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Qwest (Q) booked some much-needed cash Friday in completing the first part of its yellow pages sale.

On Friday, Qwest closed the $2.75 billion sale of part of its highly profitable Qwest Dex directory business to a group of private investors. Qwest said it expects the second phase of the QwestDex sale, pending regulatory approvals, to close in 2003.

Still, the good news fails to dispel worries in some circles about whether the company could be seeing red before it completes the second half of the transaction. The financially reeling local phone giant was forced earlier this year to put Dex on the block to help pay down debts. The two-part sale, worth a total of $7 billion and struck this summer after months of shopping for the best bid, helped pull Qwest out of a liquidity crisis that had threatened to send the big Denver telco into bankruptcy.

But the sale came at a price, and some investors are worrying even now of hurdles to come. The deal is rife with financial details. One of the terms of Qwest's recent $3.2 billion loan renegotiation was that bankers will receive the first $1.4 billion in proceeds from the sale. In a statement after the market closed Friday, Qwest said it plans to use some of the cash to pay down its existing credit facility to $2 billion.

And as

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detailed in August, Qwest, in its haste to do the two-part deal, left standing several agreements to subsidize local phone rates with the proceeds of a directory business that it no longer will own. Regulators in states including Arizona and Washington may require that those subsidies continue, or demand a cut of the sale's proceeds.

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.

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 have said that 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. The company says it expects to negotiate this arrangement on a state-by-state basis and has made assurances that it will not seek to raise phone rates.

Of course, the sale of the directory business isn't damaging only to Qwest's top line. The $1.6 billion-a-year unit typically accounts for just 8% of total revenue but 16% of cash flow. While pawning the business may have kept Qwest in business for this year, the sale has also robbed Qwest of a rare cash cow whose steady health could offset the company's numerous ills.

Consultants and analysts say they don't expect this to be an easy process.