SONAT INC
DEF 14A, 1996-03-13
NATURAL GAS TRANSMISSION
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<PAGE>   1
 
                            SCHEDULE 14A INFORMATION
 
          PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
                    EXCHANGE ACT OF 1934 (AMENDMENT NO.   )
 
Filed by the Registrant /X/
 
Filed by a Party other than the Registrant / /
 
Check the appropriate box:
 
<TABLE>
<S>                                             <C>
/ /  Preliminary Proxy Statement                / /  Confidential, for Use of the Commission
                                                     Only (as permitted by Rule 14a-6(e)(2))
/X/  Definitive Proxy Statement
/ /  Definitive Additional Materials
/ /  Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
 
                                   SONAT INC.
- --------------------------------------------------------------------------------
                (Name of Registrant as Specified In Its Charter)
 
                                   SONAT INC.
- --------------------------------------------------------------------------------
    (Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
Payment of Filing Fee (Check the appropriate box):
 
/X/  $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
     or Item 22(a)(2) of Schedule 14A.
 
/ /  $500 per each party to the controversy pursuant to Exchange Act Rule
     14a-6(i)(3).
 
/ /  Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
 
     (1)  Title of each class of securities to which transaction applies:
 
          ----------------------------------------------------------------------
     (2)  Aggregate number of securities to which transaction applies:

          ----------------------------------------------------------------------
     (3)  Per unit price or other underlying value of transaction computed
          pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
          filing fee is calculated and state how it was determined):

          ----------------------------------------------------------------------
     (4)  Proposed maximum aggregate value of transaction:
 
          ----------------------------------------------------------------------
     (5)  Total fee paid:
 
          ----------------------------------------------------------------------

/ /  Fee paid previously with preliminary materials.
 
/ /  Check box if any part of the fee is offset as provided by Exchange Act Rule
     0-11(a)(2) and identify the filing for which the offsetting fee was paid
     previously. Identify the previous filing by registration statement number,
     or the Form or Schedule and the date of its filing.
 
     (1)  Amount Previously Paid:
 
          ----------------------------------------------------------------------
     (2)  Form, Schedule or Registration Statement No.:
 
          ----------------------------------------------------------------------
     (3)  Filing Party:
 
          ----------------------------------------------------------------------
     (4)  Date Filed:

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

<PAGE>   2
 
SONAT INC.
P. O. BOX 2563, BIRMINGHAM, ALABAMA 35202              TELEPHONE: (205) 325-3800
 
- --------------------------------------------------------------------------------
 
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 25, 1996
 
To Our Stockholders:
 
     The Annual Meeting of Stockholders of Sonat Inc., a Delaware corporation,
will be held at the AmSouth Upper Lobby Auditorium, AmSouth/Harbert Plaza,
Birmingham, Alabama at 9:00 a.m., local time, on Thursday, April 25, 1996, for
the following purposes:
 
     1. To elect five Directors as members of the Board of Directors of the
        Company, to serve until the 1999 Annual Meeting of Stockholders and
        until their respective successors have been duly elected and qualified.
 
     2. To elect an Auditor of the Company for the ensuing year. The Board of
        Directors of the Company has recommended Ernst & Young LLP, the present
        Auditor, for election as Auditor (Proposal No. 1).
 
     3. To transact such other business as may properly be brought before the
        meeting.
 
     Only holders of Common Stock of record at the close of business on March 8,
1996, will be entitled to vote at the meeting.
 
     The meeting may be adjourned from time to time without other notice than by
announcement at the meeting, or any adjournment thereof, and any and all
business for which the meeting is hereby noticed may be transacted at any such
adjournment.
 
                                          By order of the Board of Directors,
 
                                                          [SIG]
 
                                                   BEVERLEY T. KRANNICH
                                                        Secretary
 
Birmingham, Alabama
March 13, 1996
 
- --------------------------------------------------------------------------------
                             YOUR VOTE IS IMPORTANT
  PLEASE COMPLETE, SIGN AND RETURN YOUR PROXY IN THE ENCLOSED RETURN ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE>   3
 
                                PROXY STATEMENT
 
               FOR ANNUAL MEETING OF STOCKHOLDERS APRIL 25, 1996
 
     This Proxy Statement is furnished in connection with the solicitation of
proxies by Sonat Inc. on behalf of the Board of Directors of the Company, to be
voted at the Annual Meeting of Stockholders, called to be held on Thursday,
April 25, 1996 at 9:00 a.m. at the AmSouth Upper Lobby Auditorium,
AmSouth/Harbert Plaza, Birmingham, Alabama. Mailing of the Proxy Statement and
the accompanying proxy card to the stockholders is expected to commence on or
about March 18, 1996.
 
VOTING SECURITIES
 
     As of January 31, 1996, the Company had outstanding 85,966,323 shares of
Common Stock, par value $1.00 per share, which are its only voting securities.
Holders of Common Stock are entitled to one vote for each share held. The Board
of Directors has fixed March 8, 1996, as the record date for the determination
of stockholders entitled to notice of, and to vote at, the Annual Meeting.
 
THE PROXY
 
     If a proxy is executed properly by a stockholder and is not revoked, it
will be voted at the Annual Meeting in the manner specified on the proxy, or if
no manner is specified, it will be voted "FOR" the election of the five nominees
for Director and "FOR" Proposal No. l. The submission of an executed proxy will
not affect a stockholder's right to attend, and to vote in person at, the Annual
Meeting. A stockholder who executes a proxy may revoke it at any time before it
is voted by filing a written revocation with the Secretary of the Company,
executing a proxy bearing a later date or attending and voting in person at the
Annual Meeting.
 
                 THE BOARD OF DIRECTORS URGES YOU TO SIGN, DATE
         AND RETURN THE ENCLOSED PROXY IN THE ENCLOSED RETURN ENVELOPE.
 
                             ELECTION OF DIRECTORS
 
     The Company's Restated Certificate of Incorporation provides for the
classification of the Board of Directors into three classes (Class I, Class II
and Class III). Five Class I Directors are to be elected at the Annual Meeting
of Stockholders to serve for a three-year term and until the election and
qualification of their respective successors in office.
 
     The five nominees for election as Class I Directors are William O. Bourke,
Roberto C. Goizueta, Ronald L. Kuehn, Jr., Robert J. Lanigan and Charles
Marshall. Each of the nominees has been previously elected as a Director by the
stockholders. In the event that any of the nominees becomes unavailable for any
reason, which is not anticipated, the Board of Directors in its discretion may,
unless it has taken appropriate action to provide for a lesser number of
Directors, designate a substitute nominee, in which event, pursuant to the
accompanying proxy, votes will be cast for such substitute nominee.
 
     THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" WILLIAM O. BOURKE, ROBERTO
C. GOIZUETA, RONALD L. KUEHN, JR., ROBERT J. LANIGAN AND CHARLES MARSHALL AS
CLASS I DIRECTORS.
<PAGE>   4
 
            NOMINEES FOR DIRECTOR -- CLASS I -- TERMS TO EXPIRE 1999
 
<TABLE>
<S>                       <C>
                          WILLIAM O. BOURKE, age 68, is Chairman of the Executive Committee of
- -----------------------   the Board of Directors and a Director of Reynolds Metals Company, an
PHOTO                     aluminum and consumer products company. He has served as a Director
                          of the Company since 1990. Mr. Bourke is also a Director of Merrill
- -----------------------   Lynch & Co., Inc. and Premark International Inc. During the past
                          five years prior to his retirement in April 1992, Mr. Bourke served
                          as an executive officer of Reynolds Metals Company.
- ----------------------------------------------------------------------------------------------
                          ROBERTO C. GOIZUETA, age 64, is Chairman of the Board and Chief
- -----------------------   Executive Officer of The Coca-Cola Company, the principal business
PHOTO                     of which is the manufacture of soft drinks. He has served as a
                          Director of the Company since 1981. Mr. Goizueta is also a Director
- -----------------------   of Eastman Kodak Company, Ford Motor Company, SunTrust Banks, Inc.,
                          SunTrust Banks of Georgia, Inc. and SunTrust Bank, Atlanta and a
                          member of the Board of Trustees of Emory University. During the past
                          five years, Mr. Goizueta has served as an executive officer of The
                          Coca-Cola Company.
- ----------------------------------------------------------------------------------------------
                          RONALD L. KUEHN, JR., age 60, is Chairman of the Board, President
- -----------------------   and Chief Executive Officer of the Company. He has served as a
PHOTO                     Director of the Company since 1981. Mr. Kuehn is also a Director of
                          AmSouth Bancorporation, Praxair, Inc., Protective Life Corporation,
- -----------------------   Sonat Offshore Drilling Inc. and Union Carbide Corporation, and a
                          member of the Board of Trustees of Birmingham-Southern College and
                          Tuskegee University. During the past five years, Mr. Kuehn has
                          served as an executive officer of the Company.
- ----------------------------------------------------------------------------------------------
</TABLE>
 
                                        2
<PAGE>   5
 
<TABLE>
<S>                       <C>
                          ROBERT J. LANIGAN, age 67, is Chairman Emeritus of the Board of
- -----------------------   Directors of Owens-Illinois, Inc., the principal business of which
PHOTO                     is the manufacture and sale of packaging products. He has served as
                          a Director of the Company since 1983. Mr. Lanigan is also a Director
- -----------------------   of Chrysler Corporation,The Coleman Company, Inc., Sonat Offshore
                          Drilling Inc. and The Dun & Bradstreet Corporation. During the past
                          five years prior to his appointment to his current position, Mr.
                          Lanigan served as an executive officer of Owens-Illinois, Inc.
- ----------------------------------------------------------------------------------------------
                          CHARLES MARSHALL, age 66, is the former Vice Chairman of the Board
- -----------------------   of American Telephone and Telegraph Company. He has served as a
PHOTO                     Director of the Company since 1982. Mr. Marshall is also a Director
                          of Ceridian Corporation, GATX Corporation, Hartmarx Corporation and
- -----------------------   Sundstrand Corporation. Prior to his retirement, Mr. Marshall served
                          as an executive officer of American Telephone and Telegraph Company.
- ----------------------------------------------------------------------------------------------
</TABLE>
 
            CONTINUING DIRECTORS -- CLASS II -- TERMS TO EXPIRE 1997
 
<TABLE>
<S>                       <C>
                          JEROME J. RICHARDSON, age 59, is Owner/Founder of the NFL Carolina
- -----------------------   Panthers. He has served as a Director of the Company since 1991. Mr.
PHOTO                     Richardson is also a Director of NCAA Foundation and Comp
                          Containment Inc., a trustee of Wofford College and a Member of the
- -----------------------   Board of Visitors of Duke University Medical Center. During the past
                          five years prior to his retirement in May 1995, Mr. Richardson
                          served as an executive officer of Flagstar Companies, Inc. and
                          Flagstar Corporation.
- ----------------------------------------------------------------------------------------------
</TABLE>
 
                                        3
<PAGE>   6
 
<TABLE>
<S>                       <C>
                          DONALD G. RUSSELL, age 64, is Executive Vice President of the
- -----------------------   Company and Chairman of the Board and Chief Executive Officer of
PHOTO                     Sonat Exploration Company (a wholly-owned subsidiary of the
                          Company). On September 22, 1994, he was elected as a Director by the
- -----------------------   Board of Directors, effective as of September 22, 1994. Mr. Russell
                          is also a Director of Sonat Offshore Drilling Inc. During the past
                          five years, Mr. Russell has served as an executive officer of the
                          Company and Sonat Exploration Company.
- ----------------------------------------------------------------------------------------------
                          ADRIAN M. TOCKLIN, age 44, is President -- Diversified Operations of
- -----------------------   CNA Insurance Companies, the principal business of which is property
PHOTO                     and casualty insurance. On July 28, 1994, she was elected as a
                          Director by the Board of Directors, effective as of September 1,
- -----------------------   1994. She is also Director and Chairman of the Board of First
                          Insurance Company of Hawaii. Ms. Tocklin was President and a
                          Director of The Continental Corporation until its merger with CNA
                          Insurance Companies in May 1995. During the past five years, Ms.
                          Tocklin has served as an executive officer of The Continental
                          Corporation and CNA Insurance Companies.
- ----------------------------------------------------------------------------------------------
                          JAMES B. WILLIAMS, age 62, is Chairman of the Board and Chief
- -----------------------   Executive Officer of SunTrust Banks, Inc. He has served as a
PHOTO                     Director of the Company since 1987. Mr. Williams is also a Director
                          of The Coca-Cola Company, Federal Reserve Bank of Atlanta, Genuine
- -----------------------   Parts Company, Georgia-Pacific Corporation, Rollins, Inc. and RPC,
                          Inc. During the past five years, Mr. Williams has served as an
                          executive officer of SunTrust Banks, Inc. and certain of its
                          subsidiaries.
- ----------------------------------------------------------------------------------------------
</TABLE>
 
                                        4
<PAGE>   7
 
<TABLE>
<S>                       <C>
                          JOE B. WYATT, age 60, is Chancellor, Chief Executive Officer and
- -----------------------   Trustee of Vanderbilt University, a position he has held during the
PHOTO                     past five years. He has served as a Director of the Company since
                          1984. Chancellor Wyatt is also a Director of Advanced Network &
- -----------------------   Services, Inc., Ingram Industries, Inc., Reynolds Metals Company and
                          University Research Association, and a Trustee of EDUCOM, Inc.
- ----------------------------------------------------------------------------------------------
</TABLE>
 
           CONTINUING DIRECTORS -- CLASS III -- TERMS TO EXPIRE 1998
 
<TABLE>
<S>                       <C>
                          JOHN J. CREEDON, age 71, is the former President and Chief Executive
- -----------------------   Officer of Metropolitan Life Insurance Company. He has served as a
PHOTO                     Director of the Company since 1987. Mr. Creedon is also a Director
                          of Metropolitan Life Insurance Company, Praxair, Inc., Rockwell
- -----------------------   International Corporation and Union Carbide Corporation. Prior to
                          his retirement, Mr. Creedon served as Chief Executive Officer and as
                          Chairman of the Executive Committee of the Board of Directors of
                          Metropolitan Life Insurance Company.
- ----------------------------------------------------------------------------------------------
                          MAX L. LUKENS, age 47, is President and Chief Operating Officer of
- -----------------------   Baker Hughes Incorporated, the principal business of which is the
PHOTO                     provision of products and services to the petroleum and continuous
                          process industries. On September 28, 1995, he was elected as a
- -----------------------   Director by the Board of Directors, effective as of November 1,
                          1995. He is also a Director of Baker Hughes Incorporated and Sonat
                          Offshore Drilling Inc. During the past five years, Mr. Lukens has
                          served as an executive officer of Baker Hughes Incorporated.
- ----------------------------------------------------------------------------------------------
</TABLE>
 
                                        5
<PAGE>   8
 
<TABLE>
<S>                       <C>
                          BENJAMIN F. PAYTON, age 63, is President of Tuskegee University, a
- -----------------------   position he has held during the past five years. He has served as a
PHOTO                     Director of the Company since 1992. Dr. Payton is also a Director of
                          AmSouth Bancorporation, ITT Corporation, Liberty Corporation,
- -----------------------   Morrison's, Inc., Praxair, Inc., Ruby Tuesday, Inc. and ITT Sheraton
                          Corporation.
- ----------------------------------------------------------------------------------------------
                          JOHN J. PHELAN, JR., age 64, is the former Chairman of the Board and
- -----------------------   Chief Executive Officer of the New York Stock Exchange. He has
PHOTO                     served as a Director of the Company since 1990. Mr. Phelan is also a
                          Director of Eastman Kodak Company, Merrill Lynch & Co., Inc. and
- -----------------------   Metropolitan Life Insurance Company and a Senior Advisor to The
                          Boston Consulting Group. Prior to his retirement in December 1990,
                          Mr. Phelan served as Chairman of the Board and Chief Executive
                          Officer of the New York Stock Exchange.
- ----------------------------------------------------------------------------------------------
</TABLE>
 
     L. Edwin Smart, who is currently a Class III Director, will retire from the
Board of Directors on April 25, 1996, in accordance with the Board's retirement
policy.
 
                         BOARD MEETINGS AND COMMITTEES
 
     During 1995 the Board of Directors held ten regular and special meetings.
The Board has established Committees which assist the Board in the discharge of
its responsibilities. Each Director attended at least 75% of the meetings of the
Board and the Committees on which the Director served.
 
     Audit Committee.  The Audit Committee reviews and reports to the Board the
scope and results of audits by the Auditor and the Company's internal auditing
staff, and reviews with the Auditor the adequacy of the Company's system of
internal controls. It reviews transactions between the Company and its Directors
and officers and Company policies with respect thereto, and compliance with the
Company's business ethics and conflict of interest policies. The Committee also
recommends a firm of certified public accountants to serve as Auditor of the
Company (subject to nomination by the Board and election by the stockholders),
authorizes all audit and other professional services rendered by the Auditor and
periodically reviews the independence of the Auditor.
 
     Membership on the Audit Committee is restricted to those Directors who are
not active or retired officers or employees of the Company. The Company's policy
on Audit Committee membership complies with the Audit Committee Policy Statement
adopted by the New York Stock Exchange. The current members of the Committee are
Mr. Creedon, Chairman, and Mr. Goizueta, Mr. Phelan, Mr. Richardson, Ms. Tocklin
and Mr. Wyatt. The Committee met three times during 1995.
 
                                        6
<PAGE>   9
 
     Committee on Directors.  The Committee on Directors makes recommendations
to the Board with respect to the size and composition of the Board, Board
retirement and tenure policies, and Director compensation. It also reviews the
qualifications of potential candidates for the Board of Directors, evaluates the
performance of incumbent Directors and recommends to the Board nominees to be
elected at the Annual Meeting of Stockholders. The current members of the
Committee are Mr. Marshall, Chairman, and Mr. Bourke, Dr. Payton, Mr. Phelan,
Mr. Richardson and Mr. Williams. The Committee met six times during 1995.
 
     The Committee on Directors will consider nominees for Director recommended
by stockholders. Such recommendations should be submitted in writing,
accompanied by a resume of the nominee's qualifications and business experience
and a signed statement of the proposed candidate consenting to be named as a
candidate and, if nominated and elected, to serve as a Director, and addressed
to the offices of the Company to the attention of Beverley T. Krannich,
Secretary.
 
     Employee Benefits Committee.  The Employee Benefits Committee periodically
reviews the status of the Company's employee benefit programs and the
performance of the managers of the funded programs. To assist in its review, the
Committee meets periodically with the chairman of the administrative committee
of the plans. The current members of the Committee are Mr. Wyatt, Chairman, and
Mr. Lanigan, Mr. Marshall, Dr. Payton, Ms. Tocklin and Mr. Williams. The
Committee met twice during 1995.
 
     Executive Compensation Committee.  The Executive Compensation Committee
reviews and makes recommendations to the Board with respect to the Company's
overall executive compensation policy. The Committee also reviews and approves
the compensation of the officers of the Company and makes awards under the
Executive Award Plan, Performance Award Plan and Cash Bonus Plan. Membership on
the Executive Compensation Committee is restricted to Directors who are not
active or retired officers or employees of the Company. The current members of
the Committee are Mr. Goizueta, Chairman, and Mr. Bourke, Mr. Lanigan, Mr.
Lukens, Mr. Smart and Mr. Wyatt. The Committee met five times during 1995.
 
     Finance Committee.  The Finance Committee approves long-term financial
policies and annual financial plans, significant capital expenditures, insurance
programs and investment policies of the Company. It also makes recommendations
to the Board concerning dividend policy, the issuance and terms of debt and
equity securities and the establishment of bank lines of credit. The current
members of the Committee are Mr. Williams, Chairman, and Mr. Creedon, Mr.
Goizueta, Mr. Lanigan, Mr. Lukens, Mr. Richardson and Mr. Smart. The Committee
met three times during 1995.
 
     Public Affairs Committee.  The Public Affairs Committee reviews the
Company's policies and practices which address issues of social and public
concern, such as government affairs, the environment, energy conservation and
charitable contributions. It also reviews stockholder relations and considers
stockholder proposals and matters of corporate governance. The current members
of the Committee are Mr. Smart, Chairman, and Mr. Bourke, Mr. Creedon, Mr.
Marshall, Dr. Payton, Mr. Phelan and Ms. Tocklin. The Committee met twice during
1995.
 
     Strategic Planning Committee.  The Strategic Planning Committee assists in
the formulation of the business strategies of the Company and its subsidiaries
and reviews the Company's management succession plan. The current members of the
Committee are Mr. Lanigan, Chairman, and Mr. Bourke, Mr. Creedon, Mr. Goizueta,
Mr. Lukens, Mr. Marshall, Dr. Payton, Mr. Phelan, Mr. Richardson, Mr. Smart, Ms.
Tocklin, Mr. Williams and Mr. Wyatt. The Committee met four times during 1995.
 
                                        7
<PAGE>   10
 
                       COMPENSATION OF OUTSIDE DIRECTORS
 
     FEES AND RETAINERS.  Each non-employee Director of the Company receives a
quarterly retainer of $8,250 ($9,500 for Committee Chairmen) and a fee of $1,250
for each Board meeting and each Board Committee meeting attended, plus incurred
expenses where appropriate.
 
     Pursuant to the Director's Fees Deferral Plan, a Director may elect to
defer receipt of some or all of the Director's fees and retainer. All amounts
deferred are credited to the Director's account under the Plan. The Director may
invest the Plan balance in "phantom" investments in the Company's common stock
and five mutual funds. The Director may choose to have the account balance
distributed in a lump sum or in annual installments, commencing upon termination
of service as a Director.
 
     RETIREMENT PLAN FOR DIRECTORS.  Directors of the Company who during some
portion of their service as Directors were not officers of the Company or its
subsidiaries are participants in the Retirement Plan for Directors. An eligible
Director who ceases being a Director after reaching age 70, completing five
years of service as a non-employee Director or as a result of death or permanent
disability, will receive a retirement benefit from the Plan. The Director may
choose to have such benefit paid as either (1) a cash lump sum in an amount
equal to the value of a series of quarterly payments equal to the retainer (as
of the date of the Director's retirement) for the period the Director served as
a non-employee Director of the Company (or its predecessor, Southern Natural Gas
Company) or (2) in a series of quarterly payments with a value equal to such
lump-sum payment.
 
     RESTRICTED STOCK PLAN FOR DIRECTORS.  Each non-employee Director of the
Company is a participant in the Restricted Stock Plan for Directors. Each such
Director who was a member of the Board of Directors on April 22, 1993 (the
effective date of the Plan, as amended and restated) was granted 2,000 shares of
restricted stock on such date, except that each Director who is scheduled to
retire from the Board under the Board's retirement policy prior to April 1, 1998
(the Plan's termination date) was granted 400 shares of restricted stock for
each remaining year of service as a Director. The Plan provides that 400 shares
granted to each Director will vest on April 1 of each of the years 1994 through
1998.
 
     Each person who first becomes a non-employee Director after April 22, 1993
will be granted 33.33 shares of restricted stock for each calendar month or
fraction thereof from the Director's election as a non-employee Director to the
following March 31 (rounded to the nearest whole share), plus 400 shares for
each subsequent Plan Year (April 1 -March 31) until the earlier of April 1, 1998
or the Director's scheduled retirement date. The product of 33.33 shares times
the number of full and partial calendar months from the Director's election as a
non-employee Director to the following March 31 (rounded to the nearest whole
share) will vest on the April 1 following such election, and 400 shares will
vest on each April 1 thereafter through April 1, 1998.
 
     All shares of restricted stock will vest immediately upon the Director's
death or disability. At the time the restricted stock vests, the Director will
receive a cash tax-offset "supplemental payment" in an amount equal to the
amount necessary to pay the federal income tax payable with respect to both the
vesting of restricted stock and receipt of the supplemental payment, assuming
the Director is taxed at the maximum effective federal income tax rate. If a
Director leaves the Board of Directors before all of the Director's shares of
restricted stock have vested, the unvested shares will be forfeited.
 
         OWNERSHIP OF COMMON STOCK BY DIRECTORS AND EXECUTIVE OFFICERS
 
     The following table shows the amount and nature of beneficial ownership of
shares of the Common Stock of the Company beneficially owned by the Directors
and certain executive officers of the Company, and by all present Directors and
executive officers of the Company as a group, as of January 31, 1996.
 
                                        8
<PAGE>   11
 
<TABLE>
<CAPTION>
                                                                AMOUNT AND NATURE OF
                    NAME OF BENEFICIAL OWNER                   BENEFICIAL OWNERSHIP(1)
    ---------------------------------------------------------  -----------------------
    <S>                                                        <C>
    Richard B. Bates.........................................            45,234(2)
    William O. Bourke........................................             5,000
    John J. Creedon..........................................            13,900(3)
    Roberto C. Goizueta......................................             3,600
    Ronald L. Kuehn, Jr......................................           672,045(2 and 4)
    Robert J. Lanigan........................................             6,040
    Max L. Lukens............................................               967
    Charles Marshall.........................................             7,600
    James E. Moylan, Jr......................................            64,934(2 and 5)
    Benjamin F. Payton.......................................             2,546
    John J. Phelan, Jr.......................................             2,660
    Jerome J. Richardson.....................................             5,050
    James A. Rubright........................................            33,307(2)
    Donald G. Russell........................................           207,376(2)
    L. Edwin Smart...........................................             3,600
    William A. Smith.........................................           217,415(2)
    Adrian M. Tocklin........................................             1,633(6)
    James B. Williams........................................            15,200
    Joe B. Wyatt.............................................             3,200
    All Present Directors and Executive Officers as a Group
      (21 persons)...........................................         1,410,154(7)
</TABLE>
 
     NOTE 1:  Each Director and executive officer has sole voting power and sole
investment power with respect to all shares beneficially owned by such
individual, unless otherwise indicated. As of January 31, 1996, each such
individual beneficially owned less than 0.8% of the outstanding shares of Common
Stock of the Company, and all present Directors and executive officers of the
Company as a group, consisting of 21 persons, beneficially owned 1.6% of the
outstanding shares of the Company's Common Stock.
 
     The number of shares shown includes 1,200 shares of restricted stock for
each of Mr. Bourke, Mr. Goizueta, Mr. Lanigan, Mr. Marshall, Dr. Payton, Mr.
Phelan, Mr. Richardson, Ms. Tocklin, Mr. Williams and Mr. Wyatt, 967 shares of
restricted stock for Mr. Lukens, 800 shares of restricted stock for Mr. Creedon,
and 400 shares of restricted stock for Mr. Smart, granted under the Company's
Restricted Stock Plan for Directors, which shares had not vested as of January
31, 1996. Such persons have the power to vote and receive dividends on such
shares, but do not have the power to dispose of, or to direct the disposition
of, such shares until such shares are vested pursuant to the terms of such plan.
 
     In addition to the shares of Common Stock shown above, as of January 31,
1996, the following individuals also held the following number of "phantom"
shares of the Company's Common Stock under the Company's Supplemental Benefit
Plan (with respect to Messrs. Kuehn and Russell) or Director's Fees Deferral
Plan (with respect to the other named individuals): Mr. Creedon, 7,256 phantom
shares; Mr. Kuehn, 11,615 phantom shares; Mr. Marshall, 1,840 phantom shares;
Mr. Russell, 5,969 phantom shares; Ms. Tocklin, 696 phantom shares; and Mr.
Williams, 2,427 phantom shares.
 
     NOTE 2:  The number of shares shown for Messrs. Bates, Kuehn, Moylan,
Rubright, Russell and Smith includes 8,100 shares, 95,200 shares, 9,500 shares,
11,700 shares, 32,000 shares and 14,300 shares, respectively, of restricted
stock granted under the Company's Executive Award Plan, which shares had not
vested as of January 31, 1996. Such persons have the right to vote and receive
dividends on such shares, but do not have the power to dispose of, or to direct
the
 
                                        9
<PAGE>   12
 
disposition of, such shares until such shares are vested pursuant to the terms
of such plan. The number of shares shown for Messrs. Bates, Kuehn, Moylan,
Rubright, Russell and Smith also includes (a) 7,570 shares, 44,781 shares, 9,713
shares, 107 shares, 10,180 shares and 15,281 shares, respectively, held by the
Trustee under the Company's Savings Plan as of January 31, 1996; and (b) 26,800
shares, 510,000 shares, 43,800 shares, 21,500 shares, 160,200 shares and 175,000
shares, respectively, covered by options under the Company's Executive Award
Plan which were exercisable within sixty days after January 31, 1996.
 
     NOTE 3:  The number of shares shown for Mr. Creedon includes 3,200 shares
held in trusts for two of his children, of which shares he disclaims any
beneficial ownership.
 
     NOTE 4:  The number of shares shown for Mr. Kuehn includes 8,500 shares
owned by his wife, 20 shares owned by his children, and 1,500 shares held in
trust for one of his children, of which shares he disclaims any beneficial
ownership.
 
     NOTE 5:  The number of shares shown for Mr. Moylan includes 1,237 shares
owned by his wife, of which shares he disclaims any beneficial ownership.
 
     NOTE 6:  The number of shares shown for Ms. Tocklin includes 100 shares
owned by her husband, of which shares she disclaims any beneficial ownership.
 
     NOTE 7:  The number of shares shown includes 182,100 shares of restricted
stock granted under the Company's Executive Award Plan, which shares had not
vested as of January 31, 1996; 104,642 shares held by the Trustee under the
Company's Savings Plan as of January 31, 1996; 1,004,740 shares covered by
options under the Company's Executive Award Plan which were exercisable within
sixty days after January 31, 1996; and 14,167 shares of restricted stock granted
under the Company's Restricted Stock Plan for Directors, which shares had not
vested as of January 31, 1996.
 
                CERTAIN BUSINESS RELATIONSHIPS AND TRANSACTIONS
 
     James B. Williams, a Director of the Company, is Chairman and Chief
Executive Officer of SunTrust Banks, Inc. ("SunTrust"). SunTrust Bank, Atlanta,
a subsidiary of SunTrust ("SunTrust Atlanta"), has extended a short-term credit
facility to the Company permitting the borrowing of $25,000,000. During 1995,
there were periodic borrowings and repayments under this facility and, at
December 31, 1995, there was $8,900,000 principal amount outstanding thereunder.
In addition, the Company, one of its wholly-owned subsidiaries and one of its
affiliates were permitted to borrow an aggregate of $47,926,000 pursuant to
long-term loan agreements, and were indebted to SunTrust Atlanta in the
principal amount thereunder of an aggregate of $12,926,000 at December 31, 1995.
A subsidiary of SunTrust also serves as an investment manager for trusts that
fund the Company's retirement and retiree medical benefits programs.
 
     In October 1995, Southern Natural Gas Company, a wholly-owned subsidiary of
the Company ("Southern Natural"), and SunTrust entered into a Payment Agreement
pursuant to which SunTrust, in exchange for a payment from Southern Natural of
$42,300,000, will make monthly payments to one of Southern Natural's suppliers
through December 2001 in settlement of certain of Southern Natural's gas
purchase obligations. The Board of Directors believes that the terms of the
Payment Agreement are fair and reasonable and as favorable as those which could
have been obtained from unrelated third parties.
 
     L. Edwin Smart, a Director of the Company, serves as counsel to the law
firm of Hughes Hubbard & Reed. Hughes Hubbard & Reed provides legal services to
the Company and certain of its subsidiaries.
 
                       COMPENSATION OF EXECUTIVE OFFICERS
 
REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE
 
     The Executive Compensation Committee of the Board of Directors of the
Company, which is composed solely of nonemployee Directors, administers the
Company's executive compensation
 
                                       10
<PAGE>   13
 
program. The Committee's primary responsibility is to ensure that the executive
compensation program furthers the interests of the Company and its stockholders.
 
     The Company's executive compensation program has three principal
objectives: (1) to attract and retain a highly qualified and motivated
management team; (2) to appropriately reward individual executives for their
contributions to the attainment of the Company's key strategic goals; and (3) to
link the interests of executives and stockholders through stock-based plans and
performance measures.
 
     The Committee meets with outside consultants at least annually to evaluate
the Company's performance against the performance of a peer group of companies
and to review and compare the level of compensation paid or awarded to key
executives to the compensation practices of the peer group. The peer group used
for determining 1995 compensation for corporate executives consisted of 19
publicly held companies in the Company's key business segments and
investments -- natural gas transmission and sales, domestic oil and gas
exploration and production, and oilfield services (the "Corporate Peer Group").
The aggregate asset mix of the companies included in the Corporate Peer Group
approximated the Company's asset mix. In comparing the level of the Company's
compensation to that of the companies in the Corporate Peer Group, the Committee
reviews an analysis which "size-adjusts" the compensation paid by a company to
take into account the relative size of the company as measured by its revenues.
The recommended size-adjustment is computed by an independent compensation
consulting firm. The Committee also reviews and may give greater weight to
compensation survey data specific to a particular business segment when
considering the compensation of executive officers whose job is related
primarily to a single business segment. The Standard & Poor's Natural Gas
Distribution/Pipeline Group described in the five-year total stockholder return
comparison on page 19 of this Proxy Statement is not used to determine the
compensation of executives, because that group's aggregate asset mix does not
include an appropriate weighting for exploration and production and oilfield
services.
 
     The key components of the Company's executive compensation program are base
salary, annual cash bonus incentives, and long-term stock incentives. The
Committee's policies with respect to each component of the program, including
the bases for the compensation of Mr. Kuehn, Chairman of the Board, President
and Chief Executive Officer of the Company, are described below. The Committee
consults with Mr. Kuehn in reviewing the individual performance and compensation
of key executives of the Company (other than Mr. Kuehn). The Committee reviews
Mr. Kuehn's performance and compensation in executive session at least annually.
 
     BASE SALARIES. Base salaries are initially established by an evaluation of
the executive's position, responsibilities and experience and a review of salary
surveys. Each year the Committee reviews the base salaries of key executive
officers of the Company and its subsidiaries and determines whether salaries
should be adjusted, based primarily on the executive's individual performance
and experience and salary survey information. In general, the Committee's
objective is to maintain executive salaries at the median of the salaries for
comparable executives in the Corporate Peer Group or other relevant peer group.
Executive salaries for 1995 were slightly above the median level overall,
although some executives were below and some above the median. Taking into
consideration Mr. Kuehn's individual performance and experience and the salary
survey data, Mr. Kuehn's base salary was increased 5.9%, effective April 1,
1995. Mr. Kuehn has been in his current position for approximately 11 1/2 years
and his salary for 1995 was above the median of the Corporate Peer Group.
 
     ANNUAL CASH BONUS INCENTIVES. Annual cash bonus incentive opportunities are
awarded each year. The amount of an executive's bonus opportunity (which is
expressed as a percentage of base salary) is dependent primarily upon such
individual's position and responsibilities and bonus opportunities provided to
comparable positions within the Corporate Peer Group or other relevant peer
group. At the beginning of each year, the Committee reviews and approves annual
performance goals. Shortly after the end of the year, the Committee determines
the appropriate bonus payout levels based on the degree to which these goals
have been achieved. The annual incentive
 
                                       11
<PAGE>   14
 
program is designed to pay total annual cash compensation in the upper quartile
of the relevant peer group when the Company meets substantially all of the goals
established for an executive's bonus opportunity. Similarly, when the goals are
not achieved, the program is intended to result in total annual cash
compensation below the median of the relevant peer group.
 
     The payout of an executive's 1995 bonus opportunity was based on the level
of achievement of certain financial goals, corporate and subsidiary goals, and
individual goals, as described below. The goals for each executive's bonus
opportunity were weighted as follows: financial goals -- 40% for Mr. Kuehn and
30-40% for the other named executive officers; corporate and subsidiary goals --
45% for Mr. Kuehn and 45-55% for the other named executive officers; and
individual goals -- 15% for all executives.
 
     The financial goals included in the 1995 bonus opportunities were the
Company's 1995 earnings per share ("EPS") as compared to EPS targets established
by the Committee, and the Company's five-year average cash flow return on assets
as compared to that of the Corporate Peer Group. In general, these goals were
weighted equally. Payout of the EPS goal was based on comparison of actual EPS
and the EPS targets, provided that a minimum level of EPS was required for any
payout to be made. The payout of the cash flow return on assets goal was based
on the Company's absolute ranking within the Corporate Peer Group and its
performance against the mean of the Corporate Peer Group.
 
     The corporate and subsidiary goals included in the 1995 bonus opportunities
included earnings goals, operating, marketing and strategic goals relating to
each major business segment, and goals relating to safety and the environment,
human resources, and corporate citizenship. When appropriate, an executive's
goals focused on the company for which he was primarily employed. Achievement of
many of the goals was determined by quantitative or objective measures, while
other goals were subjective in nature.
 
     Each executive's 1995 bonus opportunity included individual goals. Mr.
Kuehn's individual performance is based primarily on the Company's achievement
of its financial and business goals. The Committee also has discretion to make
additional cash bonus awards to recognize exceptional individual performance.
 
     In January 1996, the Committee reviewed in detail the extent to which the
1995 performance goals had been achieved. The Company's EPS was below the
minimum payout level, while cash flow return on assets was in the upper quartile
of the Corporate Peer Group and significantly above the mean for the Corporate
Peer Group. The payout percentage was 93% of the bonus opportunity for the cash
flow return on assets goal; no payout was made with respect to the bonus
opportunity for the EPS goal.
 
     The level of achievement of corporate and subsidiary goals varied
considerably among the Company's business segments. The Sonat Pipeline Group
significantly exceeded its earnings target, while Sonat Exploration Company and
Sonat Marketing Company had earnings below the minimum target levels. In
general, there was substantial achievement of most of the other corporate and
subsidiary goals. The payout percentage for corporate and subsidiary goals
ranged from 62% to 89%.
 
     Including individual performance, the total bonus payout percentages under
the 1995 annual incentive program ranged from 52% to 95%. Mr. Kuehn's total
bonus payout percentage for 1995 was 65% of his bonus opportunity.
 
     LONG-TERM STOCK INCENTIVES. The long-term stock incentives component of the
Company's executive compensation program is designed to align executive and
stockholder interests by rewarding executives for the attainment of stock price
appreciation and total stockholder returns.
 
     As a general rule, the Committee administers the long-term stock incentive
program through annual grants of stock options and restricted stock to certain
executive officers of the Company and its major operating subsidiaries. Awards
under the annual grant program were made in November
 
                                       12
<PAGE>   15
 
1995. In addition, the Committee may make special awards to individual
executives during the year on a discretionary basis.
 
     In 1995, the number of stock options and restricted shares granted to each
executive officer as part of the annual grant program was determined primarily
by individual position and responsibilities, compensation survey data of the
Company's Corporate Peer Group, and the Company's three-year total stockholder
return (considering stock price appreciation and reinvestment of dividends, and
weighted for most recent performance) as compared to the total stockholder
return of the Corporate Peer Group. The amount of an executive's annual
long-term incentive grant was expressed as a percentage of base salary. The
percentage used for each executive was tied to the Company's total stockholder
return as compared to that of the Corporate Peer Group. In 1995, the Company's
weighted annualized three-year total stockholder return was at the median of the
Corporate Peer Group. The November 1995 long-term incentive grants were designed
to reflect that performance and to result in long-term compensation at the
median of the Corporate Peer Group. For purposes of determining the value of
long-term incentive compensation, an independent compensation consulting firm
uses a modified Black-Scholes option pricing model to value stock options
granted by the Company and the companies in the Corporate Peer Group. Similarly,
the consulting firm values restricted share grants based on the present value of
the shares on the date of grant (taking into account the vesting schedules of
the grants and projected executive turnover). The Committee may adjust the
grants to take into account individual performance and the number of options and
restricted shares previously granted to the executive.
 
     In November 1995, Mr. Kuehn was awarded stock options and restricted stock
as a part of the annual program. As discussed above, the amount of this award
was intended to compensate Mr. Kuehn for the performance of the Company's stock
as compared to the Corporate Peer Group and to result in long-term compensation
at the median of the Corporate Peer Group.
 
     STOCK OWNERSHIP GUIDELINES. The Committee has established guidelines
designed to encourage key executives of the Company and its subsidiaries to
attain specified levels of stock ownership over a five-year period. Stock
ownership goals are based on the value of the Company's stock, and are expressed
as a multiple of the executive's base salary. The Committee periodically reviews
the guidelines and the executives' progress toward attaining the stock ownership
goals.
 
     POLICY WITH RESPECT TO SECTION 162(m). Section 162(m) of the Internal
Revenue Code limits the tax deduction that the Company or its subsidiaries can
take with respect to the compensation of certain executive officers, unless the
compensation is "performance-based." The Committee expects that all income
recognized by executive officers with respect to restricted stock and stock
options granted under the Executive Award Plan, and the portion of the Company's
annual cash bonus program that is based on objective financial and operating
measures, will qualify as performance-based compensation.
 
     The Committee feels that it should not use only mechanical formulas in
carrying out its responsibilities for compensating the Company's management.
Therefore, the Committee currently intends to continue to make cash bonus
payments that are based on the achievement of subjective, non-quantifiable
goals, and that may therefore not qualify as performance-based compensation. The
Committee believes that these Company, subsidiary and individual goals, while
not properly measurable by the kind of quantifiable targets that are required to
qualify compensation as performance-based, are important to the long-term
financial success of the Company and to its stockholders.
 
     CONCLUSION. The Committee believes that the executive compensation
philosophy that it has adopted effectively serves the interests of the
stockholders and the Company. It is the Committee's intention that the pay
delivered to executives be commensurate with Company performance.
 
<TABLE>
<S>                     <C>                   <C>
Roberto C. Goizueta     William O. Bourke     Robert J. Lanigan
Max L. Lukens           L. Edwin Smart        Joe B. Wyatt
</TABLE>
 
                                       13
<PAGE>   16
 
SUMMARY COMPENSATION TABLE
 
     The following table shows, for the fiscal years ending December 31, 1993,
1994 and 1995, the cash compensation paid by the Company, and a summary of
certain other compensation paid or accrued for such years, to certain of the
Company's executive officers (as determined pursuant to the rules of the
Securities and Exchange Commission) (the "named executive officers") for service
in all capacities with the Company and its subsidiaries.
 
                           SUMMARY COMPENSATION TABLE
 
<TABLE>
<CAPTION>
                                                                                 LONG-TERM COMPENSATION
                                                                                         AWARDS
                                              ANNUAL COMPENSATION           --------------------------------
                                   -----------------------------------------                    SECURITIES
                                                                 OTHER          RESTRICTED      UNDERLYING     ALL OTHER
NAME AND                                                        ANNUAL             STOCK         OPTIONS/     COMPENSATION
PRINCIPAL POSITION          YEAR      SALARY      BONUS      COMPENSATION        AWARDS(1)         SARS           (2)
- ----------------------------------------------------------------------------------------------------------------------------
<S>                       <C>      <C>         <C>         <C>              <C>                <C>          <C>
 Ronald L. Kuehn, Jr.,      1995     $710,000    $418,600  $332,396(3)      $306,375(4)           79,200        $108,107
 Director, Chairman of      1994     $660,000    $450,000  $      0         $459,938(5)           112,000       $110,064
 the Board, President and   1993     $590,000    $504,600  $300,362(3)      $420,000(6)           110,000       $113,528
 Chief Executive Officer
 Richard B. Bates,          1995     $222,500    $ 84,900  $      0         $ 74,175(4)           18,000        $ 26,100
 Senior Vice President      1994     $208,750    $121,400  $      0         $ 91,988(5)           22,000        $ 25,362
                            1993     $182,500    $ 93,000  $ 83,758(3)      $ 75,000(6)           21,000        $ 13,534
 James E. Moylan, Jr.,      1995     $226,250    $131,100  $      0         $ 74,175(4)           18,000        $ 27,284
 Senior Vice President      1994     $200,000    $114,300  $      0         $ 91,988(5)           22,000        $ 25,525
                            1993     $151,875    $ 65,500  $410,888         $ 75,000(6)           21,000        $ 18,467
 James A. Rubright,         1995     $287,750    $117,100  $      0         $ 74,175(4)           18,000        $ 40,534
 Senior Vice President      1994     $240,625    $130,600  $115,572(8)      $268,275(5 & 9)       67,500        $ 35,813
 and General Counsel(7)
 Donald G. Russell,         1995     $465,750    $184,400  $      0         $161,250(4)           45,000        $ 39,588
 Executive Vice President   1994     $430,000    $250,000  $      0         $278,750(5)           66,000        $ 71,165
                            1993     $362,500    $250,000  $649,292(3)      $300,000(6)           65,000        $102,687
 William A. Smith,          1995     $361,250    $135,300  $188,043(10)     $ 74,175(4)           18,000        $ 45,560
 Executive Vice President   1994     $342,000    $200,000  $ 44,000(11)     $167,250(5)           45,000        $ 44,439
                            1993     $313,500    $200,000  $530,865(3)      $180,000(6)           45,000        $ 41,440
</TABLE>
 
     NOTE 1:  The amount shown represents the dollar value of restricted stock
awards made during the year, calculated by multiplying the closing price of
unrestricted shares of the Company's Common Stock on the date of grant by the
number of shares awarded. Dividends are paid on all shares of restricted stock.
 
     All shares of restricted stock generally vest at the earlier of age 65 (age
67, with respect to the shares granted to Mr. Russell) or 10 years from the date
of grant, unless the average closing price of the Company's Common Stock
achieves certain specified levels, in which case vesting of such shares is
accelerated. All shares of restricted stock that have not previously vested are
generally forfeited upon termination of employment, unless such termination
occurs either by reason of death or disability or for the convenience of the
Company (as determined by the Executive Compensation Committee). All shares of
restricted stock that have not previously vested will immediately vest upon a
"Change of Control" of the Company, as described under "Compensation Upon Change
of Control" below.
 
     The number of shares of restricted stock held by the named executive
officers as of December 31, 1995, and the value of such shares (calculated by
multiplying the closing price of unrestricted shares of the Company's Common
Stock on December 31, 1995 ($35.625) by the number of shares held on such date)
is as follows: Mr. Kuehn, 95,200 shares, $3,391,500; Mr. Bates, 8,100 shares,
$288,563; Mr. Moylan, 9,500 shares, $338,438; Mr. Rubright, 11,700 shares,
$416,813; Mr. Russell, 32,000 shares, $1,140,000; and Mr. Smith, 14,300 shares,
$509,438.
 
     NOTE 2:  With respect to 1995, represents the following amounts for each of
Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith, respectively: (1)
Company matching contributions to the trust established under the Company's
Savings Plan -- $12,750, $12,750, $12,750, $5,862,
 
                                       14
<PAGE>   17
 
$12,750 and $12,750; (2) Company contributions to the Savings Plan accounts
under the Company's Supplemental Benefit Plan -- $45,050, $6,163, $6,481,
$18,597, $26,838 and $17,956; and (3) with respect to premiums paid by the
Company under the Company's "split-dollar" Executive Life Insurance Program, the
sum of (a) the value of the premium payment used to purchase term life insurance
plus (b) the value of the benefit to the executive officer of the remainder of
the premium payment -- $50,307, $7,187, $8,053, $16,075, $0 and $14,854.
 
     NOTE 3:  Represents the amount of tax-offset "supplemental payments" paid
upon the exercise of stock options (or tandem stock appreciation rights) granted
under the Company's Executive Award Plan.
 
     NOTE 4:  Represents the value of 9,500 shares, 2,300 shares, 2,300 shares,
2,300 shares, 5,000 shares and 2,300 shares of restricted stock granted on
November 30, 1995, to Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith,
respectively.
 
     NOTE 5:  Includes the value of 16,500 shares, 3,300 shares, 3,300 shares,
4,400 shares, 10,000 shares and 6,000 shares of restricted stock granted on
December 1, 1994 to Messrs. Kuehn, Bates, Moylan, Rubright, Russell and Smith,
respectively.
 
     NOTE 6:  Represents the value of 14,000 shares, 2,500 shares, 2,500 shares,
10,000 shares and 6,000 shares of restricted stock granted on December 2, 1993
to Messrs. Kuehn, Bates, Moylan, Russell and Smith, respectively.
 
     NOTE 7:  Mr. Rubright was employed by the Company as Vice President and
General Counsel on February 15, 1994.
 
     NOTE 8:  Includes (a) relocation allowances, related to Mr. Rubright's move
from Atlanta, Georgia to Birmingham, Alabama, of $89,317 in excess of relocation
allowances normally provided under Company policy, and (b) tax-reimbursement
payments of $26,255 made with respect to such reimbursement allowances.
 
     NOTE 9:  Includes the value of 5,000 shares of restricted stock granted to
Mr. Rubright on January 26, 1994 (contingent upon his commencement of employment
with the Company on February 15, 1994).
 
     NOTE 10:  Includes (a) a $119,353 tax-offset "supplemental payment" paid
upon the exercise of stock options granted under the Company's Executive Award
Plan, (b) $59,663 for housing allowances and moving expenses related to Mr.
Smith's relocation from Birmingham, Alabama to Houston, Texas, and (c)
tax-reimbursement payments of $9,027 made with respect to such moving expenses.
 
     NOTE 11:  Represents a $44,000 housing allowance related to Mr. Smith's
relocation from Birmingham, Alabama to Houston, Texas.
 
                                       15
<PAGE>   18
 
OPTION GRANT TABLE
 
     The following table contains certain information with respect to stock
options (and tandem stock appreciation rights that become exercisable only upon
certain change of control events ("Limited SARs")) granted in 1995 under the
Company's Executive Award Plan to the named executive officers.
 
                     OPTION/SAR GRANTS IN LAST FISCAL YEAR
 
<TABLE>
<CAPTION>
                                                                                            POTENTIAL REALIZABLE VALUE AT
                                                                                         ASSUMED ANNUAL RATES OF STOCK PRICE
                                                                                           APPRECIATION FOR OPTION TERM (10
                                                 INDIVIDUAL GRANTS                                      YEARS)
                              --------------------------------------------------------   ------------------------------------
                                NUMBER OF     % OF TOTAL                                        5%                 10%
                               SECURITIES    OPTIONS/SARS                                   (RESULTING         (RESULTING
                               UNDERLYING     GRANTED TO      EXERCISE                     COMPANY STOCK      COMPANY STOCK
                              OPTIONS/SARS   EMPLOYEES IN       PRICE      EXPIRATION        PRICE OF           PRICE OF
            NAME               GRANTED(1)        1995       ($/SHARE)(2)     DATE(3)        $52.53)(4)         $83.65)(4)
- ----------------------------- -------------  -------------  -------------  -----------   -----------------  -----------------
<S>                           <C>            <C>            <C>            <C>           <C>                <C>
All Stockholders.............     --             --             --             --         $ 1,743,397,030    $ 4,418,669,002
Ronald L. Kuehn, Jr..........     79,200          11.6%        $ 32.25       11/29/05     $     1,606,176    $     4,070,880
Richard B. Bates.............     18,000           2.6%        $ 32.25       11/29/05     $       365,040    $       925,200
James E. Moylan, Jr..........     18,000           2.6%        $ 32.25       11/29/05     $       365,040    $       925,200
James A. Rubright............     18,000           2.6%        $ 32.25       11/29/05     $       365,040    $       925,200
Donald G. Russell............     45,000           6.6%        $ 32.25       11/29/05     $       912,600    $     2,313,000
William A. Smith.............     18,000           2.6%        $ 32.25       11/29/05     $       365,040    $       925,200
Named Executive Officers' Potential Realizable Value as a
  % of All Stockholders' Potential Realizable Value                                                 0.23%              0.23%
</TABLE>
 
     NOTE 1:  All stock options shown in the table were granted on November 30,
1995. Each stock option was granted with a tandem Limited SAR that may be
exercised only within 60 days after an SAR Change of Control (as defined under
"Compensation Upon Change of Control" below). On November 30, 1995, the named
executive officers were also granted Limited SARs in tandem with all
then-outstanding previously-granted stock options. For more information on
Limited SARs, see "Compensation Upon Change of Control" below.
 
     The stock options (and tandem Limited SARs) shown in the table become
exercisable in equal installments on each of the first five anniversaries of the
date of grant, provided that the entire grant will become immediately
exercisable if, during any 10 business day period ending prior to November 30,
2000, the average of the closing prices of the Company's Common Stock during
such period is at least $48.375. Any stock options (and tandem Limited SARs)
that have not previously become exercisable are generally forfeited upon
termination of employment, unless such termination occurs by reason of
retirement after age 65 (age 67 for Mr. Russell), death, disability or for the
convenience of the Company (as determined by the Executive Compensation
Committee). Any options (and tandem Limited SARs) held by then-current employees
will become immediately exercisable in the event of a "Change of Control" of the
Company, as described under "Compensation Upon Change of Control" below.
 
     NOTE 2:  The exercise price equals the closing price of the Company's
Common Stock on the date of grant.
 
     NOTE 3:  The stock options (and tandem Limited SARs) are subject to
termination prior to their expiration date in the event of termination of
employment.
 
     NOTE 4:  The Resulting Company Stock Price shown in the table equals the
price the Company's Common Stock would attain at the end of the option's 10-year
term if the price of the Company's Common Stock appreciated from the date of
stock option grant at a rate of 5% or 10% per year (as the case may be). The
potential realizable values shown represent the difference between the $52.53 or
$83.65 Resulting Company Stock Price (as the case may be) and the $32.25
exercise price, multiplied by (a) for all stockholders, the number of
outstanding shares of the Company's Common Stock as of December 31, 1995, and
(b) for each named executive officer, the number of options granted.
 
                                       16
<PAGE>   19
 
AGGREGATED OPTION/SAR EXERCISES AND FISCAL YEAR-END OPTION/SAR VALUE TABLE
 
     The following table shows certain information with respect to the named
executive officers concerning the exercise of stock options (or stock
appreciation rights ("SARs") granted in tandem therewith) during 1995 and
unexercised stock options (and tandem SARs) held as of December 31, 1995.
 
<TABLE>
<CAPTION>
                                    AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                                               FISCAL YEAR-END OPTION/SAR VALUES
                         ------------------------------------------------------------------------------
                                                        NUMBER OF
                                                  SECURITIES UNDERLYING        VALUE OF UNEXERCISED,
                          SHARES                 UNEXERCISED OPTIONS/SARS    IN-THE-MONEY OPTIONS/SARS
                         ACQUIRED                 AT FISCAL YEAR END(1)        AT FISCAL YEAR END(2)
                            ON         VALUE     ------------------------   ---------------------------
          NAME           EXERCISE    REALIZED    EXERCISABLE UNEXERCISABLE  EXERCISABLE   UNEXERCISABLE
- ------------------------ ---------  -----------  ----------  ------------   -----------   -------------
<S>                      <C>        <C>          <C>         <C>            <C>           <C>
Ronald L. Kuehn, Jr.....   50,000    $ 482,500     510,000      234,800     $ 8,637,075    $ 1,332,950
Richard B. Bates........    7,333    $ 109,536      26,800       48,200     $   238,100    $   268,025
James E. Moylan, Jr.....        0    $       0      43,800       48,200     $   542,350    $   268,025
James A. Rubright.......        0    $       0      13,500       72,000     $    94,625    $   439,250
Donald G. Russell.......        0    $       0     160,200      136,800     $ 2,015,362    $   780,450
William A. Smith........   18,000    $ 173,250     175,000       81,000     $ 2,682,562    $   491,625
</TABLE>
 
     NOTE 1:  Certain stock options granted before December 6, 1991, were
granted with tandem SARs. Each stock option granted before December 6, 1991 was
granted with a tax-offset "supplemental payment" payable upon the exercise of
the stock option (or tandem SAR). The amount of the supplemental payment is the
amount necessary to pay the federal income tax payable with respect to both (1)
exercise of the stock option (or tandem SAR) and (2) receipt of the supplemental
payment, based on the assumption that the participant is taxed at the maximum
effective federal income tax rate applicable to such income.
 
     NOTE 2:  The value of each unexercised in-the-money stock option (or tandem
SAR) is equal to the difference between $35.625 (the closing price of the
Company's Common Stock on December 31, 1995) and the exercise price of the stock
option. Such value does not include the value of any tax-offset supplemental
payments.
 
DEFINED BENEFIT PLANS
 
     Employees and officers of the Company and participating subsidiaries are
participants in the Company's Retirement Plan. In general, annual retirement
benefits are based on average covered compensation for the highest five
consecutive years of the final ten years of employment. Covered compensation
under the Retirement Plan currently includes salaries and amounts paid under the
Performance Award Plan and the Cash Bonus Plan (reported in the Summary
Compensation Table); covered compensation does not include amounts relating to
the grant or vesting of restricted stock, the exercise of stock options and
SARs, and receipt of supplemental payments under the Executive Award Plan, or to
employer contributions under the Savings Plan or the Supplemental Benefit Plan.
 
     The maximum annual retirement benefit is 65% of the participant's average
covered compensation minus 50% of his primary social security benefit.
Participants accrue benefits under the following formula: (a) 2.4% of average
covered compensation minus 2.0% of primary social security benefits for each
year of service prior to January 1, 1992; plus (b) 2.0% of average covered
compensation minus 1.667% of primary social security benefits for each year of
service after January 1, 1992; plus (c) when the total of (a) plus (b) above
equals 60% of average covered compensation minus 50% of primary social security
benefits, 1% of average covered compensation for each year of service after
January 1, 1992, not included in the calculation in (b) above, up to five such
additional years of service. The eligible survivors of a deceased Retirement
Plan participant are entitled to a survivors benefit, which usually equals 75%
of the participant's retirement benefit. Retirement Plan benefits are generally
paid as life annuities.
 
                                       17
<PAGE>   20
 
     The Supplemental Benefit Plan provides its eligible participants and their
eligible survivors with retirement and survivors benefits which would have been
payable under the Retirement Plan but for the fact that benefits payable under
funded pension plans are limited by federal tax laws. As a general rule, during
1995 the federal tax laws limited annual benefits under the Retirement Plan to
$120,000 (subject to reduction in certain circumstances), and required the
Retirement Plan to disregard any portion of the participant's 1995 compensation
in excess of $150,000. A participant may choose to have benefits under the Plan
paid either as a life annuity or in a cash lump sum upon termination of
employment.
 
     The following table sets forth information with respect to the named
executive officers concerning the benefits payable under the Retirement Plan and
Supplemental Benefit Plan.
 
                           DEFINED BENEFIT PLAN TABLE
 
<TABLE>
<CAPTION>
                                            CURRENT                                 ESTIMATED ANNUAL
                                           YEARS OF           1995 COVERED         RETIREMENT BENEFIT
                  NAME                    SERVICE(1)        COMPENSATION(2)           AT AGE 65(3)
- ----------------------------------------  -----------       ----------------       ------------------
<S>                                       <C>               <C>                    <C>
Ronald L. Kuehn, Jr.....................      25.4             $1,160,000               $742,400
Richard B. Bates........................      10.8             $  343,900               $222,159
James E. Moylan, Jr.....................      19.5             $  340,550               $221,358
James A. Rubright.......................       1.8             $  418,350               $156,881
Donald G. Russell.......................       7.9             $  715,750               $138,856
William A. Smith........................      25.7             $  561,110               $364,722
</TABLE>
 
     NOTE 1:  The number of years of credited service under the Retirement Plan
and Supplemental Benefit Plan as of December 31, 1995.
 
     NOTE 2:  The amount of covered compensation under the Retirement Plan and
Supplemental Benefit Plan during 1995.
 
     NOTE 3:  The estimated annual retirement benefit payable as a single life
annuity at age 65 to the named executive officer (based on the assumptions that
such officer retires at age 65 and has average covered compensation at his
retirement date equal to his 1995 covered compensation, and calculated prior to
the offset for primary social security benefits).
 
                                       18
<PAGE>   21
 
PERFORMANCE GRAPH
 
     The following graph compares the cumulative total stockholder return on the
Company's Common Stock for the five-year period ending December 31, 1995, with
the cumulative total return of two indices during such period.
 
          COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
                 SONAT INC.; STANDARD & POOR'S 500 STOCK INDEX;
          STANDARD & POOR'S NATURAL GAS DISTRIBUTION/PIPELINE GROUP(1)
 
<TABLE>
<CAPTION>
      MEASUREMENT PERIOD                                          S&P NATURAL
    (FISCAL YEAR COVERED)         SONAT INC.        S&P 500           GAS
<S>                              <C>             <C>             <C>
12/31/90                                100.00          100.00          100.00
12/31/91                                 74.09          130.34            87.7
12/31/92                                113.78          140.25           96.16
12/31/93                                141.18          154.32          114.09
12/31/94                                142.00          156.42          108.91
12/31/95                                186.87          214.99          153.87
</TABLE>
 
     The total returns set forth above assume that $100 was invested in the
Company's Common Stock and each of the indices set forth above on December 31,
1990, and that all dividends were reinvested.
 
     NOTE 1: The Standard & Poor's Natural Gas Distribution/Pipeline Group
consists of the following companies: The Coastal Corporation, Columbia Gas
System, Inc., Consolidated Natural Gas Company, Eastern Enterprises, Enron
Corp., Ensearch Corporation, NICOR Inc., NorAm Energy Corp., ONEOK Inc., Pacific
Enterprises, Panhandle Eastern Corporation, Peoples Energy Corporation, Sonat
Inc. and The Williams Companies Inc.
 
COMPENSATION UPON CHANGE OF CONTROL
 
     Certain of the Company's benefit plans provide for the acceleration of
certain benefits in the event of a "Change of Control" of the Company. Under
such plans, a Change of Control will be deemed to have occurred if (1) any
person or group becomes the owner of (or obtains the right to acquire) 20% or
more of the Company's common stock or outstanding voting securities (with
certain exceptions, as set forth in the plans); (2) the individuals who, as of
December 1, 1995, constituted the Board of Directors (the "Incumbent Board"),
cease to be at least a majority of the Board of Directors (but including as
Incumbent Board members, except as otherwise provided, any director whose
election or nomination was approved by the Incumbent Board); or (3) there is
consummation of a reorganization, consolidation or merger involving the Company,
or sale of all or
 
                                       19
<PAGE>   22
 
substantially all of the Company's assets, unless the stockholders and Board of
Directors of the Company before the transaction control the resulting company
after the transaction.
 
     Any outside Director who is eligible for a retirement benefit under the
Retirement Plan for Directors will receive such benefit (regardless of whether
he has met the other eligibility requirements of the Plan) in the event he
ceases to be a Director following a Change of Control. A Director who
participates in the Director's Fees Deferral Plan may, prior to the year the
fees are earned, elect to have the balance of his account distributed to him in
a lump sum in the event his service as a Director is terminated within one year
following a Change of Control, regardless of any other elections he may have
made with respect to the timing and manner of payment of amounts in his account.
Also, all shares of restricted stock granted under the Restricted Stock Plan for
Directors will vest immediately upon a Change of Control.
 
     Upon the occurrence of a Change of Control, all outstanding shares of
restricted stock under the Executive Award Plan will immediately vest, and all
outstanding options (and tandem SARs) under the Executive Award Plan held by
then-current employees will become immediately exercisable. Also, upon the
occurrence of a Change of Control, the participant will receive 100% of his
bonus opportunities under the Performance Award Plan and the Cash Bonus Plan.
Any officer of the Company or certain of its subsidiaries who at the time of a
Change of Control is not vested under the Retirement Plan will be provided with
a vested benefit under the Supplemental Benefit Plan equal to the benefit that
would have been payable under the Retirement Plan if his actual years of service
had been sufficient for vesting. Following a Change of Control, a participant's
Savings Plan account under the Supplemental Benefit Plan will be distributed
within 30 days of his termination of employment.
 
     On November 30, 1995, the named executive officers were granted Limited
SARs in tandem with all outstanding options under the Executive Award Plan. Upon
exercise of a Limited SAR or an SAR within 60 days after an SAR Change of
Control (as defined below), the executive officer would receive the difference
between (1) the greater of (a) the highest price of the Company's Common Stock
during the 60-day period before exercise of the Limited SAR or SAR and (b) the
highest price paid for a share of the Company's Common Stock by an acquiring
person during the 60-day period before the SAR Change of Control and (2) the
exercise price of the Limited SAR or SAR. An "SAR Change of Control" is deemed
to have occurred if (1) any person or group acquires (or obtains the right to
acquire) beneficial ownership of 35% or more of the Company's voting securities,
(2) there is a change in the composition of a majority of the Company's Board of
Directors within any period of three consecutive years which change was not
approved by a majority of the Board as constituted immediately prior to the
commencement of such three-year period or (3) at any meeting of stockholders of
the Company called for the purpose of electing Directors the entire slate
nominated by the Board of Directors fails to be elected.
 
EXECUTIVE SEVERANCE AGREEMENTS
 
     The Company has Executive Severance Agreements with Messrs. Kuehn, Bates,
Moylan, Rubright, Russell and Smith. These agreements provide that if the
executive officer's employment is terminated either (1) within three years after
a Change of Control (as defined above), either (a) by the Company for reasons
other than dishonesty, conviction of a felony or willful unauthorized disclosure
of confidential information or other than as a consequence of death, disability
or retirement at normal retirement age (age 65 except for Mr. Russell, for whom
normal retirement age is age 67) or (b) by the executive officer for reasons
relating to a diminution of responsibilities or compensation or relocation
requiring a change in residence or a significant increase in travel, or (2) by
the executive officer for any reason during the 30-day period immediately
following the first anniversary of the Change of Control, he will receive: (1) a
lump sum payment equal to three times his highest earnings (defined to include
those items described as covered compensation under the Retirement Plan) during
any 12-month period during the three years preceding the termination (such lump
sum payment to be reduced pro rata to the extent there are less than 36 months
until the
 
                                       20
<PAGE>   23
 
officer reaches normal retirement age); (2) life, medical, and accident and
disability insurance as provided in the Company's insurance programs or, in
certain circumstances, substantially equivalent insurance to be provided by the
Company for a period of 36 months after termination of employment (or until
normal retirement age, whichever is sooner); and (3) for an executive officer
who has reached age 50 and is not otherwise entitled to an early retirement
benefit under the terms of a qualified retirement plan of the Company or its
subsidiaries, an annual benefit equal to the amount such officer would have
received had he been entitled to an early retirement benefit (reduced by any
benefits payable to him under such retirement plan and the Supplemental Benefit
Plan), and a 75% survivors benefit with respect to such early retirement
benefit. The Executive Severance Agreements also provide that if the executive
officer receives payments that would be subject to the tax imposed by Section
4999 of the Internal Revenue Code, the executive shall be entitled to receive an
additional payment in an amount necessary to put the executive officer in the
same after-tax position as if such tax had not been imposed. Assuming that the
executive officers terminated employment on January 31, 1996, in a manner
entitling them to benefits under the Executive Severance Agreements, the
respective executive officers would receive the following lump sum cash payments
pursuant to item (1) above and the following annual retirement benefits pursuant
to item (3) above: Mr. Kuehn, $3,509,384 in cash and $0 in retirement benefits;
Mr. Bates, $1,044,200 in cash and $0 in retirement benefits; Mr. Moylan,
$1,075,800 in cash and $0 in retirement benefits; Mr. Rubright, $1,266,922 in
cash and $0 in retirement benefits; Mr. Russell, $2,146,680 in cash and $6,321
in retirement benefits; and Mr. Smith, $1,699,590 in cash and $65,103 in
retirement benefits.
 
     The Executive Severance Agreements provide that the executive officer may
not voluntarily leave the employ of the Company if a third party attempts to
effect a Change of Control until such third party abandons such attempt or a
Change of Control has occurred. The Agreements renew automatically for one-year
terms unless terminated at the end of any term by the Board of Directors. The
Agreements shall also terminate if the Executive Compensation Committee
determines that the executive officer is no longer a key employee, unless a
Change of Control is threatened at the time or has occurred within the past
three years.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     L. Edwin Smart, a member of the Executive Compensation Committee of the
Board of Directors, serves as counsel to the law firm of Hughes Hubbard & Reed.
Hughes Hubbard & Reed provides legal services to the Company and certain of its
subsidiaries.
 
                                       21
<PAGE>   24
 
                      ELECTION OF AUDITOR (PROPOSAL NO. 1)
 
     Ernst & Young LLP has been nominated for election as Auditor of the
Company. The Restated Certificate of Incorporation provides that no other person
shall be eligible for election as Auditor unless notice of intention to nominate
such person has been given to the Company not less than ten days before the
Annual Meeting.
 
     A representative of Ernst & Young LLP will be present at the Annual Meeting
with the opportunity to make a statement if such representative desires to do so
and will be available to respond to appropriate questions.
 
     THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF ERNST &
YOUNG LLP AS AUDITOR (PROPOSAL NO. 1).
 
                                 OTHER MATTERS
 
PROPOSALS OF STOCKHOLDERS
 
     STOCKHOLDER PROPOSALS IN THE COMPANY'S PROXY STATEMENT.  In order for
proposals by stockholders to be considered for inclusion in the proxy statement
and form of proxy relating to the 1997 Annual Meeting of Stockholders, such
proposals must be received at the principal executive offices of the Company,
AmSouth-Sonat Tower, Birmingham, Alabama 35203, by no later than November 15,
1996.
 
     STOCKHOLDER PROPOSALS TO BE PRESENTED AT MEETINGS.  A stockholder who
desires to propose any business at an annual meeting of stockholders must give
the Secretary of the Company written notice which is received not later than the
close of business on the 60th day nor earlier than the close of business on the
90th day before the first anniversary of the preceding year's annual meeting
(the "Notice Deadline"). (Special notice provisions apply if the date of the
annual meeting is more than 30 days before or more than 60 days after such
anniversary date.) Adjournment of an annual meeting shall not commence a new
Notice Deadline. The stockholder's notice must set forth (a) a brief description
of the business desired to be brought before the meeting, the reasons for
conducting such business at the meeting and the beneficial owner, if any, on
whose behalf the proposal is made; (b) a representation that the stockholder is
a holder of record of stock of the Company entitled to vote at such meeting (or
if the record date for such meeting is subsequent to the date required for such
stockholder notice, a representation that the stockholder is a holder of record
at the time of such notice and intends to be a holder of record on the record
date for such meeting) and intends to appear in person or by proxy at such
meeting to propose such business; (c) any material interest of the stockholder
in such business; and (d) for both the stockholder giving notice and the
beneficial owner, if any, on whose behalf the proposal is made (1) the name and
address of such stockholder and beneficial owner and (2) the class and number of
shares owned beneficially and of record by such stockholder and beneficial
owner.
 
     STOCKHOLDER NOMINATIONS FOR DIRECTORS.  A stockholder who desires to
nominate Directors at a meeting of stockholders must give the Secretary of the
Company written notice within the Notice Deadline (for an annual meeting) or,
for a special meeting at which directors are to be elected pursuant to the
Company's notice of meeting, not earlier than the close of business on the 90th
day before such special meeting and not later than the close of business on the
later of the 60th day before such special meeting or the 10th day after the date
public announcement is made of the date of the special meeting and the nominees
proposed by the Board of Directors to be elected at such meeting. The
stockholder's notice must set forth (a) the name and address of the stockholder
giving the notice and of the beneficial owner, if any, on whose behalf the
nominations are made; (b) the class and number of shares owned beneficially and
of record by such stockholder and such beneficial owner; (c) a representation
that the stockholder is a holder of record of stock of the Company entitled to
vote at such meeting (or if the record date for such meeting is subsequent to
 
                                       22
<PAGE>   25
 
the date required for such stockholder notice, a representation that the
stockholder is a holder of record at the time of such notice and intends to be a
holder of record on the record date for such meeting) and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified in
the notice; (d) a description of all arrangements or understandings between the
stockholder or beneficial owner and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made; (e) such other information regarding each nominee proposed by
such stockholder as would have been required to be disclosed in solicitation of
proxies for election of directors pursuant to the proxy rules of the Securities
and Exchange Commission; and (f) the consent of each nominee to be named in the
proxy statement as a nominee and to serve as a Director of the Company if so
elected.
 
     The Chairman of the meeting may refuse to transact any business or to
acknowledge the nomination of any person if a stockholder has failed to comply
with the foregoing procedures.
 
     A copy of the Company's By-Laws may be obtained from the Company upon
written request to the Company at its principal place of business.
 
INSTITUTIONAL OWNERSHIP OF COMMON STOCK
 
     The table below sets forth, as of January 31, 1996, certain information
with respect to each person or entity known by the Company to be the beneficial
owner of more than 5% of the Company's Common Stock.
 
<TABLE>
<CAPTION>
        NAME AND ADDRESS OF             TITLE OF            NUMBER OF SHARES           PERCENT
          BENEFICIAL OWNER                CLASS            BENEFICIALLY OWNED          OF CLASS
- ------------------------------------  -------------      -----------------------       --------
<S>                                   <C>                <C>                           <C>
The Prudential Insurance Company
  of America
  Prudential Plaza
  Newark, New Jersey 07102..........  Common Stock              4,786,833               5.6  %
</TABLE>
 
     In a report on Schedule 13G filed with the Securities and Exchange
Commission with respect to the ownership of the Company's Common Stock as of
December 31, 1995, The Prudential Insurance Company of America stated that such
stock was acquired in the ordinary course of business and was not acquired for
the purpose of changing or influencing the control of the Company and was not
acquired in connection with or as a participant in any transaction having such a
purpose or effect.
 
VOTING AT THE ANNUAL MEETING
 
     The presence, in person or by proxy, of the holders of a majority of the
Company's Common Stock is necessary to constitute a quorum at the Annual Meeting
or any adjournment thereof.
 
     The vote required for the election of Directors and the approval of the
other matters scheduled for a vote at the Annual Meeting is controlled by the
provisions of the Company's Charter and By-Laws and the Delaware General
Corporation Law. Directors are elected by a plurality vote. Approval of Proposal
No. 1 would require a plurality vote. Broker "non-votes" (shares not voted on a
matter because a nominee holding shares for a beneficial owner neither receives
voting instructions from such beneficial owner nor has discretionary voting
power with respect thereto) shall not have an effect on the vote at the Annual
Meeting. The vote will be tabulated by an independent tabulator and the results
of such vote will be certified by independent inspectors of election.
 
SOLICITATION OF PROXIES
 
     The Company will bear the costs of solicitation of proxies. Officers and
regular employees of the Company may solicit proxies by mail, telephone,
telegraph and personal interview. In addition, the Company has retained D. F.
King & Co., Inc. to assist in the solicitation of proxies, and
 
                                       23
<PAGE>   26
 
anticipates that the fees that it will incur for this service, excluding
out-of-pocket expenses, will not exceed $20,000. Arrangements will be made with
brokerage houses and with other custodians, nominees and fiduciaries to forward
proxy soliciting material to beneficial owners. The Company will reimburse
persons holding stock for others in their names or in those of their nominees
for their reasonable out-of-pocket expenses in sending proxy material to their
principals and obtaining their proxies.
                         ------------------------------
 
     The information provided under the headings "Report of the Executive
Compensation Committee" and "Performance Graph" above shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
Commission or subject to Regulations 14A or 14C, other than as provided in Item
402 of Regulation S-K, or to the liabilities of Section 18 of the Securities
Exchange Act of 1934 and, unless specific reference is made therein to such
headings, shall not be incorporated by reference into any filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
 
     The Company is not aware that any matters other than those mentioned above
will be presented for action at the 1996 Annual Meeting, but if any other
matters do properly come before the meeting, the persons named as proxies will
vote upon such matters in accordance with their best judgment.
 
     Please complete, sign, date and return the enclosed proxy card promptly.
 
                                          SONAT INC.
 
                                          Beverley T. Krannich
                                            SECRETARY
 
Birmingham, Alabama
March 13, 1996
 
                                       24
<PAGE>   27
PROXY

                                   SONAT INC.
                               AMSOUTH-SONAT TOWER
                            BIRMINGHAM, ALABAMA 35203

              PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.

    The undersigned hereby appoints Ronald L. Kuehn, Jr., Donald G. Russell and
William A. Smith, and each of them, proxies, with full powers of substitution,
to represent the undersigned at the Annual Meeting of Stockholders of Sonat Inc.
to be held on April 25, 1996 and at any adjournment thereof, and to vote all
shares of stock which the undersigned would be entitled to vote if personally
present as follows:

    THE BOARD RECOMMENDS A VOTE "FOR ALL NOMINEES", AND "FOR" PROPOSAL NO. 1.

<TABLE>
<S>                           <C>                                     <C>
    1. ELECTION OF DIRECTORS         FOR all nominees / /             WITHHOLD AUTHORITY / /
        (see reverse side).   (except those whose names are inserted      to vote for
                                      on the line below)                  all nominees
</TABLE>

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

<TABLE>
<S>                                                                <C>
    2. ELECTION of Ernst & Young LLP as Auditor (Proposal No. 1).  FOR / / AGAINST / /   ABSTAIN / /
</TABLE>

          (CONTINUED, AND TO BE SIGNED AND DATED, ON THE REVERSE SIDE.)
<PAGE>   28
    3. In their discretion upon such other matters as may properly come before
       the meeting; all as set forth in the Proxy Statement for the meeting, the
       receipt of which is hereby acknowledged.

       Nominees for the Board of Directors: William O. Bourke, Roberto C.
       Goizueta, Ronald L. Kuehn, Jr., Robert J. Lanigan and Charles Marshall.

       This Proxy will be voted as specified above. If no vote is specified,
       this Proxy will be voted "FOR all nominees" in Item 1 and "FOR" Proposal
       No. 1.

                                   DATED: ________________________________, 1996
                                   SIGNATURE ___________________________________
                                   SIGNATURE ___________________________________
                                             Sign here as name(s) appear hereon.

                                         (If shares are held by joint tenants,
                                         both should sign. If signing as
                                         Attorney, Executor, Administrator,
                                         Trustee or Guardian, please give your
                                         title as such. If the signer is a
                                         corporation, please sign the full
                                         corporate name by duly authorized
                                         officer.)

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

                    PLEASE SIGN, DATE AND MAIL PROXY PROMPTLY
<PAGE>   29
                                   SONAT INC.
                               AMSOUTH-SONAT TOWER
                            BIRMINGHAM, ALABAMA 35203

          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.

    The undersigned hereby appoints Ronald L. Kuehn, Jr., Donald G. Russell and
William A. Smith, and each of them, proxies, with full powers of substitution,
and hereby authorizes each of them to represent the undersigned at the Annual
Meeting of Stockholders of Sonat Inc. to be held on April 25, 1996 and at any
adjournment thereof, and to vote all shares of stock which the undersigned would
be entitled to vote if personally present as directed on the reverse side hereof
with respect to the items set forth in the Proxy Statement and upon any other
matter which may properly come before the meeting or any adjournment thereof.

    Nominees for the Board of Directors: William O. Bourke, Roberto C. Goizueta,
Ronald L. Kuehn, Jr., Robert J. Lanigan and Charles Marshall.

                  THIS PROXY IS CONTINUED ON THE REVERSE SIDE.
              PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY.
<PAGE>   30
                                                                     Please mark
                                                                /X/   your votes
                                                                        as this

           THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2.

                                        WITHHELD
                                 FOR     FOR ALL                

Item 1--ELECTION of Directors    / /       / /
(see reverse side).

WITHHELD FOR:  
(Write that nominee's name in the space provided below).

________________________________________________________________________________

                                         FOR     AGAINST    ABSTAIN
Item 2--ELECTION of Ernst & Young LLP    / /       / /        / /
as Auditor (Proposal No. 1).

Signature(s) _____________________________________          Date _______________

NOTE: Please sign as name appears hereon. Joint owners should each sign. When
signing as attorney, executor, administrator, trustee or guardian, please give
full title as such.
<PAGE>   31

_______________      ________________     ______________________________________
   ACCT. NO.              SHARES                           NAME


                        AMSOUTH BANK OF ALABAMA, TRUSTEE
                      SONAT OFFSHORE DRILLING SAVINGS PLAN
                                 RE: SONAT INC.
                          ANNUAL MEETING APRIL 25, 1996

    Receipt of proxy soliciting material for the above meeting is acknowledged.
As to stock in Sonat Inc. owned by me but held by your nominee for my account,
you are instructed to sign and forward a proxy in the form being solicited by
the Board of Directors and to direct a vote as follows:

    THE BOARD RECOMMENDS A VOTE "FOR ALL NOMINEES", AND "FOR" PROPOSAL NO. 1.

<TABLE>
   <S>                                           <C>                                                        <C>
   1. ELECTION OF DIRECTORS (see reverse side).  FOR all nominees / /                                       WITHHOLD AUTHORITY / /
                                                 (except those whose names are inserted on the line below)  to vote for all nominees
</TABLE>

- --------------------------------------------------------------------------------
   
<TABLE>
   <S>                                                            <C>
   2. ELECTION of Ernst & Young LLP as Auditor (Proposal No. 1).  FOR / / AGAINST / / ABSTAIN / /
</TABLE>

       ITEMS CONTINUED ON THE REVERSE SIDE-PLEASE SIGN ON THE REVERSE SIDE
<PAGE>   32
    3. In their discretion upon such other matters as may properly come before
       the meeting; all as set forth in the Proxy Statement for the meeting.
       Nominees for the Board of Directors: William O. Bourke, Roberto C.
       Goizueta, Ronald L. Kuehn, Jr., Robert J. Lanigan and Charles Marshall.

THE UNDERSIGNED'S VOTE IS TO BE CAST AS SPECIFIED ABOVE. IF NO VOTE IS
SPECIFIED, IT WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1 AND "FOR" ITEM 2.

                                  Dated __________________________________, 1996

                                  Signature ____________________________________
                                              Sign here as name appears hereon.

          PLEASE SIGN, DATE AND MAIL PROMPTLY IN THE ENVELOPE PROVIDED.
<PAGE>   33
                               SONAT SAVINGS PLAN
                                   SONAT INC.
                         ANNUAL MEETING - APRIL 25, 1996

    I hereby direct The Northern Trust Company, as Trustee of the Sonat Savings
Plan, to sign and forward a proxy in the form being solicited by the Board of
Directors and to vote as directed on the reverse side all shares of Sonat Inc.
Common Stock held with respect to my account under the Plan at the Annual
Meeting of Stockholders of Sonat Inc. to be held on April 25, 1996 and at any
adjournment thereof.


             TO BE COMPLETED, SIGNED AND DATED ON THE REVERSE SIDE.
<PAGE>   34
                               SONAT SAVINGS PLAN
                                   SONAT INC.
                         ANNUAL MEETING - APRIL 25, 1996

   THE BOARD RECOMMENDS A VOTE "FOR ALL NOMINEES", AND "FOR" PROPOSAL NO. 1.

<TABLE>
<S>                                      <C>
1. ELECTION OF DIRECTORS                 FOR all nominees / /                                       WITHHOLD AUTHORITY / /
William O. Bourke, Roberto C. Goizueta,  (except those whose names are inserted on the line below)  to vote for all nominees
Ronald L. Kuehn, Jr., Robert J. Lanigan
and Charles Marshall.

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

2. ELECTION of Ernst & Young LLP as Auditor (Proposal No. 1).  FOR / / AGAINST / / ABSTAIN / /
</TABLE>

THE UNDERSIGNED'S VOTE IS TO BE CAST AS SPECIFIED ABOVE. IF NO VOTE IS
SPECIFIED, IT WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1 AND "FOR" PROPOSAL NO.
1.

        Dated _______________, 1996  Signature _________________________________
                                               Sign here as name appears hereon.


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