What's Ahead For The Bad News Bulls: `Paper Water Is Not Wet Water'

Short selling is back in vogue again. After three years of suffering through negative or breakeven returns, short sellers, who profit from stock declines, have been churning out their best returns since 1990. Mainly, they can thank the lackluster stock market, which has has exposed a bevy of inviting targets--such as Western Water and Incomnet.

There's an old saying among Colorado ranchers: "Whiskey's for drinkin', water's for fightin'. You can mess with my wife, just don't mess with my water." But these days, there's plenty of messing going on along little Cherry Creek, a mere trickle south of Denver that any cowboy could spit his chaw across. For the past two years, San Diego-based Western Water Co. has been snatching up land and water rights on either side of the creek bed in a bold plan to pump groundwater into the creek and sell it downstream to Denver's thirsty southern suburbs.

The proposed water project is the biggest deal to hit the ranches around Cherry Creek since prospectors found gold there in 1859. "We plan to make 10 times our original investment over the next 18 months," boasts Western Water Chief Executive Peter L. Jensen, who claims the developed water rights will be worth at least $100 million. Many local water experts are skeptical. "Any water deal in the arid West looks inherently good to outsiders," says David L. Little, planning manager for the Denver Water Dept. "But I would be suspicious of their plan. Paper water is not wet water."

The dispute has stirred up a nasty stock market battle. Jensen's brazen plans, which include other unusual water ventures, have helped push Western Water's share price to $25 a share, from under $2 in 1991 (chart), even though not a drop of Cherry Creek water has yet been sold. Investors include First Boston Special Situations Fund and the Dreyfus New Leaders Fund. But short sellers, who have hired their own hydrologists, are so convinced that Western Water is a hoax that they have sold short 535,000 shares, nearly half of all Western Water stock that trades. "We're in a Mexican standoff," says one short seller who is convinced Western Water is "a quasi-fraud, nothing more than hocus-pocus."

SNOW PACK. Undeterred, Jensen and his Denver water guru, John H. Huston, are starting to exploit what they claim is the only reliable water source in the area. Western Water has already accumulated 4,700 acres along the creek for $9.2 million. But there are a couple of hitches. It's uncertain if anyone will want to buy the stuff. Since the entire region sits atop an aquifer, local water districts can just as easily tap into water below their own communities as buy from Jensen.

A worse hitch, say municipal water managers and hydrologists, is that all of the groundwater in the region could eventually become depleted, including Western Water's. Many local water managers are negotiating with the Denver Water Dept. for a more enduring water source: a slice of the precious snow pack that melts into the city's reservoirs each year. "Western Water is the water of last resort," says Steven A. Boand, a county hydrologist. Western Water says such talk is merely a bluff and that towns along the creek will come around to buy its water soon enough.

Maybe. What's certain is that controversy is nothing new for either Jensen or Huston. During the 1980s, Jensen served as president of Yuba Natural Resources Inc., a California gold-mining concern headed by San Diego executive Richard T. Silberman. In 1990, Silberman pleaded guilty to money laundering. Yuba's operations were scrutinized by the feds, but Jensen was never implicated. Says the boyish Jensen, an avid surfer: "My phone was tapped. But all they ever said to me is, `Geez, you sure call the Surf Report a lot."'

RAIL TIES. In 1992, Jensen teamed up with Huston, a geologist and lawyer by training who became infamous in Denver water circles in the 1970s when he attempted to lay claim to the entire underground water supply of the Denver basin. His claim was nixed by the courts, but, says H.J. "Chipp" Barry, head of the Denver Water Dept., "he's been going after that water ever since."

Jensen's and Huston's ambitions range beyond Colorado. In April, Western Water announced an agreement with the Atchison, Topeka & Santa Fe Railway Co. and local California water officials to look into piping water from acquifers along the railroad's right of way to the city of Barstow in the Mojave Desert. Critics say Western Water is using the Santa Fe name to promote its stock. But Santa Fe official Delbert Miller says "the stock was being hyped long before we got involved." He insists that the railroad has nothing to lose and believes there may be valuable water rights near the old whistle stops. "I bought some of the damn stock myself," says Miller, "but not much."

As for the short sellers, Jensen predicts that they "are going to die a painful death" when the water starts to flow. "A lot of people think I'm smart, and a lot of people think I'm full of bull," he says. Either way, a lot of folks are soon going to learn that messing around with Colorado water is a dangerous game.

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