A buy- and sell-side analyst have conflicting views about whether a recent spread rally will continue for FirstEnergy Corp. The utility has seen its 7.375% notes of '31 rally to a bid of 185 basis points over Treasuries last Thursday from levels wide of 250 some two weeks earlier on optimism that the company's Davis-Besse nuclear plant will be up and running by late November. The plant has been shut down due to an acid leak, and must receive approval from the Nuclear Regulatory Commission (NRC) before it can be reopened.
But, the NRC may take longer than investors think, according to Leo Dierckman, analyst at 40/86 Advisors (formerly Conseco Capital Management), who has been a regular attendee at public meetings the NRC has held on Davis-Besse. "NRC membership has been very focused on safety, and I don't think they're convinced FirstEnergy has got its act together yet at Davis-Besse," Dierckman says. He argues that the company may be forced to purchase power in the open market if the plant is not ready by the beginning of next year. If such a scenario appears likely, he sees the 7.375% notes widening to some 225 basis points over the curve, at which point he says his firm, which does not currently own the bonds, may become interested.
Shawn Burke, analyst at HSBC Securities, believes FirstEnergy will trade tighter by year-end, however. "The NRC has exposure here as well, and they're incented to make sure the plant comes on-line, as long as it can be done safely." He argues that the NRC must share some culpability along with FirstEnergy, as it had inspectors on site at the plant prior to the discovery of the leak.
