<TABLE>
<S>                                                                                         <C>               <C>     
Investing Activities                                                                        $(565.3)          $(403.1)
</TABLE>

         Net cash used in investing activities was $162.2 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.  The increase in advances to  unconsolidated  affiliates  primarily
reflects  Southern's  investments of $17.2 million in the Destin  Pipeline joint
venture.



<PAGE>

<TABLE>
<CAPTION>

                                                                                                       Nine Months
                                                                                                   Ended September 30,
                                                                                              1997              1996
                                                                                                    (In Millions)

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

<S>                                                                                          <C>               <C>   
         Exploration and Production                                                          $425.7            $298.1
         Natural Gas Transmission                                                             100.5              94.9
         Energy Marketing                                                                       8.3               3.3
         Other                                                                                  2.7               3.2
                                                                                             ------            ------

         Total                                                                               $537.2            $399.5
                                                                                             ======            ======
</TABLE>

     The  Company's  share  of  capital   expenditures  by  its   unconsolidated
affiliates  was $16.7  million and $8.9 million in the first nine months of 1997
and 1996, respectively.

<TABLE>
<S>                                                                                          <C>              <C>     
Financing Activities                                                                         $208.7           $ (39.2)
</TABLE>

         Financing  activities  provided  $208.7  million  in 1997  compared  to
requiring  $39.2  million  in 1996.  The change was  primarily  attributable  to
increased borrowings, which helped finance higher capital expenditures,  and the
Company's stock  repurchase  program in the current  period.  In September 1997,
Sonat and Southern  each issued $100.0  million  under their shelf  registration
statements.  The proceeds  were used to repay  amounts  borrowed  under  Sonat's
commercial paper program and under its revolving credit agreement.

CAPITAL RESOURCES

         At September 30, 1997,  the Company had lines of credit and a revolving
credit  agreement  with a total  capacity  of $750.0  million.  Of this,  $265.3
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.  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 $234.7 million of commercial
paper then outstanding, plus the $250.0 million then outstanding in bank loans.

         Sonat  has a  shelf  registration  with  the  Securities  and  Exchange
Commission  (SEC) that  provides  for  issuance of up to $500.0  million in debt
securities of which $300.0 million has been issued.

         The Company has essentially  completed purchasing stock under its stock
repurchase  program for 1997.  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  will provide the
Company with the means to fund operations and currently  planned  investment and
capital expenditures.
<PAGE>

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
futures  contracts,  options,  and  price  swap  agreements  to  hedge  physical
positions.  In June 1997,  Sonat  Marketing  also began  engaging in  derivative
trading,  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  derivative
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.)

FORWARD LOOKING STATEMENTS

         This report on Form 10-Q contains  certain  forward-looking  statements
regarding the Company's future plans, objectives,  and expected performance that
are based on assumptions the Company  believes are reasonable,  but a variety of
factors  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  changes  in oil and gas  prices  and the timing and
success  of  the  Company's   exploratory  and  development   drilling  programs
(including  its drilling  programs in the Cotton Valley  Pinnacle Reef trend and
the Austin  Chalk  trend).  There can be no  assurance  that the actual level of
production from existing wells and the wells to be drilled in such programs will
equal expected volumes.

         The Company's  expectations  for success in the Cotton Valley  Pinnacle
Reef trend is based in part on seismic  surveys.  Much of the available  data is
based on 2-D seismic  surveys.  While 2-D seismic data is helpful in identifying
geological  anomalies  which may  become  reef  prospects,  there is no basis to
predict how many  anomalies  identified by 2-D seismic data will be confirmed as
reef  prospects  by 3-D seismic  surveys.  The Company  plans to drill only reef
prospects  based on 3-D seismic  surveys.  Furthermore,  3-D seismic data 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,  there can be no  assurance  that the  Company's  pipeline
projects will receive timely regulatory  approvals and be constructed and placed
into service on schedule.



<PAGE>



                           PART II. OTHER INFORMATION



Item 6.  Exhibits and Reports on Form 8-K


(a)      Exhibits1

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 September 30, 1997
-------------
*   Filed herewith

(b)      Reports on Form 8-K

         The Company filed a report on Form 8-K on September 29, 1997, reporting
certain  information  under Item 5, with respect to the issuance and sale by the
Company  of  $100,000,000  aggregate  principal  amount of its  6.75%  Notes due
October 1, 2007, and furnishing certain related exhibits under Item 6.




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:      November 10, 1997                By:      /s/ James E. Moylan, Jr.
       --------------------------                  --------------------------
                                                   James E. Moylan, Jr.
                                                   Senior Vice President and
                                                   Chief Financial Officer





Date:      November 10, 1997                By:      /s/ Thomas W. Barker, Jr.
       --------------------------                  ---------------------------
                                                   Thomas W. Barker, Jr.
                                                   Vice President-Finance