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A gas-fired commercial water heater has been developed which achieves a steady-state efficiency of over 95 percent and can obtain overall service efficiencies above 90 percent in many applications. These high levels of efficiency are obtained by operating in the condensing mode over a substantial portion of the duty cycle. The use of a power burner and a coil-type heat exchanger results in a compact configuration which produces both high efficiency and low emissions. The design, operating principles, and performance characteristics of the water heater are described.