Preheat the oven to 350°F (175°C) and grease a 2-quart baking dish.
In a large bowl, beat together milk, egg, garlic powder, and hot pepper sauce until well combined. Set aside.
In a saucepan, bring water and salt to a boil. Cook and stir grits in boiling water until thickened (3-5 minutes). Remove from heat and add butter along with half of the Cheddar cheese. Mix in the egg mixture, then pour the grits into the prepared baking dish.
Sprinkle remaining Cheddar cheese over the grits. Bake until cheese is melted and grits are set (about 1 hour). Let grits cool for 20-30 minutes before serving.
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