(FORTUNE Magazine) – About a year ago Jason Selch, an analyst for Liberty Wanger Asset Management, had a eureka moment. Energy prices were soaring, and Dynegy, a Houston-based wholesaler of electricity and natural gas, struck him as a sure-fire way to play the trend. What was not to like? Dynegy had seen its revenues grow by over $1 billion a year; in 1999 the company earned $151 million, enough to win it a coveted spot on FORTUNE's tally of America's fastest-growing companies. And for the past five years Dynegy had posted average annual profit growth of 55.5%, outperforming even new-economy icons like Qualcomm. Selch soon got word that the company would be in town in June for a road show, analyst-speak for the impromptu meeting that companies sometimes call after they've made a big announcement. He planned on attending--and assumed that everyone else would too.

But when he arrived at the Fairmont Hotel in downtown Chicago, he was shocked. It was as if he had just walked into a midnight showing of an Ed Wood movie at a local revival house. The place was practically empty. "There were five people from the firm and me--that's it," recalls Selch.

Eighteen months later, however, plenty of folks have come around to Selch's way of thinking. In fact, Dynegy is now packing them in. More than 100 people turned out for its annual analyst meeting on Nov. 7 in Houston's bustling energy alley. To accommodate the crowd, the company had to book two conference rooms in the Omni Hotel. This time there wasn't an empty seat in the house.

How did Dynegy go from virtual unknown to Wall Street darling in so short a time? By playing in one of the very few areas of the market that's white-hot right now. Dynegy specializes in marketing and trading two commodities--electricity and natural gas. The booming economy has driven demand for power to record levels; in some states, most conspicuously California, where a major new power plant hasn't been built in nearly a decade, demand is far outstripping capacity. "Demand is growing at eight times the rate that new power plants are being constructed," says Bill Brier, vice president of communications at Edison Electric Institute, an industry trade group.

As a result, Dynegy's stock has taken off like a rocket this year. While the Nasdaq is down 22% and the S&P 500 is off 5%, Dynegy is up a whopping 164%--double the gain of its biggest competitor, mighty Enron. Dynegy's debut in the S&P 500 index on Oct. 2 has also been a big boost. But the stock's stellar performance is by no means a fluke. Last year shares jumped 122%. "This isn't a stodgy old natural gas company anymore," says Jeanne Mockard, portfolio manager of the Putnam Utilities Growth and Income fund, where Dynegy ranks among the top ten holdings. "This is a flashy business now."

She means flashy in the best sense, of course. By September, Dynegy had already doubled last year's earnings, netting $394 million on revenues of $19 billion. Its traders moved 10.9 billion cubic feet of natural gas a day and sold 74.1 million megawatt hours of electricity. And its power plants generated 21.8 million megawatt hours of electricity, up from 9.5 million the year before. Although Dynegy is the nation's fifth-largest natural gas marketer, behind Enron, Duke, Aquila, and Exxon Mobil, it has one of the highest returns on equity in the industry.

Dynegy owns or controls 25,000 megawatts of generation capacity worldwide, enough to power the city of Chicago and its surrounding suburbs for a year. The company also has 41 gas-processing plants, which produce 135,000 barrels of natural gas liquids a day, and 13,000 miles of pipelines.

No one is claiming that Dynegy is going to topple Enron, at least not anytime soon. With revenues in the vicinity of $60 billion, Enron is an awe-inspiring juggernaut. It has offices all over the globe, from London to Rio, Tokyo to Dubai. Its CEO, Kenneth Lay, is considered a visionary who values the intellectual capital of his 18,000-person-strong staff above anything else. Enron prides itself on spotting and exploiting new opportunities in the marketplace before anyone else. It was the first energy company to open an e-commerce portal, Enron Online, and it has been a leader in the race to develop a wholesale market for bandwidth, trading Internet capacity the way it does electricity and natural gas. The company's size is its biggest weapon. Like a high school bully, it uses brute force to break into new markets and spur deregulation. Then it scoops up market share before its competitors.

By comparison, Dynegy is a pipsqueak. It's one-third Enron's size and has one-quarter the staff. Even if it wanted to, it couldn't follow Enron's example. So it isn't even trying. Instead, Dynegy is positioning itself as a kind of anti-Enron. If Enron is the schoolyard bully, Dynegy is more like a big brother. Rather than crushing incumbent utilities that can't compete against Enron's prices, Dynegy teams up with them. Together they create a critical mass capable of going toe to toe with Enron. "We let [Enron] go in and throw the hand grenades," says Steve Bergstrom, Dynegy's president and chief operating officer. "Then, when they've done quite a bit of damage, we'll come in and say, 'We'll show you how to compete with Enron.'"

Taking a back seat to Enron has other advantages. It keeps Dynegy from making some high-profile blunders. Consider Enron's push to peddle electricity to California residents three years ago. Dynegy decided to sit that one out--and CEO Chuck Watson is glad it did. After spending $10 million on marketing and signing up only 30,000 of California's eight million residential customers, Enron threw in the towel after just six months. "I like to learn from other people's mistakes," says Watson. "We don't feel compelled to be the first guy there."

What really sets Dynegy apart from Enron and other competitors, however, is that it directly controls the production of the commodities it trades. That means traders can dictate what a plant produces in order to lock in the most profitable trade. It also gives Dynegy's traders an edge over Wall Street because they're often the first to know when there's a market-moving event, such as a pipeline rupture. In a market where information is power, that's no small advantage.

Right now Dynegy is positioning itself to become a major manufacturer of electricity. By 2004 it plans to expand generating capacity to 70,000 megawatts, or 10% of the market. Many of its plants are "peakers," which means they can be fired up at a moment's notice to meet a spike in demand. In today's power-starved market, there's a good chance manufacturing could become even more profitable than trading, according to analysts.

Thirty miles outside Houston in a place called Mont Belvieu sits a massive salt dome that stores natural gas. This is the Grand Central Station of pipelines. More than 50 of them, including those of Diamond-Koch, Texas Eastman Chemical, and Chevron Phillips, meet right here. It's also home to Cedar Bayou Fractionator, a plant Dynegy acquired when it bought Chevron's midstream gas assets in 1996.

Bergstrom is my tour guide for the day. Thanks to his utter disregard for the posted speed limit, we arrive early--just as the engineers are producing their first batch of "purity," a mixture of ethane and propane. Making purity is expensive, and the computer screens show that the plant is losing roughly $10,000 a day on it. In the car going back, Bergstrom calls the trading desk to find out what's happening. He perks up on hearing that one of his traders has just sold 500,000 barrels to a firm in Turkey for a tidy profit.

Dynegy's 68 traders are born gamblers. When the company's stock hit $50 for the first time, Watson sent each of them a $50 bill. So they invented a game called Bag-o-Bucks. Everyone signed their bills, stuffed them in a big brown bag, and made bets on whose name would be drawn the quickest.

A former commodities trader himself, Watson is a seasoned gambler. And Dynegy has been trying to impart that same skill for high-stakes trading to the utilities it acquires. Some need the lesson more than others. Take Illinova. During a heat wave in June 1998, Illinova's traders were caught short on electricity, losing some $60 million in two days. By the end of the year the trading losses were so steep that they wiped out the entire $150 million the company had earned. "We were trying to be just like Dynegy," says Larry Altenbaumer, president of Illinois Power. "We lost a ton of money because we weren't good enough to compete in a market so risky."

Today Dynegy markets and trades all of Illinois Power's output--some 3,800 megawatts of electricity. In 1999 the two companies merged in a $2 billion deal. Two years ago the biggest plant, in Baldwin, Ill., was on the verge of bankruptcy. Today it's thriving. The plant is a curious mix of old and new. Every day it gobbles up 21,000 tons of coal shipped in from Wyoming and produces 1,800 megawatts of electricity. A computerized coal dumper empties the contents of the railcars on a conveyor belt that winds its way up to 19-story-tall furnaces. Tucked away in the corner of plant manager Keith McFarland's office sits a subtle reminder of the past. It's a bronze statue of two three-foot-long pipes with gaping holes in their two-inch-thick interiors. These are the same pipes that burst during that ill-timed heat wave two summers ago.

The Illinova merger marked a turnaround for Dynegy. It solved a problem that had been nagging investors for years: They just couldn't get their hands on the stock. Before the merger only about 10% of Dynegy's shares were available to the public. Watson increased the float to more than 60% by persuading two strategic partners, British Gas and Nova, to sell their combined 51% stake and by issuing 3.3 million shares after the deal closed. Immediately afterward, Dynegy's market cap tripled as money managers piled in. It's now a hefty $14.4 billion.

Although the stock continued to climb after the merger, it has since fallen 19% from its 52-week high. The main reason is Dynegy's exposure to the California power market, which faces a huge consumer backlash over surging electricity prices. The company co-owns four power plants in California with NRG Energy. In November the Federal Energy Regulatory Commission unveiled a proposal to fix California's market, which it deemed "seriously flawed," by calling for, among other things, "soft" price caps of $150 on wholesale electricity.

The price caps would be a welcome relief to people like Doug Thomas, CEO of Bellingham Cold Storage. One of the largest agricultural chilling facilities on the West Coast, Bellingham buys its electricity straight from the market. And the spike in prices last summer almost put it out of business. In May its electricity bill was $900,000, more than triple the $250,000 it had been paying per month, on average, over the previous four years.

For its part, Dynegy says concerns about its exposure to California are overblown. The power it generates there represents 15% of its total generation portfolio. Money mangers don't foresee a big impact either. Judy Saryan, manager of the Eaton Vance Utilities fund, thinks the troubles in California may even be a plus for Dynegy. By sanctioning generators already there, the state discourages others from building new power plants in California. So supply is likely to stay tight, which is good news for companies like Dynegy. "They're providing power in a market that's power short," she says. "It's a good situation for all traders and marketers and generators."

One thing that could cloud Dynegy's stock outlook is a big drop in natural gas and electricity prices--80% of Dynegy's core business is in energy trading and unregulated electricity generation. But that's not likely to happen anytime soon given the recent spike in demand. The real wild card, however, is the weather. An unusually warm winter or cool summer would be bad for the stock, as it would mean less demand for power. Dynegy mediates this risk by putting generation plants in every major region of the country. That way losses from a cool summer in Florida, for example, are offset by gains from sweltering heat in Illinois. "It's always going to be hot somewhere," says Bergstrom.

Barring a surprise from Mother Nature, money managers expect Dynegy's stock to continue its ascent. It has two things going for it that Wall Street hasn't yet widely recognized. The first is a partnership with Chevron, which lets Dynegy market the entire two billion cubic feet of natural gas it produces in the U.S. every day. Once the FTC approves Chevron's merger with Texaco, Dynegy has a shot at marketing Texaco's gas as well. Combined, Chevron and Texaco produce and market some five billion cubic feet of natural gas a day, estimates CIBC World Markets analyst William Hyler.

Plus, Wall Street has yet to factor Dynegy's broadband and e-commerce push into its price target for the stock, as it has already done for Enron. Credit Suisse First Boston analyst Curt Launer puts a $25 price tag on Enron's broadband assets in his 12-month price target of $115. And Dynegy could command almost as much. Over the past three years it has spent $120 million upgrading its technology infrastructure. Dynegy acquired fiber-optic-network providers--Extant in the U.S. and Iaxis in Britain--to establish a platform for eventually trading bandwidth online. And in November it started selling electricity and gas through its new portal, Dynegydirect. "They have a clear broadband strategy, but it's not reflected in the stock at all," says Selch, who doesn't expect to have the joint to himself the next time Dynegy's in town for a road show.

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