Sniper's method is exactly the way we did it on the DHR. Since the DHR runs from 500 feet up to over 7500 feet we needed a lot of contour lines.
His method of simply raising the water level works well on relatively long stretches of hillside with gentle slopes. What we ended up having to do was just place a small "crust" of water at a value we typed into the little height window. Our problem was that when we raised the water level, it pulled away from the mountain and we had to extend it closer. Conversely, if we lowered the water, it slipped inside the mountain.
As he says, when you eventually erase the water, it is best to use the F9 key (to go into wireframe mode) so that you don't miss any water underground.
Bill