A water heater has a burner positioned below a vertical centrally located flue with heat exchange capacity enhanced by a multiplicity of rectangular metal fins which are welded on the inside of the vertical central flue. The central flue extends upwardly within a water tank. The central flue transitions to a smaller diameter downwardly draining helically coiled condensing flue. Approximately 80% of the heat from the combustion gases is transferred to the water within the water tank through the wall of the central flue without condensation. An additional 10% or more of the combustion heat is transferred to the water accompanied by condensation of water in the coiled flue. A fan draws the combustion gases through the central flue and the coiled condensing flue and supplies the combustion gases to an exterior vent.