UPDATE 3-Waste Management posts lower profit, cuts forecast

(Updates stock action)

CHICAGO, Oct 26 (Reuters) - Waste Management Inc WMI.N posted a weaker-than-expected quarterly profit on Friday and cut its 2007 outlook due to the elimination of a tax benefit for using alternative energy sources, and its shares fell nearly 7 percent.

The largest U.S. trash hauler's net income declined 7.3 percent to $278 million, or 54 cents a share, in the third quarter from $300 million, or 55 cents a share, a year earlier.

Excluding costs for a California labor disruption, earnings were 57 cents a share, 2 cents below the analysts' average forecast compiled by Reuters Estimates.

Houston-based Waste Management said higher oil prices cut 2 cents a share off earnings because of the elimination of Section 45K tax credits. In the year-earlier quarter, the credits boosted profit by 5 cents a share.

Section 45K tax credits provide incentives to corporations to use alternative energy, which can be more costly than traditional petroleum-based sources, a Waste Management spokeswoman said. As the price of oil has risen, the gap between traditional and alternative sources has diminished, decreasing the value of those incentives.

The spokeswoman said Waste Management would continue to invest in alternative energy even as the value of those tax credits declines.

Chief Executive David Steiner said in a statement that costs related to health and welfare, litigation and bad debt also hurt results.

"The fluctuation in these costs and Section 45K tax credits were benefits in the first and second quarter of the year, and worked against us in the third quarter," he said. "These items were the primary reason earnings did not meet our expectations for the third quarter."

Third-quarter revenue slipped to $3.4 billion from $3.44 billion. Analysts had expected $3.43 billion.

For the second half of 2007, Waste Management said it no longer expected to receive 4 cents a share from Section 45K tax credits. Its full-year profit outlook of $2.07 to $2.11 a share reflected that benefit.

Analysts on average were expecting $2.10 a share for 2007.

Waste Management raised its forecast for 2007 free cash flow to $1.5 billion, $100 million above the high end of its previous forecast of $1.3 billion to $1.4 billion.

Waste Management shares were down $2.62, or 6.7 percent, at $36.41 in morning New York Stock Exchange trade. The drop pushed them into negative territory for the year, down 1 percent, at a time when the Dow Jones Waste & Disposal Services Index .DJUSPC, is up 10 percent. (Reporting by Ben Klayman; additional reporting by Scott Malone in Boston)