OK, this is what happened. After the technician looked at the old heater, he called the warranty company for authorization (this is standard). Minutes later, the warranty company called my wife and told her that she need to pay for these:
1. Service fee of $60 (this was expected)
2. New connector for the water going into the heater
3. New connector for the gas going into the heater
4. Removing and re-installing the heater timer ($150)
Grand total came to $344. I think I’ll call the warranty company to ask questions.