AbitibiBowater closed its pulp and paper mill in Grand Falls-Windsor, central Newfoundland, in 2008. (CBC)

The federal government has agreed to compensate AbitibiBowater $130 million for pulp and paper assets expropriated by Newfoundland and Labrador in 2008.

The money settles the company's claim over what it said was an illegal seizure of property by the provincial government.

The U.S.-based forestry company, now operating under bankruptcy-court protection while it restructures, was looking for $500 million under provisions of the North American Free Trade Agreement after the province expropriated some of its assets in central Newfoundland.

Newfoundland and Labrador Premier Danny Williams expressed happiness with the federal payout.

"We are pleased that the matter has been concluded and we appreciate the work of the federal government in resolving the issue," according to a statement issued to CBC News by Williams's office.

"The Government of Canada has agreed to make a payment of $130 million to AbitibiBowater upon the company’s restructuring. This payment represents the fair market value of the company’s expropriated assets," said a statement from Foreign Affairs and International Trade Canada.

"AbitibiBowater has agreed to irrevocably and permanently withdraw its claim against Canada."

The company said the federal payment forestalled an expensive legal case under NAFTA.

"We believe this is an acceptable settlement for our company, stakeholders and creditors, given the set of circumstances faced by the company at this particular time, as well as the inherent uncertainty of any judicial process," stated CEO David Paterson.

"We are now able to move forward and focus on finalizing our restructuring process and plans to emerge from creditor protection in the fall 2010. AbitibiBowater would like to thank the Government of Canada for its efforts to reach this settlement and avoid a protracted and expensive NAFTA case."