Hola John

Interesting question...

"Agua" is a feminine noun, not masculine. It takes article "el" instead of "la" as explained in our lesson, but it doesn't make word agua masculine. For example, adjectives relating to this word would still take the feminine form, e.g "el agua limpia" (the clean water). So, if later in another sentence we are referring to water with a pronoun, which is the case in this exercise, we would use the feminine form "la", not "lo". 

Hope this clarified it.

Saludos

Inma