TERRA NITROGEN CO L P /DE, 10-K, 1997-03-07

TERRA NITROGEN CO L P /DE
10-K, 1997-03-07
AGRICULTURAL CHEMICALS

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FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1996.

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

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)

5100 East Skelly Drive, Suite 800
Tulsa, Oklahoma 74135
(Address of principal executive office) (Zip code)

Registrant's telephone number:
(918) 660-0050

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Name of Each Exchange on
Title of Each Class Which Registered
------------------- ----------------
Senior Preference Units New York Stock Exchange
Representing Limited
Partner Interests
Evidenced by Depositary Receipts

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

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

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

The aggregate market value of the registrant's Senior Preference Units
held by nonaffiliates as of the close of business on February 27, 1997 was
$280,614,171.

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<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I
Items 1.
and 2. Business and Properties....................................... 1
Item 3. Legal Proceedings............................................. 7
Item 4. Submission of Matters to a Vote of Unitholders................ 7

PART II

Item 5. Market for Registrant's Units and Related Unitholder Matters.. 8
Item 6. Selected Financial Data....................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Item 8. Financial Statements and Supplementary Data................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 16

PART III

Item 10. Directors and Executive Officers of the Registrant............ 17
Item 11. Executive Compensation........................................ 19
Item 12. Security Ownership of Certain Beneficial Owners and Management 24
Item 13. Certain Relationships and Related Transactions................ 25

PART IV

Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K........................................... 27

Signatures.............................................................. 31
</TABLE>
<PAGE>

TERRA NITROGEN COMPANY, L.P.

FORM 10-K

PART I

Items 1 and 2. Business and Properties

General

Terra Nitrogen Company, L.P. ("TNCLP") is a Delaware limited partnership that
conducts its operations through an operating partnership subsidiary, Terra
Nitrogen, Limited Partnership (the "Operating Partnership"). Terra Nitrogen
Corporation ("TNC"), a Delaware corporation, owns a combined 2.0% general
partner interest in, and serves as the general partner (the "General Partner")
of, both TNCLP and the Operating Partnership (collectively the "Partnership",
unless the context otherwise requires). TNC is an indirect, wholly owned
subsidiary of Terra Industries Inc. ("Terra"), a Maryland corporation. Terra,
through its various subsidiaries, is a leading marketer and producer of nitrogen
fertilizer, crop protection products, seed and services for agricultural, turf,
ornamental and other growers. Terra also produces nitrogen products and methanol
for industrial customers.

Ownership of TNCLP is comprised of the general partner interest and the
limited partner interests. Prior to December 31, 1996, the limited partner
interests consisted of 13,636,364 Senior Preference Units ("SPUs") and 5,172,414
Common Units. Terra and its subsidiaries owned 6,974,900 SPUs and all the Common
Units on December 31, 1996, and the balance of SPUs are currently traded on the
New York Stock Exchange under the symbol "TNH". The Senior Preference and
Common Units are referred to herein individually as a "Unit" and collectively as
"Units".

Pursuant to the provisions of the TNCLP limited partnership agreement, the
Preference Period for TNCLP ended on December 31, 1996, and holders of SPUs can
elect by March 31, 1997 to convert to Common Units. (See "Status of Units at end
of Preference Period").

Partnership products

The Partnership is one of the largest U.S. producers and distributors of
nitrogen fertilizer products, which are principally used by farmers to improve
the yield and quality of their crops. The Partnership's principal products
include ammonia, urea and urea ammonium nitrate solution ("UAN"). The
Partnership's product sales are heavily weighted toward UAN and all of its
products are sold on a wholesale basis. Although, to some extent, the various
nitrogen fertilizer products are interchangeable, each has its own distinct
characteristics which result in agronomic preferences among end users. Farmers
determine which type of nitrogen fertilizer to apply depending on the crop, soil
and weather conditions, regional farming practices and relative nitrogen
fertilizer prices.

The Partnership's sales mix for each of the years 1996, 1995 and 1994 was
(based on tons sold):
<TABLE>
<CAPTION>

1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Ammonia 13% 15% 19%
Urea 13% 15% 15%
UAN 74% 70% 66%
---- ---- ----
100% 100% 100%
</TABLE>

Ammonia. The Partnership produces ammonia, the simplest form of nitrogen
fertilizer and the feedstock for the production of most other nitrogen
fertilizers, at its two plants (the "Plants") located in Verdigris, Oklahoma
(the "Verdigris Plant") and Blytheville, Arkansas (the "Blytheville Plant").
Ammonia is produced by reacting natural gas with steam and air at high
temperatures and pressures in the presence of catalysts.

1
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Ammonia has a nitrogen content of 82% by weight and is the least expensive
form of fertilizer per unit of nitrogen. However, because it is a gas that must
be kept under pressure and refrigerated, ammonia is more costly to store, ship
and apply than other nitrogen fertilizer products and must be applied during a
shorter period of the growing season. Ammonia must be injected into the soil by
specialized equipment, and soil conditions often limit its application. In
addition, in certain areas, especially in lesser developed countries, dealers
and farmers lack the equipment necessary to store, ship and apply ammonia and
are required to use other forms of nitrogen fertilizer. Ammonia can be upgraded
to produce solid or liquid fertilizers, like urea and UAN, which are relatively
easier to transport, store and apply than ammonia.

Urea. The Partnership produces granular urea at the Blytheville Plant, by
upgrading a portion of its ammonia production. Solid urea is produced by
converting ammonia into liquid urea which is then dehydrated and turned into a
solid and either prilled or granulated. Prilled materials are the most common
form of solid urea. The granular form made by the Partnership may command a
modest price premium in certain markets because the consistency in size of the
granules (relative to prills) results in a more controllable spreading pattern
and better blending characteristics.

Urea has a nitrogen content of 46% by weight, the highest level for any solid
nitrogen product. Dry urea is used both as a direct application fertilizer and
as an ingredient in the dry bulk blending of mixed fertilizer grades. Urea is
transported and stored in bulk or in bags and is often blended by distributors
into customized fertilizers containing other nutrients.

UAN. The Partnership produces UAN at the Verdigris Plant and at the
Blytheville Plant by upgrading a portion of its ammonia production. UAN is
produced by combining liquid urea and ammonium nitrate in water. UAN is a liquid
fertilizer and, unlike ammonia, is odorless and does not need to be refrigerated
or pressurized for transportation or storage.

The nitrogen content of UAN is typically 28% to 32%. As a liquid, UAN has
many advantages over solid fertilizers and gaseous ammonia. UAN may be applied
more uniformly than non-liquid products and may be mixed with various
herbicides, pesticides and other nutrients, permitting the farmer to apply
several materials simultaneously rather than in separate applications, thus
reducing energy and labor costs. In addition, UAN, unlike ammonia, may be
applied from ordinary tanks and trucks and can be sprayed on, injected into the
soil, or applied through irrigation systems, throughout the growing season.

Marketing and distribution

The Partnership sells its products primarily in the Central and Southern
Plains and Cornbelt regions of the United States. The Partnership's two Plants
are located on waterways near the major crop producing and consuming areas of
the United States, where the Partnership has ready access to barge, truck and
rail transportation at both Plants and an ammonia pipeline at the Verdigris
Plant to transport product to its primary markets. As of December 31, 1996, the
General Partner marketed the Partnership's products through a distribution and
marketing organization of 31 persons, located in the field and at the
Partnership's headquarters in Tulsa, Oklahoma. For further information on the
combined organizations of the General Partner and its affiliates, see "Certain
Relationships and Related Transactions".

All of the Partnership's sales are at the wholesale level. The Partnership's
customers for fertilizer products are dealers, national farm retail chains,
distributors and other fertilizer producers and traders. National farm retail
chains have both distribution and application capabilities. Distributors operate
as wholesalers and sell directly to dealers and national farm retail chains,
who, in turn, sell directly to farmers. Many dealers maintain storage capacity
for year-round inventory as well as application equipment. The majority of the
Partnership's sales of nitrogen fertilizer is made to dealers. For the year
ended December 31, 1996, sales to Terra totalled $41.4 million, or 11.4% of the
Partnership's sales. For a description of the Partnership's sales to affiliates
of the General Partner, see "Certain Relationships and Related Transactions".

The Partnership exports UAN through an export marketing association comprised
of three domestic UAN producers.

2
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Transportation. The Partnership transports product primarily via barge and
railcar. Additionally, the Partnership uses trucks to transport smaller
quantities of product, and the Verdigris Plant distributes ammonia through the
MAPCO pipeline. In addition, various supply terminals and transportation
equipment are generally available for the use and benefit of the Partnership and
affiliates of the General Partner. The transportation equipment includes access
to approximately 2,150 leased railcars. The Partnership has access to
significant storage capacity throughout the Midwestern U.S. and other major
fertilizer consuming regions in the U.S. through these supply terminals. See
"Certain Relationships and Related Transactions".

Production facilities

The following table illustrates the Partnership's gross production capacity
and percentage of capacity utilized.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1995 1994
----- ----- ------
<S> <C> <C> <C>
Capacity (000s tons)
Ammonia 1,470 1,470 1,400
Urea 480 480 480
UAN 2,250 2,150 2,050
----- ----- -----
Total 4,200 4,100 3,930

Capacity Utilization* 102% 102% 97%
</TABLE>
* Capacity utilization is determined by dividing the gross tons of product
produced by the tons of capacity at expected operating rates and onstream
factors.

Verdigris Plant. The Verdigris facility is located at the Port of Catoosa,
in Rogers County, Oklahoma. On the Verdigris site are the Verdigris Plant and
the Port Terminal. The Verdigris Plant is owned in fee by the Partnership,
while the Port Terminal is leased from the Tulsa-Rogers County Port Authority.
The leasehold interest is scheduled to expire on April 30, 1999, and the
Partnership has the option to renew the lease for two additional, consecutive
terms of five years each. The Verdigris Plant consists of two ammonia plants,
two nitric acid plants and two UAN solution plants. The Verdigris Plant produces
primarily ammonia and UAN solution. In 1996, approximately 75 percent of its
ammonia production was converted into UAN. In addition, the Verdigris Plant
also contains carbon dioxide and argon recovery facilities. The Verdigris
Plant's sale of by-product carbon dioxide and argon reduces the cost of
production of nitrogen products. The Verdigris Plant delivers its products by
barge, truck, rail and pipeline.

Blytheville Plant. The Blytheville Plant is located in Mississippi County,
Arkansas, adjacent to the Mississippi River. The Blytheville Plant consists of
an anhydrous ammonia plant, a granular urea plant and a UAN solution plant. In
1996, approximately 68 percent of its ammonia was converted into granular urea
and UAN. The ammonia facility at the Blytheville Plant is leased from the City
of Blytheville at a nominal annual rental. The lease term is scheduled to
expire on November 30, 1999, and the Partnership has the option to extend the
lease for twelve successive terms of five years each at the same rental rate.
The Partnership has the unconditional right to purchase the Plant for a nominal
price at the end of the lease term (including any renewal term). The urea
facility is also leased from the City of Blytheville. The lease is scheduled to
expire on November 1, 1999, and the Partnership has the option to renew the
lease for four successive periods of five years each at a nominal annual rental.
The Partnership also has an option to purchase the property for a nominal price.
The Blytheville Plant has access to a distribution system which includes rail,
truck and barge transportation. This distribution network gives the Blytheville
Plant the flexibility to serve the Eastern U.S. fertilizer markets.

Terminal Facilities. The Partnership owns and operates four terminals used
in the storage and distribution of product to customers. The Dublin Terminal, a
UAN terminal owned by the Partnership in fee, is located in Henry and Wayne
Counties, Indiana. The Blair Terminal, an ammonia and UAN terminal facility in
which the Partnership holds a fee interest and a leasehold interest, is located
in Washington County, Nebraska. The Pekin Terminal, a UAN terminal in which the
Partnership holds a leasehold interest, is located in Tazewell

3
<PAGE>

County, Illinois. The Shattuc Terminal, a UAN terminal owned by the Partnership
in fee, is located in Clinton County, Illinois. The leasehold portions of both
the Blair Terminal and the Pekin Terminal properties are leased from Conoco Inc.
under a capital lease. The lease is scheduled to terminate on November 30, 2000.
The Partnership has an option to purchase these properties for a nominal price
at the end of the lease term. In addition, as of December 31, 1996, the
Partnership leased space in 59 terminals located in numerous states.

Raw materials

Natural gas is the primary raw material used in the production of ammonia and
is also the primary fuel used in the Partnership's ammonia production processes.
The Partnership purchases natural gas from unaffiliated sources. The purchase
and transportation of natural gas account for a large majority of the
Partnership's production costs, representing approximately 50% of total costs
and expenses. A significant increase in the price of natural gas that is not
recovered through an increase in nitrogen fertilizer prices would have a
material adverse effect on the Partnership's profitability and cash flow. Annual
gas usage in the Partnership's plants is approximately 56 million MMbtus
(million British Thermal Units).

The Partnership's natural gas procurement policy is to effectively fix or cap
the unit cost of approximately 40% to 80% of its natural gas requirements for
the upcoming 12 months and up to 50% of its natural gas requirements for the
subsequent two-year period using supply contracts, financial derivatives and
other forward pricing techniques in an attempt to gain some protection against
natural gas price increases on the spot market. Consequently, if natural gas
prices were to increase in a future period the Partnership may benefit from
these forward pricing techniques; however, if natural gas prices were to fall,
the Partnership may incur costs above the spot market price as a result of such
policies.

The settlement dates for such financial instruments are scheduled to coincide
with gas purchases during such future periods. These instruments reference
physical natural gas prices or appropriate NYMEX futures contract prices. The
contracts' physical prices are frequently based on the Henry Hub Louisiana
price, which is the most common and financially liquid location of reference for
financial derivatives related to natural gas; however, natural gas supplies for
the Partnership's two production facilities are purchased from various suppliers
at locations that are different from Henry Hub. This 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 change
in price of physical gas. The partnership has entered into firm transportation
contracts to minimize the risk of interruption or curtailment of natural gas
supplies. As of December 31, 1996, the Partnership had effectively fixed or
capped the price of a substantial portion of its natural gas requirements for
1997 and 1998. Liquidation of these financial derivatives based on December 31,
1996 market prices would have resulted in a gain of $20 million.

Verdigris Plant Supply. The Verdigris Plant obtains natural gas under a
transportation agreement with Oklahoma Natural Gas Company ("ONG") that will
expire in 2004. Under the provisions of the agreements, the Partnership has the
option to: (a) purchase all or part of its natural gas requirements from ONG at
prices periodically offered by ONG, (b) purchase natural gas from third parties
or (c) use any combination of (a) or (b). Except under certain limited
circumstances, all natural gas purchased by the Verdigris Plant must be
transported to the Plant on ONG's pipeline system under interruptible
transportation agreements.

Blytheville Plant Supply. The Partnership has agreements for the
transportation of natural gas to the Blytheville Plant. The primary term of the
agreements expires on September 30, 1998.

Seasonality and volatility

Nitrogen fertilizer is a global commodity and generally has no proprietary
distinction. The U.S. nitrogen fertilizer business is both seasonal and volatile
due to a number of factors that affect U.S. and world supply and demand.
Approximately 60% of all nitrogen fertilizer consumed in the United States is
applied on acreage used for growing corn and wheat. Because of its dependence
on the U.S. agricultural markets, the Partnership's business is seasonal to the
extent that the Partnership typically realizes higher prices and accordingly
more revenues on its products in the second quarter. The seasonality of the
partnership's business is the result of the U.S. agricultural growing season,
which imposes the need to build inventories for the annual peak periods of
fertilizer application and generally results in higher fertilizer prices during
such peak periods. Prices for

4
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fertilizer typically peak in the spring, drop in the summer, increase in the
fall (as depleted inventories are restored) through the spring.

In recent years, additional nitrogen fertilizer storage capacity has been
built which allows the Partnership's customers to purchase more product during
the fall and winter months. As a result, there has been a shift in Partnership
sales from the first and second quarters of the year to the third and fourth
quarters. While the third and fourth quarter revenues now represent a higher
percentage of the annual revenues, the second quarter continues to be the
Partnership's strongest quarter producing the highest revenues and earnings.

The Partnership's revenues are primarily dependent on U.S. agricultural
conditions, which can be volatile as a result of a number of factors, the most
important of which are weather patterns and conditions (particularly during
periods of high fertilizer application), current and projected grain stocks and
prices, grain export prices and supports, and the U.S. government's agricultural
policy. U.S. governmental policies were designed to regulate or influence the
number of acres planted, the level of grain inventories, the mix of crops
planted and crop prices in order to mitigate price and grain inventory
volatility. The enactment of the Federal Agriculture Improvement and Reform
("FAIR") act during 1996 ended government acreage reduction and production
control measures and allowed farmers more flexibility in planting. As a result,
additional acres were brought into production during 1996 and this increase in
acreage production, if sustained, could have a positive impact on the fertilizer
industry over the next few years. However, there can be no assurance that the
relatively high nitrogen fertilizer price levels achieved in 1996 will continue.

Competition

The nitrogen fertilizer industry is highly competitive. Competition takes
place largely on the basis of price, reliability and deliverability, since
fertilizer is a commodity. The relative cost and availability of natural gas,
the efficiency of production facilities and the ability to transport finished
goods to end users are important competitive factors. The Partnership's
domestic competitors include large farm cooperatives, other independent
fertilizer companies and subsidiaries or divisions of larger chemical or energy
companies. In addition, nitrogen fertilizers imported into the United States
compete with domestically produced nitrogen fertilizers, including those of the
Partnership. Some of the Partnership's principal competitors may have greater
total resources and may be less dependent on earnings from nitrogen fertilizer
sales than is the Partnership. Countries with inexpensive sources of natural
gas, particularly those in the former Soviet Union and the Middle East, can
produce nitrogen fertilizers at a low cost. However, political instability and
high transportation costs can serve as deterrents to exporting nitrogen
fertilizers to the U.S.

Tight market conditions and higher ammonia prices since the spring of 1994
have created interest in construction of new plants and expansion of existing
plants in the nitrogen fertilizer industry. Consequently, new nitrogen
fertilizer production facilities are anticipated to come on stream during the
next few years. If increasing demand is insufficient to absorb new supplies
generated by these facilities, profit margins could decline in future periods.

Environmental matters

The Partnership is subject to federal, state and local environmental, health
and safety laws and regulations, particularly relating to air and water quality.
In the course of its ordinary operations, the Partnership has and will generate
wastes, which may fall within the definition of "hazardous substances" under
federal or state laws. If such wastes have been disposed of at sites which are
targeted for cleanup by federal or state regulatory authorities, the Partnership
may be among those responsible under Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") or analogous state laws for all or
part of the costs of such cleanup.

The Partnership believes that the procedures currently in effect at all of its
facilities for the production, handling and transportation of all materials are
consistent with industry standards and in compliance with applicable
environmental, health and safety laws in all material respects. In addition, in
connection with the Asset Purchase Agreement dated February 7, 1990, between TNC
and FreeportMcMoRan Resource Partners, Limited Partnership ("FMRP"), as
amended, by which TNC purchased certain nitrogen fertilizer operations from FMRP
(the "1990 TNC Acquisition"), FMRP agreed to provide TNC a limited indemnity
(the "Freeport

5
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Indemnity") for certain environmental liabilities that are the subject of
official notice from a court or governmental agency. The Freeport Indemnity
encompasses all costs incurred in respect of all such liabilities associated
with the off-site disposal of hazardous substances or other solid wastes
generated by FMRP prior to the 1990 TNC acquisition's closing date, February 28,
1990.

Certain state regulatory agencies have enacted requirements to provide
secondary containment for bulk agricultural chemical storage facilities present
at the Partnership's terminals. It is expected that other states will adopt
similar requirements pursuant to federal mandate. The Partnership has commenced
construction of these facilities at its terminals, and estimates that the future
cost of complying with these regulations in 1997 and beyond will be
approximately $1.0 million.

The Partnership may be required to install additional air and water quality
control equipment, such as low nitrous oxide burners, scrubbers, ammonia sensors
and continuous emission monitors, at certain of its facilities in order to
maintain compliance with Clean Air Act and Clean Water Act requirements. These
equipment requirements are also typically applicable to competitors as well. The
Partnership estimates that the cost of complying with these requirements will be
approximately $2.5 million through 1998.

Based on its current knowledge, the Partnership does not expect any capital
expenditures relating to environmental matters to have a material adverse effect
on its results of operations, financial condition, capital resources, liquidity
or cash flow. There can be no assurance, however, that additional environmental
matters resulting in material liabilities or expenditures will not be discovered
or that, in the future, material expenditures for such matters will not be
required by changes in law.

Employees

The Partnership does not have any employees, officers or directors.

The General Partner is responsible for the management of the Partnership. As
of December 31, 1996, the General Partner had 361 employees. None of the
General Partner's employees are subject to collective bargaining agreements.
The General Partner considers its labor relations to be good.

Status of Units at end of Preference Period

Pursuant to the provisions of the TNCLP limited partnership agreement, the
Preference Period for TNCLP ended on December 31, 1996. Until March 31, 1997 the
holders of all SPUs have the right to elect to convert their SPUs into Common
Units on a one-for-one basis, effective as of December 31, 1996 by delivering to
the General Partner a conversion notice. Any Units for which a conversion notice
is not received on or prior to March 31, 1997 remain SPUs (see "Redemption").
Those units that remain SPUs and do not convert into Common Units will continue
to be entitled to the Minimum Quarterly Distribution but will not participate
with the Common Units in any additional distributions.

The Common Units have been approved for listing on the New York Stock Exchange
under the symbol "TNH". The SPUs will, if not delisted, be traded under the new
symbol "TNH PR". In the event that too few SPUs convert to Common Units and
therefore such Common Units do not meet the exchange listing requirements, only
SPUs owned by the General Partner and its affiliates may be converted into
Common Units, and SPUs held by all other holders will remain SPUs.

Redemption

SPUs that fail to convert to Common Units may be redeemed at the option of the
Partnership, exercised in the sole discretion of the General Partner, upon at
least 30 but not more than 60 days' notice at a price equal to Unrecovered
Capital plus accrued arrearages, if any. Unrecovered Capital, as further defined
in the Partnership Agreement, currently equals $21.50. If after giving effect to
an anticipated redemption, fewer than 1.0 million SPUs would be held by non-
affiliates of the General Partner, the Partnership must redeem all such SPUs if
it redeems any SPUs.

6
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Limited Call Right

If at any time less than 25% of the issued and Outstanding Units of any class
(Senior Preference or Common) are held by non-affiliates of the General Partner,
the Partnership may call, or assign to the General Partner or its affiliates its
right to acquire all such Outstanding Units held by non-affiliated persons.
TNCLP shall 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 twenty trading days closing prices as of the
date five days before the purchase is announced or (2) the highest price paid by
the General Partner or any of its affiliates for any unit within the 90 days
preceding the date the purchase is announced.

Item 3. Legal Proceedings

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

Item 4. Submission of Matters to a Vote of Unitholders

Not Applicable.

7
<PAGE>

PART II

ITEM 5. Market for Registrant's Units and Related Unitholder Matters

Prior to January 1, 1997, the SPUs of TNCLP were listed and traded on the
New York Stock Exchange under the symbol, TNH. The high and low sales prices of
the SPUs for each quarterly period for 1996 and 1995, as reported on the New
York Stock Exchange Composite Tape, were as follows:
<TABLE>
<CAPTION>

1996 1995
--------------------- ---------------------
Quarter High Low High Low
- ------- -------- ------- --------- ------
<S> <C> <C> <C> <C>
1st $47 1/4 $35 3/4 $30 1/2 $24 1/8
2nd 49 1/4 37 32 1/4 28 1/2
3rd 46 1/2 37 1/2 32 1/2 29 1/2
4th 45 3/4 41 1/2 38 7/8 31 5/8
</TABLE>

Based on information received from TNCLP's transfer and servicing agent,
the number of registered unitholders as of February 7, 1997 is 1,019. TNC owns
6,000,000 SPUs. TNC is the record holder of all 5,172,414 Common Units
outstanding on February 7, 1997.

The quarterly cash distributions paid to the Units and the General Partner
in 1996 and 1995 were as follows:
<TABLE>
<CAPTION>

Amount Per Amount Per Amount Per
Senior Preference Junior Preference Common Amount Distributed
Unit Unit Unit to General Partner
----------------- ----------------- ---------- ------------------
<S> <C> <C> <C> <C>
1996:
First quarter $1.91 * $1.91 $18,290,234
Second quarter 1.63 * 1.63 13,022,192
Third quarter 2.42 * 2.42 27,882,757
Fourth quarter 1.77 * 1.77 15,658,463

1995:
First quarter .66 .66 .66 253,343
Second quarter 1.14 1.14 1.14 3,794,993
Third quarter 1.73 1.73 1.73 14,903,814
Fourth quarter 1.47 1.47 1.47 9,995,096
</TABLE>

* On December 31, 1995, the Junior Preference Units automatically became
SPUs pursuant to the terms of the TNCLP limited partnership agreement.

Cash distributions are based on Available Cash for the quarter as defined
in TNCLP's limited partnership agreement. 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. There are a number of factors which affect the
amount of taxable income reported to unitholders including Partnership earnings,
capital spending and cash distributions.

Item 6. Selected Financial Data

SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

The following table sets forth the Partnership's historical financial and
operating data for each of the five years ended December 31, 1996. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes included elsewhere in this report.

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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------- ------------ ------------
(Dollars in Thousands, except Income per Unit and Average Realized Prices)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................... $362,730 $373,325 $300,269 $259,782 $243,397
Other income............... 408 650 2,565 968 1,360
-------- -------- -------- -------- --------
Total revenues............ 363,138 373,975 302,834 260,750 244,757
-------- -------- -------- -------- --------
Cost of goods sold.......... 177,502 187,615 193,541 190,192 170,033
-------- -------- -------- -------- --------
Gross profit.............. 185,636 186,360 109,293 70,558 74,724
Operating expenses.......... 13,035 16,840 20,000 17,645 17,414
-------- -------- -------- -------- --------
Operating income.......... 172,601 169,520 89,293 52,913 57,310
Interest expense............ (1,210) (1,748) (3,575) (4,015) (4,629)
Interest income............. 6,242 4,696 2,038 831 811
-------- -------- -------- -------- --------
Income before income taxes and
extraordinary expense..... 177,633 172,468 87,756 49,729 53,492
Income taxes................ -- -- -- -- --
-------- -------- -------- -------- --------
Income before extraordinary
expense................... $177,633 $172,468 $ 87,756 $ 49,729 $ 53,492
======== ======== ======== ======== ========
Income before extraordinary
expense per limited
partner unit.............. $ 6.35 $ 6.55 $ 4.57 $ 2.59 $ 2.79
======== ======== ======== ======== ========
Balance Sheet Data (at period end):
Net property, plant and
equipment................. $172,771 $177,358 $179,028 $184,629 $194,171
Total assets............... 306,668 338,123 316,645 286,355 290,234
Capital lease obligations
including including current
maturities................ 4,198 5,702 42,450 38,418 39,119
Partners' capital.......... 243,744 286,356 236,879 201,003 197,720
OPERATING DATA:
Production (000s tons):(a)
Ammonia--net of
upgrades............... 397 427 535 422 481
UAN..................... 2,286 2,158 1,890 1,974 1,918
Urea.................... 447 453 424 451 472
-------- -------- -------- -------- --------
Total production..... 3,130 3,038 2,849 2,847 2,871
Sales Volume (000s tons):(a)
Ammonia................. 394 451 541 453 472
UAN..................... 2,324 2,133 1,884 1,985 1,966
Urea.................... 419 455 418 460 472
-------- -------- -------- -------- --------
Total sales.......... 3,137 3,039 2,843 2,898 2,910
Average realized prices ($/ton)
Ammonia................. 186 199 174 115 106
UAN...................... 92 93 77 74 66
Urea..................... 179 187 147 132 134
</TABLE>

- ------------------------

(a) Sales volume differs from production due to the purchase and resale by the
Partnership of ammonia, UAN and urea as well as changes in the quantities
of inventory of each of the products of the Partnership.

9
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

General

The demand for nitrogen fertilizer is subject to changes in the economy and
agricultural conditions that can significantly affect prices and the
Partnership's profitability. See "Business and Properties Seasonality and
volatility" in Items 1 and 2. Demand for nitrogen fertilizer comes primarily
from the agricultural market with approximately 60% of all nitrogen fertilizer
consumed in the United States being applied to acreage for corn and wheat.

The U.S. is the primary market for the Partnership's products. Generally,
U.S. nitrogen demand is dependent on unpredictable factors such as weather,
agricultural policy, and planted acreage. While almost all the Partnership's
sales are domestic, nitrogen fertilizer is a global commodity and thus, the
worldwide relative balance of supply and demand for nitrogen fertilizers may
impact future Partnership sales.

Weather can have a significant effect on demand for the Partnership's
products. Weather conditions that delay or intermittently disrupt field work
during the planting season may result in fewer nitrogen applications. Similar
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 reduce the amount of fertilizer
purchased in the future.

The enactment of the FAIR act during 1996 ended government acreage reduction
and production control measures and allowed farmers more flexibility in
planting. As a result, additional acres were brought into production during
1996 and this increase in acreage production, if sustained, could have a
positive impact on the fertilizer industry over the next few years.

Increased foreign and domestic demand, the breakup of the Soviet Union and
relatively few nitrogen capacity additions up until 1996 have maintained a
favorable supply and demand balance in the industry since the spring of 1994.
This supply and demand balance has led to substantial increases in nitrogen
fertilizer prices and has vastly improved the margins of the Partnership's
business over the last two and one half years. Due to factors beyond the
control of the Partnership, there is no assurance that these favorable nitrogen
prices can be maintained.

Higher worldwide nitrogen demand and higher industrial demand in the U.S. have
produced a favorable market for nitrogen products in recent years. Worldwide
demand has been fueled by a growing population and improving economies in
developing countries. As per capita income has increased in some of these
developing countries, meat consumption has also increased. The animal feed for
poultry, hogs and cattle comes from grain production. Due to higher worldwide
and domestic demand for grains, lower than expected corn and wheat harvests in
1995 (somewhat offset by a good corn harvest in 1996), grain inventories are
near their lowest level in twenty years. As a result, corn acres planted in the
U.S. in 1997 may increase approximately 1 million acres over 1996 levels.

The Former Soviet Union ("FSU") has the world's second largest nitrogen
production capability and has a tremendous influence over the world markets,
accounting for more than one-third of the world's nitrogen exports in 1996. The
breakup of the Soviet Union and its shift from a communist state to a market-
driven economy resulted in several changes to the FSU fertilizer industry.
Under the current economy, FSU fertilizer producers lost the benefit of low cost
raw materials and rail transportation and are now faced with income taxes levied
by the government. Higher costs combined with lower internal consumption led
the FSU to cut back production in an attempt to maintain higher prices which, in
turn, has lowered exports.

The improved supply and demand balance and higher prices obtained for nitrogen
fertilizers since 1994 have allowed plants to run at or above 100% of nameplate
capacity. These favorable market conditions for nitrogen producers have created
interest in the construction of new plants and expansion of existing plants.
Consequently, new nitrogen fertilizer production facilities are anticipated to
come on stream during the next few years. If increasing demand is insufficient
to absorb new supplies generated by these facilities, profit margins could
decline in future periods.

10
<PAGE>

The Partnership's margins are also influenced by the cost of natural gas,
the primary raw material in the production of nitrogen fertilizers. In 1996,
natural gas costs accounted for approximately 50% of the Partnership's total
costs and expenses.

Results of operations

1996 compared with 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
SALES VOLUMES AVG. UNIT PRICE SALES VOLUMES AVG. UNIT PRICE
(000 TONS) ($/TON) (000 TONS) ($/TON)
------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C>
Ammonia 394 186 451 199
UAN 2,324 92 2,133 93
Urea 419 179 455 187
</TABLE>

Revenues for the year ended December 31, 1996 declined $10.8 million, or
3%, due to lower sales prices for all products. Also contributing to the lower
revenues were lower sales volumes for ammonia and urea partially offset by
higher UAN sales volumes. Erratic weather patterns reduced ammonia and urea
applications and prices during 1996. Wet weather in parts of the corn belt
during the 1996 planting season created unfavorable conditions for ammonia
application. The wet weather combined with reduced demand for use in the
manufacture of phosphate fertilizers and lower industrial demand caused ammonia
prices to decline approximately 7% from 1995. Urea and ammonia sales volumes
were also impacted by a scheduled turnaround performed at the Blytheville Plant
during the third quarter of 1996 and reduced shipments for wheat pre-plant
application during 1996. UAN sales volumes increased 9% primarily due to a 12%
increase in corn acres planted during 1996.

Cost of goods sold as a percentage of revenues decreased to 49% for 1996
from 50% in 1995, despite slightly lower sales prices, reflecting the favorable
impact of the Partnership's natural gas procurement activities. The
Partnership's forward pricing activities decreased its overall cost of natural
gas from market prices by $37.1 million during 1996. Conversely, natural gas
forward pricing activities increased cost by $18.2 million during 1995. Spot
natural gas prices were higher during 1996 due to cold weather during the first
quarter of 1996 which caused spot natural gas prices to increase and remain high
during the second and third quarters as natural gas storage levels were
replenished. Toward the end of 1996, spot natural gas prices increased
dramatically due to cold weather and an anticipation that storage levels may
need to be drawn down even further to meet increased demand.

Operating expenses decreased $3.8 million, or 23%, compared with 1995
primarily due to lower data processing, legal and employee benefit expenses
during 1996. Incentive compensation expenses were also lower due to changes in
profit sharing plans.

Interest expense declined $538,000 in 1996 due to the repayment of the
Partnership's $35 million term loan during the second quarter of 1995.

Interest income increased $1.5 million due to the higher level of cash and
short term investments.

The net income allocated to the General Partner increased to 33% for the
year ended December 31, 1996 due to the increase in Available Cash distributed
to the General Partner. According to the Agreement of Limited Partnership of
TNCLP, net income is allocated to the General Partner and the Limited Partners
in each taxable year in the same proportion that Available Cash for such taxable
year was distributed to the General Partner and the Limited Partners.
Distributions of Available Cash are made 98% to the Limited Partners and 2% to
the General Partner, except that the General Partner is entitled, as an
incentive, to larger percentage interests to the extent that distributions of
Available Cash exceed specified target levels that are significantly above the
Minimum Quarterly Distribution ("MQD") of $.605 per unit. Available Cash for
1996 increased $39.9 million over 1995 due primarily to the reduction in 1995
Available Cash as a result of the repayment of the Partnership's $35 million
term loan; an increase in 1996 Available Cash as a result of the impact of
TNCLP's participation in an accounts receivable securitization facility entered
into during the third quarter of 1996 and higher net income in 1996.

11
<PAGE>

1995 compared with 1994

Revenues for the year ended December 31, 1995 increased $73.1 million, or 24%,
primarily due to higher selling prices for all products and higher UAN sales
volumes, partially offset by lower ammonia sales volumes. Prices for ammonia,
urea and UAN ranged from approximately 14% to 27% higher during 1995 as a result
of a favorable market for nitrogen products. Ammonia sales volumes were down 17%
from the prior year as a result of less favorable weather conditions for
applying ammonia in 1995 and reduced corn acres planted.

Wet weather in the U.S. during 1995 shortened the growing season and reduced
grain harvests. The reduced yields and higher international demand for grains
dropped grain inventories to their lowest levels in twenty years. As a result,
demand for nitrogen products increased during the third and fourth quarters of
1995 in anticipation of increased corn and wheat plantings in the spring of
1996.

Cost of goods sold as a percentage of revenues decreased to 50% in 1995 from
65% in 1994 primarily due to higher sales prices and a 6% decrease in natural
gas costs.

Operating expenses decreased $3.2 million, or 16%, during 1995 compared with
1994 primarily due to the reduction of general and administrative expenses and
other synergies gained from the combination of the management and marketing
organizations of Terra and the General Partner. Incentive compensation expense
was also lower due to changes in the incentive plans during 1995.

Interest expense decreased $1.8 million during 1995 due to the prepayment of
the Partnership's $35 million term loan in the second quarter of 1995.

Interest income increased $2.7 million due to the higher level of cash and
short term investments generated from higher earnings in 1995.

Other income decreased $1.9 million from 1994 due primarily to the recovery of
$1.4 million of precious metals from a boiler replaced at TNCLP's Verdigris
plant during the third quarter of 1994.

Seasonality

The U.S. nitrogen fertilizer business is seasonal. Because of its dependence
on the U.S. agricultural markets, the Partnership's business typically realizes
greater volume and higher prices, and accordingly, more revenues on its products
in the second quarter. The seasonality of the Partnership's business is the
result of the U.S. agricultural growing season, which requires producers to
build inventories for the annual peak periods of fertilizer application and
generally results in higher fertilizer prices during such peak periods. Prices
for fertilizer typically peak in the spring, drop in the summer, increase in the
fall (as depleted inventories are restored) through the spring.

Natural gas costs

The Partnership's natural gas procurement policy is to effectively fix or cap
the unit cost of approximately 40% to 80% of its natural gas requirements for
the upcoming 12 months and up to 50% of its natural gas requirements for the
subsequent two-year period using supply contracts, financial derivatives and
other forward pricing techniques in an attempt to gain some protection against
natural gas price increases on the spot market. Consequently, if natural gas
prices were to increase in a future period, the Partnership may benefit from
these forward pricing techniques; however, if natural gas prices were to fall,
the Partnership may incur costs above the spot market price as a result of such
policies.

The settlement dates for such financial instruments are scheduled to coincide
with gas purchases during future periods. These instruments are based on a
designated price which is referenced to market natural gas

12
<PAGE>

prices or appropriate NYMEX futures contract prices. The Partnership frequently
uses 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 the Partnership's two production facilities
are purchased from various suppliers at locations that are different from Henry
Hub. This 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 change in the price of physical gas. As of December
31, 1996, the Partnership had effectively fixed or capped the price of a
substantial portion of its natural gas requirements for 1997 and 1998.
Liquidation of these financial derivatives based on December 31, 1996 market
prices would have resulted in a gain of $20 million.

Increases in the price of natural gas normally do not affect the level of
ammonia production. However, since the Partnership's gas procurement includes a
range of volumes and prices, it may be cost effective to eliminate certain
higher priced increments if the purchase of that increment would result in a
negative variable cash margin on the ammonia produced from such incremental gas
purchase. Under these circumstances, production levels may be curtailed.
Production rates can be reduced by up to 10-12% of capacity, thereby reducing
operating rates to 88-90% of capacity, without significantly affecting operating
efficiency.

Capital resources and liquidity

Net cash provided by operating activities for 1996 was $206.1 million, an
increase of $15.2 million over 1995, principally due to the proceeds received
from the accounts receivable securitization program entered into during the
third quarter of 1996 and higher net income. The Partnership's principal needs
for funds are for support of its working capital, distributions to partners and
capital expenditures. The Partnership intends to fund such needs from net cash
provided by operating activities. The Partnership believes that such sources of
funds will be adequate to meet the Partnership's working capital needs, make the
quarterly distributions to partners, and fund the Partnership's capital
expenditures during 1997.

Quarterly distributions to the partners of TNCLP are based on Available Cash
for the quarter as defined in the TNCLP Agreement of Limited Partnership.
Available Cash is defined generally as all cash receipts less all cash
disbursements, adjusted for changes in certain reserves established as the
General Partner determines in its reasonable discretion to be necessary.
Distributions paid to all partners were $220.2 million in 1996, including $105.4
million in distributions to holders of SPUs. On January 27, 1997, the
Partnership declared a distribution of $8.3 million ($.605 per unit) to holders
of the SPUs as of February 7, 1997 payable on February 28, 1997. This
distribution represents only the MQD for the quarter. The remainder of the
Available Cash for the quarter ended December 31, 1996 ($26.8 million, or at
least $.885 per Common Unit) will be paid April 30, 1997 to Common Unitholders
of record as of April 18, 1997 (including those holders of the SPUs that have
converted to Common Units) and to the General Partner. Nonconverting SPU holders
are not entitled to participate in cash distributions in excess of the MQD after
December 31, 1996 (the end of the Preference Period). Also on January 27, 1997,
the Partnership declared distributions of $3.1 million to Common Unitholders
($.605 per unit), and $232,000 to the General Partner (equaling 2% of total
distributions declared above, as required). There were no accumulated
distribution arrearages for the Senior Preference or Common Units as of December
31, 1996.

According to the terms of the TNCLP Agreement of Limited Partnership, the
Partnership is required to maintain a Reserve Amount to support distributions of
the MQD on the SPUs. The Reserve Amount is equal to the lesser of $18.5 million
or four MQDs on the SPUs. At December 31, 1996, the Reserve Amount remained
fully funded. After the conversion period expires on March 31, 1997, the Reserve
Amount will be maintained only to support four quarters of MQDs on all
nonconverted SPUs. It is anticipated that any reduction in the Reserve Amount
from its current level of $18.5 million will be available for cash distributions
in May 1997.

On August 20, 1996, TNCLP and certain affiliates of the General Partner,
through Terra Funding Corporation ("TFC"), an affiliate of the General Partner
and a limited purpose corporation, entered into an agreement with a financial
institution to sell an undivided interest in their accounts receivable.
Undivided interests in new receivables may be sold as amounts are collected on
previously sold amounts. This agreement accelerates the receipt of cash on
outstanding Partnership accounts receivable and should benefit the Partnership's
cash flow during the term of the agreement which expires in 1999.

13
<PAGE>

Financial condition

The demand deposit (which represents excess Partnership cash deposited with
Terra) declined $21.8 million from the December 31, 1995 balance primarily due
to higher Partnership distributions paid during 1996 partially offset by higher
cash generated from operations and lower debt payments in 1996.

Trade accounts receivable declined $25.6 million from the December 31, 1995
balance due to the accounts receivable securitization facility entered into in
the third quarter of 1996.

Accounts payable and payable to affiliates increased $18.6 million from the
December 31, 1995 balance primarily due to higher natural gas costs at the end
of 1996 compared with the end of 1995 and due to the timing of cash transfers
between the Partnership and its affiliates.

Customer prepayments declined $9.6 million from the December 31, 1995 balance
due to fewer customers participating in the prepay program at the end of 1996.
Certain customers prepay for product during the fall and winter months to take
advantage of favorable pricing conditions. The customers then take delivery of
the product as needed during the spring planting season.

Financing arrangements

The Partnership and certain affiliates of the General Partner are included
under an amended credit agreement (the "Credit Agreement") entered into by the
Operating Partnership and certain Terra subsidiaries with certain senior lenders
and Citibank, N.A. as agent. The Operating Partnership's facilities under the
Credit Agreement include a $25 million revolving credit facility. The revolving
credit facility expires December 31, 2000. At December 31, 1996, the Operating
Partnership had $25 million of unused borrowing capacity under its revolving
credit facility.

Loans under the Credit Agreement are guaranteed by Terra and certain
subsidiaries, including the General Partner, and are secured by pledges of the
stock of significant Terra subsidiaries, including the General Partner, and are
secured by substantially all of the assets of the Operating Partnership. The
security interest granted in the Operating Partnership's assets secure only its
revolving credit facility.

The Credit Agreement contains customary events of default, including those
relating to failure to pay amounts due, misrepresentation, failure to perform
covenants, bankruptcy or insolvency, litigation and unsatisfied judgments,
violations of the Employee Retirement Income Security Act of 1974, as amended,
and environmental laws and changes in control or ownership.

The Credit Agreement contains covenants customary for financings of this type
including limitations on capital expenditures, additional debt, liens,
receivables sales, investments, changes in lines of business, transactions with
affiliates and limitations on acquisitions. The Credit Agreement also includes
covenants requiring Terra to meet certain financial tests. The Partnership is
not required to meet such financial tests under the Credit Agreement. All
outstanding amounts under the revolving credit facility must be repaid and not
reborrowed for a period of 30 consecutive days in each year.

Capital expenditures

Capital expenditures totalled $9.1 million, $8.3 million and $8.9 million for
the years ended December 31, 1996, 1995 and 1994, respectively. Expenditures for
1996 and 1995 were primarily for equipment replacement, environmental controls,
efficiency improvements and minor capacity expansions. The 1994 spending
included capacity additions for UAN at the Verdigris Plant and installation of a
small UAN plant at Blytheville. In 1997, the Partnership plans to spend
approximately $16 million for capital expenditures. Plans for 1997 include urea
storage and loading improvements at the Blytheville plant and environmental
control and ammonia efficiency improvements at the Verdigris plant. The
Partnership believes that after 1997 capital spending will range between $6
million and $10 million per year in order to maintain current operating
efficiencies. The actual amount of capital expenditures may be greater if the
Partnership decides to expand nitrogen fertilizer capacity or increase the
efficiency of its facilities.

14
<PAGE>

Environmental matters

The Partnership is subject to federal, state, and local environmental, health
and safety laws and regulations, particularly relating to air and water quality.
In the course of its ordinary operations, the Partnership has and will generate
wastes which may fall within the definition of "hazardous substances" under
federal or state laws. The Partnership's production facilities and storage
locations require ongoing operating expenditures in order to remain in
compliance with environmental regulations. Environmental operating costs in
1996, 1995, and 1994 were approximately $2.3 million, $2.3 million and $2.2
million, respectively. These operating costs consist largely of such items as
electrical and chemical usage, waste disposal, laboratory analysis, fees for
outside consultants and contractors, and salaries for environmental employees.
Environmental capital expenditures in 1996, 1995, and 1994 were approximately
$1.4 million, $133,000, and $1.4 million, respectively.

Based on its current knowledge, the Partnership does not expect capital
expenditures relating to environmental matters to have a material adverse effect
on its results of operations, financial condition, capital resources, liquidity
or cash flow. Based on information presently available, the Partnership does not
expect that any further material capital expenditures will be required to comply
with existing environmental regulations. Based on such regulations, the
Partnership does not believe that it will be required to make any material
environmental remediation expenditures in the foreseeable future.

New accounting standards

The Partnership adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Assets to be Disposed of", during 1996. There have been no events or
changes in the Partnership's business environment which would indicate that the
carrying amount of its property, plant and equipment may not be recoverable
through future cash flows generated by such assets.

In June 1996, The Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities", which establishes accounting and reporting standards for such
transfers. The Partnership will adopt SFAS No. 125 effective January 1, 1997.
Management does not expect that there will be a material impact on the
Partnership's consolidated financial position or results of operations.

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of the Partnership together with the
reports thereon of Deloitte & Touche LLP, independent auditors, and Ernst &
Young LLP, independent auditors, appear on pages F-2 through F-19 of this
report. See Index to Financial Statements on page F-1.

15
<PAGE>

QUARTERLY FINANCIAL DATA (Unaudited)

Summarized quarterly financial data are as follows (in thousands, except per
unit amounts):
<TABLE>
<CAPTION>
1996 FIRST SECOND THIRD FOURTH
Quarter Quarter Quarter Quarter
------- -------- ------- -------
<S> <C> <C> <C> <C>

Revenues.............................. $89,448 $106,238 $82,257 $85,195
Gross profit.......................... 54,206 56,557 37,685 37,188
Income before extraordinary expense... 52,998 54,682 35,883 34,070
Income before extraordinary expense
per limited partnership unit...... 1.98 1.74 1.31 1.32
Net income............................ 52,998 54,682 35,883 34,070

1995 FIRST SECOND THIRD FOURTH
Quarter Quarter Quarter Quarter
------- -------- ------- -------

Revenues.............................. $89,846 $104,402 $85,474 $94,014
Gross profit.......................... 46,523 55,807 39,866 43,925
Income before extraordinary expense... 41,701 51,850 37,111 41,806
Income before extraordinary expense
per limited partnership unit...... 1.88 1.81 1.45 1.41
Net income............................ 41,701 51,850 37,111 41,806
</TABLE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

16
<PAGE>

PART III

Item 10. Directors and Executive Officers of the Registrant

TNC, in its capacity as General Partner, manages and controls the activities
of TNCLP and the Operating Partnership. Unitholders do not direct or
participate in the management or control of either TNCLP or the Operating
Partnership. The General Partner does not intend to establish any advisory
board or similar body to which the Unitholders would be entitled to elect
representatives.

The Partnership has no directors or executive officers. Set forth below is
certain information concerning the directors and executive officers of the
General Partner. The sole stockholder of the General Partner elects the
directors of the General Partner. All directors hold office until their
successors are duly elected and qualified or their earlier resignation or
removal. All officers of the General Partner serve at the discretion of the
directors.

<TABLE>
<CAPTION>
DIRECTORS: AGE POSITION WITH THE GENERAL PARTNER (POSITION WITH TERRA INDUSTRIES INC.)
<S> <C> <C>
Michael L. Bennett 43 Director (Executive Vice President and Chief Operating Officer,
Terra Industries Inc.)
Thomas Buck.............................. 69 Director
Lawrence S. Hlobik....................... 52 Chairman of the Board of Directors and President
(Senior Vice President, Terra Industries Inc.)
Francis G. Meyer......................... 45 Director (Senior Vice President and Chief Financial Officer, Terra Industries
Inc.)
W. Mark Rosenbury........................ 49 Director (Vice President--Business Development and Strategic Planning,
Terra Industries Inc.)
Robert W. Todd........................... 69 Director

PRINCIPAL OPERATING EXECUTIVE OFFICERS OF TERRA NITROGEN CORPORATION:
Bryan D. Evans........................... 41 Vice President--Marketing
Lawrence S. Hlobik....................... 52 Chairman of the Board of Directors and President
Charles J. Pero.......................... 48 Vice President--Human Resources
Steven A. Savage......................... 52 Senior Vice President--Manufacturing
Scott C. Shelton......................... 50 Vice President--Energy
Erik L. Slockers......................... 45 Vice President--Controller

OTHER EXECUTIVE OFFICERS OF TERRA NITROGEN CORPORATION (INCLUDING OFFICES WITH TERRA INDUSTRIES INC.):
Michael L. Bennett 43 Director (Executive Vice President and Chief Operating Officer,
Terra Industries Inc.)
Francis G. Meyer......................... 45 Director (Senior Vice President and Chief Financial Officer, Terra Industries
Inc.)
W. Mark Rosenbury........................ 49 Director (Vice President--Business Development and Strategic Planning,
Terra Industries Inc.)
John S. Burchfield....................... 56 (Vice President--Human Resources, Terra Industries Inc.)
Burton M. Joyce.......................... 55 (President and Chief Executive Officer, Terra Industries Inc.)
Paula C. Norton.......................... 51 (Vice President--Corporate and Investor Relations, Terra Industries Inc.)
Robert E. Thompson....................... 45 Vice President (Vice President--Controller, Terra Industries Inc.)
George H. Valentine...................... 48 Vice President and General Counsel (Senior Vice President, General Counsel
and Corporate Secretary, Terra Industries Inc.)
</TABLE>

The Audit Committee of the Board of Directors of TNC is comprised of Messrs.
Buck and Todd. The Audit Committee has authority to review policies and
practices of TNC dealing with various matters relating to the financial
condition and auditing procedures of TNC, the Partnership and the Operating
Partnership.

Mr. Bennett has been a director since March 1995. He has been Executive Vice
President and Chief Operating Officer of Terra since February 1997 and was
President of Terra Distribution Division from November 1995 to February 1997,
Senior Vice President of Terra from February 1995 to February 1997. He was
Senior Vice President, Distribution of Terra International from October 1994 to
February 1997. He was Vice President, Northern Division thereof from January
1992 to October 1994.

17
<PAGE>

Mr. Buck has been a director since March 1995. He was a Partner with Price
Waterhouse until retiring in July 1988.

Mr. Meyer has been Vice President of TNC since December 1994 and a director
since March 1995. He has been Senior Vice President and Chief Financial Officer
of Terra since November 1995. He was Vice President and Chief Financial Officer
of Terra from November 1993 to November 1995. He was Controller thereof from
August 1991 to November 1993.

Mr. Rosenbury has been a director since November 1994 and Vice President,
Business Development and Strategic Planning of Terra since November 1995. He was
Chairman of the Board of Directors and President of TNC from November 1994 to
February 1996. He was Executive Vice President of Terra from November 1993 to
November 1995. He was Chief Operating Officer of Terra from November 1993 to
November 1994. He was Vice President and Chief Financial Officer of Terra from
August 1991 to November 1993.

Mr. Todd has been a director since March 1995. He was Vice President, Chemical
Industry Services for Citibank, N.A. until retiring in June 1990.

Mr. Evans has been Vice President, Marketing since November 1996. He was Vice
President, Marketing of Tessenderlo Kerley from 1992 to November 1996.

Mr. Hlobik has been Chairman of the Board of Directors and President of TNC,
President of Terra Nitrogen Division and Senior Vice President of Terra since
February 1996. He was Senior Vice President, Marketing of TNC from February 1995
to February 1996. He was Vice President, Marketing for Arcadian Corporation from
1989 to February 1995.

Mr. Pero has been Vice President, Human Resources since February 1990.

Mr. Savage has been Senior Vice President, Manufacturing since April 1995. He
was Vice President, Engineering and Plant Manager, Verdigris facility from
February 1990 to April 1995.

Mr. Shelton has been Vice President, Energy since April 1995. From 1990 to
April 1995, he held various director and managerial positions in natural gas
supply and business development responsibilities for Williams Gas Marketing,
Williams Energy Company and Williams Field Services.

Mr. Slockers has been Vice President and Controller since September 1995. He
was Vice President, Supply and Distribution from March 1993 to September 1995.
He was Vice President, Marketing Administration, of TNC from February 1990 to
March 1993.

Mr. Burchfield has been Vice President, Human Resources of Terra since March
1992. He was Vice President, Human Resources of AON Corporation from January
1989 to August 1991.

Mr. Joyce has been President and Chief Executive Officer of Terra since May
1991.

Ms. Norton has been Vice President, Corporate and Investor Relations of Terra
since February 1995. She was Director, Corporate Relations of Terra from January
1993 to February 1995. She was Director, Corporate Communications of Universal
Foods Corp. prior thereto.

Mr. Thompson has been Vice President of TNC since December 1994 and Vice
President, Controller of Terra since November 1994. He was Vice President,
Finance and Controller of Ameritech Custom Business Services from April 1993 to
June 1994 and Controller of Ameritech Services, Inc. from October 1990 to April
1993.

Mr. Valentine has been Vice President and General Counsel of TNC since
December 1994 and Senior Vice President, General Counsel and Corporate Secretary
of Terra since November 1995 . He was Vice President, General Counsel and
Corporate Secretary of Terra from November 1993 to November 1995. He was
Assistant General Counsel of Household International, Inc. from February 1986 to
November 1993.

None of the executive officers or directors of TNC is related by blood,
marriage or adoption to any other executive officer or director of TNC.

18
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires the
Partnership's executive officers, directors and greater than ten percent
beneficial owners to file initial reports of ownership and reports of changes in
beneficial ownership with the Securities and Exchange Commission ("SEC") and the
New York Stock Exchange. Executive officers and directors are required by SEC
regulations to furnish the Partnership with copies of all Section 16(a) forms
they file. Based solely on a review of the copies of such forms furnished to the
Partnership and written representations from the Partnership's executive
officers and directors, all of the Partnership's officers, directors and greater
than ten percent beneficial owners made all required filings, except Mr. Erik L.
Slockers, an executive officer of the Partnership, who reported one transaction
late on a subsequently filed Form 4.

Item 11. Executive Compensation

TNCLP and the Operating Partnership have no executive officers or employees.
The following table sets forth certain summary information concerning the
combined compensation of the named executive officers of TNC, including
compensation from Terra (a portion of which is allocated to the Partnership).

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
---------------------------------------------- -------------------------- -------
RESTRICTED SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION WITH TNC YEAR SALARY/1/ BONUS/2/ COMPENSATION/3/ AWARDS/4/ OPTIONS(#) PAYOUTS COMPENSATION/8/
- ------------------------- ---- --------- -------- --------------- -------------- ---------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Burton M. Joyce 1996 $543,115 $450,000 $ 3,764 $1,828,125 /5/ 60,000 $24,682
Interim Chief Executive 1995 485,257 375,000 3,513 -- -- -- 21,985
Officer /9/ 1994 444,691 450,000 5,458 -- 250,000 -- 4,500

Lawrence S. Hlobik 1996 200,385 119,900 -- 558,750 /5/ 30,000 -- 8,807
Chairman of the Board 1995 143,180 85,781 -- 191,250 /6/ -- -- 86,516
of Directors and
President /9/

Charles J. Pero 1996 134,873 36,900 -- 29,250 /5/ 6,500 -- 5,220
Vice President, 1995 127,543 95,098 -- -- -- -- 5,739
Human Resources 1994 86,500 72,959 8,275 58,800 /7/ -- -- 6,325

Steven A. Savage 1996 167,411 50,800 -- 134,550 /5/ 11,300 -- 6,479
Senior Vice President, 1995 160,014 107,923 -- 140,250 /6/ -- -- 6,930
Manufacturing 1994 117,440 86,874 15,395 42,000 /7/ -- -- 7,872

Scott C. Shelton 1996 110,519 31,300 -- 24,863 /5/ 5,100 -- 4,725
Vice President, 1995 /10/
Energy

Erik L. Slockers 1996 125,891 32,900 -- 29,250 /5/ 6,000 -- 5,100
Vice President and 1995 117,864 92,662 -- -- -- -- 5,312
Controller 1994 96,500 75,878 8,279 58,800 /7/ -- -- 5,825
</TABLE>

/1/ "Salary" includes amounts deferred at the election of the named executive
officer under the Terra Industries Employees' Savings and Investment Plan
and Supplemental Deferred Compensation Plan.

/2/ "Bonus" includes amounts awarded under the Terra Industries Incentive
Award Program for Key Executives. Except for Messrs. Joyce and Hlobik, the
amounts shown as bonuses for 1995 and 1994 include payments pursuant to
the TNC Profit Sharing Plan and the TNC Supplemental Profit Sharing Plan,
which were computed on a fiscal year basis. The amounts of bonuses paid in
1995 and 1994 were related to the fiscal years July 1, 1994 to June 30,
1995 and July 1, 1993 to June 30, 1994, respectively. Effective January 1,
1995, the TNC Supplemental Profit Sharing Plan was terminated and as a
result, a pro rata payment was made for the period July 1, 1994 to
December 31, 1994 in the first quarter of 1995. Effective June 30, 1995,
the TNC Profit Sharing Plan was terminated. Approximately 40%, 45% and
100% of TNC salaries and bonuses for 1996, 1995 and 1994, respectively,
included in the table were reimbursed to TNC by the Partnership.

19
<PAGE>

/3// Except for Messrs. Joyce, Hlobik and Shelton consists of certain payments
under the 1993 Agricultural Minerals and Chemicals Inc. ("AMCI"), a former
parent, Management Equity Plan (the "1993 AMCI MEP") that represent
dividend equivalent payments made to holders of AMCI Options (as defined
below) in respect of a pro rata portion of the shares that were available
for future awards under the 1993 AMCI MEP. All such dividend equivalent
payments in 1994 were reimbursed to TNC by the Partnership. Dividends on
AMCI Restricted Shares (as defined below) and dividend equivalent payments
in respect of shares subject to outstanding AMCI Options are not included
above. In connection with a merger agreement (the "Merger Agreement") in
October 1994 between Terra and AMCI, the 1993 AMCI MEP was terminated. See
"1993 AMCI Management Equity Plan". Amounts for Mr. Joyce include tax
reimbursements or "gross ups". While the named executive officers enjoy
certain other perquisites, such perquisites do not exceed the lesser of
$50,000 or 10% of such person's salary and bonus.

/4// The restricted stock awards relate to Common Shares of Terra Industries,
not Terra Nitrogen Corporation or Terra Nitrogen Company, L.P. The number
of restricted Common Shares ("Restricted Shares") of Terra held, and the
value thereof (shown in parenthesis) at December 31, 1996 by each of the
Named Executive Officers is: Burton M. Joyce: 125,000 ($1,843,750);
Lawrence S. Hlobik: 55,000 ($811,250); Charles J. Pero: 4,800 ($70,800);
Steven A. Savage: 22,200 ($327,450); Scott C. Shelton: 7,700 ($113,575)
and Erik L. Slockers: 4,800 ($70,800). During the restricted period, a
holder of Restricted Shares is entitled to all benefits incidental to
ownership of the Common Shares, including voting the Common Shares and
receiving such dividends as from time to time may be declared by the Board
of Directors of Terra.

/5// On November 12, 1996, the Personnel Committee of Terra's Board of
Directors approved the grant of 125,000, 25,000, 2,000, 9,200, 1,700 and
2,000 Restricted Shares under its 1992 Stock Incentive Plan to each of
Messrs. Joyce, Hlobik, Pero, Savage, Shelton and Slockers, respectively.
The closing per share price of the Common Shares on the New York Stock
Exchange ("NYSE") on the date of award was $14.625. The restrictions lapse
(i) if the executive remains employed by the Corporation until November
12, 2005 or (ii) with respect to 25%, 25% and 50% of these Restricted
Shares if, prior to November 12, 2001, the 30 business day average closing
price of the Common Shares on the NYSE is at least $20.50, $22.50 and
$24.625 per share, respectively. The restrictions lapse earlier in the
event of a change in control. See "Employee Contracts and Termination of
Employment and Change in Control Arrangements".

Mr. Hlobik also received a grant of 15,000 Restricted Shares as approved
by the Personnel Committee on February 19, 1996. The closing per share
price of the Common Shares on the NYSE on the first trading day following
the date of award was $12.875. The restrictions lapse with respect to 50%,
25% and 25% of these Restricted Shares if, prior to February 20, 2002, the
30 business day average closing price of the Common Shares on the NYSE is
at least $16.375, $18.25 and $20.00 per share, respectively. The
restrictions lapse earlier in the event of a change in control. See
"Employee Contracts and Termination of Employment and Change in Control
Arrangements".

/6// On February 16, 1995, 15,000 and 11,000 Restricted Shares were granted to
each of Messrs. Hlobik and Savage, respectively. The closing per share
price of the Common Shares on the NYSE on the first trading day following
the date of award was $12.75. The restrictions lapse with respect to 50%,
25% and 25% of these Restricted Shares if, prior to June 16, 2001, the 30
business day average closing price of the Common Shares on the NYSE is at
least $16.25, $18.125 and $19.875 per share, respectively. The
restrictions lapse earlier in the event of a change in control. See
"Employee Contracts and Termination of Employment and Change in Control
Arrangements".

/7// On November 2, 1994, the Personnel Committee of Terra's Board of Directors
approved the grant of 5,600, 4,000 and 5,600 Restricted Shares to each of
Messrs. Pero, Savage and Slockers, respectively. The closing per share
price of the Common Shares on the NYSE on the date of award was $10.50.
The restricted period terminated with respect to 50% of the Restricted
Shares on October 10, 1996 after satisfying certain stock performance
thresholds. The Restricted Shares vest with respect to an additional 25%
if, prior to February 28, 2001, the 30 business day average closing price
of the Common Shares on the NYSE is at least $15.875 per share and with
respect to the remaining 25% if, prior to February 28, 2001, the 30
business day average price is at least $17.625 per share. The restrictions
lapse earlier under certain circumstances involving a change in control.
See "Employee Contracts and Termination of Employment and Change in
Control Arrangements".

/8// "All Other Compensation" includes amounts contributed, allocated or
accrued for the named executive officers under Terra's Employees' Savings
and Investment Plan and Supplemental Deferred Compensation Plan. Prior to
1995, includes employer contributions under the TNC Employees' Savings
Plan, the TNC Supplemental Employees' Savings Plans and term life
insurance premiums. All such amounts under a TNC plan or arrangement were
reimbursed to TNC by the Partnership.

20
<PAGE>

/9/ Mr. Joyce served as Interim Chief Executive Officer of TNC from November
1995 to February 1996. Mr. Hlobik became Chairman of the Board of
Directors and President of TNC in February 1996.

/10/ Mr. Shelton was hired during 1995 and his total annual compensation for
1995 was below the threshold for disclosure in this table.

1993 AMCI Management Equity Plan

As a part of a 1993 AMCI recapitalization, AMCI adopted the 1993 AMCI MEP,
under which options ("AMCI Options") were granted to purchase shares of AMCI
Common Stock or the right to purchase restricted shares of AMCI Common Stock
("AMCI Restricted Shares") was offered to officers and key employees of AMCI and
its subsidiaries, including TNC. Each AMCI Option represented the right to
purchase one share of AMCI Common Stock. The maximum number of shares of AMCI
Common Stock that could have been issued in connection with AMCI Options or as
AMCI Restricted Shares was 3,056,838 (subject to adjustment), which constituted
15.0% of the fully diluted common equity of AMCI prior to the consummation of
the Merger Agreement.

Prior to the consummation of the Merger Agreement, Management Stockholders
owned 272,672 AMCI Restricted Shares and 1,833,131 AMCI Options. Such AMCI
Options had an exercise price of $10.73 per share. In the event that cash
dividends were paid on the outstanding AMCI Common Stock, each holder of an
outstanding AMCI Option was entitled, pursuant to the 1993 AMCI MEP, to receive
in cash a dividend equivalent payment in respect of the shares subject to such
AMCI Option and an additional dividend equivalent payment in respect of a pro
rata portion of the shares, if any, available at such time for future awards of
AMCI Options or AMCI Restricted Shares under the 1993 AMCI MEP. Dividend
equivalent payments were made at the same rate as cash dividends were paid on
outstanding shares.

In connection with the Merger Agreement in October 1994, the 1993 AMCI MEP was
terminated and each share of AMCI Common Stock was converted into the right to
receive $21.2065 in cash and each share of AMCI Common Stock subject to a stock
option was cancelled and converted into the right to receive $10.4765 in cash
(calculated as $21.2065 less the exercise price of $10.73 per share under each
such option). None of the stock option expense incurred by the General Partner
as a result of the Merger Agreement was charged to the Partnership.

Stock Options

The following table contains information concerning the grant of options to
purchase Terra Industries' Common Shares granted in 1996 under the Terra
Industries' 1992 Stock Incentive Plan to the named executive officers. No stock
appreciation rights were granted under the Plan during fiscal year 1996.

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>

INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM /2/
% of Total
NUMBER OF OPTIONS GRANTED
OPTIONS TO EMPLOYEES EXERCISE OR BASE EXPIRATION
NAME GRANTED IN 1996 /1/ IN 1996 PRICE PER SHARE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Burton M. Joyce 60,000 11.2% $14.625 11/12/06 $551,855 $1,398,509
Lawrence S. Hlobik 30,000 5.6 14.625 11/12/06 275,928 699,255
Charles J. Pero 6,500 1.2 14.625 11/12/06 59,784 151,505
Steven A. Savage 11,300 2.1 14.625 11/12/06 103,933 263,386
Scott C. Shelton 5,100 1.0 14.625 11/12/06 46,908 118,873
Erik L. Slockers 6,000 1.1 14.625 11/12/06 55,186 139,851
</TABLE>

21
<PAGE>

/1/ The Options vest in one-third increments on the business day following
each of the first, second and third anniversary of the date of grant. The
options are exercisable with respect to all of the Common Shares set forth
above following a change in control. See "Employee Contracts and
Termination of Employment and Change in Control Arrangements".

/2/ The amounts reflected in the table represent assumed rates of appreciation
only. Actual gains, if any on stock options exercised by the named
executive officers depend on the future performance of the Terra
Industries' Common Shares, overall market conditions as well as continued
employment.

Option Year-End Value Table

The following table provides information concerning the exercise of stock
options during 1996 and unexercised options to purchase Terra Industries' Common
Shares granted under the 1983 Stock Option Plan and the 1987 and 1992 Stock
Incentive Plans of Terra Industries. None of the named executive officers
exercised any stock options during 1996.
<TABLE>
<CAPTION>

NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT DECEMBER 31, 1996 OPTIONS AT DECEMBER 31, 1996 /1/
Name Exercisable Unexercisable Exercisable Unexercisable
------------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Burton M. Joyce 575,000 185,000 $4,655,000 $538,750
Lawrence S. Hlobik -0- 30,000 -0- 3,750
Charles J. Pero -0- 6,500 -0- 813
Steven A. Savage -0- 11,300 -0- 1,413
Scott C. Shelton -0- 5,100 -0- 638
Erik L. Slockers -0- 6,000 -0- 750
</TABLE>

/1/ Based on the closing price on the New York Stock Exchange-Composite
Transaction of Terra Industries' Common Shares on December 31, 1996
($14.75).

Pension Plan

In connection with the Merger Agreement, the AMCI Pension Plan was merged into
the Terra Industries Inc. Employees' Retirement Plan (the "Terra Retirement
Plan") effective December 31, 1994. Vesting service and benefit service that
were earned under the AMCI Pension Plan were credited under the terms of the
Terra Retirement Plan.

The following table shows, for employees retiring in 1996, the estimated
annual retirement benefit payable on a straight life annuity basis under Terra's
Retirement Plan and Terra's Excess Benefit Plan, on a non-contributory basis,
which covers Burton M. Joyce and certain other employees of Terra, at various
levels of accrued service and compensation.
<TABLE>
<CAPTION>
Years of Credited Service
-------------------------
Remuneration 5 10 15 20 25 30
------------ ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 150,000 $12,347 $ 24,695 $ 37,042 $ 49,390 $ 61,737 $ 74,084
250,000 21,097 42,195 63,292 84,390 105,487 126,584
500,000 42,972 85,945 128,917 171,890 214,862 257,834
750,000 64,847 129,695 194,542 259,390 324,237 389,084
1,000,000 86,722 173,445 260,167 346,890 433,612 520,334
</TABLE>

"Compensation" under Terra's Retirement Plan includes all salaries and wages
paid to a participant, including bonuses, overtime, commissions and amounts the
participant elects to defer under the Terra Employees' Savings and Investment
Plan. Covered earnings are limited by Section 401 (a)(17) of the Internal
Revenue Code ("Code") to $150,000 in 1996. The above benefits are subject to the
limitations of Section 415 of the Code, which, in 1996, provided for a maximum
annual payment of approximately $120,000. Under

22
<PAGE>

Terra's Excess Benefit Plan, however, Terra will supplement those benefits so
that the amount the participant will receive will be equal to the amount that
would have been received under Terra's Retirement Plan but for such limitations.
"Compensation" under the Excess Benefit Plan also includes amounts deferred
under the Supplemental Deferred Compensation Plan. Eligible compensation for
Burton M. Joyce as of the end of the last calendar year is $918,115 and the
estimated years of service for Mr. Joyce is 10.

Certain named executive officers and certain other employees are entitled
to the estimated annual retirement benefit under the Retirement Plan and Excess
Benefit plan as set forth in the following table.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Years of Credited Service
--------------------------------------------------------------
Remuneration 5 10 15 20 25 30
- ------------ ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 150,000 $10,847 $ 21,695 $ 32,542 $ 43,390 $ 54,237 $ 65,084
250,000 18,597 37,195 55,792 74,390 92,987 111,584
500,000 37,972 75,945 113,917 151,890 189,862 227,834
750,000 57,347 114,695 172,042 229,390 286,737 344,084
1,000,000 76,722 153,445 230,167 306,890 383,612 460,334
- --------------------------------------------------------------------------------------
</TABLE>

Eligible compensation for the following named executive officers as of the end
of the last calendar year is: Mr. Hlobik: $286,166; Mr. Pero: $229,971; Mr.
Savage: $275,334; Mr. Shelton: $110,519; and Mr. Slockers: $218,532. The
estimated years of service for each such officer is as follows: Mr. Hlobik: 2,
Mr. Pero: 10, Mr. Savage: 10, Mr. Shelton: 2 and Mr. Slockers: 10.

Eligible compensation for each of the named executive officers includes the
salary paid in 1996 to each of the named executive officers plus the bonus paid
in 1996 to such executive officers for service to the Corporation and its
subsidiaries in 1995. Amounts reported in the table entitled "Summary
Compensation Table" for 1996 include the salary paid to each of the named
executive officers in 1996 plus the bonus paid to such executive officers in
1997 for service to the Corporation and its subsidiaries in 1996.

EMPLOYEE CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS

Stock awards granted after October 1996 to the named executive officers
automatically vest or become exercisable in the event of any of the following
changes in control of Terra Industries (the "Corporation"): (i) any person or
group of persons (other than Minorco and its affiliates) acquires beneficial
ownership of the outstanding securities in an amount having, or convertible into
securities having, 25% or more of the ordinary voting power for the election of
directors of the Corporation, provided that this 25% beneficial ownership
trigger shall apply only when Minorco and its affiliates no longer own 50% or
more of the voting shares of the Corporation; (ii) during a period of not more
than 24 months, a majority of the Board of Directors of the Corporation ceases
to consist of the existing membership or successors nominated by the existing
membership or their similar successors; (iii) all or substantially all of the
individuals and entities who were the beneficial owners of the Corporation's
outstanding securities entitled to vote do not own more than 60% of such
securities in substantially the same proportions following a shareholder
approved reorganization, merger, or consolidation; or (iv) shareholder approval
of either (A) a complete liquidation or dissolution of the Corporation or (B) a
sale or other disposition of all or substantially all of the assets of the
Corporation, or a transaction having a similar effect.

Stock awards granted prior to November 1996 automatically vest or become
exercisable beginning on the day that any such officer's employment with the
Corporation is terminated involuntarily or such officer's responsibilities or
compensation are substantially reduced, if such termination or reduction occurs
within twelve months of the date on which any person or group of persons acting
in concert (other than Minorco and its affiliates) acquires beneficial ownership
of the outstanding securities of the Corporation in an amount having, or
convertible into securities having, 50% or more of the ordinary voting power for
the election of directors of the Corporation.

BOARD OF DIRECTORS COMPENSATION

Independent directors of TNC receive an annual retainer fee of $15,000 for
their directorship, plus a fee of $1,000 for each TNC board meeting attended and
each Audit Committee meeting attended. No other director of TNC receives any
compensation for serving as a director.

23
<PAGE>

Compensation Committee Interlocks and Insider Participation

Since the merger of AMCI into Terra, TNC has not had a compensation committee
and executive officer compensation decisions with respect to TNC have been made
by Terra and, in the case of those TNC executive officers who are key employees
of Terra, by the Personnel Committee of the Board of Directors of Terra, none of
the members of which are employees of Terra or its subsidiaries.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The entire general partner interest in both TNCLP and the Operating
Partnership is owned by TNC and certain limited partner interests in TNCLP are
owned by TNC, 5100 East Skelly Drive, Suite 800, Tulsa, Oklahoma 74135. All
the outstanding capital stock of TNC is owned by Terra Capital, Inc., an
indirect, wholly-owned subsidiary of Terra. The stock of TNC is pledged as
security under the Credit Agreement. See "Financing arrangements" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Terra Capital, Inc. also owns 974,900 SPUs of TNCLP. Terra and its
subsidiaries are engaged in certain transactions with the Partnership described
under the caption "Certain Relationships and Related Transactions" below.

The capital stock of Terra is owned, as of December 31, 1996, in part as
follows: 49.5% by Taurus International S.A. and 7.2% by Taurus Investments S.A.
Each of Taurus International S.A. and Taurus Investments S.A. is a company
incorporated under the laws of Luxembourg as a societe anonyme and is wholly
owned by Minorco. Minorco is a company incorporated under the laws of Luxembourg
as a societe anonyme and is an international natural resources company with
operations in gold, base metals, industrial minerals, paper and packaging and
agribusiness. Minorco's address is 9 rue Sainte Zithe, L-2763 Luxembourg City,
Grand Duchy of Luxembourg. The capital stock of Minorco is owned in part as
follows: approximately 45.8%, directly or through subsidiaries, by Anglo
American Corporation of South Africa Limited ("Anglo American"), a publicly held
mining and finance company, and approximately 22.6%, directly or through
subsidiaries, by De Beers Centenary AG ("Centenary"), a publicly held Swiss
diamond mining and investment company. Approximately 38.5% of the capital stock
of Anglo American is owned, directly or through subsidiaries, by De Beers
Consolidated Mines Limited ("De Beers"), a publicly held diamond mining and
investment company. Approximately 29.4% of the capital stock of Centenary and
approximately 32.5% of the capital stock of De Beers is owned, directly or
through subsidiaries, by Anglo American. De Beers owns approximately 9.5% of
Centenary.

Mr. Nicholas F. Oppenheimer, Deputy Chairman and a director of Anglo American,
Centenary and De Beers, and a director of Minorco, and Mr. Henry R. Slack, a
director of Terra, Chief Executive, President and a director of Minorco and a
director of Anglo American, have indirect partial interests in approximately 7%
of the outstanding shares of Minorco and approximately 8% of the outstanding
shares of Anglo American. Also, Mr. Basil T.A. Hone, a director of Terra,
beneficially owns 3,000 Minorco Ordinary Shares, and 1,000 Anglo American
Ordinary Shares, each constituting less than one percent of the outstanding
shares of the respective issuers. Mr. Edward G. Beimfohr, Mr. David E. Fisher ,
Mr. Anthony W. Lea and Mr. William R. Loomis, Jr. are directors of Terra and
Minorco. Mr. Fisher is also a director of Taurus International S.A. and Taurus
Investments S.A. Mr. Lea is also a director of Anglo American and Taurus
Investments S.A.

Set forth on the following page is certain information concerning the
beneficial ownership, as of December 31, 1996, of the TNCLP SPUs and the Terra
Industries Common Shares, by each person known to TNC to be a beneficial owner
of more than 5% of the TNCLP SPUs, by each director of TNC, by each of the Named
Executive Officers of TNC, and by all directors and executive officers of TNC as
a group.

24
<PAGE>

NUMBER OF TERRA
NUMBER OF PERCENT OF COMMON SHARES PERCENT OF
NAME UNITS /1/ CLASS BENEFICIALLY OWNED /1/ CLASS
---- --------- ----------- ---------------------- ----------
<S> <C> <C> <C> <C>

Terra Nitrogen Corporation /2// 6,000,000 44% -- --
5100 East Skelly Drive
Tulsa, Oklahoma 74135
Terra Capital, Inc. /2// 974,900 7% -- --
600 Fourth Street
Sioux City, Iowa 51101
Michael L. Bennett -- -- 66,704 *
Thomas Buck -- -- -- --
Lawrence S. Hlobik -- -- 56,010 *
Burton M. Joyce -- -- 794,665 /3 *
Francis G. Meyer -- -- 102,268 /3/ *
Charles J. Pero 750 * 5,660 *
W. Mark Rosenbury -- -- 148,450 /3/ *
Steven A. Savage 4,000 * 25,561 *
Scott C. Shelton -- -- 8,337 *
Erik L. Slockers 1,800 * 10,742 *
Robert W. Todd -- -- -- --
All directors and executive officers
as a group (16 persons) 6,550 * 1,382,617 /3/ *
-------------------------
</TABLE>

*Represents less than 1% of class.

/1/ Each has sole voting and investment power of all the securities
indicated. The number of Terra Common Shares shown also reflect the
ownership of certain restricted Common Shares subject to certain
performance related vesting conditions and Common Shares under Terra's
Employees' Savings and Investment Plan as of December 31, 1996.

/2/ Each of Terra Nitrogen Corporation and Terra Capital, Inc. is an
indirect, wholly owned subsidiary of Terra Industries Inc. Terra Nitrogen
Corporation also owns 5,172,414 Common Units. See "Status of Units at end
of Preference Period" in Items 1 and 2.

/3/ The number of Terra Industries Common Shares shown as beneficially owned
by Messrs. Joyce, Meyer, Rosenbury and by all directors and executive
officers as a group, include 575,000, 21,700, 61,000 and 657,700 Common
Shares, respectively, as to which such person or group had the right to
acquire beneficial ownership pursuant to the exercise, on or before April
30, 1997, of employee stock options. No other individual listed held any
employee stock options that are exercisable on or before April 30, 1997.

ITEM 13. Certain Relationships and Related Transactions

The General Partner does not receive a management fee or similar
compensation in connection with its management of the Partnership. Pursuant to
TNCLP's limited partnership agreement and the Operating Partnership's limited
partnership agreement, the General Partner receives:

(i) distributions in respect of its 2% General Partner interest on a
combined basis in TNCLP and the Operating Partnership (See "Market for
Registrant's Units and Related Unitholders Matters");

(ii) distributions in respect of its ownership of limited partner interests
of TNCLP;

(iii) incentive distributions payable to the General Partner out of
TNCLP's Available Cash (as defined) in the event quarterly distributions
exceed specified target levels; and

(iv) reimbursement for all direct and indirect costs and expenses incurred
on behalf of the Partnership, all general and administrative expenses
incurred by the General Partner or its affiliates for or on behalf of the
Partnership and all other expenses necessary or appropriate to the conduct
of the business of, and reasonably allocable to, the Partnership.

Such reimbursement includes the costs of compensation and employee benefit
plans properly allocable to the Partnership. Because certain of the plans are
incentive based, the maximum amount to be reimbursed by the Partnership under
such plans cannot be determined in advance. For the years ended December 31,
1996,

25
<PAGE>

1995 and 1994, the General Partner was entitled to reimbursement in the
amount of $25.9 million, $29.1 million and $36.6 million (including $3.7 million
for 1994 of compensation expense related to the 1993 AMCI MEP), respectively,
for the direct and indirect costs and expenses related to the business
activities of the Partnership.

Effective January 1,1995, TNC and Terra entered into an administrative
services agreement whereby TNC provides certain general and administrative
services for certain Terra affiliates. Certain costs and expenses incurred by
TNC for providing such services are charged (based on cost) to such affiliates,
including the Partnership. Such expenses charged to the Partnership were $7.9
million and $12.4 million for 1996 and 1995, respectively.

Beaumont Methanol, Limited Partnership ("BMLP") formerly a subsidiary of
AMCI and now a subsidiary of Terra, and TNC, were parties to an administrative
services agreement that was terminated effective January 1, 1995, pursuant to
which TNC provided (based on cost) all administrative support services required
by BMLP. BMLP paid TNC a total of $612,000 for such services for the year ended
December 31, 1994.

Effective January 1, 1995, under a general and administrative services
agreement between TNC and Terra, certain management and other services,
including, advertising, accounting, legal, human resources, insurance and risk
management, safety and environmental, and corporate relations are provided by
Terra or certain of its affiliates (other than TNC) and charged to either TNC or
the Partnership, as appropriate. Expenses under this agreement charged to the
Partnership were $5.1 million and $3.7 million for the years ended December 31,
1996 and 1995, respectively. No such expenses were charged to the Partnership
for the period October 20, 1994 to December 31, 1994.

Certain Terra supply terminals and transportation equipment are generally
available for use by the Partnership and affiliates of TNC. TNC pays the costs
associated with the operation of such terminals and transportation equipment and
related freight costs incurred to ship product to the various sales points in
the distribution system. TNC charges the Partnership or Terra based on usage of
such assets and freight costs incurred. Amounts charged to the Partnership for
the years ended December 31, 1996 and 1995 were $20.5 million and $21.0 million,
respectively.

The Partnership sells product to affiliates of the General Partner at market
prices and terms. During the years ended December 31,1996 and 1995 and the
period October 20,1994 through December 31,1994, the Partnership sold $41.4
million, $26.5 million and $7.3 million, respectively, of nitrogen fertilizer
products to affiliates of the General Partner at market prices and terms.
Accounts receivable from Terra were $201,000 and $347,000 at December 31, 1996
and 1995, respectively.

The Partnership has a demand deposit with a Terra subsidiary that represents
excess Partnership cash deposited with such affiliate. The deposit is due on
demand and bears interest based on the Cost Rate under the Accounts Receivable
Sale Agreement (6.28% at December 31, 1996). Interest income recorded by the
Partnership on this deposit was $5.1 million for 1996.

26
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as a part of this annual report:

(1) Financial Statements and (2) Financial Statement Schedules: See Index
to Financial Statements on page F-1 for financial statements and financial
statement schedules filed as part of this annual report.

(3) The exhibits listed below are filed as part of this annual report.
<TABLE>
<CAPTION>
<S> <C>
#3.1 -- Agreement of Limited Partnership of TNCLP.
3.2 -- Certificate of Limited Partnership of TNCLP.
#4.1 -- Deposit Agreement among TNCLP, the Depositary and Unitholders.
#4.2 -- Form of Depositary Receipt for SPUs (included as Exhibit A to the Deposit
Agreement filed as Exhibit 4.1 hereto).
#4.3 -- Form of Depositary Receipt for Common Units (included as Exhibit B to the Deposit
Agreement filed as Exhibit 4.1 hereto).
#4.4 -- Form of Transfer Application (included in Exhibit A to the Deposit Agreement filed
as Exhibit 4.1 hereto).
4.5 -- Certificate of Limited Partnership of the Operating Partnership.
#10.1 -- Agreement of Limited Partnership of the Operating Partnership.
**10.2 -- Master Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas
Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission
Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited
Partnership.
**10.3 -- Lease Agreement dated October 11, 1989, among ONEOK Inc., Oklahoma Natural Gas
Company, ONG Western Inc., ONG Red Oak Transmission Company, ONG Transmission
Company, Agrico Chemical Company and Freeport-McMoRan Resource Partners, Limited
Partnership.
10.4 -- Gas Service Agreement dated October 11, 1989, between Oklahoma Natural Gas Company
and Agrico Chemical Company.
**10.5 -- Transportation Service Agreement dated as of September 1, 1988, among ARKLA Energy
Resources, Arkansas Louisiana Gas Company and Agrico Chemical Company, as
supplemented by Letter Agreements dated September 2, 1988, and November 1, 1990,
and Consent to Assignment dated March 9, 1990.
10.6 -- Transportation Service Agreement effective January 1, 1990, between MAPCO Ammonia
Pipeline, Inc. and Agrico Chemical Company, and Consent to Assignment dated
January 22, 1991.
10.7 -- Omitted.
10.8 -- Car Service Contract dated as of March 2, 1990, between General American
Transportation Corporation and TNC, and Consent to Assignment dated February 22,
1990.
10.9 -- Lease Agreement dated as of December 22, 1988, between PLM Investment Management,
Inc. and Agrico Chemical Company, and Consent to Assignment dated February 23,
1990, and Assignment and Assumption effective as of March 1, 1990.
10.10 -- Lease and Agreement dated December 1, 1964, between City of Blytheville, Arkansas,
and Continental Oil Company, as supplemented.
10.11 -- Lease dated November 1, 1975, between the City of Blytheville, Arkansas, and The
Williams Companies, Inc., as supplemented.
10.12 -- Lease dated September 6, 1977, between Tulsa-Rogers County Port Authority and
Agrico Chemical Company, as supplemented.
10.13 -- Lease dated February 1, 1972, between Continental Oil Company and Agrico Chemical
Company, as supplemented.
</TABLE>

27
<PAGE>

<TABLE>
<C> <S>
10.40 -- General and Administrative Services Agreement Regarding
Services by Terra Industries Inc. filed as Exhibit 10.11 to
Terra Industries Inc. Form 10-Q for the quarter ended March
31, 1995 (file no. 1-8520), is incorporated herein by
reference.

10.41 -- General and Administrative Services Agreement Regarding
Services by Terra Nitrogen Corporation filed as Exhibit
10.12 to Terra Industries Inc. Form 10-Q for the quarter
ended March 31, 1995 (file no. 1-8520), is incorporated
herein by reference.

10.42 -- Amended and Restated Credit Agreement, dated as of December
14, 1995, among Terra Capital, Inc., the Partnership,
certain guarantors, the issuing banks and the lenders named
therein and Citibank, as agent, without exhibits or
schedules, filed as Exhibit 4.3 to the Terra Industries Inc.
Form 10-K for the year ended December 31, 1995 (file no. 1-
8520) is incorporated herein by reference.

10.43 -- Demand Deposit Agreement, dated as of November 30, 1995,
among Terra Nitrogen, Limited Partnership and Terra Capital,
Inc. filed as Exhibit 10.43 to TNCLP's Form 10-K for the
year ended December 31, 1995, is incorporated herein by
reference.

10.44 -- 1992 Stock Incentive Plan of Terra Industries filed as
Exhibit 10.1.6 to Terra Industries' Form 10-K for the year
ended December 31, 1992 (file no. 1-8520), is incorporated
herein by reference.

10.45 -- Form of Restricted Stock Agreement of Terra Industries under
its 1992 Stock Incentive Plan filed as Exhibit 10.1.7 to
Terra Industries' Form 10-K for the year ended December 31,
1992 (file no. 1-8520), is incorporated herein by reference.

10.46 -- Form of Incentive Stock Option Agreement of Terra Industries
under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.8
to Terra Industries' Form 10-K for the year ended December
31, 1992 (file no. 1-8520), is incorporated herein by
reference.

10.47 -- Form of Nonqualified Stock Incentive Agreement of Terra
Industries under its 1992 Stock Incentive Plan, filed as
Exhibit 10.1.9 to Terra Industries' Form 10-K for the year
ended December 31, 1992 (file no. 1-8520), is incorporated
herein by reference.

10.48 -- Terra Industries Inc. Supplemental Deferred Compensation
Plan effective as of December 20, 1993, filed as Exhibit
10.1.9 to Terra Industries' Form 10-K for the year ended
December 31, 1993 (file no. 1-8520), is incorporated herein
by reference.

10.49 -- Amendment No. 1 to the Terra Industries Inc. Supplemental
Deferred Compensation Plan, filed as Exhibit 10.1.15 to
Terra Industries' Form 10-Q for the quarter ended September
30, 1995 (file no. 1-8520), is incorporated herein by
reference.

10.50 -- Excess Benefit Plan of Terra Industries, as amended
effective as of January 1, 1992, filed as Exhibit 10.1.13 to
Terra Industries' Form 10-K for the year ended December 31,
1992 (file no. 1-8520), is incorporated herein by reference.

10.51 -- 1996 Incentive Award Program for Officers and Key Executives
of Terra Industries, filed as Exhibit 10.1.12 to Terra
Industries' Form 10-K for the year ended December 31, 1995
(file no. 1-8520), is incorporated herein by reference.

10.52 -- Consent and Amendment No. 1 dated as of June 4, 1996 to
Amended and Restated Credit Agreement, filed as Exhibit 4.4
to the Terra Industries Inc. Form 10-Q for the period ended
June 30, 1996 (file no. 1-8520), is incorporated herein by
reference.

10.53 -- Consent and Amendment No. 2 dated as of July 31, 1996 to
Amended and Restated Credit Agreement, filed as Exhibit 4.5
to the Terra Industries Inc. Form 10-Q for the period ended
September 30, 1996 (file no. 1-8520), is incorporated herein
by reference.

10.54 -- Receivables and Purchase Agreement dated as of August 20,
1996 among Terra Funding Corporation, Terra Capital, Inc.
Certain Financial Institutions and Bank of America National
Trust and Savings Association, filed as Exhibit 10.12 to the
Terra Industries Inc. Form 10-Q for the period ended
September 30, 1996 (File No. 1-8520), is incorporated herein
by reference.
</TABLE>

28
<PAGE>

<TABLE>
<C> <S>
10.55 -- Purchase and Sale Agreement dated as of August 20, 1996
among Terra International, Inc., Terra Nitrogen, Limited
Partnership, Beaumont Methanol, Limited Partnership, filed
as Exhibit 10.13 to the Terra Industries Inc. Form 10-Q for
the period ended September 30, 1996 (File No. 1-8520), is
incorporated herein by reference.

10.56 -- Consent, Waiver and Amendment No. 3 dated as of November 22,
1996 to the 1995 Credit Agreement, filed as Exhibit 4.6 to
the Terra Industries Inc. Form 10-K for the year ended
December 31, 1996 (File No. 1-8520), is incorporated herein
by reference.

10.57 -- 1997 Incentive Award Program for Officers and Key Employees
of Terra Industries, filed as Exhibit 10.1.10 to the Terra
Industries Inc. Form 10-K for the year ended December 31,
1996 (File No. 1-8520), is incorporated herein by reference.

10.58 -- Revised Form of Performance Share Award of Terra Industries
under its 1992 Stock Incentive Plan, filed as Exhibit
10.1.11 to the Terra Industries Inc. Form 10-K for the year
ended December 31, 1996 (File No. 1-8520), is incorporated
herein by reference.

10.59 -- Revised Form of Incentive Stock Option Agreement of Terra
Industries under its 1992 Stock Incentive Plan, filed as
Exhibit 10.1.12 to the Terra Industries Inc. Form 10-K for
the year ended December 31, 1996 (File No. 1-8520), is
incorporated herein by reference.

10.60 -- Revised Form of Nonqualified Stock Option Agreement of Terra
Industries under its 1992 Stock Incentive Plan, filed as
Exhibit 10.1.13 to the Terra Industries Inc. Form 10-K for
the year ended December 31, 1996 (File No. 1-8520), is
incorporated herein by reference.

10.61 -- 1997 Stock Incentive Plan of Terra Industries, filed as
Exhibit 10.1.14 to the Terra Industries Inc. Form 10-K for
the year ended December 31, 1996 (File No. 1-8520), is
incorporated herein by reference.

10.62 -- Amended Demand Deposit Agreement, dated as of August 20,
1996, among Terra Nitrogen Limited Partnership and Terra
Capital, Inc. filed herewith.
</TABLE>

** Confidential treatment has been granted for portions of the exhibit.
# Filed under the identical exhibit numbers in TNCLP's Form 10-K (file
No. 1-10877) for the year ended December 31, 1991 and incorporated
herein by reference.

Except as otherwise noted above, all exhibits listed above were
previously filed under the identical exhibit number in TNCLP's
Registration Statement No. 33-43007 and are incorporated herein by
reference.

EXECUTIVE COMPENSATION PLANS AND OTHER ARRANGEMENTS

<TABLE>
<C> <S>
1 -- 1992 Stock Incentive Plan of Terra Industries filed as
Exhibit 10.1.6 to Terra Industries' Form 10-K for the year
ended December 31, 1992.

2 -- Form of Restricted Stock Agreement of Terra Industries under
its 1992 Stock Incentive Plan filed as Exhibit 10.1.7 to
Terra Industries' Form 10-K for the year ended December 31,
1992.

3 -- Form of Incentive Stock Option Agreement of Terra Industries
under its 1992 Stock Incentive Plan filed as Exhibit 10.1.8
to Terra Industries' Form 10-K for the year ended December
31, 1992.

4 -- Form of Nonqualified Stock Incentive Agreement of Terra
Industries under its 1992 Stock Incentive Plan filed as
Exhibit 10.1.9 to Terra Industries' Form 10-K for the year
ended December 31, 1992.

5 -- Excess Benefit Plan of Terra Industries, as amended
effective as of January 1, 1992, filed as Exhibit 10.1.13 to
Terra Industries' Form 10-K for the year ended December 31,
1992.

6 -- Terra Industries Supplemental Deferred Compensation Plan
effective as of December 20, 1993, filed as Exhibit 10.1.9
to Terra Industries' Form 10-K for the year ended December
31, 1993.
</TABLE>

29
<PAGE>

<TABLE>
<C> <S>
7 -- Amendment No. 1 to the Terra Industries Supplemental Deferred
Compensation Plan, filed as Exhibit 10.1.15 to Terra
Industries' Form 10-Q for the quarter ended September 30,
1995.

8 -- 1995 Incentive Award Program for Officers and Key Executives
of Terra Industries filed as exhibit 10.1.14 to Terra
Industries' Form 10-K for the year ended December 31, 1994.

9 -- 1996 Incentive Award Program for Officers and Key Executives
of Terra Industries filed as exhibit 10.1.12 to Terra
Industries' Form 10-K for the year ended December 31, 1995.

10 -- Consent, Waiver and Amendment No. 3 dated as of November 22,
1996 to the 1995 Credit Agreement, filed as Exhibit 4.6 to the
Terra Industries Inc. Form 10-K for the year ended December
31, 1996 (File No. 1-8520), is incorporated herein by
reference.

11 -- 1997 Incentive Award Program for Officers and Key Employees of
Terra Industries, filed as Exhibit 10.1.10 to the Terra
Industries Inc. Form 10-K for the year ended December 31, 1996
(File No. 1-8520), is incorporated herein by reference.

12 -- Revised Form of Performance Share Award of Terra Industries
under its 1992 Stock Incentive Plan, filed as Exhibit 10.1.11
to the Terra Industries Inc. Form 10-K for the year ended
December 31, 1996 (File No. 1-8520), is incorporated herein by
reference.

13 -- Revised Form of Incentive Stock Option Agreement of Terra
Industries under its 1992 Stock Incentive Plan, filed as
Exhibit 10.1.12 to the Terra Industries Inc. Form 10-K for the
year ended December 31, 1996 (File No. 1-8520), is
incorporated herein by reference.

14 -- Revised Form of Nonqualified Stock Option Agreement of Terra
Industries under its 1992 Stock Incentive Plan, filed as
Exhibit 10.1.13 to the Terra Industries Inc. Form 10-K for the
year ended December 31, 1996 (File No. 1-8520), is
incorporated herein by reference.

15 -- 1997 Stock Incentive Plan of Terra Industries, filed as
Exhibit 10.1.14 to the Terra Industries Inc. Form 10-K for the
year ended December 31, 1996 (File No. 1-8520), is
incorporated herein by reference.
</TABLE>

(b) Reports on Form 8-K:

None.

30
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 Corporation,
as General Partner

/s/ Erik L. Slockers
By:__________________________________
Erik L. Slockers
Vice President and Controller
(Principal Accounting Officer)

Dated: March 7, 1997

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant as of March 5, 1997 and in the capacities indicated.

<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>

/s/ Lawrence S. Hlobik Chairman of the Board of Directors
----------------------------------- and President
(Lawrence S. Hlobik)

/s/ Michael L. Bennett Director of Terra Nitrogen Corporation
- ------------------------------------
(Michael L. Bennett)

/s/ Thomas Buck Director of Terra Nitrogen Corporation
- ------------------------------------
(Thomas Buck)

/s/ Francis G. Meyer Director of Terra Nitrogen Corporation
- ------------------------------------
(Francis G. Meyer)

/s/ W. Mark Rosenbury Director of Terra Nitrogen Corporation
- ------------------------------------
(W. Mark Rosenbury)

/s/ Robert W. Todd Director of Terra Nitrogen Corporation
- ------------------------------------
(Robert W. Todd)
</TABLE>

31
<PAGE>

INDEX TO FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
OF TERRA NITROGEN COMPANY, L.P.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>

Independent Auditors' Reports....................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........................................ F-4
Consolidated Statements of Income for the Years ended December 31, 1996, 1995 and 1994.............. F-5
Consolidated Statements of Partners' Capital for the Years ended December 31, 1996, 1995 and 1994... F-6
Consolidated Statements of Cash Flows for the Years ended December 31, 1996, 1995 and 1994.......... F-7
Notes to Consolidated Financial Statements.......................................................... F-8

</TABLE>

All financial statement schedules are omitted because they are either not
required, not applicable or the information is shown in the financial statements
or in the notes to financial statements.

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Partners
Terra Nitrogen Company, L.P.

We have audited the accompanying consolidated balance sheets of Terra Nitrogen
Company, L.P. (a limited partnership) as of December 31, 1996 and 1995, and the
related consolidated statements of income, partners' capital, and cash flows for
the years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of Terra Nitrogen
Company, L.P. at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.

Deloitte & Touche LLP

Tulsa, Oklahoma
February 3, 1997

F-2
<PAGE>

REPORT OF INDEPENDENT AUDITORS

THE PARTNERS
TERRA NITROGEN COMPANY, L.P.

We have audited the accompanying consolidated statements of income, partners'
capital, and cash flows of Terra Nitrogen Company, L.P. for the year ended
December 31, 1994. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows for the year ended December 31, 1994, of Terra Nitrogen Company,
L.P., in conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Tulsa, Oklahoma
January 13, 1995

F-3
<PAGE>

TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents: (Note 2)
Cash and cash equivalents $ 712 $ 3,643
Demand deposit with affiliate 46,050 67,847
-------- --------
46,762 71,490
Receivables:
Trade net of allowance for doubtful accounts
of $0 and $300 at December 31, 1996 and
1995, respectively (Notes 4 & 5) 1,726 27,294
Other 9,328 1,132
Inventory - finished products 15,209 12,201
Inventory - materials and supplies 14,489 7,035
Distribution reserve fund (Note 3) 18,480 --
Prepaid expenses and other assets 2,353 6,001
-------- --------
Total current assets 108,347 125,153

Property, plant and equipment, net (Note 6) 172,771 177,358

Distribution reserve fund (Note 3) -- 18,480
Other assets 25,550 17,132
-------- --------
Total assets $306,668 $338,123
======== ========

LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 25,159 $ 22,080
Payable to affiliates 17,144 1,655
Accrued liabilities 9,427 5,753
Customer prepayments 5,936 15,517
Current portion of capital lease obligations 1,162 1,504
-------- --------
Total current liabilities 58,828 46,509

Capital lease obligations (Note 7) 3,036 4,198

Other long-term obligations 1,060 1,060

Partners' capital:
Limited partners' interests:
Senior preference unitholders 207,483 226,285
Common unitholder 30,636 37,768
General partner's interest 5,625 22,303
-------- --------
Total partners' capital 243,744 286,356
-------- --------
Total liabilities and partners' capital $306,668 $338,123
======== ========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
(In Thousands, Except Per Unit Amounts)
<S> <C> <C> <C>

Revenues $362,730 $373,325 $300,269
Other income 408 650 2,565
-------- -------- --------
Total revenues 363,138 373,975 302,834

Cost of goods sold 177,502 187,615 193,541
-------- -------- --------
Gross profit 185,636 186,360 109,293

Operating expenses 13,035 16,840 20,000
-------- -------- --------
172,601 169,520 89,293

Interest expense (1,210) (1,748) (3,575)
Interest income 6,242 4,696 2,038
-------- -------- --------
Income before extraordinary expense 177,633 172,468 87,756
Extraordinary expense - loss on early
retirement of debt (Note 7) -- -- (1,211)
-------- -------- --------
Net income $177,633 $172,468 $ 86,545
======== ======== ========
Net income allocable to limited
partners' interest $119,458 $123,220 $ 84,822
======== ======== ========

Earnings per limited partner unit (Note 2):
Income before extraordinary expense $ 6.35 $ 6.55 $ 4.57
Extraordinary expense -- -- (0.06)
-------- -------- --------
Net income $ 6.35 $ 6.55 $ 4.51
======== ======== ========

</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>

TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL

LIMITED PARTNERS' INTERESTS
------------------------------------------
SENIOR JUNIOR GENERAL TOTAL
PREFERENCE PREFERENCE COMMON PARTNER'S PARTNERS'
UNITHOLDERS UNITHOLDER UNITHOLDER INTEREST CAPITAL
----------- ---------- ---------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Partners' capital at
December 31, 1993 $156,352 $ 23,285 $ 20,073 $ 1,293 $201,003
Net income 34,438 27,058 23,326 1,723 86,545
Distributions (20,160) (15,840) (13,655) (1,014) (50,669)
-------- -------- -------- --------- --------

Partners' capital at
December 31, 1994 170,630 34,503 29,744 2,002 236,879
Net income 50,027 39,307 33,886 49,248 172,468
Distributions (38,182) (30,000) (25,862) (28,947) (122,991)
Conversion of Junior Preference
Units to Senior Preference Units 43,810 (43,810) -- -- --
-------- -------- -------- --------- --------

Partners' capital at
December 31, 1995 226,285 -- 37,768 22,303 286,356
Net income 86,607 -- 32,851 58,175 177,633
Distributions (105,409) -- (39,983) (74,853) (220,245)
-------- -------- -------- --------- --------

Partners' capital at
December 31, 1996 $207,483 $ -- $ 30,636 $ 5,625 $243,744
======== ======== ======== ========= ========
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>

TERRA NITROGEN COMPANY, L.P.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1996 1995 1994
---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 177,633 $ 172,468 $ 86,545
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 11,432 11,000 15,679
Amortization and write-off of deferred charges 40 36 1,893
Changes in operating assets and liabilities:
Receivables 17,372 (365) (8,543)
Inventory (10,462) 10,793 (2,425)
Prepaid expenses and other current assets 3,648 (771) (2,506)
Accounts payable 3,079 1,467 (7,981)
Payable to affiliates 12,575 (3,902) 676
Accrued liabilities and customer prepayments (2,993) 11,181 5,630
Other (6,213) (10,978) 5,836
--------- --------- --------
Net cash provided by operating activities 206,111 190,929 94,804

INVESTING ACTIVITIES
Capital expenditures (9,090) (8,312) (8,908)
--------- --------- --------
Net cash used in investing activities (9,090) (8,312) (8,908)

FINANCING ACTIVITIES
Borrowings under revolving line of credit -- -- 2,500
Repayments of revolving line of credit -- -- (11,500)
Proceeds from issuance of long-term debt -- -- 38,885
Repayment of long-term debt (1,504) (36,748) (35,995)
Partnership distributions paid (220,245) (122,991) (50,669)
--------- --------- --------
Net cash used in financing activities (221,749) (159,739) (56,779)
--------- --------- --------

Net increase (decrease) in cash and cash equivalents (24,728) 22,878 29,117

Cash and cash equivalents at beginning of year 71,490 48,612 19,495
--------- --------- --------

Cash and cash equivalents at end of year $ 46,762 $ 71,490 $ 48,612
========= ========= ========
</TABLE>

See notes to consolidated financial statements.

F-7
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

Terra Nitrogen Company, L.P. ("TNCLP" or the "Partnership"), is a Delaware
limited partnership which owns a 99% limited partner interest as the sole
limited partner in Terra Nitrogen, Limited Partnership (the "Operating
Partnership"). The Operating Partnership was organized by Terra Nitrogen
Corporation ("TNC"), the General Partner, to succeed to and acquire the
nitrogen fertilizer business of TNC. TNC, as the General Partner, conducts,
directs, manages and exercises full control over all business and affairs of
the Partnership. TNC owns a 2% combined general partner interest in both the
Partnership and Operating Partnership. TNC has agreed not to voluntarily
withdraw as the General Partner of the Partnership, subject to certain
limited exceptions, prior to January 1, 2002.

On October 20, 1994, Terra Industries Inc. ("Terra"), a Maryland
corporation, acquired Agricultural Minerals and Chemicals Inc. ("AMCI"), the
former parent of TNC, pursuant to a merger agreement (the "Merger
Agreement"). Although the General Partner continues to control the
Partnership, the General Partner is now an indirect, wholly owned subsidiary
of Terra.

Ownership of TNCLP is comprised of the general partner interest and the
limited partner interests. On December 31, 1996, the limited partner
interests consisted of 13,636,364 Senior Preference Units ("SPUs") and
5,172,414 Common Units. Terra and its subsidiaries owned 6,974,900 SPUs and
all the Common Units on December 31, 1996, and the balance of SPUs were
publicly held.

Pursuant to the provisions of the TNCLP Agreement of Limited Partnership,
the Preference Period for TNCLP ended on December 31, 1996 and holders of
SPUs can elect, by March 31, 1997, to convert to Common Units. (See Note 3
"Agreement of Limited Partnership".)

2. SIGNIFICANT ACCOUNTING POLICIES

GENERAL - The Partnership is in the business of manufacturing, distributing
and selling fertilizer products, including ammonia, urea and urea ammonium
nitrate solution ("UAN"), which are principally used by farmers to improve
the yield and quality of their crops. The Partnership sells products
primarily throughout the United States on a wholesale basis. The
Partnership's customers vary in size and are primarily related to the
agriculture industry and to a lesser extent to the chemical industry. Credit
is extended based on an evaluation of the customer's financial condition,
and generally collateral is not required. Expected credit losses have been
provided for in the financial statements.

BASIS OF PRESENTATION - The consolidated financial statements reflect the
combined assets, liabilities and operations of the Partnership and the
Operating Partnership. The Partnership has adopted a December 31 year-end
for tax and financial reporting purposes. Income is allocated to the General
Partner and classes of limited partnership units in accordance with the
provisions of the TNCLP Agreement of Limited Partnership which provides for
allocations of income between the Limited Partners and the General Partner
in the same proportion as cash distributions declared during the year. (See
"Net Income Per Limited Partner Unit".)

RECLASSIFICATIONS - Certain reclassifications have been made to prior years'
financial statements to conform with current year presentation.

ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles 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

F-8
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from these estimates.

CASH AND CASH EQUIVALENTS - TNCLP considers liquid debt instruments with an
original maturity of three months or less to be cash equivalents. The
Partnership has a demand deposit with an affiliate that represents excess
Partnership cash deposited with Terra. The deposit is due on demand and
bears interest based on the Cost Rate under the Accounts Receivable Sale
Agreement (6.28% at December 31, 1996). Interest income recorded by TNCLP on
this deposit was $5.1 million for 1996.

INVENTORY - Finished product inventories are stated at the lower of average
cost or market. Cost includes labor, materials, depreciation and other
production costs. Materials and supplies inventories are stated at the lower
of average cost or market.

PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are stated at
cost. Depreciation of plant and equipment is provided over the estimated
useful lives of the respective assets, generally 3 to 20 years, principally
on the straight-line basis. Expenditures for additions, major renewals and
betterments are capitalized, and expenditures for maintenance and repairs
are charged to income as incurred. When properties are retired or otherwise
disposed of, the cost thereof and the applicable accumulated depreciation
are removed from the respective accounts, and the resulting gain or loss is
reflected in income.

The Partnership adopted the provisions of Statement of Financial Accounting
Standards (SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Assets to be Disposed of" during 1996. There have been no
events or changes in the Partnership's business environment which would
indicate that the carrying amount of its property, plant and equipment may
not be recoverable through future cash flows generated by such assets.

HEDGING TRANSACTIONS - The Partnership enters into both physical and
financial contracts to manage the cost of natural gas, the primary raw
material used in production of nitrogen fertilizers. The financial
contracts, referred to collectively as forward positions, include both
exchange and over-the-counter options and swap transactions. Contract
settlement dates are scheduled to coincide with the dates of natural gas
purchases. Realized gains and losses from forward positions and premiums
paid for option contracts are deferred and either credited or charged to
production cost in the month in which the underlying natural gas is
purchased.

PLANT TURNAROUND AND CATALYST REPLACEMENT COSTS - Costs related to the
periodic scheduled maintenance of production facilities (plant turnarounds)
are capitalized when incurred and amortized on a straight-line basis,
generally over one or two years, until the next scheduled turnaround.
Included in other non-current assets at December 31, 1996 and 1995 is $23.3
million and $15.1 million, respectively, of unamortized plant turnaround and
catalyst replacement costs.

INCOME TAXES - The Partnership is not subject to income taxes and the income
tax liability of the individual partners is not reflected in the
consolidated financial statements of the Partnership. The reported amount of
assets and liabilities of the Partnership exceeded the tax basis of the
assets and liabilities by approximately $159 million and $155 million at
December 31, 1996 and 1995, respectively.

F-9
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME PER LIMITED PARTNER UNIT - Net income per limited partner unit is
computed by dividing net income, less an approximate 33%, 29% and 2% share
allocable to the General Partner for the years ended December 31, 1996, 1995,
and 1994, respectively, by 18,808,778 limited partner units for each of the
years ended December 31, 1996, 1995 and 1994.

The net income allocated to the General Partner increased to 33% for the year
ended December 31, 1996 due to the increase in Available Cash distributed to
the General Partner. According to the Agreement of Limited Partnership of
TNCLP, net income is allocated to the General Partner and the Limited
Partners in each taxable year in the same proportion that Available Cash for
such taxable year was distributed to the General Partner and the Limited
Partners. Distributions of Available Cash are made 98% to the Limited
Partners and 2% to the General Partner, except that the General Partner is
entitled, as an incentive, to larger percentage interests to the extent that
distributions of Available Cash exceed specified target levels that are
significantly above the Minimum Quarterly Distribution ("MQD") of $.605 per
unit. Available Cash for 1996 increased $39.9 million over 1995 due primarily
to the reduction in 1995 Available Cash as a result of the repayment of the
Partnership's $35 million term loan; an increase in 1996 Available Cash as a
result of the impact of TNCLP's participation in an accounts receivable
securitization facility (See Note 5 "Accounts Receivable Securitization")
entered into during the third quarter of 1996 and higher net income in 1996.

ENVIRONMENTAL LIABILITIES - In the normal course of business, the Partnership
monitors its operations and makes expenditures for environmental protection;
in addition, the Partnership's operations are generally subject to the
environmental standards and regulations of various regulatory agencies.
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Environmental liabilities are recognized when it
is probable that a loss has been incurred and the amount of that loss is
reasonably estimable. Environmental liabilities are accrued based upon
estimates of expected future costs without discounting to present value the
estimated costs to be paid in the future, and without consideration of
possible recoveries from third parties. No environmental liabilities were
accrued at either December 31, 1996 or 1995. While current and future
environmental laws and regulations will potentially subject the Partnership
to corrective costs and expenses, management is not currently aware of any
such matters which it considers to be of a material nature.

NEW ACCOUNTING STANDARDS - In June 1996, The Financial Accounting Standards
Board issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", which establishes
accounting and reporting standards for such transfers. The Partnership will
adopt SFAS No. 125 effective January 1, 1997. Management does not expect that
there will be a material impact on the Partnership's consolidated financial
position or results of operations.

3. AGREEMENT OF LIMITED PARTNERSHIP

The Partnership makes quarterly cash distributions to Unitholders and the
General Partner in an amount equal to 100% of Available Cash, as defined,
unless Available Cash is required to fund the Reserve Amount as described
below. During the period commencing December 4, 1991 and ending December 31,
1996 (the "Preference Period"), Senior Preference and Common Units
participated equally in distributions after each class of Units received the
MQD, subject to the General Partner's right to receive cash distributions.
The General Partner receives a combined minimum 2% of total cash
distributions and as an incentive, the General Partner's participation
increases if cash distributions exceed specified target levels.

F-10
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. AGREEMENT OF LIMITED PARTNERSHIP (CONTINUED)

The quarterly cash distributions paid to the Units and the General Partner
in 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Senior Preference Units Junior Preference Units Common Units General Partner
------------------------ ------------------------ -------------- ----------------
Total $ Per Total $ Per Total $ Per Total $ Per
------------ --------- ------------ --------- ------- ----- -------- -----
($000s) Unit ($000s) Unit ($000s) Unit ($000s) Unit
------------ --------- ------------ --------- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996:
First Quarter 26,046 1.91 * * 9,880 1.91 18,290 --
Second Quarter 22,227 1.63 * * 8,431 1.63 13,022 --
Third Quarter 33,000 2.42 * * 12,517 2.42 27,883 --
Fourth Quarter 24,136 1.77 * * 9,155 1.77 15,658 --

1995:
First Quarter 5,040 .66 3,960 .66 3,414 .66 253 --
Second Quarter 8,706 1.14 6,840 1.14 5,897 1.14 3,795 --
Third Quarter 13,211 1.73 10,380 1.73 8,948 1.73 14,904 --
Fourth Quarter 11,225 1.47 8,820 1.47 7,603 1.47 9,995 --
</TABLE>

* On December 31, 1995, the Junior Preference Units automatically became SPUs
pursuant to the terms of the Limited Partnership Agreement of TNCLP.

During the Preference Period, distributions of Available Cash were subject to
the rights of SPUs to receive $.605 per unit per quarter, plus any arrearages
for minimum payments for prior quarters before any other distributions. After
such amounts were paid, the Reserve Amount (as described below) was funded
before distributions to Common Unitholders.

Pursuant to the terms of the TNCLP Agreement of Limited Partnership, as a result
of the conversion of Junior Preference Units into SPUs on December 31, 1995,
distributions on the converted Junior Preference Units have been made with, and
not after, distributions on the other SPUs and payment of the MQD on the
converted Junior Preference Units have also been supported by the Reserve
Amount.

Pursuant to the provisions of the TNCLP Agreement of Limited Partnership, the
Preference Period for TNCLP ended on December 31, 1996. Until March 31, 1997
the holders of all SPUs have the right to elect to convert their SPUs into
Common Units on a one-for-one basis, effective as of December 31, 1996. Any
Units which do not convert and remain SPUs will continue to be entitled to the
MQD but will not participate with the Common Units in any additional
distributions.

SPUs that fail to convert to Common Units may be redeemed at the option of the
Partnership, exercised in the sole discretion of the General Partner, upon at
least 30 but not more than 60 days' notice at a price of $21.50 per SPU. If
after giving effect to an anticipated redemption, fewer than 1.0 million SPUs
would be held by non-affiliates of the General Partner, the Partnership must
redeem all such SPUs if it redeems any SPUs.

F-11
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. AGREEMENT OF LIMITED PARTNERSHIP (CONITNUED)

closing prices as of the date five days before the purchase is announced or
(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.

On January 27, 1997, the Partnership declared a distribution of $8.3 million
($.605 per unit) to holders of the SPUs as of February 7, 1997 payable on
February 28, 1997. This distribution represents only the MQD for the
quarter. The remainder of the Available Cash for the quarter ended December
31, 1996 will be paid April 30, 1997 to Common Unitholders of record as of
April 18, 1997 (including those holders of SPUs that have converted to
Common Units) and to the General Partner. Nonconverting SPU holders are not
entitled to participate in cash distributions in excess of the MQD after the
end of the Preference Period. Also on January 27, 1997, the Partnership
declared distributions of $3.1 million to Common Unitholders ($.605 per
unit), and $232,000 to the General Partner (equaling 2% of total
distributions declared above, as required). There were no accumulated
distribution arrearages for the Senior Preference or Common Units as of
December 31, 1996.

During 1992, the Partnership funded a reserve of $18.5 million to support
MQDs on the SPUs (the "Reserve Amount") pursuant to the provisions of the
Agreement of Limited Partnership of TNCLP. The Reserve Amount is equal to
the lesser of $18.5 million or four MQDs on the SPUs and at December 31,
1996, was invested in U.S. Government backed securities with maturities
primarily of 30 days from the date of purchase. After the Preference Period,
the Reserve Amount will be maintained only to support distributions on any
remaining nonconverted SPUs. The Reserve Amount will be maintained in the
amount equal to four quarters of MQDs on all nonconverted SPUs. It is
anticipated that any reduction in the Reserve Amount from its current level
of $18.5 million will be available for cash distributions in May 1997.

4. RELATED PARTY TRANSACTIONS

GENERAL PARTNER - The Partnership has no employees. Pursuant to the
provisions of the TNCLP Agreement of Limited Partnership, TNC, as General
Partner, is reimbursed for all direct and indirect expenses or payments it
makes on behalf of the Partnership and for that portion of TNC's or its
affiliates' administrative and overhead expenses and all other expenses
necessary or appropriate to the conduct of the Partnership's business and
reasonably allocable to the Partnership. In addition to such provisions,
effective January 1, 1995, TNC and Terra entered into an administrative
services agreement whereby TNC provides certain general and administrative
services for certain Terra affiliates. Costs and expenses incurred by TNC
for providing such services are charged to these affiliates, including the
Partnership. For the years ended December 31, 1996, 1995 and 1994, expenses
charged to the Partnership by TNC amounted to $25.9 million, $29.1 million
and $36.6 million, including $21.1 million, $26.5 million and $31.5 million,
respectively, for payroll and payroll-related expenses including pension
costs.

Effective January 1, 1995, under a general and administrative services
agreement between TNC and Terra, certain services including accounting,
legal, risk management, investor relations and certain employee benefit and
other employee-related expenses are provided by Terra to TNC. The portion of
these expenses allocated to TNC that relate to TNC's activities as General
Partner are charged to the Partnership. Expenses under this agreement
charged to the Partnership were $5.1 million and $3.7 million for the years
ended December 31, 1996 and 1995, respectively. No such expenses were
charged to the Partnership for the period October 20 to December 31, 1994.

F-12
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. RELATED PARTY TRANSACTION (CONTINUED)

Certain Terra supply terminals and transportation equipment are generally
available for use by the Partnership and affiliates of TNC. TNC pays the costs
associated with the operation of such terminals and transportation equipment
and related freight costs incurred to ship product to the various sales points
in the distribution system. TNC charges the Partnership or Terra based on usage
of such assets and freight costs incurred. Amounts charged to the Partnership
for the years ended December 31, 1996 and 1995 were $20.5 million and $21.0
million, respectively.

Prior to January 1, 1995, substantially all of TNC's employees were covered by
the AMCI pension plan. Effective January 1, 1995, these employees became
members of the Terra Industries, Inc. Employees' Retirement Plan (the "Terra
Retirement Plan"), a noncontributory defined benefit pension plan. The
accumulated benefits and plan assets of the Terra Retirement Plan are not
determined separately for TNC employees. TNC recorded pension costs of $1.2
million and $1.4 million ($1.1 million and $1.1 million of which was charged to
the Partnership) in 1996 and 1995, respectively, as its allocated share of the
total periodic pension cost for the Terra Retirement Plan. Benefits are based
on years of service and average final compensation. Pension costs are funded
to satisfy minimum requirements prescribed by the Employee Retirement Income
Security Act of 1974. Contributions made by TNC to the Terra Retirement Plan
for the years ended December 31, 1996 and 1995 were $0 and $198,000,
respectively. Contributions made by TNC to the former AMCI pension plan were
$1.4 million for the year ended December 31, 1994.

Net periodic pension cost charged to the Partnership under the previous AMCI
pension plan consists of the following:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
(In Thousands)
<S> <C>
Service cost $1,021
Interest cost 348
Return on assets (264)
Net amortization and deferrals 75
------
Net periodic pension cost $1,180
======
</TABLE>

The AMCI defined contribution plan was merged into a qualified savings plan of
Terra as of December 31, 1994. The Terra plan allows employees who meet
specified service requirements to contribute a percentage of their total
compensation, up to a maximum defined by the plan. Each employee's
contribution, up to a specified maximum, may be matched by TNC based on a
specified percentage of employee contributions. Employee contributions vest
immediately, while Terra's contributions vest over five years. Expenses
associated with TNC's contribution to the Terra qualified savings plan charged
to the Partnership for the years ended December 31, 1996 and 1995 were $759,000
and $658,000, respectively. Expenses charged to the Partnership for TNC's
contribution to the AMCI defined contribution plan for the year ended December
31, 1994 were $689,000.

Prior to 1995 TNC had incentive compensation plans covering substantially all
of its employees. Incentive compensation was paid to employees under the plans
based on specified levels of TNCLP's annual earnings before interest, taxes,
depreciation and amortization. In 1995, the incentive compensation plan was
amended to cover only certain key employees and is based on Terra Nitrogen
Division (which consists of the Partnership and the Nitrogen Manufacturing
business represented by Terra's plants located in Wood-

F-13
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. RELATED PARTY TRANSACTIONS (CONTINUED)

ward, Oklahoma; Port Neal, Iowa; and Courtright, Ontario) annual earnings
before interest, taxes and minority interest. Expenses for the incentive
compensation plans charged to the Partnership for the years ended December
31, 1996, 1995 and 1994 were $1.3 million, $2.5 million and $5.4 million,
respectively.

In 1993, AMCI adopted the 1993 AMCI Management Equity Plan ("MEP") which
provided for among other things, the granting of options to purchase shares
of AMCI common stock or the right to purchase restricted shares of AMCI
common stock. Holders of the options participated in AMCI cash dividends.
These dividends generally constituted compensation expense to AMCI and TNC,
allocable to the Partnership under the TNCLP Agreement of Limited
Partnership. Expenses for this plan and its predecessor charged to the
Partnership were $3.7 million for the year ended December 31, 1994. In
connection with the Merger Agreement, the MEP was terminated.

The Partnership sold $41.4 million, $26.5 million and $7.3 million of
nitrogen fertilizer products to Terra at market prices and terms during the
years ended December 31, 1996 and 1995 and the period October 20 to December
31, 1994, respectively. Accounts receivable from Terra were $201,000 and
$347,000 at December 31, 1996 and 1995, respectively.

OTHER RELATED PARTY TRANSACTIONS - During the year ended December 31, 1994,
the Partnership sold $34.9 million of nitrogen fertilizer products to
Transammonia Inc. ("Transammonia"). Prior to the Merger Agreement, a key
executive and principal owner of Transammonia was a general partner of two
partnerships which owned common stock representing 7.4% of the common equity
of AMCI. In addition, another executive of Transammonia served on the board
of directors of TNC and AMCI.

5. ACCOUNTS RECEIVABLE SECURITIZATION

On August 20, 1996, TNCLP and certain affiliates of the General Partner,
through Terra Funding Corporation ("TFC"), an affiliate of the General
Partner and a limited purpose corporation, entered into an agreement with a
financial institution to sell an undivided interest in their accounts
receivable. Undivided interests in new receivables may be sold as amounts are
collected on previously sold amounts. TNCLP's receivables sold to TFC under
this agreement are sold without recourse. The discount on TNCLP's portion of
the accounts receivable sold in 1996 was $746,000 and is included in interest
expense in the Consolidated Statements of Income. The amount of discount
charged on accounts receivable sold is subject to adjustment, on a
prospective basis, based on collection experience.

F-14
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
-------- --------
(In Thousands)
<S> <C> <C>
ASSETS OWNED:
Land and improvements $ 5,261 $ 5,257
Plant and equipment 245,916 241,589
Terminals and transportation equipment 6,998 6,473
-------- --------
258,175 253,319
ASSETS UNDER CAPITAL LEASE:
Plant and equipment 9,262 8,601

Accumulated depreciation and amortization 94,666 84,562
-------- --------
$172,771 $177,358
======== ========
</TABLE>

7. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS

Capital lease obligations are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------- -------
(In Thousands)
<S> <C> <C>

Capitalized lease obligations $4,198 $5,702
Less current maturities 1,162 1,504
------ ------
$3,036 $4,198
====== ======
</TABLE>

In conjunction with the Merger Agreement, Terra and its subsidiaries entered
into a credit agreement (the "Credit Agreement") with certain lenders and
with Citibank, N.A. as agent. The Operating Partnership's former $85 million
credit agreement consisting of a $35 million term loan and $50 million
revolving credit facility, was retired and replaced by comparable facilities
under the Credit Agreement. Deferred finance charges of $1.2 million
associated with the former credit agreement were expensed as a result of the
refinancing and are reported as extraordinary expense in the 1994
Consolidated Statement of Income. The Credit Agreement was amended and
restated as of May 12, 1995, to reduce the revolving credit facility from $50
million to $25 million, thereby reducing certain commitment fees. In
connection with such Credit Agreement amendments, the Partnership repaid its
$35 million term loan in May 1995. The revolving credit facility expires
December 31, 2000. At December 31, 1996, the Operating Partnership had $25
million of unused borrowing capacity under its revolving credit facility. The
terms of the Credit Agreement provide that all outstanding amounts under the
revolving credit facility must be repaid and not reborrowed for a period of
30 consecutive days in each year. Interest on the revolving credit facility
is based on the prime commercial lending rate plus 0.25% or the Eurodollar
rate plus 0.75% at the General Partner's option. The Operating Partnership
incurs certain fees in connection with the borrow-

F-15
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. CAPITAL LEASE OBLIGATIONS (CONTINUED)

ings discussed above, including a commitment fee equal to 1/2 of 1% of the
unused amount of the revolving credit facility.

Loans under the Credit Agreement are guaranteed by Terra and certain
subsidiaries, including the General Partner, and are secured by pledges of
the stock of significant Terra subsidiaries, including the General Partner,
and are secured by substantially all of the Operating Partnership's assets.
The security interest granted in the Operating Partnership's assets secures
only its revolving credit facility.

The Credit Agreement contains restrictive covenants, including covenants
requiring Terra to meet certain financial tests. All such covenants were
complied with as of December 31, 1996.

Interest paid by the Partnership was $471,000, $2.3 million and $2.5 million
for the years ended December 31, 1996, 1995 and 1994, respectively.

8. LEASES AND COMMITMENTS

The Operating Partnership leases certain land, buildings and equipment.
Minimum rental commitments under capital and noncancelable operating leases
are as follows:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- -------
(In Thousands)
<S> <C> <C> <C>
Year ending December 31:
1997 $1,457 $ 3,458 $ 4,915
1998 1,283 2,705 3,988
1999 1,249 2,180 3,429
2000 893 1,680 2,573
2001 - 782 782
Later years - 640 640
------ ------- -------
Total minimum lease payments 4,882 11,445 16,327
Less amount representing interest 684 - 684
------ ------- -------
Net minimum lease payments $4,198 $11,445 $15,643
====== ======= =======
</TABLE>

Included above is the lease of the Port Terminal at the Verdigris facility.
The leasehold interest is scheduled to expire on April 30, 1999, and the
Partnership has the option to renew the lease for two additional, consecutive
terms of five years each.

The above amounts include the leases for the ammonia and urea facilities at
the Blytheville Plant. The lease term for the ammonia facility is scheduled
to expire on November 30, 1999 and the Partnership has the option to extend
the lease for twelve successive terms of five years each at the same rental
rate. The urea facility lease is scheduled to expire November 1, 1999, and
the Partnership has the option to renew the lease for four successive periods
of five years each at a nominal annual rental. The Partnership has the right
to purchase the ammonia and the urea facilities for a nominal price at the
end of the respective lease terms (including any renewal terms).

F-16
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. LEASES AND COMMITMENTS (CONTINUED)

Rent expense under noncancelable operating leases amounted to approximately
$6.5 million, $7.6 million and $7.0 million, including contingent rentals of
$1.8 million, $1.9 million, and $1.5 million, based primarily on terminal
throughput, for the years ended December 31, 1996, 1995 and 1994,
respectively.

The Partnership has certain commitments with respect to the transportation of
minimum quantities of ammonia, urea and UAN. The aggregate amount of required
payments under these commitments are: 1997 - $6.2 million; 1998 - $890,000;
1999 - $850,000; 2000 - $850,000; 2001 - $0; 2002 and after - $3.8 million.

9. HEDGING

Natural gas supplies to fulfill production requirements at the Operating
Partnership's production facilities are purchased at market prices. Natural
gas market prices, as with other commodities, are volatile and the Operating
Partnership uses swap agreements and purchased options to effectively
maintain fixed prices for a portion of its natural gas requirements. The
settlement dates for such financial instruments are scheduled to coincide
with gas purchases during such future periods. These contracts reference
physical natural gas prices or appropriate NYMEX futures contract prices. The
contracts' physical prices are frequently based on the Henry Hub, Louisiana
price. Natural gas supplies for the Partnership's two production facilities
are purchased from various suppliers at locations that are different from the
Henry Hub. This 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 change in the price of
physical gas.

The Partnership also engages in swap agreements, which are agreements with
third parties to exchange cash based on a designated price, which price is
referenced to natural gas market prices or appropriate NYMEX futures contract
prices. Option contracts are also used and represent agreements giving the
holder of the contract the right to either own or sell a futures or swap
contract at a designated price. Option contracts require initial premium
payments ranging from 2% to 5% of contract value.

The Partnership has also entered into basis swaps. Such contracts require
payments to or from the Partnership for the amount, if any, that monthly
published gas prices from the source specified in the contract differ from
prices of NYMEX natural gas futures during a specified period. As of December
31, 1996 and 1995, MMbtu's under such contracts totalled 6.5 million and 2.1
million, respectively.

The following summarizes open natural gas contracts at December 31, 1996 and
1995:

<TABLE>
<CAPTION>
1996 1995
---------------------- -----------------------
CONTRACT UNREALIZED CONTRACT UNREALIZED
MMbtu GAIN (LOSS) MMbtu GAIN (LOSS)
-------- ----------- -------- ------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Swaps 82,880 $19,559 85,115 $7,016
Options 2,540 397 3,185 365
------ ------- ------ ------
85,420 $19,956 88,300 $7,381
====== ======= ====== ======
</TABLE>

F-17
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9. HEDGING (CONTINUED)

Annual production requirements are approximately 56 million MMbtus of
natural gas. Contracts were in place at December 31, 1996 to cover 74% of
1997 natural gas requirements, 61% for 1998 and 22% for 1999.

Gains and losses, including unamortized premiums paid for option contracts,
on settlement of these contracts and agreements are credited or charged to
production cost in the month in which the underlying natural gas is
purchased. The Operating Partnership is exposed to favorable or unfavorable
market risk associated with outstanding natural gas positions as a result
of increases or decreases in natural gas prices in relation to the
underlying NYMEX contract prices. Realized gains of $7.6 million on closed
contracts relating to January 1997 have been deferred at December 31, 1996.

During 1996, natural gas forward pricing activities reduced the
Partnership's natural gas costs by $37.1 million compared with spot market
natural gas prices. During 1995, natural gas forward pricing activities
increased cost by $18.2 million compared with spot market prices.

10. OTHER FINANCIAL INFORMATION

AVAILABLE-FOR-SALE SECURITIES - At December 31, 1996, the Partnership had
invested $18.5 million in U.S. government backed securities, which are
included in the distribution reserve fund. These securities generally mature
within 30 days from their date of purchase and had a market value which
approximated their carrying value of $18.5 million at December 31, 1996.

FAIR VALUES OF FINANCIAL INSTRUMENTS - The following methods and assumptions
were used by the Partnership in estimating its fair value disclosures for
financial instruments:

CASH AND CASH EQUIVALENTS - The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate their fair
values.

DISTRIBUTION RESERVE FUND - The carrying amount reported in the balance
sheet for the distribution reserve fund approximates its fair value.

CAPITAL LEASE OBLIGATIONS - The carrying amounts of the Partnership's
borrowings under capital lease obligations approximate fair value.

OFF-BALANCE-SHEET INSTRUMENTS - Fair values for the Partnership's
natural gas swaps and options are based on contract prices in effect at
December 31, 1996 and December 31, 1995. The unrealized gain (loss) on
these contracts is disclosed in Note 9.

CONCENTRATION OF CREDIT RISK - The Partnership is subject to credit risk
through trade receivables and short-term investments. Although a substantial
portion of its debtors' ability to pay is dependent upon the agribusiness
economic sector, credit risk with respect to trade receivables is minimized
due to a large customer base and its geographic dispersion. Credit risk
related to trade receivables has also been minimized as a result of the
accounts receivable securitization agreement entered into during 1996.
Short-term cash investments are placed with well capitalized, high quality
financial institutions and in short duration corporate and government debt
securities funds.

F-18
<PAGE>

TERRA NITROGEN COMPANY, L.P.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. OTHER FINANCIAL INFORMATION (CONTINUED)

MAJOR CUSTOMERS - For the year ended December 31, 1996, sales to Terra
totalled $41.4 million, or 11.4%, of the Partnership's sales. None of the
Partnership's customers represented more than 10% of the Partnership's sales
for the year ended December 31, 1995. For the year ended December 31, 1994,
sales to an international trader and marketer of various commodities
totalled $34.9 million, or 11.6% of the Partnership's sales.

F-19

<PAGE>

AMENDED AND RESTATED
DEMAND DEPOSIT AGREEMENT
------------------------

Sioux City, Iowa
August 20, 1996

FOR VALUE RECEIVED, Terra Capital, Inc., a Delaware corporation ("TCI"),
hereby promises to pay to the order of Terra Nitrogen, Limited Partnership, a
Delaware limited partnership or its successors or assigns as the case may be
("TNLP"), at Tulsa, Oklahoma, or such other place as may be specified in writing
by TNLP, the aggregate amount of all cash deposited from time to time by TNLP
with TCI under this agreement, together with interest thereon at an annual rate
(the "Reference Rate") equal to the higher of (1) the rate of interest charged
to TCI as "Eurodollar Rate Advances" for borrowings under its Amended and
Restated Credit Agreement dated as of December 14, 1995 among TCI, TNLP, certain
Lenders, Issuing Banks and Citibank, N.A., as Agent, as from time to time
amended or replaced (the "Credit Agreement") and (2) the rate of interest equal
to the "Cost Rate" under the Purchase and Sale Agreement dated as of August 20,
1996 among Terra International, Inc., TNLP, Beaumont Methanol, Limited
Partnership, Terra Funding Corporation, and TCI. If computed on the basis of
subsection (1) above, the Reference Rate will be an adjusted monthly rate being
the average of the eurodollar rate on the first and last business day of each
month as quoted in the Midwest Edition of The Wall Street Journal plus the
-----------------------
Applicable Margin (as defined in the Credit Agreement) applied to the average
daily outstanding advances for each month.

TNLP may deposit funds in this agreement with TCI at any time. Any funds
requested to be withdrawn from TCI by TNLP shall be payable immediately on the
demand of TNLP. Accrued interest shall be credited or paid within five business
days after the end of each month.

This agreement shall be governed by the laws of the state of Iowa.

IN WITNESS WHEREOF, TCI has executed this agreement as of the date first
above written.

TERRA CAPITAL, INC.

By: /S/ Robert E. Thompson
-----------------------
Robert E. Thompson
Vice President

ACKNOWLEDGEMENT:

Terra Nitrogen, Limited Partnership
By: Terra Nitrogen Corporation
Its: General Partner

By: /S/ Erik L. Slockers
--------------------
Erik L. Slockers
Vice President and Controller

<PAGE>

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL POSITION OF TERRA NITROGEN COMPANY, L.P. AS
OF DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF INCOME FOR THE
YEAR THEN ENDED.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 46,762
<SECURITIES> 0
<RECEIVABLES> 11,054
<ALLOWANCES> 0
<INVENTORY> 29,698
<CURRENT-ASSETS> 108,347
<PP&E> 267,437
<DEPRECIATION> (94,686)
<TOTAL-ASSETS> 306,668
<CURRENT-LIABILITIES> 58,828
<BONDS> 3,036
0
0
<COMMON> 0
<OTHER-SE> 243,744<F1>
<TOTAL-LIABILITY-AND-EQUITY> 306,668
<SALES> 362,730
<TOTAL-REVENUES> 363,138
<CGS> 177,502
<TOTAL-COSTS> 177,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,210
<INCOME-PRETAX> 177,633
<INCOME-TAX> 0
<INCOME-CONTINUING> 177,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 177,633
<EPS-PRIMARY> 6.35
<EPS-DILUTED> 0
<FN>
<F1>DUE TO THE NATURE OF THE PARTNERSHIP, THIS REPRESENT PARTNERS CAPITAL.
</FN>

</TABLE>