And just standing by. This is the conference operator. Welcome to the Source Energy Services First Quarter 2024 Results Conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star and then one. I would now like to turn the conference over to Scott Melbye, CEO. Mr. Melbye, please proceed.
Thank you, operator. Good morning and welcome to Source Energy Services first quarter 2024 conference call. My name is Scott Melbye. I'm the CEO of Source. I'm joined today by Derren Newell, our CFO. This morning we will provide a brief overview of the quarter, which will immediately be followed by a question-and-answer period. Before I get started, I'd like to refer everyone to the financial statements and the MD&A that were posted to SEDAR+ and the company's website last night and remind you of the advisory on forward-looking information found in our MD&A and press release. On this call, Source's numbers are in CAD, metric tons, and we will refer to adjusted gross margin, adjusted EBITDA, and free cash flow, which are non-IFRS measures as described in our MD&A. Except for these items just mentioned, our financial information is prepared in accordance with IFRS.
Strong first quarter business performance resulted in the highest quarterly adjusted EBITDA in Source's history. Extreme weather in early January impacted the start of the year. However, activity levels rebounded quickly and remained robust for the balance of the quarter. The business performed well in all areas, and especially in Wellsite Solutions, where we recorded record last-mile volumes and record throughput in the Sahara fleet. Source continued to repurchase and redeem its senior secured notes, bringing our outstanding balance down to CAD 142.9 million at March 31st. Our working capital surplus was CAD 68.8 million at the end of the first quarter. During the quarter, we took steps to expand our logistics capability with the acquisition of a fleet of sand trucking assets for CAD 8.1 million. This acquisition enabled Source to grow its last-mile service offering and strengthen its mine-to-wellsite offerings in the WCSB.
In addition to the acquisition, we began a rail expansion at our Chetwynd terminal, which, upon completion, will become our third unit-train facility in the WCSB and our first in Northeast BC. The expansion will support the increased demand in the Northeast BC portion of the Montney and specifically in the Attachie region. The combination of the trucking acquisition and the Chetwynd rail expansion truly enhances Source's distribution capability within the WCSB. We continue to evaluate additional logistics opportunities in Northeast BC to ensure we have the infrastructure to support the industry as LNG Canada comes online later this year or early 2025. Additional highlights from the first quarter include sand sales volume of 875,000 tons and sand revenue of CAD 133 million, an increase of CAD 1.2 million from the first quarter of 2023.
Total revenue was CAD 169.6 million, a CAD 5.8 million increase from the same period last year.
Wellsite Solutions set a new record for the amount of sand handled by the last-mile logistics team, and the Sahara fleet was 98% utilized during the quarter versus 89% in Q1 of 2023. Gross margin for the quarter was CAD 35.6 million, and adjusted gross margin was CAD 43.2 million, increases of 12% and 14% respectively when compared to the first quarter of 2023. We reported net income of CAD 1.9 million and adjusted EBITDA of CAD 32 million, a CAD 4.4 million improvement from the same period of 2023. We repurchased and redeemed a total of CAD 6.8 million aggregate principal value of the senior secured notes during the quarter. As I mentioned previously, this brings our note balance down to CAD 142.9 million at the end of the quarter.
Free cash flow for the first quarter was CAD 15.5 million, an increase of CAD 2.6 million compared to last year.
Improved operating results and lower financing expense were the principal reasons for the improvement. Financing expenses were lower in the first quarter due to lower average balances outstanding for both the senior secured notes and the ABL facility. Capital expenditures in Q1 of 2024 were higher due to expenditures on the trucking acquisition and higher overburden removal costs. We will continue to allocate free cash flow to reducing debt in 2024 as we remain focused on reducing our overall leverage in the business. We are confident that we will achieve our debt targets by mid-2024. With that, I will now turn over to Derren to provide a brief overview of our financial results for the quarter.
Thanks, Scott. Sand revenue for the first quarter of 2024 was CAD 133 million, an increase of CAD 1.2 million over the first quarter of 2023. The increase was due to a $6.83 per metric ton or 5% increase in average realized sand prices. Sand sales volumes, which were impacted by the extreme cold snap which started January, were lower than the prior year by 33,000 metric tons. This reduced most of the impact of the pricing improvement. While sand revenue realized from mine-grade sales lowered the average realized sand price in the quarter by $5.40 per metric ton, it did have a favorable impact on the cost of sales and gross margins by improving production efficiencies and yields. Wellsite Solutions revenue for the first quarter of 2024 was CAD 35.7 million, an increase of CAD 5.1 million or 17% compared to first quarter of 2023.
Last-mile solutions trucking volumes increased 13% compared to Q1 of 2023 and represent the highest volumes handled by the team. Sahara revenue was up 13% compared to Q1 of 2023, primarily due to a 20% increase in days. The Canadian Sahara fleet was utilized, and the overall Sahara fleet as Scott said was utilized 98% in the quarter. Terminal services revenue for Q1 of 2024 was CAD 0.9 million, a decrease of CAD 0.5 million compared to the first quarter. The reduction is due to lower storage and sand elevation revenue, less transloading fees for other products, and the loss of rental income from the sale of the Berthold facility in the second quarter of 2023. Cost of sales, excluding depreciation, increased by CAD 0.5 million compared to the first quarter of 2023.
The increase was due to higher volumes trucked by the last-mile logistics team for the additional volume moved to the well site. Sahara-related costs were also higher due to the higher activity levels seen in the quarter. Offsetting these increases was lower costs for procured materials due to the lower sand sales volumes realized in the quarter. The weaker Canadian dollar on our US-denominated costs increased our cost by $0.0021 per metric ton compared to the same period last year. Gross margins increased by CAD 3.9 million compared to the first quarter of 2023. Excluding gross margins from mine-grade sales, adjusted gross margin was CAD 50.93 per metric ton compared to CAD 44.81 per metric ton for the same period last year. The increase in gross margins arose from improved performance of the Wellsite Solutions group in the quarter, as well as continued strength in sand prices.
Despite a weaker Canadian dollar during the first quarter, adjusted gross margin was not impacted by the foreign exchange as cost of sales impact was mitigated by the positive impact in our US-denominated revenue in the quarter. We remain in a naturally balanced FX position. We will continue to monitor our FX exposures and actively manage if required. Total operating and general administrative expenses in the quarter increased by CAD 1.3 million. Operating expenses increased by CAD 0.2 million from the first quarter of 2023, primarily due to higher people costs and higher royalty costs related to shipping from mines with royalties attached. These increases were partially offset by lower repairs and maintenance costs at the Peace River facility.
General and administrative expenses increased by CAD 1.1 million in the first quarter compared to the same period last year, primarily due to higher compensation expense and professional fees in 2024 compared to 2023.
Finance expenses were CAD 8.7 million for the first quarter of 2024, a decrease of CAD 0.6 million from the same period last year. The decrease was due to lower interest incurred on senior secured notes due to the impact of the repurchases that have occurred over the last nine months, and lower interest occurred on the ABL facility due to lower draws in the outstanding facility during the quarter. As Scott said on March 31st, the outstanding principal on our notes was CAD 142.9 million, and Source had drawn CAD 37.2 million under its ABL, leaving it with CAD 23.5 million of available liquidity. Source will continue to remain focused on lowering its leverage over the coming quarters as it works through achieving its debt target. Source's ABL and senior secured notes are now both showing its current liabilities as their maturities are both within the year.
But with our improving debt metrics, we're confident in executing our long-term plans for refinancing the balance sheet. With that, I'll turn it back to you, Scott.
Thanks, Derren. As we look ahead, we continue to believe industry activity levels will favorably impact sand supply and demand fundamentals in the WCSB. These strong Canadian industry fundamentals driven by growth in Northeast BC, coupled with Source's capabilities, will continue to support market share gains and strong financial results for 2024 and beyond. In the longer term, we believe increased demand for natural gas driven by power generation facilities, increased natural gas pipeline export capabilities, and LNG exports will drive incremental demand for Source's services. We see the completion of Coastal GasLink pipeline as a positive step forward in LNG Canada becoming a reality in late 2024. We've also seen positive momentum on wood fiber and other proposed LNG projects, which has the potential to drive additional demand for our products and services.
Source continues to focus on enhancing our industry-leading frac sand logistics chain, and we believe we have unique opportunities in front of us to grow the company further and further our competitive advantage without impacting the balance sheet goals. In addition to growth in our core market, we continue to explore opportunities to diversify and expand our service offerings and to further utilize our existing Western Canadian terminals. Thank you for your time this morning. That concludes the formal portion of the call. We will now ask the operator to open the lines for questions.
Thank you. We will now begin the question-and-answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any key. To withdraw your question, please press star, then two. We will pause for a moment as callers join the queue. The first question comes from Nick Corcoran.
Good morning. This is Nick Corcoran from Acumen Capital. Congrats on this strong quarter. Just a couple of questions from me. The first thing is you mentioned in your prepared remarks that you started the expansion on the Chetwynd facility. What is the total CapEx expected to be, and over what timeline?
Yeah. Good morning, Nick. So the Chetwynd expansion is just a rail expansion at the facility, and we would expect that to come in around CAD 5-6 million total capital for the expansion to a unit train facility. In terms of the timeline, we expect that facility to be fully unit train capable in about 30-60 days from now. So it's a fairly quick expansion, and we expect most of the capital to hit in Q2.
Good. Then on the last quarter, you mentioned there might be unique ways to grow the business that won't require the balance sheet. Do you have any update on those?
Yeah. We continue to work on those, and we continue to believe that there's some real opportunities out there. We don't have anything to update on this call, but we're hopeful that very shortly we'll be able to update on those initiatives.
Good. One last question from me. Debt increase in the quarter. How are you thinking about your leverage target for the remainder of the year?
I mean, the debt increase in the quarter was all driven by the increase in the working capital that we see in the first quarter of the year. Fully expect ABL will draw itself back down over the balance of the year, and we're going to remain focused on banging away on the note balance as we've I mean, people are probably almost sick of hearing at this point.
Let's get callers. Thanks for taking my questions.
Thanks, Nick.
Thank you. The next question comes from Jesús Sánchez-Leon with Castañar Investment Fund.
Hi. How are you? My first question will be around Forex impact, especially the Canadian dollar decrease versus the U.S. dollar. How is that impacting us in terms of our cost of operations, labor, equipment, and on the other side, selling in Canadian dollars?
As we said in the remarks, we're pretty much naturally hedged. We saw a $0.21 impact in our cost of sales, which is predominantly a US dollar cost for us. We have equally an offsetting $0.21 impact on our US-denominated revenue, and we're very focused on making sure we're running a balanced book. At this point, see that continuing for the balance of the year.
My second question will be about the lower volume delivered during Q1. Is that due to bad weather occurring on the site delivery? So we will be able to compensate that lower level of volumes across the year, or?
Yeah. So as I mentioned in the prepared remarks, we saw really extreme cold weather at the very beginning of January, which really delayed the start on a lot of frac programs. And so the effect of that delayed start on the frac programs really just moves volume and spreads it out throughout the first and the second quarter. So any volume that was missed in the first quarter due to that extreme weather really is going to be made up in the second quarter or throughout the balance of the year. And so we don't really see any impact on if we're looking at it on an entire-year basis, we don't see any impact on the overall volumes, but there will be some shift from quarters to quarters depending on weather events.
That's very helpful. Thank you very much.
Thank you.
Thank you. The next question comes from John Gibson with BMO Capital Markets.
Morning. Can you talk about your contract book? I mean, obviously, you sent a new customer last quarter, but can you maybe talk about the other large contracts when they're up for renewal, and how do you expect pricing discussions to play out?
Yeah. Good morning, John. Our contract book is, as I think we mentioned before, we have a portfolio of expiry dates on those contracts. And so we have a couple coming due at the end of this year. We've had some early discussions with at least one of the ones that are coming due at the end of the year, and we expect the pricing to be fairly consistent to where it was on the previous pricing. I think the other one is a little too early to mention and to predict the outcome of it. But overall, in the market, we don't see a material change in pricing. And so therefore, we would expect that we would see those contracts or similar contracts renewed at about or maybe slightly better pricing, just depending on the dynamics of each individual customer.
Okay. Great. And then secondly for me, with the Chetwynd rail terminal complete, how much incremental profit could you distribute into the market either on a percentage basis or on a metric ton basis relative to sort of what you're doing now?
Yeah. The Chetwynd terminal at full build, and just for maybe a little bit of background, the Chetwynd terminal always had the appropriate amount of storage. And so it's in excess of 30,000 tons of storage. But we didn't have sort of a matching rail capacity. And so the unit-train expansion is now matching the rail capacity with the storage at that facility. We expect that area of the Montney to be very active and growing going forward. And so that terminal will be capable of 300,000-500,000 of incremental volume, and that'll be nameplate capacity once it moves to a unit-train capable facility. On an annual basis, I would expect that's maybe 100-200 to start out with and then growing into the total capacity of that facility.
Okay. Great. Thanks for the response. I'll turn it back.
Thanks, John.
Thank you. Once again, if you have a question, please press star, then one. We have a question from Jesús Sánchez-Leon with Castañar Investment Fund.
Thank you, Juan. Last question from my side. Can you break down the revenues? How much is done in US dollars? How much is done in Canadian, please?
That's not something we've really disclosed in the past, but we keep our book very balanced. So that's kind of up to management to manage.
Okay. Thank you very much.
Thank you. This concludes the question-and-answer session. I would like to turn the conference back over to Scott Melbye for any closing remarks.
Thank you, everyone, for joining today. If anyone has any follow-on questions, please feel free to reach out to myself or Derren.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.