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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2003

Commission file number 1-10877

OR

For the transition period from              to             

TERRA NITROGEN COMPANY, L.P.

(Exact name of registrant as specified in its charter)

(712) 277-1340

(Registrant’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to section 12(g) of the Act: None

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.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.)    Yes  ¨     No  x

The aggregate market value of the voting and non-voting common units held by non-affiliates computed by reference to the price at which the common units were last sold, or the average bid and asked price of such common units, as of the last business day of the registrant’s most recently completed second fiscal quarter was $23,437,218.30.

The number of shares outstanding of the registrant’s Partnership units, as of March 1, 2004, was 18,501,576.

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Terra Nitrogen Company, L.P.

Form 10-K

PART I

ITEMS 1 AND 2. BUSINESS AND PROPERTIES

General

Terra Nitrogen Company, L.P. (“TNCLP”) is a Delaware limited partnership that conducts its operations through an operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the “Operating Partnership”). Terra Nitrogen Corporation (“TNC” or “General Partner”), a Delaware corporation, is the general partner of both TNCLP and the Operating Partnership (collectively the “Partnership,” unless the context otherwise requires) and owns a consolidated 2.0% interest in the Partnership. TNC is an indirect, wholly-owned subsidiary of Terra Industries Inc. (“Terra” or “the company”), a Maryland corporation. Terra is an industry leader in the production of nitrogen products and methanol. Terra is one of the largest North American producers of anhydrous ammonia and nitrogen solutions and is the largest producer of ammonia and ammonium nitrate in the U.K. In addition, during 2003 Terra was the largest U.S. producer of methanol.

Ownership of TNCLP is composed of the general partner interest and the limited partner interests. The limited partner interests consist of 18,501,576 common units. Terra and its subsidiaries owned 13,889,014 common units as of December 31, 2003, and the balance are traded on the New York Stock Exchange under the symbol “TNH.” The common units are referred to herein individually as a “unit” and collectively as “units.”

Terra makes available free of charge through its web site, www.terraindustries.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. Terra’s Internet web site and the information contained or incorporated therein are not intended to be incorporated into this Annual Report on Form 10-K.

Partnership Products

The Partnership is one of the largest U.S. producers and distributors of nitrogen fertilizer products, which are used primarily by farmers to improve the yield and quality of their crops. The Partnership’s principal products include ammonia, urea and urea ammonium nitrate solution (“UAN”). The Partnership’s product sales are heavily weighted toward UAN, and all of its products are sold on a wholesale basis. Although these different nitrogen products are often interchangeable, each has its own characteristics, and customer product preferences vary according to the crop planted, soil and weather conditions, regional farming practices, relative prices and the cost and availability of appropriate storage, handling and application equipment.

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The Partnership’s nitrogen products are described in greater detail below:

Anhydrous Ammonia

The Partnership produces anhydrous ammonia (often referred to simply as “ammonia”), the simplest form of nitrogen fertilizer and the feedstock for the production of other nitrogen fertilizers, at two manufacturing facilities in Verdigris, Oklahoma and Blytheville, Arkansas. Ammonia is produced by reacting natural gas with steam and air at high temperatures and pressures in the presence of catalysts.

Ammonia contains 82% nitrogen by weight and is generally the least expensive form of fertilizer per pound of nitrogen. However, because it is a gas that must be kept under pressure and refrigerated, ammonia is more costly to store, ship and apply than other nitrogen fertilizer products and must be applied during a shorter period of the growing season. Ammonia must be injected into the soil by specialized equipment, and soil conditions can limit its application.

In addition, in most areas of the world, especially in lesser-developed countries, dealers and farmers lack the equipment necessary to store, ship and apply ammonia and are required to use other forms of nitrogen fertilizer. Ammonia can be upgraded into solid or liquid fertilizers, like urea and UAN, which are easier to transport, store and apply than ammonia.

Urea

The Partnership produces granular urea at its Blytheville, Arkansas facility by upgrading portions of its ammonia production. Solid urea is produced by converting ammonia into urea solution that is then concentrated and either prilled or granulated. Prilled materials are the most common form of solid urea. Granular urea may command a modest price premium in certain markets because the consistency in size of the granules (relative to prills) results in a more controllable and uniform spreading pattern and better blending characteristics. The Partnership does not produce prilled urea.

Dry urea contains 46% nitrogen by weight, the highest level for any solid nitrogen product. Dry urea is used both as a direct application fertilizer and as an ingredient in the dry bulk blending of mixed fertilizer grades. Urea is transported and stored in bulk or in bags and is often blended by distributors into customized fertilizers containing other nutrients. In addition, urea liquor (urea solution) is used as an animal feed supplement and in industrial applications.

UAN

The Partnership produces UAN at its Verdigris, Oklahoma and Blytheville, Arkansas facilities by upgrading portions of its ammonia production. UAN is produced by combining urea solution and ammonium nitrate solution. UAN is a liquid fertilizer and, unlike ammonia, is odorless and does not need to be refrigerated or pressurized when transported or stored.

The nitrogen content of UAN is typically 28% to 32% by weight. As a liquid, UAN has many advantages over solid fertilizers and anhydrous ammonia. UAN may be applied more uniformly than non-liquid products and may be mixed with various crop protection products or other nutrients, permitting the farmer to apply several materials simultaneously, thus reducing energy and labor costs. In addition, UAN, unlike ammonia, may be applied from ordinary tanks and trucks and can be applied to the soil either through spraying, injecting or through irrigation systems throughout the growing season. Moreover, due to its stable nature, UAN can be a preferred fertilizer choice for crops requiring soil surface applications (such as no-till row crops) since UAN is less subject to volatization losses. The use of conservation tilling and “no-till” farming techniques, which reduce erosion, has increased in the United States over the past decade. This trend, if continued, will likely increase UAN demand.

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Marketing and Distribution

The Partnership sells its products primarily in the Central and Southern Plains and Corn Belt regions of the United States. The Partnership’s two facilities (in Verdigris, Oklahoma and Blytheville, Arkansas) are located near the major crop producing and consuming areas of the United States, and the Partnership has ready access to barge, truck and rail transportation at both facilities. In addition, the Verdigris facility has an ammonia pipeline to transport product to primary markets. The Partnership’s products are marketed and distributed through an organization based in Sioux City, Iowa that provides combined services to the Partnership and to Terra. For further information on the combined organizations of the General Partner and its affiliates, see Footnote 4 to Item 8 “Financial Statements and Supplementary Data”.

All of the Partnership’s sales are at the wholesale level. The Partnership’s customers for fertilizer products are dealers, national farm retail chains, distributors and other fertilizer producers and traders. National farm retail chains have both distribution and application capabilities. Distributors operate as wholesalers and sell directly to dealers and national farm retail chains, which, in turn, sell directly to farmers. Many dealers maintain year-round storage capacity for inventory as well as application equipment. The Partnership sells a majority of its nitrogen fertilizer products to dealers. No single customer accounted for more than 10% of the Partnership’s 2003 sales.

Production and Terminal Facilities

Production Facilities

The Partnership’s two facilities in Blytheville, Arkansas and Verdigris, Oklahoma produce nitrogen fertilizer products. These facilities have the production capacities shown in the table at right.

Both the Partnership’s manufacturing facilities are designed to operate continuously, except for planned shutdowns (usually biennial) for maintenance and efficiency improvements. Capacity utilization (gross tons produced divided by capacity tons at expected operating rates and on-stream factors) of the Partnership’s fertilizer manufacturing facilities was 95% in 2003, 102% in 2002 and 81% in 2001. Terra’s capacity utilization was above rated capacity in 2002 due to a deferred turnaround and a record UAN production at the Verdigris facility. Capacity utilization was down in 2001 and 2003 reflecting several plant shutdowns due to market conditions.

The Partnership ceased production at the Blytheville, Arkansas facility and at one of the two Verdigris, Oklahoma ammonia plants on February 27, 2003 because of high natural gas prices. The Partnership resumed full capacity production at both facilities on March 13, 2003 when natural gas prices decreased and product prices improved. On July 1, 2003, the Partnership suspended ammonia and urea production at Blytheville due to concerns the facility would not cover its cash costs because of continuing high natural gas costs and seasonal declines in fertilizer prices. At that time, the Partnership recorded a $40.7 million

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charge for the impairment of Blytheville’s long-term assets as the Partnership’s general partner, TNC, concluded that future market conditions may not justify ongoing investment in the maintenance and replacement capital required to operate the Blytheville facility for its established useful life. Production resumed at Blytheville on October 1, 2003 in response to higher urea selling prices and improved seasonal demand. TNCLP expects Blytheville’s production to continue through at least April 30, 2004.

The Partnership owns all of its manufacturing facilities in fee, unless otherwise stated below.

The Verdigris, Oklahoma facility is made up of two ammonia plants, two nitric acid plants, two UAN plants and a port terminal. The Partnership owns the plants in fee, while the port terminal is leased from the Tulsa-Rogers County Port Authority. The leasehold interest on the port terminal is scheduled to expire in April 2004, and the Partnership has an option to renew that lease for an additional five-year term.

The Blytheville, Arkansas facility consists of an anhydrous ammonia plant, a granular urea plant and a UAN plant. TNCLP leases the ammonia plant from the City of Blytheville at a nominal annual rate. The ammonia plant lease is scheduled to expire in November 2009, and the Partnership has an option to extend the lease for 11 successive terms of five years each at the same rental rate. The Partnership has an unconditional option to purchase the plant for a nominal price at the end of the lease term (including any renewal term). The urea plant is also leased from the City of Blytheville. The urea plant lease is scheduled to expire in October 2010, and the Partnership has an option to extend the lease for three successive terms of five years each at the same rental rate. The Partnership also has a similar, unconditional option to purchase the urea plant for a nominal price.

The Partnership’s fixed assets are subject to a lien securing an $8.2 million note payable by the Partnership to a subsidiary of Terra.

Terminal Facilities

The Partnership owns and operates three terminals used to store and distribute UAN to customers. The Partnership owns UAN terminals near Dublin, Indiana (Henry and Wayne Counties), Blair, Nebraska (Washington County), and Pekin, Illinois (Tazewell County). In addition, the Blair, Nebraska terminal stores and distributes anhydrous ammonia.

Breakdown of Revenue by Product

Revenue contributions of the Partnership’s principal products (as a percentage of the Partnership’s total revenues) for each of the last three years appear in the table at right.

Credit

The Partnership’s credit terms are generally 15-30 days from date of shipment, but may be extended for longer periods during certain sales seasons consistent with industry practices. The Partnership’s bad debt write-offs have been less than $1 million annually for each of the past three years.

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Seasonality and Volatility

The fertilizer business is seasonal, based upon the planting, growing and harvesting cycles. Inventories must be accumulated to allow for uninterrupted customer deliveries, and require significant storage capacity. This seasonality generally results in higher fertilizer prices during peak periods, with prices normally reaching their highest point in the spring, decreasing in the summer, and increasing again in the fall as depleted inventories are restored.

The fertilizer business can also be volatile as a result of a number of other factors. The most important of these factors are:

Governmental policies may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted and crop prices.

Nitrogen fertilizer price levels are influenced by world supply and demand for ammonia and nitrogen-based products. Long-term demand is affected by population growth and rising living standards that determine food consumption. Shorter-term demand is affected by world economic conditions and international trade decisions. Supply is affected by increasing worldwide capacity and the availability of nitrogen product exports from major producing regions such as the former Soviet Union, the Middle East and South America. During the mid-to-late 1990s favorable nitrogen prices in the industry spurred capacity additions in the form of new and expanded production facilities. More recently, depressed U.S. prices and margins for nitrogen products have resulted in some curtailments or shutdowns of North American capacity. Some, but not all, of these shutdowns are expected to be permanent.

Raw Materials

The principal raw material used to produce manufactured nitrogen products is natural gas. The Partnership believes there is a sufficient supply of natural gas for the foreseeable future and has entered into firm transportation contracts to minimize the risk of interruption or curtailment of natural gas supplies during the peak-demand winter season.

Terra’s natural gas procurement policy, which also applies to the Partnership’s gas procurement, is to fix or cap the price of 20% to 80% of its natural gas requirements for a rolling 12-month period, and up to 50% of its natural gas requirements for the subsequent 24-month period, provided that such arrangements would not result in costs greater than expected selling prices for our finished products. Departures from the policy are permitted with the approval of Terra’s Board of Directors. Capping natural gas prices is accomplished through various supply contracts, financial derivatives and other instruments. A significant portion of global nitrogen products production occurs at facilities with access to fixed-priced natural gas supplies. These facilities’ natural gas costs have been and likely will continue to be substantially lower than the Partnership’s.

If natural gas prices rise, the Partnership may benefit from its use of forward-pricing techniques. Conversely, if natural gas prices fall, the Partnership may incur costs above the then-available spot market price. The settlement dates of forward-pricing contracts coincide with gas purchase dates. Forward- pricing contracts are based on a designated price, which price is referenced to physical natural gas prices or appropriate NYMEX futures contract prices.

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Transportation

The Partnership uses several modes of transportation to ship product to customers, including railroad cars, common carrier trucks, barges and common carrier pipelines. The Partnership uses approximately 57 liquid, dry and anhydrous ammonia fertilizer terminal storage facilities in numerous states. Railcars are the major source of transportation for shipments from the Partnership’s manufacturing facilities. Terra currently leases approximately 2,100 railcars. The Partnership also owns 10 nitric acid railcars. In addition, the Verdigris facility distributes ammonia through a common carrier pipeline.

The Partnership transports purchased natural gas to its Verdigris, Oklahoma facility via an intrastate pipeline. This pipeline is not an open-access carrier, but is nonetheless part of a widespread regional system through which Verdigris can receive natural gas from any major Oklahoma source. The Partnership also has limited access to out-of-state natural gas supplies for this facility. The Partnership transports purchased natural gas for its Blytheville, Arkansas facility, which is delivered by an inter-state natural gas pipeline company.

Research and Development

The Partnership currently is not undertaking any significant, ongoing research and development efforts.

Competition

Nitrogen products are global commodities, and the Partnership’s customers include distributors, industrial end-users, dealers and other fertilizer producers. Customers make purchasing decisions principally on the delivered price and availability of the product. The Partnership competes with a number of domestic and foreign producers, including state-owned and government-subsidized entities. Some of the Partnership’s principal competitors may have greater total resources and may be less dependent on earnings from nitrogen fertilizer sales than the Partnership. Some foreign competitors may have access to lower cost or government-subsidized natural gas supplies, particularly those with facilities in warmer climates. Natural gas comprises a significant portion of the raw materials cost of the Partnership’s nitrogen products. Competitive natural gas purchasing is essential to maintaining a low-cost product position. The Partnership competes with other manufacturers of nitrogen products on delivery terms and availability of products, as well as on price.

Environmental and Other Regulatory Matters

The Partnership’s operations are subject to various federal, state and local environmental, health and safety laws and regulations, including laws relating to air quality, hazardous and solid wastes and water quality. The Partnership is also involved in the manufacture, handling, transportation, storage and disposal of materials that are or may be classified as hazardous or toxic by federal, state or other regulatory agencies. The Partnership takes precautions to reduce the likelihood of accidents involving these materials. If such materials have been or are disposed of at sites that are targeted for investigation and remediation by federal or state regulatory authorities, the Partnership may be responsible under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) or analogous laws for all or part of the costs of such investigation and remediation.

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Freeport-McMoRan Resource Partners, Limited Partnership (a former owner and operator of the Partnership’s production facilities) has retained liability for certain environmental matters originating prior to the Partnership’s acquisition of these facilities.

The Partnership may be required to install additional air and water quality control equipment, such as low NOx burners, scrubbers, ammonia sensors and continuous emission monitors, at its facilities to comply with Clean Air Act, Clean Water Act and similar requirements. These equipment requirements are also typically apply to competitors as well. The Partnership estimates that the cost of additional equipment to comply with these requirements in 2004 and beyond will be less than $10 million.

The Partnership endeavors to comply in all material respects with applicable environmental, health and safety regulations and has incurred substantial costs in connection with such compliance. Because these regulations are expected to continue to change and generally to be more restrictive than current requirements, the costs of compliance will likely increase. The Partnership does not expect its compliance with such regulations to have a material adverse effect on its results of operations, financial position or net cash flows.

Revenues and Assets

The Partnership’s revenues from external customers, measure of profit and loss and total assets for the years 2001-2003 are included in Item 8.

Employees

The Partnership does not have any employees.

The General Partner is responsible for managing the Partnership. As of December 31, 2003, the General Partner had 240 employees. None of the General Partner’s employees that work in connection with the Partnership’s business are subject to collective bargaining agreements. The General Partner considers its labor relations to be good.

Limited Call Right

Since 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. The General Partner and its affiliates owned 75.1% of the common units at December 31, 2003. If the General Partner elects to acquire all outstanding units, TNCLP 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 or any of its affiliates for any unit within the 90 days preceding the date the purchase is announced.

ITEM 3. LEGAL PROCEEDINGS

There is no pending or threatened litigation to the knowledge of the Partnership that would have a material adverse effect on the business or financial condition of the Partnership.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF UNITHOLDERS

No matters were submitted to a vote of unitholders of TNCLP during the fourth quarter of 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT’S UNITS AND RELATED UNITHOLDER MATTERS

TNCLP’s common units are listed on the New York Stock Exchange. The high and low sales prices of the common units for each quarterly period for 2003 and 2002, as reported on the New York Stock Exchange Composite Price History, are shown on the right.

Based on information received from TNCLP’s transfer and servicing agent, the number of registered unitholders as of March 1, 2004 is 294. TNC owned 11,172,414 common units as of December 31, 2003. Terra Capital, Inc. owned 2,716,600 common units as of December 31, 2003.

The quarterly cash distributions paid to the holders of common units and the General Partner in 2003 and 2002 appear in the table on the right.

Under TNCLP’s limited partnership agreement, cash distributions to unitholders are based on Available Cash for the quarter as defined therein. 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. For additional information regarding cash distributions, see the “Liquidity and Capital Resources” section of “Management’s Discussion and Analysis.” There are a number of factors which affect the amount of taxable income reported to unitholders including Partnership earnings, capital spending and cash distributions.

ITEM 6. SELECTED FINANCIAL DATA

Selected Historical Financial and Operating Data

The following table sets forth the Partnership’s historical financial and operating data for each of the five years ended December 31, 2003. This information should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this report.

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Selected Historical Financial and Operating Data

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ITEM 7. 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 and 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, that 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.

We operate facilities at Verdigris, Oklahoma and Blytheville, Arkansas. During 2003, we determined that future market conditions may not justify the ongoing investment in maintenance and replacement capital necessary to extend operations for the remainder of the Blytheville facility’s established useful life. Accordingly, a $40.7 million charge was recorded during the second quarter as an “Impairment of long-lived assets”. While the plant’s value is permanently impaired, we resumed production in October 2003 in response to higher urea selling prices and improved seasonal demand. We expect production to continue through at least April 30, 2004. We anticipate $4.0 to $6.0 million of spending will be required when the facility is permanently idled.

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.

Our earnings are very sensitive to small changes in the prices of major products and natural gas costs. Assuming Verdigris operates at 95% of rated capacity, operating income and cash flows will change by $2.6 million for a $10/ton change in the price of anhydrous ammonia, $10.5 million for a $5/ton change in the price of UAN solutions and $3.4 million for $0.10/MMBtu change to cost of natural gas. During 2003, the Partnership realized selling prices of $242/ton and $97/ton for ammonia and UAN solutions, respectively, and paid an average $5.21/MMBtu for natural gas including the effect of forward purchase decisions.

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.

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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 this report.

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.

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 the Impairment or Disposal of Long-Lived Assets”, we commenced a review to determine if the Blytheville facility’s carrying value was impaired. This review led us 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”. While the plant’s value is permanently impaired, we resumed production in October 2003 in response to higher urea selling prices and improved seasonal demand. We expect production to continue through April 30, 2004. We anticipate $4.0 to $6.0 million of spending will be required when the facility is permanently idled.

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.

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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 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.

Factors That Affect Operating Performance

Factors that may affect the Partnership’s operating results include: the relative balance of supply and demand for nitrogen fertilizers, the availability and cost of natural gas, the number of planted acres – which is affected by both worldwide demand and government policies, the types of crops planted, the effects general weather patterns have on the timing and duration of fieldwork for crop planting and harvesting, the effect of environmental legislation on supply and demand for the Partnership’s products, the availability of financing sources to fund seasonal working capital needs and the potential for interruption to operations due to accidents or natural disasters.

The principal raw material used to produce nitrogen products is natural gas. Natural gas costs in 2003 accounted for about 65% of total costs and expenses (excluding impairment of long-lived assets) for the Partnership. A significant increase in the price of natural gas that is not covered by forward pricing arrangements or recovered through an increase in the price of related nitrogen products would have an adverse effect on the Partnership’s business, financial condition and results of operations. During parts of 2003 and 2001, spikes in North American natural gas markets prompted industry-wide nitrogen production curtailments. We produced only 90% and 95% of our total nitrogen capacity in 2001 and 2003, respectively, because of plant shutdowns and production curtailments related to high natural gas costs and to balance inventory levels to demand. A portion of global nitrogen products is manufactured at facilities with access to fixed-price natural gas supplies that have been, and could continue to be, priced substantially lower than the Partnership’s natural gas.

The Partnership enters into forward pricing contracts for natural gas so long as such arrangements would not result in costs that would be greater than expected selling prices for finished products manufactured by the Partnership. Terra’s natural gas forward pricing policy (which is applicable to the Partnership) has

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been to fix or cap the price of between 20% and 80% of its natural gas requirements for a rolling 12- month period and up to 50% of its natural gas requirements for the subsequent 24-month period through supply contracts, financial derivatives and other instruments. Deviations from this policy are permitted through notification to Terra’s Board of Directors. The Partnership’s December 31, 2003 forward positions covered 33% of its expected 2004 natural gas requirements and none beyond.

Prices for nitrogen products are influenced by the world supply and demand balance for ammonia and other nitrogen-based products. Long-term demand is affected by population growth and rising living standards that influence food consumption. Short-term demand is affected by world economic conditions and international trade decisions. For example, 2001 demand was also reduced, in part, due to relatively high nitrogen prices and low grain prices. Supply is affected by increasing worldwide capacity and the availability of nitrogen product exports from major producing regions such as the former Soviet Union, the Middle East and South America.

Weather can significantly affect demand for the Partnership’s products. Weather conditions that delay or intermittently disrupt fieldwork during the planting season may cause agricultural customers to use forms of nitrogen fertilizer that are more or less favorable to the Partnership’s sales. Weather conditions following harvest may delay or eliminate opportunities to apply fertilizer in the fall. Weather can also have an adverse effect on crop yields, which lowers the income of growers and could impair their ability to pay for crop inputs purchased from Terra’s dealer customers. Conversely, low crop yields often increase the planted areas in the subsequent growing season, which, in turn, increases the demand for nitrogen fertilizer.

The Partnership’s business is highly seasonal, with the majority of its products used during the second quarter in conjunction with spring planting. Due to the business’ seasonality and the relatively brief periods during which products can be used by customers, the Partnership and its customers generally build inventories during the second half of the year to ensure product availability during the peak sales season. For its current level of sales, the Partnership requires lines of credit to fund inventory increases and to support customer credit terms. The Partnership believes that its credit facilities are adequate for expected 2004 sales levels.

The Partnership’s operations may be subject to significant interruption if one or more of its facilities were to experience a major accident or natural disaster. The Partnership currently maintains insurance, including business interruption insurance, which it believes is sufficient to allow the Partnership to cover major damage to any of its facilities.

RESULTS OF OPERATIONS – 2003 COMPARED WITH 2002

The Partnership’s sales volumes and prices for 2003 and 2002 follow (quantities in thousands of tons):

Revenues for 2003 increased $78.5 million, or 24%, to $405.4 million compared with $326.9 million in 2002 as the result of higher selling prices partly offset by lower sales volumes. Sales prices were higher as the result of lower nitrogen fertilizer supplies caused by increased demand and industry-wide production curtailments. Sales volumes in 2003 were lower than the previous year due to curtailments of Partnership

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production. The Partnership ceased production at the Blytheville, Arkansas facility and at one of the two Verdigris, Oklahoma ammonia plants on February 27, 2003 because of high natural gas prices. The Partnership resumed full capacity production at both facilities on March 13, 2003 when natural gas prices decreased and product prices improved. On July 1, 2003, the Partnership suspended ammonia and urea production at Blytheville due to concerns the facility would not cover its cash costs because of continuing high natural gas costs and seasonal declines in fertilizer prices. At that time, the Partnership recorded a $40.7 million charge for the impairment of Blytheville’s long-term assets as the Partnership’s general partner, TNC, concluded that future market conditions may not justify ongoing investment in the maintenance and replacement capital required to operate the Blytheville facility for its established useful life. Production resumed at Blytheville on October 1, 2003 in response to higher urea selling prices and improved seasonal demand. TNCLP expects Blytheville’s production to continue through at least April 30, 2004.

Gross profits during 2003 were $14.7 million and declined $1.2 million from 2002. Higher 2003 selling prices contributed $113 million to gross profits, but were more than offset by higher natural gas costs, lower sales volumes and idle plant costs. The 2003 cost of natural gas purchases increased $104 million, or 67% over 2002 as unit costs, net of forward pricing gains and losses, increased to $5.21 per million British thermal units (“MMBtu”) for 2003 compared to $3.12/MMBtu for 2002. Natural gas costs in 2003 were $3.0 million higher than spot prices as the result of forward price contracts.

Operating expenses of $9.1 million declined $0.3 million, or 4%, as the result of reduced headcount and lower spending for administrative activities. Net interest expense of $0.2 million was $0.1 million lower than in 2002 due to lower borrowing levels and higher cash balances.

RESULTS OF OPERATIONS – 2002 COMPARED WITH 2001

The Partnership’s sale volumes and prices for 2002 and 2001 follow (quantities in thousand of tons):

Revenues for 2002 were $326.9 million and increased $21.1 million, or 7%, from $305.8 million in 2001 as higher selling volumes were partially offset by substantially lower selling prices. Selling prices were lower as the result of increased supplies of nitrogen fertilizer in contrast to 2001 when high natural gas costs caused industry-wide production curtailments. The revenue shortfall from lower prices was more than offset by higher 2002 volumes as compared to the previous year. Sales volumes in 2001 were depressed due to lower production rates, reduced demand in response to high prices and increased competition from imports. In 2002, less volatile natural gas costs resulted in more normal production rates and demand increased to pre-2001 levels in response to lower nitrogen prices and higher grain prices.

Gross profits during 2002 totaled $15.9 million compared to $1.2 million for 2001. The increase in gross profits was primarily related to lower natural gas costs and higher sales volumes, offset in part by reduced selling prices. Natural gas unit costs declined $64.5 million in 2002 reflecting unit costs that, including $7.1 million of gains of forward pricing contracts, averaged $3.12/MMBtu during 2002 compared to $4.29/MMBtu in 2001.

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Liquidity and Capital Resources

Net cash provided by operating activities for 2003 was $14.2 million compared to $59.1 million in 2002, a decline of $44.9 million principally due to a $2.6 million increase to working capital needs in 2003 compared to a $42.2 million decline to working capital balances during 2002. Working capital changes in 2002 included reductions to accounts receivable and inventory balances, and an increase in cash received from customers for prepayments, as a result of tighter nitrogen supply/demand fundamentals as compared to market conditions at the end of 2001. Higher selling prices and natural gas costs at the end of 2003 compared to 2002 required $13.3 million of cash to fund the increased value of year-end accounts receivable and inventory balances. In addition, accounts payable balances declined $12.7 million from the prior year primarily as the result of lower credit availability from natural gas suppliers. Offsetting the cash required to fund 2003 increases to current assets and reductions in accounts payable balances was a $19.7 million increase to accrued liabilities and customer prepayments which reflected the higher price and demand for prepayment arrangements as compared to last year. At December 31, 2003, we had received $41.3 million of customer prepayments that we expect to be substantially fulfilled during the first half of 2004.

Capital expenditures of $1.9 million during 2003 were used 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.

Contractual obligations and commitments to make future payments, other than notes due to affiliates, were as follows at December 31, 2003:

The Partnership’s principal funding needs are to support its working capital and capital expenditures. The Partnership intends to fund its needs primarily from net 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 December 31, 2003, the Partnership had no outstanding borrowings or letters of credit, resulting in availability of approximately $70.0 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,

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depreciation, amortization and other non-cash items (as defined in the credit facility) for the preceding four quarters. For the 12 months ended December 31, 2003, Terra’s operating cash flows (as defined in the credit facility) were $122.1 million. Terra is also required to maintain a minimum aggregate unused borrowing availability of $30 million at all times. At December 31, 2003, Terra’s aggregate borrowing availability under the facility was approximately $143.9 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, 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.

Expenditures related to environmental, health and safety regulation compliance are primarily composed of operating costs that totaled $1.9 million, $3.1 million and $3.6 million in 2003, 2002 and 2001, respectively. Because environmental, health and safety regulations are expected to continue to change and generally to be more restrictive than current requirements, the costs of compliance will likely increase. The Partnership does not expect its compliance with such regulations will have a material adverse effect on its results of operations, financial position or net cash flows.

In addition, the Partnership incurred $808,000 and $91,000 of capital expenditures in 2002 and 2001, respectively, related to capital improvements to ensure compliance with environmental, health and safety regulations. The Partnership may be required to install additional air and water quality control equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors and continuous emission monitors to continue to achieve compliance with the Clean Air Act and similar requirements. These equipment requirements typically apply to competitors as well. The Partnership estimates that the cost of complying with these existing requirements in 2004 and beyond will be less than $10 million.

At December 31, 2003, the Partnership had a $36.2 million demand deposit with Terra Capital, Inc. that earned interest at 0.98%, the rate received by Terra Capital, Inc. on its commingled cash investments. As of January 5, 2004, such funds were held in a separate Partnership account.

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 2003, 2002 and 2001 were $4.7 million, $7.6 million and $8.3 million, respectively.

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 specified levels are increased by the amount

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of quarterly distributions to holders of Common Units that are less than $0.605 per unit. As of December 31, 2003, the cumulative shortfall on quarterly distributions to holders of Common Units that must be paid before the General Partner receives an incentive payment was $209.5 million, or $11.32 per unit.

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

Recently Issued Accounting Standards

Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations”, became effective for the Partnership’s fiscal year beginning January 1, 2003. This standard requires the Partnership to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The adoption of this standard did not have a material effect on the Partnership’s financial statements.

SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure” amends SFAS No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The adoption of this standard did not impact the Partnership’s financial statements.

SFAS No. 149, “Amendments of Statement 133 on Derivative Instruments and Hedging Activities”, amends and clarifies financial accounting for derivative instruments. This standard became effective in the Partnership’s 2003 third quarter. The adoption of this standard did not have a material effect on the Partnership’s financial statements.

SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This standard became effective for Partnership contracts entered into after May 31, 2003. The adoption of this standard did not have a material effect on the Partnership’s financial statements.

FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others”, clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing certain guarantees. FIN 45 also expands the disclosure to be made by a guarantor in its financial statements about its obligations under certain guarantees that it has issued. The provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of FIN 45 became effective for the Partnership in 2003 and did not impact its financial statements.

FASB Interpretation (“FIN”) No. 46, an interpretation of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, was issued in January 2003. FIN 46 addresses the consolidation of variable interest entities. In December 2003, the FASB issued revised FIN 46 (“FIN 46R”) to clarify provisions of FIN 46 and exempt certain entities from its requirements. If it is reasonably possible that an enterprise will initially consolidate or disclose information about a variable interest entity on December 24, 2003, certain disclosures are required for financial statements issued after December 31, 2003,

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regardless of the date on which the variable interest entity was created. For an interest entity to which the provisions of FIN 46 have not been applied, it should apply FIN 46R no later than March 31, 2004. This effective date includes those entities to which FIN 46 was previously applied. The provisions of FIN 46R will not impact the Partnership’s financial statements.

General Partner Option to Effect Mandatory Redemption of Partnership Units

At December 31, 2003, 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, as is the case at December 31, 2003, 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 or any of its affiliates for any unit within the 90 days preceding the date the purchase is announced.

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, investors should 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. 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 Forms 8-K.

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, nitrogen products selling prices 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 “Factors that Affect Operating Results” section of this discussion.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Management and Financial Instruments

Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows of the Partnership due to adverse changes in financial and commodity market prices and rates. The Partnership uses derivative financial instruments to manage risk in the area of changes in natural gas prices. The Partnership has no foreign currency exchange rate risk and all debt carries variable interest rates and approximates fair value.

The General Partner’s policy is to avoid unnecessary risk and to limit, to the extent practical, risks associated with operating activities. The General Manager may not engage in activities that expose the Partnership to speculative or non-operating risks. Management is expected to limit risks to acceptable levels. The use of derivative financial instruments is consistent with the overall business objectives of the Partnership. Derivatives are used to manage operating risk within the limits established by the General Partner’s Board of Directors, and in response to identified exposures, provided they qualify as hedge activities. As such, derivative financial instruments are used to hedge firm commitments and forecasted commodity purchase transactions. The use of derivative financial instruments subjects the Partnership to some inherent risks associated with future contractual commitments, including market and operational risks, credit risk associated with counterparties, product location (basis) differentials and market liquidity. The General Partner continuously monitors the valuation of identified risks and adjusts the portfolio based on current market conditions.

Natural gas is the principal raw material used to manufacture nitrogen. Natural gas prices are volatile and the General Partner manages some of this volatility through the use of derivative commodity instruments. Terra Industries’ hedging policy (which is applicable to TNCLP) is described under the previous heading, “Factors that Affect Operating Performance”. The Partnership has hedged 33% of expected 2004 requirements and none of its requirements beyond December 31, 2004. The fair value of these instruments is estimated based on published referenced prices and quoted market prices from brokers. These instruments fixed natural gas prices at $5.6 million lower than published prices for December 31, 2003 forward markets. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10% adverse price change. As of December 31, 2003, the Partnership’s market risk exposure related to future hedged natural gas requirements was $5.1 million based on a sensitivity analysis. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. Since the Partnership forward prices only a portion of its natural gas requirements, this hypothetical adverse impact on natural gas derivative instruments should be more than offset by lower costs for natural gas purchases.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Consolidated Balance Sheets

See Notes to the Consolidated Financial Statements

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Consolidated Statements of Operations

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Consolidated Statements of Partners’ Capital

See Notes to the Consolidated Financial Statements

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Consolidated Statements of Cash Flows