In a saucepan, bring the water and milk to a boil. Add the salt and slowly add the grits and return to a boil, stirring constantly for 1 minute. Reduce the heat, cover, and cook for 3 minutes. While stirring the grits add the 1/2 cup of butter and stir until butter is melted. Cover and cook for 3 to 5 minutes, or until the grits are thick and creamy. Remove from heat and set aside.
Using a skillet, saute the onions in the remaining tablespoon of butter for 1 minute. Add the processed cheese, garlic powder, 1 1/2 cups cheddar, and onions to grits, and stir until the cheese is melted. Add the tomatoes and mix well. Pour the grits into a greased 8 by 11 by 2-inch casserole and bake for 40 minutes. Sprinkle remaining 1 cup cheese over the casserole for the last 5 minutes of cooking time.