I would now like to turn the conference over to Scott Melbourn, CEO. Mr. Melbourn, please go, proceed.
Thank you. Good morning, and welcome to Source Energy Services Second Quarter 2024 conference call. My name is Scott Melbourn. 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 be immediately 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 advisory on of the advisory on forward-looking information found in our MD&A and press release. On this call, Source's numbers are in Canadian dollars and 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 the items just mentioned, our financial information is prepared in accordance with IFRS. Continued strong business performance in the second quarter resulted in the second consecutive quarter of record sand volumes and record total revenues. The business performed well in all areas, including the Last Mile Logistics Group, where we again recorded record last mile volumes. Source repurchased and redeemed additional senior secured notes, bringing our outstanding balance down to CAD 140.5 million, while our ABL balance was reduced by CAD 23.8 million during the second quarter. We exited the quarter with CAD 153.9 million of debt and a working capital surplus of CAD 42.5 million, bringing our net debt down to CAD 111.4 million.
Source's ABL facility and senior secured notes are shown as current liabilities, as the maturities are both within a year. We are currently evaluating a number of options to refinance the balance sheet, which we expect will be completed in the coming months. Subsequent to the quarter, we announced a partnership with Trican to develop a new terminal located in Taylor, British Columbia. The terminal, when completed, will be Source's third unit train terminal capable of supporting LNG-driven growth in Northeast BC. The partnership with Trican provides Source an effective mechanism to develop the much-needed infrastructure without impacting our balance sheet goals and provides our partner with dedicated access to Source sand. The terminal will become a key piece of infrastructure to service a growing portion of the Montney and enhance the sand logistics in the region.
Ultimately, Source believes that by utilizing its Northern White and domestic sand offerings, that it will be able to provide the lowest landed cost of sand in the region. Over the longer term, the Montney will continue to be the resource play that feeds LNG Canada, Cedar LNG, as well as the other projects proceeding towards FID. The combination of Source's infrastructure in Wembley, Chetwynd, Taylor and Peace River provides Source with an unparalleled offering to support growth in the region. The highlights in the second quarter include sand volumes of 921,000 metric tons and sand revenue of CAD 141.1 million. These are new records for Source and represent an increase of CAD 38.1 million in sand revenue from the second quarter of 2023.
Total revenue was CAD 176.4 million, a CAD 49.4 million increase from Q2 of last year. Gross margin was CAD 32.6 million, while adjusted gross margin was CAD 42.1 million, increases of 31% and 40% respectively when compared to Q2 of 2023. Net income was CAD 4.7 million, while adjusted EBITDA was CAD 30.8 million, a CAD 10.4 million improvement from the same period of 2023. The Last Mile Logistics group delivered record sand volumes to our customers' well sites during the quarter, while our nine-unit Sahara fleet achieved 80% utilization. Sahara Ten was completed and shipped to Alaska, where it will work for a large E&P customer for the next three years.
Free cash flow for the second quarter was CAD 13.5 million, an increase of CAD 5.7 million compared to last year. Improved operating results and lower financing expense were the principal reasons for the improvement. Capital expenditures were higher due to lower sales proceeds on excess equipment as the Berthold terminal was sold in Q2 of 2023 and due to expenditures on the Chetwynd terminal expansion and upgrades at the Peace River facility. Year-to-date, free cash flow has reached CAD 29 million and is CAD 8.3 million ahead of the first half of 2023. With that, I'll now turn it over to Derren to provide a brief overview of our financial results for the quarter.
Thanks, Scott. As Scott mentioned, sand revenue for the second quarter of 2024 increased by CAD 38.1 million over the second quarter of 2023. The increase was due to a 219,000 metric ton, or 31% increase in sand volumes, and at CAD 6.84 per metric ton, or 5% increase in the average realized sand price. Sand volumes were impacted by continued strong activity levels from our customers and the addition of two new customers since the start of the year. Sand revenues were also impacted by improved performance from the Peace River facility.... While sand revenue realized from mine gate sales lowered the average realized sand price in the quarter by CAD 7.14 per metric ton, it did have a favorable impact on cost of sales and gross margins by improving our production efficiencies and yields.
Wellsite revenues for the second quarter of 2024 was CAD 35.4 million, an increase of CAD 11.4 million, or 47%, compared to the second quarter of last year. Last mile solutions trucking volumes increased 26% compared to Q2 2023, and as Scott mentioned, this is the highest volumes handled by that team. Sahara revenue was flat compared to Q2 2023, as a 28% increase in Canadian Sahara revenue was offset by limited activity for the U.S. Sahara unit. Terminal services revenue for Q2 2024 was CAD 0.9 million, an increase of CAD 0.1 million compared to Q2 2023. The reduction is due to lower storage and sand elevation revenue, less transloading from other products, and loss of rental income from the sale of the Berthold facility in Q2 2023. Offsetting these decreases was improved chemical elevation revenues.
Cost of sales, excluding depreciation, increased by CAD 37.5 million compared to the second quarter of 2023. This increase was due to higher sales volumes, higher last mile logistics volumes, and higher rail costs. Sahara-related costs were also higher due to improved Canadian activity levels and higher equipment repairs in the quarter. The weaker Canadian dollar on our US-denominated costs increased costs by CAD 1.97 compared to the same period last year. Gross margins increased by CAD 7.7 million compared to the second quarter of 2023. The increase in gross margins arose from higher sand volumes and improved performance from last mile logistics group in the quarter. Excluding gross margins from mine gate, adjusted gross margin per metric ton was CAD 46.16, compared to CAD 46.36 per metric ton last year.
Despite a weaker Canadian dollar during the second quarter, adjusted gross margin was improved by CAD 0.16 per metric ton, as the foreign exchange impact on US-denominated cost of sales was less than the positive impact on US-denominated revenue realized in the quarter. We target to remain in a naturally balanced FX position, and we'll continue to monitor exposure and actively manage as required in the future. Total operating income and expenses in the quarter increased by CAD 2.3 million. Operating expenses increased by CAD 0.3 million from the second quarter of 2023, primarily due to higher royalty costs related to shipping more sand from mines with royalties and higher insurance costs. These increases were partially offset by lower repairs and maintenance at the Peace River facility this year.
General and administrative expenses increased CAD 1.9 million in the second quarter compared to the same period in 2023, primarily due to higher incentive compensation expense, higher professional fees, and a bad debt allowance that was recorded. Finance expense was CAD 8.6 million for the second quarter, 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 repurchases that have occurred over the last year and lower other interest charges. Interest occurred on the ABL facility was higher than the prior year due to higher average draws outstanding on that facility during the quarter to support the higher activity levels.
On June 30, the principal balance outstanding on our notes was CAD 140.5 million, and Source had drawn CAD 13.4 million under its ABL facility, leaving CAD 42.7 million of available liquidity. Source remains focused on lowering its leverage over the coming quarters as it works towards achieving its debt target and refinancing its 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 the increased demand for natural gas, driven by LNG exports, increased natural gas pipeline export capabilities and power generation facilities, will drive incremental demand for Source Energy Services. We see the completion of LNG Canada later this year, the FID on the Cedar LNG facility, and work on other proposed LNG projects such as Woodfibre and Ksi Lisims, as positive developments for the basin and for our business.
Source continues to focus on enhancing our industry-leading Frac sand logistics chain, and we have and will continue to execute on a number of opportunities to grow the company and further our competitive advantage without impacting our balance sheet goals. In addition to growth in our core markets, we continue to explore opportunities to diversify and expand our service offerings... and to further utilize our existing Canadian, Western Canadian terminals. Thank you for your time this morning. That concludes the formal portion of our call. We'll now ask the operator to open the lines for questions.
Thank you. To join the question queue, you may press Star, then one on your telephone keypad. You'll be acknowledged your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press Star, then two. First question comes from Nick Cochrane with Acumen Capital. Please go ahead.
Good morning, guys. Congrats on a strong quarter.
Morning, Nick.
Morning.
A couple questions for me. First, on margins. I know it was a record quarter with last mile logistics. Can you maybe help us understand how the last mile logistics part of your business impacts your overall margins?
Yeah, I think, you know, the, yeah, you know, last mile logistics piece of our business, which encompasses, really any portion that, that comes from our terminals all the way to the well site, and our well site services. You know, it, it, you know, obviously will have a, a positive impact on the, on the margins, depending on the activity level and, and depending on the distance from our, our terminal out to the well site. I think we saw as, as you looked at, at Q1, we saw a bigger impact from our, our well site, our last mile services, just given that some of the pads were a longer distance and, and, and, you know, the Sahara fleet was a little more utilized in, in Q1.
And so had a more positive impact to the tune of, you know, maybe CAD 1 or CAD 2 on overall gross margin. But as you looked in this quarter, you know, there was a slightly lower impact, you know. As we look forward, you know, it's an important piece of our business. You know, obviously, we think it gives us a distinct competitive advantage. And, you know, we'll continue to have a positive impact on our overall gross margin.
Great. And then, with LNG Canada coming closer to the first shipment, have you seen any prices in or change in pricing for for frac sand in general?
So, you know, I think the market, in terms of pricing, has been fairly stable and has been fairly stable over the last, you know, call it 12 months. You know, as we cycle closer and closer to LNG Canada, I expect that we'll continue to have some stability in the pricing market. However, I do think, you know, we'll have pockets in time where there is excess demand or there is potentially logistics shortages, which will drive some higher spot prices.
You know, I think overall, how we see pricing playing out in Western Canada is, you know, we expect it to be fairly stable going into, you know, the beginning of LNG Canada in Q1, with some pockets and some potential upticks, as we cycle into periods of higher demand.
That's helpful. And there's been rumblings of at least one competitor in Northeast BC opening a terminal. What are you seeing in terms of the competitive landscape, and how do you see yourself being able to react to this?
Yeah, I think, you know, in terms of the competitive landscape, you know, obviously others see Northeast BC as a growth area, and so I'm not surprised of rumblings of others. You know, we really like our competitive position in Northeast BC, and we really like our competitive position for LNG infrastructure. Because it's not just one spot, and it's not just one component. And so, you know, others may have one component, whether it's a terminal or you know, whether it's another piece of the logistics chain. But really what Source brings is the entire logistics chain from the sand production all the way through to the well site, which gives us a distinct advantage.
You know, we also bring, you know, a robust LNG infrastructure, which includes Wembley, which includes unit train capability at Chetwynd, and which will include unit train capability in Northeast BC. Which is, you know, important, for the logistics of the area to have that redundancy and to have not just one single location. And then, you know, I think the our Peace River asset and our ability to bring in a domestic portion into the basin at the lowest landed cost, I think is another important piece of the overall LNG infrastructure. And so, you know, I think there'll continue to be rumblings of competitors in the region.
But you know, I think it'll be very difficult to compete against Source and our footprint and what we can offer in the region.
That's great color. Thanks for passing on.
The next question comes from Paul Mackaklic, with Pluto Bank. Please go ahead. Please, go ahead. Mr. Paul, we can't hear you. Please go ahead. This concludes the question and answer session. I would like to turn the conference back over to Scott Melbourn for any closing remarks. Please go ahead.
Thank you, everyone, for joining today, and thank you for your interest. As always, myself or Derren are available for any follow-up questions you may have. Thanks, and have a great day.
This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a great day.