UPDATE 2-United Utilities says bills to rise with incomes

(Adds further CEO comment, detail, updates shares)

By John Bowker

LONDON, June 3 (Reuters) - Britain's United Utilities Plc (UU.L) said on Tuesday it does not expect a hike in customer water bills to exceed salary rises, as it reported full-year operating profit rose 7 percent to 677.2 million pounds ($1.3 billion).

The company, which supplies water and sewage services to customers in the north-west of England, said the rising cost of debt and higher energy prices were likely to add to the amount regulator Ofwat will allow it to charge customers.

"The regulator has to look at the capital expenditure required, like our (energy) costs and the cost of debt -- the cost of debt is going up," Chief Executive Philip Green told reporters.

He added energy costs of its water business were expected to rise around 60 percent in the current financial year, while investment in its water infrastructure was likely to remain steady over the five years 2010-2015 at about 3 billion pounds.

Ofwat will set the price regime for that period following a consultation process.

"It's a tough challenge, but we don't expect prices to go up higher than incomes," Green said.

United Utilities pretax profit from continuing operations fell slightly to 478.3 million pounds, but was still above analyst expectations of around 471 million, according to Reuters Estimates.

"We have had a successful year (and) we are confident of delivering a strong financial performance over the remainder of the regulatory period," Green said.

United Utilities shares, which have held around flat in the year to date, were up 0.5 percent at 761.5 pence by 0841 GMT -- valuing the business at around 6.65 billion pounds.

The company sold its electricity distribution business for 1.8 billion pounds last year, and pledged to return 1.5 billion to investors in August this year.

"A solid set of results confirming UU's defensive appeal .. We believe that the shares should perform relatively well in a difficult economic environment," Cazenove analysts said in a research note.

UU said its capital expenditure for the year was up 45 percent at 826 million pounds, in line with regulatory assumptions, while the dividend was raised 4 percent. (Reporting by John Bowker; Editing by Quentin Bryar and Sue Thomas)