Safest bet is to go dry. If the water pan is above the placement of the smoke generator, in theory, water vapor will rise with heat, but there's no 100% guarantee. I have used them with water in a heavily modified smoker which allowed placement of the water pan well above the pellet smoker...no issues. I've also used them in a slightly modified propane smoker (Smoke Vault 24") with water...no issues. If using water and it the pellets fail to stay lit, removing the water would be my first step in troubleshooting. Of course, high ambient humidity can cause the same issues, but mainly with start-up (nuke the pellets to dry before loading and lighting).
Eric