Sill plate damage from water. Do I need to replace?
If the water heater leaked on the sill plate and caused it to rot or significantly soften, then you have a problem.
But, if the water heater leaked on the sill plate and it was wet for a relativelty short time, you don't have water "damage" to the wood. Although moisture isn't good for anything in the house, the wood won't have much problem getting wet as long as it is allowed to expel that moisture by airing out.
If you find that your sill plate is rotten, you should replace it even if the house doesn't show structural symptoms. If there's a rim joist above the sill plate, it will likely span the damaged softened area for a long time without showing symptoms in the wall above.
To replace it, you'll just have to support the floor system and wall and cut out the old one. The siding/exterior sheathing is probably attached to it, so plan on doing some surgery to get it out.