Innogy's healthy dividend masks margin pressure in UK, Netherlands

* Sees (Shanghai: 600481.SS - news) adj EBITDA of 4.4 bln eur in 2017, lower end of range

* Proposes 2016 div of 1.60 eur/shr vs 1.58 eur Rtrs poll

* Parent RWE would receive 683 mln eur based on plans

* Innogy says loss at Npower narrowed in 2016 (Recasts, adds context on retail markets, trader quote)

By Christoph Steitz and Tom Käckenhoff

ESSEN, Germany, March 13 (Reuters) - German energy group Innogy proposed a dividend payout at the top of its target range, in a boon for struggling parent RWE (IOB: 0FUZ.IL - news) , even as it said it lost 300,000 customers in Britain and the Netherlands last year.

Innogy, which is RWE's healthy renewables, networks and retail divisions and was listed last year, proposed a dividend of 1.60 euros per share on Monday, marginally above a Reuters poll forecast of 1.58 euros.

That means RWE, with its 76.8 percent stake, would receive 683 million euros ($729 million) in payouts, cash it badly needs after impairments on its power plants triggered the largest loss in its 119-year history.

Shares (Berlin: DI6.BE - news) in Innogy, however, slipped 0.3 percent and those of RWE were down 0.7 percent, after Innogy said it expects core earnings (adjusted EBITDA) of 4.4 billion euros this year, the lower end of a previous target range of 4.3 bln-4.7 bln.

The company, Germany's biggest energy group, announced a 7 percent drop in adjusted EBITDA for 2016 to 4.20 billion euros, although that was slightly better than a Reuters poll forecast of 4.17 billion euros.

Strong competition in the British and Dutch markets is making it hard for Innogy to retain customers there while maintaining profitability.

"We are accepting customers losses," Innogy Chief Executive Peter Terium said, referring to the Dutch retail market where rivals are snatching customers at ultra-low margins.

Terium said Innogy also continued to face challenges in the UK retail market, where the cartel office (CMA) has capped some power tariffs. However, it narrowed its operating loss at its British unit Npower to 109 million euros in 2016 from 137 million a year earlier, as a restructuring programme at the group had started to bear fruit.

It expects to turn an operating profit at Npower this year, it said.

Innogy sees growing competition in key areas of its overall business, including renewables, where bid-based tender systems have replaced incentive schemes to lower the cost for solar and wind power.

It said its adjusted net income, the source of its dividend, should top 1.2 billion euros this year, up from 1.12 billion in 2016, but below a Reuters poll forecast for 1.3 billion euros.

"The slightly disappointing outlook for net income is a burdening factor, because that's what's determining future dividends," said a trader.

The proposed 2016 dividend represents a payout ratio of 79 percent, the upper end of the company's 70-80 percent target range, which Innogy confirmed.

($1 = 0.9372 euros) (Additional reporting by Vera Eckert and Hakan Ersen; Editing by Vyas Mohan and Susan Fenton)