##### 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 March 31, 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
(State or other jurisdiction of 
incorporation or organization)
    
    73-1389684
(I.R.S. Employer
Identification No.)Terra CentrePO Box 6000600 Fourth StreetSioux City, Iowa
    
    51102-6000(Address of principal executive office)
    
    (Zip Code)
 Registrants telephone number, including area code: (712) 277-1340
 þ o
 þ o
  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 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
    
    
    26Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    28Item 1A. Risk Factors
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    29Exhibit 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
 March 31,
    
    
    December 31,
    
    
    March 31,2009
    
    
    2008
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    138,588
    
    
    $
    154,681
    
    
    $
    248,780Demand deposits with affiliate
    
    
    6,408
    
    
    
    
    
    
    
    1,012Accounts receivable
    
    
    34,314
    
    
    
    38,053
    
    
    
    28,267Inventory
    
    
    37,869
    
    
    
    57,207
    
    
    
    38,833Prepaid expenses and other current assets
    
    
    5,297
    
    
    
    11,815
    
    
    
    16,338Total current assets
    
    
    222,476
    
    
    
    261,756
    
    
    
    333,230Property, plant and equipment, net
    
    
    69,185
    
    
    
    68,208
    
    
    
    69,698Other assets
    
    
    9,840
    
    
    
    11,442
    
    
    
    19,157Total assets
    
    $
    301,501
    
    
    $
    341,406
    
    
    $
    422,085LIABILITIES AND PARTNERS CAPITALCurrent liabilities:Accounts payable and accrued liabilities
    
    $
    18,904
    
    
    $
    24,844
    
    
    $
    43,191Customer prepayments
    
    
    72,253
    
    
    
    45,067
    
    
    
    154,058Derivative hedge liabilities
    
    
    11,510
    
    
    
    43,315
    
    
    
    567Total current liabilities
    
    
    102,667
    
    
    
    113,226
    
    
    
    197,816Other long-term liabilities
    
    
    1,212
    
    
    
    871
    
    
    
    436Total liabilities
    
    
    103,879
    
    
    
    114,097
    
    
    
    198,252Partners capital:Limited partners interests, 18,502 Common Units
authorized and outstanding
    
    
    190,420
    
    
    
    217,894
    
    
    
    211,525Limited partners interests, 184 Class B Common
Units authorized and outstanding
    
    
    536
    
    
    
    1,024
    
    
    
    550General partners interest
    
    
    17,025
    
    
    
    39,172
    
    
    
    (2,693
    )Accumulated other comprehensive income (loss)
    
    
    (10,359
    )
    
    
    (30,781
    )
    
    
    14,451Total partners capital
    
    
    197,622
    
    
    
    227,309
    
    
    
    223,833Total liabilities and partners capital
    
    $
    301,501
    
    
    $
    341,406
    
    
    $
    422,085
   3




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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Revenues:Product revenues
    
    $
    165,076
    
    
    $
    174,253Other income
    
    
    226
    
    
    
    279Total revenues
    
    
    165,302
    
    
    
    174,532Costs and expenses:Cost of goods sold
    
    
    117,016
    
    
    
    91,971Gross profit
    
    
    48,286
    
    
    
    82,561Operating expenses
    
    
    5,277
    
    
    
    3,524Income from operations
    
    
    43,009
    
    
    
    79,037Interest expense
    
    
    (81
    )
    
    
    (81
    )Interest income
    
    
    414
    
    
    
    2,640Net income
    
    $
    43,342
    
    
    $
    81,596Allocation of net income:General Partner
    
    $
    15,423
    
    
    $
    8,096Class B Common Units
    
    
    423
    
    
    
    796Common Units
    
    
    27,496
    
    
    
    72,704Net income
    
    $
    43,342
    
    
    $
    81,596Net income per Common Unit
    
    $
    1.49
    
    
    $
    3.93
   4




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TERRA NITROGEN COMPANY, L.P.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  (unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008Operating activities:Net income
    
    $
    43,342
    
    
    $
    81,596Adjustments to reconcile net income to net cash
flows from operating activities:Depreciation and amortization
    
    
    4,270
    
    
    
    5,745Non-cash (gain) loss on derivative instruments
    
    
    4
    
    
    
    (301
    )Changes in operating assets and liabilities:Receivables
    
    
    3,739
    
    
    
    21,368Inventories
    
    
    19,338
    
    
    
    (19,490
    )Accounts payable and customer prepayments
    
    
    22,166
    
    
    
    3,647Other assets and liabilities
    
    
    (5,492
    )
    
    
    (3,955
    )Net cash flows from operating activities
    
    
    87,367
    
    
    
    88,610Investing activities:Capital expenditures and plant turnaround expenditures
    
    
    (3,601
    )
    
    
    (946
    )Change in demand deposits with affiliate
    
    
    (6,408
    )
    
    
    (1,012
    )Net cash flows from investing activities
    
    
    (10,009
    )
    
    
    (1,958
    )Financing activities:Partnership distributions paid
    
    
    (93,451
    )
    
    
    (84,012
    )Net cash flows from financing activities
    
    
    (93,451
    )
    
    
    (84,012
    )Increase (decrease) to cash and cash equivalents
    
    
    (16,093
    )
    
    
    2,640Cash and cash equivalents at beginning of period
    
    
    154,681
    
    
    
    246,140Cash and cash equivalents at end of period
    
    $
    138,588
    
    
    $
    248,780Supplemental disclosure of cash flow information:Cash paid during the period for interest
    
    $
    63
    
    
    $
    63
   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
    
    
    27,496
    
    
    
    423
    
    
    
    15,423
    
    
    
    3⁄4
    
    
    
    43,342
    
    
    $
    43,342Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    20,422
    
    
    
    20,422
    
    
    
    20,422Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    63,764Distributions
    
    
    (54,970
    )
    
    
    (911
    )
    
    
    (37,570
    )
    
    
    3⁄4
    
    
    
    (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
 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
    
    
    72,704
    
    
    
    796
    
    
    
    8,096
    
    
    
    3⁄4
    
    
    
    81,596
    
    
    $
    81,596Change in fair value of derivatives
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    3⁄4
    
    
    
    19,150
    
    
    
    19,150
    
    
    
    19,150Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    100,746Distributions
    
    
    (82,332
    )
    
    
    (819
    )
    
    
    (861
    )
    
    
    3⁄4
    
    
    
    (84,012
    )Partners capital at March 31, 2008
    
    $
    211,525
    
    
    $
    550
    
    
    $
    (2,693
    )
    
    $
    14,451
    
    
    $
    223,833Limited partner units issued and
outstanding March 31, 2008:Common Units
    
    
    
    
    
    
    
    
    
    
    18,501,576Class B Common Units
    
    
    
    
    
    
    
    
    
    
    184,072Total units outstanding at March 31, 2008
    
    
    
    
    
    
    
    
    
    
    18,685,648
   6




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TERRA NITROGEN COMPANY, L.P.
 
 Notes to Consolidated Financial Statements (Unaudited)
 1.
    
    Background and Basis of PresentationTerra 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 Statement of Financial Accounting Standards (SFAS) 131,
Disclosures about Segments of an Enterprise and Related Information(SFAS 131). 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 condensed consolidated financial statements and notes thereto have
been prepared in accordance with the requirements of the U.S. Securities and Exchange
Commission for interim reporting. Our significant accounting policies are described in the
notes to the consolidated financial statements in our Annual Report on Form 10-K for the year
ended December 31, 2008. Management is responsible for the unaudited condensed consolidated
financial statements included in this document. The condensed consolidated financial statements
included in this document are unaudited, but in the opinion of management, include all
adjustments necessary for fair presentation of the Partnerships financial position, results of
operations and cash flows for the periods presented.2.
    
    New Accounting PronouncementsIn December 2007, the Financial Accounting Standards Board (FASB) issued SFAS 141R, Business
Combinations(SFAS 141R), which changes the way we account for business acquisitions. SFAS 141R
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 SFAS 141R 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. SFAS 141R
became effective for the Partnership on January 1, 2009 and the adoption did not have an impact
on our financial statements.In March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities(SFAS 161). SFAS 161 is an amendment of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities (SFAS 133). To address concerns that the existing disclosure
requirements of SFAS 133 do not provide adequate information, SFAS 161
requires enhanced disclosures about an entitys derivative and hedging activities and thereby
improves the transparency of financial reporting. SFAS 161 became effective for the Partnership
on January 1, 2009 and we have included the additional disclosure information required by SFAS
161 within Note 6, Derivative Financial Instruments, of the Notes to the Consolidated Financial
Statements.
  7




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The FASB has issued Draft Abstract Emerging Issues Task Force (EITF) Issue 07-4, Application of
the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships (EITF 07-4).
EITF 07-4 specifies the treatment of earnings per unit calculations when incentive distribution
rights exist. EITF 07-4 became effective for the Partnership on January 1, 2009 and did not
have an impact on our financial statements.In April 2009, the FASB issued FASB Staff Position No. 107-1 (FSP FAS 107-1) and APB 28-1 (APB
28-1), which amends FASB Statement No. 107, Disclosures about Fair Value of Financial
Instrumentsand APB Opinion No. 28, Interim Financial Reporting, to require disclosures about
the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB
28-1 will be effective for interim reporting periods ending after June 15, 2009. We are
currently evaluating the future impacts and disclosures of this staff positions.In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Whether a Market is
not Active and a Transaction is not Distressed(FSP FAS 157-4), which provides additional
guidance in accordance with FASB No. 157, Fair Value Measurements, when the volume and level of
activity for the asset or liability has significantly decreased. FSP FAS 157-4 shall be
effective for interim and annual reporting periods ending after June 15, 2009. We are currently
evaluating the future impacts and disclosures of this staff position.3.
    
    Agreement of Limited PartnershipWe 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 $93.5 million to our partners in the first three months of
2009 and $84.0 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.
  8




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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 March 31, 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.4.
    
    Net Income per Common UnitBasic 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 periods ended March 31, 2009 and 2008:
 Three Months EndedMarch 31,(in thousands, except per-unit amounts)
    
    2009
    
    
    2008Basic income per Common Unit:Net income
    
    $
    43,342
    
    
    $
    81,596Less: Net income allocable to Class B Common Units
    
    
    (423
    )
    
    
    (796
    )Less: Net income allocable to General Partner
    
    
    (15,423
    )
    
    
    (8,096
    )Net income allocable to Common Units
    
    
    27,496
    
    
    
    72,704Weighted average units outstanding
    
    
    18,502
    
    
    
    18,502Net income per Common Unit
    
    $
    1.49
    
    
    $
    3.93
   9




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5.
    
    InventoriesInventories consisted of the following:
 March 31,
    
    
    December 31,
    
    
    March 31,(in thousands)
    
    2009
    
    
    2008
    
    
    2008Materials and supplies
    
    $
    9,665
    
    
    $
    10,708
    
    
    $
    8,405Finished goods
    
    
    28,204
    
    
    
    46,499
    
    
    
    30,428Total
    
    $
    37,869
    
    
    $
    57,207
    
    
    $
    38,833
 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. The
cost of inventories is determined by using the first-in, first-out method. 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 InstrumentsIn March 2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and Hedging
Activities(SFAS 161). SFAS 161 is an amendment of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities(SFAS 133). SFAS 161 requires enhanced disclosures of an
entitys derivative and hedging activities and thereby improves the transparency of financial
reporting. SFAS 161 became effective for the Partnership on January 1, 2009 and we have
incorporated the additional disclosure information for SFAS 161 below.
  10




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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 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,
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.
  11




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March 31,
    
    
    March 31,2009
    
    
    2008(in thousands)
    
    
    
    
    
    Contract
    
    
    ContractTransaction Type
    
    Commodity Type
    
    
    MMBtu
    
    
    MMBtuSwaps
    
    Natural Gas
    
    
    7,700
    
    
    
    9,125Basis swaps
    
    Natural Gas
    
    
    8,675
    
    
    
    9,575Purchased put options
    
    Natural Gas
    
    
    2,450
    
    
    
    Purchased call options
    
    Natural Gas
    
    
    3,420
    
    
    
    
  12




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##### Table of Contents



Asset Derivatives (a)March 31,
    
    
    December 31,
    
    
    March 31,Derivative Instrument
    
    Location
    
    
    2009
    
    
    2008
    
    
    2008Commodity Derivatives
    
    Other current assets
    
    $
    3,678
    
    
    $
    9,456
    
    
    $
    15,148
 Liability Derivatives (a)March 31,
    
    
    December 31,
    
    
    March 31,Derivative Instrument
    
    Location
    
    
    2009
    
    
    2008
    
    
    2008Commodity Derivatives
    
    Derivative hedge liabilities
    
    $
    (11,510
    )
    
    $
    (43,315
    )
    
    $
    (567
    )
 (a)
    
    Amounts are disclosed at gross fair value in accordance with SFAS 161
requirements. All of our commodity derivatives are designated as cash flow hedging
instruments under SFAS 133. See footnote 1 and 6 of our 2008 Annual Report Form 10-K for
additional information on our overall risk management strategies. 
    13




---



##### Table of Contents



Amount 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)March 31,
    
    
    March 31,
    
    
    from AOCI into
    
    
    March 31,
    
    
    March 31,
    
    
    Location of Gain (Loss)
    
    
    March 31,
    
    
    March 31,2009
    
    
    2008
    
    
    Income (a)
    
    
    2009
    
    
    2008
    
    
    Recognized in Income (b)
    
    
    2009
    
    
    2008$
    (13,287
    )
    
    $
    21,653
    
    
    Cost of Sales
    
    $
    (33,709
    )
    
    $
    2,503
    
    
    Cost of Sales
    
    $
    (1,240
    )
    
    $
    127
 (a)
    
    Effective portion of gain (loss).(b)
    
    The amount of gain or (loss) recognized in income represents ($0.6) million and
$0.1 million related to the ineffective portion of the hedging relationships and ($0.6)
million and $ related to the amount excluded from the assessment of hedge
effectiveness.  Three Months EndedMarch 31,(in thousands)
    
    2009
    
    
    2008Beginning accumulated loss
    
    $
    (30,781
    )
    
    $
    (4,699
    )Reclassification into earnings
    
    
    33,709
    
    
    
    (2,503
    )Net change in market value
    
    
    (13,287
    )
    
    
    21,653Ending accumulated income (loss)
    
    $
    (10,359
    )
    
    $
    14,451
  7.
    
    Fair Value Measurements
 Fair Value Measurements Effective Date of
FASB Statement No. 157,
   14




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##### Table of Contents




    
    Level 1  inputs to the valuation methodology are unadjusted quoted prices for
identical assets or liabilities in active markets.
    
    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.
   Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsDerivative contracts
    
    $
    3⁄4
    
    
    $
    3,678
    
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    3,678
    
    
    $
    3⁄4LiabilitiesDerivative contracts
    
    $
    3⁄4
    
    
    $
    (11,510
    )
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    (11,510
    )
    
    $
    3⁄4
  15




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##### Table of Contents



Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsDerivative contracts
    
    $
    3⁄4
    
    
    $
    9,456
    
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    9,456
    
    
    $
    3⁄4LiabilitiesDerivative contracts
    
    $
    3⁄4
    
    
    $
    (43,315
    )
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    (43,315
    )
    
    $
    3⁄4
  Quoted Market
    
    
    Significant Other
    
    
    SignificantPrices in Active
    
    
    Observable
    
    
    UnobservableMarkets
    
    
    Inputs
    
    
    Inputs(in thousands)
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)AssetsDerivative contracts
    
    $
    3⁄4
    
    
    $
    15,148
    
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    15,148
    
    
    $
    3⁄4LiabilitiesDerivative contracts
    
    $
    3⁄4
    
    
    $
    (567
    )
    
    $
    3⁄4Total
    
    $
    3⁄4
    
    
    $
    (567
    )
    
    $
    3⁄4
 8.
    
    Turnaround CostsThe following represents a summary of the deferred plant turnaround costs for the three months
ended March 31, 2009 and 2008:
 TurnaroundBeginning
    
    
    Costs
    
    
    Turnaround
    
    
    Ending(in thousands)
    
    Balance
    
    
    Capitalized
    
    
    Amortization
    
    
    BalancePeriods ended:March 31, 2009
    
    $
    5,255
    
    
    $
    247
    
    
    $
    (1,875
    )
    
    $
    3,627March 31, 2008
    
    $
    16,841
    
    
    $
    43
    
    
    $
    (3,335
    )
    
    $
    13,549
  16




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##### Table of Contents



9.
    
    Revolving Credit FacilityWe have a $50 million revolving credit 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 2.25% at March 31, 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
March 31, 2009, we had $50 million of borrowing availability and there were no outstanding
borrowings or letters of credit under the facility.10.
    
    Unsolicited Exchange OfferOn January 15, 2009, CF Industries Holdings, Inc. (CF) presented a letter to Terras Board of
Directors 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 interest of Terra or its
stockholders and substantially undervalued the Company. CF Industries subsequently announced
that they remained committed to the proposal, and on February 3, 2009, announced that they
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 CF
 shares 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 shareholders within ten business days, and further advised Terras
shareholders 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 an absolute basis and relative to CF and
is not in the best interests of Terra and its stockholders.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 our shareholders 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 our shareholders than it would owning Terra on a stand-alone basis.
  17




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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.
  18




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##### Table of Contents



Business Strategy
    
    
    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
    19




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##### Table of Contents



Supply
  Natural Gas Costs
  March 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    March 31,(in $ per MMBtu)
    
    2008
    
    
    2008
    
    
    2008
    
    
    2008
    
    
    2009$
    10.50
    
    
    $
    13.22
    
    
    $
    7.90
    
    
    $
    6.09
    
    
    $
    4.69
  RESULTS OF OPERATIONS
 Consolidated Results
   20




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##### Table of Contents



Three Months Ended March 31,2009  2008(in millions except per share data)
    
    2009
    
    
    2008
    
    
    Change
    
    
    PercentNet sales
    
    $
    165.3
    
    
    $
    174.5
    
    
    $
    (9.2
    )
    
    
    -5
    %Cost of goods sold
    
    
    117.0
    
    
    
    92.0
    
    
    
    25.0
    
    
    
    27
    %Gross margin
    
    
    48.3
    
    
    
    82.5
    
    
    
    (34.2
    )
    
    
    -41
    %Gross margin percentage
    
    
    29.2
    %
    
    
    47.3
    %
    
    
    -18.1
    
    
    
    -38
    %Selling, general and
administrative expenses
    
    
    5.3
    
    
    
    3.5
    
    
    
    1.8
    
    
    
    51
    %Operating earnings
    
    
    43.0
    
    
    
    79.0
    
    
    
    (36.0
    )
    
    
    -46
    %Interest income, net
    
    
    0.3
    
    
    
    2.6
    
    
    
    (2.3
    )
    
    
    -88
    %Net Income
    
    $
    43.3
    
    
    $
    81.6
    
    
    $
    (38.3
    )
    
    
    -47
    %Net income allocable to
Common Units
    
    $
    27.5
    
    
    $
    72.7
    
    
    $
    (45.2
    )
    
    
    -62
    %Net income per Common Unit
    
    $
    1.49
    
    
    $
    3.93
    
    
    $
    (2.44
    )
    
    
    -62
    %
 Sales Volumes and Prices
  2009
    
    
    2008Volumes
    
    
    Unit Price
    
    
    Volumes
    
    
    Unit Price(000 tons)
    
    
    ($/ton)2
    
    
    (000 tons)
    
    
    ($/ton)2Ammonia
    
    
    105
    
    
    $
    437
    
    
    
    38
    
    
    $
    519UAN1
    
    
    367
    
    
    $
    289
    
    
    
    502
    
    
    $
    281
 1.
    
    The nitrogen content of UAN is 32% by weight.2.
    
    After deducting outbound freight costs. RESULTS OF OPERATIONS  QUARTER ENDED MARCH 31, 2009 COMPARED WITH QUARTER ENDED MARCH 31, 2008
   21




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##### Table of Contents



Selling, General and Administrative Costs
  Interest Income
  CAPITAL RESOURCES AND LIQUIDITY
    22




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##### Table of Contents



Cash Flows
  Total cash provided by (used in)
    
    2009
    
    
    2008Operating activities
    
    $
    87,367
    
    
    $
    88,610Investing activities
    
    
    (10,009
    )
    
    
    (1,958
    )Financing activities
    
    
    (93,451
    )
    
    
    (84,012
    )Increase (decrease) in cash and
cash equivalents
    
    $
    (16,093
    )
    
    $
    2,640
 Operating Activities
  Investing Activities
  Financing Activities
  Revolving Credit Facility
 Revolving Bank Credit Facility Financial Statements and Supplementary Data
  23




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##### Table of Contents



Unsolicited Exchange Offer by CF Industries Holdings, Inc.
  Debt
  Partnership Distributions
   24




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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
    
    
    
    
    
    
    
    50.505
    %
    
    
    0.985
    %
    
    
    48.510
    %
    
    
    100.000
    %
  General Partner Option to Effect Mandatory Redemption of Partnership Units
    25




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
    26




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##### Table of Contents



FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
   
    
    changes in financial 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, and
 
    
    other risks detailed in the section entitled Risk Factors in our 2008 Annual Report on
Form 10-K.
 Business Managements Discussion and Analysis of Financial Condition and
Results of Operations Notes to our Consolidated Financial Statements
  27




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  
 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
   28




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##### Table of Contents



ITEM 6. EXHIBITS
 (a) Exhibits:
 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
  29




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##### Table of Contents



SIGNATURE
  TERRA NITROGEN COMPANY, L.P.By:
    
    TERRA NITROGEN GP INC.as General PartnerBy:
    
    /s/ DANIEL D. GREENWELL

Daniel D. GreenwellVice President andChief Financial Officer(Principal Financial Officer andPrincipal Accounting Officer)
   30




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber

    
    Description31.1
    
    
    Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of the Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of the Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
  31