UPDATE 1-Power producer Drax's core earnings beat estimates

(Corrects paragraph 1 to say company produced less power, not more)

By Karolin Schaps and Esha Vaish

Feb 18 (Reuters) - Drax Group (LSE: DRX.L - news) , operator of Britain's biggest power station, reported 2013 core earnings ahead of analysts' estimates on Tuesday despite generating slightly less electricity from its power production fleet.

However, core earnings before interest, tax, depreciation and amortisation still slumped 23 percent to 230 million pounds ($384 million) due to the rising costs of its carbon emissions and the company warned of a tougher year ahead on the back of tighter profit margins due to the mild winter.

Analysts on average had been expecting EBITDA of 221.52 million pounds, according to Thomson Reuters I/B/E/S Estimates.

Drax cut the final dividend to 8.9 pence a share from 10.9 pence last year, making 17.6 pence per share for the year, short of the average forecast given by analysts of 18.13 pence and down 30 percent on the payout for 2012.

Underlying earnings per share were down 32 percent at 35.3 pence.

By 1113 GMT Drax's shares were down nearly 2 percent at 790 pence.

The company, which is gradually converting half of its coal-fired generating capacity to burning biomass in a 700 million-pound ($1.2 billion) project, said it was confident it would receive government support to convert the next two units, having successfully switched over the first unit in April last year.

But it does not expect to make further conversions until 2015 and in the meantime has to pay a UK carbon tax levied on emissions, which is increasing again this year.

At the same time, the FTSE-250 company also needs to pay for carbon emissions through the EU's Emissions Trading System and since last year Drax no longer benefits from free carbon allowances and therefore faces higher costs.

Drax is expected to sign a government contract this spring which guarantees a minimum electricity price for the biomass power plant, an agreement that guarantees future returns and which is essential for the firm's conversion plan.

"In 2016, we expect half of Drax to be fuelled by sustainable biomass, some 4 percent of the UK's electricity," Chief Executive Dorothy Thompson said in a statement.

Drax expects to convert the second unit in April 2015 and the third in the fourth quarter of 2015 at the earliest.

To fuel its future biomass units the company said it was looking at increasing wood pellet production facilities in the United States, without elaborating on specific plans.

Drax will open two production plants in the United States in the first and second quarters of 2015, it said. ($1=0.5983 British pounds) (Editing by Greg Mahlich)