From:
http://etd.lsu.edu/docs/available/et...Thesis2012.pdf
When ignition timing was fixed it was found that exhaust temperature increased with increasing water content as a result of later combustion and less heat lost to the ambient environment. However, applying an ignition timing scheme to achieve maximum torque resulted in a decrease in exhaust temperature as water content increased. This is because of the heat lost to vaporizing additional water in the fuel. Furthermore, it was suggested that the use of hydrous ethanol may allow the use of higher compression ratio devices that would increase the power output of the engine [Brewster et al, 2007].
Makes sense. Water leads to an effective retardation of combustion due to ignition delay and reduced flame propagation speed. You lose power. So you need to add timing and voila, EGTs drop again.