2nd UPDATE: Veolia Shares Up On 9-Month Expectations,Issues Remain

Shares in French waste and water utility Veolia Environnement SA (VE) surged Thursday as the group's nine-month adjusted operating profit, although down 8.6% on operational and contracts termination, came in above expectations, although the group's sole third quarter performance was below consensus and the group issued another profit warning.

At 1253 GMT, shares in Veolia were up 1.8% at EUR9.20 while the CAC-40 benchmark index was up 1.5%. "Veolia's operating results are in-line-plus," a Paris-based trader said.

However, "the third quarter performance was quite disappointing," Societe Generale's analyst John Honore said, noting that over the sole third quarter, Veolia's adjusted operating profit came in at EUR313 million, down from EUR418 million a year earlier. This came in below expectations, he said.

Furthermore, Veolia, which stunned markets earlier this year with a profit warning and disclosures of operational problems in some divisions, warned of a downturn in full-year adjusted operating profit after previously saying it saw a "slight decline" due to ongoing operational issues.

And uncertainties remain, due to the current economic environment and the potential charges related to the divestitures, the group's chief financial officer, Pierre-Francois Riolacci, said.

Veolia, the world's largest environmental utility by revenue, said over the first nine months of the year, its adjusted operating profit dropped 8.6% to EUR1.25 billion, excluding the transportation business which has been merged into a joint-venture, Veolia Transdev. Veolia's operating profit dropped 16.4% compared with the numbers it reported a year ago, but Veolia has restated the figures from the 2010 period following divestitures and reorganizations.

Revenue for the period dropped 6% to EUR23.96 billion, from EUR25.47 billion a year earlier.

Veolia said its adjusted operating profit has been adjusted for "impairment of goodwill, badwill recognized in net profit and certain other items defined as special items."

Chairman and Chief Executive Antoine Frerot said a company reorganization is underway to address remaining difficulties in southern Europe, North Africa and the U.S. "Investments are under control and the 2011 divestment program has largely been completed," he said.

The group divested EUR1.17 billion over the period.

In August, the group announced a corporate overhaul, including divestitures and a significant geographic scale-back. Veolia plans to exit activities in Egypt and Morocco and the Marine Services business in the U.S., while it is reviewing its business in Italy. It also plans to reduce its global presence to 40 countries from 77 currently and to press ahead with cost-cutting efforts.

The news followed a disclosure of accounting fraud in its U.S. division and a profit warning.

For 2011, Veolia initially expected its adjusted operating profit to grow between 4% and 8%, while it also saw growth in net profit.

Yet the group confirmed Thursday the 2011 objectives of organic revenue growth, EUR250 million in annual cost savings and at least EUR1.3 billion in divestments and positive free cash flow after dividend payment.

As for the dividend, the group will clear its policy during its investor day on Dec. 6, Riolacci said, before declining to elaborate.

-By Geraldine Amiel, Dow Jones Newswires; +33 1 40171767; geraldine.amiel@dowjones.com

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