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Telecommunication services provider Frontier Communications (FTR - Analyst Report) is seeking funds from Connect America Fund (CAF) to support its broadband developments in under-served areas.  The company is seeking $71.5 million under CAF grants, which will help it in adding more locations under its broadband coverage. The funds would be in addition to the company’s own capital spending of $2.2 billion in the past three years to foster broadband penetration and network infrastructure in its coverage area.

Under CAF, Frontier is entitled to a $300 million funding support for broadband deployment in rural areas. The company already received funds worth $71.9 million under CAF Phase I interim support. These funds would benefit approximately 92,876 households in which Frontier is required to provide broadband services within Jul 2015. In addition, the prerequisites for the grant also entail the company to expand broadband availability to at least 85% of the households under its coverage with minimum speeds of 3 Mbps by year-end 2013 and 4 Mbps by year-end 2015.

However, Frontier continues to experience decline in regulatory derived revenue (access service revenue) due to lower subsidy payments received under the federal program. In Nov 2011, the Federal Communications Commission (FCC) reformed its USF and inter-carrier compensation rules andhighlighted its efforts to expand high-speed Internet services to rural areas over six years (2012–2018). It will reduce access and compensation rates charged by Frontier over the time frame, resulting in significant decline in the company’s access revenues. This will also result in lower profits in 2013 and beyond.

Further, intense competition from the company's peers like Windstream Corporation (WIN - Analyst Report), a highly leveraged balance sheet, regulatory pressure as well as integration risks in converting the acquired properties into its own system might limit the earnings potential in the upcoming quarters.

Frontier, which operates with other carriers like CenturyLink, Inc. (CTL - Analyst Report) and United States Cellular Corporation (USM - Analyst Report) retains a Zacks Rank #3 (Hold).

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