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* New contract frees $104 mln in funding for Raytheon
* Air Force says on track to be back on schedule by mid-2014
* Raytheon says program 'top priority'
By Andrea Shalal-Esa
WASHINGTON, Dec 20 (Reuters) - The U.S. Air Force said on Thursday it has restructured a troubled air-to-air missile program run by Raytheon Co, freeing $104 million in immediate funding for the company and putting the program on track to return to its original schedule by mid-2014.
Lieutenant General Charles Davis, the top Air Force official in charge of acquisition issues, said the two sides reached agreement last week on new contract terms that will pay Raytheon for delivery of actual missile rounds rather than the "performance-based" milestones used in the past.
"That gets us back to where we would have been ... roughly in the middle of 2014," Davis told Reuters in an interview at his Pentagon office.
He said the Air Force would continue to keep close tabs on Raytheon's AIM-120 Advanced Medium-Range Air-to-Air Missile (AMRAAM), which is used by Air Force fighter jets and Navy planes that fly off carriers.
"At this point right now the only thing that's important ... is the delivery of the missiles," Davis said, describing the Air Force's decision to withhold funds from Raytheon "very prudent" after repeated failures of the missile's rocket motors.
After years of delays in missile deliveries to the United States and foreign militaries, the Air Force announced in March that it was withholding $621 million in payments from Raytheon until the company accelerated deliveries of the advanced missiles.
On Thursday, the Air Force said it was resuming payments to Raytheon after a 10-month pause from February to December 2012. Spokesman Ed Gulick said no additional funding was being withheld from Raytheon at this point.
The delays were caused by problems with solid rocket motors supplied by Alliant Techsystems Inc (ATK) that power the missiles, prompting Raytheon to switch to Norwegian ammunition supplier, Nammo.
Raytheon welcomed the restructuring and said the program was "a top priority" for the company, noting that its investments in developing a second source of rocket motors were paying off.
"This fall, Raytheon delivered more than 120 AMRAAM missiles, and this month we are delivering the first missiles with rocket motors produced by our second source along with rocket motor cases provided to them by our U.S. source," said Raytheon spokesman Jonathan Kasle.
Raytheon Chief Executive William Swanson told an investor conference at the end of November that the program should return to "business as usual" and recover its production schedule by mid-2013. He said the company had already received 125 rocket motors from Nammo and production was expected to reach 100 motors per month in the first quarter.
Davis said Nammo's rocket motors had performed well in tests, and the Norwegian company was now working to increase its production rate to the level needed for the program.
He said ATK's future role on the program was unclear, given that it could take the company around 18 months to reformulate its rocket fuel and get it certified. The issue had developed over time due to changes in the formulation of the fuel.
He said the problems with the AMRAAM contract underscored the danger of relying on a sole producer of critical equipment, and the Air Force viewed it as important to maintain more than one supplier in the future.
But he said the projected purchase rates could raise concerns in the future.
"It'll be something that we'll have to pay attention to in the future," Davis said. "It's important that we try to keep more than one (supplier), but sometimes at the rate we're buying or the rate we're building it's not viable for two companies to stay actively involved. It'll be something that we'll have to pay attention to in the future."
Gulick said the revamped contract also called for Raytheon to compensate the U.S. government and foreign militaries between $27 million to $33 million for late rocket motor deliveries.
That compensation included no-cost labor to install a variety of software upgrades for foreign countries harmed by the late deliveries, warranty coverage and free repairs, Gulick said.
He said the Air Force also got warranty coverage for 325 AIM-120D missiles, and 40 no-cost repairs.