Illawarra Coal Holdings Pty Ltd was found to be taking the water at its Dendrobium mine, about 75 kilometres south of Sydney, following an investigation by the NSW water regulator.
The company will contribute almost $2.9 million to wetland or waterway restoration in an "enforceable undertaking" stipulated by the Natural Resources Access Regulator.
The regulator alleges the mine's operations at Kembla Heights, west of Wollongong, caused the incidental taking of surface water without a licence from 2018 to 2023.
Chief Regulatory Officer Grant Barnes said the agreement was "the most effective outcome" as an alternative to court action.
"We have achieved the most effective outcome for the people of NSW which redresses the alleged breaches that occurred, delivers benefits to the local community, and puts in place much improved processes to better manage water at this mine in the future," Mr Barnes said.
Energy giant South32, which owns and operates Illawarra Coal, said it has paid $5.6m to account for the passive taking of water resulting from underground activities at the Dendrobium mine since 2014.
"We understand that water is a critical resource and recognise our obligation to pay for all water used by our operations in the same manner all water users do," a spokesman told AAP.
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