Water heaters are pretty simple. There are two input lines and two output lines. One set of lines is the 'domestic' water, which means it comes in from your fresh water tank and goes out to the hot water lines (galley, head, etc.) The other lines are for engine supplied hot water. The water comes from the engine, goes through the water heater (where is goes through a heat exchanger, heating the domestic water) and out.
The valve you see is a pressure relief valve. As the water in the tank heats up it expands. If it gets too hot and expands to much the pressure relief valve opens and the water flows out instead of blowing up the tank.
The other posters have described the preferred method of winterizing the tank - you really want a bypass line for the domestic water, and a drain on the tank. However, on many boats this has not been done, and is difficult to do for all the obvious reasons that nothing on boat is easy to do.
My last boat had the hoses to the water heater basically glued on with globs of sealant. There was no way to reach the drain. I had to use 5 gallons of marine / rv antifreeze to winterize the water heater. Just keep adding the antifreeze until you see it come out the hot water taps in the galley and head. In the spring you will need to run a lot of water through the hot water tank to get the antifreeze out, but it's not difficult.
Deep Blue C, 2002 C&C 110
Mt. Sinai, NY
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