Yes, they will still replace it. I have had this problem for months, but I assume it was because I had dropped my phone a time or two. I had a barely noticeable dent, but the back was scuffed so badly that the metal was becoming shiny. There were countless scratches. Additionally, my screen had some discoloration in the area where there were two large bubbles very close together (I had 5 all together). Now I realize this discoloration was probably caused by pressure the bubbles were applying to the screen, as someone above described.
Even with all the scuffs my phone had, I took it into the store yesterday. The genius looked at it for about a minute (examing the water indicator as someone else described above) and then replaced it, no questions asked.
As for those who questioned receiving a refurbished unit, I would rather have a refurbished phone without bubbles and screen discolorations than keep my original one that did.