Water is always a byproduct of combustion.
In my line of work, we can’t wear gloves that are very warm, due to the need to grab screws and small parts. When we are on a rooftop working on something in really cold weather, it’s very tempting to warm our hands under the flue of a running rooftop unit.
It’s also a great way to end up with thin, soaking wet gloves, all ready to freeze your hands once you have to go back to working on the unit.
Water in the exhaust is why the tailpipe always rusts out first on your car’s exhaust. It’s why the fluecap rusts out first on your water heater vent – that moisture is entrained in the exhaust as steam, but as the exhaust cools the moisture condenses.
In addition to carbon monoxide buildup, a catalytic natural gas or LP heater dumps all that moisture straight into the space it heats. It is a super great way to grow mold.