Whether its your penis or your bicep, staying hydrated is important to keeping your cells in their optimum state- nice, plump and full of energy, so I can see why you've noticed a difference.
However, in terms of gains, I think you'd have to become significantly dehydrated over an extended period of time for it to have a negative effect.
Scientists have show we get plenty of water from food (depending on what sort obviously, but in a balanced diet) so as long as you're eating healthily and having a glass of water with each meal, you should be fine.