##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 033-43007
 TERRA NITROGEN COMPANY, L.P.
  Delaware
    
    73-1389684(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Terra CentrePO Box 6000600 Fourth StreetSioux City, Iowa
(Address of principal executive office)
    
    51102-6000
(Zip Code)
 Registrants telephone number, including area code: (712) 277-1340
 þ Yes o No
 þ Yes o No
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o Yes þ No




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##### 



TABLE OF CONTENTS
 Part I  FINANCIAL INFORMATIONItem 1. Financial StatementsConsolidated Balance Sheets
    
    
    3Consolidated Statements of Operations
    
    
    4Consolidated Statements of Cash Flows
    
    
    5Consolidated Statements of Partners Capital
    
    
    6Notes to the Consolidated Financial Statements
    
    
    7Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    34Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    36Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1.
    
    FINANCIAL STATEMENTS
 TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED BALANCE SHEETS
 unaudited
 September 30,
    
    
    December 31,
    
    
    September 30,2009
    
    
    2008
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    70,656
    
    
    $
    154,681
    
    
    $
    185,763Demand deposits with affiliate
    
    
    
    
    
    
    
    
    
    
    4,369Accounts receivable, less allowance for
doubtful accounts of $760, $0 and $0
    
    
    18,933
    
    
    
    38,053
    
    
    
    57,140Inventories, net
    
    
    21,610
    
    
    
    57,207
    
    
    
    43,697Prepaid expenses and other current assets
    
    
    5,076
    
    
    
    11,815
    
    
    
    12,703Total current assets
    
    
    116,275
    
    
    
    261,756
    
    
    
    303,672Property, plant and equipment, net
    
    
    77,171
    
    
    
    68,208
    
    
    
    68,480Other long-term assets
    
    
    15,450
    
    
    
    11,442
    
    
    
    12,137Total assets
    
    $
    208,896
    
    
    $
    341,406
    
    
    $
    384,289LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    26,733
    
    
    $
    24,844
    
    
    $
    38,079Customer prepayments
    
    
    20,450
    
    
    
    45,067
    
    
    
    92,092Derivative hedge liabilities
    
    
    992
    
    
    
    43,315
    
    
    
    81,653Total current liabilities
    
    
    48,175
    
    
    
    113,226
    
    
    
    211,824Other long-term liabilities
    
    
    638
    
    
    
    871
    
    
    
    1,071Total liabilities
    
    
    48,813
    
    
    
    114,097
    
    
    
    212,895Partners capital:Limited partners interests, 18,502 Common Units
authorized and outstanding
    
    
    160,358
    
    
    
    217,894
    
    
    
    204,013Limited partners interests, 184 Class B Common
Units authorized and outstanding
    
    
    60
    
    
    
    1,024
    
    
    
    855General partners interest
    
    
    (1,374
    )
    
    
    39,172
    
    
    
    35,830Accumulated other comprehensive income (loss)
    
    
    1,039
    
    
    
    (30,781
    )
    
    
    (69,304
    )Total partners capital
    
    
    160,083
    
    
    
    227,309
    
    
    
    171,394Total liabilities and partners capital
    
    $
    208,896
    
    
    $
    341,406
    
    
    $
    384,289
   3




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##### Table of Contents



TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS   (unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues:Product revenues
    
    $
    101,396
    
    
    $
    246,450
    
    
    $
    409,106
    
    
    $
    677,495Other income
    
    
    149
    
    
    
    135
    
    
    
    512
    
    
    
    293Total revenues
    
    
    101,545
    
    
    
    246,585
    
    
    
    409,618
    
    
    
    677,788Costs and expenses:Cost of goods sold
    
    
    79,749
    
    
    
    138,286
    
    
    
    274,747
    
    
    
    352,118Gross profit
    
    
    21,796
    
    
    
    108,299
    
    
    
    134,871
    
    
    
    325,670Operating expenses
    
    
    4,477
    
    
    
    3,196
    
    
    
    13,879
    
    
    
    12,833Income from operations
    
    
    17,319
    
    
    
    105,103
    
    
    
    120,992
    
    
    
    312,837Interest expense
    
    
    (82
    )
    
    
    (82
    )
    
    
    (244
    )
    
    
    (245
    )Interest income
    
    
    73
    
    
    
    1,179
    
    
    
    682
    
    
    
    5,359Net income
    
    $
    17,310
    
    
    $
    106,200
    
    
    $
    121,430
    
    
    $
    317,951Allocation of net income:General Partner
    
    $
    5,221
    
    
    $
    41,996
    
    
    $
    42,828
    
    
    $
    104,793Class B Common Units
    
    
    169
    
    
    
    1,035
    
    
    
    1,185
    
    
    
    3,100Common Units
    
    
    11,920
    
    
    
    63,169
    
    
    
    77,417
    
    
    
    210,058Net income
    
    $
    17,310
    
    
    $
    106,200
    
    
    $
    121,430
    
    
    $
    317,951Net income per Common Unit
    
    $
    0.64
    
    
    $
    3.41
    
    
    $
    4.18
    
    
    $
    11.35
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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Nine Months EndedSeptember 30,2009
    
    
    2008Operating activities:Net income
    
    $
    121,430
    
    
    $
    317,951Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    12,409
    
    
    
    17,287Non-cash (gain) loss on derivative instruments
    
    
    (265
    )
    
    
    1,093Changes in operating assets and liabilities:Receivables
    
    
    19,120
    
    
    
    (7,505
    )Inventories
    
    
    35,597
    
    
    
    (24,354
    )Accounts payable and customer prepayments
    
    
    (21,919
    )
    
    
    (62,254
    )Other assets and liabilities
    
    
    (6,206
    )
    
    
    (2,974
    )Net cash flows from operating activities
    
    
    160,166
    
    
    
    239,244Investing activities:Capital expenditures and plant turnaround expenditures
    
    
    (23,715
    )
    
    
    (6,201
    )Changes in demand deposits with affiliate
    
    
    
    
    
    
    (4,369
    )Net cash flows from investing activities
    
    
    (23,715
    )
    
    
    (10,570
    )Financing activities:Partnership distributions paid
    
    
    (220,476
    )
    
    
    (289,051
    )Net cash flows from financing activities
    
    
    (220,476
    )
    
    
    (289,051
    )Decrease to cash and cash equivalents
    
    
    (84,025
    )
    
    
    (60,377
    )Cash and cash equivalents at beginning of period
    
    
    154,681
    
    
    
    246,140Cash and cash equivalents at end of period
    
    $
    70,656
    
    
    $
    185,763Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    190
    
    
    $
    191
   5




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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL
 (unaudited)
 AccumulatedClass B
    
    
    General
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Units
    
    
    Units
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2009
    
    $
    217,894
    
    
    $
    1,024
    
    
    $
    39,172
    
    
    $
    (30,781
    )
    
    $
    227,309Net income
    
    
    77,417
    
    
    
    1,185
    
    
    
    42,828
    
    
    
    3⁄4
    
    
    
    121,430
    
    
    $
    121,430Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    31,820
    
    
    
    31,820
    
    
    
    31,820Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    153,250Distributions
    
    
    (134,953
    )
    
    
    (2,149
    )
    
    
    (83,374
    )
    
    
    3⁄4
    
    
    
    (220,476
    )Partners capital at September 30, 2009
    
    $
    160,358
    
    
    $
    60
    
    
    $
    (1,374
    )
    
    $
    1,039
    
    
    $
    160,083Limited partner units issued and
outstanding September 30, 2009:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at September 30, 2009
    
    
    
    
    
    
    
    
    
    
    18,685,648
 AccumulatedClass B
    
    
    General
    
    
    Other
    
    
    TotalCommon
    
    
    Common
    
    
    Partners
    
    
    Comprehensive
    
    
    Partners
    
    
    Comprehensive(in thousands, except for Units)
    
    Units
    
    
    Units
    
    
    Interests
    
    
    Income (Loss)
    
    
    Capital
    
    
    IncomePartners capital at January 1, 2008
    
    $
    221,153
    
    
    $
    573
    
    
    $
    (9,928
    )
    
    $
    (4,699
    )
    
    $
    207,099Net income
    
    
    210,058
    
    
    
    3,100
    
    
    
    104,793
    
    
    
    3⁄4
    
    
    
    317,951
    
    
    $
    317,951Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    (64,605
    )
    
    
    (64,605
    )
    
    
    (64,605
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    253,346Distributions
    
    
    (227,198
    )
    
    
    (2,818
    )
    
    
    (59,035
    )
    
    
    3⁄4
    
    
    
    (289,051
    )Partners capital at September 30, 2008
    
    $
    204,013
    
    
    $
    855
    
    
    $
    35,830
    
    
    $
    (69,304
    )
    
    $
    171,394Limited partner units issued and
outstanding September 30, 2008:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at September 30, 2008
    
    
    
    
    
    
    
    
    
    
    18,685,648
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TERRA NITROGEN COMPANY, L.P.
 
 Notes to Consolidated Financial Statements (Unaudited)
 1.
    
    Background and Basis of Presentation
 Terra Nitrogen Company, L.P. (TNCLP, our, we, or us) is a leading producer and marketer of
wholesale nitrogen products made from natural gas. TNCLP and its operating partnership
subsidiary, Terra Nitrogen, Limited Partnership (Operating Partnership), are referred to
herein, collectively, as the Partnership. Our principal products are anhydrous ammonia
(ammonia) and urea ammonium nitrate solutions (UAN), which we manufacture at our facility in
Verdigris, Oklahoma. We operate in one principal industry segment  Nitrogen Products, which is
based upon the guidance provided in the Segment Reporting topic of the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (Codification). As a wholesale
nitrogen producer, we do not report industry segments in a separate disclosure because our only
reportable industry segment is nitrogen.The accompanying unaudited consolidated financial statements and notes thereto have been
prepared in accordance with the requirements of the U.S. Securities and Exchange Commission
(SEC) for interim reporting. They do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements. Therefore, these
financial statements should be read in conjunction with our audited consolidated financial
statements and notes thereto for the year ended December 31, 2008, included in our 2008 Annual
Report on Form 10-K.Our significant accounting policies are described in the notes to consolidated financial
statements in our Annual Report on Form 10-K for the year ended December 31, 2008. Management
is responsible for the unaudited consolidated financial statements included in this document.
The consolidated financial statements included in this document are unaudited; however, they
contain all normal recurring adjustments that, in the opinion of management, are necessary for
a fair presentation of the Partnerships financial position, results of operations and cash
flows for the periods presented.Because of the seasonal nature of our operations and effects of weather-related conditions in
several of its marketing areas, results of any interim reporting period should not be
considered as indicative of results for future quarters or the full year.
 2.
    
    New Accounting Pronouncements
 We adopted the provisions of the FASB Statement on Generally Accepted Accounting Principles
(GAAP) relating to the Codification on July 1, 2009. This Statement establishes the
Codification as the source of authoritative accounting principles recognized by the FASB to be
applied by nongovernmental entities in the preparation of financial statements in conformity
with GAAP. Rules and interpretive releases of the SEC under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue
new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task
Force (EITF) Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting
Standard Updates will not be authoritative in their own right as they will only serve to update
the Codification. The adoption did not have an impact on our consolidated financial position,
results of operations or cash flows.
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The FASB Statement on Business Combinations was effective for us for business combinations with
the acquisition date on or after January 1, 2009. This Statement requires the acquiring entity
in a business combination to recognize all (and only) the assets acquired and liabilities
assumed in the transaction and establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed in a business combination. Certain
provisions of this Statement will, among other things, impact the determination of
acquisition-date fair value of consideration paid in a business combination (including
contingent consideration); exclude transaction costs from acquisition accounting; and change
accounting practices for acquired contingencies, acquisition-related restructuring costs,
in-process research and development, indemnification assets and tax benefits. The adoption did
not have an impact on our consolidated financial position, results of operations or cash flows.We adopted the provisions of the FASB Statement on disclosures relating to Derivatives and
Hedging on January 1, 2009. This Statement requires entities to provide enhanced disclosures
about how and why an entity uses derivative instruments, how derivative instruments and related
hedged items are accounted, and how derivative instruments and related hedged items affect an
entitys financial position, results of operations, and cash flows. These disclosures are
included in Note 6 herein.We adopted the provisions of the EITF guidance relating to Earnings Per Share for Master
Limited Partnerships on January 1, 2009. This guidance specifies the treatment of earnings per
unit calculations when incentive distribution rights exist. The adoption did not have an impact
on our consolidated financial position, results of operations or cash flows.We adopted the provisions of the FASB Staff Position (FSP) relating to Fair Value Measurements
and Disclosures, as of April 1, 2009. This FSP provides additional guidance on estimating fair
value when the volume and level of activity for an asset or liability have significantly
decreased in relation to normal market activity. The FSP also provides additional guidance on
circumstances that may indicate that a transaction is not orderly and requires additional
disclosures. The adoption did not have an impact on our consolidated financial position,
results of operations or cash flows.We adopted the provisions of a FSP relating to Investments on April 1, 2009. This FSP amends
the other-than-temporary recognition guidance for debt securities and requires additional
interim and annual disclosures of other-than-temporary impairments on debt and equity
securities. Pursuant to the new guidance, an other-than-temporary impairment has occurred if a
company does not expect to recover the entire amortized cost basis of the security. In this
situation, if the company does not intend to sell the impaired security, and it is not more
likely than not it will be required to sell the security before the recovery of its amortized
cost basis, the amount of the other-than-temporary impairment recognized in earnings is limited
to the portion attributed to the credit loss. The remaining portion of the other-than-temporary
impairment is
then recorded in other comprehensive income. The adoption did not have an impact on our
consolidated financial position, results of operations or cash flows.
  8




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We adopted the provisions of a FSP on Financial Instruments, as of April 1, 2009. This FSP
required disclosures about fair value of all financial instruments for interim reporting
periods. This FSP relates to fair value disclosures for any financial instruments that are not
currently reflected in a companys balance sheet at fair value. Prior to the effective date of
this FSP, fair values for these assets and liabilities were only disclosed once a year. This
FSP will now require these disclosures to be made on a quarterly basis, providing qualitative
and quantitative information about fair value estimates for all those financial instruments not
measured on the balance sheet at fair value. We have included the additional disclosure
information in Note 7 herein.We adopted the provisions of the FASB Statement on Subsequent Events on July 1, 2009. This
Statement provides authoritative accounting literature and disclosure requirements for material
events occurring subsequent to the balance sheet date and prior to the issuance of the
financial statements. The adoption did not have an impact on our consolidated financial
position, results of operations or cash flows. We have evaluated subsequent events through
November 6, 2009, which is the date of our Form 10-Q filing. We have included a subsequent
events disclosure in Note 11 herein.In June 2009, the FASB issued a Statement on Transfers and Servicing, an amendment of previous
authoritative guidance. The most significant amendments resulting from this Statement consist
of the removal of the concept of a qualifying special-purpose entity (SPE) from previous
authoritative guidance, and the elimination of the exception for qualifying SPEs from the
Consolidation guidance regarding variable interest entities. This Statement is effective for us
January 1, 2010 and we are currently assessing the impact this guidance will have on our
financial statements.In June 2009, the FASB issued a Statement which amends the previous Consolidations guidance
regarding variable interest entities and addresses the effects of eliminating the qualifying
special purpose entity concept from the guidance on Transfers and Servicing. This Statement
responds to concerns about the application of certain key provisions of the previous guidance
on Consolidations regarding variable interest entities, including concerns over the
transparency of enterprises involvement with variable interest entities. This Statement is
effective for us January 1, 2010 and we are currently assessing the impact this Statement will
have on our financial statements.In September 2009, the EITF issued guidance relating to Revenue Recognition. This guidance will
change the accounting for revenue recognition for arrangements with multiple deliverables and
will enable entities to separately account for individual deliverables for many more revenue
arrangements. This guidance eliminates the requirement that all undelivered elements must have
objective and reliable evidence of fair value before a company can recognize the portion of the
overall arrangement fee that is attributable to items that already have been delivered. As a
result, the new guidance may allow some companies to recognize revenue on transactions that
involve multiple deliverables earlier than under current requirements. This guidance is
effective
for us January 1, 2011 and we are currently assessing the impact this Statement will have on
our financial statements.
  9




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3.
    
    Agreement of Limited Partnership
 We make quarterly distributions to our partners based on Available Cash (as defined in our
Agreement of Limited Partnership) for the quarter. Available Cash is defined generally as all
cash receipts less all cash disbursements, adjusted for changes in certain reserves established
as Terra Nitrogen GP Inc. (the General Partner) determines in its reasonable discretion to be
necessary. We paid distributions of $220.5 million to our partners in the first nine months of
2009 and $289.1 million for the same period in 2008.We receive 99% of the Available Cash from the Operating Partnership and 1% is distributed to
its general partner (who is also our General Partner). Cash distributions from the Operating
Partnership generally represent the Operating Partnerships Available Cash from operations. Our
cash distributions are made 99.975% to Common Unitholders and Class B Common Unitholders and
0.025% to our General Partner except when cumulative distributions of Available Cash exceed
specified target levels above the Minimum Quarterly Distributions (MQD) of $0.605 per unit.
Under such circumstances, our General Partner is entitled, as an incentive, to larger
percentage interests.On October 22, 2009, we announced a $1.63 cash distribution per common limited partnership
unit, payable on November 24, 2009 to holders of record as of November 6, 2009. We have
exceeded the cumulative MQD amounts and will distribute Available Cash as summarized in the
following table:
 Income and Distribution AllocationClass BTarget
    
    
    Target
    
    
    Common
    
    
    Common
    
    
    GeneralLimit
    
    
    Increment
    
    
    Units
    
    
    Units
    
    
    Partner
    
    
    TotalMinimum Quarterly Distribution
    
    $
    0.605
    
    
    $
    0.605
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %First Target
    
    
    0.715
    
    
    
    0.110
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %Second Target
    
    
    0.825
    
    
    
    0.110
    
    
    
    85.859
    %
    
    
    0.985
    %
    
    
    13.156
    %
    
    
    100.000
    %Third Target
    
    
    1.045
    
    
    
    0.220
    
    
    
    75.758
    %
    
    
    0.985
    %
    
    
    23.257
    %
    
    
    100.000
    %Final Target and Beyond
    
    
    1.045
    
    
    
    3⁄4
    
    
    
    50.505
    %
    
    
    0.985
    %
    
    
    48.510
    %
    
    
    100.000
    %
 The General Partner is required to remit the majority of cash distributions it receives
from the Partnership, in excess of its 1% Partnership equity interest, to an affiliated
company.At September 30, 2009, the General Partner and its affiliates owned 75.3% of our outstanding
units. When not more than 25% of our issued and outstanding units are held by non-affiliates
of the General Partner, we, at the General Partners sole discretion, may call, or assign to
the General Partner or its affiliates, our right to acquire all such outstanding units held by
non-affiliated persons. If the General Partner elects to acquire all outstanding units, we are
required to give at least 30 but not more than 60 days notice of our decision to purchase the
outstanding units. The purchase price per unit will be the greater of (1) the average of the
previous 20 trading days closing prices as of the date five days before the purchase is
announced and (2)
the highest price paid by the General Partner or any of its affiliates for any unit within the
90 days preceding the date the purchase is announced. Additional purchases of common units by
the General Partner may be restricted under the terms of Terra Industries Inc.s bank credit
agreement as described therein.
  10




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4.
    
    Net Income per Common Unit
 Basic and diluted income per Common Unit is based on the weighted-average number of Common
Units outstanding during the period. The following table provides a reconciliation for basic
and diluted income per Common Unit for the three and nine month periods ended September 30,
2009 and 2008:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,(in thousands, except per-unit amounts)
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008Basic income per Common Unit:Net income
    
    $
    17,310
    
    
    $
    106,200
    
    
    $
    121,430
    
    
    $
    317,951Less: Net income allocable to
Class B Common Units
    
    
    169
    
    
    
    1,035
    
    
    
    1,185
    
    
    
    3,100Less: Net income allocable to
General Partner
    
    
    5,221
    
    
    
    41,996
    
    
    
    42,828
    
    
    
    104,793Net income allocable to Common Units
    
    
    11,920
    
    
    
    63,169
    
    
    
    77,417
    
    
    
    210,058Weighted average units outstanding
    
    
    18,502
    
    
    
    18,502
    
    
    
    18,502
    
    
    
    18,052Net income per Common Unit
    
    $
    0.64
    
    
    $
    3.41
    
    
    $
    4.18
    
    
    $
    11.35
 There were no dilutive Common Units outstanding for the three and nine month periods ended
September 30, 2009 and 2008.
 5.
    
    Inventories, Net
 Inventories consisted of the following:
 September 30,
    
    
    December 31,
    
    
    September 30,(in thousands)
    
    2009
    
    
    2008
    
    
    2008Materials and supplies
    
    $
    8,961
    
    
    $
    10,708
    
    
    $
    11,343Finished goods
    
    
    12,649
    
    
    
    46,499
    
    
    
    32,354Total
    
    $
    20,610
    
    
    $
    57,207
    
    
    $
    43,697
 Production costs include the cost of direct labor and materials, depreciation and amortization,
and overhead costs related to manufacturing activities. We allocate fixed production overhead
costs based on the normal capacity of our production facilities and unallocated overhead costs
are recognized as expense in the period incurred. We determine the cost of inventories using
the first-in, first-out method.
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Inventories are stated at the lower of cost or market. Market is defined as current replacement
cost, except that market should not exceed the net realizable value and should not be less than
net realizable value reduced by an allowance for an approximately normal profit margin. We
perform a monthly analysis of our inventory balances to determine if the carrying amount of
inventories exceeds our net realizable value. Our determination of estimated net realizable
value is based on customer orders, market trends and historical pricing. If the carrying amount
exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net
realizable value.We estimate a reserve for obsolescence and excess of materials and supplies inventory.
Inventory is stated net of the reserve.
 6.
    
    Derivative Financial Instruments
 We enter into derivative financial instruments, including swaps, basis swaps, purchased put and
call options and sold call options, to manage the effect of changes in natural gas costs and
the price of our nitrogen products. We report the fair value of the derivatives on our balance
sheet. If the derivative is not designated as a hedging instrument, changes in fair value are
recognized in earnings in the period of change. If the derivative is designated as a cash flow
hedge, and to the extent such hedge is determined to be effective, changes in fair value are
reported as a component of accumulated other comprehensive income (loss) in the period of
change, and subsequently recognized in our statement of operations in the period the offsetting
hedged transaction occurs. If an instrument or the hedged item is settled early, we evaluate
whether the hedged forecasted transaction is still probable of occurring when determining
whether to reclassify any gains or losses immediately in cost of sales or wait until the
forecasted transaction occurs.Until our derivatives settle, we test derivatives for ineffectiveness. This includes assessing
the correlation of New York Mercantile Exchange (NYMEX) pricing, which is commonly used as an
index in natural gas derivatives, to the natural gas pipelines pricing at our manufacturing
facilities. This assessment requires management judgment to determine the statistically and
industry appropriate analysis of prior operating relationships between the NYMEX prices and the
natural gas pipelines prices at our facilities.To the extent possible, we base our market value calculations on third party data. Due to
multiple types of settlement methods available, not all settlement methods for future period
trades are available from third party sources. In the event that a derivative is measured for
fair value based on a settlement method that is not readily available, we estimate the fair
value based on forward pricing information for similar types of settlement methods.We manage risk using derivative financial instruments for changes in natural gas supply prices
and changes in nitrogen prices. Derivative financial instruments have credit risk and market
risk.
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To manage credit risk, we enter into derivative transactions only with counter-parties who are
currently rated as BBB or better or equivalent as recognized by a national rating agency.
We will not enter into transactions with a counter-party if the additional transaction will
result in credit exposure exceeding $20 million. The credit rating of counter-parties may be
modified through guarantees, letters of credit or other credit enhancement vehicles. As of
September 30, 2009, we did not have any credit risk related contingent features that would
require us to settle the derivative instruments or to post collateral upon the occurrence of a
credit event.We classify a derivative financial instrument as a hedge if all of the following conditions are
met:
 1.
    
    The item to be hedged must expose us to currency, interest or price risk;2.
    
    It must be probable that the results of the hedge position substantially offset
the effects of currency, interest or price changes on the hedged item (i.e., there is a
high correlation between the hedge position and changes in market value of the hedge
item); and3.
    
    The derivative financial instrument must be designated as a hedge of the item
at the inception of the hedge.
 We purchase natural gas at market prices to meet production requirements at our manufacturing
facility. Natural gas market prices are volatile and we effectively hedge a portion of our
natural gas production requirements and inventory through the use of swaps and options. These
contracts reference physical natural gas prices or approximate NYMEX futures contract prices.
Contract physical prices are frequently based on prices at the Henry Hub in Louisiana, the most
common and financially liquid location of reference for financial derivatives related to
natural gas. However, we purchase natural gas for our manufacturing facility at locations other
than Henry Hub, which often creates a location basis differential between the contract price
and the physical price of natural gas. Accordingly, the use of financial derivatives may not
exactly offset the changes in the price of physical gas. Natural gas derivatives are designated
as cash flow hedges, provided that the derivatives meet the conditions discussed above. The
contracts are traded in months forward and settlement dates are scheduled to coincide with gas
purchases during that future period.A swap is a contract between us and a third party to exchange cash based on a designated price.
Option contracts give the holder the right to either own or sell a futures or swap contract.
The option contracts require initial premium payments ranging from 2% to 5% of contract value.
Basis swap contracts require payments to or from us for the amount, if any, that monthly
published gas prices from the source specified in the contract differ from the prices of NYMEX
natural gas futures during a specified period. There are no initial cash requirements related
to the swap and basis swap agreements; however, the counterparties require maintenance of cash
margin balances generally 10% to 20% of the contract value.
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As of September 30, 2009 and 2008, we had open derivative contracts for 5.7 million MMBtus and
14.8 million MMBtus, respectively, of natural gas.
The gross fair market value of all derivative instruments and their location in our
Consolidated Balance Sheet are shown by those in an asset or liability position and are all
categorized as commodity derivatives.
 Asset Derivatives (a)September 30,
    
    
    December 31,
    
    
    September 30,Derivative Instrument
    
    Location
    
    2009
    
    
    2008
    
    
    2008Commodity Derivatives
    
    Other current assets
    
    $
    4,008
    
    
    $
    9,456
    
    
    $
    11,779
 Liability Derivatives (a)September 30,
    
    
    December 31,
    
    
    September 30,Derivative Instrument
    
    Location
    
    2009
    
    
    2008
    
    
    2008Commodity Derivatives
    
    Derivative hedge liabilities
    
    $
    (992
    )
    
    $
    (43,315
    )
    
    $
    (81,653
    )
 (a)
    
    Amounts are disclosed at gross fair value as required by the Derivative and
Hedging topic of the Codification. All of our commodity derivatives are designated as
cash flow hedging instruments. See Notes 1 and 6 to our audited consolidated financial
statements included in our 2008 Annual Report on Form 10-K for additional information
on our overall risk management strategies. Certain derivatives outstanding at September 30, 2009 and 2008, which settled during
October 2009 and October 2008, respectively, are included in the position of open natural gas
derivatives in the table above. The October 2009 derivatives settled for an approximate $0.1
million gain compared to the October 2008 derivatives which settled for an approximate $16.0
million loss. All material open derivatives at September 30, 2009 will settle during the next
12 months.At September 30, 2009 and 2008, we determined that a portion of certain derivative contracts
were ineffective for accounting purposes and, as a result, recorded a $0.8 million charge and
$1.8 million charge, respectively, to cost of sales for the nine month periods ending September
30, 2009 and 2008, respectively. At September 30, 2009 and 2008, we excluded a portion of the
loss on certain derivative contracts from the effectiveness assessment and, as a result,
reported a $1.1 million credit and $2.9 million credit, respectively, to cost of sales.The effective portion of gains and losses on derivative contracts that qualify for hedge
treatment are carried as accumulated other comprehensive income (loss) (AOCI) and credited or charged
to cost of sales in the month in which the hedged transaction settles. Gains and losses on the
contracts that do not qualify for hedge treatment are credited or charged to cost of sales
based on the positions of fair value. The risk and reward of outstanding natural gas positions
are directly related to increases or decreases in natural gas prices in relation to the
underlying NYMEX natural gas contract prices. All of our commodity derivatives are designated
as cash flow hedging instruments under the Derivatives and Hedging topic of the Codification.
See Notes 1 and 6 to our audited consolidated financial statements included in our 2008 Annual
Report on Form 10-K for additional information on our overall risk management strategies.
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The following table presents the effect of our commodity derivative instruments on the
Consolidated Statement of Operations for the three and nine months ended September 30, 2009 and
2008.
 Three Months EndedAmount of Gain (Loss)Amount of Gain (Loss)
    
    
    Location of Gain
    
    Reclassified from AOCI
    
    
    
    
    
    
    Amount of Gain (Loss)Recognized in OCI
    
    
    (Loss) Reclassified
    
    into Income
    
    
    
    
    
    
    Recognized in Income(b)Sept. 30,
    
    
    Sept. 30,
    
    
    from AOCI into
    
    Sept. 30,
    
    
    Sept. 30,
    
    
    Location of Gain (Loss)
    
    
    Sept. 30,
    
    
    Sept. 30,2009
    
    
    2008
    
    
    Income (a)
    
    2009
    
    
    2008
    
    
    Recognized in Income (b)
    
    
    2009
    
    
    2008$
    (574
    )
    
    $
    (94,479
    )
    
    Cost of Sales
    
    $
    (2,711
    )
    
    $
    7,060
    
    
    Cost of Sales
    
    $
    265
    
    
    $
    1,093
 Nine Months EndedAmount of Gain (Loss)Amount of Gain (Loss)
    
    
    Location of Gain
    
    Reclassified from AOCI
    
    
    
    
    
    
    Amount of Gain (Loss)Recognized in OCI
    
    
    (Loss) Reclassified
    
    into Income
    
    
    
    
    
    
    Recognized in Income(b)Sept. 30,
    
    
    Sept. 30,
    
    
    from AOCI into
    
    Sept. 30,
    
    
    Sept. 30,
    
    
    Location of Gain (Loss)
    
    
    Sept. 30,
    
    
    Sept. 30,2009
    
    
    2008
    
    
    Income (a)
    
    2009
    
    
    2008
    
    
    Recognized in Income (b)
    
    
    2009
    
    
    2008$
    (15,196
    )
    
    $
    (79,790
    )
    
    Cost of Sales
    
    $
    (47,016
    )
    
    $
    (15,185
    )
    
    Cost of Sales
    
    $
    265
    
    
    $
    1,093
 (a)
    
    Effective portion of gain (loss)(b)
    
    The amount of gain or (loss) recognized in income represents ($0.8) million and
($1.8) million related to the ineffective portion of the hedging relationships and $1.1
million and $2.9 million related to the amount excluded from the assessment of hedge
effectiveness. Approximately $1.0 million of the net accumulated income at September 30, 2009 will be
reclassified into earnings during the next twelve months as compared to $69.3 million of the
net accumulated loss at September 30, 2008.At times, we also use forward derivative instruments, such as nitrogen solution contracts, to
fix or set floor prices for a portion of our nitrogen sales volumes. At September 30, 2009, we
had open nitrogen solutions contracts. When outstanding, the nitrogen solution contracts do not
qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness.
Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected
in revenue in the statement of operations. For both the three and nine month periods ending
September 30, 2009, we recognized an unrealized loss of less than $0.1 million on nitrogen
forward derivative instruments. For the three and nine month periods ending September 30, 2008,
there were no gains or losses on nitrogen forward derivative instruments.
 7.
    
    Fair Value Measurements
 The Fair Value Measurements and Disclosures topic of the Codification establishes a three level
hierarchal disclosure framework that prioritizes and ranks the level of market price
observability used in measuring assets and liabilities at fair value. Market price
observability is impacted by a number of factors, including the type of asset or liability and
their characteristics. Assets and liabilities with readily available active quoted prices or
for which fair value can be measured from actively quoted prices generally will have a higher
degree of market price observability and a lesser degree of judgment used in measuring fair
value.The three levels are defined as follows:
 
    
    Level 1  inputs to the valuation methodology are unadjusted quoted prices for
identical assets or liabilities in active markets.
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
    
    Level 2  inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the asset
or liability, either directly or indirectly, for substantially the full term of the
financial instrument.
    
    Level 3  inputs to the valuation methodology are observable and significant to the
fair value measurement.
 We evaluated our assets and liabilities to determine which items should be disclosed according
to the Fair Value Measurements and Disclosures topic of the Codification. We currently measure
our money market funds and derivative contracts on a recurring basis at fair value. The fair
value of our money market fund investments were determined based on quoted prices in active
markets for identical assets. The inputs included in the fair value measurement of our
derivative contracts use adjusted quoted prices from an active market, which are classified at
level 2, as a significant other observable input in the disclosure hierarchy framework as
defined by the Fair Value Measurements and Disclosures topic of the Codification. The
Partnerships gas derivative contracts, which are classified as a level 2 input, are comprised
of swaps, basis swaps and options. The valuation techniques for these contracts are observable
market data for inputs, including prices quoted on the New York Mercantile Exchange, prices
quoted in spot markets and commonly referenced industry publications and prices quoted by
market makers. There have been no changes in valuation techniques during the nine months ending
September 30, 2009.The following table summarizes the valuation of our assets and liabilities in accordance with
the Fair Value Measurements and Disclosures topic of the Codification fair value hierarchy
levels as of September 30, 2009:
 Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsMoney market funds
    
    $
    70,651
    
    
    $
    3⁄4
    
    
    $
    3⁄4Derivative contracts
    
    
    3⁄4
    
    
    
    4,008
    
    
    
    3⁄4Total
    
    $
    70,651
    
    
    $
    4,008
    
    
    $
    3⁄4LiabilitiesDerivative contracts
    
    $
    3⁄4
    
    
    $
    (992
    )
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    (992
    )
    
    $
    3⁄4
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The following table summarizes the valuation of our assets and liabilities in accordance
with the Fair Value Measurements and Disclosures topic of the Codification fair value hierarchy
levels as of December 31, 2008:
 Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsMoney market funds
    
    $
    154,676
    
    
    $
    3⁄4
    
    
    $
    3⁄4Derivative contracts
    
    
    3⁄4
    
    
    
    9,456
    
    
    
    3⁄4Total
    
    $
    154,676
    
    
    $
    9,456
    
    
    $
    3⁄4LiabilitiesDerivative contracts
    
    $
    3⁄4
    
    
    $
    (43,315
    )
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    (43,315
    )
    
    $
    3⁄4
 The following table summarizes the valuation of our assets and liabilities in accordance
with the Fair Value Measurements and Disclosures topic of the Codification fair value hierarchy
levels as of September 30, 2008:
 Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsMoney market funds
    
    $
    126,165
    
    
    $
    3⁄4
    
    
    $
    3⁄4Derivative contracts
    
    
    3⁄4
    
    
    
    11,779
    
    
    
    3⁄4Total
    
    $
    126,165
    
    
    $
    11,779
    
    
    $
    3⁄4LiabilitiesDerivative contracts
    
    $
    3⁄4
    
    
    $
    (81,653
    )
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    (81,653
    )
    
    $
    3⁄4
 Fair values of financial instruments: We use the following methods and assumptions in
estimating our fair value disclosures for financial instruments:
 
    
    Cash and cash equivalents The carrying amounts approximate fair value due to the
short maturity of these instruments.
    
    Demand deposits with affiliate The carrying amounts approximate fair value due to
the short maturity of these instruments.
    
    Financial instruments Fair values for the Partnerships natural gas swaps and
options are based on contract prices in effect at September 30, 2009 and 2008. The
unrealized loss on these contracts is disclosed in Note 6 herein.
 Concentration of credit risk:We are subject to credit risk through trade receivables and
short-term investments. Although a substantial portion of our debtors ability to pay depends
upon the agribusiness economic sector, credit risk with respect to trade receivables is
minimized due to a large customer base and our geographic dispersion.
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8.
    
    Turnaround Costs
 The following represents a summary of the deferred plant turnaround costs for the nine months
ended September 30, 2009 and 2008:
 TurnaroundBeginning
    
    
    Costs
    
    
    Turnaround
    
    
    Ending(in thousands)
    
    Balance
    
    
    Capitalized
    
    
    Amortization
    
    
    BalancePeriods ended:September 30, 2009
    
    $
    5,255
    
    
    $
    7,364
    
    
    $
    (5,001
    )
    
    $
    7,618September 30, 2008
    
    $
    16,841
    
    
    $
    341
    
    
    $
    (10,048
    )
    
    $
    7,134
 9.
    
    Revolving Credit Facility
 We have a $50 million revolving credit facility (facility) available that expires January 31,
2012. The revolving credit facility bears interest at a variable rate plus a margin (London
Interbank Offer Rate (LIBOR) plus 175 basis points, or 2.01% at September 30, 2009). Under the
credit facility, we may borrow an amount generally based on eligible cash balances, 85% of
eligible accounts receivable and 60% of eligible finished goods inventory, less outstanding
letters of credit. Our borrowings under the credit facility are secured by substantially all of
our working capital. The agreement also requires us to adhere to certain limitations on
additional debt, capital expenditures, acquisitions, liens, asset sales, investments,
prepayments of subordinated indebtedness, changes in lines of business and transactions with
affiliates. At September 30, 2009, we had $50 million of borrowing availability and there were
no outstanding borrowings or letters of credit under the facility.On October 9, 2009, we amended the facility so that, subject to certain conditions, the
borrowing base applicable to the existing credit agreement would be measured monthly (instead
of weekly as previously provided).
 10.
    
    Unsolicited Proposals for a Business Combination by CF Holdings, Inc.
 On January 15, 2009, CF Industries Holdings, Inc. (CF) presented a letter to the Board of
Directors of Terra Industries Inc. (Terra or Company) proposing CFs acquisition of Terra in an
all-stock transaction. Terras Board rejected the proposal on the grounds that it was not in
the best interests of Terra or its stockholders and substantially undervalued the Company. CF
subsequently announced that they remained committed to the proposal, and on February 3, 2009,
announced that it would nominate three director candidates to Terras Board of Directors and
commence an exchange offer for all of Terras outstanding common shares.On February 23, 2009, CF announced that it had commenced an unsolicited exchange offer to
acquire all of the outstanding common shares of Terra at a fixed exchange ratio of 0.4235 of a
CF common share for each Terra common share. In response, Terras Board of Directors announced
on February 23, 2009 that it would review and consider CFs exchange offer and make a formal
recommendation to stockholders within ten business days, and further advised Terras
stockholders to take no action pending the review of the proposed exchange offer by Terras
Board of Directors. On March 3, 2009, Terras Board of Directors unanimously concluded that
CFs offer did not present a compelling case to create
additional value for the stockholders of either Terra or CF, substantially undervalues Terra on
both an absolute basis and relative to CF and is not in the best interests of Terra and its
stockholders.
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On March 9, 2009, CF sent a letter to Terras Board of Directors stating CF would be prepared
to enter into a negotiated merger agreement with Terra on the basis of an exchange ratio based
on $27.50 for each Terra common share, with an exchange ratio of not less than 0.4129 of a CF
common share and not more than 0.4539 of a CF common share. On March 11, 2009, Terras Board of
Directors unanimously concluded that CFs proposal continues to run counter to Terras
strategic objectives, substantially undervalues Terra both absolutely and relative to CF, and
would deliver less value to Terras stockholders than would owning Terra on a stand-alone
basis.On March 23, 2009, CF sent a letter to Terras Board of Directors stating CF would be prepared
to enter into a negotiated merger agreement with Terra on the basis of an exchange ratio based
on $30.50 for each Terra share, with an exchange ratio of not less than 0.4129 of a CF common
share and not more than 0.4539 of a CF common share, the same collar as CFs proposal of March
9, 2009. On March 24, 2009, Terras Board of Directors unanimously concluded that CFs proposal
continues to run counter to Terras strategic objectives, substantially undervalues Terra both
absolutely and relative to CF, and would deliver less value to Terras stockholders than it
would owing Terra on a stand-alone basis.On August 5, 2009, CF sent a letter to Terras Board of Directors reaffirming CFs intent to
pursue a business combination with Terra and stating that CF would be prepared to enter into a
negotiated merger agreement with Terra on the basis of a fixed exchange ratio of 0.465 of a CF
common share for each Terra common share, and the return of at least $1 billion of cash to
stockholders of the combined company and the distribution to only CFs stockholders prior to
the merger of certain contingent future shares. On August 25, 2009, Terras Board of Directors
unanimously concluded that CFs proposal continues to run counter to Terras strategic
objectives, substantially undervalues Terra both absolutely and relative to CF and would
deliver less value to Terras stockholders than would owning Terra on a stand-alone basis.On August 31, 2009, CF announced that its unsolicited exchange offer to acquire all of the
outstanding common shares of Terra had expired and would not be extended. No Terra common
shares were purchased by CF pursuant to the exchange offer.On September 9, 2009, CF delivered a notice to Terra resubmitting CFs slate of three nominees
for election to Terras Board at Terras 2009 annual meeting of stockholders.On September 28, 2009, CF announced that it had acquired 6,985,048 common shares, or
approximately 7%, of Terra in the open market at a cost of approximately $247 million. CF also
announced that it had sent a merger agreement to Terra, which included a fixed exchange ratio
of 0.465 of a CF common share for each Terra common share (such exchange ratio to be adjusted
upon the declaration by Terra of its proposed $7.50 per common share special cash dividend) and
the distribution to only CFs stockholders prior to the merger of certain contingent future
shares. On September 30, 2009, Terras Board of
Directors unanimously concluded that CFs proposal continues to run counter to Terras
strategic objectives, substantially undervalues Terra both absolutely and relative to CF and
would deliver less value to Terras stockholders than would owning Terra on a stand-alone
basis.
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On November 1, 2009, CF sent a letter to Terras Board of Directors reaffirming CFs intent to
pursue a business combination with Terra and stating that CF would be prepared to enter into a
negotiated merger agreement with Terra to acquire Terra for $32.00 in cash (reduced by the
$7.50 per share special dividend declared by Terra) and 0.1034 of a CF common share for each
Terra common share. On November 3, 2009, Terras Board of Directors unanimously concluded that
CFs proposal is inadequate, opportunistic and not in the best interests of Terra and its
stockholders.
 11.
    
    Subsequent Events
 We are dependent on Terra in a number of respects. Terra provides all of our management,
natural gas purchasing and hedging, selling and administrative services and operates our
facilities through its wholly-owned subsidiary Terra Nitrogen GP Inc., the Partnerships
General Partner. Terra and its wholly-owned subsidiaries have more debt and debt service
requirements than us. Although Terra is affected by most of the factors that affect us, its
higher level of debt could put a greater risk on Terra in the event of adverse business
conditions. Our results of operations and financial condition might be materially adversely
affected by financial difficulties at Terra, default by it or its subsidiaries on their debt or
their bankruptcy. For additional information concerning Terra, refer to Terras filings with
the SEC on Form 10-K and Form 10-K/A, Forms 10-Q and current reports on Forms 8-K.On October 19, 2009, Terra announced that it had entered into an agreement to purchase a 50%
interest in Agrium Inc.s (Agrium) Carseland, Alberta, Canada nitrogen production assets and
certain U.S assets for a purchase price of approximately $250 million. The closing of the
acquisition is subject to certain closing conditions and contingencies, including the
completion by Agrium of its acquisition of CF.On October 26, 2009, Terra Capital, Inc. (TCAPI), a wholly-owned subsidiary of Terra, announced
the closing of its private offering of $600 million aggregate principal amount of senior notes
due 2019 (2019 Notes). The 2019 Notes have an interest rate of 7.75% per annum and were issued
at a price equal to 98.298% of their face value. The 2019 Notes were sold in a private offering
that is exempt from the registration requirements of the Securities Act of 1933, as amended
(Securities Act). The 2019 Notes are guaranteed on a senior unsecured basis by Terra and
certain of its subsidiaries.On October 27, 2009, TCAPI announced that it had completed its previously announced cash
tender offer and consent solicitation for its outstanding 2017 Notes. At the close of the
tender offer, TCAPI received tenders from holders of approximately $317.5 aggregate principal
amount of the 2017 Notes, representing approximately 96.2% of the then outstanding 2017 Notes.
TCAPI funded the purchase of the 2017 Notes tendered with the proceeds of the 2019 Notes
offering.
  20




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##### Table of Contents



On October 28, 2009, Terra declared the previously announced special cash dividend of $7.50 per
common share, payable December 11, 2009 to Terra stockholders of record as of November 23,
2009.
  21




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 Overview
   Dependence on Terra Industries
  Introduction
  
    
    Business Strategy;
    
    Recent Business Environment;
    
    Results of Operations;
    
    Liquidity and Capital Resources; and
    
    Various Quantitative and Qualitative Disclosures.
 Business Strategy
   22




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##### Table of Contents




    
    Manage our assets to reap the highest returns through the cycle by maintaining our
facilities to be safe and reliable, cultivating relationships with natural customers who
due to their physical location can receive our product most economically, and closely
managing the supply chain to keep storage, transportation and other costs down.
    
    Develop higher-return product markets, such as that for UAN, our primary nitrogen
fertilizer product.
  Recent Business Environment
  Demand
    23




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##### Table of Contents



Supply
   Natural Gas Costs
   24




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##### Table of Contents



September 30,
    
    
    December 31,
    
    
    March 31,
    
    
    June 30,
    
    
    September 30,(in $ per MMBtu)
    
    2008
    
    
    2008
    
    
    2009
    
    
    2009
    
    
    2009$
    7.90
    
    
    $
    6.09
    
    
    $
    4.69
    
    
    $
    5.09
    
    
    $
    5.72
  RESULTS OF OPERATIONS
 Consolidated Results
   Three Months Ended
    
    
    Quarter to Date
    
    
    Nine Months Ended
    
    
    Year to DateSeptember 30,
    
    
    2009-2008
    
    
    September 30,
    
    
    2009-2008(in millions except per unit data)
    
    2009
    
    
    2008
    
    
    Change
    
    
    Percent
    
    
    2009
    
    
    2008
    
    
    Change
    
    
    PercentNet sales
    
    $
    101.5
    
    
    $
    246.6
    
    
    $
    (145.1
    )
    
    
    -59
    %
    
    $
    409.6
    
    
    $
    677.8
    
    
    $
    (268.2
    )
    
    
    -40
    %Cost of goods sold
    
    
    79.7
    
    
    
    138.3
    
    
    
    (58.6
    )
    
    
    -42
    %
    
    
    274.7
    
    
    
    352.1
    
    
    
    (77.4
    )
    
    
    -22
    %Gross margin
    
    
    21.8
    
    
    
    108.3
    
    
    
    (86.5
    )
    
    
    -80
    %
    
    
    134.9
    
    
    
    325.7
    
    
    
    (190.8
    )
    
    
    -59
    %Gross margin percentage
    
    
    21.5
    %
    
    
    43.9
    %
    
    
    -22.4
    %
    
    
    -51
    %
    
    
    32.9
    %
    
    
    48.1
    %
    
    
    -15.1
    %
    
    
    -31
    %Selling, general and
administrative expenses
    
    
    4.5
    
    
    
    3.2
    
    
    
    1.3
    
    
    
    -41
    %
    
    
    13.9
    
    
    
    12.8
    
    
    
    1.1
    
    
    
    9
    %Operating earnings
    
    
    17.3
    
    
    
    105.1
    
    
    
    (87.8
    )
    
    
    -84
    %
    
    
    121.0
    
    
    
    312.9
    
    
    
    (191.9
    )
    
    
    -61
    %Interest income, net
    
    
    
    
    
    
    1.1
    
    
    
    (1.1
    )
    
    
    -100
    %
    
    
    0.4
    
    
    
    5.1
    
    
    
    (4.7
    )
    
    
    -92
    %Net income
    
    $
    17.3
    
    
    $
    106.2
    
    
    $
    (88.9
    )
    
    
    -84
    %
    
    $
    121.4
    
    
    $
    318.0
    
    
    $
    (196.6
    )
    
    
    -62
    %Net income allocable to
Common Units
    
    $
    11.9
    
    
    $
    63.2
    
    
    $
    (51.3
    )
    
    
    -81
    %
    
    $
    77.4
    
    
    $
    210.1
    
    
    $
    (132.7
    )
    
    
    -63
    %Net income per Common Unit
    
    $
    0.64
    
    
    $
    3.41
    
    
    
    2.8
    
    
    
    -81
    %
    
    $
    4.18
    
    
    $
    11.35
    
    
    $
    (7.2
    )
    
    
    -63
    %
  25




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##### Table of Contents



Sales Volumes and Prices
  2009
    
    
    2008Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)2
    
    
    (000 tons)
    
    
    ($/ton)2Ammonia
    
    
    58
    
    
    $
    249
    
    
    
    68
    
    
    $
    664UAN 1
    
    
    517
    
    
    $
    136
    
    
    
    536
    
    
    $
    342Natural gas cost 3
    
    
    
    
    
    $
    3.53
    
    
    
    
    
    
    $
    9.28
 1.
    
    The nitrogen content of UAN is 32% by weight.2.
    
    After deducting $16.5 million and $17.2 million outbound freight costs for the third
quarter of 2009 and 2008, respectively.3.
    
    Excluding the impact of hedge costs, natural gas cost was $3.22 per MMBtu for the 2009 third
quarter.  2009
    
    
    2008Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)2
    
    
    (000 tons)
    
    
    ($/ton)2Ammonia
    
    
    246
    
    
    $
    394
    
    
    
    222
    
    
    $
    582UAN 1
    
    
    1,295
    
    
    $
    208
    
    
    
    1,560
    
    
    $
    321Natural gas cost 3
    
    
    
    
    
    $
    4.97
    
    
    
    
    
    
    $
    8.00
 1.
    
    The nitrogen content of UAN is 32% by weight.2.
    
    After deducting $41.9 million and $47.0 million outbound freight costs for the first
nine months of 2009 and 2008, respectively.3.
    
    Excluding the impact of hedge costs, natural gas cost was $3.28 per MMBtu for the
first nine months of 2009. RESULTS OF OPERATIONS  QUARTER ENDED SEPTEMBER 30, 2009 COMPARED
WITH QUARTER ENDED SEPTEMBER 30, 2008
    26




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##### Table of Contents



Selling, General and Administrative Costs
  Interest Income
  RESULTS OF OPERATIONS  NINE MONTHS ENDED SEPTEMBER 30, 2009
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 2008
      27




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##### Table of Contents



Selling, General and Administrative Costs
  Interest Income
  CAPITAL RESOURCES AND LIQUIDITY
   Cash Flows
  Total cash provided by (used in)
    
    2009
    
    
    2008Operating activities
    
    $
    160.2
    
    
    $
    239.3Investing activities
    
    
    (23.7
    )
    
    
    (10.6
    )Financing activities
    
    
    (220.5
    )
    
    
    (289.1
    )Increase (decrease) in cash and
cash equivalents
    
    $
    (84.0
    )
    
    $
    (60.4
    )
  28




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##### Table of Contents



Operating Activities
  Investing Activities
  Financing Activities
  Revolving Credit Facility
      29




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##### Table of Contents



Debt
  Partnership Distributions
    30




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##### Table of Contents



Income and Distribution AllocationClass BTarget
    
    
    Target
    
    
    Common
    
    
    Common
    
    
    GeneralLimit
    
    
    Increment
    
    
    Units
    
    
    Units
    
    
    Partner
    
    
    TotalMinimum Quarterly Distribution
    
    $
    0.605
    
    
    $
    0.605
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %First Target
    
    
    0.715
    
    
    
    0.110
    
    
    
    98.990
    %
    
    
    0.985
    %
    
    
    0.025
    %
    
    
    100.000
    %Second Target
    
    
    0.825
    
    
    
    0.110
    
    
    
    85.859
    %
    
    
    0.985
    %
    
    
    13.156
    %
    
    
    100.000
    %Third Target
    
    
    1.045
    
    
    
    0.220
    
    
    
    75.758
    %
    
    
    0.985
    %
    
    
    23.257
    %
    
    
    100.000
    %Final Target and Beyond
    
    
    1.045
    
    
    
    3⁄4
    
    
    
    50.505
    %
    
    
    0.985
    %
    
    
    48.510
    %
    
    
    100.000
    %
  General Partner Option to Effect Mandatory Redemption of Partnership Units
     31




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4.
    
    CONTROLS AND PROCEDURES
    32




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##### Table of Contents



FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
   
    
    changes in financial and capital markets,
    
    general economic conditions within the agricultural industry,
    
    competitive factors and price changes (principally, sales prices of nitrogen products
and natural gas costs),
    
    changes in product mix,
    
    changes in the seasonality of demand patterns,
    
    changes in weather conditions,
    
    changes in environmental and other government regulations,
    
    changes in agricultural regulations,
    
    changes in the securities trading markets, and
    
    other risks detailed in the section entitled Risk Factors in our 2008 Annual Report on
Form 10-K and subsequent Quarterly Reports on Form 10-Q.
 Business,
Legal Proceedings, Managements Discussion and Analysis of Financial Condition and Results of
Operations Notes to our Consolidated Financial Statements
  33




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##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 1A.
    
    RISK FACTORS
  If the global economic downturn continues or worsens, our business could be adversely impacted.
  Disruption in or increased costs of transportation services could have an adverse effect on our
profitability.
  CFs continued proposals for a business combination with Terra may be disruptive to the
Partnerships business and adversely affect our operations and results.
   34




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##### Table of Contents



ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5.
    
    OTHER INFORMATION
   35




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##### Table of Contents



ITEM 6.
    
    EXHIBITS
 (a) Exhibits:
 Exhibits 31.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibits 31.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
  36




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##### Table of Contents



SIGNATURE
  TERRA NITROGEN COMPANY, L.P.By:
    TERRA NITROGEN GP INC.as General PartnerBy:
    /s/ DANIEL D. GREENWELLDaniel D. GreenwellVice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)   37




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    DescriptionExhibits 31.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibits 31.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 32.1
    
    Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2
    
    Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
  38