Financial terms were not disclosed, but Darren Dreger of TSN reports the contract is for $12 million, with O'Reilly being paid $5.8 million in 2014-15 and $6.2 million in 2015-16.
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"I'm very happy with the deal, can't wait to get back to Colorado and get ready for the season," O'Reilly told Adrian Dater of the Denver Post.
The contract was agreed to as Avalanche executive vice president Joe Sakic, general manager Greg Sherman, O'Reilly and agent Pat Morris waited to enter the arbitration hearing.
"We were right outside the door, ready to do this," Sakic told the Post.
Sakic said he arrived for the hearing in Toronto on Monday and began talking with O'Reilly and Morris on Tuesday.
"We knew no matter what there would at least be a one-year deal, but then it became, 'Well, how about two?'" Sakic said. "There was never any animosity between us this whole time. Any of the perceived animosity came from the outside."
The contract will keep O'Reilly with the Avalanche through the 2015-16 season, when he can become an unrestricted free agent. Sakic said he hopes a long-term contract can be worked out.
"When we shook hands I think we were both very happy," Sakic said. "I know the Colorado Avalanche is very happy. He's a very valuable player to us and we want him long-term. That hasn't happened yet, but we'll keep working at it and see what happens.
"Like I said, we value Ryan a lot and we're just real happy to have him under contract."
O'Reilly, 23, had a team-best 28 goals last season and set career-highs in goals and points (64). He won the Lady Byng Trophy for skillful and gentlemanly play after being assessed two penalty minutes while playing 80 games. He had two goals and four assists in seven Stanley Cup Playoff games.
Selected by the Avalanche in the second round (No. 33) of the 2009 NHL Draft, O'Reilly has 73 goals and 191 points in 345 NHL games in five seasons.