UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q



ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarter ended March 31, 2010ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period
from                             to


Commission file number 033-43007

TERRA NITROGEN COMPANY, L.P.(Exact name of registrant as specified in its charter)

Delaware

73-1389684(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)Terra Centre
PO Box 6000
600 Fourth Street
Sioux City, Iowa(Address of principal executive office)

51102-6000(Zip Code)


Registrant's telephone number, including area code: (712) 277-1340

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. ý Yes    o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files. o Yes    o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). o Yes    ý No

At the close of business on May 7, 2010 there were 18,501,576 Common Units.



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Table of Contents

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

18Item 3.

Quantitative and Qualitative Disclosures about Market Risk

26Item 4.

Controls and Procedures

27Part IIOTHER INFORMATIONItem 1.

Legal Proceedings

29Item 1A.

Risk Factors

29Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

29Item 3.

Defaults upon Senior Securities

29Item 4.

Submission of Matters to a Vote of Security Holders

29Item 5.

Other Information

29Item 6.

Exhibits

30


2

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Table of Contents



PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

TERRA NITROGEN COMPANY, L.P.        CONSOLIDATED BALANCE SHEETS        (in thousands)(unaudited)

March 31,
2010

December 31,
2009

March 31,
2009ASSETSCurrent assets:Cash and cash equivalents

$
87,154

$
24,778

$
138,588Demand deposits with affiliate





3,835


6,408Accounts receivable, less allowance for doubtful accounts of $760, $760 and $0


24,491


23,878


34,314Inventories, net


41,350


29,506


37,869Prepaid expenses and other current assets


1,345


5,363


5,297Total current assets


154,340


87,360


222,476Property, plant and equipment, net


79,825


79,150


69,185Other long-term assets


14,384


15,305


9,840Total assets

$
248,549

$
181,815

$
301,501LIABILITIES AND PARTNERS' CAPITALCurrent liabilities:Accounts payable and accrued liabilities

$
27,274

$
23,407

$
18,904Customer prepayments


48,584


16,402


72,253Derivative hedge liabilities


4,212


39


11,510Total current liabilities


80,070


39,848


102,667Other long-term liabilities


423


654


1,212Total liabilities


80,493


40,502


103,879Partners' capital:Limited partners' interests, 18,502 Common Units authorized and outstanding


185,711


152,802


190,420Limited partners' interests, 184 Class B Common Units authorized and outstanding


182


(145
)

536General partners' interest


(13,820
)

(14,507
)

17,025Accumulated other comprehensive (loss) income


(4,017
)

3,163


(10,359
)Total partners' capital


168,056


141,313


197,622Total liabilities and partners' capital

$
248,549

$
181,815

$
301,501


See
Accompanying Notes to the Consolidated Financial Statements.

3

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Table of Contents

TERRA NITROGEN COMPANY, L.P.        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per unit amounts)(unaudited)

Three Months Ended
March 31,2010

2009Revenues:Product revenues

$
118,564

$
165,076Other income


179


226Total revenues


118,743


165,302Costs and expenses:Cost of goods sold


79,184


117,016Gross profit


39,559


48,286Operating expenses


5,574


5,277Income from operations


33,985


43,009Interest expense


(81
)

(81
)Interest income


19


414Net income

$
33,923

$
43,342Allocation of net income:General Partner

$
687

$
15,423Class B Common Units


327


423Common Units


32,909


27,496Net income

$
33,923

$
43,342Net income per Common Unit

$
1.78

$
1.49


See
Accompanying Notes to the Consolidated Financial Statements.

4

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Table of Contents

TERRA NITROGEN COMPANY, L.P.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)(unaudited)

Three Months Ended
March 31,2010

2009Operating activities:Net income

$
33,923

$
43,342Adjustments to reconcile net income to net cash flows from operating activities:Depreciation and amortization


3,966


4,270Non-cash loss on derivative instruments


200


4Changes in operating assets and liabilities:Receivables


(613
)

3,739Inventories


(11,844
)

19,338Accounts payable and customer prepayments


36,705


22,166Other assets and liabilities


(315
)

(5,492
)Net cash flows from operating activities


62,022


87,367Investing activities:Capital expenditures and plant turnaround expenditures


(3,481
)

(3,601
)Changes in demand deposits with affiliate


3,835


(6,408
)Net cash flows from investing activities


354


(10,009
)Financing activities:Partnership distributions paid





(93,451
)Net cash flows from financing activities





(93,451
)Increase (decrease) to cash and cash equivalents


62,376


(16,093
)Cash and cash equivalents at beginning of period


24,778


154,681Cash and cash equivalents at end of period

$
87,154

$
138,588Supplemental disclosure of cash flow information:Cash paid during the period for interest

$
63

$
63


See
Accompanying Notes to the Consolidated Financial Statements.

5

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Table of Contents

TERRA NITROGEN COMPANY, L.P.        CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL        (in thousands, except for units)(unaudited)

(in thousands, except for Units)

Common
Units

Class B
Common
Units

General
Partners'
Interests

Accumulated
Other
Comprehensive
Income
(Loss)

Total
Partners'
Capital

Comprehensive
IncomePartners' capital at January 1, 2010

$
152,802

$
(145
)
$
(14,507
)
$
3,163

$
141,313Net income


32,909


327


687





33,923

$
33,923Change in fair value of derivatives











(7,180
)

(7,180
)

(7,180
)Comprehensive income
















$
26,743Distributions














Partners' capital at March 31, 2010

$
185,711

$
182

$
(13,820
)
$
(4,017
)
$
168,056Limited partner units issued and outstanding March 31, 2010:Common Units








18,501,576Class B Common Units








184,072Total units outstanding at March 31, 2010








18,685,648




(in thousands, except for Units)

Common
Units

Class B
Common
Units

General
Partners'
Interests

Accumulated
Other
Comprehensive
Income
(Loss)

Total
Partners'
Capital

Comprehensive
IncomePartners' capital at January 1, 2009

$
217,894

$
1,024

$
39,172

$
(30,781
)
$
227,309Net income


27,496


423


15,423





43,342

$
43,342Change in fair value of derivatives











20,422


20,422


20,422Comprehensive income
















$
63,764Distributions


(54,970
)

(911
)

(37,570
)




(93,451
)Partners' capital at March 31, 2009

$
190,420

$
536

$
17,025

$
(10,359
)
$
197,622Limited partner units issued and outstanding March 31, 2009:Common Units








18,501,576Class B Common Units








184,072Total units outstanding at March 31, 2009








18,685,648


See Accompanying Notes to the Consolidated Financial Statements.

6

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Table of Contents

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 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 United States Securities and Exchange
Commission (SEC) for interim reporting. They do not include all of the information and footnotes required by United States 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, 2009, included in our
2009 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, 2009. 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 Standards

Following are summaries of accounting pronouncements that were either recently adopted or may become applicable to our consolidated financial statements. It should be noted that the
accounting standards references provided below reflect the FASB Codification that was effective for periods ending after September 15, 2009, and related Accounting Standards Updates (ASU).

Recently Adopted Pronouncements

In June 2009, the FASB issued an accounting standard that revises the rules for consolidating variable interest entities (ASU
No. 2009-17). This standard changes how a reporting entity determines when to consolidate an entity that is insufficiently capitalized or is not controlled through voting (or
similar rights). The determination is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most
significantly impact the other entity's economic performance. The standard also requires a company to provide additional disclosures about its involvement with variable interest entities and any
significant changes in risk exposure due to that involvement. We adopted this standard as of January 1, 2010. The adoption of this standard did not have a material impact on our consolidated
financial statements.

7

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

2.    New Accounting Standards (Continued)

In
June 2009, the FASB issued a standard that amends the requirements for transfers of financial assets (ASU No. 2009-16). This standard removes the concept of a
qualifying special-purpose entity and removes the exception from applying these rules to qualifying special purpose entities. It also changes the requirements for derecognizing financial assets and
requires additional disclosures about a transferor's continuing involvement in financial assets. We adopted this standard as of January 1, 2010. The adoption of this standard did not have a
material impact on our consolidated financial statements.

In
January 2010, the FASB issued a standard pertaining to fair value disclosures (ASU No. 2010-6) that requires a reporting entity to disclose separately the amounts
of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, and to disclose separately certain additional information
about purchases, sales, issuances, and settlements of Level 3 fair value measurements. This standard also requires an entity to provide disclosures about the valuation techniques and inputs
used to measure fair value for both recurring and nonrecurring fair value measurements for Level 2 and Level 3 items. The standard is effective for interim and annual reporting periods
beginning after December 15, 2009, except for the Level 3 disclosure of activity, which is effective for fiscal years beginning after December 15, 2010. We adopted the effective
portions of this standard as of March 31, 2010. The adoption of the effective portions of this standard did not have a material impact on our consolidated financial statements.

Recently Issued Pronouncements

In October 2009, the FASB issued a standard that addresses the accounting for multiple-deliverable arrangements to enable vendors to
account for revenue from products or services (deliverables) separately rather than as a combined unit (ASU No. 2009-13). It establishes a hierarchy for determining the selling
price for each deliverable. The selling price used for each deliverable should be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence
is not available, or estimated selling prices. This standard also clarifies existing requirements that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a
marketplace participant. This standard is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We have not yet determined
the impact of this standard on our consolidated financial statements.

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), an indirect, wholly-owned subsidiary of
Terra Industries Inc. (Terra), determines in its reasonable discretion to be necessary. Based upon the liquidity needs of the business, these reserve requirements did not allow for a quarterly
distribution for the quarter ended March 31, 2010. We paid a quarterly distribution of $93.5 million to our partners for the quarter ended March 31, 2009.

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

8

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3.    Agreement of Limited Partnership (Continued)

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 or Incentive Distribution Rights (IDRs).

On
April 28, 2010, we announced a $1.25 cash distribution per common limited partnership unit, payable on May 27, 2010 to holders of record as of May 10, 2010. Since
TNCLP did not declare a distribution for the fourth quarter of 2009 an MQD shortfall was created which is required to be fulfilled before the General Partner is to receive IDRs. The announced $1.25
cash distribution fulfills the MQD shortfall and exceeds current quarterly requirements. We have exceeded the cumulative MQD amounts and will distribute Available Cash as summarized in the following
table:

Income and Distribution AllocationTarget
Limit

Target
Increment

Common
Units

Class B
Common
Units

General
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





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
March 31, 2010, 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.

9

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

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 month period ended March 31, 2010 and 2009:

Three Months Ended
March 31,(in thousands, except per-unit amounts)

2010

2009Basic income per Common Unit:Net income

$
33,923

$
43,342Less: Net income allocable to Class B Common Units


(327
)

(423
)Less: Net income allocable to General Partner


(687
)

(15,423
)Net income allocable to Common Units


32,909


27,496Weighted average units outstanding


18,502


18,502Net income per Common Unit

$
1.78

$
1.49


There
were no dilutive Common Units outstanding for the three periods ended March 31, 2010 and 2009.

5.    Inventories, Net

Inventories consisted of the following:

(in thousands)

March 31, 2010

December 31, 2009

March 31, 2009Materials and supplies

$
9,373

$
9,137

$
9,665Finished goods


31,977


20,369


28,204Total

$
41,350

$
29,506

$
37,869


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.

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.

10

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

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) (AOCI) 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.

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 March 31, 2010, 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:



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

11

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

6.    Derivative Financial Instruments (Continued)

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.

As
of March 31, 2010 and 2009, we had open derivative contracts for 4.6 million MMBtus and 7.7 million MMBtus, respectively, of natural gas.

The
gross fair market value of all derivative instruments and their location in our Consolidated Balance Sheets are shown by those in an asset or liability position and are all
categorized as commodity derivatives.

Asset Derivatives(a)
(in thousands)

Derivative Instrument

Location

March 31,
2010

December 31,
2009

March 31,
2009Commodity Derivatives

Other current assets

$
9

$
3,384

$
3,678


Liability Derivatives(a)

Derivative Instrument

Location

March 31,
2010

December 31,
2009

March 31,
2009Commodity Derivatives

Derivative hedge liabilities

$
(4,212
)
$
(39
)
$
(11,510
)


Certain
derivatives outstanding at March 31, 2010 and 2009, which settled during April 2010 and April 2009, respectively, are included in the position of open natural gas
derivatives in the table above. The April 2010 derivatives settled for an approximate $2.6 million loss compared to the April 2009 derivatives which settled for an approximate
$6.0 million loss. All material open derivatives at March 31, 2010 will settle during the next 12 months.

12

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

6.    Derivative Financial Instruments (Continued)

At March 31, 2010 and 2009, we determined that a portion of certain derivative contracts were ineffective for accounting purposes and, as a result, recorded a $0.2 million
charge and $0.6 million charge, respectively, to cost of sales for the three month periods ending March 31, 2010 and 2009, respectively. At March 31, 2009, we excluded a portion
of the loss on certain derivative contracts from the effectiveness assessment and, as a result, reported a $0.6 million charge to cost of sales.

The
effective portion of gains and losses on derivative contracts that qualify for hedge treatment are carried as 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 2009 Annual Report on Form 10-K for additional information on our overall risk management strategies.

The
following table presents the effect of our commodity derivative instruments on the Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009.

Three Months Ended
(in thousands)

Amount of Gain (Loss)
Recognized in AOCI



Amount of Gain (Loss)
Reclassified from AOCI
into Income



Amount of Gain (Loss)
Recognized in Income(b)Location of Gain
(Loss) Reclassified
from AOCI into
Income(a)March 31,
2010

March 31,
2009

March 31,
2010

March 31,
2009

Location of Gain
(Loss) Recognized
in Income(b)

March 31,
2010

March 31,
2009$(4,017)

$
(13,287
)
Cost of Sales

$
892

$
(33,709
)
Cost of Sales

$
(185
)
$
(1,240
)


Approximately $4.0 million of the net accumulated loss at March 31, 2010 will be reclassified into earnings during the next twelve
months as compared to $10.4 million of the net accumulated loss at March 31, 2009.

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.

13

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7.    Fair Value Measurements (Continued)

The
three levels are defined as follows:



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 NYMEX, 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 three months ending March 31, 2010.

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 March 31, 2010:

(in thousands)

Quoted Market
Prices in
Active Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)AssetsMoney market funds

$
87,149

$


$
Derivative contracts





9


Total

$
87,149

$
9

$
LiabilitiesDerivative contracts

$


$
(4,212
)
$
Total

$


$
(4,212
)
$



14

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7.    Fair Value Measurements (Continued)

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, 2009:

(in thousands)

Quoted Market
Prices in
Active Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)AssetsMoney market funds

$
24,773

$


$
Derivative contracts





3,384


Total

$
24,773

$
3,384

$
LiabilitiesDerivative contracts

$


$
(39
)
$
Total

$


$
(39
)
$



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 March 31, 2009:

(in thousands)

Quoted Market
Prices in
Active Markets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)AssetsMoney market funds

$
138,583

$


$
Derivative contracts





3,678


Total

$
138,583

$
3,678

$
LiabilitiesDerivative contracts

$


$
(11,510
)
$
Total

$


$
(11,510
)
$



Fair values of financial instruments:We use the following methods and assumptions in estimating our fair value disclosures for
financial
instruments:



15

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7.    Fair Value Measurements (Continued)

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.

8.    Turnaround Costs

The following represents a summary of the deferred plant turnaround costs for the three months ended March 31, 2010 and 2009:

(in thousands)

Beginning
Balance

Turnaround
Costs
Capitalized

Turnaround
Amortization

Ending
BalancePeriod ended:March 31, 2010

$
8,425

$
69

$
(1,211
)
$
7,283March 31, 2009

$
5,255

$
247

$
(1,875
)
$
3,627


9.    Revolving Credit Facility

We have a $50 million revolving credit facility (facility). The revolving credit facility bears interest at a variable rate plus a margin (London Interbank Offer Rate (LIBOR) plus
300 basis points, or 3.23% at March 31, 2010). 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 March 31, 2010, 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).

Our
ability to continue to meet the covenants under the facility in the future will depend on market conditions, operating cash flows, working capital needs, receipt of customer
prepayments and trade credit terms. Failure to meet these covenants, or to obtain a waiver from the lenders, would result in our default such that all outstanding amounts could become immediately due
and payable and we would be unable to borrow additional amounts under the facility. Access to adequate bank facilities may be required to fund operating cash needs. Therefore, any default or
termination of the facility could have a material adverse effect on our business.

The
facility also requires that there be no change of control related to Terra, such that no individual or group (within the meaning of the Securities Exchange Act of 1934, as amended
(Exchange Act)) beneficially owns more than 35% of the outstanding voting shares of Terra. Such a change of control would constitute an event of default under the facility. On April 2, 2010, we
entered into a waiver relating to this facility. The waiver provides for the waiver of the change of control event of default that would have resulted from CF Industries Holdings, Inc.'s (CF)
acquisition of more than

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Table of Contents

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

9.    Revolving Credit Facility (Continued)

35%
of Terra's outstanding common stock on April 5, 2010 (see Note 10). The waiver is effective through July 1, 2010. The General Partner is currently considering options to
replace the facility. There can be no assurance, however, that the facility can be replaced on terms acceptable to the General Partner or at all.

10.    Subsequent Event

During 2009, CF made a number of proposals to acquire Terra.

On
February 15, 2010, Terra and Yara International ASA (Yara) announced that, on February 12, 2010, they had entered into an agreement and plan of merger (Yara/Terra merger
agreement) pursuant to which Yara would acquire Terra. The Yara/Terra merger agreement allowed Terra to terminate the agreement to accept a "superior proposal" (as defined in the Yara/Terra merger
agreement) subject to certain conditions, including the payment of a cash termination fee of $123.0 million to Yara.

On
March 2, 2010, CF announced a new offer to acquire Terra, and on March 5, 2010, CF commenced an exchange offer to acquire all of Terra's outstanding common stock for
consideration consisting of $37.15 in cash and 0.0953 of a share of CF common stock per share of Terra common stock. On March 10, 2010, Terra announced that the Terra board of directors had
determined that CF's offer constituted a "superior proposal" under the terms of the Yara/Terra merger agreement, and on March 12, 2010, after complying with the procedures to terminate the
Yara/Terra merger agreement,
Terra entered into a definitive merger agreement with CF, which provided for the acquisition of Terra by means of an exchange offer followed by a second-step merger (the CF/Terra merger
agreement.)

On
April 5, 2010, following the initial expiration of the exchange offer, CF acquired approximately 79% of Terra's outstanding common stock and commenced a subsequent offering
period to acquire the remaining shares of Terra common stock. The subsequent offering period expired April 14, 2010, and on April 15, 2010, CF completed the second-step
merger in which one of CF's subsidiaries merged with and into Terra and Terra became an indirect wholly-owned subsidiary of CF.

Effective
in April 2010, TNCLP will discontinue the use of hedge accounting for derivative instruments, including natural gas swaps. This change will not affect the hedging strategy,
economic decisions or cash flows of TNCLP. Once hedge accounting ceases, the entire unrealized gain or loss on derivative instruments will be recorded directly in income for the period. These
unrealized gains or losses on derivative instruments will be communicated as part of reporting quarterly earnings of TNCLP.

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Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

You should read the following discussion and analysis in conjunction with our Unaudited Condensed Consolidated Financial Statements and
the related Notes thereto contained in Part I, Item 1 of this report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of
our business or the risks associated with an investment in our common units. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports
filed with the SEC, including our Annual Report on
Form 10-K for the year ended December 31, 2009 and subsequent reports on Form 8-K, which discuss our business in greater detail.

The
section entitled "Risk Factors" contained in Part II, Item 1A of this report, and similar discussions in our other SEC filings, describe some of the important risk
factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this report and in
our other filings with the SEC.

Dependence on Terra

We have been dependent on Terra Industries Inc. (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 is an indirect, wholly-owned subsidiary of CF Industries Holdings, Inc. (CF). CF and its wholly-owned subsidiaries, including Terra, 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 CF, refer to CF's filings with the Securities and Exchange Commission on Form 10-K, Form 10-Q and current reports on Form 8-K. As a
result of the acquisition, we are now similarly dependent on CF.

Introduction

In this discussion and analysis, we explain our business in the following areas:



Company Overview

Terra Nitrogen Company, L.P. (TNCLP, we, our, or us) is a Delaware limited partnership that produces and distributes nitrogen
products primarily to the agriculture industry. We conduct our business through an operating partnership, Terra Nitrogen, Limited Partnership (TNLP or the Operating Partnership, and collectively with
TNCLP, the Partnership). Terra Nitrogen GP Inc. (TNGP or General Partner), is the general partner of both TNLCP and TNLP and owns a consolidated 0.05 percent general partner
interest in the Partnership. The General Partner is an indirect, wholly-owned subsidiary of Terra. We are a leading pure play nitrogen producer in North America serving

18

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Table of Contents

agricultural
and industrial customers. TNLP is an integral part of the pure play nitrogen strategy by producing 1.0 million tons of ammonia annually, of which 0.7 million tons are
upgraded.

On
April 15, 2010, Terra became an indirect, wholly-owned subsidiary of CF pursuant to an agreement and plan of merger between CF and Terra, dated as of March 12, 2010. The
merger agreement provided for the acquisition of Terra by means of an exchange offer followed by a second-step merger. On April 5, 2010, following the initial expiration of the
exchange offer, CF acquired approximately 79% of Terra's outstanding common stock and commenced a subsequent offering period to acquire the remaining shares of Terra's common stock. The subsequent
offering period expired April 14, 2010, and on April 15, 2010, CF completed the second-step merger in which one of CF's indirect subsidiaries merged with and into Terra.

Upgraded Product Focus

Our principal products are anhydrous ammonia (ammonia) and urea ammonium nitrate solutions (UAN), which we manufacture at our
Verdigris, Oklahoma facility. We are the second largest UAN production facility in North America. Our location is well positioned to serve customers in the Cornbelt because our transportation costs
are lower than those of Gulf or offshore producers. In addition to lower transportation costs, our plant has a significant natural gas basis advantage as compared to the Henry Hub. The plant is served
by the OneOK (Panhandle) gas pipeline.

The
core of the nitrogen pure play strategy is meeting the nitrogen demand of the agriculture industry, specifically for corn production. World grain stocks recently have been at levels
supportive of nitrogen demand as a result of the growing population, developing economies in India and China, and on a smaller scale, the influence of the ethanol fuel market. Nitrogen is vital to
successful corn yields and, unlike other fertilizers such as potash and phosphate which can be applied on a rotational basis, nitrogen must be applied annually.

Business Strategy

We are a leading producer and marketer of wholesale nitrogen products, serving agricultural and industrial customers. The nitrogen
products industry has periods of oversupply during industry downturns that lead to capacity shutdowns at the least cost effective plants. These shutdowns are followed by supply shortages, which result
in higher selling prices and higher industry-wide production rates during industry upturns. The higher selling prices encourage capacity additions until we start to see an oversupply, and
the cycle repeats itself.

To
succeed in this business, a producer must have the financial strength to weather industry downturns and the ability to serve its customers cost-effectively during every
phase of the cycle. A nitrogen producer will also benefit from having one or more nitrogen products that operate in non-agricultural industries to balance the cyclicality of agriculture
demand.

We
base our business strategies on these concepts. In practice, this means we:



In
every case, we invest our capital judiciously to realize a return above the cost of capital over the industry cycle.

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Table of Contents

Recent Business Environment

The following factors are the key drivers of our profitability: nitrogen products selling prices, as determined primarily by the global
nitrogen demand/supply balance and natural gas costs, particularly in North American markets.

Demand

Short term demand is primarily impacted by the expected number of planted corn acres. The United States Department of Agriculture's
Prospective Plantings report issued March 31, 2010 indicates U.S. corn planting intentions of 88.8 million acres, a 3% increase over last year's 86.5 million acres. This would be
the second highest corn planting in over 50 years. The May 2010 corn future price had fallen to $3.45 per bushel as of April 16, 2010, as ending corn stock inventories were raised in
March due to lower exports.

Long
term demand for nitrogen products is driven by a growing global population, its desire for a higher protein diet, and to a lesser degree, by the rise in demand of alternative
bio-fuels in North America. 2010 is expected to see a strong recovery in the fertilizer markets as the fundamentals for corn demand have improved. An increase in ethanol demand is expected
in the coming years due to the government mandated volumes of 15.0 billion gallons in 2015 and an anticipated increase in the ethanol blend rate by the Environmental Protection Agency from
10 percent to 15 percent in 2010. In 2009 ethanol production exceeded the mandated volumes of 10.5 billion gallons by 2.5 billion gallons. Therefore, the 2010 increase to
12.0 billion gallons is already covered by current production volumes. However, an increase in the blend rate would increase the immediate demand for corn in 2010. Energy prices and policy will
have an impact on the magnitude of ethanol's impact on nitrogen demand in the future.

Supply

Over the past seven years, global ammonia capacity has increased at an average of approximately 2.5 percent per year. This
increase was attributable principally to the combination of new project capacity offset by permanent plant closings in the U.S. and Europe. As global operating rates and prices have risen, so have
plans for new capacity.

This
anticipated new global capacity is expected to come primarily from advantaged natural gas regions, such as the Middle East and Africa. However, this expansion of capacity could be
limited by high capital and construction costs, lower nitrogen prices and increasing natural gas prices. Russia has increased domestic gas prices as well as prices paid by their export customers. This
has increased production costs for plants in Russia and Europe.

Imports
account for a significant portion of U.S. nitrogen product supply. Producers from Russia, Canada, the Middle East, Trinidad and Venezuela are major exporters to the U.S. These
export producers are often competitive in regions close to the point of entry for imports, primarily the Gulf Coast and east coast of North America. Due to higher freight costs and limited
distribution infrastructure, importers are less competitive in serving the main corn growing regions of the U.S., which are more distant from these points of entry.

Natural Gas Costs

Based on projected net increases in natural gas supply for most of 2010, coupled with high storage volumes, we expect moderate North
American natural gas prices to continue, enabling us to remain competitive with offshore producers.

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Table of Contents

The
following are the average NYMEX forward natural gas price for the succeeding twelve month period noted for the respective dates:

March 31,
2009

June 30,
2009

September 30,
2009

December 31,
2009

March 31,
2010(in $ per MMBtu)$4.69

$
5.09

$
5.72

$
5.79

$
4.54


Our
strategy for natural gas procurement is to manage our exposure to price volatility by locking in our margin for known commitments. We execute our risk management approach by hedging
natural gas prices through the use of supply contracts, financial derivatives and other instruments.

RESULTS OF OPERATIONS

Consolidated Results

We reported for the first quarter of 2010 net income of $33.9 million on revenues of $118.7 million, compared with the
first quarter of 2009 net income of $43.3 million on revenues of $165.3 million. The decrease in net income and revenue for the first quarter of 2010 is due to lower ammonia and UAN
sales prices and lower ammonia sales volumes. Net income per Common Unit for the three months ended March 31, 2010 was $1.78 compared with $1.49 million for the quarter ended
March 31, 2009.

The
following table shows the results of operations for the three month periods ended March 31, 2010 and 2009:

Three Months Ended March 31,2010-2009(in millions except per unit data)

2010

2009

Change

PercentNet sales

$
118.7

$
165.3

$
(46.6
)

(28
)%Cost of goods sold


79.2


117.0


(37.8
)

(32
)%Gross margin


39.5


48.3


(8.8
)

(18
)%Gross margin percentage


33.3
%

29.2
%

4.1
%

14
%Selling, general and administrative expenses


5.6


5.3


0.3


6
%Operating earnings


33.9


43.0


(9.1
)

(21
)%Interest income, net





0.3


(0.3
)

(100
)%Net income

$
33.9

$
43.3

$
(9.4
)

(22
)%Net income allocable to Common Units

$
32.9

$
27.5

$
5.4


20
%Net income per Common Unit

$
1.78

$
1.49

$
0.29


19
%


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Table of Contents

Sales Volumes and Prices

The following table shows North American ammonia and UAN volumes and prices for the three month periods ended March 31, 2010 and
2009:

2010

2009Volumes
(000 tons)

Unit Price
($/ton)(2)

Volumes
(000 tons)

Unit Price
($/ton)(2)Ammonia


52

$
308


105

$
437UAN(1)


471

$
186


367

$
289Natural gas cost(3)




$
5.28




$
7.07


---

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Table of Contents

RESULTS OF OPERATIONSQUARTER ENDED MARCH 31, 2010 COMPARED
WITH QUARTER ENDED MARCH 31, 2009

Our net sales for the first quarter of 2010 were $118.7 million, a decline of $46.6 million or 28% from the first quarter
of 2009 net sales of $165.3 million. The decline was primarily due to a decline in UAN and ammonia sales prices of 36% and 30%, respectively, and a decline in ammonia sales volumes of 50%.

Our
gross margin was $39.5 million in the first quarter of 2010 compared to $48.3 million in the first quarter of 2009. The gross margin increased as a percentage of sales
to 33.3% from 29.2%. The gross margin percentage includes a 25.3% decrease in natural gas costs for the first quarter of 2010. The first quarter natural gas unit costs, net of forward pricing gains
and losses, declined from $7.07 per MMBtu in 2009 to $5.28 per MMBtu in 2010. Net income was impacted primarily by a decrease in aggregate product pricing of $44.3 million and was partially
offset by a reduction in natural gas cost of $31.7 million and the increase in sales volumes of $4.6 million.

We
enter into forward sales commitments by utilizing forward pricing and prepayment programs with customers. We use derivative instruments to hedge a portion of our natural gas
requirements. The use
of these derivative instruments is designed to hedge exposure to natural gas price fluctuations for production required for forward sales estimates. The net benefit of derivatives for the first
quarter of 2010 was $0.9 million and the net cost of derivatives for the first quarter of 2009 was $33.7 million. Excluding the impact of the hedge cost, natural gas cost was $5.37 per
MMBtu in the first quarter of 2010.

Effective
in April 2010, TNCLP will discontinue the use of hedge accounting for derivative instruments, including natural gas swaps. This change will not affect the hedging
strategy, economic decisions or cash flows of TNCLP. Once hedge accounting ceases, the entire unrealized gain or loss on derivative instruments will be recorded directly in income for the period.
These unrealized gains or losses on derivative instruments will be communicated as part of reporting quarterly earnings of TNCLP.

Selling, General and Administrative Costs

Selling, general and administrative costs were $5.6 million in the first quarter of 2010, an increase of $0.3 million
from the first quarter of 2009. The increase is primarily due to an increase in K-1 tax compliance costs in the current year.

Interest Income

Interest income has decreased in the first quarter of 2010 due to declining interest rates and a reduction of the average investment
balance as compared to the first quarter of 2009.

LIQUIDITY AND CAPITAL RESOURCES

Our principal funding needs are to support working capital requirements, make payments for plant turnaround and capital expenditures
and quarterly distributions. Cash and cash equivalents were $87.2 million at March 31, 2010. During the first quarter of 2010, cash and cash equivalents increased by $62.4 million
from December 31, 2009.

Our
cash receipts are generally received by Terra. Cash receipts, net of cash payments made by Terra, are transferred to us from Terra weekly. Because of this cash collection and
distribution arrangement, Terra is a creditor to us.

23

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Table of Contents

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for the three months ended
March 31, 2010 and 2009 ($ in thousands):

Total cash provided by (used in)

2010

2009Operating activities

$
62,022

$
87,367Investing activities


354


(10,009
)Financing activities





(93,451
)Increase (decrease) in cash and cash equivalents

$
62,376

$
(16,093
)


Operating Activities

Net cash provided by operating activities for the first quarter of 2010 represented $38.1 million from operations and
$23.9 million from working capital changes. The $38.1 million includes $33.9 million of net income, adjusted for non-cash expenses of $3.9 million of
depreciation of property, plant and equipment and amortization of deferred plant turnaround costs.

Investing Activities

Our investing activities used cash of $0.4 million for the first quarter of 2010. This includes $3.4 million of capital
expenditures and $0.1 million of plant turnaround expenditures.

Financing Activities

There were no uses of cash related to financing activities in the first quarter of 2010 due to there being no distributions paid to our
unitholders during the quarter. The distributions paid are based on the "Available Cash," as defined in our Agreement of Limited Partnership. See Note 3 included herein.

Revolving Credit Facility

We have a $50 million revolving credit facility. A portion of this facility is available for swing loans and for the issuance of
letters of credit. At March 31, 2010, there were no revolving credit borrowings and there were no outstanding letters of credit. The facility requires us to maintain certain financial ratio
covenants relating to minimum earnings, maximum capital expenditures and minimum liquidity. We must also adhere to certain limitations on additional indebtedness, capital expenditures, acquisitions,
liens, investments, asset sales, prepayments or subordinated indebtedness, changes in lines of business, restricted payments and transactions with affiliates, among others. Terra and its other
domestic subsidiaries have guaranteed our obligations on an unsecured basis. For additional information regarding our facility, see Note 9 to our audited consolidated financial statements
included in our 2009 Annual Report on Form 10-K and also Note 9 included herein.

Under
the 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 facility are secured by substantially all of our working capital.

In
addition, if our aggregate borrowing availability falls below $10 million, we are required to have generated $25 million of operating cash flows or earnings before
interest, income taxes, depreciation, amortization and other non-cash items as defined in the facility for the preceding four quarters. We are also required to maintain a minimum aggregate
unused borrowing availability of $5 million at all times.

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).

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Table of Contents

Our
ability to continue to meet the covenants under the facility in the future will depend on market conditions, operating cash flows, working capital needs, receipt of customer
prepayments and trade credit terms. Failure to meet these covenants, or to obtain a waiver from the lenders, would result in our default such that all outstanding amounts could become immediately due
and payable and we would be unable to borrow additional amounts under the facility. Access to adequate bank facilities may be required to fund operating cash needs. Therefore, any default or
termination of the facility could have a material adverse effect on our business.

The
facility also requires that there be no change of control related to Terra, such that no individual or group (within the meaning of the Securities Exchange Act of 1934, as amended
(Exchange Act)) beneficially owns more than 35% of the outstanding voting shares of Terra. Such a change of control would constitute an event of default under the facility. On April 2, 2010, we
entered into a waiver relating to this facility. The waiver provides for the waiver of the change of control event of default that would have resulted from CF Industries Holdings, Inc.'s (CF)
acquisition of more than 35% of Terra's outstanding common stock on April 5, 2010 (see Note 10). The waiver is effective through July 1, 2010. The General Partner is currently
considering options to replace the facility. There can be no assurance, however, that the facility can be replaced on terms acceptable to the General Partner or at all.

Debt

The General Partner is an indirect, wholly-owned subsidiary of Terra. Under the General Partner's governing documents, neither we nor
the General Partner may make any bankruptcy filing (or take similar action) without the approval of the General Partners' independent directors.

Partnership Distributions

We make quarterly distributions to our partners based on "Available Cash" for the quarter, as defined in our Agreement of Limited
Partnership. Available Cash is defined generally as all cash receipts less all cash disbursements, adjusted for changes in certain reserves established as the General Partner determines in its
reasonable discretion to be necessary. Based upon
the liquidity needs of the business, these reserve requirements did not allow for a quarterly distribution in the quarter ended March 31, 2010. We paid a quarterly distribution of
$93.5 million for the quarter ended March 31, 2009.

We
receive 99% of the Available Cash from the Operating Partnership and 1% is distributed to its General Partner. Cash distributions from the Operating Partnership generally represent
our Available Cash from operations. Our cash distributions are made 99.975% to 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
or Incentive Distribution Rights (IDRs). Pursuant to our Agreement of Limited Partnership, income allocable to the limited partners and General Partner is based upon the distributions of Available
Cash for the year. Therefore, earnings per unit reflect an annualized allocation rate.

On
April 28, 2010, we announced a $1.25 cash distribution per common limited partnership unit, payable on May 27, 2010 to holders of record as of May 10, 2010. Since
TNCLP did not declare a distribution for the fourth quarter of 2009 an MQD shortfall was created which is required to be fulfilled before the General Partner is to receive IDRs. The announced $1.25
cash distribution fulfills

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the
MQD shortfall and exceeds current quarterly requirements. We have exceeded the cumulative MQD amounts and will distribute Available Cash as summarized in the following table:

Income and Distribution AllocationTarget
Limit

Target
Increment

Common
Units

Class B
Common
Units

General
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





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.

General Partner Option to Effect Mandatory Redemption of Partnership Units

At March 31, 2010, the General Partner and its affiliates owned 75.3% of our outstanding units. When not more than 25% of the
issued and outstanding units are held by non-affiliates of the General Partner, as was the case at March 31, 2010, 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.

Our
cash receipts are generally received by Terra on our behalf. Cash receipts, net of cash payments made by Terra, are transferred to us from Terra on a weekly basis. As a result of
this cash collection and distribution arrangement, Terra is a creditor to us.

There
were no material changes outside the ordinary course of business to the Partnership's contractual obligations, critical accounting policies or off-balance sheet
arrangements presented in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of
the Annual Report on Form 10-K for the period ended December 31, 2009.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are significantly affected by the price of natural gas. We employ derivative commodity instruments related to a portion
of our natural gas requirements (primarily swaps and options) for the purpose of managing exposure to commodity price risk in the purchase of natural gas. Changes in the market value of these
derivative instruments are expected to have a high correlation to changes in the spot price of natural gas. For more information about how we manage specific risk exposures, refer to our 2009 Annual
Report on Form 10-K,, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" and Note 6 included herein. There were no material changes in our use of
financial instruments during the quarter ended March 31, 2010.

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Natural gas is the principal raw material used to manufacture nitrogen. Natural gas prices are volatile and we mitigate some of this volatility through the use of
derivative commodity instruments. Our current policy is to hedge natural gas provided that such arrangements would not result in costs greater than expected selling prices for our finished products.
Estimated North American natural gas requirements for 2010 are approximately 38 billion cubic feet. We have hedged 12% of our expected North American requirements for the next twelve months.
The fair value of these instruments is estimated based, in part, on quoted market prices from brokers, realized gains or losses and/or computations. These instruments and other natural gas positions
fixed natural gas prices at $4.2 million (includes $4.0 million related to accumulated other comprehensive loss) more than published prices for March 31, 2010 forward markets.

The
General Partner's ability to manage our exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations
imposed by our bank agreement covenants.

ITEM 4.    CONTROLS AND PROCEDURES

Our Principal Executive Officer and Principal Financial Officer have concluded, based on their evaluation as of the end of the period
covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act are
recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.

There
were no significant changes in our internal control over financial reporting that occurred during the most recent quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY

Certain statements in this report may constitute "forward-looking" statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are based upon assumptions as to future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is
expressed or forecasted in these forward-looking statements. As a result, these statements speak only as of the date they were made and we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

Words
such as "expects," "intends," "plans," "projects," "believes," "estimates," and similar expressions are used to identify these forward-looking statements. Forward-looking
statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks, uncertainties and assumptions include, among others,
statements relating to:



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Additional
information as to these factors can be found in our 2009 Annual Report on Form 10-K.

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PART II. OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

From time to time, we are involved in various claims, disputes, administrative proceedings and legal actions arising in the ordinary
course of business. We do not believe that the matters in which we are currently involved, either individually or in the aggregate, will have a material adverse effect on our consolidated financial
position, results of operations or liquidity.

ITEM 1A.    RISK FACTORS

There were no significant changes in our risk factors during the first three months of 2010 as compared to the risk factors identified
in our 2009 Annual Report on Form 10-K.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.    REMOVED AND RESERVED

None

ITEM 5.    OTHER INFORMATION

None

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ITEM 6.    EXHIBITS

Exhibit 10.1

Waiver, dated as of April 2, 2010, among Terra Nitrogen, Limited Partnership, a Delaware limited partnership, Terra Nitrogen Company, L.P., a Delaware limited partnership, Terra Nitrogen GP, Inc., a
Delaware corporation, the Lenders party thereto, and Citicorp USA, Inc., as Administrative Agent thereunder (incorporated by reference to Exhibit 10.1 to TNCLP's Form 8-K dated April 2, 2010 (Commission File No. 003-43007)Exhibit 31.1

Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 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


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

TERRA NITROGEN COMPANY, L.P.By:

TERRA NITROGEN GP INC.
as General PartnerBy:

/s/ ANTHONY J. NOCCHIERO Anthony J. Nocchiero Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)By:

/s/ STEPHEN R. WILSON Stephen R. Wilson President and Chief Executive
Officer, Chairman of the Board
(Principal Executive Officer)


Date:
May 7, 2010

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