1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 Form 8-K Current Report Pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 Date of earliest event reported: July 23, 1998 SONAT INC. (Exact name of registrant as specified in its charter) Delaware 1-7179 63-0647939 (State of (Commission (IRS Employer ncorporation) File Number) Identification No.) AmSouth Sonat Tower Birmingham, Alabama 35203 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: 205-325-3800

2 Item 5. Other events. On July 23, 1998, Sonat Inc. (the "Company") announced its results of operations for the second quarter of 1998 and that it has completed the restructuring of its wholly owned subsidiary, Sonat Exploration Company ("Sonat Exploration"), that was announced in April. A copy of the press release, including second quarter results, is filed as an exhibit to this report. In addition to the steps previously announced in connection with the restructuring of Sonat Exploration, which include the sale of oil and gas properties having proved reserves of approximately 500 billion cubic feet of natural gas equivalent ("Bcfe"), the consolidation of business units from seven to three, and a substantial work force reduction, Sonat Exploration reviewed all of its oil and natural gas reserves during the quarter. Based on that review, Sonat Exploration has revised downward proved reserves by a net 199 Bcfe from year end 1997 proved reserves and has impaired additional properties, principally in the Cotton Valley Pinnacle Reef trend. The effect of the further impairments is substantially offset by the better than expected results now anticipated from the property sales. Therefore, the after-tax restructuring charge estimated previously as being up to $275 million is $289 million, which was booked in the second quarter. As a result of the restructuring, after giving effect to the sale of oil and gas properties, Sonat Exploration's proved reserves, as of June 30, 1998, are approximately 1.7 trillion cubic feet of natural gas equivalent. Going forward, Sonat Exploration expects its total unit costs, other than interest, to be $1.59 per thousand cubic feet of natural gas equivalent, down sharply from $1.89 in first quarter of 1998. Sonat Exploration's total 1998 production, not including volumes from the properties being sold after the effective sales dates, is now expected to be 258 Bcfe. Cautionary Statement Concerning Forward-Looking Statements This report includes certain forward-looking statements, which 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 management's forward-looking statements. Such statements are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company believes that actual sales proceeds from its property divestiture program will equal or exceed current estimates. Such estimates are based on signed purchase and sale agreements for the Austin Chalk and Arkoma Basin properties and offers for certain of the remaining properties. Final sales proceeds will be determined, however, only as such sales are closed. -1-

3 Estimates of future production of oil and gas depend on a number of assumptions, including the timing and success of the Company's drilling programs, performance of wells, expected levels of capital spending and oil and natural gas prices. In addition, estimates of future unit costs of production depend on assumptions of production levels and expected future costs. Because of these and other variables, there can be no assurances that the actual level of production will equal projected volumes or that the actual future unit costs of production will equal the current estimate. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits (c) Exhibits The following documents are filed herewith as exhibits to this Current Report: Exhibit No. Exhibit 99 Press Release dated July 23, 1998 -2-

4 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 hereunto duly authorized. Sonat Inc. By: /s/ James E. Moylan, Jr. James E. Moylan, Jr. Senior Vice President and Chief Financial Officer Dated: July 23, 1998 -3-

5 SONAT INC. CURRENT REPORT ON FORM 8-K INDEX TO EXHIBITS Exhibit No. Exhibit 99* Press Release dated July 23, 1998 ----------------- * Filed herewith



1 EXHIBIT 99 Bruce L. Connery FOR RELEASE: July 23, 1998 205 325 3898 Thomas W. Barker, Jr. 205 325 3586 SONAT ANNOUNCES COMPLETION OF SONAT EXPLORATION RESTRUCTURING, SECOND QUARTER RESULTS AND DECLARATION OF DIVIDEND BIRMINGHAM, Ala. -- Ronald L. Kuehn, Jr., chairman, president and chief executive officer of Sonat Inc. (NYSE: SNT), today said that the company has completed the restructuring of its wholly owned Sonat Exploration Company that was announced in April. In addition to the steps previously announced, which include the sale of oil and natural gas properties having proved reserves of approximately 500 billion cubic feet of natural gas equivalent (Bcfe), the consolidation of business units from seven to three, and a substantial work force reduction, the company reviewed all of its oil and natural gas reserves during the quarter. Based on that review, Sonat Exploration has revised downward proved reserves by a net 199 Bcfe from year-end 1997 proved reserves and has impaired additional properties. A substantial portion of the additional impairment is in the Cotton Valley Pinnacle Reef trend following an unsuccessful exploratory well in the Opelika region of the play in June and poor well performance of recently completed wells in the Bear Grass area of the trend. The effect of the further impairments is substantially offset by the favorable results now expected from the property sales effort. Therefore, the after-tax restructuring charge estimated previously as being up to $275 million is $289 million, which was booked in the second quarter. As a result of the restructuring and giving effect to the sale of oil and gas properties, Sonat Exploration's proved reserves as of June 30, 1998, are approximately 1.7 trillion cubic feet of natural gas equivalent. The property sales are expected to be completed during the third quarter. Going forward, Sonat expects its total unit costs, other than interest, to be $1.59 per thousand cubic feet of natural gas equivalent, down sharply from $1.89 in the first quarter of 1998. Sonat Exploration's total 1998 production, not including volumes from the properties being sold after the effective sales dates, is now expected to be 258 Bcfe. Commenting on the restructuring, Kuehn said, "While the restructuring process has been very difficult, we are glad to have it completed and behind us. The restructuring improves Sonat Exploration's profitability significantly. But most important, it allows us to focus on our excellent offshore and onshore opportunities." Second Quarter and Year-to-Date Financial Results For the three months ended June 30, 1998, Sonat lost $258 million, or $2.32 per diluted share. After eliminating the effect of the previously described restructuring charge, the company earned $31 million, or $.28 per diluted share, compared with $17 million, or $.15 per diluted share, for the same 1997 period. The improvement in normalized earnings is primarily due to lower expenses at Sonat Exploration. For the first six months of 1998, the company's earnings were $69 million, or $.62 per diluted share, after eliminating the second quarter charge. This compares with $87 million, or $.77 per diluted share, for the first six months of 1997. Exploration and Production Results and Operations Sonat Exploration's earnings before interest and taxes (EBIT) for the second quarter of 1998 were $10 million, after eliminating the effect of the $445 million pre-tax second quarter charge. This compares with a loss of $10 million in the same 1997 period. The improvement is primarily due to a lower unit amortization rate and lower general and administrative costs. Total production rose from 73 Bcfe to 74 Bcfe. Second quarter 1998 production includes 14 Bcfe from properties that are being sold that was produced after the expected effective sales dates for those properties. The operating income generated by that production has been reserved and is therefore not reflected in the company's financial results.

2 Realized natural gas prices for the second quarter of 1998 were $2.00 per thousand cubic feet (Mcf) as compared with $1.97 per Mcf last year. Realized oil prices were $13.00 per barrel compared with $19.30 per barrel last year. Natural Gas Transmission Results and Operations EBIT for the natural gas transmission segment was $63 million compared with $55 million in the second quarter of 1997. The improvement is primarily due to higher earnings at Citrus Corp. and equity earnings from the allowance for funds used during the construction of the Destin Pipeline. Southern Natural Gas Company's throughput rose from 236 Bcf to 240 Bcf due to cooler weather in April 1998 as well as volumes from new pipeline expansions. Expansion Update Southern Natural has five expansion projects in various stages of construction or regulatory permitting, the company's share of which totals $294 million. During the second quarter, the Federal Energy Regulatory Commission approved a $52 million project that will supply 65 million cubic feet per day of firm capacity to customers in east Tennessee, northeast Alabama and northwest Georgia as well as an extension of the Destin Pipeline that will connect gas supplies being developed offshore Louisiana by CNG Producing Company and other producers. Both of these projects are scheduled for completion in late 1998. Energy Services Results and Operations Financial results for the energy services segment improved from 1997 levels, as second quarter EBIT rose to $1.6 million from a loss of $.2 million in the second quarter of 1997. The improvement reflects higher volumes, better margins and the contribution of the Mid-Georgia Cogen plant, which began operations on June 1. Sonat Marketing Company's second quarter physical sales volumes were slightly below 1997 levels. Notional sales volumes from natural gas derivative transactions almost doubled, reflecting Sonat Marketing's expanding its financial transactions on behalf of customers and increasing reliance on financial transactions to manage basis positions. Sonat Power Marketing's second quarter volumes rose 42 percent from a year ago. Trading margins were also improved due to opportunities created by very volatile electric power prices during the second quarter. As previously mentioned, the Mid-Georgia Cogen plant, a 300-megawatt combined-cycle, natural gas-fueled peaking unit that is jointly owned by Sonat Energy Services Company and GPU International, Inc. began operations in June. Operating results were better than expected due to very hot weather in the Southeast, which caused this facility to operate almost every day. Sonat Energy Services is pursuing additional power plant opportunities. Dividend Approved Kuehn also announced that a regular quarterly dividend of $.27 per share was declared for Sonat's common stock. The dividend, payable on September 14, 1998, to stockholders of record on August 31, 1998, is the 238th consecutive quarterly dividend paid on the company's common stock. Sonat Inc., headquartered in Birmingham, is a diversified energy company engaged in exploration and production of oil and natural gas, interstate transmission of natural gas, and energy services.

3 Cautionary Statement Concerning Forward-Looking Statements This press release includes certain forward-looking statements, which 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 management's forward-looking statements. Such statements are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company believes that actual sales proceeds from its property divestiture program will equal or exceed current estimates. Final sales proceeds will be determined, however, only as such sales are closed. Estimates of future production of oil and natural gas depend on a number of assumptions, including the timing and success of the company's drilling programs, performance of wells, expected levels of capital spending, and oil and natural gas prices. In addition, estimates of future unit costs of production depend on assumptions of production levels and expected future costs. Because of these and other variables, there can be no assurance that the actual level of production will equal projected volumes or that the actual future unit costs of production will equal the current estimate. Additional factors that may affect the company can be found under the caption "Cautionary Statement Concerning Forward-Looking Statements" in the company's 1997 Annual Report on Form 10-K and its Quarterly Report on Form 10-Q for the first quarter of 1998. These reports, which are filed with the Securities and Exchange Commission, are hereby referenced in their entirety for further information about the company, its operations and its financial statements. # # # 98-26

4 SONAT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) <TABLE> <CAPTION> 3 Months 6 Months ---------------------- ---------------------- Periods Ended June 30, 1998 1997 (1) 1998 1997 (1) --------------------------------------------------------------------------------------------------------------------------- (In Thousands, Except Per-Share Amounts) <S> <C> <C> <C> <C> Revenues $ 925,222 $856,130 $2,034,407 $1,979,795 Costs and Expenses 1,311,931 818,907 2,346,159 1,831,539 ---------- -------- ---------- ---------- Operating Income (Loss) (386,709) 37,223 (311,752) 148,256 Other Income 17,690 10,858 27,513 26,275 ---------- -------- ---------- ---------- Earnings (Loss) Before Interest and Taxes (369,019) 48,081 (284,239) 174,531 Interest Expense, Net (32,281) (23,681) (60,787) (45,309) ---------- -------- ---------- ---------- Income (Loss) Before Income Taxes (401,300) 24,400 (345,026) 129,222 Income Tax Expense (Benefit) (143,322) 7,549 (125,061) 42,504 ---------- -------- ---------- ---------- Net Income (Loss) (2) $ (257,978) $ 16,851 $ (219,965) $ 86,718 ========== ======== ========== ========== Earnings (Loss) Per Share of Common Stock $ (2.34) $ .15 $ (2.00) $ .79 ========== ======== ========== ========== Earnings (Loss) Per Share of Common Stock-Assuming Dilution $ (2.32) $ .15 $ (1.98) $ .77 ========== ======== ========== ========== Weighted Average Shares Outstanding 110,049 110,185 110,008 110,285 ========== ======== ========== ========== Weighted Average Shares Outstanding-Assuming Dilution 111,057 111,883 111,060 111,915 ========== ======== ========== ========== Cash Dividends Paid Per Common Share $ .27 $ .27 $ .54 $ .54 ========== ======== ========== ========== --------------------------------------------------------------------------------------------------------------------------- </TABLE> (1) The 1997 information has been restated to reflect the Company's merger with Zilkha Energy Company on January 30, 1998, which was accounted for as a pooling of interests. (2) Net income for both 1998 periods includes a charge for restructuring and impairment costs related to the Company's oil and gas operations of $289.1 million, or $2.63 per share ($2.60 per share diluted).

5 SONAT INC. AND SUBSIDIARIES SUPPLEMENTAL DATA (Unaudited) <TABLE> <CAPTION> 3 Months 6 Months --------------------- --------------------- Periods Ended June 30, 1998 1997 1998 1997 -------------------------------------------------------------------------------------------------------------------------- (In Thousands) BUSINESS SEGMENTS Revenues: <S> <C> <C> <C> <C> Exploration and production $ 148,270 $ 151,991 $ 310,173 $ 357,620 Natural gas transmission 95,500 103,382 201,001 202,548 Energy services 800,164 696,425 1,737,219 1,656,204 Other 9,958 12,472 22,334 21,368 Intersegment revenue (128,670) (108,140) (236,320) (257,945) --------- --------- ---------- ---------- $ 925,222 $ 856,130 $2,034,407 $1,979,795 ========= ========= ========== ========== Operating Income (Loss): Exploration and production $(435,442) $ (10,629) $ (422,565) $ 50,189 Natural gas transmission 45,614 45,230 104,894 92,040 Energy services 2,175 (441) 3,324 1,055 Other, net of corporate expenses 944 3,063 2,595 4,972 --------- --------- ---------- ---------- $(386,709) $ 37,223 $ (311,752) $ 148,256 ========= ========= ========== ========== Earnings (Loss) Before Interest and Taxes: Exploration and production $(435,178) $ (10,152) $ (422,141) $ 52,750 Natural gas transmission 63,147 55,052 132,062 115,156 Energy services 1,644 (170) 2,480 754 Other 1,368 3,351 3,360 5,871 --------- --------- ---------- ---------- $(369,019) $ 48,081 $ (284,239) $ 174,531 ========= ========= ========== ========== INTEREST EXPENSE, NET: Interest income $ 1,063 $ 1,013 $ 3,263 $ 2,195 Interest expense (34,792) (26,518) (66,922) (51,371) Interest capitalized 1,448 1,824 2,872 3,867 --------- --------- ---------- ---------- $ (32,281) $ (23,681) $ (60,787) $ (45,309) ========= ========= ========== ========== </TABLE>

6 SONAT INC. AND SUBSIDIARIES OPERATIONAL DATA (Unaudited) Exploration and Production <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales Volumes: <S> <C> <C> <C> <C> Gas (Bcf) 60 62 123 129 Oil and condensate (MBbls) 1,784 1,312 3,734 2,706 Natural gas liquids (MBbls) 591 414 1,175 796 Average Sales Prices: Gas ($/Mcf) $ 2.00 $ 1.97 $ 2.01 $ 2.26 Oil and condensate ($/Bbl) 13.00 19.30 13.92 20.65 Natural gas liquids ($/Bbl) 8.81 8.39 9.27 12.41 --------------------------------------------------------------------------------------------------------------------------- </TABLE> Natural Gas Transmission <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- (Billion Cubic Feet) Southern Volumes: <S> <C> <C> <C> <C> Market transportation 137 136 322 306 Supply transportation 103 100 198 180 ----- ----- ----- ----- Total Volumes 240 236 520 486 ===== ===== ===== ===== Florida Gas Volumes (100%) 118 130 220 235 ===== ===== ===== ===== --------------------------------------------------------------------------------------------------------------------------- </TABLE> Energy Services <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Physical Volumes: Sonat Marketing Sales Volumes (100%) <S> <C> <C> <C> <C> (Billion Cubic Feet) 284 299 644 603 ===== ===== ===== ===== Sonat Power Marketing Sales Volumes (100%) (Thousands of Megawatt Hours) 2,729 1,921 5,899 3,318 ===== ===== ===== ===== Financial Settlements (Notional): (Bcf/d) 7.3 3.0 7.0 3.0 ===== ===== ===== ===== </TABLE>