Arc Hydro edits the ArcGIS configuration file ArcMap.exe.Config (located in the ArcGIS installation directory, e.g. "C:\Program Files\ArcGIS\Desktop10.1\bin\ArcMap.exe.Config") during its installation.
It appends an <appSettings> section with all the entries listed below and in particular.
<add key="ESRI.APWR.SaveXMLInMap" value="true" />
If this key is not found then the xml will be saved to the disk when the mxd is saved.
Reinstalling Arc Hydro should fix the issue or you can append the section below in your config file.
We will look into modifying this behavior so that the xml does not get created if the node is not found.
Christine Dartiguenave
Esri Water Resources Team
ArcMap.exe.Config File
<?xml version="1.0" encoding="utf-8"?>
<configuration>
...
<appSettings>
<add key="ESRI.APWR.SaveXMLInMap" value="true" />
<add key="ESRI.APWR.DebugLevel" value="0" />
<add key="ESRI.APWR.LogFilePath" value="C:\TEMP" />
<add key="ESRI.APWR.LogFileName" value="AP" />
<add key="ESRI.APWR.UNIQUEIDTABLE" value="APUNIQUEID" />
<add key="ESRI.APWR.LAYERKEYTABLE" value="LAYERKEYTABLE" />
<add key="ESRI.APWR.UNIQUEIDFIELD" value="LASTID" />
<add key="ESRI.APWR.LAYERNAMEFIELD" value="LAYERNAME" />
<add key="ESRI.APWR.LAYERKEYFIELD" value="LAYERKEY" />
<add key="ESRI.APWR.IDNAMEFIELD" value="IDNAME" />
<add key="ESRI.APWR.IDFLDNAME" value="IDFLDNAME" />
<add key="ESRI.APWR.UIDS" value="HYDROID,HYDROID|MID,MARINEID" />
</appSettings>
</configuration>