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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarter ended March 31, 2004



OR



| ̈ | 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 1-10877



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TERRA NITROGEN COMPANY, L.P.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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   |  | 51102-6000                          
|(Address of principal executive office)                        |  | (Zip Code)                          



Registrants
telephone number:

(712) 277-1340



At the close of business on March 31, 2004, there were 18,501,576 Common Units outstanding.



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.    x  Yes ̈No



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PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



TERRA NITROGEN COMPANY, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)



|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|--------------------------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | ------------- |  | - | ------- | -
|                                                                |  | March 31,2004 |         |   | December 31,2003 |   |         | March 31,2003 | 
|ASSETS                                                          |  |               |         |   |                  |   |         |               |  |   |         |  
|Current assets:                                                 |  |               |         |   |                  |   |         |               |  |   |         |  
|Cash and cash equivalents                                       |  | $             | 48,480  |   |                  | $ | 39,596  |               |  | $ | 13,458  |  
|Accounts receivable                                             |  |               | 21,720  |   |                  |   | 36,612  |               |  |   | 18,778  |  
|Inventory  finished products                                   |  |               | 21,359  |   |                  |   | 12,516  |               |  |   | 33,723  |  
|Inventory  materials and supplies                              |  |               | 6,587   |   |                  |   | 6,848   |               |  |   | 10,140  |  
|Prepaid insurance and other current assets                      |  |               | 5,826   |   |                  |   | 6,344   |               |  |   | 2,745   |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Total current assets                                            |  |               | 103,972 |   |                  |   | 101,916 |               |  |   | 78,844  |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Property, plant and equipment, net                              |  |               | 82,706  |   |                  |   | 84,691  |               |  |   | 123,616 |  
|Other assets                                                    |  |               | 8,691   |   |                  |   | 9,631   |               |  |   | 9,597   |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Total assets                                                    |  | $             | 195,369 |   |                  | $ | 196,238 |               |  | $ | 212,057 |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|LIABILITIES AND PARTNERS CAPITAL                               |  |               |         |   |                  |   |         |               |  |   |         |  
|Current liabilities:                                            |  |               |         |   |                  |   |         |               |  |   |         |  
|Accounts payable and accrued liabilities                        |  | $             | 6,446   |   |                  | $ | 8,661   |               |  | $ | 24,196  |  
|Customer prepayments                                            |  |               | 38,241  |   |                  |   | 41,251  |               |  |   | 21,176  |  
|Pension liabilities due to affiliate                            |  |               | 4,116   |   |                  |   | 4,116   |               |  |   |        |  
|Current portion of long-term debt and capital lease obligations |  |               | 58      |   |                  |   | 58      |               |  |   | 56      |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Total current liabilities                                       |  |               | 48,861  |   |                  |   | 54,086  |               |  |   | 45,428  |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Long-term debt due to affiliates                                |  |               | 8,200   |   |                  |   | 8,200   |               |  |   | 8,200   |  
|Capital lease obligations                                       |  |               | 59      |   |                  |   | 75      |               |  |   | 119     |  
|Pension liabilities due to affiliate                            |  |               |        |   |                  |   |        |               |  |   | 5,316   |  
|Other liabilities                                               |  |               | 1,600   |   |                  |   | 1,600   |               |  |   |        |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Total liabilities                                               |  |               | 58,720  |   |                  |   | 63,961  |               |  |   | 59,063  |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Partners capital:                                              |  |               |         |   |                  |   |         |               |  |   |         |  
|Limited partners interests  common unitholders                |  |               | 145,410 |   |                  |   | 138,274 |               |  |   | 165,945 |  
|General partners interest                                      |  |               | (10,901 | ) |                  |   | (11,047 | )             |  |   | (10,483 | )
|Accumulated other comprehensive income                          |  |               | 2,140   |   |                  |   | 5,050   |               |  |   | (2,468  | )
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Total partners capital                                         |  |               | 136,649 |   |                  |   | 132,277 |               |  |   | 152,994 |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  
|Total liabilities and partners capital                         |  | $             | 195,369 |   |                  | $ | 196,238 |               |  | $ | 212,057 |  
|                                                                |  |               |         |   |                  |   |         |               |  |   |         |  



See
Accompanying Notes to the Condensed Consolidated Financial Statements.



2



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TERRA NITROGEN COMPANY, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit
amounts)

(unaudited)



|                                                          |  |                             |         |   |      |   |        |  
|--------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                          |  | Three Months EndedMarch 31, |        
|                                                          |  | 2004                        |         |   | 2003 |  
|Revenues                                                  |  | $                           | 108,213 |   |      | $ | 70,855 |  
|Other income                                              |  |                             | 71      |   |      |   | 82     |  
|                                                          |  |                             |         |   |      |   |        |  
|Total revenues                                            |  |                             | 108,284 |   |      |   | 70,937 |  
|Cost of goods sold                                        |  |                             | 94,308  |   |      |   | 75,961 |  
|                                                          |  |                             |         |   |      |   |        |  
|Gross profit (loss)                                       |  |                             | 13,976  |   |      |   | (5,024 | )
|Operating expenses                                        |  |                             | 2,173   |   |      |   | 2,019  |  
|                                                          |  |                             |         |   |      |   |        |  
|Operating income (loss)                                   |  |                             | 11,803  |   |      |   | (7,043 | )
|Interest expense                                          |  |                             | 2       |   |      |   | 3      |  
|Interest income                                           |  |                             | (201    | ) |      |   | (13    | )
|                                                          |  |                             |         |   |      |   |        |  
|Net income (loss)                                         |  | $                           | 12,002  |   |      | $ | (7,033 | )
|                                                          |  |                             |         |   |      |   |        |  
|Net income (loss) allocable to limited partners interest |  | $                           | 11,762  |   |      | $ | (6,892 | )
|                                                          |  |                             |         |   |      |   |        |  
|Net income (loss) per limited partnership unit            |  | $                           | 0.64    |   |      | $ | (0.37  | )
|                                                          |  |                             |         |   |      |   |        |  



See Accompanying Notes to the
Condensed Consolidated Financial Statements.



3



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TERRA NITROGEN COMPANY, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                        |  |                             |        |   |      |   |         |  
|--------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                                                        |  | Three Months EndedMarch 31, |       
|                                                                                        |  | 2004                        |        |   | 2003 |  
|Operating activities:                                                                   |  |                             |        |   |      |   |         |  
|Net income (loss) from operations                                                       |  | $                           | 12,002 |   |      | $ | (7,033  | )
|Adjustments to reconcile net income (loss) to net cash flows from operating activities: |  |                             |        |   |      |   |         |  
|Depreciation                                                                            |  |                             | 2,338  |   |      |   | 3,301   |  
|Changes in operating assets and liabilities:                                            |  |                             |        |   |      |   |         |  
|Receivables                                                                             |  |                             | 14,892 |   |      |   | 7,982   |  
|Inventories                                                                             |  |                             | (8,582 | ) |      |   | (23,760 | )
|Prepaid insurance and other current assets                                              |  |                             | (2,393 | ) |      |   | 3,914   |  
|Accounts payable, accrued liabilities and customer prepayments                          |  |                             | (5,225 | ) |      |   | (2,203  | )
|Other                                                                                   |  |                             | 682    |   |      |   | 518     |  
|                                                                                        |  |                             |        |   |      |   |         |  
|Net cash flows from operating activities                                                |  |                             | 13,714 |   |      |   | (17,281 | )
|                                                                                        |  |                            
|Investing activities:                                                                   |  |                             |        |   |      |   |         |  
|Capital expenditures                                                                    |  |                             | (94    | ) |      |   | (861    | )
|Other                                                                                   |  |                             |       |   |      |   | 593     |  
|                                                                                        |  |                             |        |   |      |   |         |  
|Net cash flows from investing activities                                                |  |                             | (94    | ) |      |   | (268    | )
|                                                                                        |  |                            
|Financing activities:                                                                   |  |                             |        |   |      |   |         |  
|Repayment of long-term debt and capital lease obligations                               |  |                             | (16    | ) |      |   | (11     | )
|Partnership distributions paid                                                          |  |                             | (4,720 | ) |      |   | (4,720  | )
|                                                                                        |  |                             |        |   |      |   |         |  
|Net cash flows from financing activities                                                |  |                             | (4,736 | ) |      |   | (4,731  | )
|                                                                                        |  |                             |        |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                                    |  |                             | 8,884  |   |      |   | (22,280 | )
|Cash and cash equivalents at beginning of period                                        |  |                             | 39,596 |   |      |   | 35,738  |  
|                                                                                        |  |                             |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                              |  | $                           | 48,480 |   |      | $ | 13,458  |  
|                                                                                        |  |                             |        |   |      |   |         |  



See Accompanying Notes to the
Condensed Consolidated Financial Statements.



4



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TERRA NITROGEN COMPANY, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS CAPITAL

(in thousands,
except for units)

(unaudited)



|                                     |  |                           |         |   |                           |   |         |                                            |  |   |                       |   |  |   |         |  
|------------------------------------ |  | ------------------------- | ------- | - | ------------------------- | - | ------- | ------------------------------------------ |  | - | --------------------- | - |  | - | ------- | -
|                                     |  | LimitedPartnersInterests |         |   | GeneralPartnersInterests |   |         | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TotalPartnersCapital |  
|Partners capital at January 1, 2004 |  | $                         | 138,274 |   |                           | $ | (11,047 | )                                          |  | $ | 5,050                 |   |  | $ | 132,277 |  
|Net income                           |  |                           | 11,762  |   |                           |   | 240     |                                            |  |   |                      |   |  |   | 12,002  |  
|Change in fair value of derivatives  |  |                           |        |   |                           |   |        |                                            |  |   | (2,910                | ) |  |   | (2,910  | )
|Comprehensive income                 |  |                           |        |   |                           |   |        |                                            |  |   |                      |   |  |   | 9,092   |  
|Distributions                        |  |                           | (4,626  | ) |                           |   | (94     | )                                          |  |   |                      |   |  |   | (4,720  | )
|                                     |  |                           |         |   |                           |   |         |                                            |  |   |                       |   |  |   |         |  
|Partners capital at March 31, 2004  |  | $                         | 145,410 |   |                           | $ | (10,901 | )                                          |  | $ | 2,140                 |   |  | $ | 136,649 |  
|                                     |  |                           |         |   |                           |   |         |                                            |  |   |                       |   |  |   |         |  



|                                                               |  |           
|-------------------------------------------------------------- |  | ----------
|Limited partner units issued and outstanding at March 31, 2004 |  | 18,501,576
|                                                               |  |           



|                                     |  |                           |         |   |                          |   |         |                                            |  |   |                       |   |  |   |         |  
|------------------------------------ |  | ------------------------- | ------- | - | ------------------------ | - | ------- | ------------------------------------------ |  | - | --------------------- | - |  | - | ------- | -
|                                     |  | LimitedPartnersInterests |         |   | GeneralPartnersInterest |   |         | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TotalPartnersCapital |  
|Partners capital at January 1, 2003 |  | $                         | 177,463 |   |                          | $ | (10,248 | )                                          |  | $ | 2,273                 |   |  | $ | 169,488 |  
|Net loss                             |  |                           | (6,892  | ) |                          |   | (141    | )                                          |  |   |                      |   |  |   | (7,033  | )
|Change in fair value of derivatives  |  |                           |        |   |                          |   |        |                                            |  |   | (4,741                | ) |  |   | (4,741  | )
|Comprehensive loss                   |  |                           |        |   |                          |   |        |                                            |  |   |                      |   |  |   | (11,774 | )
|Distributions                        |  |                           | (4,626  | ) |                          |   | (94     | )                                          |  |   |                      |   |  |   | (4,720  | )
|                                     |  |                           |         |   |                          |   |         |                                            |  |   |                       |   |  |   |         |  
|Partners capital at March 31, 2003  |  | $                         | 165,945 |   |                          | $ | (10,483 | )                                          |  | $ | (2,468                | ) |  | $ | 152,994 |  
|                                     |  |                           |         |   |                          |   |         |                                            |  |   |                       |   |  |   |         |  



|                                                               |  |           
|-------------------------------------------------------------- |  | ----------
|Limited partner units issued and outstanding at March 31, 2003 |  | 18,501,576
|                                                               |  |           



See Accompanying Notes to the
Condensed Consolidated Financial Statements.



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TERRA NITROGEN COMPANY, L.P.



Notes to Consolidated Financial Statements (Unaudited)



|1. | Basis of Presentation
|-- | ---------------------



The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes
thereto contained in the Terra Nitrogen Company, L.P. (TNCLP) Annual Report on Form 10-K for the year ended December 31, 2003. TNCLP and its operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the Operating
Partnership), are referred to herein, collectively, as the Partnership.



The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for the fair statement of the results for the periods presented. All
of these adjustments are of a normal and recurring nature. Results for the quarter are not necessarily indicative of future financial results of the Partnership.



|2. | Agreement of Limited Partnership
|-- | --------------------------------



The Partnership makes quarterly cash distributions to Unitholders and the General Partner in an amount equal to 100% of its Available Cash (as
defined in the Partnership Agreement).



The Partnership paid a
$4.7 million cash distribution ($0.25 per common unit) on February 25, 2004 and February 27, 2003.



At March 31, 2004, the General Partner and its affiliates owned 75.1% of the Partnerships outstanding units. When less than 25% of the issued and
outstanding units are held by non-affiliates of the General Partner, the Partnership, at the General Partners sole discretion, may call, or assign to the General Partner or its affiliates, its right to acquire all such outstanding units held
by non-affiliated persons. If the General Partner elects to acquire all outstanding units, the Partnership is required to give at least 30 but not more than 60 days notice of its 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 of 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 are restricted under the terms of Terras (Terra) bank credit agreement as described therein.



|3. | Derivative Financial Instruments
|-- | --------------------------------



Natural gas is the principal raw material used in the Partnerships production of nitrogen products. Natural gas prices are volatile and we manage
this volatility through the use of



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derivative commodity instruments. Terra Industries policy is to hedge 20-80% of its natural gas
requirements for the upcoming 12 months and up to 50% of the requirements for the following 24-month period, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. Deviations from
this policy are permitted by notification of Terra Industries Board of Directors. The financial derivatives are traded in months forward and settlement dates are scheduled to coincide with gas purchases during those future periods. These
contracts reference physical natural gas prices or approximate NYMEX futures contract prices. Contract prices are frequently based on prices at the most common and financially liquid location of reference for financial derivatives related to natural
gas. However, natural gas supplies for our facilities are purchased for each plant at locations other than reference points, which often creates a location basis differential between the contract price and the physical price of natural gas.
Accordingly, use of financial derivatives may not exactly offset the change in the price of physical gas.



The Partnership has entered into forward pricing positions for a portion of its natural gas requirements for the remainder of 2004, consistent with its
policy. As a result of its policies, the Partnership has reduced the potential adverse financial impact of natural gas increases during the forward pricing period, but conversely, if natural gas prices were to fall, the Partnership will incur higher
costs. Contracts were in place at March 31, 2004 to cover 23% of natural gas requirements for the succeeding twelve months.



Unrealized gains from forward pricing positions totaled $1.9 million as of March 31, 2004. The amount ultimately recognized by the Partnership will be
dependent on published prices in effect at the time of settlement. The Partnership also had $.4 million of realized gains on closed contracts relating to future periods that have been deferred to the respective period.



For the period ending March 31, 2004, recording the fair value of natural
gas derivatives resulted in a $3.3 million decrease to current assets, a $.4 million increase to cost of sales and a $2.9 million decrease to accumulated other comprehensive income. The decrease to current assets was to recognize the value of open
natural gas contracts; the increase to current liabilities was to reclassify deferred gains on closed contracts.



|4. | Impairment of Long-Lived Assets
|-- | -------------------------------



The Partnership reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. If the sum of the expected future cash flows expected to result from the use of the asset (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the
difference between the carrying amount and the fair value of the asset.



On June 26, 2003, we suspended production at our Blytheville facility due to expectations that the facility would not cover its cash costs because of continuing high natural gas costs and the seasonal decline in
nitrogen fertilizer demand and prices. In response to this action and as required by Statement of Financial Accounting Standards No. 144, Accounting for



7



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the Impairment or Disposal of Long-Lived Assets, Terra commenced a review to determine if the
Blytheville facilitys carrying value was impaired. This review led management to conclude that future market conditions may not justify the ongoing investment in maintenance and replacement capital necessary to extend operations for the
remainder of the facilitys established useful life. Accordingly a $40.7 million charge was recorded during the second quarter as an Impairment of long-lived assets. Although we resumed Blythevilles production in October 2003,
we plan to discontinue production or about May 31, 2004, and prepare the site for permanent closure. No decision has yet been made regarding sale or demolition of the facilitys production plants. We expect to operate the facilitys
storage and distribution assets as a terminal for ammonia produced at our Verdigris facility or obtained from other sources. We anticipate $3.0 to $4.0 million of spending, primarily employee severance and decommissioning costs, will be required
when the facility is permanently idled.



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



Introduction



We are a producer and marketer of nitrogen products for use in agricultural and industrial markets. Nitrogen is a commodity chemical whose
prices are established based on global supply and demand conditions. The nitrogen products industry has cycles of oversupply, resulting in lower prices and idled capacity, followed by supply shortages, resulting in high selling prices and higher
industry-wide production rates. For example, high nitrogen margins in 1995 led to capacity expansion projects globally that resulted in capacity increases that were, in the short term, substantially greater than demand growth, causing oversupply
conditions that reduced nitrogen prices. Since 1998, new global capacity has been partially offset by permanent plant closings in the U.S. and Europe. In order to be viable under these market conditions, a producer must be among the low-cost
producers to markets it serves and have a financial position that can sustain it during periods of oversupply.



Natural gas is the most significant raw material in the production of nitrogen products. North American natural gas costs have increased substantially since 1999. Since we compete with nitrogen products imported from
regions with lower natural gas costs, the oversupply situation during most of the three years ending December 31, 2002 did not permit us to increase selling prices to levels necessary to cover the natural gas cost increases. This resulted in
curtailments of North American nitrogen production by Terra and other producers. These curtailments contributed to reductions in global nitrogen product supplies, which have enabled nitrogen price increases to current levels.



Imports, most of which are produced at facilities with access to fixed-price natural gas
supplies, account for a significant portion of U.S. nitrogen product supply. Imported products natural gas costs have been and could continue to be substantially lower than the delivered cost of natural gas to our facilities. Offshore
producers are most competitive in regions close to the point of entry for imports, including the Gulf Coast and East Coast of North America. Importers are less competitive in serving the main corn-growing regions of the U.S. This is due to limited
distribution infrastructure and high freight costs to ship products from the ports to end-use markets.



Our sales volumes are primarily dependent upon the operating rates for our plants. We may purchase product from other manufacturers or importers for resale, but gross margins on those volumes would rarely be
significant. The profitability and cash flows from our operations are affected by our ability to manage our costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other
factors affecting our operating results include the level of planted acres, transportation costs, weather conditions (particularly during the planting season), grain prices and other variables described in Items 1 and 2 in the Business and
Properties section of the Partnerships most recent Form 10-K filing with the Securities and Exchange Commission.



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Critical Accounting Policies



The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States of America for reporting purposes. The preparation of these financial statements requires us to make estimates and judgments that affect the amount
of assets, liabilities, revenues and expenses at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.



Critical accounting policies are defined as those that reflect significant judgments and uncertainties, and potentially result in materially
different amounts being reported under different assumptions and conditions. Our critical accounting policies are described below.



Impairments of Long-Lived Assets



We record impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets are less than the carrying amount of these items. Our cash flow estimates are based on historical results adjusted to reflect our best estimate of future market and operating conditions. The net
carrying value of assets not recoverable is reduced to fair value. Our estimates of fair value represent our best estimate based on industry trends and reference to market rates and transactions.



Revenue Recognition



Revenue is recognized when title to finished product passes to the customer. Revenue is recognized as the net amount to be received after
deducting estimated amounts for discounts and trade allowances. Revenue includes amounts paid by customers for shipping and handling.



Inventory Valuation



Inventories are stated at the lower of cost and estimated net realizable value. The average cost of inventories is determined using the first-in, first-out method. The nitrogen industry is characterized by rapid
change in both demand and pricing. Rapid declines in demand could result in temporary or permanent production curtailment, while rapid price declines could result in a lower of cost and market adjustment.



Derivatives and Financial Instruments



The Partnership accounts for derivatives in accordance with Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires the recognition of derivatives in the balance sheet and the measurement of these instruments at fair value.
Changes in fair value of derivatives are recorded in earnings unless the normal purchase or sale exception or hedge accounting is elected.



The General Partner enters into derivative instruments including future contracts, swap agreements, and purchased options to cap or fix prices for a portion of natural
gas production requirements. The General Partner has designated, documented and assessed accounting hedge relationships, which mostly resulted in cash flow hedges that require the Partnership to record the



10



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derivative assets or liabilities at their fair value on its balance sheet with an offset in other comprehensive income.
Amounts are removed from other comprehensive income as the underlying transactions occur and realized gains or losses are recorded.



Dependence on Terra Industries



The Partnership is dependent on Terra in a number of respects. The Partnerships bank facilities are, as noted in Liquidity and Capital Resources,
dependent on Terras results and financial condition. Terra provides all of the Partnerships management services and operates all of its facilities through its wholly-owned subsidiary TNC, the Partnerships general partner. Terra and
its wholly-owned subsidiaries, including TNC, have more debt and debt service requirements than the Partnership. Although Terra is affected by most of the factors that affect the Partnership, its higher level of debt could put a greater risk on
Terra in the event business conditions deteriorate materially. The Partnerships results of operations and financial condition might be materially adversely affected by financial difficulties at Terra, default by it or its subsidiaries on their
debt or their bankruptcy. For additional information concerning Terra, refer to Terras filings with the Securities and Exchange Commission on Form 10-K, Forms 10-Q and current reports on Form 8-K.



Three months ended March 31, 2004 compared with

three months ended March 31, 2003



Volumes and prices for the three-month periods ended March 31, 2004 and 2003 follow:



|        |  |                   |  |                    |     |                   |     |                    |   |    
|------- |  | ----------------- |  | ------------------ | --- | ----------------- | --- | ------------------ | - | ---
|        |  | 2004              |  | 2003              
|        |  | Volumes(000 tons) |  | Unit Price($/ton)* |     | Volumes(000 tons) |     | Unit Price($/ton)*
|Ammonia |  | 81                |  | $                  | 272 |                   | 50  |                    | $ | 219
|UAN     |  | 503               |  |                    | 111 |                   | 438 |                    |   | 86 
|Urea    |  | 122               |  |                    | 182 |                   | 102 |                    |   | 153

---

|* | After deduction of outbound freight costs
|- | -----------------------------------------



Revenues for the quarter ended March 31, 2004 increased $37.3 million, or 52.7%, compared with the same quarter in 2003 primarily as the result of higher sales prices for
all Partnership products. Sales prices were higher as the result of lower nitrogen supplies caused by increased demand and industry-wide production curtailments.



Gross profits for the first quarter were $14.0 million and increased $19.0 million from 2003. Higher 2004 sales prices contributed about
$20.5 to gross profits, but were partially offset by higher natural gas costs. First quarter natural gas costs increased almost 13%, or $8.3 million, from $4.57/MMBtu in 2003 to $5.17/MMBtu in 2004 (net of forward pricing gains or losses.) As a
result of forward price contracts, first quarter 2004 natural gas costs for the Partnership were $3.2 million lower than spot prices.



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Operating expenses of $2.2 million in 2004 increased $.2 million, or 8%, from 2003 as the result of higher spending for
administrative activities. Net interest income in 2004 was $.2 million favorable to the 2003 first quarter due to higher cash balances and lower short-term borrowings.



Capital resources and liquidity



Net cash from operating activities for the first three months of 2004 was $13.7 million composed of $14.3 million of cash from operating activities and $.6 million of
increases to working capital balances. The primary increase in working capital consisted of a seasonal increase in inventory and current liabilities offset by a reduction in accounts receivable.



Capital expenditures of $.1 million during the first three months of 2004 were primarily to
fund replacement and stay-in-business additions to plant and equipment. The Partnership expects 2004 capital expenditures to approximate $5.0 million to fund replacement and stay-in-business additions to plant and equipment.



The Partnerships principal funding needs are to support its working capital and capital
expenditures. The Partnership intends to fund its needs primarily from cash provided by operating activities and, to the extent required, from funds borrowed under the joint revolving bank credit facility (described below) or from Terra Capital,
Inc., the parent of the General Partner.



Terra, Terra Capital, Inc., the
Partnership and certain other Terra affiliates have a $175 million joint revolving bank credit facility that expires in June 2005. Under the credit facility, the Partnership 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. The Partnerships borrowings under the credit facility are secured by substantially all of its working capital. At March 31, 2004,
the Partnership had no outstanding borrowings or letters of credit, resulting in availability of approximately $77.2 million under the facility. Management expects the facility to be adequate to meet the Partnerships operating cash needs.



Under the credit facility, Terra and its subsidiaries, including the
Partnership, are subject to covenants which impose 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. In addition, if Terras aggregate borrowing availability falls below $60 million, Terra is required to have generated $60 million of operating cash flows or earnings before interest, income taxes, depreciation, amortization and
other non-cash items (as defined in the credit facility) for the preceding four quarters. For the 12 months ended March 31, 2004, Terras operating cash flows (as defined in the credit facility) were $170.7 million. Terra is also required to
maintain a minimum aggregate unused borrowing availability of $30 million at all times. At March 31, 2004, Terras borrowing availability under the facility was $141 million.



Terras ability to continue to meet the covenants under the credit facility in the future will depend on market conditions, operating
cash flows, working capital needs, receipt of customer prepayments and trade credit terms. Terras failure to meet these covenants, or to obtain a waiver from the lenders, would result in a default by all of the borrowers under the credit
facility,



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including the Partnership, such that all amounts outstanding to the Partnership could become immediately due and payable
and the Partnership would be unable to borrow additional amounts under the credit facility. Because access to adequate bank facilities is critical to funding the Partnerships operating cash needs and the General Partners purchase of
financial derivatives to manage the Partnerships exposure to natural gas commodity price risk, any default or termination of the joint revolving bank credit facility could have a material adverse effect on the Partnership.



Terra currently anticipates that it will be able to meet its covenants through 2004.
Nevertheless, if there were to be any adverse changes in the factors discussed above, there can be no assurance that this would be the case.



Quarterly distributions to TNCLPs partners are based on Available Cash for the quarter as defined in the TNCLP 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. Distributions paid to the partners in the first
three months of 2004 and 2003 were $4.7 million.



Distributions of Available
Cash are made 98% to the Limited Partners and 2% to the General Partner, except that the General Partner is entitled, as an incentive, to larger percentage interests to the extent that distributions of Available Cash exceed specified levels.



The Partnership anticipates that approximately $4.1 million in pension funding
will be required in 2004.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK



The Partnerships operations are significantly
affected by the price of natural gas. It employs derivative commodity instruments related to a portion of its natural gas requirements (primarily futures, 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 have a high correlation to changes in the spot price of natural gas. For more information about how the Partnership manages specific risk exposures, refer to its
most recent Annual Report on Form 10-K (which is on file with the Securities and Exchange Commission), Item 7A Quantitative and Qualitative Disclosures about Market Risk and Note 13  Derivative Financial Instruments contained in
Item 8.



The volume of natural gas hedged varies from time to time based on
managements judgment of market conditions, particularly natural gas prices and prices for nitrogen products and methanol. Contracts were in place at March 31, 2004 to cover 23% of its natural gas requirements for the succeeding twelve months
(see Note 4). The General Partners ability to manage the Partnerships exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by Terras bank
agreement covenants.



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ITEM 4. CONTROLS AND PROCEDURES



Our Chief Executive Officer and Chief 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 Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange Commissions rules and forms.



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



FORWARD LOOKING PRECAUTIONS



Information contained in this report, other than historical information,
may be considered forward looking. Forward-looking information reflects Managements current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to the following: Changes in the 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 agricultural regulations, and other risks detailed in the Partnerships Securities and Exchange Commission
filings, in particular the Factors that Affect Operating Results section of its most recent Form 10-K.



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PART II. OTHER INFORMATION



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits:



|              |  |                                                                                                       
|------------- |  | ------------------------------------------------------------------------------------------------------
|Exhibits 31.1 |  | Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|Exhibits 31.2 |  | Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|              | 
|Exhibit 32    |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                               



(b) Reports on Form 8-K



Form 8-K dated January 29, 2004 furnishing under Item 12
Terra Nitrogens fourth quarter 2003 earnings.



Form 8-K
dated March 31, 2004 reporting under Item 5 Terra Nitrogens plan to close its Blytheville, Arkansas manufacturing facility.



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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 CORPORATIONas General PartnerBy:

/s/ Francis G. MeyerFrancis G. MeyerVice President (Principal Accounting Officer)




Date: April 30, 2004



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