(FORTUNE Magazine) – Kenneth Lay skied down Ajax Mountain in Aspen, Colorado, on a cold dark afternoon last December, blissfully unaware that the stock of his Houston-based energy conglomerate was taking an even steeper plunge. The Enron chairman returned to his vacation home on Roaring Fork River to find an urgent message from President and Chief Operating Officer Richard Kinder: "We've got a major problem, and we've got to talk."

That afternoon, Enron's stock had lost 2 7/8 points, or roughly $750 million in market capital, amid rumors that the company's natural gas marketing arm, Enron Capital & Trade Resources, was shorting the market even as the January futures contracts expired and a pre-Christmas cold snap was sending prices up the chimney. The crisis of confidence was compounded by rumors that Jeffrey Skilling, the 42-year-old wunderkind chairman of Enron Capital & Trade, had been led off the company trading floor in handcuffs.

"I knew we couldn't have had the exposure we were rumored to have," Lay recalls. "Our trading controls are such that we're never out of balance more than plus or minus 1%." Lay also knew that the rumors about Skilling's arrest were false. At Enron, where "speed and danger count," in the words of one executive, most top brass spend their spare time on the ski slopes. Skilling was at Beaver Creek, while Kinder happened to be at Crested Butte.

Lay immediately organized damage control: The next morning, he put out a press release announcing that Enron would start buying back its own shares. Then he convened a conference call with 170 Wall Street analysts during which Kinder and Skilling explained Enron Capital's system of computerized trading controls, noting that to the extent its positions were even slightly out of balance, the company was actually making money. The strategy worked: Enron's stock recovered all but half a point of the previous day's losses. Skilling later claimed that he was unable to trace the source of the rumors that had caused the market frenzy, but he did offer a two-word explanation of the possible motive behind them: "Enron envy."

Today Enron has even more to covet, and it's not exactly hiding its light under a bushel. It recently reported 15% earnings growth for the fifth year in a row, and Lay predicts that Enron's profit will double from the 1995 level of $519.7 million to more than $1 billion by the year 2000. The company's stock has bounced back from its December lows and is currently trading in the $41 range, thanks to rising oil and gas prices. Though its gross sales of $9.2 billion last year put it near the bottom of FORTUNE's Global 500, Enron has grand ambitions. Lay already has twice remade what used to be a sleepy, regional pipeline company, creating what he describes as "the first natural gas major, sort of like the Seven Sisters in the oil business." Next, he plans to morph Enron into a global energy supermarket with a retail brand name as recognizable as Coca-Cola.

"Over 40% of our earnings in 1995 came from businesses that did not exist ten years ago," Lay says. "We expect that five years from now, over 40% of our earnings will come from businesses that did not exist five years ago. It's a matter of re-creating the company and the businesses we're in. That's not unusual for a company like a Rubbermaid. They create a new business about every other year. But it's unique in a capital-intensive, long-lead-time industry like the energy industry." Outsiders tend to agree. Competitors voted Enron the most innovative company in the U.S. in Fortune's poll of "America's Most Admired Corporations" this year, ahead of high-tech highfliers like Intel and Microsoft. And Wall Street analysts heap praise on everything from earnings strategy to the quality and depth of the management team.

To be sure, Enron has made some highly publicized stumbles. Construction of a multi-billion-dollar power plant in India--the largest foreign investment ever in that country--was suspended last year when a nationalist Hindu party won local elections. Enron is still struggling to renegotiate a take-or-pay North Sea natural gas contract with Phillips Petroleum, which could be costly to unwind. But Enron officials say they have these problems under control. The Indian plant has been revived and increased in size. Any settlement with Phillips, according to Enron, "will not have a materially adverse effect on its financial position."

So aside from envy, what's not to like about Enron? According to some critics, the very things that have made the company a success: management's penchant for risk taking and innovation; the parent corporation's aggressive accounting practices and allegedly byzantine methods of "managing earnings" via no fewer than six separately traded subsidiaries; an alleged overemphasis on short-term performance, symbolized by the daily posting of stock prices in the headquarters building; and the unusually complex intracompany transactions needed to drive profit growth. "Enron's just got too much hype in it for us,'' says a member of a multibillion-dollar Houston-based investment firm that specializes in blue-chip stocks. "A few years ago, they were promoting natural gas-powered automobiles. Then they dropped that idea like a hot potato, and started building power plants and spinning them off. It's hard to figure out what the fresh feed for the month is going to be."

When Enron was created as a debt-laden stepchild of the merger of Houston Natural Gas and Internorth, Lay was recruited from a competitor to ward off corporate raiders such as Irwin Jacobs. He set out to make Enron the leading integrated pipeline company in North America, shedding layers of bureaucracy and expanding the company's pipeline network. Enron now derives most of its profit from operating 37,000 miles of interstate pipeline that transports nearly 20% of the nation's natural gas, and from its in-house oil-and-gas exploration division.

But even as he expanded the pipeline business, Lay foresaw that the biggest returns were to be obtained not in transporting gas but in trading it. That led in 1992 to the creation of Enron Capital shortly after natural gas futures contracts were introduced on the New York Mercantile Exchange. In 1991, Enron had started its first power plant project abroad. The international division now accounts for 12% of gross earnings, while Enron Capital supplies 22%.

Next, Enron plans to take advantage of changes in state legislation that will open up marketing of electric power, turning itself into a highly sophisticated "energy store" capable of providing a full range of natural gas and electrical power services to industrial, commercial, and residential customers worldwide. "It will be just like with the different competing telephone companies who offer a full line of telecommunications services today," says Lay. "You'll be able to call up and order all your energy from Enron."

A politically well-connected former Federal Energy Regulatory Commission official, the 54-year-old Lay plays the role of the classic "Mr. Outside," jetting around the world opening doors for the company and schmoozing his mostly Republican contacts in Washington, D.C. The slim and soft-spoken former Missouri farm boy with a Ph.D. in economics co-chaired the committee that hosted Houston's 1990 economic summit and was a major contributor and fundraiser for former President George Bush, and for the failed presidential campaign of Texas Senator Phil Gramm, whose wife, former Commodity Futures Trading Commission Chairman Wendy Gramm, sits on Enron's board.

Kinder, 51, a no-nonsense attorney with pale blue eyes and silvery hair, also hails from a small town in Missouri that was the birthplace of conservative commentator Rush Limbaugh. He is Enron's "Mr. Inside," a detail man with a head for numbers and a somewhat controversial reputation predicated in part on his demanding performance standards. Regarded as a virtual equal, he and Lay pack a powerful one-two punch seldom seen at similarly big but less entrepreneurial energy corporations.

The two men also win admiration for their choices of heads of Enron's four major divisions. One veteran energy industry watcher calls Enron Capital's Skilling, a Harvard MBA hired from McKinsey & Co., "the most intellectually brilliant executive in the natural gas business." The co-chairman of Enron Operations Corp., which supervises the company's pipelines and construction projects, is Thomas E. White, a former brigadier general who served as an aide to Colin Powell at the Joint Chiefs of Staff. Enron Development, the unit in charge of international power projects such as the Indian plant, is chaired by hard-charging Rebecca Mark, 41, another Harvard MBA and ski enthusiast who is one of the highest-ranking women in the energy industry (see "Women, Sex & Power"). And Forrest Hoglund, the chairman of Enron's 61%-owned oil and gas unit, more than doubled the company's production in just seven years; he was rewarded with stock options that brought him $19 million in 1994.

"If Forrest creates enormous value for the shareholders and receives enormous compensation for it, then Godspeed to him," says Lay. "I'm not afraid to hire someone who's smarter, more creative, prettier, more handsome, or more highly paid.'' Indeed, so eager is Lay to foster entrepreneurial risk taking, that he has instituted a universal stock option plan that promises to pay all the company's 6,600-plus employees twice their annual salaries after eight years.

At Enron Capital, arguably Enron's most innovative unit, Skilling is trying to create a whole corps of entrepreneurs. His mostly thirtysomething traders routinely structure deals that have sales or cost values of up to $5 million without having to seek upper-management approval. Decisions on each trader's performance are entrusted to teams of some two dozen people who rank their peers on criteria including "ability to learn," "leadership of self and others," "connecting and leveraging," and, of course, "innovativeness," as well as old-fashioned revenue production. "There's too much conventionality and too little risk taking when people have to answer to one boss," says Skilling. "You and the boss might not get along or you might spend all your time kissing the boss's ass to get ahead. You can't kiss the ass of 24 people. And together, those 24 people are more likely to have the interests of the shareholders at heart than any one person."

Overseas, Enron's rewards-for-risks philosophy has sometimes gotten the company into trouble. The success of its initial overseas power plant in Britain in 1991 convinced Lay that he should give a green light to rising star Rebecca Mark, who shared his opportunistic interest in riding the wave of liberalization and privatization sweeping power-short countries in the developing world. By 1994, Mark had guided the development of a barge-mounted power plant in Guatemala and two oil-fired power plants in the Philippines that were completed in less than 12 months, and acquired a 17% interest in a 4,100-mile pipeline in Argentina.

But in India, Enron faced accusations that it was charging above-market rates for its energy, prompting suspension of the deal. In the end, the prices were reduced but Enron got to increase the plant's capacity. The company's largest current project, a $1.7 billion Bolivia-to-Brazil pipeline, also stirred local complaints. Enron's critics charge that the company has managed to win such rich concessions, in the form of Bolivian oil and gas transportation rights, in return for building the pipeline, that the government will have a hard time privatizing the remainder of its domestic energy industry. Mark retorts that Enron is merely being rewarded for taking risks; Enron deserves contract protections "designed to make us feel safe about investing our money well ahead of anyone else."

Back in Houston, Chairman Lay is refining his third and most ambitious vision for Enron: to make it "the world's leading energy company." Here again, Enron Capital and its computer-literate leader are expected to play key roles. Skilling is now applying the methods he pioneered in trading methane molecules to the trading of electrons in the wholesaling and retailing of electricity. Although it entered this business just two years ago, Enron Capital has already become the nation's third-largest electricity wholesaler, behind the Bonneville Power Administration and the Tennessee Valley Authority.

While Lay estimates the wholesale electricity business at $90 billion a year in the U.S., the retail electricity market is even bigger--close to $300 billion in the U.S. and Canada, according to one estimate. And it is this market Lay wants to tap. Bills for legislation that would open the business to nonutility companies have been introduced in at least two dozen states, with Massachusetts's and Connecticut's proposed legislation the furthest along. The Federal Energy Regulatory Commission is also planning to review rules that currently limit access to the power grid only to utilities and independent wholesalers.

Already, Enron Capital is positioning itself for this market through its natural gas marketing operations. The company is providing retail gas services to groups of commercial customers, such as the New York State Restaurant Association. Skilling hopes that customers that sign up for Enron's natural gas today will become electricity customers in the future, lured by the promise of delivery guarantees and cost reductions.

Such aggressive tactics are one thing when you're marketing a product, another thing altogether when you are writing out a balance sheet, charge critics of Enron's methods of "managing" its earnings. One frequently voiced complaint involves Enron's "marked to market" accounting, which counts proceeds from long-term gas contracts as present income. According to several former employees, this practice simultaneously inflates current earnings and creates a "feeding frenzy" as executives scramble to make new deals to prop up future profits.

Many analysts and former insiders are also skeptical of the international division's practice of selling interests in completed power projects to a separately traded subsidiary, Enron Global Power & Pipeline, which is 59% owned by the parent. As one knowledgeable source points out, such sales allow management to accelerate or defer the realization of earnings from power plant development as it sees fit. Several high-ranking Enron Global Power & Pipeline executives left the company last year; they were uncomfortable with the apparent conflict of interest involved in these transactions.

A close look at Enron's seemingly impressive 1995 earnings hints at some of the possible repercussions of management's live-for-today philosophy. The corporation's reported half-billion-dollar profit came in part from the $367 million gain provided by the sale of stock in its oil and gas subsidiary EOG. Another $48 million was supplied by the realization of previously deferred income from the sale of stock in EPP. "Without those stock sales, 1995 really wasn't that great a year," says a former top executive. "It's difficult to see how they're going to keep increasing profits by 15% a year."

Lay replies that he has plenty of new earnings opportunities: among them, taking Enron Capital's expertise in gas and electricity marketing to Europe, and exploring solar cell and other high-tech energy ventures. But he has recently revised his stated earnings targets: Instead of pledging to increase profits 15% each year, he now aims for profits to grow by an average of 15% annually over the next five years. If Lay meets that bold goal, his risk taking will be rewarded in lavish Enron style: With 2.7 million stock options, the chairman will receive an enviable payoff, no doubt. Still, ordinary investors may want to think twice about whether the rewards for them will prove worth the risks.

REPORTER ASSOCIATES Joyce E. Davis, Joe McGowan