ALAMEDA, Calif. — A water rights dispute has stalled plans by California’s Imperial Irrigation District to sell $250 million of Build America Bond certificates of participation next week to finance new power-generating equipment.

Two landowners filed a reverse validation action challenging the bond resolution the IID board approved June 22. The suit appears to stem from a long-running dispute over water rights, which has no bearing on the energy financing, the district’s general counsel, Jeff Garber, said Thursday.

“We believe that the causes of action in the plaintiff’s complaint are not legally sound and there is no legitimate basis for the reverse validation claim,” Garber said in an e-mail.

The district was formed to deliver Colorado River water to the agricultural Imperial Valley, but it also operates a separate energy department that serves 145,000 electricity customers in three counties in California’s inland desert along the Mexican border.

The legal complaint, filed by landowners Michael Morgan and Foster Feed Yard Inc., focuses primarily on the district’s 2003 quantification settlement agreement, a much-litigated settlement among the IID, the federal government, and Southern California water agencies calling for some water to be transferred from the district to the urban agencies.

The suit argues that the proposed electricity revenue bonds encumber “electrical assets it owns in trust for its water beneficiaries.” The certificates of participation are to be secured by net revenues of the district’s electric system.

“IID strongly disputes any financial liability exposure related to the QSA and water rate cases,” Garber said in his e-mail. “Given that the new energy bonds are to be secured only with energy department revenues, there is no misrepresentation in the bond documents.”

In any case, the COP sale will be postponed while the district prepares a ­response to the suit and revises bond documents.

“We put in a lot of work to get this done and we were ready to price Wednesday,” chief financial officer Greg Broeking said.

The district has successfully fended off multiple lawsuits from the same plaintiffs in recent years, Broeking said, adding that he knows the publicity could affect the market’s reception of the debt offering.

“We’re kind of used to being sued a lot by this group but it may alarm potential investors,” he said. “It’s not helping us market the bonds, that’s for sure.”

The district got a mixed message from the two agencies rating the deal: Moody’s Investors Service downgraded the electric revenue credits to A1 from Aa3, while Standard & Poor’s upgraded the power credits to AA-minus from A-plus.

“The rating downgrade to A1 from Aa3 factors in the continued economic ­pressures on the service area, including very high unemployment rates in Imperial County,” Moody’s said in a news release.

Imperial County tops the Associated Press’s list of most economically stressed counties in the nation, an index the news agency calculates using a formula based on unemployment, foreclosure and bankruptcy rates.

“Reflecting the challenges in the local economy, IID’s load decreases have led to a 5% decrease in 2010 year-to-date revenues,” according to the Moody’s release. “To the extent that generation load demand fails to increase, IID is at risk of further declines in its financial profile as debt service obligations increase as a result of this financing.”

For Standard & Poor’s, a strong fundamental financial position led to an upgrade for the water district.

“It’s just got really strong financial margins, good cash and good debt service margins, even considering the costs of the capital plan,” analyst Ian Carroll said Wednesday.

Proceeds from the COP issue would be used to purchase and install new generating equipment at the district’s El Centro Generating Unit 3. The new Siemens gear will replace a boiler and turbine that date from 1957, more than tripling its maximum output, according to an IID news release.

“Repowering of this unit will replace equipment installed more than 50 years ago with Siemens state-of-the-art power island equipment, increasing overall output by 100 megawatts,” Markus Tacke, chief executive of Siemens Energy’s industrial power business unit, said in the news release announcing the IID deal.

The new equipment is expected to be in operation by mid-2012.

“We’re putting pretty much state-of-the-art technology in there to increase capacity,” Broeking said. “It lowers our operational costs going forward and also increases our reliability.”

The district had hired Fitch Ratings for previous bond deals, but chose not to this time because it’s planning a Build America Bond COP issue.

“The taxable BAB market does not value the Fitch rating,” Mike Berwanger of financial adviser Public Financial Management told the district board at its June 15 meeting. “The district will realize a slight savings by not paying Fitch.”

Goldman, Sachs & Co. and Citi are co-senior managers. Fulbright & Jaworski LLP is bond counsel.

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