Attached files

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EX-32.2 - EXHIBIT 32.2 - TERRA NITROGEN CO L P /DE	a2199626zex-32_2.htm
EX-31.2 - EXHIBIT 31.2 - TERRA NITROGEN CO L P /DE	a2199626zex-31_2.htm
EX-32.1 - EXHIBIT 32.1 - TERRA NITROGEN CO L P /DE	a2199626zex-32_1.htm
EX-31.1 - EXHIBIT 31.1 - TERRA NITROGEN CO L P /DE	a2199626zex-31_1.htm

Sales Volumes and Prices

        The following table shows our ammonia and UAN volumes and prices for the three and six month periods ended June 30, 2010 and 2009:

Second Quarter of 2010 Compared to the Second Quarter of 2009

        Our net sales for the second quarter of 2010 were $166.9 million, an increase of $24.1 million, or 16.9%, from the second quarter of 2009 net sales of $142.8 million. The increase was due to increases in UAN and ammonia sales volumes of 32% and 23%, respectively, partially offset by a decline in average UAN and ammonia sales prices of 7% and 24%, respectively.

        Our gross margin was $69.4 million in the second quarter of 2010 compared to $64.8 million in the second quarter of 2009. Gross margin as compared to prior year increased due to higher volumes, partially offset by an increase in natural gas prices and realization of lower fertilizer prices. The second quarter natural gas unit costs, net of derivative gains and losses, increased from $4.26 per MMBtu in 2009 to $4.37 per MMBtu in 2010. The gross margin percent as a percent of sales decreased to 41.6% from 45.4%.

        We enter into forward sales commitments by utilizing forward pricing and prepayment programs with customers. We use derivative instruments to hedge a portion of our natural gas requirements. The use of these derivative instruments is designed to fix natural gas costs for production required for forward sales commitments. Effective in April 2010, we discontinued the use of hedge accounting for derivative instruments. This change did not affect our gas purchasing decisions, hedging approach or cash flows. The impact of discontinuing hedge accounting on our second quarter results was not significant.

        Selling, general and administrative costs were $2.7 million in the second quarter of 2010, a decline of $1.4 million from the second quarter of 2009. The decline is primarily due to lower share-based compensation expense and lower corporate expenses.

        Interest income decreased in the second quarter of 2010 due to declining interest rates and a reduction of the average investment balance as compared to the second quarter of 2009.

        Our net earnings increased to $66.7 million in the second quarter of 2010, an increase of $5.9 million, or 10%, as compared to $60.8 million in the second quarter of 2009. Net earnings increased primarily due to higher gross margin and lower selling, general and administrative expenses in the quarter.

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Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

        Our net sales for the six months ended June 30, 2010 were $285.7 million, a decline of $22.4 million, or 7.3%, from the six months ended June 30, 2009 net sales of $308.1 million. The decline was primarily due to 25% and 22% declines in ammonia and UAN sales prices, respectively, partially offset by a 30% increase in ammonia sales volume as compared to the first six months of 2009.

        Our gross margin was $109.0 million for the six months ended June 30, 2010 compared to $113.1 million for the six months ended June 30, 2009. Natural gas unit costs for the first six months of 2010, net of derivative gains and losses, decreased 14.9% from $5.68 per MMBtu in 2009 to $4.83 per MMBtu in 2010. The decrease in natural gas prices, plus the impact of higher volumes were offset by the impact of lower selling prices which reduced gross margin as compared to the prior year. The gross margin percent as a percent of sales increased to 38.2% from 36.7%.

        Selling, general and administrative costs were $8.3 million for the six months ended June 30, 2010, a decrease of $1.1 million as compared to the same period in 2009. This is primarily due to lower long-term share-based compensation expense and lower corporate expenses.

        Interest income decreased for the six months ended June 30, 2010 due to declining interest rates and a reduction of the average investment balance as compared for the six months ended June 30, 2009.

        Our net earnings decreased to $100.6 million for the six months ended June 30, 2010, a decrease of $3.5 million, or 3%, as compared to $104.1 million for the six months ended June 30, 2009. Net earnings decreased primarily due to lower gross margin offset partially by lower selling, general and administrative expenses.

Liquidity and Capital Resources

        Our principal funding needs are for operating expenses, working capital, capital expenditures and quarterly distributions. Cash and cash equivalents were $94.6 million at June 30, 2010. During the first six months of 2010, cash and cash equivalents increased by $69.8 million from December 31, 2009.

        Our cash receipts are generally collected by CF. Cash receipts, net of cash payments made by CF, are transferred to us weekly. Because of this cash collection and distribution arrangement, CF is a creditor to us.

Cash Flows

        The following table summarizes our cash flows from operating, investing and financing activities for the six months ended June 30, 2010 and 2009:

Operating Activities

        Net cash provided by operating activities for the first six months of 2010 represented $108.0 million from operations, offset by $7.4 million of working capital changes. The $108.0 million

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includes $100.6 million of net earnings, adjusted for non-cash expenses of $7.9 million of depreciation of property, plant and equipment and amortization of deferred plant turnaround costs.

Investing Activities

        Our investing activities used $6.7 million of cash in the first half of 2010 for capital expenditures and plant turnaround expenditures.

Financing Activities

        During the first six months of 2010, we paid distributions of approximately $23.6 million to our unit holders. The distributions paid are based on "Available Cash," as defined in our Agreement of Limited Partnership. See Note 4 included herein.

Revolving Credit Facility

        We have a $50 million revolving credit facility (the facility). A portion of this facility is available for swing loans and for the issuance of letters of credit. At June 30, 2010, there were no revolving credit borrowings and there were no outstanding letters of credit. The facility requires us to maintain certain financial ratio covenants relating to minimum earnings, maximum capital expenditures and minimum liquidity. We must also adhere to certain limitations on additional indebtedness, capital expenditures, acquisitions, liens, investments, asset sales, prepayments or subordinated indebtedness, changes in lines of business, restricted payments and transactions with affiliates, among others. CF and its other domestic subsidiaries have guaranteed our obligations on an unsecured basis. For additional information regarding our facility, see Note 9 to our audited consolidated financial statements included in our 2009 Annual Report on Form 10-K and also Note 10 included herein.

        Under the 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 facility are secured by substantially all of our working capital.

        In addition, if our aggregate borrowing availability falls below $10 million, we are required to have generated $25 million of operating cash flows or earnings before interest, income taxes, depreciation, amortization and other non-cash items as defined in the facility for the preceding four quarters. We are also required to maintain a minimum aggregate unused borrowing availability of $5 million at all times.

        Our ability to continue to meet the covenants under the 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 our default such that all outstanding amounts could become immediately due and payable and we would be unable to borrow additional amounts under the facility. Access to adequate bank facilities may be required to fund operating cash needs. Therefore, any default or termination of the facility could have a material adverse effect on our business.

        On April 2, 2010, we entered into a waiver relating to this facility. The waiver provided for a waiver of the change of control event that would have resulted from CF's acquisition of more than 35% of Terra's outstanding common stock on April 5, 2010 (see Note 1). The waiver was effective through July 1, 2010. On June 30, 2010, a second waiver was executed, extending the effective date through September 28, 2010. The General Partner is currently considering options to replace the facility. There can be no assurance, however, that the facility can be replaced on terms acceptable to the General Partner or at all.

General Partner

        The General Partner is an indirect, wholly-owned subsidiary of CF. Under the General Partner's governing documents, neither we nor the General Partner may make any bankruptcy filing (or take similar action) without the approval of the General Partners' independent directors.

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Partnership Distributions

        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 to be necessary in its reasonable discretion. We paid distributions of $23.6 million and $154.7 million for the six months ended June 30, 2010 and 2009, respectively.

        We receive 99% of the Available Cash from 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 or Incentive Distribution Rights (IDRs). Pursuant to our Agreement of Limited Partnership, earnings allocable to the limited partners and General Partner is based upon the distributions of Available Cash for the year. Therefore, earnings per unit reflect an annualized allocation rate.

        On July 27, 2010, we announced a $2.36 cash distribution per common limited partnership unit, payable on August 25, 2010 to holders of record as of August 10, 2010. In the second 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.

General Partner Option to Effect Mandatory Redemption of Partnership Units

        At June 30, 2010, the General Partner and its affiliates owned 75.3% of our outstanding units. When not more than 25% of the issued and outstanding units are held by non-affiliates of the General Partner, as was the case at June 30, 2010, 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.

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Cash Transactions with Affiliates

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

Derivatives

        We account for derivatives under ASC 815—Derivatives and Hedging. Under this standard, derivatives are reported on the balance sheet at fair value. Prior to the second quarter of 2010, we generally classified our natural gas derivatives as cash flow hedges, whereby the effective portion of the change in fair value was reported as a component of accumulated comprehensive income and was subsequently recognized in earnings in the period the offsetting hedged transaction occurred. Beginning in the second quarter of 2010, we continue to use derivatives as an economic hedge of gas price risk, but without the application of hedge accounting. Accordingly, changes in the fair value of the derivatives are recorded in earnings as the changes occur. This change will increase volatility in reported earnings in future periods.

Contractual Obligations

        There were no material changes outside the ordinary course of business to the Partnership's contractual obligations, critical accounting policies 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, 2009.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to the impact of changes in the price of natural gas which we use in the manufacture of our nitrogen products. Because natural gas prices are volatile, we seek to protect against significant adverse natural gas price movements. We manage the risk of changes in natural gas prices through the use of physical gas supply contracts and derivative financial instruments covering a period not exceeding three years.

        The derivative instruments that we have used are natural gas swaps and options. These contracts settle using NYMEX futures prices, which represents fair value at any given time. The contracts are entered into with respect to gas to be consumed in the future and settlements are scheduled to coincide with anticipated natural gas purchases during those future periods.

        As of June 30, 2010 and December 31, 2009, we had open derivative contracts for 0.2 million MMBtus and 6.1 million MMBtus, respectively, of natural gas, a substantial portion of which relate to sales that had been contracted to be sold at a fixed price in the future. An overall $1.00 per MMBtus change in the forward curve prices of natural gas would change the pre-tax unrealized mark-to-market gain/loss on these derivative positions by $0.2 million.

ITEM 4.    CONTROLS AND PROCEDURES

        Our Principal Executive Officer and Principal 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 Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.

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Changes in Internal Control Over Financial Reporting

        Except as noted below, there was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

        In April 2010, CF completed its merger of Terra and Terra Nitrogen GP Inc. with and into a wholly-owned subsidiary of CF Industries. We are currently integrating policies, processes, technology and operations for the combined company and will continue to evaluate our internal control over financial reporting as we develop and execute our integration plans. Until the companies are fully integrated, we will maintain the operational integrity of each company's legacy internal controls 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. 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, except as otherwise required by law.

        Words such as "expects," "intends," "plans," "projects," "believes," "estimates," and similar expressions are used to identify these forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. These risks, uncertainties and assumptions include, among others, statements relating to:

•

the volatile cost of natural gas;



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the cyclical nature of our business;



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the global commodity nature of our fertilizer products, the impact of global supply and demand on our selling prices, and the intense global competition in the consolidating markets in which we operate;



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conditions in the U.S. agricultural industry;



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weather conditions;



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our inability to accurately predict seasonal demand for our products;



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risks involving derivatives and the effectiveness of our risk measurement and hedging activities;



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risks related to TNCLP's reliance on one production facility;



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reliance on third party transportation providers,



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potential liabilities and expenditures related to environmental and health and safety laws and regulations;



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future regulatory restrictions and requirements related to GHG emissions, climate change or other environmental requirements;



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acts of terrorism and regulations to combat terrorism.



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CF and its affiliates are engaged in fertilizer manufacturing;



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dependence on CF and its employees;



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deterioration of global market and economic conditions;



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potential inability to renew our credit facility;

        Additional information as to these factors can be found in Part II, Item 1A, "Risk Factors" included herein.

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PART II. OTHER INFORMATION

ITEM 1A.    RISK FACTORS

        In addition to the other information contained in this Form 10-Q, the following risk factors should be considered carefully in evaluating the Partnership's business. The business, financial condition, and results of operations could be materially adversely affected by any of these risks. Please note that additional risks not presently known to the Partnership or that management currently deems immaterial may also impair our business, financial condition and results of operations

Our business is dependent on natural gas, which is subject to a high level of price volatility.

        Natural gas is the principal raw material used to produce nitrogen fertilizers and comprises a significant portion of the total cost of our products.

        The price of natural gas in North America directly impacts a substantial portion of our operating expenses. The price of natural gas in North America is highly volatile and is also generally higher than the price of natural gas in certain other major fertilizer-producing regions, including the Middle East and Trinidad. In addition to having access to lower-priced natural gas, some of our competitors may also benefit from fixed-price natural gas contracts, which may be linked directly to the market price of the nitrogen fertilizer being manufactured. Recent declines in the price of North American natural gas have been driven, in part, by the development of new sources of natural gas for the North American market, including, "unconventional" sources, such as shale gas, exploration and development of new natural gas fields and natural gas imports in the form of liquid natural gas. Any limitation on these sources of natural gas as a result of the environmental concerns some have raised with the development of new natural gas fields or the techniques used to produce shale gas or otherwise could cause the price of natural gas in North America to rise significantly. Given the volatility of pricing and our dependence on North American natural gas, the price we pay for natural gas in the future may be higher than prices paid by producers in certain other fertilizer-producing regions of the world, which may make it more difficult for us to compete against these producers.

        We may not be able to pass along higher operating costs to our customers in the form of higher product prices. A significant increase in the price of natural gas (which can be driven by, among other things, supply disruptions, governmental or regulatory actions, cold weather and oil price spikes) that is not hedged or recovered through an increase in the price of related nitrogen products could result in reduced profit margins and lower product production. We have previously idled our facility in response to high natural gas prices and may do so again in the future.

Our business is cyclical, resulting in periods of industry oversupply during which our results of operations tend to be negatively impacted.

        Historically, selling prices for our products have fluctuated in response to periodic changes in supply and demand conditions. Demand is affected by population growth, changes in dietary habits, non-food usage of crops, such as the production of ethanol and other biofuels, and planted acreage and application rates, among other things. Supply is affected by available capacity and operating rates, raw material costs and availability, government policies and global trade.

        Periods of high demand, high capacity utilization and increasing operating margins tend to result in new plant investment and increased production, causing supply to exceed demand and prices and capacity utilization to decline. In particular, new capacity is expected to be added abroad in low-cost regions. Future growth in demand for fertilizer may not be sufficient to alleviate any existing or future conditions of excess industry capacity.

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        During periods of industry oversupply, our results of operations tend to be affected negatively as the price at which we sell our products typically declines, resulting in possible reduced profit margins, write-downs in the value of our inventory, lower production of our products and/or plant closures.

Our products are global commodities and we face intense competition from other producers.

        Our products are global commodities and can be subject to intense price competition from both domestic and foreign sources. Fertilizers are global commodities, and customers, including end-users, dealers, other crop-nutrients producers and distributors, base their purchasing decisions principally on the delivered price and availability of the product. We compete with a number of U.S. and offshore producers, including state-owned and government-subsidized entities.

        Some of these competitors have greater total resources and are less dependent on earnings from nitrogen fertilizer sales, which make them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Consolidation in the fertilizer industry has increased the resources of several of our competitors, and we expect consolidation among fertilizer producers to continue. In light of this industry consolidation, our competitive position could suffer to the extent we are not able to expand our own resources either through investments in new or existing operations or through acquisitions, joint ventures or partnerships.

        China, the world's largest producer and consumer of fertilizers, is expected to continue expanding its fertilizer production capability. This expected increase in capacity could adversely affect the balance between global supply and demand and may put downward pressure on global fertilizer prices, which could adversely affect our results of operations and financial condition.

A decline in U.S. agricultural production or limitations on the use of our products for agricultural purposes could materially adversely affect the market for our products.

        Conditions in the U.S. agricultural industry significantly impact our operating results. The U.S. agricultural industry can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, domestic and international demand for U.S. agricultural products and U.S. and foreign policies regarding trade in agricultural products.

        State and federal governmental policies, including farm and biofuel subsidies and commodity support programs, as well as the prices of fertilizer products, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. In recent years, for example, ethanol production in the United States has increased significantly due, in part, to federal legislation mandating greater use of renewable fuels. This increase in ethanol production has led to an increase in the amount of corn grown in the United States and to increased fertilizer usage on both corn and other crops that have also benefited from improved farm economics. While the current Renewable Fuels Standard, or RFS, encourages continued high levels of corn-based ethanol production, a growing "food versus fuel" debate and other factors have resulted in calls to reduce subsidies for ethanol, allow increased ethanol imports and adopt temporary waivers of the current RFS levels, any of which could have an adverse effect on corn-based ethanol production, planted corn acreage and fertilizer demand. Developments in crop technology, such as nitrogen fixation, the conversion of atmospheric nitrogen into compounds that plants can assimilate, could also reduce the use of chemical fertilizers and adversely affect the demand for our products. In addition, several states are currently considering limitations on the use and application of chemical fertilizers due to concerns about the impact of these products on the environment.

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Adverse weather conditions may decrease demand for our fertilizer products and increase the cost of natural gas.

        Weather conditions that delay or intermittently disrupt field work during the planting and growing seasons may cause agricultural customers to use different forms of nitrogen fertilizer, which may adversely affect demand for the forms that we sell or may impede farmers from applying our fertilizers until the following growing season, resulting in lower demand for our products.

        Adverse 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 purchase fertilizer from our customers.

        Weather conditions or, in certain cases, weather forecasts, can also dramatically affect the price of natural gas, our principal raw material used to make nitrogen based fertilizers. Colder than normal winters and warmer than normal summers increase the natural gas demand for residential use. In addition, hurricanes affecting the gulf coastal states can severely impact the supply of natural gas and cause prices to rise sharply.

Our inability to predict future seasonal fertilizer demand accurately could result in excess inventory, potentially at costs in excess of market value, or product shortages.

        The fertilizer business is seasonal. The strongest demand for our products occurs during the spring planting season, with a second period of strong demand following the fall harvest. We and/or our customers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. Seasonality is greatest for ammonia due to the short application season and the limited ability of our customers and their customers to store significant quantities of this product. The seasonality of fertilizer demand results in our sales volumes and net sales being the highest during the spring and our working capital requirements being the highest just prior to the start of the spring season. Our quarterly financial results can vary significantly from one year to the next due to weather-related shifts in planting schedules and purchasing patterns. If seasonal demand exceeds our projections, our customers may acquire products from our competitors, and our profitability will be negatively impacted. If seasonal demand is less than we expect, we will be left with excess inventory that will have to be stored (in which case our results of operations will be negatively impacted by any related storage costs) and/or liquidated (in which case the selling price may be below our production, procurement and storage costs). The risks associated with excess inventory and product shortages are particularly acute with respect to our nitrogen fertilizer business because of the highly volatile cost of natural gas and nitrogen fertilizer prices and the relatively brief periods during which farmers can apply nitrogen fertilizers.

Our business is subject to risks involving derivatives, including the risk that our hedging activities might not prevent losses.

        We manage commodity price risk for our business. Although we implemented risk measurement systems that use various methodologies to quantify the risk, these systems might not always be followed or might not always work as planned. Further, such risk measurement systems do not in themselves manage risk, and adverse changes involving volatility, adverse correlation of commodity prices and the liquidity of markets might still adversely affect earnings and cash flows, as well as the balance sheet under applicable accounting rules, even if risks have been identified. Our ability to manage exposure to commodity price risk in the purchase of natural gas through the use of financial derivatives may be affected by limitations imposed by the covenants in the agreements governing our indebtedness.

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        In order to manage financial exposure to commodity price and market fluctuations, we utilize natural gas derivatives to hedge our exposure to the price volatility of natural gas, the principal raw material used in the production of nitrogen based fertilizers. In these hedging activities, we have used fixed-price, forward, physical purchase and sales contracts, futures, financial swaps and option contracts. Nevertheless, no single hedging arrangement can adequately address all risks present in a given contract or industry. Therefore, unhedged risks will always continue to exist.

We are wholly dependent on our Verdigris manufacturing facility, and any operational disruption could result in a reduction of sales volumes and could cause us to incur substantial expenditures.

        Our manufacturing operations may be subject to significant interruption if our Verdigris manufacturing facility were to experience a major accident or were damaged by severe weather or other natural disaster. In addition, our operations are subject to hazards inherent in nitrogen fertilizer manufacturing. Some of those hazards could cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and could result in suspension of operations and the imposition of civil or criminal penalties. We currently maintain property insurance, including business interruption insurance although there can be no assurance that we have sufficient coverage, or can in the future obtain and maintain sufficient coverage at reasonable costs.

We rely on third party providers of transportation services and equipment, which subjects us to risks and uncertainties beyond our control that may adversely affect our operations.

        We rely on railroad, trucking, pipeline, river barge and ocean vessel companies to transport raw materials to our manufacturing facilities, to deliver finished products to our distribution system and to ship finished products to our customers. These transportation operations, equipment and services are subject to various hazards, including extreme weather conditions, work stoppages, delays, accidents such as spills and derailments and other accidents and other operating hazards.

        These transportation operations, equipment and services are also subject to environmental, safety, and regulatory oversight. Due to concerns related to accidents, terrorism or the potential use of fertilizers as explosives, local, state and federal governments could implement new regulations affecting the transportation of our raw materials or finished products.

        If we are delayed or are unable to ship our finished products or obtain raw materials as a result of these transportation companies' failure to operate properly or obtain required permits, licenses or approvals, or if new and more stringent regulatory requirements are implemented affecting transportation operations or equipment, or if there are significant increases in the cost of these services or equipment, our sales revenues and/or cost of operations could be adversely affected. In addition, increases in our transportation costs, or changes in such costs relative to transportation costs incurred by our competitors, could have an adverse effect on our revenues and results of operations.

        The railroad industry has initiated various efforts to limit the railroads' potential liability stemming from the transportation of Toxic Inhalation Hazard, or TIH, materials, such as the anhydrous ammonia we transport to and from our manufacturing and distribution facilities. These efforts by the railroads include (i) requesting that the Surface Transportation Board, or STB, issue a policy statement finding that it is reasonable for a railroad to require a shipper to indemnify the railroads and carry insurance for all liability above a certain amount arising from the transportation of TIH materials; (ii) requesting that the STB approve an increase in the maximum reasonable rates that a railroad can charge for the transportation of TIH materials; and (iii) lobbying for new legislation or regulations that would limit or eliminate the railroads' common carrier obligation to transport TIH materials. If the railroads were to succeed in one or more of these initiatives, it could materially and adversely affect our operating

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expenses and potentially our ability to transport anhydrous ammonia and increase our liability for releases of our anhydrous ammonia while in the care, custody and control of the railroads.

        New regulations could also be implemented affecting the equipment used to ship our raw materials or finished products. The U.S. railroad industry is also proposing higher ammonia tank car performance standards which could require the modification or replacement of our leased tank car fleet. These higher standards could adversely impact our cost of operations and our ability to obtain an adequate supply of rail cars to support our operations.

We are subject to numerous environmental and health and safety laws, regulations and permits, as well as potential environmental liabilities, which may require us to make substantial expenditures.

        We are subject to numerous environmental and health and safety laws and regulations in the United States, including laws and regulations relating to the generation, treatment, storage, disposal and handling of hazardous substances and wastes; and the cleanup of hazardous substance releases. These laws include the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, the Toxic Substances Control Act and various other federal, state, provincial, local and international statutes.

        As a fertilizer company working with chemicals and other hazardous substances, our business is inherently subject to spills, discharges or other releases of hazardous substances into the environment. Certain environmental laws, including CERCLA, impose joint and several liability, without regard to fault, for cleanup costs on persons who have disposed of or released hazardous substances into the environment. Given the nature of our business, we have incurred, are incurring currently, and are likely to incur periodically in the future, liabilities under CERCLA and other environmental cleanup laws at our facility, adjacent or nearby third-party facilities or offsite disposal locations. The costs associated with future cleanup activities that we may be required to conduct or finance may be material. Additionally, we may become liable to third parties for damages, including personal injury and property damage, resulting from the disposal or release of hazardous substances into the environment.

        Violations of environmental and health and safety laws can result in substantial penalties, court orders to install pollution-control equipment, civil and criminal sanctions, permit revocations and facility shutdowns. Environmental and health and safety laws change rapidly and have tended to become more stringent over time. As a result, we have not always been and may not always be in compliance with all environmental and health and safety laws and regulations. Additionally, future environmental and health and safety laws and regulations or more vigorous enforcement of current laws and regulations, whether caused by violations of environmental and health and safety laws by us or other chemical fertilizer companies or otherwise, may require us to make substantial expenditures. Additionally, our costs to comply with, or any liabilities under, these laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

        From time to time, our production of anhydrous ammonia has resulted in accidental releases that have temporarily disrupted our manufacturing operations and resulted in liability for administrative penalties and claims for personal injury. Although, to date, our costs to resolve these liabilities have not been material, we could incur significant costs if our liability coverage is not sufficient to pay for all or a large part of any judgments against us, or if our carrier refuses coverage for these losses.

        Expansion of our operations is also predicated upon securing necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed material permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility and on our business, financial condition and results of operations.

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Future regulatory restrictions on greenhouse gas emissions or other environmental discharges in the jurisdictions in which we operate could materially adversely affect our operating results.

        There have been increased initiatives by various parties to legislate and/or regulate carbon emissions, including carbon dioxide. Our nitrogen operations produce substantial quantities of carbon dioxide in the chemical reactions that are necessary to produce anhydrous ammonia.

        In the United States, it is possible that greenhouse gas (GHG) emissions will be limited through federal legislation and/or regulatory action. In June 2009, the American Clean Energy and Security Act was passed by the U.S. House of Representatives. This legislation would establish an economy-wide cap and trade system for carbon emissions commencing in 2012. Emitters of GHGs would be required to have allowances to offset their GHG emissions and, over time, the cap on aggregate GHG emissions would decline. Similar legislation was introduced in the U.S. Senate in September 2009. The fertilizer industry likely would be affected by such a cap and trade system due to anticipated increases in the cost of natural gas fuel and feedstock resulting from its implementation and due to the cost of emission allowances. In addition, cap and trade proposals would likely increase the cost of electricity we use. At this time, we cannot predict whether legislation imposing limits on GHG emissions in the United States will be enacted.

        The Greenhouse Gas Mandatory Reporting Rule promulgated by the EPA requires our facility to monitor emissions beginning on January 1, 2010 and begin reporting on the previous year's emissions annually starting in 2011. In addition to the GHG reporting rule, which directly affects our facility, the EPA has issued or proposed other regulations which could eventually impact us, including potentially applying the Clean Air Act to regulate GHGs.

        Federal and/or state regulation of GHGs may require us to make changes in our operating activities that would increase our operating costs, reduce our efficiency, limit our output, require us to make capital improvements to our facilities, increase our costs for or limit the availability of energy, raw materials or transportation, or otherwise materially adversely affect our operating results. In addition, to the extent climate change restrictions imposed in countries where our competitors operate are less stringent than in the United States or Canada, our competitors could gain cost or other competitive advantages over us.

Acts of terrorism and regulations to combat terrorism could negatively affect our business.

        Like other companies with major industrial facilities, our plants and facilities may be targets of terrorist activities. These facilities store significant quantities of anhydrous ammonia and other items that can be dangerous if mishandled. Any damage to infrastructure facilities, such as electric generation, transmission and distribution facilities, or injury to employees, who could be direct targets or indirect casualties of an act of terrorism, may affect our operations. Any disruption of our ability to produce or distribute our products could result in a significant decrease in revenues and significant additional costs to replace, repair or insure our assets, which could have a material adverse impact on our financial condition and results of operations. In addition, due to concerns related to terrorism or the potential use of certain fertilizers as explosives, local, state, federal and foreign governments could implement new regulations impacting the security of our plants, terminals and warehouses or the transportation and use of fertilizers. These regulations could result in higher operating costs or limitations on the sale of our products and could result in significant unanticipated costs, lower revenues and/or reduced profit margins.

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CF and its affiliates are also engaged in fertilizer manufacturing.

        The partnership agreement does not prohibit CF and its affiliates, other than Terra Nitrogen GP Inc., its wholly-owned subsidiary and our general partner (our General Partner), from owning and operating nitrogen fertilizer manufacturing plants and storage and distribution assets or engaging in any businesses which could harm our business. In addition, CF, may acquire, construct or dispose of additional assets related to our business, without any obligation to offer us the opportunity to purchase or construct any of these assets.

We are dependent on CF and its employees for the success of our business.

        We are dependent on CF for our success in a number of respects. CF, through our General Partner, manages our business operations and, together with its affiliates, provides certain other services to us, including production, manufacturing, sales, customer service, distribution, accounting, legal, risk management, investor relations and other general and administrative services. 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, a higher level of debt could put CF at greater risk than us in the event business conditions deteriorate materially. Our results of operations and financial condition might be adversely affected by financial difficulties at CF, and default by them or their subsidiaries on their debt or their bankruptcy. Information regarding CF can be obtained in the various filings with the Securities and Exchange Commission, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Deterioration of global market and economic conditions could have a material adverse effect on our business, financial condition and results of operations.

        A continued slowdown of, or persistent weakness in, economic activity caused by the current recession could adversely affect our business in the following ways, among others: conditions in the current credit markets could impact the ability of our customers and their customers to obtain sufficient credit to support their operations; the failure of our customers to fulfill their purchase obligations could result in increases in bad debts and impact our working capital; and the failure of certain key suppliers or derivative counterparties could increase our exposure to disruptions in supply or to financial losses. The overall impact of the global economic downturn on us is difficult to predict, and our business could be materially adversely impacted.

We may be unable to renew our credit facility.

        Under our revolving credit facility, a change of control will occur if, among other such things, an individual or group acquires more than 35 percent of the outstanding voting shares of Terra. Such a change of control did occur upon the acquisition of Terra by CF, which constituted an event of default under the credit facility. A waiver of this covenant has been granted through September 30, 2010. We are currently considering options to replace the revolving credit facility. However, there can be no assurance that the facility can be replaced on acceptable terms.

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ITEM 6.    EXHIBITS

(a)   Exhibits:

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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.

Date: August 6, 2010

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