Regional fiber operators have always been out there, but in the last 5-10 years, they have started to get attention, and not just when it comes to consolidation. With us today is DQE Communications CEO and President Jim Morozzi. DQE has its roots in the energy utility world of metro Pittsburgh but has moved far beyond the original vision of a dark infrastructure company into a regional lit and dark fiber access provider. Jim joined DQE in 2013 and has overseen the company’s expansion across Pennsylvania and neighboring states.
TR: What was your journey to the CEO and President roles at DQE Communications?
JM: I started my career as an electrical engineer in the electric utility business, building distribution circuits, sub-transmission circuits, and substation upgrades with PECO Energy, a utility in the Philadelphia area that is now part of Exelon. Later, when I was working in the corporate strategy group of PECO, I was asked to figure out ways to further utilize the company’s assets: poles, conduits, experienced linemen, big bucket trucks, and things of that nature. At that time, the FCC was auctioning off PCS licenses, and so we put together a plan to get into telecommunications at PECO Energy. I was very fortunate to move from a corporate strategy role to turning up a telecommunications business. We got PECO into PCS business, and built out the Philadelphia MTA, largely on PECO infrastructure: transmission towers, distribution poles, sub transmission poles, and such things. Later, we got into the CLEC business with what became the precursor to our fiber world today offering voice and data services in and around the Philadelphia area with Adelphia Business Solutions. Later, I led D & E Communications, an RLEC in Lancaster County, Pennsylvania, that served about 240,000 access lines, after which I joined DQE Communications.
TR: What does DQE Communications’ infrastructure and business model look like today?
JM: We are a regional fiber- provider. We provide mission-critical data services to our customers, the majority of whom are large enterprises. Our network is primarily concentrated around southwestern Pennsylvania and consists of more than 4,200 route miles of fiber. We are in every commercial data center in the southwestern PA region and in many of the business parks and buildings. Pittsburgh is the hub for the business environment in western PA, but like any metro area, you have the suburbs and plenty of business parks outside the downtown area. When DQE Communications was established 25 years ago, dark fiber was the only thing that we provided. But, like all our other brethren in this space, we have evolved to offer metro ethernet services, Internet services, DWDM, SD-WAN services, and all the ancillary products that go along with that.
TR: What types of customers do you focus on?
JM: What we focus on is, first and foremost, the large enterprises. We have also done well with schools and school districts, universities, and hospitals. In addition to that, we do a decent amount of government work. Lastly, we do a fair amount of wireless backhaul. We are not a national provider with cell sites all over the country, but we do have a good concentration in and around Western PA. We also do a lot of last-mile services for larger telecom companies. For instance, if a retailer has thousands of national locations, we will do the sites that are in Pittsburgh on behalf of the service provider handling the national contract.
TR: Where have you found opportunities for incremental geographical expansion lately?
JM: It was a big push for us last year when we turned up our Harrisburg market. We have built a ring there and look to continue to grow that. We are also in the process of building out in Lancaster County, Pennsylvania, connecting York and down into the Hagerstown, Maryland, area as well. We are currently focusing on the pole attachments and getting the permits and the utilities to do their make-ready work. We are also expanding our network in West Virginia from Morgantown down to Clarksburg. That looks like an attractive little pocket for us.
TR: How are you building out that new footprint? Is it all your own network or do you lease other assets along the way?
JM: We are building our own network. Of course, we get pole access agreements from the local utility or telephone companies out there, but we are not someone who relies a lot on type-2 connections. That said, we do rely on some middle-mile transport through IRUs because sometimes it’s more cost-effective to buy a 100-mile IRU from point A to point B than to build across the mountains. However, we always build the metro rings ourselves. For example, two years ago, we built metro ring in Altoona, PA, and now we are building laterals off that wherever the business takes us, but we took advantage of some IRU fiber to get us back into Pittsburgh, using our own DWDM on top of that for the transport. Our rule of thumb is that if we can’t hit 70-80% of the locations with our own network, we’re not interested because we can’t control that network experience.
TR: To what extent does DQE’s network infrastructure overlap with your sister company on the energy side of things, Duquesne Light Company?
JM: Duquesne Light Company operates in only two counties in Western PA: Allegheny County and Beaver County, while right now, DQE is in approximately 15 counties. We have expanded far beyond that original footprint. We do that because we follow our customers. For instance, we do business with several regional banks that are either headquartered in or have a significant presence in Pittsburgh but also have some locations in Harrisburg, or maybe down in Morgantown, West Virginia. So, we try to grow with our customers, and take their lead regarding where they need services and providers like us to meet their needs. That’s how we’ve gone from one to two counties in PA to 15. Also, to Morgantown, WV, and even a little bit of Ohio. Our philosophy has tried to stay close to what we know best alongside the customers with whom we have had a good relationship and incrementally grow.
Another principal overlap is that Safety is a major component of both DQE and Duquesne Light. Electric line worker’s jobs are full of potential risks, and even with DQE working in the communications space, safety must be a primary focus. We start every meeting with a safety message and have drawn on our corporate affiliate to make that a fundamental value for us. Going along with that, both DLC and DQE, have a laser focus on reliability and resiliency. We know electric customers are impacted when the lights go out , so when they do, you’ve got to respond fast. We feel the same way. Your fiber services should not go out. When you do have an issue, we have that mentality to respond quickly, and I think the way we do that sets us apart in our customers’ eyes.
TR: You have also recently entered the FTTH marketplace. How does that project fit in with your plans?
JM: We recently launched our Fiber@Home service, and we’re trying to take advantage of the network we’ve already built and go into the unserved or underserved areas and communities in and around our backbone network. For instance, our network stretches north from Pittsburgh through Mercer County and into Lawrence County. Perhaps initially, we were pursuing a 911 opportunity or a wireless tower deal, but we go through many residential neighborhoods to get from point A to point B. We’re trying to be both strategic and tactical by asking what towns or what neighborhoods we extend our network through that are not served by the likes of other service providers. So, in the northern part of our network, near Sharon and Hermitage, PA, we just turned on some fiber to the home services, utilizing GPON technology and taking advantage of the fact that we have metro Ethernet access rings in that area, and are deploying the OLTs to serve the homes in that area. Our technicians hang the ONTs within or on the side of the house and run the drop cable – all fiber to the homes. We’re at the very beginning of this, but we officially have residential service now available.
TR: Will you be looking to take advantage of the federal dollars available for such projects?
JM: We are excited about the Middle Mile grants and BEAD funding that are coming up. People don’t think so much about Pennsylvania being very rural, but there are big pockets of this state that fit in this definition of unserved or underserved. We are trying to match up where we have backbone fiber and will put our best foot forward in those kinds of opportunities. We have also won grants from local counties with specific broadband needs for their residents, although those are relatively small dollars. We won a decent size opportunity grant in West Virginia as well. Moving forward, we are trying to be smart about where to pick and choose our Fiber@Home opportunities.
TR: For your wireless backhaul business, at what stage do you see the industry’s rollout of infrastructure for 5G in your region?
JM: It’s still in the early stage. We do business with the major wireless carriers, and our specific experience is that the upgrades and broadband speeds have been happening a little bit slower than I was anticipating. Many of the cell site services we provide are either 1G or 10G, and we expect to see most of those 1G convert to 10G. We see conversions, but they haven’t been in mass right now. That would indicate to me that the 5G rollouts are not happening as quickly as many might have thought or predicted. We are also doing a fair amount of small-cell dark fiber, which supports the 5G piece.
TR: DQE Communications has largely stayed above the fray when it comes to M&A over the years. What is your perspective on the consolidation of infrastructure companies?
JM: We made one acquisition a long while ago, which got us into the lit services business but other than that, we have stayed out of M&A activity. It’s not that we haven’t looked, but things are a little frothy, as you know. We have decided that we think we can make good use of extra invested capital by incrementally growing our footprint. So that’s where we have deployed our capital as opposed to acquiring at higher EBITDA multiples. We get phone calls because we have a nice network in Western Pennsylvania that would fill some holes for people, but our business is strong and profitable, we have good solid EBITDA margins, and good returns on that invested capital. Fiber infrastructure has value and we’re working to optimize that value through appropriate investment.
TR: How did the pandemic manifest itself for DQE and its ecosystem?
JM: In March of 2020, when everything closed, our teams went and worked from home, but we didn’t miss a beat. Because of the way we plan for disaster recovery and business continuity, our team was equipped to work from home and still able to run our business. All our customers left their offices as well, so for a period of time, it was tough to get a hold of people, and we had to figure out different ways to get in touch with the IT directors, the CIOs, and other people who make buying decisions. People are coming back, but even now, downtown Pittsburgh is a bit different than what it was pre-COVID, and I don’t think Pittsburgh is atypical on these kinds of things. We have seen customers and potential customers reevaluate their space needs, but we’re primarily past a lot of that stuff now. Things are certainly better than they were in 2020 and 2021,but the business environment has changed in terms of how employees work. Even our own company operates on a hybrid model, and I think our employees enjoy and appreciate that flexibility. They know that mission number one is to provide the critical data communications that our customers demand.
TR: Have you seen supply chain disruptions?
JM: We certainly have been seeing longer lead times for almost everything. We’ve been fortunate to have pre-ordered a lot of fiber that is either sitting in the warehouses where we need it or is on a production schedule for somewhere down the road. We did see an effect on metro ethernet switches, which were affected by the chip shortages out of Asia. We tend to be a bit more conservative, perhaps going back to that utility mindset, so we had a decent amount of inventory going into this. We still saw issues, for instance, getting taps and splice cases and such for or Fiber@Home product that delayed us about 3-4 weeks just because we couldn’t get our hands on equipment. It has eased up a bit, but it’s not fixed yet. We’re still being quoted much, much longer lead times than they should be. That forces us to plan in advance, which ties up capital having inventory sitting on a shelf. It’s not the best way to operate a business, but that’s what you have to do in order to be able to serve the customer. .
TR: Thank you for talking with Telecom Ramblings!
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