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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

Registrant's telephone number, including area code: (847) 405-2400

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

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

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

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

        At the close of business on November 5, 2010 there were 18,501,576 Common Units outstanding.

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TERRA NITROGEN COMPANY, L.P.

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TERRA NITROGEN COMPANY, L.P.

PART I. FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(in millions, except for units)

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per unit amounts)

(unaudited)

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(unaudited)

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

(in millions)

(unaudited)

 

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited)

1. Background and Basis of Presentation

        Terra Nitrogen Company, L.P. (TNCLP, our, we, or us) is a manufacturer of nitrogen fertilizer products. TNCLP and its operating partnership subsidiary, Terra Nitrogen, Limited Partnership (Operating Partnership), are referred to herein, collectively, as the "Partnership." Our principal products are anhydrous ammonia (ammonia) and urea ammonium nitrate solutions (UAN), which we manufacture at our facility in Verdigris, Oklahoma. We operate in one principal industry segment—Nitrogen Products, which is based upon the guidance provided in the Segment Reporting topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (Codification).

        Terra Nitrogen GP Inc., the Partnership's general partner (the General Partner), is a wholly-owned subsidiary of Terra Industries Inc. (Terra). On April 15, 2010, Terra became an indirect, wholly-owned subsidiary of CF Industries Holdings, Inc. (CF) pursuant to an agreement and plan of merger between CF and Terra, dated as of March 12, 2010. As a result of the acquisition, the General Partner became a wholly-owned subsidiary of CF. CF's acquisition of Terra has not impacted the recorded basis of any of the assets or liabilities of the Partnership.

        The accompanying unaudited interim consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements for the year ended December 31, 2009, in accordance with accounting principles generally accepted in the United States for interim financial reporting. In the opinion of management, these statements reflect all adjustments, consisting only of normal and recurring adjustments that are necessary for the fair representation of the information for the periods presented. The unaudited interim consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Operating results for any period presented apply to that period only and are not necessarily indicative of results for any future period.

        The preparation of the unaudited interim financial statements requires management to make use of estimates and assumptions that affect the reported amount of assets and liabilities, revenue and expenses and certain financial statement disclosures. Actual results could differ from these estimates. Significant estimates in these consolidated financial statements include net realizable value of inventories, environmental remediation liabilities, environmental and litigation contingencies, the cost of sales incentives, useful lives of property, the evaluation of impairments of property and allowances for doubtful accounts receivable.

2. Summary of Significant Accounting Policies

        For a complete discussion of the Partnership's significant accounting policies, refer to the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on March 3, 2010.

3. New Accounting Standards

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

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

3. New Accounting Standards (Continued)

Recently Adopted Pronouncements

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

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

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

4. Agreement of Limited Partnership

        We make quarterly distributions to our partners based on "Available Cash" for the quarter (as defined in our Agreement of Limited Partnership). Available Cash is defined generally as all cash receipts less all cash disbursements, adjusted for changes in certain reserves established as the General Partner determines in its reasonable discretion to be necessary. In the nine months ended September 30, 2010 and 2009, we paid partnership distributions of $94.5 million and $220.5 million, respectively.

        We receive 99% of the Available Cash from the Operating Partnership and 1% is distributed to its general partner (who is also our General Partner). Cash distributions from the Operating Partnership generally represent the Operating Partnership's Available Cash from operations. Our cash distributions are made 99.975% to Common Unitholders and Class B Common Unitholders and 0.025% to our General Partner except when cumulative distributions of Available Cash exceed specified target levels above the Minimum Quarterly Distribution (MQD) of $0.605 per unit. Under such circumstances, our

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

4. Agreement of Limited Partnership (Continued)

General Partner is entitled, as an incentive, to larger percentage interests or Incentive Distribution Rights (IDRs).

        On November 4, 2010, we announced a $1.40 cash distribution per common limited partnership unit, payable on November 29, 2010 to holders of record as of November 15, 2010. In the third quarter, we exceeded the cumulative MQD amounts and will distribute Available Cash as summarized in the following table:

        The General Partner is required to remit the majority of cash distributions it receives from the Partnership, in excess of its 1% Partnership equity interest, to an affiliated company.

        At September 30, 2010, the General Partner and its affiliates owned 75.3% of our outstanding units. When not more than 25% of our issued and outstanding units are held by non-affiliates of the General Partner, we, at the General Partner's sole discretion, may call, or assign to the General Partner or its affiliates, our right to acquire all such outstanding units held by non-affiliated persons. If the General Partner elects to acquire all outstanding units, we are required to give at least 30 but not more than 60 days notice of our decision to purchase the outstanding units. The purchase price per unit will be the greater of (1) the average of the previous 20 trading days' closing prices as of the date five days before the purchase is announced and (2) the highest price paid by the General Partner or any of its affiliates for any unit within the 90 days preceding the date the purchase is announced.

5. Net Earnings per Common Unit

        Basic and diluted earnings per Common Unit is based on the weighted-average number of Common Units outstanding during the period. The following table provides a reconciliation for basic

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

5. Net Earnings per Common Unit (Continued)

and diluted earnings per Common Unit for the three and nine month periods ended September 30, 2010 and 2009:

        There were no dilutive Common Units outstanding for the three and nine month periods ended September 30, 2010 and 2009.

6. Inventories, Net

        Inventories consisted of the following:

7. Derivative Financial Instruments

        We enter into derivative financial instruments, including swaps, basis swaps, purchased put and call options and sold call options, to manage the volatility of in natural gas prices. We report derivatives on the balance sheet at fair value. If the derivative is not designated as a hedging instrument, changes in fair value are recognized in the statement of operations in the period of change. Cash flows related to natural gas derivatives are reported as operating activities.

        Prior to the acquisition of Terra by CF, we generally classified our natural gas derivatives as cash flow hedges if all of the following conditions were met: The item to be hedged exposed us to currency, interest or price risk; it was probable that the results of the hedge position substantially offset the effects of the risk; and the hedge designation occurred at the inception of the hedge. If the derivative was designated as a cash flow hedge, and to the extent such hedge was determined to be effective, changes in fair value were reported as a component of accumulated other comprehensive income (AOCI) in the period of change, and subsequently recognized in earnings in the period the offsetting hedged transaction occurred.

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7. Derivative Financial Instruments (Continued)

        In the second quarter of 2010, we discontinued hedge accounting in order to align our accounting policy with CF's. At that time, all open cash flow hedges were de-designated, resulting in changes in fair value thereafter being recognized in the statement of operations. The remaining balance in AOCI relating to derivatives that were originally designated as cash flow hedges was reclassified into earnings as derivatives settled during the three months ended June 30, 2010.

        The gross fair values of derivatives on our Consolidated Balance Sheets are shown below. At September 30, 2010, all balance sheet amounts arise from commodity derivatives that are not designated as hedging instruments. At December 31, 2009, all balance sheet amounts arose from commodity derivatives that were designated as cash flow hedges. For additional information on derivative fair values, see Note 8—Fair Value Measurements.

        At September 30, 2009, we determined that a portion of certain derivative contracts were ineffective for accounting purposes and, as a result, we recorded a $0.8 million charge to cost of sales for the nine month period ended September 30, 2009. At September 30, 2009, we excluded a portion of the loss on certain derivative contracts from the effectiveness assessment and, as a result, reported a $1.1 million credit to cost of sales.

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7. Derivative Financial Instruments (Continued)

        The following table presents the effect of our commodity derivative instruments on the Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009.

 

        At September 30, 2010, we had open derivative contracts for 10.4 million MMBtus of natural gas. For the nine months ended September 30, 2010, we used derivatives to cover approximately 55% of our natural gas consumption.

        We purchase natural gas at market prices to meet production requirements at our manufacturing facility. Natural gas market prices are volatile and we effectively hedge a portion of our natural gas production requirements through the use of swaps and options. These contracts reference physical natural gas prices or approximate NYMEX futures contract prices. Contract prices are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, we purchase natural gas for our manufacturing facility at locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

7. Derivative Financial Instruments (Continued)

not exactly offset the changes in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

        Our derivatives do not have credit risk related contingent features that would require us to settle the derivatives or post collateral upon the occurrence of a credit event.

8. Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

        The following table presents assets and liabilities included in our consolidated balance sheet that are recognized at fair value on a recurring basis, and indicates the fair value hierarchy utilized to determine such fair value as of September 30, 2010 and December 31, 2009.

 

        Following is a summary of the valuation techniques for assets and liabilities recorded in our consolidated balance sheet at fair value on a recurring basis:

Cash and Cash Equivalents

        As of September 30, 2010 and December 31, 2009, our cash and cash equivalents consisted primarily of U.S. Treasury Bills with original maturities of three months or less and money market mutual funds that invest in U.S. government obligations.

Natural Gas Derivatives

        The derivative instruments that we currently use are primarily natural gas swap contracts. These contracts settle using NYMEX futures prices, which represent fair value at any given time. The contracts are traded in months forward and settlements are scheduled to coincide with anticipated gas purchases during those future periods. Quoted market prices from NYMEX are used to determine the

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

8. Fair Value Measurements (Continued)

fair value of these instruments. See Note 7—Derivative Financial Instruments for additional information.

9. Property, Plant and Equipment, Net

        Property, plant and equipment—net consists of the following:

10. Plant Turnarounds, Net

        Plant turnarounds—Scheduled inspections, replacements and overhauls of plant machinery and equipment at our continuous process manufacturing facility are referred to as plant turnarounds. The expenditures related to turnarounds are capitalized when incurred. The following is a summary of plant turnaround activity for the nine months ended September 30, 2010 and 2009:

        Scheduled replacements and overhauls of plant and equipment include the dismantling, repair or replacement and installation of various components including piping, valves, motors, turbines, pumps, compressors, heat exchangers and the replacement of catalyst when a full plant shutdown occurs. Scheduled inspections are also conducted during full plant shutdowns, including required safety inspections which entail the disassembly of various components such as steam boilers, pressure vessels and other equipment requiring safety certifications. Internal employee costs and overhead are not considered turnaround costs and are not capitalized.

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TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited) (Continued)

11. Revolving Credit Facility

        Effective September 28, 2010, we terminated our $50 million revolving credit facility (the facility). Under the facility interest was charged at a variable rate plus a fixed margin (London Interbank Offer Rate (LIBOR) plus 300 basis points). Under the facility, available borrowing was generally based on eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory, less outstanding letters of credit. Borrowings under the credit facility were secured by substantially all of our working capital. The facility also required us to adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. At September 28, 2010, there were no amounts outstanding under the facility.

12. Contingency

        In October 2007, a request for information was received from the U.S. Environmental Protection Agency (EPA) pursuant to Section 114 of the Clean Air Act with respect to CF's (formerly Terra's) nitric acid plant at Port Neal, Iowa. Subsequently, a proposal was made to the EPA to resolve a number of potential Clean Air Act violations associated with prior modifications at nine of the nitric acid plants, including our Verdigris facility. Negotiations with the EPA have been ongoing since May 2008 with respect to a proposed consent decree that, if finalized, will require compliance with significantly lower nitrogen oxide emission standards. It is expected that compliance with these emission limits will require new or upgraded selective catalytic reduction systems and continuous emission monitors at our facility. Although agreement in principle has been reached with the EPA with respect to the standards and modifications, the final terms of the consent decree to resolve this matter are continuing to be negotiated.

13. Related Parties

        On September 29, 2010, we entered into an Amendment to the General and Administrative Services and Product Offtake Agreement (the Amendment) with CF Industries, Inc. (CF Industries), Terra and the General Partner.

        Effective as of July 1, 2010, the Amendment changes the Amended and Restated General and Administrative Services Agreement among Terra , the General Partner and TNCLP, dated as of October 23, 2007 (the Terra Services Agreement), to assign all of Terra's rights and obligations under the Terra Services Agreement to CF Industries and amend the cost of the services to be provided to TNCLP by CF Industries by replacing the prior variable cost allocation with a fixed quarterly fee of $3.5 million, subject to annual inflation adjustment. The fixed quarterly fee is in addition to costs and expenses incurred by CF Industries that are directly attributable to TNCLP.

        Also, pursuant to the Amendment, beginning at a future effective date to be agreed by the parties and announced at a later date, TNCLP will sell all of its fertilizer products to CF Industries at prices to be determined based on the then current market prices for TNCLP products as defined in the Amendment. The Amendment is effective for a one-year term from the effective date and will renew automatically for successive one-year terms unless terminated by any of the parties.

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TERRA NITROGEN COMPANY, L.P.

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

Overview

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

        The section entitled "Risk Factors" contained in Part II, Item 1A of our Quarterly Report on Form 10-Q filed with the SEC on August 6, 2010, and similar discussions in our other SEC filings, describe some of the important risk factors that may affect our business, financial condition, results of operations and/or liquidity. You should carefully consider those risks, in addition to the other information in this report and in our other filings with the SEC.

        Terra Nitrogen GP Inc., the Partnership's general partner (TNGP or the General Partner), is a wholly-owned subsidiary of Terra Industries Inc. (Terra). On April 15, 2010, Terra became an indirect, wholly-owned subsidiary of CF Industries Holdings, Inc. (CF) pursuant to an agreement and plan of merger between CF and Terra, dated as of March 12, 2010. As a result of the acquisition, the General Partner became a wholly-owned subsidiary of CF. CF's acquisition of Terra did not impact the recorded basis of any of the assets or liabilities of the Partnership.

Dependence on CF

        We are dependent on CF in a number of respects. CF provides all of our management, natural gas purchasing and hedging, selling and administrative services and operates our facilities through the General Partner. CF and its wholly-owned subsidiaries, have more debt and debt service requirements than we do. Although CF is affected by most of the factors that affect us, CF's higher level of debt could put them at greater risk than us in the event of adverse business conditions. Our results of operations and financial condition might be materially adversely affected by financial difficulties at CF, default by it or its subsidiaries on their debt or their bankruptcy. For additional information concerning CF, refer to CF's filings with the Securities and Exchange Commission on Form 10-K, Form 10-Q and current reports on Form 8-K.

Introduction

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

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Company Overview;



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Results of Operations; and



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Liquidity and Capital Resources

Company Overview

        Terra Nitrogen Company, L.P. (TNCLP, we, our, or us) is a Delaware limited partnership that produces and distributes nitrogen fertilizer products primarily to the agriculture industry. We conduct our business through an operating partnership, Terra Nitrogen, Limited Partnership (TNLP or the

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Operating Partnership, and collectively with TNCLP, the Partnership). The General Partner is the general partner of both TNLCP and TNLP and owns a consolidated 0.05 percent general partner interest in the Partnership. The General Partner is an indirect, wholly-owned subsidiary of CF. We are a leading nitrogen producer in North America serving agricultural and industrial customers, by producing approximately 1.0 million tons of anhydrous ammonia (ammonia) annually, of which approximately 0.7 million tons are upgraded into approximately 1.9 million tons of 32% urea ammonium nitrate solutions (UAN).

        Our principal products are ammonia and UAN, which we manufacture at our Verdigris, Oklahoma facility. Verdigris is the second largest UAN production facility in North America. Our location is well suited to serve customers in the Cornbelt. Our plant has a natural gas basis advantage as compared to producers who obtain natural gas priced at Henry Hub. The plant is served by the OneOK (Panhandle) gas pipeline.

Results of Operations

Consolidated Results

        We reported net earnings for the three months ended September 30, 2010 of $35.2 million on revenues of $136.0 million compared with net earnings for the three months ended September 30, 2009 of $17.3 million, on revenues of $101.5 million. Net earnings per Common Unit for the three months ended September 30, 2010 was $1.40 compared with $0.64 for the three months ended September 30, 2009.

        We also reported net earnings for the nine months ended September 30, 2010 of $135.8 million, on revenues of $421.7 million, compared with net earnings for the nine months ended September 30, 2009 of $121.4 million, on revenues of $409.6 million. Net earnings per Common Unit for the nine months ended September 30, 2010 was $5.40 compared with $4.18 for the nine months ended September 30, 2009.

        The following table shows the results of operations for the three and nine month periods ended September 30, 2010 and 2009:

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(1)

The nitrogen content of UAN is 32% by weight.

(2)

After deducting outbound freight costs of $16.3 million and $16.5 million for the third quarters of 2010 and 2009, respectively, and $48.8 million and $41.9 million for the first nine months of 2010 and 2009, respectively.

(3)

Includes the cost of natural gas purchases and realized gains and losses on natural gas derivatives.