You were right the first time. The heat hits the water pan and moves to the back of the cooker where it rises to the top of the chamber. It then banks down from the top of the chamber down to the exhaust holes located just above the water pan and then out the stove pipe. Now if you add a heat diverter it works the same except you protect your water pan and save burning through so much water.
BWS G2 Party w/custom cart, Thermapen (does yours have flames.......mine does so be jealous)