Terra Nitrogen Co L P 10-Q 2008 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended March 31, 2008

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number 1-10877

TERRA NITROGEN COMPANY, L.P.

(Exact name of registrant as specified in its charter)

Delaware	73-1389684
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
Terra Centre
PO Box 6000, 600 Fourth Street
Sioux City, Iowa	51102-6000
(Address of principal executive office)	(Zip Code)

Registrant’s telephone number:
(712) 277-1340

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or15(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.
þYeso 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):

o Large accelerated filer þ Accelerated filer o Non-accelerated filer
(Do not check if a smaller reporting company) o Smaller reporting company

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

At the close of business on April 25, 2008 there were 18,501,576 Common Units.

TABLE OF CONTENTS

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Cash Flows	5
Consolidated Statements of Partners’ Capital	6
Notes to Consolidated Financial Statements	7
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures about Market Risk	19
Item 4. Controls and Procedures	19
Part II — OTHER INFORMATION
Item 1. Legal Proceedings	21
Item 1A. Risk Factors	21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3. Defaults upon Senior Securities	21
Item 4. Submission of Matters to a Vote of Security Holders	21
Item 5. Other Information	21
Item 6. Exhibits	22
Exhibit 31.1
Exhibit 31.2
Exhibit 32

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TERRA NITROGEN COMPANY, L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

	March 31,			December 31,			March 31,
	2008			2007			2007
ASSETS
Current assets:
Cash and cash equivalents	$	248,780		$	246,140		$	99,820
Demand deposits with affiliate		1,012			¾			¾
Accounts receivable		28,267			49,635			36,009
Inventory		38,833			19,343			33,665
Prepaid expenses and other current assets		16,338			4,906			5,275
Total current assets		333,230			320,024			174,769
Property, plant and equipment, net		69,698			71,289			73,234
Other assets		19,157			22,473			14,408
Total assets	$	422,085		$	413,786		$	262,411
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable and accrued liabilities	$	43,758		$	49,825		$	38,048
Customer prepayments		154,058			154,644			56,586
Total current liabilities		197,816			204,469			94,634
Other long-term liabilities		436			2,218			495
Total liabilities		198,252			206,687			95,129
Partners’ capital:
Limited partners’ interests, 18,502 Common Units and 184 Class B Common Units authorized and outstanding		212,075			221,726			177,640
General partners’ interest		(2,693	)		(9,928	)		(10,371	)
Accumulated other comprehensive income (loss)		14,451			(4,699	)		13
Total partners’ capital		223,833			207,099			167,282
Total liabilities and partners’ capital	$	422,085		$	413,786		$	262,411

See Accompanying Notes to the Consolidated Financial Statements.

3

TERRA NITROGEN COMPANY, L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit amounts)

(unaudited)

	Three Months Ended
	March 31,
	2008			2007
Revenues	$	174,253		$	127,852
Other		279			305
Total revenues		174,532			128,157
Cost of goods sold		91,971			90,770
Gross profit		82,561			37,387
Operating expenses		3,524			3,178
Operating income		79,037			34,209
Interest expense		(81	)		(112	)
Interest income		2,640			1,233
Net income	$	81,596		$	35,330
Net income allocable to Common Units	$	72,704		$	34,624
Net income per Common Unit	$	3.93		$	1.87

See Accompanying Notes to the Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	March 31,
	2008			2007
Operating activities:
Net income	$	81,596		$	35,330
Adjustments to reconcile net income to net cash flows from operating activities:
Depreciation and amortization		5,745			3,808
Non-cash gain on derivative instruments		(301	)		(1,633	)
Changes in operating assets and liabilities:
Receivables		21,368			1,667
Inventories		(19,490	)		(10,956	)
Accounts payable and customer prepayments		3,647			19,334
Other assets and liabilities		(3,955	)		7,222
Net cash flows from operating activities		88,610			54,772
Investing activities:
Capital expenditures		(903	)		(1,331	)
Plant turnaround expenditures		(43	)		(53	)
Change in demand deposits with affiliate		(1,012	)		2,457
Net cash flows from investing activities		(1,958	)		1,073
Financing activities:
Partnership distributions paid		(84,012	)		(18,312	)
Net cash flows used in financing activities		(84,012	)		(18,312	)
Net increase in cash and cash equivalents		2,640			37,533
Cash and cash equivalents at beginning of year		246,140			62,287
Cash and cash equivalents at end of period	$	248,780		$	99,820
Supplemental disclosure of cash flow information:
Cash paid during the year for interest	$	63		$	63

See Accompanying Notes to the Consolidated Financial Statements.

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TERRA NITROGEN COMPANY, L.P.

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

(in thousands, except for units)

(unaudited)

										Accumulated
				Class B			General			Other			Total
	Common			Common			Partners’			Comprehensive			Partners’			Comprehensive
(in thousands, except for Units)	Units			Units			Interests			Income (Loss)			Capital			Income
Partners’ capital at January 1, 2008	$	221,153		$	573		$	(9,928	)	$	(4,699	)	$	207,099
Net income		72,704			796			8,096			¾			81,596		$	81,596
Change in fair value of derivatives		¾			¾			¾			19,150			19,150			19,150
Comprehensive income																$	100,746
Distributions		(82,332	)		(819	)		(861	)		¾			(84,012	)
Partners’ capital at March 31, 2008	$	211,525		$	550		$	(2,693	)	$	14,451		$	223,833
Limited partner units issued and outstanding March 31, 2008:
Common Units								18,501,576
Class B Common Units								184,072
Total units outstanding at March 31, 2008								18,685,648

										Accumulated
				Class B			General			Other			Total
	Common			Common			Partners’			Comprehensive			Partners’			Comprehensive
(in thousands, except for Units)	Units			Units			Interests			Income (Loss)			Capital			Income
Partners’ capital at January 1, 2007	$	160,837		$	(41	)	$	(10,545	)	$	(6,179	)	$	144,072
Net income		34,624			344			362			¾			35,330		$	35,330
Change in fair value of derivatives		¾			¾			¾			6,192			6,192			6,192
Comprehensive income																$	41,522
Distributions		(17,945	)		(179	)		(188	)		¾			(18,312	)
Partners’ capital at March 31, 2007	$	177,516		$	124		$	(10,371	)	$	13		$	167,282
Limited partner units issued and outstanding at March 31, 2007:
Common Units								18,501,576
Class B Common Units								184,072
Total units outstanding at March 31, 2007								18,685,648

See Accompanying Notes to the Consolidated Financial Statements.

6

TERRA NITROGEN COMPANY, L.P.

Notes to Consolidated Financial Statements (Unaudited)

1.	Financial Statement Presentation
	Basis of Presentation
	The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Terra Nitrogen Company, L.P. (“TNCLP”, “our”, “we”, or “us”) Annual Report on Form 10-K for the year ended December 31, 2007. TNCLP and its operating partnership subsidiary, Terra Nitrogen, Limited Partnership (the “Operating Partnership”), are referred to herein, collectively, as the “Partnership”.
	The accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for the fair statement of the results for the periods presented. All of these adjustments are of a normal and recurring nature. Results for the quarter are not necessarily indicative of our future financial results.
	Derivatives and Financial Instruments
	We account for derivatives in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activities,which requires that derivatives be reported on the balance sheet at fair value and, if the derivative is not designated as a hedging instrument, changes in fair value must be recognized in earnings in the period of change. If the derivative is designated as a hedge and to the extent such hedge is determined effective, changes in fair value are reported as a component of accumulated other comprehensive income (loss) in the period of change, and subsequently recognized in the determination of net income in the period that the offsetting hedged transaction occurs.
	Terra Industries Inc. and its subsidiaries (“Terra”) enter into derivative instruments with counterparties for our operations. When Terra enters into a derivative instrument for our operations, we simultaneously enter into a derivative instrument with Terra as the counterparty. The terms of the derivative instruments between us and Terra are identical to the terms of the derivative instruments between Terra and Terra’s counterparty. The types of derivative instruments entered into include swap and basis swap agreements and put and call options to cap or fix prices for a portion of our natural gas production requirements. Terra may also enter into similar derivative instruments to fix or set floor prices for a portion of our nitrogen sales volumes.
	Revenue Recognition
	Revenue is recognized when persuasive evidence of a transaction exists, delivery has occurred, the price is fixed or determinable, no obligations remain and collectibility is probable. We classify any discounts and trade allowances as a reduction in revenue. Gains or losses associated with settled nitrogen derivative contracts are classified as revenue. We classify amounts directly or indirectly billed to our customers for shipping and handling as revenue.

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Cost of Goods Sold

The cost of manufacturing fertilizer products is recorded when the fertilizer products are sold and revenue is recognized. We classify amounts directly or indirectly billed for delivery of products to its customers or its terminals as cost of goods sold. Premiums paid for option contracts are deferred and recognized in cost of goods sold in the month to which the related derivative transactions are settled. Realized gains and losses on derivatives activities are recognized in cost of goods sold.

Inventories

Inventories are stated at the lower of average cost or estimated net realizable value. We perform a monthly analysis of our inventory balances to determine if the carrying amount of inventories exceeds its net realizable value. The analysis of estimated realizable value is based on customer orders, market trends and historical pricing. If the carrying amount exceeds the estimated net realizable value, the carrying amount is reduced to the estimated net realizable value.

Production costs include the cost of direct labor and materials, depreciation and amortization, and overhead costs related to manufacturing activities. The cost of inventories is determined using the first-in, first-out method.

We estimate a reserve for obsolescence and excess of our materials and supplies inventory. Inventory is stated net of the reserve.

Impairment of Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the undiscounted future cash flows expected to result from the use of the asset is less than the carrying amount of the asset, an impairment loss is recognized based on the difference between the carrying amount and the fair value of the asset.

Natural Gas Swaps, Options and Basis Swaps

The estimated fair value of each class of derivatives is based on published referenced prices and quoted market prices from brokers.

Cash and Cash Equivalents

We classify cash and short-term investments with an original maturity of three months or less as cash and cash equivalents. Demand deposits with affiliate are not classified in cash and cash equivalents.

Demand Deposits with Affiliate

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

8

	Use of Estimates in Preparation of the Financial Statements
	The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
2.	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. We paid distributions of $84.0 million to our partners in the first quarter of 2008 and $18.3 million for the same period in 2007.
	We receive 99% of the Available Cash from Terra Nitrogen, Limited Partnership (“the Operating Partnership”) and 1% is distributed to its General Partner. Cash distributions from the Operating Partnership generally represent our Available Cash from operations. Our cash distributions are made 99.975% to Common Unitholders and 0.025% to our General Partner except when cumulative distributions of Available Cash exceed specified target levels above the Minimum Quarterly Distributions (“MQD”) of $0.605 per unit. Under such circumstances, our General Partner is entitled, as an incentive, to larger percentage interests.
	On April 24, 2008, we announced a $4.20 distribution to be paid to Common Unit holders in the 2008 second quarter. We have exceeded the cumulative MQD amounts and will distribute the Available Cash as summarized in following table:

	Income and Distribution Allocation
								Class B
	Target		Target		Common			Common			General
	Limit		Increment		Units			Units			Partner			Total
Minimum Quarterly Distribution	$	0.605		0.605		98.990	%		0.985	%		0.025	%		100.000	%
First Target		0.715		0.110		98.990	%		0.985	%		0.025	%		100.000	%
Second Target		0.825		0.110		85.859	%		0.985	%		13.156	%		100.000	%
Third Target		1.045		0.220		75.758	%		0.985	%		23.257	%		100.000	%
Final Target and Beyond	$	1.045		¾		50.505	%		0.985	%		48.510	%		100.000	%

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

At March 31, 2008, the General Partner and its affiliates owned 75.3% of our outstanding units. When less than 25% of the 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 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. Additional purchases of common units by the General Partner may be restricted under the terms of Terra’s bank credit agreement as described therein.

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3.	Net Income per Limited Partnership Unit
	Basic and diluted income per unit is based on the weighted-average number of Common Units outstanding during the period. The following table provides a reconciliation for basic and diluted income per unit for the three-month periods ended March 31, 2008 and 2007:

	Three Months Ended
	March 31,
(in thousands, except per-unit amounts)	2008		2007
Basic income per Common Unit:
Net income allocable to Common Unit class	$	72,704	$	34,624
Weighted average units outstanding		18,502		18,502
Net income per Common Unit	$	3.93	$	1.87

	There were no dilutive Common Units outstanding for the three-month periods ended March 31, 2008 and 2007.
4.	Inventories
	Inventories consisted of the following:

	March 31,		December 31,		March 31,
(in thousands)	2008		2007		2007
Materials and supplies	$	8,405	$	8,231	$	8,820
Finished goods		30,428		11,112		24,845
Total	$	38,833	$	19,343	$	33,665

	Inventory is valued at actual first in, first out cost. Costs include raw material, labor and overhead.
5.	Derivative Financial Instruments
	We manage risk using derivative financial instruments for changes in natural gas supply prices and changes in nitrogen prices. Derivative financial instruments have credit risk and market risk.
	Terra enters into derivative instruments with counterparties for our operations. When Terra enters into a derivative instrument for our operations, we simultaneously enter into a derivative instrument with Terra as the counterparty. The terms of the derivative instruments between us and Terra are identical to the terms of the derivative instruments between Terra and Terra’s counterparty.

10

We classify a derivative financial instrument as a hedge if all of the following conditions are met:

1.	The item to be hedged must expose us to currency or price risk.
2.	It must be probable that the results of the hedge position substantially offset the effects of currency or price changes on the hedged item (e.g., there is a high correlation between the hedge position and changes in market value of the hedge item).
3.	The derivative financial instrument must be designated as a hedge of the item at the inception of the hedge.

Natural gas supplies to meet production requirements at our production facilities are purchased at market prices. Natural gas market prices are volatile and we effectively hedge a portion of our natural gas production requirements and inventory through the use of swaps, basis swaps and options. These contracts reference physical natural gas prices or approximate NYMEX futures contract prices. Contract physical prices are frequently based on prices at the Henry Hub in Louisiana, the most common and financially liquid location of reference for financial derivatives related to natural gas. However, natural gas supplies for our production facilities are purchased at locations other than Henry Hub, which often creates a location basis differential between the contract price and the physical price of natural gas. Accordingly, the use of financial derivatives may not exactly offset the changes in the price of physical gas. The contracts are traded in months forward and settlement dates are scheduled to coincide with gas purchases during that future period.

A swap is a contract between us and a third party to exchange cash based on a designated price. Option contracts give the holder the right to either own or sell a futures or swap contract. The option contracts require initial premium payments ranging from 2% to 5% of contract value. Basis swap contracts require payments to or from us for the amount, if any, that monthly published gas prices from the source specified in the contract differ from the prices of a NYMEX natural gas futures during a specified period. There are no initial cash requirements related to the swap and basis swap agreements.

The following summarizes the position of open natural gas derivative contracts at March 31, 2008, December 31, 2007 and March 31, 2007:

	Other		Accrued
	Current		Current			Net
(in thousands)	Assets		Liabilities			Asset (Liability)
March 31, 2008	$	15,148	$	(567	)	$	14,581
December 31, 2007	$	3,101	$	(7,959	)	$	(4,858	)
March 31, 2007	$	4,052	$	(2,434	)	$	1,618

Certain derivatives outstanding at March 31, 2008 and 2007, which settled during April 2008 and 2007, respectively, are included in the position of open natural gas derivatives in the table above. The April 2008 derivatives settled for an approximate $4.8 million gain as compared to the April 2007 derivatives which settled for an approximate $0.4 million loss. All open derivatives will settle during the next 12 months.

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We determined that certain derivative contracts were ineffective hedges for accounting purposes and recorded a credit of $0.1 million and $1.6 million to cost of sales for the three-month periods ending March 31, 2008 and 2007, respectively.

The effective portion of gains and losses on settlement of these contracts that qualify for hedge treatment are carried as accumulated other comprehensive income (loss) and are credited or charged to cost of sales in the month in which the hedged transaction settles. Gains and losses on the contracts that do not qualify for hedge treatment are credited or charged to cost of sales based on the positions’ fair value. The risk and reward of outstanding natural gas positions are directly related to increases or decreases in natural gas prices in relation to the underlying NYMEX natural gas contract prices.

The activity related to accumulated other comprehensive income (loss) for the three-month periods ended March 31, 2008 and 2007 is:

(in thousands)	2008			2007
Beginning accumulated loss	$	(4,699	)	$	(6,179	)
Reclassification into earnings		(2,503	)		36
Net change associated with current period hedging transactions		21,653			6,156
Ending accumulated income	$	14,451		$	13

	Approximately $14.5 million of the net accumulated gain at March 31, 2008 will be reclassified into earnings during the next twelve months.
	At times, we also use forward derivative instruments to fix or set floor prices for a portion of our nitrogen sales volumes. At March 31, 2008, we had no open contracts covering nitrogen solutions. When outstanding, the nitrogen solution contracts do not qualify for hedge treatment due to inadequate trading history to demonstrate effectiveness. Consequently, these contracts are marked-to-market and unrealized gains or losses are reflected in revenue in the statement of operations. For the three-month period ending March 31, 2008, there were no gains or losses on nitrogen forward derivative instruments. For the three-month period ending March 31, 2007, we recognized a loss of $0.9 million on nitrogen forward derivative instruments.
6.	Fair Value Measurements
	On January 1, 2008, we adopted SFAS No. 157,Fair Value Measurements(SFAS 157), which, among other things, requires enhanced disclosure assets and liabilities measured and reported at fair value. In February 2008, the FASB issued FASB Staff Position No. 157-2,Effective Date of FASB Statement No. 157,which delayed for one year the applicability of SFAS 157’s fair-value measurements to certain nonfinancial assets and liabilities. We adopted SFAS 157 in 2008, except as it applies to those nonfinancial assets and liabilities affected by the one-year delay. The adoption of SFAS 157 did not have a material impact on our financial statements. SFAS 157 establishes a hierarchal disclosure framework that prioritizes and ranks the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of asset or liability and their characteristics. Assets and liabilities with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

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The three levels are defined as follows:

• Level 1 – inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – inputs to the valuation methodology are observable and significant to the fair value measurement.

We evaluated our assets and liabilities to determine which items should be disclosed according to SFAS 157. We currently measure our derivative contracts on a recurring basis at fair value. The inputs included in the fair value measurement of our derivative contracts use adjusted quoted prices from an active market which are classified at level 2 as a significant other observable input in the disclosure hierarchy framework.

The following table summarizes the valuation of our assets and liabilities in accordance with SFAS 157 fair value hierarchy levels as of March 31, 2008:

	Quoted Market		Significant Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs
(in thousands)	(Level 1)		(Level 2)		(Level 3)
Assets
Derivative contracts	$	¾	$	15,148	$	¾
Total	$	¾	$	15,148	$	¾
Liabilities
Derivative contracts	$	¾	$	567	$	¾
Total	$	¾	$	567	$	¾

7.

Revolving Credit Facility

We have a $50.0 million revolving credit facility available that expires January 31, 2012. The revolving credit facility bears interest at a variable rate plus a margin (London Interbank Offer Rate (LIBOR) plus 175 basis points, or 4.46% at March 31, 2008). Under the credit facility, we may borrow an amount generally based on eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory, less outstanding letters of credit. Our borrowings under the credit facility are secured by substantially all of our working capital. The agreement also requires us to adhere to certain limitations on additional debt, capital expenditures, acquisitions, liens, asset sales, investments, prepayments of subordinated indebtedness, changes in lines of business and transactions with affiliates. At March 31, 2008, we had $50.0 million of borrowing availability and there were no outstanding borrowings or letters of credit under the facility.

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8.	New Accounting Pronouncements
	In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141R,Business Combination,which changes how business acquisitions are accounted. SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction and establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed in a business combination. Certain provisions of this Standard will, among other things, impact the determination of acquisition-date fair value of consideration paid in a business combination (including contingent consideration); exclude transaction costs from acquisition accounting; and change accounting practices for acquired contingencies, acquisition-related restructuring costs, in-process research and development, indemnification assets, and tax benefits. SFAS 141R is effective for business combinations and adjustments to an acquired entity’s deferred tax asset and liability balances occurring after December 31, 2008. We are currently evaluating the future impacts and disclosures of SFAS 141R.
	In December 2007, the FASB issued SFAS 160,Noncontrolling Interests in Consolidated Financial Statements,an amendment of ARB No. 51, (SFAS 160). SFAS 160 improves the comparability and transparency of financial statements when reporting minority interest. Entities with a noncontrolling interest will be required to clearly identify and present the ownership interest in the consolidated statement of financial position within equity, but separate from the parent’s equity. The amount of consolidated net income attributable to the parent and to the noncontrolling interest will be identified and presented on the face of the consolidated statement of income. The statement offers further guidance on changes in ownership interest, deconsolidation, and required disclosures. The statement is effective for fiscal years and interim periods within those fiscal years beginning January 1, 2009. We are currently assessing the impact SFAS 160 may have on our financial statements.
	In March 2008 the FASB issued SFAS 161,Disclosures about Derivative Instruments and Hedging Activities(SFAS 161). SFAS 161 is an amendment of SFAS 133,Accounting for Derivative Instruments and Hedging Activities(“SFAS 133”). To address concerns that the existing disclosure requirements of SFAS 133 do not provide adequate information, this Statement requires enhanced disclosures about an entity’s derivative and hedging activities and thereby improves the transparency of financial reporting. This statement shall be effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We are currently evaluating the future impacts and disclosures of SFAS 161.
	The FASB has issued Draft Abstract Emerging Issues Task Force (EITF) Issue 07-4,Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships(EITF 07-4). EITF 07-4 specifies the treatment of earnings per unit calculations when incentive distribution rights exist. The issue shall be effective for financial statements issued for fiscal years and interim periods within those fiscal years beginning January 1, 2009. We are currently assessing the impact EITF 07-4 may have on our financial statements.

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

Introduction

We produce and market wholesale 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. Natural gas is the most significant raw material in the production of nitrogen products. 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.

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.

Our sales volumes are primarily dependent upon the operating rates for our Verdigris, Oklahoma plant. We may purchase products from other manufacturers or importers for resale, however, historic gross margins on those volumes are rarely significant. Profitability and cash flows from the operations are affected by the ability to manage costs and expenses (other than natural gas), most of which do not materially change for different levels of production or sales. Other factors affecting operating results include the level of planted acres, transportation costs, weather conditions (particularly during the planting season), grain prices and other variables described in Item 1 “Business” and Item 2 “Properties” sections of the Partnership’s most recent Form 10-K filing with the Securities and Exchange Commission.

Dependence on Terra Industries

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

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Three months ended March 31, 2008 compared with
three months ended March 31, 2007

Volumes and prices for the three-month periods ended March 31, 2008 and 2007 are:

	2008				2007
	Volumes		Unit Price		Volumes		Unit Price
	(000 tons)		($/ton)2		(000 tons)		($/ton)2
Ammonia		38	$	519		69	$	356
UAN (32% basis)1		502	$	281		502	$	182

1.	The nitrogen content of UAN is 32% by weight.
2.	After deducting outbound freight costs.

Revenues for the 2008 first quarter were $174.5 million, compared to $128.2 million for the 2007 first quarter. The $46.3 million, or 36%, increase in revenues was primarily due to an increase in ammonia and UAN sales prices of 46% and 54%, respectively. The higher prices result from increased demand for nitrogen products for corn and wheat plantings.

The 2008 first quarter gross profit was $82.6 million, which was $45.2 million more than the 2007 first quarter. As compared to the 2007 first quarter, 2008 gross profits increased approximately $56.0 million due to higher prices of our products, partially offset by higher natural gas costs of $5.5 million. Natural gas costs, including the effects of forward price contracts, during the 2008 and 2007 first quarters were $7.16 per MMBtu and $6.39 per MMBtu, respectively.

Capital resources and liquidity

Operating activities for the first three months of 2008 generated $88.6 million of cash, comprised of $87.0 million of cash from operating activities and $1.6 million from working capital changes. First quarter changes to current assets and liabilities represented seasonal fluctuations to working capital balances. These balances included an increase in inventory of $19.5 million, offset by a decrease in accounts receivable of $21.4 million.

Capital expenditures of $0.9 million during the first three months of 2008 were primarily to fund replacement and sustaining capital needs. Plant turnaround costs represent cash used for the periodic scheduled maintenance of our continuous process production facilities.

Our principal funding needs are to support our working capital and capital expenditures. We intend to fund our needs primarily from cash provided by operating activities and, to the extent required, from funds borrowed under our $50.0 million revolving bank credit facility.

We have a $50.0 million revolving credit facility available that expires January 31, 2012. Under the credit facility, we may borrow an amount generally based on eligible cash balances, 85% of eligible accounts receivable and 60% of eligible finished goods inventory, less outstanding letters of credit. Our borrowings under the credit facility are secured by substantially all of our working capital. At March 31, 2008, we had borrowing availability of $50.0 million and had no outstanding borrowings or letters of credit under the facility. Management expects the facility to be adequate to meet our operating cash needs.

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Under the credit facility, we 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 our aggregate borrowing availability falls below $10.0 million, we are required to have generated $25.0 million of operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items as defined in the credit facility for the preceding four quarters. We are also required to maintain a minimum aggregate unused borrowing availability of $5.0 million at all times.

Our 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. Failure to meet these covenants, or to obtain a waiver from the lenders, would result in a default by us such that all outstanding amounts could become immediately due and payable and we would be unable to borrow additional amounts under the credit facility. Because access to adequate bank facilities may be critical to funding our operating cash needs and purchase of financial derivatives to manage our exposure to natural gas commodity price risk, any default or termination of the revolving bank credit facility could have a material adverse effect on us.

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. We paid distributions of $84.0 million to our partners in the first quarter of 2008 and $18.3 million for the same period in 2007.

We receive 99% of the Available Cash from Terra Nitrogen, Limited Partnership (“the Operating Partnership”) and 1% is distributed to its General Partner. Cash distributions from the Operating Partnership generally represent our Available Cash from operations. Our cash distributions are made 99.975% to Common Unitholders and 0.025% to our General Partner except when cumulative distributions of Available Cash exceed specified target levels above the Minimum Quarterly Distributions (“MQD”) of $0.605 per unit. Under such circumstances, our General Partner is entitled, as an incentive, to larger percentage interests.

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On April 24, 2008, we announced a $4.20 distribution to be paid to Common Unit holders in the 2008 second quarter. We have exceeded the cumulative MQD amounts and will distribute the Available Cash as summarized in the following table:

	Income and Distribution Allocation
								Class B
	Target		Target		Common			Common			General
	Limit		Increment		Units			Units			Partner			Total
Minimum Quarterly Distribution	$	0.605		0.605		98.990	%		0.985	%		0.025	%		100.000	%
First Target		0.715		0.110		98.990	%		0.985	%		0.025	%		100.000	%
Second Target		0.825		0.110		85.859	%		0.985	%		13.156	%		100.000	%
Third Target		1.045		0.220		75.758	%		0.985	%		23.257	%		100.000	%
Final Target and Beyond	$	1.045		¾		50.505	%		0.985	%		48.510	%		100.000	%

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

At March 31, 2008, the General Partner and its affiliates owned 75.3% of our outstanding units. When less than 25% of the 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 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. Additional purchases of common units by the General Partner may be restricted under the terms of Terra’s bank credit agreement as described therein.

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

There were no material changes outside the ordinary course of business to the Company’s contractual obligations or off-balance sheet arrangements presented in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Annual Report on Form 10-K for the period ended December 31, 2007.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our operations are significantly affected by the price of natural gas. We employ derivative commodity instruments related to a portion of our natural gas requirements (primarily futures, swaps and options) for the purpose of managing exposure to commodity price risk in the purchase of natural gas. Changes in the market value of these derivative instruments are expected to have a high correlation to changes in the spot price of natural gas. For more information about how we manage specific risk exposures, refer to our most recent Annual Report on Form 10-K (which is on file with the Securities and Exchange Commission), Item 7A “Quantitative and Qualitative Disclosures about Market Risk” and Note 6 — Derivative Financial Instruments contained in Item 8 of our 2007 form 10-K. There were no material changes in our use of financial instruments during the quarter ended March 31, 2008.

The volume of natural gas hedged varies from time to time based on management’s judgment of market conditions, particularly natural gas prices and prices for nitrogen products. Management also considers our position related to forward fixed price sales contracts in determining the level of derivatives necessary. Contracts were in place at March 31, 2008 to cover approximately 23% of its natural gas requirements for the succeeding twelve months. The General Partner’s ability to manage our exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by our bank agreement covenants.

ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

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

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FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY

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

Words such as “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” and similar expressions are used to identify these forward-looking statements. These include, among others, statements relating to:

• changes in financial markets,

• general economic conditions within the agricultural industry,

• competitive factors and price changes (principally, sales prices of nitrogen products and natural gas costs),

• changes in product mix,

• changes in the seasonality of demand patterns,

• changes in weather conditions,

• changes in environmental and other government regulations,

• changes in agricultural regulations, and

• other risks detailed in the section entitled “Risk Factors”.

Additional information as to these factors can be found in our 2007 Annual Report in the sections entitledBusinessandManagement’s Discussion and Analysis of Financial Condition and Results of Operationsand in theNotes to our Consolidated Financial Statementsincluded as part of this report.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

There were no significant changes in our risk factors during the first quarter of 2008 as compared to the risk factors identified in our 2007 Form 10-K.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

(a) Exhibits:

Exhibits 31.1	Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibits 31.2	Certification of the Vice President and Chief Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

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

TERRA NITROGEN COMPANY, L.P.
By:	TERRA NITROGEN GP INC.
	as General Partner
By:	/s/ DANIEL D. GREENWELLDaniel D. Greenwell
	Vice President and
	Chief Accounting Officer
	(Principal Financial Officer)

Date: April 25, 2008

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