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Frontier Communications (FTR - Analyst Report), a provider of telecommunication services in rural areas, has announced its participation in Lifeline Broadband Pilot Program — the Federal Communications Commission’s (FCC) pilot project on broadband deployment. Frontier’s participation in the FCC project is expected to strengthen its foothold in the rural broadband market and help it significantly through expansion in underserved areas.

Beginning mid-2013, Lifeline Broadband Pilot Program will involve lifeline discount on broadband services and promote awareness on them. Frontier, together with Connect Ohio, a subsidiary of Connected Nation, a non-profit organization will provide digital training to the willing participants in Ohio. In addition, the company will provide discounted broadband services and free or discounted computers in selected areas of Ohio. 

Frontier has been a significant beneficiary of Universal Service Fund (USF), which supports wireless services in underserved areas. Approximately 12% of the 2011 revenue was from regulated sources including USF. On November 23, 2011, the FCC reformed its USF and inter-carrier compensation rules and highlighted its efforts to expand high-speed Internet services to rural areas over the next six years (2012–2018).

The changes transformed USF into a new fund called Connect America Fund (CAF) that entitled Frontier to a $300 million funding support from the FCC for broadband deployment in rural areas. The company has already received funds worth $71.9 million from the FCC under CAF Phase I interim support. These funds are expected to benefit approximately 92,876 households where Frontier is required to provide broadband services within July 24, 2015.

In addition to this, the FCC requirements also focus on capital investment commitments by providers to expand broadband availability to at least 85% of the households throughout its coverage with minimum speeds of 3 Mbps by year-end 2013 end and 4 Mbps by year-end 2015. As of September 2012, the company fulfilled 80% of its commitments and is on track to meet 85% of its target by year-end 2013.    

Besides the FCC funding, Frontier is also expected to benefit from the transfer of Verizon’s assets from 14 rural states in April. The move positioned Frontier as the largest rural telecommunications company in the U.S. The company would draw future synergies from further network integration and efficiencies and from real estate consolidation. Another important achievement of the company is its wholesale agreement with Hughes Network Systems, LLC (a U.S. based satellite broadband service provider) to distribute satellite-based broadband services branded as Frontier Broadband.

However, 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.

We maintain our long-term Neutral recommendation on Frontier. The company has a Zacks #3 Rank implying a short-term (1-3 months) Hold rating.

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