The yellow pages business will soon be history at Qwest ( Q). Luckily for investors, the company will have a stack of bills by which to remember it.

It's not enough that the teetering Denver telco soon will part with one of its most profitable lines of business. In its haste to do the $7 billion, two-part deal, observers say the company left standing several agreements to subsidize local phone rates with the proceeds of a directory business that it no longer will own.

Some investors say that the fact that Qwest left those subsidy agreements in place shows how desperate the cash-strapped, debt-encumbered company was to do a deal. And they say the cash drain that the subsidies represent is one that Qwest can ill afford as it faces the prospect of credit-line negotiations as well as billions of dollars in debt-repayment deadlines in the coming year. Despite those worries, Qwest shares rallied Tuesday, adding 71 cents, to $2.95.

Eighties Night

It's not clear how many of the 14 states in which Qwest operates have subsidy obligations. A company spokesman said he didn't know. But in at least three states -- Arizona, Washington and Colorado -- Qwest is committed to paying a total of $235 million a year to help lower the cost of consumer phone service. That's 15% of the total Dex revenues last year.

"I find that when things look as stupid as this, they often are," says Friedman Billings Ramsey analyst Susan Kalla.

The agreements date back to the '80s, when the Baby Bells tried to move their yellow pages businesses out from under state control. Since the directory business was created through a quasi state-run phone operation, some state regulators tried to retain at least a portion of the proceeds as a giveback for customers who helped underwrite the business in the first place.

At the time, Qwest agreed to give a cut of its yellow pages revenues back to the ratepayers in at least these three states, in exchange for being allowed to run the directory business without regulatory oversight or restrictions. As part of a regulated industry, the company's income was capped, and anything beyond the cap had to flow back to operations to help lower prices.

In Washington, Qwest contributes $3 per customer per month toward the overall phone bill, or roughly $100 million a year. In Arizona, the cut of Qwest's Dex revenue that counts toward the subsidy is $43 million. And in Colorado, Qwest pays a $92 million annual subsidy.

Regulators at those three states say those subsidies from Qwest will continue whether the yellow pages businesses are controlled by Qwest or not.

Qwest says the obligation, while intended to represent a cut of the revenues from the Dex business, is merely an arrangement on its balance sheet and that no checks are written to the states.

Nonetheless, a Qwest spokesman said the company may remedy the existing obligations "through the regulatory process, if necessary."

But a representative from Colorado's Public Utility Commission says it's a longstanding arrangement and that Qwest has made assurances that it will oblige with the terms. The representative said that, years ago, when the telco tried to challenge the arrangement, the state's Supreme Court sided with regulators.

Muscles and Corpuscles

"They probably hope now that between political muscle and logic they will get out from under these obligations," said a former U.S. West executive, who left soon after the Qwest merger.

While that probably gives investors a more sanguine look at the Dex sale, it also looks like it may be a boon to teams of lawyers and lobbyists.