Hawaiian Telcom residential customers could get a free corded telephone upon the $435 million sale of the company's directories publishing business late this year or early next year.

The state Division of Consumer Advocacy is urging the Public Utilities Commission to approve the sale only if the phone company meets certain conditions that include providing customers with coupons for free phones. Hawaiian Telcom announced in May that it planned to sell its Yellow Pages directory publishing business to Englewood, Colo.-based Local Insight Media LP.

The Division of Consumer Advocacy's proposed conditions are likely to provide framework for the PUC's final decision and order.

Just how much the free phone coupon would cost Hawaiian Telcom was not disclosed. However, the company has offered a corded phone for sale as cheap as $5 each. If the company gave away such phones to each of its 345,556 residential access line subscribers, the retail cost could reach $1.73 million.

Hawaiian Telcom declined to comment on the proposed sale conditions.

"It is our company's policy to refrain from commenting on proceedings that are ongoing before the Public Utilities Commission," the company said in a written statement.

The sale, which still needs state PUC approval, would help Hawaiian Telcom reduce $1.38 billion in long-term debt created when the company was sold from Verizon Communications Inc. to The Carlyle Group in 2005. The reduced debt would increase the company's financial flexibility while moving Hawaiian Telcom closer to a PUC-set debt-to-equity ratio at which dividend payments to the phone company's investors can begin.

As things stand, the highly profitable Yellow Pages business essentially helps to subsidize the less-profitable phone business. Under the proposed conditions, which were agreed to by Hawaiian Telcom, the company agrees to include $42.6 million of directory publishing revenues as regulated phone business revenues in any future rate-change request.

"That was the true value" of the proposed conditions, said Catherine Awakuni, executive director for the Division of Consumer Advocacy. "The real benefit to the ratepayers is the revenue imputation.

"The (free phone) coupon is really kind of an additive. What both parties were thinking was that it would provide the customers with an opportunity to have a phone in emergency situations," Awakuni said.

If the sale goes through, the directory will continue to be published as the official telephone book of Hawaiian Telcom and will still be named the Hawaiian Telcom Yellow Pages. The sale would have no impact on the directory business's 62 contract employees, Hawaiian Telcom has said. LM Berry Co. is expected to remain the directory's printer.

In 2007, Hawaiian Telcom will publish 10 directories on O'ahu, Maui, Hawai'i and Kaua'i with a total circulation exceeding 1.8 million white and yellow pages books. Hawaiian Telcom said its directory currently ranks No. 1 in the Hawai'i market for possession and usage by consumers.

Hawaiian Telcom's directory competes with directories published by Ad-Ventures and Paradise Pages.

Reach Sean Hao at shao@honoluluadvertiser.com.