Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. Financial Statements and Supplementary Data. PART IV

Table of Contents





UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549



FORM 10-K



ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE TRANSITION PERIOD
FROM                  TO


COMMISSION FILE NUMBER: 814-00841



FS Energy and Power Fund(Exact name of registrant as specified in its charter)



Delaware

27-6822130(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)201 Rouse BoulevardPhiladelphia, Pennsylvania

19112(Address of principal executive offices)

(Zip Code)


Registrant's telephone number, including area code: (215) 495-1150



Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Shares of Beneficial Interest, par value
$0.001 per share



Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was
required to submit and post such files). Yes o    No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer ý (Do not check if a
smaller reporting company)

Smaller reporting company o


Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o    No ý.

There is no established market for the Registrant's common shares of beneficial interest. The Registrant is currently conducting an ongoing public offering of its
common shares of beneficial interest pursuant to a Registration Statement on Form N-2, which shares are being sold at a price of $6.95 per share, with discounts available for certain categories
of purchasers, or at a price per share, after deducting selling commissions and dealer manager fees, necessary to ensure that shares are not sold at a price below net asset value per share.

There
were 379,873,173 shares of the Registrant's common shares of beneficial interest outstanding as of March 1, 2016.

Documents Incorporated by Reference

Portions of the registrant's definitive Proxy Statement relating to the Registrant's 2016 Annual Meeting of Shareholders, to be filed with the Securities and
Exchange Commission within 120 days following the end of the Registrant's fiscal year, are incorporated by reference in Part III of this annual report on Form 10-K as indicated
herein.





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FS ENERGY AND POWER FUND

FORM 10-K FOR THE FISCAL YEAR  ENDED DECEMBER 31, 2015

TABLE OF CONTENTS



PagePART IITEM 1.

BUSINESS

1ITEM 1A.

RISK FACTORS

23ITEM 1B.

UNRESOLVED STAFF COMMENTS

56ITEM 2.

PROPERTIES

56ITEM 3.

LEGAL PROCEEDINGS

56ITEM 4.

MINE SAFETY DISCLOSURES

56PART IIITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

57ITEM 6.

SELECTED FINANCIAL DATA

59ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

61ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

102ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

104ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

168ITEM 9A.

CONTROLS AND PROCEDURES

168ITEM 9B.

OTHER INFORMATION

169PART IIIITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

170ITEM 11.

EXECUTIVE COMPENSATION

170ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

170ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

170ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

170PART IVITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

171SIGNATURES

177


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Table of Contents

PART I

Many of the amounts and percentages presented in Part I have been rounded for convenience of presentation and all dollar
amounts, excluding per share amounts, are presented in thousands unless otherwise noted.

Item 1.    Business.

FS Energy and Power Fund, or the Company, which may also be referred to as "we," "us" or "our," was organized in September 2010 and
commenced investment operations in
July 2011. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a business development company, or BDC, under the Investment
Company Act of 1940, as amended, or the 1940 Act. In addition, we have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a regulated investment company, or
RIC, under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of December 31, 2015, we had total assets of approximately $3.5 billion.

We
are managed by FS Investment Advisor, LLC, or FS Advisor, a registered investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, which
oversees the management of our operations and is responsible for making investment decisions with respect to our portfolio. FS Advisor has engaged GSO Capital Partners LP, or GSO, to act as our
investment sub-adviser. GSO assists FS Advisor in identifying investment opportunities and makes investment recommendations for approval by FS Advisor, according to guidelines set by FS Advisor. GSO,
a registered investment adviser under the Advisers Act, oversaw approximately $79.1 billion in assets under management as of December 31, 2015. GSO is the credit platform of The
Blackstone Group L.P., or Blackstone, a leading global alternative asset manager and provider of financial advisory services.

Our
investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of energy and power, or Energy, companies. This investment policy may not
be changed without at least 60 days' prior notice to holders of our common shares of any such change. We consider Energy companies to be those companies that engage in the exploration,
development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined products, coal
or power, including those companies that provide equipment or services to companies engaged in any of the foregoing. We concentrate our investments on debt securities in Energy companies that we
believe have, or are connected to, a strong infrastructure and/or underlying asset base so as to enhance collateral coverage and downside protection for our investments. We may also make select equity
investments in certain Energy companies meeting our investment objectives of current income generation and long-term capital appreciation. Our primary areas of focus will be the upstream, midstream,
power and service and equipment sub-sectors of the Energy industry; however, we broadly define our "Energy Investment Universe" as follows:



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Our
investment objectives are to generate current income and long-term capital appreciation. We seek to meet our investment objectives
by:



Our
portfolio is comprised primarily of income-oriented securities, which refers to debt securities and income-oriented preferred and common equity interests, of privately-held Energy
companies within the United States. We intend to weight our portfolio towards senior and subordinated debt. In addition to investments purchased from dealers or other investors in the secondary
market, we expect to invest in primary market transactions and directly originated investments as this will provide us with the ability to tailor investments to best match a project's or company's
needs with our investment objectives. Our portfolio may also be comprised of select income-oriented preferred or common equity interests, which refers to equity interests that pay consistent,
high-yielding dividends, that we believe will produce both current income and long-term capital appreciation. These income-oriented preferred or common equity interests may include interests in master
limited partnerships, or MLPs. MLPs are entities that (i) are structured as limited partnerships or limited liability companies, (ii) are publicly traded, (iii) satisfy certain
requirements to be treated as partnerships for U.S. federal income tax purposes and (iv) primarily own and operate midstream and upstream Energy companies. In connection with certain of our
debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. In addition, a portion of our portfolio may be comprised of minority interests in
the form of common or preferred equity or other equity-related securities, such as rights and warrants that may be converted into or exchanged for common stock or other equity or the cash value of
common stock or other equity, in our target companies, as well as derivatives, including total return swaps and credit default swaps. We expect that the size of our individual investments will
generally range between $5 million and $75 million each, although investments may vary proportionately as the size of our capital base changes and will ultimately be at the discretion of
FS Advisor, subject to oversight by our board of trustees.

To
seek to enhance our returns, we intend to employ leverage as market conditions permit and at the discretion of FS Advisor, but in no event will leverage employed exceed 50% of the
value of our assets, as required by the 1940 Act.

During
the year ended December 31, 2015, we made investments in portfolio companies totaling $1,195,947. During the same period, we sold investments for proceeds of $590,726 and
received principal repayments of $209,808. As of December 31, 2015, our investment portfolio, with a total fair value of $3,069,498 (30% in first lien senior secured loans, 30% in second lien
senior secured loans, 11% in senior secured bonds, 19% in subordinated debt and 10% in equity/other), consisted of interests in 90 portfolio companies. The portfolio companies that comprised our
portfolio as of such date had an average annual earnings before interest, taxes, depreciation and amortization, or EBITDA, of approximately $244.8 million. As of December 31, 2015, the
investments in our portfolio were purchased at a weighted average price of 98.4% of par value and our estimated gross annual portfolio yield, prior to leverage (which represents the expected yield to
be generated by us on our investment portfolio based on the composition of our portfolio as of such date), was 9.3% based upon the amortized cost of our investments. The estimated gross annual
portfolio yield does not represent an actual investment return to shareholders.

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Based
on our regular weekly cash distribution rate of $0.013625 per share as of December 31, 2015 and our public offering price of $7.50 per share as of such date, the annualized
distribution rate to shareholders as of December 31, 2015 was 9.45%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income,
realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than
the rates set forth above. See "Item 1A. Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements.

As
a BDC, we are subject to certain regulatory restrictions in making our investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in
transactions originated by the BDC or its affiliates in the absence of an exemptive order from the U.S. Securities and Exchange Commission, or SEC. However, BDCs are permitted to, and may,
simultaneously co-invest in transactions where price is the only negotiated point. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of
certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of FS Advisor, including FS Investment Corporation, FS Investment Corporation II, FS
Investment Corporation III, FS Investment Corporation IV and any future BDCs that are advised by FS Advisor or its affiliated investment advisers, or collectively, our co-investment affiliates. We
believe this relief has and may continue to enhance our ability to further our investment objectives and strategy. We believe this relief may also increase favorable investment opportunities for us,
in part, by allowing us to participate in larger investments, together with our co-investment affiliates, than would be available to us if such relief had not been obtained. Because we did not seek
exemptive relief to engage in co-investment transactions with GSO and its affiliates, we will continue to be permitted to co-invest with GSO and its affiliates only in accordance with existing
regulatory guidance.

While
a BDC may list its shares for trading in the public markets, we have currently elected not to do so. We believe that a non-traded structure is more appropriate during our offering
stage due to the long-term nature of the assets in which we invest. This structure allows us to operate with a long-term view, similar to that of other types of private investment funds, instead of
managing to quarterly market expectations. While our offering price, which exceeds our net asset value per share, is subject to adjustment in accordance with the 1940 Act and our share pricing policy,
because our common shares will not be listed on a national securities exchange, our shareholders will not be subject to the daily share price volatility associated with the public markets. However,
the net asset value of our common shares may be volatile.

To
provide our shareholders with limited liquidity, we intend to conduct quarterly tender offers pursuant to our share repurchase program. We are not obligated to repurchase common
shares and, if we do so, common shares will be repurchased at a discount of 10% from the offering price in effect at the time of repurchase. The first such tender offer commenced in August 2012. This
will be the only method by which our shareholders may obtain liquidity prior to a liquidity event. Therefore, shareholders may not be able to sell their common shares promptly or at a desired price.
If shareholders are able to sell their common shares, it is likely they will have to sell them at a significant discount to their purchase price. During the year ended December 31, 2015, we
repurchased 4,833,902 common shares at an average price per share of $8.277 for aggregate consideration totaling $40,009. During the year ended December 31, 2014, we repurchased 1,041,178
common shares at an average
price per share of $9.856 for aggregate consideration totaling $10,262. During the year ended December 31, 2013, we repurchased 340,096 common shares at an average price per share of $9.624 for
aggregate consideration totaling $3,273. On January 6, 2016, we repurchased 2,716,924 common shares at $6.75 per share for aggregate consideration totaling $18,339.

We
do not currently intend to list our common shares on an exchange and do not expect a public market to develop for them in the foreseeable future. We intend to seek to complete a
liquidity event within five years following the completion of our offering stage; however, the offering period may extend for an indefinite period. Accordingly, shareholders should consider that they
may not have access to the money they invest for an indefinite period of time until we complete a liquidity event. We will view our offering stage as complete as of the termination date of our most
recent public equity offering if we have not conducted a public equity offering in any continuous two year period. In addition, shares of BDCs listed on a national securities exchange frequently trade
at a discount to net

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asset
value. If we determine to pursue a listing of our common shares on a national securities exchange, shareholders, including those who purchase shares at the offering price, may experience a loss
on their investment if they sell their shares at a time when our common shares are trading at a discount to net asset value. This risk is separate and distinct from the risk that our net asset value
will decrease. There can be no assurance that we will be able to complete a liquidity event.

Status of Our Continuous Public Offering

Since commencing our continuous public offering and through March 1, 2016, we have sold 386,582,293 common shares (as adjusted
for share distributions) for gross proceeds of $3,896,873, including common shares issued under our distribution reinvestment plan. As of March 1, 2016, we had raised total gross proceeds of
$3,917,077, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 from common shares sold pursuant to a private placement to certain members of our
board of trustees and other individuals and entities affiliated with FS Advisor and GSO.

About FS Advisor

FS Advisor is a subsidiary of our affiliate, Franklin Square Holdings, L.P., or Franklin Square Holdings, a national sponsor of
alternative investment funds designed for the individual investor. FS Advisor is registered as an investment adviser with the SEC under the Advisers Act and is led by substantially the same personnel
that form the investment and operations team of FB
Income Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC and FS Global Advisor, LLC. FB Income Advisor, LLC, FSIC II
Advisor, LLC, FSIC III Advisor, LLC and FSIC IV Advisor, LLC are registered investment advisers that manage Franklin Square Holdings' four other affiliated BDCs, FS Investment
Corporation, FS Investment Corporation II, FS Investment Corporation III and FS Investment Corporation IV, respectively. FS Global Advisor, LLC is a registered investment adviser that
manages Franklin Square Holdings' affiliated closed-end management investment company, FS Global Credit Opportunities Fund.

In
addition to managing our investments, the managers, officers and other personnel of FS Advisor also currently manage the following entities through affiliated investment advisers:

Name

Entity

Investment Focus

Gross
Assets(1)FS Investment Corporation

BDC

Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies.

$
4,149,663FS Investment Corporation II(2)

BDC

Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies.

$
5,032,346FS Investment Corporation III

BDC

Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies.

$
3,058,486FS Investment Corporation IV(3)

BDC

Primarily invests in senior secured loans, second lien secured loans and, to a lesser extent, subordinated loans of private U.S. companies.

$
200FS Global Credit Opportunities Fund(4)

Closed-end management investment company

Primarily invests in secured and unsecured floating and fixed rate loans, bonds and other types of credit instruments.

$
1,303,793


(1)As
of December 31, 2015, except as otherwise noted below.(2)As
of September 30, 2015.(3)FS
Investment Corporation IV formally commenced investment operations on January 6, 2016, upon meeting its minimum offering requirement of raising
gross proceeds of at least $1.0 million in its continuous public offering from persons who were not affiliated with FS Investment Corporation IV or its investment adviser, FSIC IV
Advisor, LLC.(4)Two
funds affiliated with FS Global Credit Opportunities Fund, FS Global Credit Opportunities FundA and FS Global Credit Opportunities
FundD, or together, the FSGCOF Offered Funds, which have the same investment objectives and strategies as FS Global Credit Opportunities Fund, currently offer common shares of beneficial
interest to the public and invest substantially all of the net proceeds of their respective offerings in FS Global Credit Opportunities Fund.


Our
chairman, president and chief executive officer, Michael C. Forman, has led FS Advisor since its inception. In 2007, he co-founded Franklin Square Holdings with the goal of
delivering alternative investment solutions, advised by what Franklin Square Holdings believes to be best-in-class institutional

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asset
managers, to individual investors nationwide. In addition to leading FS Advisor, Mr. Forman currently serves as chairman, president and chief executive officer of FB Income
Advisor, LLC, FSIC II Advisor, LLC, FS Investment Corporation II, FSIC III Advisor, LLC, FS Investment Corporation III, FSIC IV Advisor, LLC, FS Investment Corporation IV,
FS Global Advisor, LLC, FS Global Credit Opportunities Fund and the FSGCOF Offered Funds. Mr. Forman also currently serves as chairman and chief executive officer of FS Investment
Corporation.

FS
Advisor's senior management team has significant experience in private lending and private equity investing, and has developed an expertise in using all levels of a firm's capital
structure to produce income-generating investments, while focusing on risk management. The team also has extensive knowledge of the managerial, operational and regulatory requirements of publicly
registered alternative asset entities, such as BDCs. We believe that the active and ongoing participation by Franklin Square Holdings and its affiliates in the credit markets, and the depth of
experience and disciplined investment approach of FS Advisor's management team, will allow FS Advisor to successfully execute our investment strategy.

All
investment decisions require the unanimous approval of FS Advisor's investment committee, which is currently comprised of Mr. Forman, Gerald F. Stahlecker, Zachary Klehr and
Sean Coleman. Our board of trustees, including a majority of independent trustees, oversees and monitors our investment performance and annually reviews the investment advisory and administrative
services agreement and the investment sub-advisory agreement to determine, among other things, whether the fees payable under such agreements are reasonable in light of the services provided.

About GSO

From time to time, FS Advisor may enter into sub-advisory relationships with registered investment advisers that possess skills that FS
Advisor believes will aid it in achieving our investment objectives. FS Advisor has engaged GSO to act as our investment sub-adviser. GSO assists FS Advisor in identifying investment opportunities and
makes investment recommendations for approval by FS Advisor, according to guidelines set by FS Advisor. GSO also serves as the investment sub-adviser to FS Global Credit Opportunities Fund. In
addition, GSO's wholly-owned subsidiary, GSO/Blackstone Debt Funds Management LLC, or GDFM, serves as the investment sub-adviser to FS Investment Corporation, FS Investment Corporation II, FS
Investment Corporation III and FS Investment Corporation IV. GSO is a Delaware limited partnership with principal offices located at 345 Park Avenue, New York, New York 10154.

GSO
is the credit platform of Blackstone, a leading global alternative asset manager. As of December 31, 2015, GSO and its affiliates, excluding Blackstone, managed approximately
$79.1 billion of assets across multiple strategies and investment types within the leveraged finance marketplace, including leveraged loans, high-yield bonds, distressed, mezzanine and private
equity. GSO has extensive experience investing in Energy companies. From 2005 through 2015, funds managed by GSO have invested over $16 billion in Energy companies. As investment sub-adviser,
GSO utilizes its experience in Energy investing and makes recommendations to FS Advisor in a manner that is consistent with its existing investment and monitoring processes.

Blackstone
is a leading global alternative asset manager and provider of financial advisory services. It is one of the largest independent managers of private capital in the world, with
assets under management of approximately $336.4 billion as of December 31, 2015. Blackstone's alternative asset management businesses include the management of private equity funds, real
estate funds, funds of hedge funds, credit-oriented funds, collateralized loan obligation vehicles, separately managed accounts and publicly-traded closed-end mutual funds. Blackstone is a
publicly-traded limited partnership that has common units which trade on the New York Stock Exchange LLC under the ticker symbol "BX." Information about Blackstone and its various affiliates,
including certain ownership, governance and financial information, is disclosed in Blackstone's periodic filings with the SEC, which can be obtained from Blackstone's website at http://ir.blackstone.comor the SEC's website atwww.sec.gov. Information contained on Blackstone's
website and in Blackstone's filings with the SEC are not incorporated by reference into this annual report on Form 10-K and shareholders should not consider that information to be part of this
annual report on Form 10-K.

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Market Opportunity

We expect that there are and will continue to be significant investment opportunities in income-oriented securities of privately-held
Energy companies within the United States that will provide attractive risk-adjusted returns compared to other types of investments.

Recent
volatility in the price of oil combined with reduced secondary market liquidity has resulted in lower prices and higher yields for broadly syndicated energy debt investments. From
August 31, 2014 to December 31, 2015, the average yield to a 3-year maturity of broadly syndicated energy loans increased from 6.08% to 21.0%, the highest since 2009, as measured by the
energy component of the Credit Suisse Leveraged Loan Index, and the average yield-to-worst of high yield energy bonds increased from 5.6% to 16.0%, the highest since 2008, as measured by the energy
component of the Credit Suisse High Yield Index. We believe that the debt securities of many of these energy companies are undervalued relative to our fundamental analysis and that the broad decline
in energy credit prices has not taken into account company-by-company differences in hedging programs, cost structures and liquidity profiles. In addition, certain companies have the ability to reduce
costs through technological advances and many have options available to them to enhance liquidity in the event commodity prices remain depressed for a prolonged period of time. It is our view that by
focusing our investments in the senior secured debt of companies with positive free cash flows, low cost structures, strong balance sheets and high-quality reserves we can generate attractive
risk-adjusted returns over the long-term, while protecting our downside in most commodity price environments. Senior secured debt investments in upstream energy companies can provide downside
protection through hard asset coverage. These investments can be secured by the issuer's assets (e.g., reserves) which comprise the majority of enterprise value in upstream companies, and may
be seized by senior secured creditors in the event of a default, if necessary.

We
also believe that the recent commodity price volatility has and should continue to disrupt the flow of credit from banks and the capital markets to energy companies and that this
disruption will create opportunities for us to increase our directly originated deal flow. In particular, we expect that private energy companies, which represent approximately 98% of all U.S. energy
companies, will experience the most significant reduction in credit availability from traditional sources. At the same time, we see multiple factors which will necessitate additional and continued
capital infusion for energy companies across all sub-sectors. Upstream companies face anticipated production declines of previously discovered oil and natural gas reserves, which we believe will
require large annual capital inflows to replace lost production. Midstream assets throughout the United States are aging and are not ideally located to new areas of development, requiring that
additional infrastructure be built to ensure this new supply reaches market. Further, we believe these investment opportunities could increase due to potential environmental regulations that are
expected to impact fossil-fuel power generation, particularly coal generation, which itself comprises more than a third of the current U.S. power market. We expect such market dynamics across these
sub-sectors will present a growing investment opportunity for us over the long-term. Additionally, we believe that regulatory factors may further diminish the role of traditional financial
institutions in providing financing to energy companies.

We
believe that this large and varied asset class maintains attractive and distinct investment characteristics, including established hard asset values, high barriers to entry and
attractive long-term growth profiles, which will allow us to provide superior risk-adjusted returns compared to other types of investments.

Characteristics of and Risks Related to Investments in Private Companies

We invest primarily in income-oriented securities of privately-held Energy companies within the United States. Investments in private
companies pose significantly greater risks than investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and
ability to withstand financial distress. As a result, these companies, which may present greater credit risk than public companies, may be unable to meet the obligations under their debt and equity
securities that we hold. Second, the investments themselves may often be illiquid. The securities of many of the companies in which we invest are not publicly traded or actively traded on the
secondary market and are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors. In addition, our directly originated investments generally

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will
not be traded on any secondary market, and a trading market for such investments may not develop. These securities may also be subject to legal and other restrictions on resale. As such, we may
have difficulty exiting an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. These investments may also be difficult to value because little
public information generally exists about private companies, requiring an experienced due diligence team to analyze and value the potential portfolio company. Finally, these companies may not have
third-party debt ratings or audited financial statements. We must therefore rely on the ability of FS Advisor and/or GSO to obtain adequate information through their due diligence efforts to evaluate
the creditworthiness of, and risks involved in investing in, these companies, and to determine the optimal time to exit an investment. These companies and their financial information will also
generally not be subject to the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and other rules and regulations that govern public companies that are designed to protect investors.

Investment Strategy

Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies.
This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such change. In accordance with the best interests of our shareholders,
FS Advisor monitors our targeted investment mix as economic conditions evolve.

When
identifying prospective portfolio companies, we focus primarily on the attributes set forth below, which we believe help us generate higher total returns with an acceptable level of
risk. While these criteria provide general guidelines for our investment decisions, we caution investors that, if we believe
the benefits of investing are sufficiently strong, not all of these criteria necessarily will be met by each prospective portfolio company in which we choose to invest. These attributes
are:



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In
addition, in an order dated June 4, 2013, the SEC granted exemptive relief that, subject to the satisfaction of certain conditions, expanded our ability to co-invest in certain
privately negotiated investment transactions with our co-investment affiliates, which we believe has and may continue to enhance our ability to further our investment objectives and strategy.

Potential Competitive Strengths

We believe that we offer investors the following potential competitive strengths:



We believe that the breadth and depth of the experience of FS Advisor's senior management team, together with the wider resources of
GSO's investment team, which is dedicated to sourcing, structuring, executing, monitoring and harvesting a broad range of private investments, provides us with a significant competitive advantage in
sourcing and analyzing what we believe to be attractive investment opportunities worldwide.



Our long-term investment horizon gives us great flexibility, which we believe allows us to maximize returns on our investments. Unlike
most private equity and venture capital funds, we are not required to return capital to our shareholders once we exit a portfolio investment. Such funds typically can only be invested once and must be
returned to investors after a specific time period. These provisions often force private equity and venture capital funds to seek liquidity events, including initial public offerings, mergers or
recapitalizations, more quickly than they otherwise might, potentially resulting in a lower return to investors. We believe that freedom from such capital return requirements, which allows us to
invest using a longer term focus, provides us with the opportunity to increase total returns on invested capital, compared to other private company investment vehicles.



FS Advisor seeks to leverage GSO's significant access to transaction flow. GSO seeks to generate investment opportunities through
syndicate and club deals (generally, investments made by a small group of investment firms), through its trading platform, relationships with investment banks, which may be exclusive to GSO, and,
subject to regulatory constraints as discussed under "Regulation" and the allocation policies of GSO and its affiliates, as applicable,
also through GSO's direct origination channels. These include significant contacts to participants in the credit and leveraged finance marketplace, which it can draw upon in sourcing investment
opportunities for us. With respect to syndicate and club deals, GSO has built a network of relationships with commercial and investment banks, finance companies and other investment funds as a result
of the long track record of its investment professionals in the leveraged finance marketplace. With respect to GSO's origination channel, FS Advisor seeks to leverage the global presence of GSO and
its long-standing personal contacts within the Energy industry to generate access to a substantial amount of directly originated transactions with attractive investment characteristics. We believe
that the broad network of GSO provides a significant pipeline of investment opportunities for us. GSO also has a significant trading platform, which, we believe, allows us access to the secondary
market for investment opportunities.



FS Advisor and GSO employ a conservative investment approach focused on current income and long-term investment performance. This
investment approach involves a multi-stage selection process for each investment opportunity, as well as ongoing monitoring of each investment made, with particular emphasis on early detection of
deteriorating credit conditions at portfolio companies which would result in adverse portfolio developments. This strategy is designed to maximize current income and minimize the risk of capital loss
while maintaining the potential for long-term capital appreciation.

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FS Advisor and GSO believe that their broad expertise and experience investing at all levels of a company's capital structure enable us
to manage risk while affording us the opportunity for significant returns on our investments. We attempt to capitalize on this expertise in an effort to produce and maintain an investment portfolio
that will perform in a broad range of economic conditions. In addition, we seek to leverage this broad-ranging capability to enable us to provide Energy companies with financing that most closely
aligns with their particular capital needs. We believe that such flexibility is valuable to Energy companies and provides us with a competitive advantage over other capital providers that are more
limited in the securities in which they invest.

Operating and Regulatory Structure

Our investment activities are managed by FS Advisor and supervised by our board of trustees, a majority of whom are independent. Under
the investment advisory and administrative services agreement, we have agreed to pay FS Advisor an annual base management fee based on the average value of our gross assets as well as incentive fees
based on our performance. See "See Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsContractual Obligations" for a description of the
fees we pay to FS Advisor.

From
time to time, FS Advisor may enter into sub-advisory relationships with registered investment advisers that possess skills or attributes that FS Advisor believes will aid it in
achieving our investment objectives. FS Advisor has engaged GSO to act as our investment sub-adviser. GSO assists FS Advisor in identifying investment opportunities and makes investment
recommendations for consideration and approval by FS Advisor according to guidelines set by FS Advisor. FS Advisor oversees our day-to-day operations, including the provision of general ledger
accounting, fund accounting, legal services, investor relations and other administrative services. FS Advisor also performs, or oversees the performance of, our corporate operations and required
administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In
addition, FS Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and
generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others.

We
reimburse FS Advisor for expenses necessary to perform services related to our administration and operations, including FS Advisor's allocable portion of the compensation and related
expenses of certain personnel of Franklin Square Holdings providing administrative services to us on behalf of FS Advisor. The amount of this reimbursement is set at the lesser of (1) FS
Advisor's actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same
geographic location. FS Advisor is required to allocate the cost of such services to us based on factors such as assets, revenues, time allocations and/or other reasonable metrics. Our board of
trustees reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of administrative expenses among us and certain affiliates of FS Advisor. Our
board of trustees then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the estimated cost to us
of obtaining similar services from third-party service providers known to be available. In addition, our board of trustees considers whether any single third party service provider would be capable of
providing all such services at comparable cost and quality. Finally, our board of trustees, among other things, compares the total amount paid to FS Advisor for such services as a percentage of our
net assets to the same ratio as reported by other comparable BDCs. We do not reimburse FS Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital
equipment or other administrative items allocated to a controlling person of FS Advisor.

In
addition, we have contracted with State Street Bank and Trust Company, or State Street, to provide various accounting and administrative services including, but not limited to,
preparing preliminary financial information for review by FS Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information
provided by us and performing testing with respect to RIC compliance.

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As
a BDC, we are required to comply with certain regulatory requirements. Also, while we are permitted to finance investments using debt, our ability to use debt will be limited in
certain significant respects pursuant to the 1940 Act. Within the limits of existing regulation, we will adjust our use of debt, according to market conditions, to the level we believe will allow us
to generate maximum risk-adjusted returns. See "Regulation." We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under
Subchapter M of the Code.

Investment Types

Our portfolio is comprised primarily of income-oriented securities, which refers to debt securities and income-oriented preferred and
common equity interests, of privately-held Energy companies within the United States. We intend to weight our portfolio towards senior and subordinated debt. In addition to investments purchased from
dealers or other investors in the secondary market, we expect to invest in primary market transactions and directly originated investments as this will provide us with the ability to tailor
investments to best match a project's or company's needs with our investment objectives. Our portfolio may also be comprised of select
income-oriented preferred or common equity interests, which refers to equity interests that pay consistent, high-yielding dividends, that we believe will produce both current income and long-term
capital appreciation. These income-oriented preferred or common equity interests may include interests in MLPs. In connection with certain of our debt investments, we may on occasion receive equity
interests such as warrants or options as additional consideration



Senior debt is situated at the top of the capital structure. Because this debt has priority in payment, it carries the lowest risk
among all investments in a company. Generally, senior debt in which we may invest is expected to have a maturity period of three to seven years, offer some form of amortization, and have first
priority security interests in the assets of the borrower. Senior debt is comprised of first lien and second lien debt positions. Second lien debt is granted a second priority security interest in the
assets of the borrower, which means that any realization of collateral will generally be applied to pay first lien debt in full before second lien debt positions are paid and the value of the
collateral may not be sufficient to repay in full both first lien secured debt and second lien secured debt. Generally, in normalized markets, we expect that the variable interest rate on our first
lien debt typically will range between 4.0% and 9.0% over a standard benchmark, such as the prime rate or the London Interbank Offered Rate, or LIBOR. In normalized markets, we expect that the
variable interest rate on second lien debt will range between 6.0% and 10.0% over a standard benchmark. In addition, we may receive additional returns from any warrants we may receive in connection
with these investments.



In addition to senior debt, we may invest a portion of our assets in subordinated debt of private companies. Subordinated debt usually
ranks junior in priority of payment to first lien and second lien secured loans and is often unsecured, but is situated above preferred equity and common equity in the capital structure. In return for
their junior status compared to first lien and second lien secured loans, subordinated debt typically offers higher returns through both higher interest rates and possible equity ownership in the form
of warrants, enabling the lender to participate in the capital appreciation of the borrower. These warrants typically require only a nominal cost to exercise. We intend to generally target
subordinated debt with interest-only payments throughout the life of the security, with the principal due at maturity. Typically, subordinated debt investments have maturities of five to ten years.
Generally, in normalized markets, we expect these securities to carry a fixed rate or a floating current yield of 8.0% to 12.0% over a standard benchmark. In addition, we may receive additional
returns from any warrants we may receive in connection with these investments. In some cases, a portion of the total interest may accrue or be paid-in-kind, or PIK.



Preferred equity typically includes a stated value or liquidation preference structurally ahead of common equity holders. Holders of
preferred equity can be entitled to a wide range of voting and

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other
rights, depending on the structure of each separate security. Preferred equity can also include a conversion feature whereby the securities convert into common stock based on established
parameters according to set ratios. We seek to invest in primarily income-oriented equity securities of Energy companies in a manner consistent with our status as a BDC.



We may also invest in other equity securities which are typically structurally subordinate to all other securities within the capital
structure and do not have a stated maturity. As compared to more senior securities, equity interests have greater risk exposure, but also have the potential to provide a higher return. Some of these
investments may take the form of common units in MLPs. MLPs typically pay their unitholders quarterly distributions, offering investors a current yield and the opportunity for a more stable return
profile.



We may invest in energy-specific non-operating investments including net profits interests, royalty interests or VPPs. Such
non-operating interests do not include the rights and obligations of operating a mineral property (costs of exploration, development and operation) and do not bear any part of the net losses. Net
profits interests and royalty interests are contractual agreements whereby the holders of such interests are entitled to a portion of the mineral production or proceeds therefrom. A VPP is a type of
structured investment whereby the owner sells a specific volume of production in a field or property to an investor and the investor receives a specific quota of production on a monthly basis in
either raw output or proceeds therefrom. A VPP is typically set to expire after a certain length of time or after a specified aggregate total volume of the commodity has been delivered. If the
producer cannot meet the supply quota for a given period, the supply obligation rolls forward to future cycles until the buyer is made financially whole.



We may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S. currencies, to the extent
permitted by the 1940 Act.



We may also invest from time to time in derivatives, such as total return swaps and credit default swaps. We anticipate that any use of
derivatives would primarily be as a substitute for investing in conventional securities. Any use of derivatives may subject us to additional risks. See "Item 1A. Risk FactorsRisks
Related to Our InvestmentsWe may from time to time enter into total return swaps, credit default swaps or other derivative transactions which expose us to certain risks, including credit
risk, market risk, liquidity risk and other risks similar to those associated with the use of leverage."

Sources of Income

The primary means through which our shareholders may receive a return of value is through interest income, dividends and capital gains
generated by our investments. In addition to these sources of income, we may receive fees paid by our portfolio companies, including one-time closing fees paid at the time each investment is made.
Closing fees typically range from 1.0% to 3.0% of the purchase price of an investment. In addition, we may generate revenues in the form of non-recurring commitment, origination, structuring or
diligence fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees.

Risk Management

We seek to limit the downside potential of our investment portfolio by:



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Such
restrictions may include affirmative and negative covenants, default penalties, lien protection, change of control provisions and board rights. We may also enter into interest rate
hedging transactions at the sole discretion of FS Advisor. Such transactions will enable us to selectively modify interest rate exposure as market conditions dictate.



Affirmative covenants require borrowers to take actions that are meant to ensure the solvency of the company, facilitate the lender's
monitoring of the borrower and ensure payment of interest and loan principal due to lenders. Examples of affirmative covenants include covenants requiring the borrower to maintain adequate insurance,
accounting and tax records, and to produce frequent financial reports for the benefit of the lender.



Negative covenants impose restrictions on the borrower and are meant to protect lenders from actions that the borrower may take that
could harm the credit quality of the lender's investments. Examples of negative covenants include restrictions on the payment of dividends and restrictions on the issuance of additional debt without
the lender's approval. In addition, certain covenants restrict a borrower's activities by requiring it to meet certain earnings interest coverage ratio and leverage ratio requirements. These covenants
are also referred to as financial or maintenance covenants.

Investment Process

The investment professionals employed by FS Advisor and GSO have spent their careers developing the resources necessary to invest in
private companies. Our transaction process is highlighted below.

Our Transaction Process

GRAPHIC



In order to source transactions, FS Advisor seeks to leverage GSO's significant access to transaction flow, along with GSO's trading
platform, which allows for access to the syndicated loan market, which may be a key source of investment opportunities for us. GSO seeks to generate investment opportunities through its trading
platform, through syndicate and club deals, through relationships with investment banks, which may be exclusive to GSO, and, subject to regulatory constraints and the allocation policies of GSO and
its affiliates, as applicable, through GSO's direct origination channels. GSO also relies on its relationships with private equity sponsors, investment banks and commercial banks to source investment
opportunities. With respect to syndicate and club deals, GSO has built a network of relationships with commercial and investment banks, finance companies and other investment funds as a result of the
long track record of its investment professionals in the leveraged finance marketplace. GSO may compensate certain brokers or other financial services firms out of its own profits or revenues for
services provided in connection with the identification of appropriate investment opportunities. With respect to GSO's origination channel, FS Advisor seeks to leverage the global presence of GSO and
its long-standing personal contacts within the Energy industry

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to
generate access to a substantial amount of directly originated transactions with what we believe to be attractive investment characteristics. We believe that the broad network of GSO provides a
significant pipeline of investment opportunities for us.



Initial Review.In its initial review of an investment opportunity to present to FS Advisor, GSO's transaction team examines information
furnished by
the target company and external sources, including rating agencies, if applicable, to determine whether the investment meets our basic investment criteria and other guidelines specified by FS Advisor,
within the context of proper allocation of our portfolio among various issuers and industry sub-sectors, and offers an acceptable probability of attractive returns with identifiable downside risk. For
the majority of securities available on the secondary market, a comprehensive analysis is conducted and continuously maintained by a dedicated GSO research analyst, the results of which are available
for the transaction team to review. In the case of a directly originated transaction, FS Advisor and GSO conduct detailed due diligence investigations as necessary.

Credit Analysis/Due Diligence.Before undertaking an investment, the transaction teams from GSO and FS Advisor conduct a thorough due
diligence
review of the opportunity to ensure the company fits our investment strategy, which may include:



When
possible, our advisory team seeks to structure transactions in such a way that our target companies are required to bear the costs of due diligence, including those costs related to
any outside consulting work we may require.



Recommendation.FS Advisor has engaged GSO to identify and recommend investment opportunities for its approval. GSO seeks to maintain a
defensive
approach toward its investment recommendations by emphasizing risk control in its transaction process, which includes (i) the pre-review of each opportunity by one of its portfolio managers to
assess the general quality, value and fit relative to our portfolio, (ii) where possible, transaction structuring with a focus on preservation of capital in varying economic environments and
(iii) ultimate approval of investment recommendations by GSO's investment committee.

Approval.After completing its internal transaction process, GSO makes formal recommendations for review and approval by FS Advisor. In
connection
with its recommendation, it transmits any relevant underwriting material and other information pertinent to the decision-making process. In addition, GSO makes its staff available to answer inquiries
by FS Advisor in connection with its recommendations. The consummation of a transaction requires unanimous approval of the members of FS Advisor's investment committee.



Portfolio Monitoring.FS Advisor, with the help of GSO, monitors our portfolio with a focus toward anticipating negative credit events.
To maintain
portfolio company performance and help to ensure a successful exit, FS Advisor and GSO work closely with the lead equity sponsor, loan syndicator, portfolio company management, consultants, advisers
and other security holders to discuss

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financial
position, compliance with covenants, financial requirements and execution of the company's business plan. In addition, depending on the size, nature and performance of the transaction, we
may occupy a seat or serve as an observer on a portfolio company's board of directors or similar governing body.

Typically,
FS Advisor and GSO receive financial reports detailing operating performance, sales volumes, margins, cash flows, financial position and other key operating metrics on a
quarterly basis from our portfolio companies. FS Advisor and GSO use this data, combined with due diligence gained through contact with the company's customers, suppliers, competitors, market research
and other methods, to conduct an ongoing, rigorous assessment of the company's operating performance and prospects. GSO may rely on brokers or other financial services firms that may help identify
potential investments from time to time for assistance in monitoring these investments.

In
addition to various risk management and monitoring tools, FS Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in
our portfolio. FS Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

Investment
Rating

Summary Description1

Investment exceeding expectations and/or capital gain expected.2

Performing investment generally executing in accordance with the portfolio company's business planfull return of principal and interest expected.3

Performing investment requiring closer monitoring.4

Underperforming investmentsome loss of interest or dividend possible, but still expecting a positive return on investment.5

Underperforming investment with expected loss of interest and some principal.


FS
Advisor monitors and, when appropriate, changes the investment ratings assigned to each investment in our portfolio. In connection with valuing our assets, our board of trustees
reviews these investment ratings on a quarterly basis. In the event that our advisory team determines that an investment is underperforming, or circumstances suggest that the risk associated with a
particular investment has significantly increased, FS Advisor will attempt to sell the asset in the secondary market, if applicable, or to implement a plan to attempt to exit the investment or to
correct the situation.

The
following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December 31, 2015 and 2014:

December 31, 2015

December 31, 2014Investment Rating

Fair
Value

Percentage
of Portfolio

Fair
Value

Percentage
of Portfolio1

$
159,204


5
%
$
119,174


4
%2


1,340,637


44
%

2,630,119


78
%3


1,288,144


42
%

586,116


17
%4


203,084


7
%

39,768


1
%5


78,429


2
%




​
​
​
​
​
​
​
​
​
​
​
​
​
​$
3,069,498


100
%
$
3,375,177


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


The
amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new
investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values. As of
December 31, 2015, 42% of our portfolio, based on fair value, consisted of investments with an investment rating of three, 7% of our portfolio, based on fair value, consisted of
investments with an investment rating of four and 2% of our portfolio, based on fair value, consisted of investments with an investment rating of five. The increase in the amount of our
investments rated a three or four and the investments now rated a five is due primarily to the pronounced decline in the price of oil and the increased volatility in the Energy credit markets during
the year ended December 31, 2015.

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Valuation Process.Each quarter, we value investments in our portfolio, and such values are disclosed each quarter in reports filed with
the SEC.
Investments for which market quotations are readily available are recorded at such market quotations. With respect to investments for which market quotations are not readily available, our board of
trustees determines the fair value of such investments in good faith, utilizing the input of our valuation committee, FS Advisor and any other professionals or materials that our board of trustees
deems worthy and relevant, including GSO and independent third-party valuation services, if applicable. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting PoliciesValuation of Portfolio Investments."

Managerial Assistance.As a BDC, we must offer, and provide upon request, managerial assistance to certain of our portfolio companies.
This
assistance could involve, among other things, monitoring the operations of our portfolio companies, participating in board and management meetings, consulting with and advising officers of portfolio
companies and providing other organizational and financial guidance. Depending on the nature of the assistance required, FS Advisor or GSO will provide such managerial assistance on our behalf to
portfolio companies that request this assistance. To the extent fees are paid for these services, we, rather than FS Advisor or GSO, will retain any fees paid for such assistance.



While we attempt to invest in securities that may be sold in a privately negotiated over-the-counter market, providing us a means by
which we may exit our positions, we expect that a large portion of our portfolio may not be sold on this secondary market. For any investments that are not able to be sold within this market, we focus
primarily on investing in companies whose business models and growth prospects offer attractive exit possibilities, including repayment of our investments, an initial public offering of equity
securities, a merger, a sale or a recapitalization, in each case with the potential for capital gains.

Financing Arrangements

To seek to enhance our returns, we employ leverage as market conditions permit and at the discretion of FS Advisor, but in no event may
leverage employed exceed 50% of the value of our assets, as required by the 1940 Act. Our wholly-owned, special-purpose financing subsidiaries, Berwyn Funding LLC, or Berwyn Funding; FSEP Term
Funding LLC, or FSEP Funding; Energy Funding LLC, or Energy Funding; Foxfields Funding LLC, or Foxfields Funding; Gladwyne Funding LLC, or Gladwyne Funding; Strafford
Funding LLC, or Strafford Funding and Wayne Funding LLC, or Wayne Funding, have entered into financing arrangements with BNP Paribas Prime Brokerage, Inc., or BNP; Deutsche Bank
AG, New York Branch, or Deutsche Bank; Natixis, New York Branch, or Natixis; Fortress Credit Co LLC, or Fortress; Goldman Sachs Bank USA, or Goldman; and
Wells Fargo Securities, LLC and Wells Fargo Bank, National Association, or Wells Fargo, respectively. The following table presents summary information with respect to our outstanding financing
arrangements as of December 31, 2015:

Facility

Type of
Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity DateBNP Facility

Prime Brokerage

L+1.10%

$
113,737

$
186,263

September 26, 2016(1)Deutsche Bank Credit Facility

Revolving

L+1.80%

$
280,000

$
60,000

June 11, 2016Fortress Facility

Term

L+5.00%(2)

$
89,600

$
65,400

November 6, 2020Goldman Facility

Repurchase

L+2.75%

$
324,984

$
16

September 15, 2017Natixis Credit Facility

Revolving

CP+2.25%

$
92,173




July 11, 2023Wells Fargo Credit Facility

Revolving

L+2.50% to 2.75%

$
140,000

$
60,000

September 9, 2019


(1)The
financing arrangement entered into by Berwyn Funding and BNP, or the BNP facility, is generally terminable upon 270 days' notice by either party.
As of December 31, 2015, neither Berwyn Funding nor BNP had provided notice of its intent to terminate the facility.(2)The
financing arrangement entered into by Foxfields Funding and Fortress, or the Fortress facility, accrues interest at a rate equal to LIBOR plus 5.00%,
subject to a floor of 0.75%.


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Our
average borrowings and weighted average interest rate, including the effect of non-usage fees, for the year ended December 31, 2015 were $1,010,699 and 2.77%, respectively. As
of December 31, 2015, our weighted average effective interest rate on borrowings was 2.95%.

See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital Resources" for additional
information regarding our financing arrangements.

Regulation

We have elected to be regulated as a BDC under the 1940 Act. The 1940 Act contains prohibitions and restrictions relating to
transactions between BDCs and their affiliates, principal underwriters and affiliates of those affiliates or underwriters. The 1940 Act requires that a majority of our trustees be persons other than
"interested persons," as that term is defined in the 1940 Act. In addition, the 1940 Act provides that we may not change the nature of our business so as to cease to be, or to withdraw our election
as, a BDC unless approved by a majority of our outstanding voting securities.

The
1940 Act defines "a majority of the outstanding voting securities" as the lesser of (i) 67% or more of the voting securities present at a meeting if the holders of more than
50% of our outstanding voting securities are present or represented by proxy or (ii) 50% of our voting securities. Furthermore, our investment policy is to invest, under normal circumstances,
at least 80% of our total assets in securities of Energy companies. This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such
change.

We
will generally not be able to issue and sell our common shares at a price per share, after deducting selling commissions and dealer manager fees, that is below our net asset value per
share. See "Item 1A. Risk FactorsRisks Related to Business Development CompaniesRegulations governing our operation as a BDC and RIC will affect our ability to raise,
and the way in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth." We may, however, sell our common shares, or warrants, options or
rights to acquire our common shares, at a price below the then-current net asset value of our common shares if our board of trustees determines that such sale is in our best interests and the best
interests of our shareholders, and our shareholders approve such sale. In addition, we may generally issue new common shares at a price below our net asset value per share in rights offerings to
existing shareholders, in payment of dividends and in certain other limited circumstances.

As
a BDC, we are subject to certain regulatory restrictions in making our investments. For example, BDCs generally are not permitted to co-invest with certain affiliated entities in
transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and may, co-invest in transactions where price is the only
negotiated point. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain conditions, to co-invest in certain privately negotiated
investment transactions with our co-investment affiliates. Under the terms of this relief, a "required majority" (as defined in Section 57(o) of the 1940 Act) of our independent trustees must
make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and
fair to us and our shareholders and do not involve overreaching of us or our shareholders on the part of any person concerned and (2) the transaction is consistent with the interests of our
shareholders and is consistent with our investment objectives and strategy. We believe this relief has and may continue to enhance our ability to further our investment objectives and strategy. We
believe this relief may also increase favorable investment opportunities for us, in part, by allowing us to participate in larger investments, together with our co-investment affiliates, than would be
available to us if such relief had not been obtained. Because we did not seek exemptive relief to engage in co-investment transactions with GSO and its affiliates, we will continue to be permitted to
co-invest with GSO and its affiliates only in accordance with existing regulatory guidance.



Under the 1940 Act, a BDC may not acquire any asset other than assets of the type listed in Section 55(a) of the 1940 Act, which
are referred to as qualifying assets, unless, at the time the

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acquisition
is made, qualifying assets represent at least 70% of the company's total assets. The principal categories of qualifying assets relevant to our business are any of the
following:



In
addition, a BDC must have been organized and have its principal place of business in the United States and must be operated for the purpose of making investments in the types of
securities described in (1), (2) or (3) above.



In order to count portfolio securities as qualifying assets for the purpose of the 70% test, we must either control the issuer of the
securities or must offer to make available to the issuer of the securities (other than small and solvent companies described above) significant managerial assistance; except that, where we purchase
such securities in conjunction with one or more other persons acting together, one of the other persons in the group may make available such managerial assistance. Making available managerial
assistance means, among other things, any arrangement whereby the BDC, through its trustees, officers or employees, offers to provide, and, if accepted, does so provide, significant guidance and
counsel concerning the management, operations or business objectives and policies of a portfolio company.

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Pending investment in other types of "qualifying assets," as described above, our investments may consist of cash, cash equivalents,
U.S. government securities or high-quality debt securities maturing in one year or less from the time of investment, which we refer to, collectively, as temporary investments, so that 70% of our
assets are qualifying assets. Typically, we will invest in U.S. Treasury bills or in repurchase agreements, provided that such agreements are fully collateralized by cash or securities issued by the
U.S. government or its agencies. A repurchase agreement involves the purchase by an investor, such as us, of a specified security and the simultaneous agreement by the seller to repurchase it at an
agreed-upon future date and at a price that is greater than the purchase price by an amount that reflects an agreed-upon interest rate. There is no percentage restriction on the proportion of our
assets that may be invested in such repurchase agreements. However, if more than 25% of our total assets constitute repurchase agreements from a single counterparty, we would not meet the
Diversification Tests (as defined below) in order to qualify as a RIC for U.S. federal income tax purposes as described below under "Taxation as a RIC." Thus, we do not intend to enter
into repurchase agreements with a single counterparty in excess of this limit. FS Advisor will monitor the creditworthiness of the counterparties with which we enter into repurchase agreement
transactions.



We are permitted, under specified conditions, to issue multiple classes of debt and one class of shares senior to our common shares if
our asset coverage, as defined in the 1940 Act, is at least equal to 200% immediately after each such issuance. In addition, while any senior securities remain outstanding, we must make provisions to
prohibit any distribution to our shareholders or the repurchase of such securities or shares unless we meet the applicable asset coverage ratios at the time of the distribution or repurchase. We may
also borrow amounts up to 5% of the value of our total assets for temporary purposes without regard to asset coverage. For a discussion of the risks associated with leverage, see "Item 1A. Risk
FactorsRisks Related to Debt Financing" and "Item 1A. Risk FactorsRisks Related to Business Development Companies."



We and FS Advisor have each adopted a code of ethics pursuant to Rule 17j-1 promulgated under the 1940 Act that, among other
things, establishes procedures for personal investments and restricts certain personal securities transactions. Personnel subject to the code may invest in securities for their personal investment
accounts, including securities that may be purchased or held by us, so long as such investments are made in accordance with each code's requirements. Our code of ethics was filed as an exhibit to our
current report on Form 8-K filed with the SEC on November 14, 2014. FS Advisor's code of ethics is attached as an exhibit to Post-Effective Amendment No. 3 to our registration
statement on Form N-2 (File No. 333-184407) pertaining to the public offering of our common shares filed on November 17, 2014. Shareholders may also read and copy these codes of
ethics at the SEC's Public Reference Room located at 100 F Street, N.E., Washington, D.C. 20549. Shareholders may obtain information on the operation of the Public Reference Room by calling the
SEC at (202) 551-8090. In addition, each code of ethics is available on our website atwww.franklinsquare.comand on the EDGAR Database on the
SEC's Internet site atwww.sec.gov. Shareholders may also obtain a copy of each code of ethics, after paying a duplicating fee, by electronic request at
the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, at 100 F Street, N.E, Washington, D.C. 20549.



We and FS Advisor have adopted and implemented written policies and procedures reasonably designed to prevent violation of the federal
securities laws and are required to review these compliance policies and procedures annually for their adequacy and the effectiveness of their implementation. Our chief compliance officer and the
chief compliance officer of FS Advisor are responsible for administering these policies and procedures.

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We have delegated our proxy voting responsibility to FS Advisor. The proxy voting policies and procedures of FS Advisor are set forth
below. The guidelines are reviewed periodically by FS Advisor and our non-interested trustees, and, accordingly, are subject to change.

As
an investment adviser registered under the Advisers Act, FS Advisor has a fiduciary duty to act solely in the best interests of its clients. As part of this duty, it recognizes that
it must vote client securities in a timely manner free of conflicts of interest and in the best interests of its clients.

These
policies and procedures for voting proxies for the investment advisory clients of FS Advisor are intended to comply with Section 206 of, and Rule 206(4)-6 promulgated
under, the Advisers Act.

FS
Advisor will vote proxies relating to our securities in the best interest of its clients' shareholders. It will review on a case-by-case basis each proposal submitted for a
shareholder vote to determine its impact on the portfolio securities held by its clients. Although FS Advisor will generally vote against proposals that may have a negative impact on its clients'
portfolio securities, it may vote for such a proposal if there exists compelling long-term reasons to do so.

The
proxy voting decisions of FS Advisor are made by the senior officers who are responsible for monitoring each of its clients' investments. To ensure that its vote is not the product
of a conflict of interest, it will require that: (a) anyone involved in the decision-making process disclose to its chief compliance officer any potential conflict that he or she is aware of
and any contact that he or she has had with any interested party regarding a proxy vote; and (b) employees involved in the decision making process or vote administration are prohibited from
revealing how FS Advisor intends to vote on a proposal in order to reduce any attempted influence from interested parties.

Shareholders
may obtain information, without charge, regarding how FS Advisor voted proxies with respect to our portfolio securities by making a written request for proxy voting
information to: Chief Compliance Officer, FS Energy and Power Fund, 201 Rouse Boulevard, Philadelphia, Pennsylvania 19112 or by calling us collect at (215) 495-1150.



We will be periodically examined by the SEC for compliance with the 1940 Act.

We
are required to provide and maintain a bond issued by a reputable fidelity insurance company to protect us against larceny and embezzlement. Furthermore, as a BDC, we are prohibited
from protecting any trustee or officer against any liability to us or our shareholders arising from willful misconduct, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of such person's office.



We are subject to the reporting and disclosure requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
including the filing of quarterly, annual and current reports, proxy statements and other required items. In addition, we are subject to the Sarbanes-Oxley Act, which imposes a wide variety of
regulatory requirements on publicly held companies and their insiders. Many of these requirements affect us. For example:



The
Sarbanes-Oxley Act requires us to review our current policies and procedures to determine whether we comply with the Sarbanes-Oxley Act and the regulations promulgated thereunder. We
monitor our compliance with all regulations that are adopted under the Sarbanes-Oxley Act and take actions necessary to ensure that we are in compliance therewith. In addition, we voluntarily comply

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with
Section 404(b) of the Sarbanes-Oxley Act, and have engaged our independent registered public accounting firm to audit our internal control over financial reporting.

Taxation as a RIC

We have elected to be treated as a RIC under Subchapter M of the Code. As a RIC, we generally will not have to pay
corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute as dividends to our shareholders. To qualify for and maintain our qualification as a RIC, we
must, among other things, meet certain source-of-income and asset diversification requirements (as described below). In addition, in order to maintain RIC tax treatment, we must distribute to our
shareholders, for each tax year, dividends of an amount at least equal to 90% of our "investment company taxable income," which is generally the sum of our net ordinary income plus the excess, if any,
of realized net short-term capital gains over realized net long-term capital losses, determined without regard to any deduction for distributions paid, or the Annual Distribution Requirement.

If
we:



then
we will not be subject to U.S. federal income tax on the portion of our income or capital gains we distribute (or are deemed to distribute) as dividends to our shareholders. We will be subject to
U.S. federal income tax at the regular corporate rates on any income or capital gains not distributed (or deemed distributed) as dividends to our shareholders.

As
a RIC, we will be subject to a 4% nondeductible federal excise tax on certain undistributed income unless we distribute dividends in a timely manner to our shareholders generally of
an amount at least equal to the sum of (1) 98% of our net ordinary income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net
income, which is the excess of capital gains over capital losses (as adjusted for certain ordinary losses) for the one-year period ending October 31 of that calendar year and (3) any net
ordinary income and capital gain net income for the preceding years that were not distributed during such years and on which we paid no U.S. federal income tax, or the Excise Tax Avoidance
Requirement. Any distribution declared by us during October, November or December of any calendar year, payable to shareholders of record on a specified date in such a month and actually paid during
January of the following calendar year, will be treated as if it had been paid by us, as well as received by our U.S. shareholders on December 31 of the calendar year in which the distribution
was declared. We generally will endeavor in each tax year to avoid any material U.S. federal excise tax on our earnings.

In
order to qualify as a RIC for U.S. federal income tax purposes, we must, among other things:



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For
U.S. federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a corresponding payment in cash. For example, if we hold
debt instruments that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in certain cases, increasing interest rates or debt
instruments that were issued with warrants), we must include in income each tax year a portion of the original issue discount that accrues over the life of the obligation, regardless of whether cash
representing such income is received by us in the same tax year. We may also have to include in income other amounts that we have not yet received in cash, such as deferred loan origination fees that
are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may constitute original issue discount or other income
required to be included in taxable income prior to receipt of cash.

We
invest a portion of our net assets in below investment grade instruments. Investments in these types of instruments may present special tax issues for us. U.S. federal income tax
rules are not entirely clear about issues such as when we may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken for bad debts or
worthless instruments, how payments received on instruments in default should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are
taxable. We will address these and other issues to the extent necessary in order to seek to ensure that we distribute sufficient income to avoid any material U.S. federal income or excise tax.

Because
any original issue discount or other amounts accrued will be included in our investment company taxable income for the year of the accrual, we may be required to make a
distribution to our shareholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty
meeting the Annual Distribution Requirement necessary to maintain RIC tax treatment under Subchapter M of the Code. We may have to sell or otherwise dispose of some of our investments at times
and/or at prices we would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other
sources, we may fail to qualify for RIC tax treatment and thus become subject to corporate-level U.S. federal income tax.

Although
we do not presently expect to do so, we are authorized to borrow funds and to sell or otherwise dispose of assets in order to satisfy distribution requirements. However, under
the 1940 Act, we are not permitted to make distributions to our shareholders while our debt obligations and other senior securities are outstanding unless certain "asset coverage" tests are met. See
"RegulationSenior Securities." Moreover, our ability to sell or otherwise
dispose of assets to meet the Annual Distribution Requirement may be limited by (1) the illiquid nature of our portfolio and/or (2) other requirements relating to our status as a RIC,
including the Diversification Tests. If we sell or otherwise dispose of assets in order to meet the Annual
Distribution Requirement or the Excise Tax Avoidance Requirement, we may make such dispositions at times that, from an investment standpoint, are not advantageous.

To
satisfy the Diversification Tests at the close of each quarter of our tax year, we will generally have invested no more than 25% of the value of our total assets in MLPs and certain
other "qualified publicly traded partnerships". As a limited partner in the MLPs in which we seek to invest, we will be deemed to have received our share of income, gains, losses, deductions, and
credits from those MLPs. Historically, a significant portion of income from MLPs has been offset by tax deductions. As a result, this income has been significantly lower than cash distributions paid
by MLPs. The percentage of an MLP's income and gains which is offset by tax deductions, losses and credits will fluctuate over time for various reasons. A significant slowdown in acquisition activity
or capital spending by MLPs held in our portfolio could result in a reduction of accelerated depreciation generated by new acquisitions, which may result in an increase in our investment company
taxable income that we are required to distribute to shareholders to satisfy the Annual Distribution Requirement or the Excise Tax Avoidance Requirement or to eliminate our liability for U.S. federal
income tax. If our income from our investments in MLPs exceeds the cash distributions received from such investments, we may need to obtain cash from other sources in order to satisfy the Annual
Distribution Requirement. If we are unable to obtain cash from other sources, we may fail to qualify for RIC tax treatment and become subject to corporate-level U.S. federal income tax. We may
also recognize for U.S. federal income tax purposes gain in excess of cash proceeds upon the sale of an interest in an MLP. Any such gain may

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need
to be distributed (or deemed distributed) in order to avoid liability for corporate-level U.S. federal income taxes on such gain.

A
portfolio company in which we invest may face financial difficulties that require us to work-out, modify or otherwise restructure our investment in the portfolio company. Any such
transaction could, depending upon the specific terms of the transaction, result in unusable capital losses and future non-cash income. Any such transaction could also result in our receiving assets
that give rise to non-qualifying income for purposes of the 90% Income Test or otherwise would not count toward satisfying the Diversification Tests.

Some
of the income that we might otherwise earn, such as fees for providing managerial assistance, certain fees earned with respect to our investments, income recognized in a work-out or
restructuring of a portfolio investment, or income recognized from an equity investment in an operating partnership, may not satisfy the 90% Income Test. To manage the risk that such income might
disqualify us as a RIC for failure to satisfy the 90% Income Test, one or more subsidiary entities treated as U.S. corporations for entity-level tax purposes may be employed to earn such income and
(if applicable) hold the related asset. Such subsidiary entities will be required to pay U.S. federal income tax on their earnings, which ultimately will reduce the yield to our shareholders on such
fees and income.

Employees

We do not currently have any employees. Each of our executive officers is a principal, officer or employee of FS Advisor, which manages
and oversees our investment operations. In the future, FS Advisor may retain additional investment personnel based upon its needs.

Available Information

Within 60 days after the end of each fiscal quarter, we will distribute our quarterly report on Form 10-Q to all
shareholders of record and to the securities administrator in each jurisdiction in which we offer or sell securities. In addition, we will distribute our annual report on Form 10-K to all
shareholders of record and to the securities administrator in each jurisdiction in which we offer or sell securities within 120 days after the end of each fiscal year. These reports will also
be available on our website atwww.franklinsquare.comand on the SEC's website atwww.sec.gov.These
reports should not be considered a part of or as incorporated by reference into this annual report on Form 10-K and the information contained on our website should not be considered to be part
of or as incorporated by reference into this annual report on Form 10-K.

We
are required to file with or submit to the SEC annual, quarterly and current reports, proxy statements and other information meeting the informational requirements of the Exchange
Act. You may inspect and copy these reports, proxy statements and other information, as well as the registration statements related to our continuous public offering and related exhibits and
schedules, at the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at
(202) 551-8090. The SEC maintains an Internet site that contains reports, proxy and information statements and other information filed electronically by us with the SEC, which are available on
the SEC's website atwww.sec.gov. Copies of these reports, proxy and information statements and other information may be obtained, after paying a
duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC's Public Reference Section, 100 F Street, N.E., Washington, D.C. 20549.

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Item 1A.    Risk Factors.

Investing in our common shares involves a number of significant risks. In addition to the other information
contained in this annual report on Form 10-K, investors should consider carefully the following information before making an investment in our common shares. If any of the following events
occur, our business, financial condition and results of operations could be materially and adversely affected. In such case, the net asset value of our common shares could decline or the value of our
debt our equity investments may decline, and investors may lose all or part of their investment.

Risks Related to an Investment in Our Common Shares

Investors will not know the purchase price per share at the time they submit their subscription
agreements and could receive fewer common shares than anticipated if our board of trustees determines to increase the offering price to comply with the requirement that we avoid selling common shares
at a net offering price below our net asset value per share.

The purchase price at which shareholders purchase common shares will be determined at each weekly closing date to ensure that the sales
price, after deducting selling commissions and dealer manager fees, is equal to or greater than the net asset value of our common shares. As a result, in the event of an increase in our net asset
value per share, a shareholder's purchase price may be higher than the prior weekly closing price per share, and therefore shareholders may receive a smaller number of common shares than if the
investor had subscribed at the prior weekly closing price.

We are a relatively new company and have a limited operating history.

We were formed on September 16, 2010 and commenced investment operations on July 18, 2011 after satisfying the minimum
offering requirement of selling, in aggregate, $2.5 million in common shares to persons not affiliated with us or FS Advisor. We are subject to all of the business risks and uncertainties
associated with any new business, including the risk that we will not achieve our investment objectives and that the value of our common shares could decline substantially.

An investor may not have the opportunity to evaluate historical data or assess our future
investments prior to purchasing our common shares.

Other than those investments reflected in our portfolio at the time an investor subscribes for our common shares, investors will not be
able to evaluate the economic merits, transaction terms or other financial or operational data concerning the investments we make using the proceeds from our continuous public offering prior to making
a decision to purchase our common shares. An investor must rely on FS Advisor and GSO to implement our investment policies, to evaluate all of our investment opportunities and to structure the terms
of our investments rather than evaluating our future investments in advance of purchasing our common shares. Because investors are not able to evaluate all of our investments in advance of purchasing
our common shares, our continuous public offering may entail more risk than other types of offerings. This additional risk may
hinder an investor's ability to achieve their own personal investment objectives related to portfolio diversification, risk-adjusted investment returns and other objectives.

Our common shares are not listed on an exchange or quoted through a quotation system, and will not
be for the foreseeable future, if ever. Therefore, shareholders will have limited liquidity and may not receive a full return of invested capital upon selling common shares.

Our common shares are illiquid assets for which there is not a secondary market and it is not expected that any will develop in the
foreseeable future. There can be no assurance that we will complete a liquidity event. A liquidity event could include (1) a listing of our common shares on a national securities exchange,
(2) the sale of all or substantially all of our assets either on a complete portfolio basis or individually followed by a liquidation or (3) a merger or another transaction approved by
our board of trustees in which our shareholders likely will receive cash or shares of a publicly-traded company, including potentially a company that is an affiliate of us.

In
addition, any shares repurchased pursuant to our share repurchase program may be purchased at a price which may reflect a discount from the purchase price a shareholder paid for the
common

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shares
being repurchased. See "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
SecuritiesShare Repurchase Program" for a detailed description of our share repurchase program.

If
our common shares are listed, we cannot assure shareholders that a public trading market will develop. In addition, a liquidity event involving a listing of our common shares on a
national securities exchange may include certain restrictions on the ability of shareholders to sell their common shares. Further, even if we do complete a liquidity event, shareholders may not
receive a return of all of their invested capital.

We are not obligated to complete a liquidity event by a specified date; therefore, it will be
difficult for an investor to sell his or her common shares.

A liquidity event could include (1) a listing of our common shares on a national securities exchange, (2) the sale of all
or substantially all of our assets either on a complete portfolio basis or individually followed by a liquidation, or (3) a merger or another transaction approved by our board of trustees in
which our shareholders likely will receive cash or shares of a publicly-traded company, including potentially a company that is an affiliate of us. However, there can be no assurance
that we will complete a liquidity event by a specified date or at all. If we do not successfully complete a liquidity event, liquidity for an investor's common shares will be limited to our share
repurchase program, which we have no obligation to maintain.

Because the dealer manager for our continuous public offering is one of our affiliates, shareholders
will not have the benefit of an independent due diligence review of us by our affiliated dealer manager, which is customarily performed in firm commitment underwritten offerings; the absence of an
independent due diligence review by our affiliated dealer manager, increases the risks and uncertainty faced as a shareholder.

The dealer manager for our continuous public offering, FS2 Capital Partners, LLC, or FS2, is one of
our affiliates. As a result, its due diligence review and investigation of us cannot be considered to be an independent review. Therefore, shareholders do not have the benefit of an independent review
and investigation of our offering of the type normally performed by an unaffiliated, independent underwriter in a firm commitment underwritten public securities offering.

Our ability to successfully conduct our continuous public offering depends, in part, on the ability
of the dealer manager to establish, operate and maintain a network of broker-dealers.

The success of our continuous public offering, and correspondingly our ability to implement our business strategy, depends upon the
ability of the dealer manager to establish, operate and maintain a network of licensed securities broker-dealers and other agents to sell our common shares. If the dealer manager fails to perform, we
may not be able to raise adequate proceeds through our continuous public offering to implement our investment strategy. If we are unsuccessful in implementing our investment strategy, shareholders
could lose all or a part of their investment.

Only a limited number of common shares may be repurchased pursuant to our share repurchase program
and, to the extent shareholders are able to sell their common shares under our share repurchase program, shareholders may not be able to recover the amount of their investment in those shares.

Our share repurchase program includes numerous restrictions that limit shareholders' ability to sell their common shares. We intend to
limit the number of common shares repurchased pursuant to our share repurchase program as follows: (1) we currently intend to limit the number of common shares to be repurchased during any
calendar year to the number of common shares we can repurchase with the proceeds we receive from the issuance of our common shares under our distribution reinvestment plan, although at the discretion
of our board of trustees, we may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase
common shares; (2) we intend to limit the number of common shares to be repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior calendar
year, or 2.5% in each calendar quarter (though the actual number of common shares that we offer to repurchase may be less in light of the limitations noted above); (3) unless shareholders
tender all of their common shares, shareholders must tender at least 25% of

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the
number of common shares they have purchased and generally must maintain a minimum balance of $5,000 subsequent to submitting a portion of their common shares for repurchase by us; and
(4) to the extent that the number of common shares tendered for repurchase exceeds the number of common shares that we are able to repurchase, we will repurchase common shares on a pro rata
basis, not on a first-come, first-served basis. Further, we will have no obligation to repurchase common shares if the repurchase would violate the restrictions on distributions under federal law or
Delaware law, which prohibits distributions that would cause a trust to fail to meet statutory tests of solvency. Any of the foregoing limitations may prevent us from accommodating all repurchase
requests made in any year.

In
addition, our board of trustees may amend, suspend or terminate the share repurchase program upon 30 days' notice. We will notify shareholders of such developments
(1) in our quarterly reports or (2) by means of a separate mailing to shareholders, accompanied by disclosure in a current or periodic report under the Exchange Act. In addition,
although we have adopted a share repurchase program, we have discretion to not repurchase common shares, to suspend the share repurchase program and to cease repurchases. Further, the share repurchase
program has many limitations and should not be relied upon as a method to sell common shares promptly or at a desired price.

The timing of our repurchase offers pursuant to our share repurchase program may be at a time that
is disadvantageous to our shareholders.

When we make quarterly repurchase offers pursuant to our share repurchase program, we may offer to repurchase common shares at a price
that is lower than the price that investors paid for common shares in our offering. As a result, to the extent investors have the ability to sell their common shares to us as part of our share
repurchase program, the price at which an investor may sell common shares, which we expect will be 90% of the offering price in effect on the date of repurchase, may be lower than what an investor
paid in connection with the purchase of common shares in our offering.

In
addition, in the event an investor chooses to participate in our share repurchase program, the investor will be required to provide us with notice of intent to participate prior to
knowing what the repurchase price will be on the repurchase date. Although an investor will have the ability to withdraw a repurchase request prior to the expiration date of such tender offer, to the
extent an investor seeks to sell common shares to us as part of our share repurchase program, the investor will be required to do so without knowledge of what the repurchase price of our common shares
will be on the repurchase date.

We may be unable to invest a significant portion of the net proceeds of our offering on acceptable
terms in an acceptable timeframe.

Delays in investing the net proceeds of our offering may impair our performance. We cannot assure investors that we will be able to
identify any investments that meet our investment objectives or that any investment that we make will produce a positive return. We may be unable to invest the net proceeds of our offering on
acceptable terms within the time period that we anticipate or at all, which could harm our financial condition and operating results.

In
addition, even if GSO identifies privately-negotiated investment opportunities that meet our investment objectives, because we did not seek exemptive relief to engage in co-investment
transactions with GSO and its affiliates, we will continue to be permitted to co-invest with GSO and its affiliates only in accordance with existing regulatory guidance (i.e., where price is
the only negotiated point) and the allocation policies of FS Advisor, GSO and their respective affiliates.

Prior
to investing in securities of portfolio companies, we will invest the net proceeds of our continuous public offering primarily in cash, cash equivalents, U.S. government
securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, which may produce returns that are significantly lower than the returns
which we expect to achieve when our portfolio is fully invested in securities meeting our investment objectives. As a result, any distributions that we pay while our portfolio is not fully invested in
securities meeting our investment objectives may be lower than the distributions that we may be able to pay when our portfolio is fully invested in securities meeting our investment objectives.

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We may pay distributions from offering proceeds, borrowings or the sale of assets to the extent our
cash flows from operations, net investment income or earnings are not sufficient to fund declared distributions.

We may fund distributions from the uninvested proceeds of our continuous public offering and borrowings, and we have not established
limits on the amount of funds we may use from net offering proceeds or borrowings to make any such distributions. We have paid and may continue to pay distributions from the sale of assets to the
extent distributions exceed our earnings or cash flows from operations. Distributions from the proceeds of our continuous public offering or from borrowings could reduce the amount of capital we
ultimately invest in our portfolio companies.

A shareholder's interest in us will be diluted if we issue additional common shares, which could
reduce the overall value of an investment in us.

Our investors do not have preemptive rights to any common shares we issue in the future. Our declaration of trust authorizes us to
issue 450,000,000 common shares. Pursuant to our declaration of trust, a majority of our entire board of trustees may amend our declaration of trust to increase the number of authorized common shares
without shareholder approval. After an investor purchases common shares, our board of trustees may elect to sell additional common shares in the future, issue equity interests in private offerings or
issue share-based awards to our independent trustees or employees of FS Advisor. To the extent we issue additional equity interests after an investor purchases our common shares, an investor's
percentage ownership interest in us will be diluted. In addition, depending upon the terms and pricing of any additional offerings and the value of our investments, an investor may also experience
dilution in the book value and fair value of their common shares.

Certain provisions of our declaration of trust and bylaws could deter takeover attempts and have an
adverse impact on the value of our common shares.

Our declaration of trust and bylaws, as well as certain statutory and regulatory requirements, contain certain provisions that may have
the effect of discouraging a third party from attempting to acquire us. Our board of trustees may, without shareholder action, authorize the issuance of shares in one or more classes or series,
including preferred shares; and our board of trustees may, without shareholder action, amend our declaration of trust to increase the number of our common shares, of any class or series, that we have
authority to issue. These anti-takeover provisions may inhibit a change of control in circumstances that could give the holders of our common shares the opportunity to realize a premium over the value
of our common shares.

Risks Related to Our Business and Structure

Our board of trustees may change our investment policy by providing our shareholders with
60 days' prior notice, or may modify or waive our current operating policies and strategy without prior notice or shareholder approval, the effects of which may be adverse.

Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies.
This investment policy may be changed by our board of trustees if we provide our shareholders with at least 60 days' prior notice. In addition, our
board of trustees has the authority to modify or waive our current operating policies, investment criteria and strategy without prior notice and without shareholder approval. We cannot predict the
effect any changes to our investment policy, current operating policies, investment criteria and strategy would have on our business, net asset value, operating results and the value of our common
shares. However, the effects might be adverse, which could negatively impact our ability to pay distributions to shareholders and cause shareholders to lose all or part of their investment. Moreover,
we will have significant flexibility in investing the net proceeds of this offering and may use the net proceeds from our continuous offering in ways with which investors may not agree or for purposes
other than those currently contemplated. Finally, because our common shares are not expected to be listed on a national securities exchange for the foreseeable future, shareholders will be limited in
their ability to sell their common shares in response to any changes in our investment policy, operating policies, investment criteria or strategy.

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Our ability to achieve our investment objectives depends on FS Advisor's and GSO's ability to manage
and support our investment process. If either our agreement with FS Advisor or FS Advisor's agreement with GSO were to be terminated, or if either FS Advisor or GSO were to lose any members of their
respective senior management teams, our ability to achieve our investment objectives could be significantly harmed.

Because we have no employees, we depend on the investment expertise, skill and network of business contacts of FS Advisor and GSO. FS
Advisor, with the assistance of GSO, evaluates, negotiates, structures, executes, monitors and services our investments. Our future success depends to a significant extent on the continued service and
coordination of FS Advisor and GSO, as well as their respective senior management teams. The departure of any members of FS Advisor's senior management team could have a material adverse effect on our
ability to achieve our investment objectives. Likewise, the departure of any key employees of GSO or termination of key relationships may impact its ability to render services to us under the terms of
its investment sub-advisory agreement with FS Advisor.

Our
ability to achieve our investment objectives depends on FS Advisor's ability, with the assistance of GSO, to identify, analyze, invest in, finance and monitor companies that meet our
investment criteria. FS Advisor's capabilities in structuring the investment process, providing competent, attentive and efficient services to us, and facilitating access to financing on acceptable
terms depend on the employment of investment professionals in an adequate number and of adequate sophistication to match the corresponding flow of transactions. To achieve our investment objectives,
FS Advisor may need to hire, train, supervise and manage new investment professionals to participate in our investment selection and monitoring process. FS Advisor may not be able to find investment
professionals in a timely manner or at all. Failure to support our investment process could have a material adverse effect on our business, financial condition and results of operations.

In
addition, the investment advisory and administrative services agreement that FS Advisor has entered into with us, as well as the investment sub-advisory agreement that FS Advisor has
entered into with GSO, have termination provisions that allow the parties to terminate the agreements without penalty. The investment advisory and administrative services agreement may be terminated
at any time, without
penalty, by FS Advisor, upon 120 days' notice to us. The investment sub-advisory agreement may be terminated at any time, without the payment of any penalty, upon 60 days' written notice
by GSO or, if our board of trustees or the holders of a majority of our outstanding voting securities determine that the investment sub-advisory agreement with GSO should be terminated, by FS Advisor.
If either agreement is terminated, it may adversely affect the quality of our investment opportunities. In addition, in the event such agreements are terminated, it may be difficult for us to replace
FS Advisor or for FS Advisor to replace GSO. Furthermore, the termination of either of these agreements may adversely impact the terms of any financing arrangement into which we may enter, which could
have a material adverse effect on our business and financial condition.

Because our business model depends to a significant extent upon relationships with private equity
sponsors, investment banks and commercial banks, the inability of FS Advisor and GSO to maintain or develop these relationships, or the failure of these relationships to generate investment
opportunities, could adversely affect our business.

If FS Advisor or GSO fails to maintain its existing relationships with private equity sponsors, investment banks and commercial banks
on which they rely to provide us with potential investment opportunities or develop new relationships with other sponsors or sources of investment opportunities, we may not be able to grow our
investment portfolio. In addition, individuals with whom FS Advisor and GSO have relationships generally are not obligated to provide us with investment opportunities, and, therefore, there is no
assurance that such relationships will generate investment opportunities for us. GSO may compensate certain brokers or other financial services firms out of GSO's own profits or revenues for services
provided in connection with the identification of appropriate investment opportunities.

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Our financial condition and results of operations depend on our ability to manage future growth
effectively.

Our ability to achieve our investment objectives depends on our ability to acquire suitable investments and monitor and administer
those investments, which depends, in turn, on our investment adviser's ability to identify, invest in and monitor companies that meet our investment criteria.

Accomplishing
this result on a cost-effective basis is largely a function of the structuring of our investment process and the ability of FS Advisor to provide competent, attentive and
efficient services to us. Our executive officers and the members of FS Advisor's investment committee have substantial responsibilities in connection with their roles at Franklin Square Holdings and
with the other entities affiliated with Franklin Square Holdings, as well as responsibilities under the investment advisory and administrative services agreement. They may also be called upon to
provide significant managerial assistance to certain of our portfolio companies. These demands on their time, which will increase as the number of investments grow, may distract them or slow the rate
of investment. In order to grow,
FS Advisor will need to hire, train, supervise, manage and retain new employees. However, we cannot assure you that FS Advisor will be able to do so effectively. Any failure to manage our future
growth effectively could have a material adverse effect on our business, financial condition and results of operations.

Our business requires a substantial amount of capital to grow because we must distribute most of our
income.

Our business requires a substantial amount of capital. We have issued equity securities and have borrowed from financial institutions.
A reduction in the availability of new capital could limit our ability to grow. We must distribute dividends of an amount at least equal to 90% of our investment company taxable income each year to
maintain our RIC status. As a result, any such cash earnings may not be available to fund investment originations. We expect to continue to borrow from financial institutions and issue additional debt
and equity securities. If we fail to obtain funds from such sources or from other sources to fund our investments, it could limit our ability to grow, which may have an adverse effect on the value of
our securities. In addition, as a BDC, our ability to borrow or issue preferred stock may be restricted if our total assets are less than 200% of our total borrowings and preferred stock.

We may face increasing competition for investment opportunities, which could delay deployment of our
capital, reduce returns and result in losses.

We compete for investments with other BDCs and investment funds (including private equity funds, mezzanine funds and collateralized
loan obligation, or, CLO, funds), as well as traditional financial services companies such as commercial banks and other sources of funding. Moreover, alternative investment vehicles, such as hedge
funds, have begun to invest in areas in which they have not traditionally invested, including making investments in middle market private U.S. companies, which we define as companies with annual
revenue of $50 million to $2.5 billion at the time of investment. As a result of these new entrants, competition for investment opportunities in middle-market private U.S. companies may
intensify. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. For example, some competitors may have a lower cost
of capital and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments than we have. These
characteristics could allow our competitors to consider a wider variety of investments, establish more relationships and offer better pricing and more flexible structuring than we are able to do. We
may lose investment opportunities if we do not match our competitors' pricing, terms and structure. If we are forced to match our competitors' pricing, terms and structure, we may not be able to
achieve acceptable returns on our investments or may bear substantial risk of capital loss. A significant part of our competitive advantage stems from the fact that the market for investments in
middle market private U.S. companies is underserved by traditional commercial banks and other financial sources. A significant increase in the number and/or the size of our competitors in this target
market could force us to accept less attractive investment terms. Furthermore, many of our competitors have greater experience operating under, or are not subject to, the regulatory restrictions that
the 1940 Act imposes on us as a BDC.

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A significant portion of our investment portfolio is and will be recorded at fair value as
determined in good faith by our board of trustees and, as a result, there is and will be uncertainty as to the value of our portfolio investments.

Under the 1940 Act, we are required to carry our portfolio investments at market value or, if there is no readily available market
value, at fair value as determined by or under the direction of our board of trustees. There is not a public market for the securities of the privately-held companies in which we invest. Many of our
investments are not publicly-traded or actively-traded on a secondary market but are, instead, traded on a privately negotiated over-the-counter secondary market for institutional investors or are not
traded at all. As a result, we value these securities quarterly at fair value as determined in good faith by our board of trustees.

Certain
factors that may be considered in determining the fair value of our investments include dealer quotes for securities traded on the secondary market for institutional investors,
the nature and realizable value of any collateral, the portfolio company's earnings and its ability to make payments on its indebtedness, the markets in which the portfolio company does business,
comparison to comparable publicly-traded companies, discounted cash flows and other relevant factors. Because such valuations, and particularly valuations of private securities and private companies,
are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ materially from the values that would have been used if a
ready market for these non-traded securities existed. Due to this uncertainty, our fair value determinations may cause our net asset value on a given date to materially understate or overstate the
value that we may ultimately realize upon the sale of one or more of our investments.

There is a risk that investors in our common shares may not receive distributions or that our
distributions may not grow over time.

We cannot assure shareholders that we will achieve investment results that will allow us to make a specified level of cash
distributions or year-to-year increases in cash distributions. All distributions will be paid at the discretion of our board of trustees and will depend on our earnings, our net investment income, our
financial condition, maintenance of our RIC status, compliance with applicable BDC regulations and such other factors as our board of trustees may deem relevant from time to time. In addition, due to
the asset coverage test applicable to us as a BDC, we may be limited in our ability to make distributions. See "Item 1. BusinessRegulationSenior Securities."

Our distribution proceeds have exceeded and in the future may exceed our earnings, particularly
during the period before we have substantially invested the net proceeds from our continuous public offering. Therefore, portions of the distributions that we make may represent a return of capital to
shareholders, which will lower their tax basis in their common shares.

We may pay all or a substantial portion of our distributions from the proceeds of our continuous public offering or from borrowings in
anticipation of future cash flow, which may constitute a return of shareholders' capital and will lower such shareholders' tax basis in their common shares. A return of capital generally is a return
of a shareholder's investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with the
offering, including any fees payable to FS Advisor. Moreover, a return of capital will generally not be taxable, but will reduce each shareholder's cost basis in our common shares, and will result in
a higher reported capital gain or lower reported capital loss when the common shares on which such return of capital was received are sold.

Changes in laws or regulations governing our operations or the operations of our business partners
may adversely affect our business or cause us to alter our business strategy.

We, our portfolio companies and our business partners are subject to regulation at the local, state and federal level. New legislation
may be enacted or new interpretations, rulings or regulations could be adopted, including those governing the types of investments we are permitted to make, any of which could harm us and our
shareholders, potentially with retroactive effect. Changes in laws or regulations governing the operations of those with whom we do business, including selected broker-dealers and other financial
representatives selling our common shares, could also have a material adverse effect on

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our
business, financial condition and results of operations. In addition, over the last several years there has been an increase in regulatory attention to the extension of credit outside of the
traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. New legislation, interpretations, rulings or regulations could
require changes to certain business practices of us or our portfolio companies, negatively impact the operations, cash flows or financial condition of us or our portfolio companies, impose additional
costs on us or our portfolio companies or otherwise adversely affect our business or the business of our portfolio companies.

In
addition, any changes to the laws and regulations governing our operations, including with respect to permitted investments, may cause us to alter our investment strategy to avail
ourselves of new or different opportunities or make other changes to our business. Such changes could result in material differences to our strategy and plans as set forth in this annual report on
Form 10-K and may result in our investment focus shifting from the areas of expertise of FS Advisor and GSO to other types of investments in which FS Advisor and GSO may have less expertise or
little or no experience. Thus, any
such changes, if they occur, could have a material adverse effect on our results of operations and the value of a shareholder's investment.

As a public company, we are subject to regulations not applicable to private companies, such as
provisions of the Sarbanes-Oxley Act. Efforts to comply with such regulations will involve significant expenditures, and non-compliance with such regulations may adversely affect us.

As a public company, we are subject to regulations not applicable to private companies, including provisions of the Sarbanes-Oxley Act
and the related rules and regulations promulgated by the SEC. Our management is required to report on our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act and rules and regulations of the SEC thereunder. We are required to review on an annual basis our internal control over financial reporting, and on a quarterly and annual basis, to evaluate and
disclose changes in our internal control over financial reporting. Section 404 of the Sarbanes-Oxley Act also generally requires an attestation from our independent registered public accounting
firm on the effectiveness of our internal control over financial reporting.

We
incur significant expenses in connection with our compliance with the Sarbanes-Oxley Act and other regulations applicable to public companies, which may negatively impact our
financial performance and our ability to make distributions. Compliance with such regulations also requires a significant amount of our management's time and attention. For example, we cannot be
certain as to the timing of the completion of our Sarbanes-Oxley mandated evaluations, testings and remediation actions, if any, or the impact of the same on our operations, and we may not be able to
ensure that the process is effective or that our internal control over financial reporting are or will be deemed effective in the future. In the event that we are unable to maintain an effective
system of internal control and maintain compliance with the Sarbanes-Oxley Act and related rules, we may be adversely affected.

Economic activity in the United States was adversely impacted by the global financial crisis of 2008
and future recessions, downturns, disruptions or instability could have a materially adverse effect on our business.

From time to time, the global capital markets may experience periods of disruption and instability, which could cause disruptions in
liquidity in the debt capital markets, significant write-offs in the financial services sector, the re-pricing of credit risk in the broadly syndicated credit market and the failure of major financial
institutions. Despite actions of U.S. and foreign governments, these events could contribute to worsening general economic conditions that materially and adversely impact the broader financial and
credit markets and reduce the availability of debt and equity capital for the market as a whole and financial services firms in particular.

Beginning
in the third quarter of 2007, global credit and other financial markets suffered substantial stress, volatility, illiquidity and disruption. These forces reached extraordinary
levels in late 2008, resulting in the bankruptcy of, the acquisition of, or government intervention in the affairs of several major domestic and international financial institutions. In particular,
the financial services sector was negatively impacted by significant write-offs as the value of the assets held by financial firms declined, impairing their capital positions and abilities to lend and
invest. We believe that such value declines
were exacerbated by widespread forced liquidations as leveraged holders of financial assets, faced with declining prices, were compelled to sell to meet margin requirements and maintain

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compliance
with applicable capital standards. Such forced liquidations also impaired or eliminated many investors and investment vehicles, leading to a decline in the supply of capital for investment
and depressed pricing levels for many assets. These events significantly diminished overall confidence in the debt and equity markets, engendered unprecedented declines in the values of certain
assets, and caused extreme economic uncertainty.

Deterioration
of economic and market conditions in the future could negatively impact credit spreads as well as our ability to obtain financing, particularly from the debt markets.

Future downgrades of the U.S. credit rating and global economic uncertainty could negatively impact
our business, financial condition and results of operations.

In August 2011, Standard & Poor's Ratings Services, or S&P, lowered its long-term sovereign credit rating on the U.S. from "AAA"
to "AA+," which was affirmed by S&P in June 2015. In January 2012, S&P lowered its long-term sovereign credit rating for France, Italy, Spain and six other European countries, which negatively
impacted global markets and economic conditions. In addition, in April 2012, S&P further lowered its long-term sovereign credit rating for Spain. Recent U.S. budget deficit concerns, together with
signs of deteriorating sovereign debt conditions in Europe, have increased the possibility of additional credit-rating downgrades and economic slowdowns. The impact of any further downgrade to the
U.S. government's sovereign credit rating, or its perceived creditworthiness, and the impact of the current crisis in Europe with respect to the ability of certain European Union countries to continue
to service their sovereign debt obligations are inherently unpredictable and could adversely affect the U.S. and global financial markets and economic conditions. In addition, the economic downturn
and the significant government interventions into the financial markets and fiscal stimulus spending over the last several years have contributed to significantly increased U.S. budget deficits. There
can be no assurance that future fiscal or monetary measures to aid economic recovery will be effective. These developments and reactions of the credit markets toward these developments could cause
interest rates and borrowing costs to rise, which may negatively impact our ability to obtain debt financing on favorable terms. In addition, any adverse economic conditions resulting from any further
downgrade of the U.S. government's sovereign credit rating or the economic crisis in Europe could have a material adverse effect on our business, financial condition and results of operations.

Declines in market values or fair market values of our investments could result in significant net
unrealized depreciation of our portfolio, which, in turn, would reduce our net asset value.

Under the 1940 Act, we are required to carry our investments at market value or, if there is no readily available market value, at fair
value as determined in good faith by or under the direction of our board of trustees. While most of our investments will not be publicly traded, applicable accounting standards require us to assume as
part of our valuation process that our investments are sold in a principal market to market participants (even if we plan on holding an investment through its maturity) and impairments of the market
values or fair market values of our investments, even if unrealized, must be reflected in our financial statements for the applicable period as unrealized depreciation, which could result in
significant reductions to our net asset value for a given period.

The impact on us of recent financial reform legislation, including the Dodd-Frank Act, is uncertain.

In light of recent conditions in the U.S. and global financial markets and the U.S. and global economy, legislators, the presidential
administration and regulators have increased their focus on the regulation of the financial services industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended, or the
Dodd-Frank Act, institutes a wide range of reforms that will have an impact on all financial institutions. Many of the requirements called for in the Dodd-Frank Act will be implemented over time, most
of which will be subject to implementing regulations over the course of several years. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies and through regulations, the full impact such requirements will have on our business, results of operations or financial condition is unclear. The
changes resulting from the Dodd-Frank Act may require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and
regulatory requirements. Failure to comply with any such laws, regulations or principles, or changes thereto, may negatively impact our business, results of operations and financial

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condition.
While we cannot predict what effect any changes in the laws or regulations or their interpretations would have on us as a result of recent financial reform legislation, these changes could
be materially adverse to us and our shareholders.

Future legislation or rules could modify how we treat derivatives and other financial arrangements
for purposes of our compliance with the leverage limitations of the 1940 Act.

Future legislation or rules may modify how we treat derivatives and other financial arrangements for purposes of our compliance with
the leverage limitations of the 1940 Act. For example, the SEC proposed a new rule in December 2015 that is designed to enhance the regulation of the use of derivatives by registered investments
companies and business development companies. The proposed rule, if adopted, or any future legislation or rules, may modify how leverage is calculated under the 1940 Act and, therefore, may increase
or decrease the amount of leverage currently available to us under the 1940 Act, which may be materially adverse to us and our shareholders.

We may experience fluctuations in our quarterly results.

We could experience fluctuations in our quarterly operating results due to a number of factors, including our ability or inability to
make investments in companies that meet our investment criteria, the interest rate payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition
of realized and unrealized gains or losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any previous period
should not be relied upon as being indicative of performance in future periods.

If we, our affiliates and our and their respective third-party service providers are unable to
maintain the availability of electronic data systems and safeguard the security of data, our ability to conduct business may be compromised, which could impair our liquidity, disrupt our business,
damage our reputation or otherwise affect our business.

Cybersecurity refers to the combination of technologies, processes, and procedures established to protect information technology
systems and data from unauthorized access, attack, or damage. We, our affiliates and our and their respective third-party service providers are subject to cybersecurity risks. Cybersecurity risks have
significantly increased in recent years and, while we have not experienced any material losses relating to cyber attacks or other information security breaches, we could suffer such losses in the
future. Our, our affiliates and our and their respective third-party service providers' computer systems, software and networks may be vulnerable to unauthorized access, computer viruses or other
malicious code and other events that could have a security impact. If one or more of such events occur, this potentially could jeopardize confidential and other information, including nonpublic
personal information and sensitive business data, processed and stored in, and transmitted through, computer systems and networks, or otherwise cause interruptions or malfunctions in our operations or
the operations of our affiliates and our and their respective third-party service providers. This could result in significant losses, reputational damage, litigation, regulatory fines or penalties, or
otherwise adversely affect our business, financial condition or results of operations. Privacy and information security laws and regulation changes, and compliance with those changes, may result in
cost increases due to system changes and the development of new administrative processes. In addition, we may be required to expend significant additional resources to modify our
protective measures and to investigate and remediate vulnerabilities or other exposures arising from operational and security risks.

Risks Related to FS Advisor, GSO and Their Respective Affiliates

FS Advisor has limited prior experience managing a BDC or a RIC.

While FS Advisor's management team consists of substantially the same personnel that form the investment and operations team of the
investment advisers to Franklin Square Holdings' three other affiliated BDCs, FS Advisor has limited prior experience managing a BDC or a RIC and has limited experience investing in Energy companies.
Therefore, FS Advisor may not be able to successfully operate our business or achieve our investment objectives. As a result, an investment in our common

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shares
may entail more risk than the shares of a comparable company with a substantial operating history.

The
1940 Act and the Code impose numerous constraints on the operations of BDCs and RICs that do not apply to other types of investment vehicles. For example, under the 1940 Act, BDCs
are required to invest at least 70% of their total assets primarily in securities of qualifying U.S. private or thinly-traded public companies. Moreover, qualification for RIC tax treatment under
Subchapter M of the Code requires satisfaction of source-of-income, diversification and other requirements. The failure to comply with these provisions in a timely manner could prevent us from
qualifying as a BDC or a RIC or could force us to pay unexpected taxes and penalties, which could be material. FS Advisor's limited experience in managing a portfolio of assets under such constraints
may hinder its ability to take advantage of attractive investment opportunities and, as a result, achieve our investment objectives.

FS Advisor and its affiliates, including our officers and some of our trustees, face conflicts of
interest caused by compensation arrangements with us and our affiliates, which could result in actions that are not in the best interests of our shareholders.

FS Advisor and its affiliates receive substantial fees from us in return for their services, and these fees could influence the advice
provided to us. Among other matters, the compensation arrangements could affect their judgment with respect to public offerings of equity by us, which allow the dealer manager to earn additional
dealer manager fees and FS Advisor to earn increased asset management fees. In addition, the decision to utilize leverage has increased our assets and, as a result, has increased the amount of base
management fees payable to FS Advisor.

We may be obligated to pay FS Advisor incentive compensation even if we incur a net loss due to a
decline in the value of our portfolio.

Our investment advisory and administrative services agreement entitles FS Advisor to receive incentive compensation on income
regardless of any capital losses. In such case, we may be required to pay FS Advisor incentive compensation for a fiscal quarter even if there is a decline in the value of our portfolio or if we incur
a net loss for that quarter.

Any
incentive fee payable by us that relates to our net investment income may be computed and paid on income that may include interest that has been accrued but not yet received. If a
portfolio company defaults on a loan that is structured to provide accrued interest, it is possible that accrued interest previously included in the calculation of the incentive fee will become
uncollectible. FS Advisor is not under any obligation to reimburse us for any part of the incentive fee it received that was based on accrued income that we never received as a result of a default by
an entity on the obligation that resulted in the accrual of such income, and such circumstances would result in our paying an incentive fee on income we never received.

For
U.S. federal income tax purposes, we will be required to recognize taxable income (such as deferred interest that is accrued as original issue discount) in some circumstances in
which we do not receive a corresponding payment in cash and to make distributions with respect to such income to maintain our status as a RIC. Under such circumstances, we may have difficulty meeting
the Annual Distribution Requirement necessary to maintain RIC tax treatment under the Code. This difficulty in making the required distribution may be amplified to the extent that we are required to
pay an incentive fee with respect to such accrued income. As a result, we may have to sell some of our investments at times and/or at prices we would not consider advantageous, raise additional debt
or equity capital, or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to qualify for RIC tax treatment and thus become subject to
corporate-level income tax.

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There may be conflicts of interest related to obligations FS Advisor's and GSO's senior management
and investment teams have to our affiliates and to other clients.

The members of the senior management and investment teams of both FS Advisor and GSO serve or may serve as officers, directors or
principals of entities that operate in the same or a related line of business as we do, or of investment vehicles managed by the same personnel. For example, the officers, managers and other personnel
of FS Advisor also serve in similar capacities for the investment advisers to Franklin Square Holdings' four other affiliated BDCs, FS Investment Corporation, FS Investment Corporation II, FS
Investment Corporation III, FS Investment Corporation IV and Franklin Square Holdings' affiliated closed-end management investment company, FS Global Credit Opportunities Fund. In serving in these
multiple and other capacities, they may have obligations to other clients or investors in those entities, the fulfillment of which may not be in our best interests or in the best interest of our
shareholders. Our investment objectives may overlap with the investment objectives of such investment funds, accounts or other investment vehicles. For example, we rely on FS Advisor to manage our
day-to-day activities and to implement our investment strategy. FS Advisor and certain of its affiliates are presently, and plan in the future to continue to be, involved with activities which are
unrelated to us. As a result of these activities, FS Advisor, its employees and certain of its
affiliates will have conflicts of interest in allocating their time between us and other activities in which they are or may become involved, including the management of other entities affiliated with
Franklin Square Holdings. FS Advisor and its employees will devote only as much of its or their time to our business as FS Advisor and its employees, in their judgment, determine is reasonably
required, which may be substantially less than their full time.

Furthermore,
GSO, on which FS Advisor relies to assist it in identifying investment opportunities and making investment recommendations, has similar conflicts of interest. GSO or its
subsidiary, GDFM, serves as investment sub-adviser to Franklin Square Holdings' four other affiliated BDCs and Franklin Square Holdings' affiliated closed-end management investment company. GSO, its
affiliates and their respective members, partners, officers and employees will devote as much of their time to our activities as they deem necessary and appropriate. GSO and its affiliates are not
restricted from forming additional investment vehicles, from entering into other investment advisory relationships or from engaging in other business activities, even though such activities may be in
competition with us and/or may involve substantial time and resources of GSO. Also, in connection with such business activities, GSO and its affiliates may have existing business relationships or
access to material, non-public information that may prevent it from recommending investment opportunities that would otherwise fit within our investment objectives. All of these factors could be
viewed as creating a conflict of interest in that the time, effort and ability of the members of GSO, its affiliates and their officers and employees will not be devoted exclusively to our business
but will be allocated between us and the management of the monies of other advisees of GSO and its affiliates.

The time and resources that individuals employed by FS Advisor and GSO devote to us may be diverted,
and we may face additional competition due to the fact that individuals employed by FS Advisor and GSO are not prohibited from raising money for or managing another entity that makes the same types of
investments that we target.

Neither FS Advisor nor GSO, or individuals employed by FS Advisor or GSO, are prohibited from raising money for and managing another
investment entity that makes the same types of investments as those we target. As a result, the time and resources that these individuals may devote to us may be diverted. In addition, we may compete
with any such investment entity for the same investors and investment opportunities. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction
of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. Because we did not seek exemptive relief to engage in co-investment
transactions with GSO and its affiliates, we will continue to be permitted to co-invest with GSO and its affiliates only in accordance with existing regulatory guidance. Affiliates of GSO, whose
primary businesses include the origination of investments, engage in investment advisory business with accounts that compete with us. Affiliates of GSO have no obligation to make their originated
investment opportunities available to GSO or to us.

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Our incentive fee may induce FS Advisor to make, and GSO to recommend, speculative investments.

The incentive fee payable by us to FS Advisor may create an incentive for it to enter into investments on our behalf that are risky or
more speculative than would be the case in the absence of such compensation arrangement. The way in which the incentive fee payable to FS Advisor is determined may encourage it to use leverage to
increase the return on our investments. In addition, the fact that our base management fee is payable based upon our gross assets, which would include any borrowings for investment purposes, may
encourage FS Advisor to use leverage to make additional investments. Under certain circumstances, the use of leverage may increase the likelihood of default, which would disfavor holders of our common
shares. Such a practice could result in our investing in more speculative securities than would otherwise be in our best interests, which could result in higher investment losses, particularly during
cyclical economic downturns. In addition, since GSO will receive a portion of the advisory fees paid to FS Advisor, GSO may have an incentive to recommend investments that are riskier or more
speculative.

FS Advisor's liability is limited under our investment advisory and administrative services
agreement, and we are required to indemnify it against certain liabilities, which may lead it to act in a riskier manner on our behalf than it would when acting for its own account.

Pursuant to our investment advisory and administrative services agreement, FS Advisor and its officers, managers, partners, members
(and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity affiliated with FS Advisor will not be liable to us for their acts
under our investment advisory and administrative services agreement, absent willful misfeasance, bad faith or gross negligence in the performance of their duties. We have agreed to indemnify, defend
and protect FS Advisor and its officers, managers, partners, members (and their members, including the owners of their members), agents, employees, controlling persons and any other person or entity
affiliated with FS Advisor with respect to all damages, liabilities, costs and expenses resulting from acts of FS Advisor not arising out of willful misfeasance, bad faith or gross negligence in the
performance of their duties under our investment advisory and administrative services agreement. These protections may lead FS Advisor to act in a riskier manner when acting on our behalf than it
would when acting for its own account.

Risks Related to Business Development Companies

The requirement that we invest a sufficient portion of our assets in qualifying assets could
preclude us from investing in accordance with our current business strategy; conversely, the failure to invest a sufficient portion of our assets in qualifying assets could result in our failure to
maintain our status as a BDC.

As a BDC, we may not acquire any assets other than "qualifying assets" unless, at the time of such acquisition, at least 70% of our
total assets are qualifying assets. Therefore, we may be precluded from investing in what we believe are attractive investments if such investments are not qualifying assets. Conversely, if we fail to
invest a sufficient portion of our assets in qualifying assets, we could lose our status as a BDC, which would have a material adverse effect on our business, financial condition and results of
operations. Similarly, these rules could prevent us from making additional investments in existing portfolio companies, which could result in the dilution of our position, or could require us to
dispose of investments at an inopportune time to comply with the 1940 Act. If we were forced to sell non-qualifying investments in the portfolio for compliance purposes, the proceeds from such sale
could be significantly less than the current value of such investments.

Failure to maintain our status as a BDC would reduce our operating flexibility.

If we do not remain a BDC, we might be regulated as a closed-end investment company under the 1940 Act, which would subject us to
substantially more regulatory restrictions under the 1940 Act and correspondingly decrease our operating flexibility.

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Regulations governing our operation as a BDC and a RIC will affect our ability to raise, and the way
in which we raise, additional capital or borrow for investment purposes, which may have a negative effect on our growth.

As a result of our need to satisfy the Annual Distribution Requirement necessary to maintain RIC tax treatment under
Subchapter M of the Code, we may need to periodically access the capital markets to raise cash to fund new investments. We may issue "senior securities," as defined in the 1940 Act, including
issuing preferred shares, borrowing money from banks or other financial institutions or issuing debt securities only in amounts such that our asset coverage, as defined in the 1940 Act, equals at
least 200% after such incurrence or issuance. Our ability to issue certain other types of securities is also limited. Compliance with these limitations on our ability to raise capital may unfavorably
limit our investment opportunities and may reduce our ability in comparison to other companies to profit from favorable spreads between the rates at which we can borrow and the rates at which we can
lend. As a BDC, therefore, we intend to issue equity continuously at a rate more frequent than our privately owned competitors, which may lead to greater shareholder dilution.

We
expect to continue to borrow for investment purposes. If the value of our assets declines, we may be unable to satisfy the asset coverage test, which would prohibit us from paying
distributions and as a result could cause us to be subject to U.S federal corporate income or excise taxation, regardless of the amount of distributions paid. If we cannot satisfy the asset coverage
test, we may be required to sell a portion of our investments and, depending on the nature of our debt financing, repay a portion of our indebtedness at a time when such sales may be disadvantageous.

Under
the 1940 Act, we generally are prohibited from issuing or selling our common shares at a price per share, after deducting selling commissions and dealer manager fees, that is below
our net asset value per share, which may be a disadvantage as compared with other public companies. We may, however, sell our common shares, or warrants, options or rights to acquire our common
shares, at a price below the current net asset value of the common shares if our board of trustees and independent trustees determine that such sale is in our best interests and the best interests of
our shareholders, and our shareholders as well as those shareholders that are not affiliated with us approve such sale.

Future legislation may allow us to incur additional leverage.

As a BDC, we are generally not permitted to incur indebtedness unless immediately after such borrowing we have an asset coverage for
total borrowings of at least 200% (i.e., the amount of debt may not exceed 50% of the value of our assets). Recent legislation introduced in the U.S. House of Representatives, if passed, would
modify this section of the 1940 Act to permit an increase in the amount of debt that BDCs could incur by modifying the percentage from 200% to 150%. Even if this legislation does not pass, similar
legislation may pass that permits us to incur additional leverage under the 1940 Act. As a result, we may be able to incur additional indebtedness in the future, and, therefore, the risk of an
investment in us may increase.

Our ability to enter into transactions with our affiliates is restricted.

We are prohibited under the 1940 Act from participating in certain transactions with certain of our affiliates without the prior
approval of a majority of the independent members of our board of trustees and, in some cases, the SEC. Any person that owns, directly or indirectly, 5% or more of our outstanding voting securities
will be our affiliate for purposes of the 1940 Act and we will generally be prohibited from buying or selling any securities from or to such affiliate, absent the prior approval of our board of
trustees. The 1940 Act also prohibits certain "joint" transactions with certain of our affiliates, which could include investments in the same portfolio company (whether at the same or different
times), without prior approval of our board of trustees and, in some cases, the SEC. In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction
of certain conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. If a person acquires more than 25% of our voting securities, we will be
prohibited from buying or selling any security from or to such person or certain of that person's affiliates, or entering into prohibited joint transactions with such persons to the extent not covered
by our exemptive relief, absent the prior approval of the SEC. Similar restrictions limit our ability to transact business with our officers or trustees or their affiliates. As a result of these
restrictions, we may

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be
prohibited from buying or selling any security from or to any portfolio company of a private equity fund managed by FS Advisor without the prior approval of the SEC, which may limit the scope of
investment opportunities that would otherwise be available to us.

We are uncertain of our sources for funding our future capital needs; if we cannot obtain debt or
equity financing on acceptable terms, our ability to acquire investments and to expand our operations will be adversely affected.

The net proceeds from the sale of common shares will be used for our investment opportunities, operating expenses and for payment of
various fees and expenses such as base management fees, incentive fees and other fees. We may also need to access the capital markets to refinance existing debt obligations to the extent maturing
obligations are not repaid with cash flows from operations. In order to maintain RIC tax treatment, we must make distributions to our shareholders each tax year on a timely basis generally of an
amount at least equal to 90% of our investment company taxable income, determined without regard to any deduction for distributions paid, and the amounts of such distributions will therefore not be
available to fund investment originations or to repay maturing debt. In addition, with certain limited exceptions, we are only allowed to borrow amounts or issue debt securities or preferred shares,
which we refer to collectively as "senior securities," such that our asset coverage, as calculated pursuant to the 1940 Act, equals at least 200% immediately after such borrowing, which, in certain
circumstances, may restrict our ability to borrow or issue debt securities or preferred shares. In the event that we develop a need for additional capital in the future for investments or for any
other reason, and we cannot obtain debt or equity financing on acceptable terms, or at all, our ability to acquire investments and to expand our operations will be adversely affected. As a result, we
would be less able to allocate our portfolio among various issuers and sub-sectors and achieve our investment objectives, which may negatively impact our results of operations and reduce our ability
to make distributions to our shareholders.

Risks Related to Our Investments

Our investments in prospective portfolio companies may be risky, and we could lose all or part of
our investment.

Our investments in senior and subordinated debt, select equity investments and other investments issued by private Energy companies may
be risky.

Senior Debt.There is a risk that any collateral pledged by portfolio companies in which we have taken a security interest may decrease
in value over
time or lose its entire value, may be difficult to sell in a timely manner, may be difficult to appraise and may fluctuate in value based upon the success of the business and market conditions,
including as a result of the inability of the portfolio company to raise additional capital. To the extent our debt investment is collateralized by the securities of a portfolio company's
subsidiaries, such securities may lose some or all of their value in the event of the bankruptcy or insolvency of the portfolio company. Also, in some circumstances, our security interest may be
contractually or structurally subordinated to claims of other creditors. In addition, deterioration in a portfolio company's financial condition and prospects, including its inability to raise
additional capital, may be accompanied by deterioration in the value of the collateral for the loan. Loans that are under-collateralized involve a greater risk of loss. In addition, second lien
secured loans are granted a second priority security interest in collateral, which means that any realization of collateral will generally be applied to pay first lien secured loans in full before
second lien secured loans are paid. Consequently, the fact that a loan is secured does not guarantee that we will receive principal and interest payments according to the senior debt's terms, or at
all, or that we will be able to collect on the loan should we be forced to enforce our remedies.

Subordinated Debt.Our subordinated debt investments will generally rank junior in priority of payment to senior debt and will
generally be
unsecured. This may result in a heightened level of risk and volatility or a loss of principal, which could lead to the loss of the entire investment. These investments may involve additional risks
that could adversely affect our investment returns. To the extent interest payments associated with such debt are deferred, such debt may be subject to greater fluctuations in valuations, and such
debt could subject us and our shareholders to non-cash income.

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Because
we will not receive any principal repayments prior to the maturity of some of our subordinated debt investments, such investments will be of greater risk than amortizing loans.

Equity Investments.We expect to make select equity investments in income-oriented preferred or common equity interests, which may
include interests
in MLPs. In addition, when we invest in senior secured loans and notes or subordinated debt, we may acquire warrants to purchase equity securities. The equity interests we receive may not appreciate
in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity interests, and any gains that we do realize on the disposition of any equity interests may
not be sufficient to offset any other losses we experience.

Net Profits Interests, Royalty Interests or VPPs.We may invest in energy-specific non-operating investments including net profits
interests, royalty
interests or VPPs. Net profits interests and royalty
interests are contractual agreements whereby the holders of such interests are entitled to a portion of the mineral production, or proceeds therefrom. A VPP is a type of structured investment whereby
the owner sells a specific volume of production in a field or property to an investor and the investor receives a specific quota of production on a monthly basis in either raw output or proceeds
therefrom. We will not have any operational control over these investments and our receipt of payments is contingent on the producer's ability to meet its supply obligations, which can make these
types of investments highly speculative.

Non-U.S. Securities.We may invest in non-U.S. securities, which may include securities denominated in U.S. dollars or in non-U.S.
currencies, to the
extent permitted by the 1940 Act. Because evidences of ownership of such securities usually are held outside the United States, we would be subject to additional risks if we invested in non-U.S.
securities, which include possible adverse political and economic developments, seizure or nationalization of foreign deposits and adoption of governmental restrictions which might adversely affect or
restrict the payment of principal and interest on the non-U.S. securities to investors located outside the country of the issuer, whether from currency blockage or otherwise. Because non-U.S.
securities may be purchased with and payable in foreign currencies, the value of these assets as measured in U.S. dollars may be affected unfavorably by changes in currency rates and exchange control
regulations.

In
addition, we invest in securities that are rated below investment grade by rating agencies or that would be rated below investment grade if they were rated. Below investment grade
securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. They may also be difficult
to value and illiquid.

Our portfolio companies may incur debt that ranks equally with, or senior to, our investments in
such companies.

Our portfolio companies may have, or may be permitted to incur, other debt that ranks equally with, or senior to, the debt in which we
invest. By their terms, such debt instruments may entitle the holders to receive payment of interest or principal on or before the dates on which we are entitled to receive payments with respect to
the debt instruments in which we invest. Also, in the event of insolvency, liquidation, dissolution, reorganization or bankruptcy of a portfolio company, holders of debt instruments ranking senior to
our investment in that portfolio company would typically be entitled to receive payment in full before we receive any proceeds. After repaying such senior creditors, such portfolio company may not
have any remaining assets to use for repaying its obligation to us. In the case of debt ranking equally with debt instruments in which we invest, we would have to share on an equal basis any
distributions with other creditors holding such debt in the event of an insolvency, liquidation, dissolution, reorganization or bankruptcy of the relevant portfolio company.

There may be circumstances where our debt investments could be subordinated to claims of other
creditors or we could be subject to lender liability claims.

If one of our portfolio companies were to go bankrupt, depending on the facts and circumstances, including the extent to which we
actually provided managerial assistance to that portfolio company, a bankruptcy court might recharacterize our debt investment and subordinate all or a portion of our claim to that of other creditors.
In situations where a bankruptcy carries a high degree of political

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significance,
our legal rights may be subordinated to other creditors. We may also be subject to lender liability claims for actions taken by us with respect to a borrower's business or in instances
where we exercise control over the borrower or render significant managerial assistance.

We generally will not control our portfolio companies.

We do not expect to control most of our portfolio companies, even though we may have board representation or board observation rights,
and our debt agreements with such portfolio companies may contain certain restrictive covenants. As a result, we are subject to the risk that a portfolio company in which we invest may make business
decisions with which we disagree and the management of such company, as representatives of the holders of their common equity, may take risks or otherwise act in ways that do not serve our interests
as debt investors. Due to the lack of liquidity for our investments in non-traded companies, we may not be able to dispose of our interests in our portfolio companies as readily as we would like or at
an appropriate valuation. As a result, a portfolio company may make decisions that could decrease the value of our portfolio holdings.

We are exposed to risks associated with changes in interest rates.

We are subject to financial market risks, including changes in interest rates. General interest rate fluctuations may have a
substantial negative impact on our investments and investment opportunities and, accordingly have a material adverse effect on our investment objectives and our rate of return on invested capital. In
addition, an increase in interest rates would make it more expensive to use debt for our financing needs, if any.

Interest
rates have recently been at or near historic lows. In the event of a rising interest rate environment, payments under floating rate debt instruments generally would rise and
there may be a significant number of issuers of such floating rate debt instruments that would be unable or unwilling to pay such increased interest costs and may otherwise be unable to repay their
loans. Investments in floating rate debt instruments may also decline in value in response to rising interest rates if the interest rates of such investments do not rise as much, or as quickly, as
market interest rates in general. Similarly, during periods of rising interest rates, fixed rate debt instruments may decline in value because the fixed rates of interest paid thereunder may be below
market interest rates.

Second priority liens on collateral securing debt investments that we make to our portfolio
companies may be subject to control by senior creditors with first priority liens. If there is a default, the value of the collateral may not be sufficient to repay in full both the first priority
creditors and us.

Certain debt investments that we make to portfolio companies may be secured on a second priority basis by the same collateral securing
first priority debt of such companies. The first priority liens on the collateral will secure the portfolio company's obligations under any outstanding senior debt and may secure certain other future
debt that may be permitted to be incurred by such company under the agreements governing the loans. The holders of obligations secured by the first priority liens on the collateral will generally
control the liquidation of and be entitled to receive proceeds from any realization of the collateral to repay the obligations in full before us. In addition, the value of the collateral in the event
of liquidation will depend on market and economic conditions, the availability of buyers and other factors. There can be no assurance that the proceeds, if any, from the sale or sales of all of the
collateral would be sufficient to satisfy the debt obligations secured by the second priority liens after payment in full of all obligations secured by the first priority liens on the collateral. If
such proceeds are not sufficient to repay amounts outstanding under the debt obligations secured by the second priority liens, then we, to the extent not repaid from the proceeds of the sale of the
collateral, will only have an unsecured claim against such company's remaining assets, if any.

The
rights we may have with respect to the collateral securing the debt investments we make in our portfolio companies with senior debt outstanding may also be limited pursuant to the
terms of one or more intercreditor agreements that we enter into with the holders of senior debt. Under such an intercreditor agreement, at any time that obligations that have the benefit of the first
priority liens are outstanding, any of the following actions that may be taken in respect of the collateral will be at the direction of the holders of the obligations secured by the first priority
liens: the ability to cause the commencement of enforcement proceedings against the collateral; the ability to control the conduct of

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such
proceedings; the approval of amendments to collateral documents; releases of liens on the collateral; and waivers of past defaults under collateral documents. We may not have the ability to
control or direct such actions, even if our rights are adversely affected.

Economic recessions or downturns could impair our portfolio companies and harm our operating
results.

Many of our portfolio companies may be susceptible to economic slowdowns or recessions and may be unable to repay our debt investments
during these periods. Therefore, our non-performing assets are likely to increase, and the value of our portfolio is likely to decrease, during these periods. Adverse economic conditions may also
decrease the value of any collateral securing our first lien or second lien secured loans. A prolonged recession may further decrease the value of such collateral and result in losses of value in our
portfolio and a decrease in our revenues, net income and net asset value. Unfavorable economic conditions also could increase our funding costs, limit our access to the capital markets or result in a
decision by lenders not to extend credit to us on terms we deem acceptable. These events could prevent us from increasing investments and harm our operating results. Economic downturns or recessions
may also result in a portfolio company's failure to satisfy financial or operating covenants imposed by us or other lenders, which could lead to defaults and, potentially, acceleration of the time
when the loans are due and foreclosure on its assets representing collateral for its obligations, which could trigger cross defaults under other agreements and jeopardize our portfolio company's
ability to meet its obligations under the debt that we hold and the value of any equity securities we own. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate
new terms with a defaulting portfolio company.

A covenant breach by our portfolio companies may harm our operating results.

A portfolio company's failure to satisfy financial or operating covenants imposed by us or other lenders could lead to defaults and,
potentially, termination of its loans and foreclosure on its secured assets, which could trigger cross-defaults under other agreements and jeopardize a portfolio company's ability to meet its
obligations under the debt or equity securities that we hold. We may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms, which may include the waiver of
certain financial covenants, with a defaulting portfolio company.

Our portfolio companies may be highly leveraged.

Some of our portfolio companies may be highly leveraged, which may have adverse consequences to these companies and to us as an
investor. These companies may be subject to restrictive financial and operating covenants and the leverage may impair these companies' ability to finance their future operations and capital needs. As
a result, these companies' flexibility to respond to changing business and economic conditions and to take advantage of business opportunities may be limited. Further, a leveraged company's income and
net assets will tend to increase or decrease at a greater rate than if borrowed money were not used.

Investing in middle-market companies involves a number of significant risks, any one of which could
have a material adverse effect on our operating results.

Investments in middle-market companies involve some of the same risks that apply generally to investments in larger, more established
companies. However, such investments have more pronounced risks in that they:



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We may not realize gains from our equity investments.

Certain investments that we may make may include warrants or other equity securities. In addition, we may make direct equity
investments in portfolio companies. The equity interests we receive may not appreciate in value and, in fact, may decline in value. Accordingly, we may not be able to realize gains from our equity
interests, and any gains that we do realize on the disposition of any equity interests may not be sufficient to offset any other losses we experience. We may also be unable to realize any value if a
portfolio company does not have a liquidity event, such as a sale of the business, recapitalization or public offering, which would allow us to sell the underlying equity interests. We may be unable
to exercise any put rights we acquire which grant us the right to sell our equity securities back to the portfolio company for the consideration provided in our investment documents if the issuer is
in financial distress.

An investment strategy focused primarily on privately-held companies presents certain challenges,
including the lack of available information about these companies.

Our investments are primarily in privately-held companies. Investments in private companies pose significantly greater risks than
investments in public companies. First, private companies have reduced access to the capital markets, resulting in diminished capital resources and the ability to withstand financial distress. As a
result, these companies, which may present greater credit risk than public companies, may be unable to meet the obligations under their debt and equity securities that we hold. Second, the investments
themselves often may be illiquid. The securities of many of the companies in which we invest are not publicly-traded or actively-traded on the secondary market and are, instead, traded on a privately
negotiated over-the-counter secondary market for institutional investors. In addition, such securities may be subject to legal and other restrictions on resale. As such, we may have difficulty exiting
an investment promptly or at a desired price prior to maturity or outside of a normal amortization schedule. These investments may also be difficult to value because little public information
generally exists about private companies, requiring an experienced due diligence team to analyze and value the potential portfolio company. Finally, these companies often may not have third-party debt
ratings or audited financial statements. We must therefore rely on the ability of FS Advisor and/or GSO to obtain adequate information through due diligence to evaluate the creditworthiness and
potential returns from investing in these companies. These companies and their financial information will generally not be subject to the Sarbanes-Oxley Act and other rules and regulations that govern
public companies. If we are unable to uncover all material information about these companies, we may not make a fully informed investment decision, and we may lose money on our investments.

A lack of liquidity in certain of our investments may adversely affect our business.

We invest in certain companies whose securities are not publicly-traded or actively-traded on the secondary market and are, instead,
traded on a privately-negotiated over-the-counter secondary market for institutional investors, and whose securities are subject to legal and other restrictions on resale or are otherwise less liquid
than publicly-traded securities. The illiquidity of certain of our investments may make it difficult for us to sell these investments when desired. In addition, if we are required to liquidate all or
a portion of our portfolio quickly, we may realize significantly less than the value at

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which
we had previously recorded these investments. The reduced liquidity of our investments may make it difficult for us to dispose of them at a favorable price, and, as a result, we may suffer
losses.

We may not have the funds or ability to make additional investments in our portfolio companies.

We may not have the funds or ability to make additional investments in our portfolio companies. After our initial investment in a
portfolio company, we may be called upon from time to time to provide additional funds to such company or have the opportunity to increase our investment through the exercise of a warrant to purchase
common stock. There is no assurance that we will make, or will have sufficient funds to make, follow-on investments. Any decisions not to make a follow-on investment or any inability on our part to
make such an investment may have a negative impact on a portfolio company in need of such an investment, may result in a missed opportunity for us to increase our participation in a successful
operation or may reduce the expected return on the investment.

Our investments may include original issue discount instruments.

To the extent that we invest in original issue discount instruments and the accretion of original issue discount constitutes a portion
of our income, we will be exposed to risks associated with the requirement to include such non-cash income in taxable and accounting income prior to receipt of cash, including the
following:



We may from time to time enter into total return swaps, credit default swaps or other derivative
transactions which expose us to certain risks, including credit risk, market risk, liquidity risk and other risks similar to those associated with the use of leverage.

We may from time to time enter into total return swaps, credit default swaps or other derivative transactions that seek to modify or
replace the investment performance of a particular reference security or other asset. These transactions are typically individually negotiated, non-standardized agreements between two parties to
exchange payments, with payments generally calculated by reference to a notional amount or quantity. Swap contracts and similar derivative contracts are not traded on exchanges; rather, banks and
dealers act as principals in these markets. These investments may present risks in excess of those resulting from the referenced security or other asset. Because these transactions are not an
acquisition of the referenced security or other asset itself, the investor has no right directly to enforce compliance with the terms of the referenced security or other asset and has no voting or
other consensual rights of ownership with respect to the referenced security or other asset. In the event of insolvency of a counterparty, we will be treated as a general creditor of the counterparty
and will have no claim of title with respect to the referenced security or other asset.

A
total return swap is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the referenced security or other assets
underlying the total return swap during a specified period, in return for periodic payments based on a fixed or variable interest rate.

A
total return swap is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the total return swap and the debt obligations underlying the total
return swap. In

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addition,
we may incur certain costs in connection with a total return swap that could in the aggregate be significant.

A
credit default swap is a contract in which one party buys or sells protection against a credit event with respect to an issuer, such as an issuer's failure to make timely payments of
interest or principal on its debt obligations, bankruptcy or restructuring during a specified period. Generally, if we sell credit protection using a credit default swap, we will receive fixed
payments from the swap counterparty and if a credit event occurs with respect to the applicable issuer, we will pay the swap counterparty par for the issuer's defaulted debt securities and the swap
counterparty will deliver the defaulted debt securities to us. Generally, if we buy credit protection using a credit default swap, we will make fixed payments to the counterparty and if a credit event
occurs with respect to the applicable issuer, we will deliver the issuer's defaulted securities underlying the swap to the swap counterparty and the counterparty will pay us par for the defaulted
securities. Alternatively, a credit default swap may be cash settled and the buyer of protection would receive the difference between the par value and the market value of the issuer's defaulted debt
securities from the seller of protection.

Credit
default swaps are subject to the credit risk of the underlying issuer. If we are selling credit protection, there is a risk that we will not properly assess the risk of the
underlying issuer, a credit event will occur and we will have to pay the counterparty. If we are buying credit protection, there is a risk that we will not properly assess the risk of the underlying
issuer, no credit event will occur and we will receive no benefit for the premium paid.

A
derivative transaction is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the
counterparty. In some cases, we may post collateral to secure our obligations to the counterparty, and we may be required to post additional collateral upon the occurrence of certain events such as a
decrease in the value of the reference security or other asset. In some cases, the counterparty may not collateralize any of its obligations to us.

Derivative
investments effectively add leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or
investing directly in such market. In addition to the risks described above, such arrangements are subject to risks similar to those associated with the use of leverage. See "Risks
Related to Debt Financing."

Prepayments of our debt investments by our portfolio companies could adversely impact our results of
operations and reduce our return on equity.

We are subject to the risk that the investments we make in our portfolio companies may be repaid prior to maturity. When this occurs,
we will generally reinvest these proceeds in temporary investments, pending their future investment in new portfolio companies. These temporary investments will typically have substantially lower
yields than the debt being prepaid and we could experience significant delays in reinvesting these amounts. Any future investment in a new portfolio company may also be at lower yields than the debt
that was repaid. As a result, our results of operations could be materially adversely affected if one or more of our portfolio companies elect to prepay amounts owed to us. Additionally, prepayments,
net of prepayment fees, could negatively impact our return on equity.

Energy Company Risks

Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies.
This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such change. The revenues, income (or losses) and valuations of Energy
companies can fluctuate suddenly and dramatically due to a number of factors.

Because our investment policy is to invest at least 80% of our total assets in securities of Energy
companies, our portfolio will not be well allocated among various industries.

As there can be a correlation in the valuation of the securities in our portfolio, a decline in value of the securities of one company
may be accompanied by a decline in the valuations of the securities of other companies within the Energy industry that we may hold in our portfolio. A decline in value of

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the
securities of such issuers or a downturn in the Energy sector might have a more severe impact on us than on an entity that is more broadly allocated among various industries.

An increase or decrease in commodity supply or demand may adversely affect our business.

A decrease in the production of natural gas, natural gas liquids, crude oil, coal or other energy commodities, a decrease in the volume
of such commodities available for transportation, mining, processing, storage or distribution, or a sustained decline in demand for such commodities may adversely impact the financial performance or
prospects of Energy companies in which we may invest. Energy companies are subject to supply and demand fluctuations in the markets they serve which will be impacted by a wide range of factors,
including fluctuating commodity prices, weather, increased conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion of natural gas, natural gas
liquids, crude oil or coal production, rising interest rates, declines in domestic or foreign production of natural gas, natural gas liquids and crude oil, accidents or catastrophic events and
economic conditions, among others.

An increase or decrease in commodity pricing may adversely affect our business.

The return on our prospective investments in Energy companies will be dependent on the margins received by those companies for the
exploration, development, production, gathering, transportation, processing, storing, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined
products, coal or power. These margins may fluctuate widely in response to a variety of factors including global and domestic economic conditions, weather conditions, natural disasters, the supply and
price of imported energy commodities, the production and storage levels of energy commodities in certain regions or in the world, political instability, terrorist activities, transportation
facilities, energy conservation, domestic and foreign governmental regulation and taxation and the availability of local, intrastate and interstate transportation systems. Volatility of commodity
prices may also make it more difficult for Energy companies in which we may invest to raise capital to the extent the market perceives that their performance may be directly or indirectly tied to
commodity prices.

Cyclicality within the Energy sector may adversely affect our business.

Industries within the Energy sector are cyclical with fluctuations in commodity prices and demand for commodities driven by a variety
of factors. The highly cyclical nature of the industries within the Energy sector may lead to volatile changes in commodity prices, which may adversely affect the earnings of Energy companies in which
we may invest.

A prolonged continuation of depressed oil and natural gas prices could have a material adverse
effect on us.

A prolonged continuation of depressed oil and natural gas prices would adversely affect the credit quality and performance of certain
of our debt and equity investments in Energy companies. A decrease in credit quality and performance would, in turn, negatively affect the fair value of these investments, which would consequently
negatively affect our net asset value. Should a prolonged period of depressed oil and natural gas prices occur, it is likely that our portfolio companies' abilities to satisfy financial or operating
covenants imposed by us or other lenders will be adversely affected, thereby negatively impacting their financial condition and their ability to satisfy their debt service and other obligations to us.
Likewise, should a prolonged period of depressed oil and natural gas prices occur, it is likely that our portfolio companies' cash flow and profit generating capacities would also be adversely
affected thereby negatively impacting their ability to pay us dividends or distributions on certain of our investments.

Changes in international, foreign, federal, state or local government regulation may adversely
affect our business.

Energy companies are subject to significant international, foreign, federal, state and local government regulation, including how
facilities are constructed, maintained and operated, environmental and safety controls, and the prices they may charge for the products and services they provide. Various governmental authorities have
the power to enforce compliance with these regulations

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and
the permits issued under them, and violators are subject to administrative, civil and criminal penalties, including civil fines, injunctions or both. For example, many state and federal
environmental laws provide for civil penalties as well as regulatory remediation, thus adding to the potential liability an Energy company may face. More extensive laws, regulations or enforcement
policies could be enacted in the future which would likely increase compliance costs and may adversely affect the financial performance of Energy companies in which we may invest.

In
particular, changes to laws and increased regulations or enforcement policies as a result of oil spills may adversely affect the financial performance of Energy companies.
Additionally, changes to laws and increased regulation or restrictions on the use of hydraulic fracturing may adversely impact the ability of Energy companies to economically develop oil and natural
gas resources and, in turn, reduce production for such commodities. Any such changes or increased regulations or policies may adversely affect the performance of Energy companies in which we may
invest.

Energy companies are subject to various operational risks.

Energy companies are subject to various operational risks, such as disruption of operations, mining, drilling or installation
accidents, inability to timely and effectively integrate newly acquired assets, unanticipated operation and maintenance expenses, lack of proper asset integrity, underestimated cost projections,
inability to renew or increased costs of rights of way, failure to obtain the necessary permits to operate and failure of third-party contractors to perform their contractual obligations. Thus, some
Energy companies may be subject to construction risk, acquisition risk or other risks arising from their specific business strategies.

Energy companies that focus on exploration and production are subject to numerous reserve and
production related risks.

Exploration and production businesses are subject to overstatement of the quantities of their reserves based upon any reserve estimates
that prove to be inaccurate, the possibility that no commercially productive oil, natural gas or other energy reservoirs will be discovered as a result of drilling or other exploration activities, the
curtailment, delay or cancellation of exploration activities as a result of unexpected conditions or miscalculations, title problems, pressure or irregularities in formations, equipment failures or
accidents, adverse weather conditions, compliance with environmental and other governmental requirements and cost of, or shortages or delays in the availability of, drilling rigs and other exploration
equipment, and operational risks and hazards associated with the development of the underlying properties, including natural disasters, blowouts, explosions, fires, leakage of crude oil, natural gas
or other resources, mechanical failures, cratering and pollution.

Competition between Energy companies may adversely affect our business.

The Energy companies in which we may invest face substantial competition in acquiring assets, expanding or constructing assets and
facilities, obtaining and retaining customers and contracts, securing trained personnel and operating their assets. Many of their competitors may have superior financial and other resources.

Inability by companies in which we may invest to make accretive acquisitions may adversely affect
our business.

The ability of Energy companies in which we may invest to grow and, where applicable, to increase dividends or distributions to their
equity holders can be highly dependent on their ability to make acquisitions of infrastructure assets that result in an increase in free cash flow. In the event that such companies are unable to make
such accretive acquisitions because they are unable to identify attractive acquisition candidates or negotiate acceptable purchase contracts, because
they are unable to raise financing for such acquisitions on economically acceptable terms, or because they are outbid by competitors, their future growth and ability to make or raise dividends or
distributions will be limited and their ability to repay their debt and make payments to preferred equity holders may be weakened. Furthermore, even if these companies do consummate acquisitions that
they believe will be accretive, the acquisitions may instead result in a decrease in free cash flow.

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A significant accident or event that is not fully insured could adversely affect the operations and
financial condition of Energy companies in which we may invest.

The operations of Energy companies in which we may invest are subject to many hazards inherent in the transporting, processing,
storing, distributing, mining, generating or marketing of natural gas, natural gas liquids, crude oil, coal, refined products, power or other commodities, or in the exploring, managing or producing of
such commodities, including: damage to pipelines, storage tanks, vessels or related equipment and surrounding properties caused by hurricanes, tornadoes, floods, fires and other natural disasters or
by acts of terrorism; inadvertent damage from construction or other equipment; leaks of natural gas, natural gas liquids, crude oil, refined products or other commodities; and fires and explosions.
Further, since the September 11th terrorist attacks, the U.S. government has issued warnings that energy assets and facilities, specifically U.S. pipeline infrastructure, may be targeted
in future terrorist attacks. These risks could result in substantial losses due to personal injury or loss of life, severe damage to and destruction of property and equipment and pollution or other
environmental damage and may result in the curtailment or suspension of their related operations. Not all Energy companies are fully insured against all risks inherent to their businesses. If a
significant accident or event occurs that is not fully insured, it could adversely affect the
Energy company's operations and financial condition. In addition, any increased governmental regulation to mitigate such risks (including regulations related to recent oil spills or hydraulic
fracturing), could increase insurance premiums and other operating costs for Energy companies in which we may invest.

Energy reserves naturally deplete as they are produced over time and this may adversely affect our
business.

Energy reserves naturally deplete as they are produced over time. Many Energy companies are either engaged in the production of natural
gas, natural gas liquids, crude oil or coal, or are engaged in transporting, storing, distributing and processing these items or their derivatives on behalf of shippers. To maintain or grow their
revenues, these companies or their customers need to maintain or expand their reserves through exploration of new sources of supply, through the development of existing sources or through
acquisitions. The financial performance of Energy companies in which we may invest may be adversely affected if they, or the companies to whom they provide services, are unable to cost-effectively
acquire additional reserves sufficient to replace the depleted reserves. If an Energy company fails to add reserves by acquiring or developing them, its reserves and production will decline over time
as the reserves are produced. If an Energy company is not able to raise capital on favorable terms, it may not be able to add to or maintain its reserves.

Infrastructure assets may be the future target of terrorist organizations.

The terrorist attacks in the United States on September 11, 2001, had a disruptive effect on the economy and the securities
markets. United States military and related action in the Middle East and elsewhere could have significant adverse effects on the U.S. economy and the stock market. Uncertainty surrounding military
strikes or actions or a sustained military campaign may affect an Energy company's operations in unpredictable ways, including disruptions of fuel supplies and markets, and infrastructure assets could
be direct targets, or indirect casualties, of an act of terror. The U.S. government has issued warnings that infrastructure assets, specifically the United States' pipeline infrastructure, may be the
future target of terrorist organizations. In addition, changes in the insurance markets have made certain types of insurance more difficult, if not impossible, to obtain and have generally resulted in
increased premium costs.

Certain Energy companies are dependent on their parents or sponsors for a majority of their revenues
and may be subject to affiliate party risk.

Certain Energy companies in which we may invest are dependent on their parents or sponsors for a majority of their revenues. Any
failure by an Energy company's parent or sponsor to satisfy its payments or obligations would impact the Energy company's revenues and cash flows and ability to make distributions.

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Changing economic, regulatory and political conditions in some countries, including political and
military conflicts, may adversely affect the businesses in which we invest.

Changing economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to
time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes, boycotts and government inspections or requisitioning of vessels. These types of events could impact the
delivery of commodities or impact pricing of commodities.

Risks Related to Our Investments in MLPs

An investment in MLP units involves certain risks which differ from an investment in the common stock of a corporation. Holders of MLP
units have limited control and voting rights on matters affecting the partnership. In addition, there are certain tax risks associated with an investment in MLP units. See
"Risks Related to U.S. Federal Income Tax."

An MLP's cash flow, and consequently its distributions, are subject to operational and general
energy industry risks, which may result in disparate quarterly distributions.

A portion of the cash flow received by us may be derived from investments in the equity securities of MLPs. The amount of cash that an
MLP has available for distributions and the tax character of such distributions depend upon the amount of cash generated by the MLP's operations. Cash available for distribution will vary from quarter
to quarter and is largely dependent on factors affecting the MLP's operations and factors affecting the Energy industry in general. In addition to the risk factors described above, other factors which
may reduce the amount of cash an MLP has available for distribution in a given quarter include increased operating costs, maintenance capital expenditures, acquisition costs, expansion, construction
or exploration costs and borrowing costs.

Investments in MLPs may have limited liquidity.

Although common units of some MLPs may trade on public exchanges, certain of these securities may trade less frequently, particularly
those with smaller capitalizations. Securities with limited trading volumes may display volatile or erratic price movements. As a result, these securities may be difficult to dispose of at a fair
price at the times when we believe it is desirable to do so. These securities are also more difficult to value, and our judgment as to value will often be given greater weight than market quotations,
if any exist. Investment of our capital in securities that are less actively-traded, or over time experience decreased trading volume, may restrict our ability to take advantage of other market
opportunities. In addition, many MLP units are privately held.

Investments in MLPs are susceptible to interest rate fluctuation risks.

Interest
rate risk is the risk that securities will decline in value because of changes in market interest rates. The yields of equity and debt securities of
MLPs are susceptible in the short-term to fluctuations in interest rates and, like treasury bonds, the prices of these securities typically decline when interest rates rise. Accordingly, our net asset
value may be impacted by an increase in interest rates. Further, rising interest rates could adversely impact the financial performance of MLPs in which we invest by increasing their costs of capital.
This may reduce their ability to execute acquisitions or expansion projects in a cost-effective manner.

Investments in MLPs are subject to certain tax risks.

MLPs are not subject to tax at the partnership level. Rather, each partner is allocated a share of the MLP's income, gains, losses,
deductions, and expenses. A change in current tax law, or a change in the underlying business of a given MLP could result in the MLP being treated as a corporation for U.S. federal tax purposes, which
would result in such MLP being required to pay U.S. federal income tax on its taxable income. Such treatment also would have the effect of reducing the amount of cash available for distribution by the
affected MLP.

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Our investments in MLPs may be subject to additional fees and expenses, including management and
incentive fees, and, as a result, our investments in MLPs may achieve a lower rate of return than our other investments.

MLPs are subject to additional fees, some of which are paid regardless of the performance of its assets. We will pay certain management
fees to the adviser entity of any MLP in which we invest. FS Advisor will also earn its base management fee from us based on our gross assets, including our investment in any such MLP; therefore, we
will be paying both FS Advisor's base management fee and any management fees charged by an MLP. As a result, our investment returns attributable to MLPs in which we invest may be lower than other
investments we select. In addition, because the fees received by an MLP adviser are typically based on the managed assets of the MLP, including the proceeds of any leverage it may incur, the MLP
adviser has a financial incentive to utilize leverage, which may create a conflict of interest between the MLP adviser and us as a shareholder in the MLP.

Risks Related to Debt Financing

We currently use borrowed funds to make investments and are exposed to the typical risks associated
with leverage.

Borrowings and other types of financing, also known as leverage, magnify the potential for gain or loss on amounts invested and,
therefore, increase the risks associated with investing in our securities. Our and our special-purpose financing subsidiaries' lenders and debt holders have fixed dollar claims on our and their assets
that are superior to the claims of our shareholders. If the value of our assets increases, then leverage would cause the net asset value to increase more sharply than it would have had we not
leveraged. Conversely, if the value of our assets decreases, leverage would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in
our income in excess of consolidated interest payable on the borrowed funds would cause our net investment income to increase more than it would without the leverage, while any decrease in our income
would cause net investment income to decline more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make distributions to shareholders. Leverage is
generally considered a speculative investment technique.

The agreements governing our financing arrangements contain various covenants which, if not complied
with, could accelerate repayment under the applicable arrangement, thereby materially and adversely affecting our liquidity, financial condition, results of operations and our ability to pay
distributions to our shareholders.

Our wholly-owned, special-purpose financing subsidiaries, Berwyn Funding, FSEP Funding, Energy Funding, Foxfields Funding, Wayne
Funding, Gladwyne Funding and Strafford Funding have entered into financing arrangements with BNP, Deutsche Bank, Natixis, Fortress, Wells Fargo and Goldman, respectively. The agreements governing
these financing arrangements contain various default provisions and operational covenants which, if triggered, could result in the termination of the respective financing arrangements and the
acceleration of any amounts outstanding thereunder, which could require us or our subsidiaries to liquidate positions at a time and/or at a price which is disadvantageous to us. This could result in
losses and impact our ability to meet our investment objectives and pay distributions to shareholders.

Our
or our subsidiaries' failure to comply with the covenants set forth in the financing arrangements could materially and adversely affect our liquidity, financial condition, results of
operations and our ability to pay distributions to our shareholders. We cannot assure shareholders that we or our subsidiaries will be able to borrow funds under any such financing arrangements at any
particular time or at all. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsFinancial Condition, Liquidity and Capital Resources" for a more detailed discussion of the terms of our financing arrangements.

We are subject to risks associated with our debt securitization facility.

Through our two wholly-owned, special-purpose financing subsidiaries, Gladwyne Funding and Strafford Funding, we entered into a debt
financing arrangement with Goldman pursuant to which up to $325,000 will be made available to us to fund investments and for other general corporate purposes. The financing transaction with Goldman is
structured as a debt securitization. We use the term "debt

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securitization"
to describe a form of secured borrowing under which an operating company, sometimes referred to as an originator, acquires or originates loans or other assets that earn income, whether
on a one-time or recurring basis, or collectively referred to herein as income producing assets, and borrows money on a non-recourse basis against a legally separate pool of income producing assets.
In a typical debt securitization, the originator transfers the income producing assets to a special-purpose, bankruptcy-remote subsidiary, also referred to as a "special purpose entity", which is
established solely for the purpose of holding income producing assets and issuing debt secured by these income producing assets. The special purpose entity completes the borrowing through the issuance
of notes secured by the income producing assets.

Pursuant
to the financing arrangement, assets in our portfolio may be sold and/or contributed by us from time to time to Gladwyne Funding. The assets held by Gladwyne Funding will secure
the obligations of Gladwyne Funding under the floating rate notes, or Notes, to be issued from time to time by Gladwyne Funding to Strafford Funding pursuant to an indenture, dated as of
September 11, 2014, as supplemented by the First Supplemental Indenture dated as of December 15, 2014, or together, the Indenture. Pursuant to the Indenture, the aggregate principal
amount of Notes that may be issued by Gladwyne Funding from time to time is $577,750.

Strafford
Funding, in turn, has entered into a repurchase transaction with Goldman pursuant to the terms of a master repurchase agreement and the related annex and master confirmation
thereto, each dated as of September 11, 2014 and an amended and restated master confirmation dated as of December 15, 2014, or collectively, the Goldman facility. Pursuant to the Goldman
facility, on one or more occasions beginning December 15, 2014 Goldman began purchasing Notes held by Strafford Funding for an aggregate purchase price equal to approximately 56.25% of the
principal amount of Notes purchased. Subject to certain conditions, the maximum principal amount of Notes that may be purchased under the Goldman facility is $577,750. Accordingly, the aggregate
maximum amount payable to Strafford Funding under the Goldman facility will not exceed $325,000, plus applicable financing fees. As of December 31, 2015, Strafford Funding has purchased
$577,750 of Notes, the maximum principal amount of Notes that may be purchased under the Goldman facility. The maximum repurchase amount payable by Strafford Funding to Goldman under the Goldman
facility in respect of the Notes is $325,000, plus applicable financing fees.

See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition,
Liquidity and Capital ResourcesGoldman Financing" for a more detailed discussion of the terms of this debt securitization facility.

As
a result of this debt securitization facility, we are subject to certain risks, including, but not limited to, those set forth below.

Our equity investment in Gladwyne Funding is subordinated to the debt obligations of Gladwyne
Funding.

Any dividends or other payments in respect of our equity interest in Gladwyne Funding are subordinated in priority of payment to the
Notes. In addition, Gladwyne Funding is subject to certain payment restrictions set forth in the Indenture in respect of our equity interest.

We
will receive cash distributions based on our investment in Gladwyne Funding only if Gladwyne Funding has made all required cash interest payments on the Notes. We cannot assure you
that distributions on the assets held by Gladwyne Funding will be sufficient to make any distributions to us or that the yield on our investment in Gladwyne Funding will meet our expectations.

Our
equity investment in Gladwyne Funding is unsecured and ranks behind all of the creditors, known or unknown, of Gladwyne Funding, including the holders of the Notes. Consequently, if
the value of Gladwyne Funding's assets decreases as a result of conditions in the credit markets, defaulted loans, capital gains and losses on the underlying assets or prepayment or changes in
interest rates generally, the value of our equity investment in Gladwyne Funding could be reduced. Accordingly, our investment in Gladwyne Funding may not produce a profit and may be subject to a loss
in an amount up to the entire amount of such equity investment.

In
addition, if the value of Gladwyne Funding's assets decreases and Gladwyne Funding is unable to make any required payments to Strafford Funding pursuant to the terms of the Notes,
Strafford Funding may, in turn, be unable to make any required payments to Goldman pursuant to the terms of

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the
Goldman facility. In such event, if the value of Strafford Funding's assets is not sufficient to meet Strafford Funding's payment obligations to Goldman, Strafford Funding may request that we loan
to it pursuant to an uncommitted revolving credit agreement, dated as of September 11, 2014 and amended and restated on December 15, 2014, between Strafford Funding, as borrower, and us,
as lender, or the Revolving Credit Agreement, or that we otherwise provide additional funds to it to cover its payment obligations to Goldman. Otherwise, we may be subject to a loss in an amount up to
the entire amount of our equity investment in Strafford Funding.

Our equity investment in Strafford Funding is subordinated to the debt obligations of Strafford
Funding.

Our equity investment in Strafford Funding is unsecured and ranks behind all of the creditors, known or unknown, of Strafford Funding,
including Goldman. Consequently, if the value of Strafford Funding's assets decreases as a result of conditions in the credit markets, defaulted loans, capital gains and losses on the underlying
assets or prepayment or changes in interest rates generally, the value of our equity investment in Strafford Funding could be reduced. Accordingly, our investment in Strafford Funding may not produce
a profit and may be subject to a loss in an amount up to the entire amount of such equity investment.

In
addition, if the value of Strafford Funding's assets decreases or Gladwyne Funding fails to make any required payments to Strafford Funding pursuant to the terms of the Notes,
Strafford Funding may be unable to make any required payments to Goldman pursuant to the terms of the Goldman facility. In such event, if the value of Strafford Funding's assets is not sufficient to
meet Strafford Funding's payment obligations to Goldman, Strafford Funding may request that we loan to it pursuant to the Revolving Credit Agreement or that we otherwise provide additional funds to it
to cover its payment obligations to Goldman. Otherwise, we may be subject to a loss in an amount up to the entire amount of our equity investment in Strafford Funding.

Our equity investment in Gladwyne Funding has a high degree of leverage.

The maximum aggregate principal amount of Notes permitted to be issued by Gladwyne Funding under the Indenture is $577,750. The maximum
repurchase amount payable by Strafford Funding to Goldman under the Goldman facility in respect of the Notes is $325,000, plus applicable financing fees. The market value of our equity investment in
Gladwyne Funding may be significantly affected by a variety of factors, including changes in the market value of the assets held by Gladwyne Funding, changes in distributions on the assets held by
Gladwyne Funding, defaults and recoveries on those assets, capital gains and losses on those assets, prepayments on those assets and other risks associated with those assets. Our investment in
Gladwyne Funding may not produce a profit and may be subject to a loss in an amount up to the entire amount of such equity investment. The leveraged nature of our equity investment may magnify the
adverse impact of any loss on our equity investment.

The interests of Goldman, as the holder of the Notes, may not be aligned with our interests, and we
will not have control over remedies in respect of the Notes.

The Notes rank senior in right of payment to any equity securities issued by Gladwyne Funding. As a result, there are circumstances in
which the interests of Goldman, as the holder of the Notes, may not be aligned with our interests. For example, under the terms of the Notes, Goldman has the right to receive payments of principal and
interest prior to Gladwyne Funding making any distributions or dividends to holders of its equity securities.

For
as long as the Notes remain outstanding, Goldman has the right to act in certain circumstances with respect to the portfolio of assets that secure the obligations of Gladwyne Funding
under the Notes in ways that may benefit their interests but not ours, including by exercising remedies or directing the trustee under the Indenture to declare events of default under or accelerate
the Notes in accordance with the terms of the Indenture. Goldman has no obligation to consider any possible adverse effect that actions taken may have on our equity interests. For example, upon the
occurrence of an event of default (as defined in the Indenture) with respect to the Notes, the trustee, which is currently Citibank N.A., or Citibank, may declare the outstanding principal amount of
all of the Notes, together with any accrued interest thereon, to be immediately due and payable. This would have the effect of accelerating the outstanding principal amount of the Notes and triggering
a repayment

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obligation
on the part of Gladwyne Funding. Gladwyne Funding may not have proceeds sufficient to make required payments on the Notes and make any distributions to us. Any failure of Gladwyne Funding
to make distributions on the equity interests we hold could have a material adverse effect on our business, financial condition, results of operations and cash flows, and may result in our inability
to make distributions to our shareholders in amounts sufficient to maintain our qualification as a RIC, or at all.

The market value of the Notes may decline causing Strafford Funding to borrow funds from us in order
to meet certain margin posting, which would have an adverse effect on the timing of payments to us.

If at any time during the term of the Goldman facility the market value of the Notes (measured by reference to the market value of
Gladwyne Funding's portfolio of assets) declines and is less than the required margin amount under the Goldman facility, or the Margin Threshold, Strafford Funding will be required to post cash
collateral with Goldman in an amount at least equal to the amount by which the market value of the Notes at such time is less than the Margin Threshold. In such event, in order to satisfy this
requirement, Strafford Funding intends to borrow funds from us pursuant to the Revolving Credit Agreement. We may, in our sole discretion, make such loans from time to time to Strafford Funding
pursuant to the terms of the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement may not exceed $325,000 and will accrue interest at a rate equal to one-month LIBOR plus a
spread of 0.75% per annum. To the extent we loan additional funds to Strafford Funding to satisfy the Margin Threshold, such event could have a material adverse effect on our business, financial
condition, results of operations and cash flows, and may result in our inability to make distributions to our shareholders in amounts sufficient to maintain our qualification as a RIC, or at all.
There is no assurance that loans made pursuant to the Revolving Credit Agreement will be repaid.

Restructurings of investments held by Gladwyne Funding, if any, may decrease their value and reduce
the value of our equity interest in Gladwyne Funding.

As investment manager, we have broad authority to direct and supervise the investment and reinvestment of the assets held by Gladwyne
Funding, which may require from time to time the execution of amendments, waivers, modifications and other changes to the investment documentation in accordance with the related investment management
agreement we have entered into with Gladwyne Funding. During periods of economic uncertainty and recession, the necessity for amendments, waivers, modifications and restructurings of investments may
increase. Such amendments, waivers, modifications and other restructurings may change the terms of the investments and, in some cases, may result in Gladwyne Funding holding assets that do not meet
certain specified criteria for the investments made by it, and also could adversely impact the market value of such investments and thereby the market value of the Notes, which in turn could adversely
impact the ability of Strafford Funding to meet the Margin Threshold. Any amendment, waiver, modification or other restructuring that affects the market value of the assets underlying the Notes and
therefore reduces Strafford Funding's ability to meet the Margin Threshold, will make it more likely that Gladwyne Funding will need to retain assets, including cash, to increase the market value of
the assets underlying the Notes and for Strafford Funding to post cash collateral with Goldman in an amount at least equal to the amount by which the market value of the Notes is less than the Margin
Threshold. Any such use of cash by Gladwyne Funding would reduce distributions available to us or delay the timing of distributions to us.

We may not receive cash from Gladwyne Funding or Strafford Funding.

We will receive cash from Gladwyne Funding and Strafford Funding only to the extent that Gladwyne Funding or Strafford Funding,
respectively, makes distributions to us. Gladwyne Funding may make distributions to us, in turn, only to the extent permitted by the Indenture. The Indenture generally provides that distributions by
Gladwyne Funding may not be made unless all amounts then due and owing with respect to the Notes have been paid in full. If we do not receive cash from Gladwyne Funding or Strafford Funding, we may be
unable to make distributions to our shareholders in amounts sufficient to maintain our qualification as a RIC, or at all. We also could be forced to sell investments in our portfolio at less than
their fair value in order to continue making such distributions.

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We are subject to the credit risk of Goldman.

If Goldman fails to sell the Notes back to Strafford Funding at the end of the applicable period, Strafford Funding's recourse will be
limited to an unsecured claim against Goldman for the difference between the value of such Notes at such time and the amount that would be owing by Strafford Funding to Goldman had Goldman performed
under the Goldman facility. The ability of Goldman to satisfy such a claim will be subject to Goldman's creditworthiness at that time.

If we borrow money, the potential for gain or loss on amounts invested in us will be magnified and
may increase the risk of investing in us.

The use of borrowings, also known as leverage, increases the volatility of investments by magnifying the potential for gain or loss on
invested equity capital. If we use leverage to partially finance our investments, through borrowing from banks and other lenders, shareholders will experience increased risks of investing in our
common shares. If the value of our assets increases, leverage would cause the net asset value attributable to our common shares to increase more sharply than it would have had we not leveraged.
Conversely, if the value of our assets decreases, leverage would cause net asset value to decline more sharply than it otherwise would have had we not leveraged. Similarly, any increase in our income
in excess of interest payable on the borrowed funds would cause our net income to increase more than it would without the leverage, while any decrease in our income would cause net income to decline
more sharply than it would have had we not borrowed. Such a decline could negatively affect our ability to make common share distribution payments. Leverage is generally considered a speculative
investment technique. In addition, the decision to utilize leverage will increase our assets and, as a result, will increase the amount of base management fees payable to FS Advisor.

As
of December 31, 2015, we had $371,679 in borrowings available under our financing arrangements. Below is a summary of our outstanding financing arrangements as of
December 31, 2015:

Facility

Type of
Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity DateBNP Facility

Prime Brokerage

L+1.10%

$
113,737

$
186,263

September 26, 2016(1)Deutsche Bank Credit Facility

Revolving

L+1.80%

$
280,000

$
60,000

June 11, 2016Fortress Facility

Term

L+5.00%(2)

$
89,600

$
65,400

November 6, 2020Goldman Facility

Repurchase

L+2.75%

$
324,984

$
16

September 15, 2017Natixis Credit Facility

Revolving

CP+2.25%

$
92,173




July 11, 2023Wells Fargo Credit Facility

Revolving

L+2.50% to 2.75%

$
140,000

$
60,000

September 9, 2019


(1)The
BNP facility generally is terminable upon 270 days' notice by either party. As of December 31, 2015, neither Berwyn Funding nor BNP had
provided notice of its intent to terminate the facility.(2)Borrowings
under the Fortress facility accrue interest at a rate equal to LIBOR plus 5.00%, subject to a floor of 0.75%.


Illustration.The following table illustrates the effect of leverage on returns from an investment in our common shares assuming
various annual
returns, net of expenses. The calculations in the table below are hypothetical and actual returns may be higher or lower than those appearing below. The calculation assumes (i) $3,945,591 in
total average assets, (ii) a weighted average cost of funds of 3.21%, (iii) $1,412,173 in borrowings outstanding (i.e., assumes that the full $1,412,173 available to us as of
December 31, 2015 under the financing arrangements with BNP, Deutsche Bank, Fortress, Goldman, Natixis and Wells Fargo is outstanding) and (iv) $2,533,418 in average shareholders'
equity. In order to compute the "Corresponding return to shareholders," the "Assumed Return on Our Portfolio (net of expenses)" is multiplied by the assumed total average assets to obtain an assumed
return to us. From this amount, the interest expense is calculated by multiplying the assumed weighted average cost of funds times the assumed borrowings outstanding, and the product is subtracted
from the assumed return to us in order to determine the return available to shareholders. The return available to shareholders is then divided by our shareholders' equity to determine the
"Corresponding return to shareholders." Actual interest payments may be different.

Assumed Return on Our Portfolio (net of expenses)

10%

5%

0%

5%

10%Corresponding return to shareholders


17.36
%

9.58
%

1.79
%

6.00
%

13.79
%


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Similarly,
assuming (i) approximately $3,945,591 in total average assets, (ii) a weighted average cost of funds of approximately 3.21% and (iii) $1,412,173 in
borrowings outstanding (i.e., assumes that the full $1,412,173 available to us as of December 31, 2015 under the financing arrangements with BNP, Deutsche Bank, Fortress, Goldman,
Natixis and Wells Fargo is outstanding, our assets would need to yield an annual return (net of expenses) of approximately 1.15% in order to cover the annual interest payments on our outstanding
borrowings.

Changes in interest rates may affect our cost of capital and net investment income.

Because we intend to use debt to finance investments, our net investment income will depend, in part, upon the difference between the
rate at which we borrow funds and the rate at which we invest those funds. As a result, we can offer no assurance that a significant change in market interest rates will not have a material adverse
effect on our net investment income. In periods of rising interest rates when we have debt outstanding, our cost of funds will increase, which could reduce our net investment income. We expect that
our long-term fixed-rate investments will be financed primarily with equity and long-term debt. We may use interest rate risk management techniques in an effort to limit our exposure to interest rate
fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. These activities may limit our ability to participate in the benefits of
lower interest rates with respect to the hedged portfolio. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business,
financial condition and results of operations. Also, we have limited experience in entering into hedging transactions, and we will initially have to develop such expertise or arrange for such
expertise to be provided.

A
rise in the general level of interest rates can be expected to lead to higher interest rates applicable to our debt investments. Accordingly, an increase in interest rates would make
it easier for us to meet or exceed the incentive fee hurdle rate and may result in a substantial increase of the amount of incentive fees payable to FS Advisor with respect to pre-incentive fee net
investment income.

Risks Related to U.S. Federal Income Tax

We will be subject to corporate-level income tax if we are unable to qualify as a RIC under
Subchapter M of the Code or to satisfy RIC distribution requirements.

To qualify for and maintain RIC tax treatment under Subchapter M of the Code, we must meet the following annual distribution,
income source and asset diversification requirements. See "Item 1. BusinessTaxation as a RIC."



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We
must satisfy these tests on an ongoing basis in order to maintain RIC tax treatment, and may be required to make distributions to shareholders at times when it would be more
advantageous to invest cash in our existing or other investments, or when we do not have funds readily available for distribution. Compliance with the RIC tax requirements may hinder our ability to
operate solely on the basis of maximizing profits and the value of our shareholders' investments. If we fail to qualify for or maintain RIC tax treatment for any reason and are subject to corporate
income tax, the resulting corporate taxes could substantially reduce our net assets, the amount of income available for distribution and the amount of our distributions.

Some of our investments may be subject to corporate-level income tax.

We may invest in certain debt and equity investments through taxable subsidiaries and the taxable income of these taxable subsidiaries
will be subject to federal and state corporate income taxes. We may invest in certain foreign debt and equity investments which could be subject to foreign taxes (such as income tax, withholding and
value added taxes).

We may have difficulty paying our required distributions if we recognize income before or without
receiving cash representing such income.

For U.S. federal income tax purposes, we may be required to recognize taxable income in circumstances in which we do not receive a
corresponding payment in cash. For example, if we hold debt obligations that are treated under applicable tax rules as having original issue discount (such as debt instruments with PIK interest or, in
certain cases, increasing interest rates or debt obligations that were issued with warrants), we must include in income each tax year a portion of the original issue discount that accrues over the
life of the obligation, regardless of whether cash representing such income is received by us in the same tax year. We may also have to include in income other amounts that we have not yet received in
cash, such as deferred loan origination fees that are paid after origination of the loan or are paid in non-cash compensation such as warrants or stock. We anticipate that a portion of our income may
constitute original issue discounts or other income required to be included in taxable income prior to receipt of cash. Further, we may elect to amortize market discounts and include such amounts in
our taxable income in the current tax year, instead of upon disposition, as an election not to do so would limit our ability to deduct interest expenses for tax purposes.

Because
any original issue discount or other amounts accrued will be included in our investment company taxable income for the tax year of the accrual, we may be required to make a
distribution to our shareholders in order to satisfy the Annual Distribution Requirement, even though we will not have received any corresponding cash amount. As a result, we may have difficulty
meeting the Annual Distribution Requirement necessary to maintain RIC tax treatment under Subchapter M of the Code. We may have to sell some of our investments at times and/or at prices we
would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose. If we are not able to obtain cash from other sources, we may fail to
qualify for or maintain RIC tax treatment and thus become subject to corporate-level income tax.

We may be adversely affected if an MLP or other non-corporate business structure in which we invest
is treated as a corporation, rather than a partnership, for U.S. federal income tax purposes.

Our ability to meet our investment objectives will depend on the level of taxable income and distributions and dividends we receive
from the MLPs and other Energy company securities in which we may invest, a factor over which we have no control. The benefit we derive from an investment in MLPs is largely dependent on the MLPs
being treated as partnerships for U.S. federal income tax purposes. As a partnership, an MLP has no tax liability at the entity level. If, as a result of a change in current law or a change in an
MLP's business, an MLP is treated as a corporation for U.S. federal

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income
tax purposes, such MLP would be obligated to pay U.S. federal income tax on its income at the corporate tax rate. If an MLP were classified as a corporation for U.S. federal income tax
purposes, the amount of cash available for distribution would be reduced and distributions received by us would be taxed under U.S. federal income tax laws applicable to corporate distributions (as
dividend income, return of capital or capital gain). Therefore, treatment of an MLP as a corporation for U.S. federal income tax purposes would result in a reduction in the after-tax return to us,
likely causing a reduction in the value of our common shares. In addition, if we receive a Schedule K-1 from an MLP after having mailed a Form 1099-DIV to our shareholders, and our
estimates with respect to the applicable MLP are determined to have been materially incorrect, we may be required to mail an amended Form 1099-DIV to our shareholders.

We may be adversely affected if an MLP or other non-corporate business structure in which we invest
is unable to take advantage of certain tax deductions for U.S. federal income tax purposes and our income from investments in MLPs may exceed the cash received from such investments.

As a limited partner in the MLPs in which we seek to invest, we will receive our share of income, gains, losses, deductions and credits
from those MLPs. Historically, a significant portion of income from MLPs has been offset by tax deductions. As a result, this income has been significantly lower than cash distributions paid by MLPs.
We will incur a current tax liability on our share of an MLP's income and gains that is not offset by tax deductions, losses, and credits, or our net operating loss carryforwards, if any. The
percentage of an MLP's income and gains which is offset by tax deductions, losses, and credits will fluctuate over time for various reasons. A significant slowdown in acquisition activity or capital
spending by MLPs held in our portfolio could result in a reduction of accelerated depreciation generated by new acquisitions, which may result in an increase in our net ordinary income that we are
required to distribute to shareholders to maintain our status as a RIC and to eliminate our liability for U.S. federal income tax. If our income from our investments in MLPs exceeds the cash
distributions received from such investments, we may need to obtain cash from other sources in order to satisfy the Annual Distribution Requirement. If we are unable to obtain cash from other sources,
we may fail to qualify for or maintain RIC tax treatment and become subject to corporate-level federal income tax. We may also recognize gain in excess of cash proceeds upon the sale of an interest in
an MLP. Any such gain may need to be distributed or deemed distributed in order to avoid liability for corporate-level federal income taxes on such gain.

Our portfolio investments may present special tax issues.

Investments in below-investment grade debt instruments and certain equity securities may present special tax issues for us. U.S.
federal income tax rules are not entirely clear about issues such as when we may cease to accrue interest, original issue discount or market discount, when and to what extent deductions may be taken
for bad debts or worthless debt in equity securities, how payments received on obligations in default should be allocated between principal and interest income, as well as whether exchanges of debt
instruments in a bankruptcy or workout context are taxable. Such matters could cause us to recognize taxable income for U.S. federal income tax purposes, even in the absence of cash or economic gain,
and require us to make taxable distributions to
our shareholders to maintain our RIC status or preclude the imposition of either U.S. federal corporate income or excise taxation. Additionally, because such taxable income may not be matched by
corresponding cash received by us, we may be required to borrow money or dispose of other investments to be able to make distributions to our shareholders. These and other issues will be considered by
us, to the extent determined necessary, in order that we minimize the level of any U.S. federal income or excise tax that we would otherwise incur. See "Item 1.
BusinessTaxation as a RIC."

Legislative or regulatory tax changes could adversely affect investors.

At any time, the federal income tax laws governing RICs or the administrative interpretations of those laws or regulations may be
amended. Any of those new laws, regulations or interpretations may take effect retroactively and could adversely affect the taxation of us or our shareholders. Therefore, changes in tax laws,
regulations or administrative interpretations or any amendments thereto could diminish the value of an investment in our shares or the value or the resale potential of our investments.

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Item 1B.    Unresolved Staff Comments.

Not applicable.

Item 2.    Properties.

We do not own any real estate or other physical properties materially important to our operation. Our headquarters are located at 201
Rouse Boulevard, Philadelphia, Pennsylvania, 19112. We believe that our office facilities are suitable and adequate for our business as it is presently conducted.

Item 3.    Legal Proceedings.

We are not currently subject to any material legal proceedings, and, to our knowledge, no material legal proceedings are threatened
against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our
portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material effect upon our financial condition
or results of operations.

Item 4.    Mine Safety Disclosures.

Not applicable.

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PART II

Many of the amounts and percentages presented in Part II have been rounded for convenience of presentation and all dollar
amounts, excluding per share amounts, are presented in thousands unless otherwise noted.

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

There is currently no market for our common shares, and we do not expect that a market for our common shares will develop in the
foreseeable future. None of our common shares have been authorized for issuance under any equity compensation plans. Under Delaware law, our shareholders generally will not be personally liable for
our debts or obligations.

We
are offering our common shares on a continuous basis at a price of $6.95 per share as of March 1, 2016; however, to the extent that our net asset value per share increases, we
will sell at a price necessary to ensure that common shares are not sold at a price per share, after deducting selling commissions and dealer manager fees, that is below net asset value per share. In
connection with each weekly closing on the sale of common shares in our continuous public offering, our board of trustees or a committee thereof is required, within 48 hours of the time that
each closing and sale is made, to make the determination that we are not selling common shares at a price per share which, after deducting selling commissions and dealer manager fees, is below our
then-current net asset value per share.

In
the event of a material decline in our net asset value per share, which we consider to be a 2.5% decrease below our then-current net offering price, we will reduce our offering price
in order to establish a new net offering price that is not more than 2.5% above our net asset value per share.

Set
forth below is a chart describing the classes of our securities outstanding as of March 1, 2016:

(1)

(2)

(3)

(4)Title of Class

Amount
Authorized

Amount Held by Us or
for Our Account

Amount Outstanding
Exclusive of Amount
Under Column (3)Common Shares


450,000,000





379,873,173


As
of March 1, 2016, we had 87,560 record holders of our common shares.

Share Repurchase Program

To provide our shareholders with limited liquidity, we intend to conduct quarterly tender offers pursuant to our share repurchase
program. Our board of trustees will consider the following factors, among others, in making its determination regarding whether to cause us to offer to repurchase common shares and under what
terms:



We
currently intend to limit the number of common shares to be repurchased during any calendar year to the number of common shares we can repurchase with the proceeds we receive from the
issuance of our common shares under our distribution reinvestment plan. Because our distribution reinvestment plan is structured as an "opt in" program that requires shareholders to affirmatively
elect to have their cash distributions reinvested in additional common shares, such requirement may

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contribute
to the illiquidity of our common shares. At the discretion of our board of trustees, we may also use cash on hand, cash available from borrowings and cash from the liquidation of securities
investments as of the end of the applicable period to repurchase common shares. In addition, we will limit the number of common shares to be repurchased in any calendar year to 10% of the weighted
average number of common shares outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of common shares that we offer to repurchase may be less in light of the
limitations noted above. We intend to offer to repurchase common shares on each date of repurchase at a price equal to 90% of the offering price in effect on the date of repurchase. FS Advisor will
not receive any separate fees in connection with the repurchase of shares under our share repurchase program. Our board of trustees may amend, suspend, or terminate the share repurchase program at any
time, upon 30 days' notice.

The
table below provides information concerning our repurchases of common shares during the quarter ended December 31, 2015 pursuant to our share repurchase program.

Period

Total
Number of
Shares
Purchased

Average
Price Paid
per Share

Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs

Maximum Number of
Shares that May Yet
Be Purchased
Under the
Plans or ProgramsOctober 1 to October 31, 2015


2,711,088

$
7.875


2,711,088


(1
)November 1 to November 30, 2015











December 1 to December 31, 2015











​
​
​
​
​
​
​
​
​
​
​
​
​
​Total


2,711,088

$
7.875


2,711,088


(1
)​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


(1)A
description of the maximum number of common shares that may be purchased under our share repurchase program is included in the narrative preceding this
table.


Distributions

We declared our first distribution on July 21, 2011. Subject to our board of trustees' discretion and applicable legal
restrictions, we intend to authorize and declare ordinary cash distributions on a weekly basis and pay such distributions on a monthly basis. We will calculate each shareholder's specific distribution
amount for the period using record and declaration dates and each shareholder's distributions will begin to accrue on the date we accept such shareholder's subscription for our common shares. From
time to time, we may also pay special interim distributions in the form of cash or common shares at the discretion of our board of trustees. For example, our board of trustees may periodically declare
share distributions in order to reduce our net asset value per share if necessary to ensure that we do not sell common shares at a price per share, after deducting selling commissions and dealer
manager fees, that is below our net asset value per share.

The
following table reflects the cash distributions per share that we have declared and paid on our common shares during the years ended December 31, 2015, 2014 and 2013:

DistributionFor the Year Ended December 31,

Per Share

Amount2013

$
0.6616

$
77,8152014

$
0.6882

$
163,0432015

$
0.7085

$
238,833


On
November 11, 2015 and March 9, 2016, our board of trustees declared regular weekly cash distributions for January 2016 through March 2016 and April 2016 through June
2016, respectively. These distributions have been or will be paid monthly to shareholders of record as of weekly record dates previously determined by our board of trustees in the amount of $0.013625
per share. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees. We have not established
limits on the amount of funds we may use from available sources to make distributions.

For
additional information regarding our distributions, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsRIC Tax
Treatment and Distributions."

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Item 6.    Selected Financial Data

The following selected consolidated financial data for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 is derived
from our consolidated financial statements which have been audited by RSM US LLP, our independent registered public accounting firm. The data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and notes thereto included elsewhere in this annual report on
Form 10-K.

Year Ended December 31,2015

2014

2013

2012

2011(1)Statements of operations data:Investment income

$
379,653

$
289,970

$
132,002

$
29,965

$
1,394Operating expensesTotal expenses


152,058


115,081


65,198


19,803


1,466Less: Expense reimbursement from sponsor











(1,432
)

(725
)Add: Expense recoupment to sponsor











1,432


​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net expenses


152,058


115,081


65,198


19,803


741​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net investment income (loss)


227,595


174,889


66,804


10,162


653Total net realized and unrealized gain (loss) on investments


(738,894
)

(344,398
)

41,566


32,101


314​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations

$
(511,299
)
$
(169,509
)
$
108,370

$
42,263

$
967​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Per share data:(2)Net investment income (loss)basic and diluted(3)

$
0.67

$
0.74

$
0.58

$
0.33

$
0.16​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operationsbasic and diluted(3)

$
(1.51
)
$
(0.72
)
$
0.94

$
1.38

$
0.23​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Distributions declared(4)

$
0.71

$
0.69

$
0.66

$
0.63

$
0.28​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Balance sheet data:Total assets

$
3,499,419

$
3,714,351

$
2,428,659

$
829,494

$
112,732​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Credit facilities and repurchase agreement payable

$
1,040,494

$
1,090,413

$
624,174

$
185,232

$
20,518​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total net assets

$
2,417,861

$
2,565,721

$
1,676,237

$
602,889

$
67,685​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Other data:Total return(5)


(15.87
)%

(4.14
)%

10.49
%

14.07
%

1.23
%Number of portfolio company investments at period end


90


125


104


64


21Total portfolio investments for the period

$
1,195,947

$
2,437,689

$
2,295,602

$
826,011

$
95,199Proceeds from sales and prepayments of investments

$
800,534

$
1,044,311

$
735,673

$
244,192

$
3,564


(1)We
formally commenced investment operations on July 18, 2011. Prior to such date, we had no operations except for matters relating to our
organization.(2)The
share information utilized to determine per share data for the years ended December 31, 2012 and 2011 has been retroactively adjusted to reflect
the share distribution declared in February 2012.(3)The
per share data was derived by using the weighted average shares outstanding during the applicable period.


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(4)The
per share data for distributions reflects the actual amount of distributions paid per share (as adjusted for share distributions) during the applicable
period.(5)The
total return for each year presented was calculated by taking the net asset value per share as of the end of the applicable year, adding the cash
distributions per share which were declared during the applicable calendar year and dividing the total by the net asset value per share at the beginning of the applicable year. The 2011 total return
is based on an initial investment at $8.91 per share, which represents the initial offering price per share, net of sales commissions and dealer manager fees, after taking into account the share
distribution to shareholders described in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsRIC Tax Treatment and Distributions." The
total return does not consider the effect of the sales load from the sale of our common shares. The total return includes the effect of the issuance of common shares at a net offering price that is
greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of our
future total return, which may be greater or less than the returns shown in the table due to a number of factors, including our ability or inability to make investments in companies that meet our
investment criteria, the interest rates payable on the debt securities we acquire, the level of our expenses, variations in and the timing of the recognition of realized and unrealized gains or
losses, the degree to which we encounter competition in our markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being
indicative of performance in future periods. The total return calculations set forth above represent the total return on our investment portfolio during the applicable period and do not represent an
actual return to shareholders.


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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
                              (in thousands, except share and per share amounts)

The following discussion should be read in conjunction with our consolidated financial statements and the related notes thereto
included elsewhere in this annual report on Form 10-K.

Forward-Looking Statements

Some of the statements in this annual report on Form 10-K constitute forward-looking statements because they relate to future
events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K may include statements as
to:



In
addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The
forward-looking statements contained in this annual report on Form 10-K involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the
forward-looking statements for any reason, including the factors set forth in "Item 1A. Risk Factors." Other factors that could cause actual results to differ materially
include:



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We
have based the forward-looking statements included in this annual report on Form 10-K on information available to us on the date of this annual report on Form 10-K.
Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise.
Shareholders are advised to consult any additional disclosures that we may make directly to shareholders or through reports that we may file in the future with the SEC, including annual reports on
Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this annual report on Form 10-K are
excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.

Overview

We were formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced
investment operations on July 18, 2011 upon raising gross proceeds in excess of $2,500 from sales of our common shares in our continuous public offering to persons who were not affiliated with
us or FS Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for
U.S. federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. Prior to satisfying the minimum offering requirement, we had no operations except for
matters relating to our organization.

Our
investment activities are managed by FS Advisor and supervised by our board of trustees, a majority of whom are independent. Under our investment advisory and administrative services
agreement, we have agreed to pay FS Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FS Advisor has engaged GSO to act as our
investment sub-adviser. GSO assists FS Advisor in identifying investment opportunities and makes investment recommendations for approval by FS Advisor according to guidelines set by FS Advisor.

Our
investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies. This investment policy may not be changed without at
least 60 days' prior notice to holders of our common shares of any such change.

Our
investment objective is to generate current income and long-term capital appreciation. We have identified and intend to focus on the following investment categories, which we believe
will allow us to generate an attractive total return with an acceptable level of risk.

Direct Originations:We intend to leverage our relationship with GSO and its global sourcing and origination platform including its
industry relationships, to directly source investment opportunities. Such investments are originated or structured for us or made by us and are not generally available to the broader market. These
investments may include both debt and equity components, although we do not expect to make equity investments (other than income-oriented equity investments) independent of having an existing credit
relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

Opportunistic:We seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market
price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general
dislocations in the markets, a misunderstanding by the market of a particular company or an Energy industry sub-sector being out of favor with the broader investment community. We seek to allocate
capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment. Such opportunities may
include both event driven investments and anchor orders.

In
the case of event driven investments, we intend to take advantage of dislocations that arise in the markets due to an impending event and where the market's apparent expectation of
value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or
legal ruling, or a material contract expiration, any of which may significantly improve or impair a company's financial position. Compared to other investment strategies, event driven investing
depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying

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macroeconomic
fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market
environments.

We
may also invest in certain opportunities that are originated and then syndicated by a commercial or investment bank but where we provide a capital commitment significantly above the
average syndicate participant, i.e., an anchor order. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our
significant capital commitment. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, Energy
industry sub-sector or financial sponsor, and the broader investment experiences of FS Advisor and GSO.

Broadly Syndicated/Other:Although our primary focus is to invest in directly originated transactions and opportunistic investments, in
certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our directly originated investments
and provide a complement to our less liquid strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are
able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.

Our
portfolio is comprised primarily of income-oriented securities, which refers to debt securities and income-oriented preferred and common equity interests, of privately-held Energy
companies within the United States. We intend to weight our portfolio towards senior and subordinated debt. In addition to investments purchased from dealers or other investors in the secondary
market, we expect to invest in primary market transactions and directly originated investments as this will provide us with the ability to tailor investments to best match a project's or company's
needs with our investment objectives. Our portfolio may also be comprised of select income-oriented preferred or common equity interests, which
refers to equity interests that pay consistent, high-yielding dividends, that we believe will produce both current income and long-term capital appreciation. These income-oriented preferred or common
equity interests may include interests in MLPs. In connection with certain of our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration.

Revenues

The principal measure of our financial performance is net increase or decrease in net assets resulting from operations, which includes
net investment income, net realized gain or loss on investments, net realized gain or loss on total return swap, net realized gain or loss on foreign currency, net change in unrealized appreciation or
depreciation on investments; net change in unrealized appreciation or depreciation on total return swap and net change in unrealized gain or loss on foreign currency. Net investment income is the
difference between our income from interest, dividends, fees and other investment income and our operating and other expenses. Net realized gain or loss on investments is the difference between the
proceeds received from dispositions of portfolio investments and their amortized cost, including the respective realized gain or loss on foreign currency for those foreign denominated investment
transactions. Net realized gain or loss on total return swap is the net monthly settlement payments received on our total return swap, or TRS. Net realized gain or loss on foreign currency is the
portion of realized gain or loss attributable to foreign currency fluctuations. Net change in unrealized appreciation or depreciation on investments is the net change in the fair value of our
investment portfolio, including the respective unrealized gain or loss on foreign currency for those foreign denominated investments. Net change in unrealized appreciation or depreciation on total
return swap is the net change in the fair value of the TRS. Net change in unrealized gain or loss on foreign currency is the net change in the value of receivables or accruals due to the impact of
foreign currency fluctuations. In future periods, we do not expect our revenues to include net realized gain or loss on total return swap or net unrealized appreciation or depreciation on total return
swap as a result of the termination of our TRS on May 24, 2013. We may, however, elect to utilize a total return swap in the future.

We
principally generate revenues in the form of interest income on the debt investments we hold. We also generate revenues in the form of dividends and other distributions on the equity
or other securities we may hold. In addition, we may generate revenues in the form of non-recurring

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commitment,
closing, origination, structuring or diligence fees, fees for providing managerial assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in
connection with our investments will be recognized as earned.

Expenses

Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative
services agreement, interest expense from financing arrangements and other expenses necessary for our operations. Our investment advisory fee compensates FS Advisor for its work in identifying,
evaluating, negotiating, executing, monitoring and servicing our investments. FS Advisor is responsible for compensating our investment sub-adviser.

We
reimburse FS Advisor for expenses necessary to perform services related to our administration and operations, including FS Advisor's allocable portion of the compensation and related
expenses of certain personnel of Franklin Square Holdings providing administrative services to us on behalf of FS Advisor. Such services include the provision of general ledger accounting, fund
accounting, legal services, investor relations and other administrative services. FS Advisor also performs, or oversees the performance of, our corporate operations and required administrative
services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, FS Advisor
assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing the
payment of our expenses and the performance of administrative and professional services rendered to us by others.

The
amount of the reimbursement payable to FS Advisor is set at the lesser of (1) FS Advisor's actual costs incurred in providing such services and (2) the amount that we
estimate we would be required to pay alternative service providers for comparable services in the same geographic location. FS Advisor is required to allocate the cost of such services to us based on
factors such as assets, revenues, time allocations and/or other reasonable metrics. Our board of trustees reviews the methodology employed in determining how the expenses are allocated to us and the
proposed allocation of the administrative expenses among us and certain affiliates of FS Advisor. Our board of trustees then assesses the reasonableness of such reimbursements for expenses allocated
to us based on the breadth, depth and quality of such services as compared to the estimated cost to us of obtaining similar services from third-party service providers known to be available. In
addition, our board of trustees considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, our board of
trustees, among other things, compares the total amount paid to FS Advisor for such services as a percentage of our net assets to the same ratio as reported by other comparable BDCs. We do not
reimburse FS Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of
FS Advisor.

We
bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:



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In
addition, we have contracted with State Street to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information
for review by FS Advisor, preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with
respect to RIC compliance.

Expense Reimbursement

Pursuant to an expense support and conditional reimbursement agreement, amended and restated as of May 16, 2013, or the expense
reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to shareholders will be paid
from our offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that
are treated for tax purposes as a return of capital, a portion of our distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use
such dividends or other distribution proceeds to fund our distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions
to shareholders that
represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.

Under
the expense reimbursement agreement, Franklin Square Holdings will reimburse us quarterly for expenses in an amount equal to the difference between our cumulative distributions
paid to our shareholders in each quarter, less the sum of our net investment company taxable income, net capital gains and dividends and other distributions paid to us on account of preferred and
common equity investments in portfolio companies (to the extent such amounts are not included in net investment company taxable income or net capital gains) in each quarter.

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Pursuant
to the expense reimbursement agreement, we have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such
agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment
company taxable income, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent
not included in net investment company taxable income or net capital gains) exceeds the distributions paid by us to our shareholders; provided, however, that (i) we will only reimburse Franklin
Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of such
reimbursement (together with any other reimbursement paid during such fiscal year) does not cause "other operating expenses" (as defined below) (on an annualized basis and net of any expense support
payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to our common shares for the fiscal year-to-date period after taking
such payments into account and (B) the percentage of our average net assets attributable to our common shares represented by "other operating expenses" during the fiscal year in which such
expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment
from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the
aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which
Franklin Square Holdings made the expense support payment to which such reimbursement relates. We are not obligated to pay interest on the payments we receive from Franklin Square Holdings. "Other
operating expenses" means our total "operating expenses" (as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest
expense, brokerage commissions and extraordinary expenses. "Operating expenses" means all operating costs and expenses incurred, as determined in accordance with U.S. generally accepted accounting
principles, or GAAP for investment companies.

We
or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be
determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts accrued
thereunder as of the date of termination. Similarly, our conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement shall survive the
termination of such agreement by either party.

Franklin
Square Holdings is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that
the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters.

As
of December 31, 2015 and 2014, we had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed to us by Franklin
Square Holdings may become subject to repayment in the future. During the year ended December 31, 2013, $1,083 of expense recoupments was paid to Franklin Square Holdings. As of
December 31, 2015 and 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future.

Portfolio Investment Activity for the Years Ended December 31, 2015 and 2014

During the year ended December 31, 2015, we made investments in portfolio companies totaling $1,195,947. During the same period,
we sold investments for proceeds of $590,726 and received principal repayments of $209,808. As of December 31, 2015, our investment portfolio, with a total fair value of $3,069,498 (30% in
first lien senior secured loans, 30% in second lien senior secured loans, 11% in senior secured bonds, 19% in subordinated debt and 10% in equity/other), consisted of interests in 90 portfolio
companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA, of approximately $244.8 million. As of December 31, 2015, the investments in
our portfolio were purchased at a weighted average price of 98.4% of par value and our

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estimated
gross annual portfolio yield (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), prior to
leverage, was 9.3% based upon the amortized cost of our investments. The estimated gross annual portfolio yield does not represent an actual investment return to shareholders.

Based
on our regular weekly cash distribution rate of $0.013625 per share as of December 31, 2015 and our public offering price of $7.50 per share as of such date, the annualized
distribution rate to shareholders as of December 31, 2015 was 9.45%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income,
realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than
the rates set forth above. See "Item 1A. Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements.

During
the year ended December 31, 2014, we made investments in portfolio companies totaling $2,437,689. During the same period, we sold investments for proceeds of $462,170 and
received principal repayments of $582,141. As of December 31, 2014, our investment portfolio, with a total fair value of $3,375,177 (25% in first lien senior secured loans, 29% in second lien
senior secured loans, 9% in senior secured bonds, 28% in subordinated debt and 9% in equity/other), consisted of interests in 125 portfolio companies. The portfolio companies that comprised our
portfolio as of such date had an average annual EBITDA of approximately $233.3 million. As of December 31, 2014, the investments in our portfolio were purchased at a weighted average
price of 99.1% of par value and our estimated gross annual portfolio yield, prior to leverage, was 8.8% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to
leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2014. The estimated gross annual portfolio
yield does not represent an actual investment return to shareholders.

Based
on our regular weekly cash distribution rate of $0.013625 per share as of December 31, 2014 and our public offering price of $9.80 per share as of such date, the annualized
distribution rate to shareholders as of December 31, 2014 was 7.23%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income,
realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than
the rates set forth above. See "Item 1A. Risk Factors" for a discussion of the uncertainties, risks and assumptions associated with these statements.

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the years ended
December 31, 2015 and 2014:

For the Year EndedNet Investment Activity

December 31,
2015

December 31,
2014Purchases

$
1,195,947

$
2,437,689Sales and Redemptions


(800,534
)

(1,044,311
)​
​
​
​
​
​
​
​Net Portfolio Activity

$
395,413

$
1,393,378​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​




For the Year Ended
December 31, 2015

For the Year Ended
December 31, 2014New Investment Activity by Asset Class

Purchases

Percentage

Purchases

PercentageSenior Secured LoansFirst Lien

$
439,617


37
%
$
579,698


24
%Senior Secured LoansSecond Lien


261,831


22
%

669,846


27
%Senior Secured Bonds


196,821


16
%

314,897


13
%Subordinated Debt


258,418


22
%

706,530


29
%Equity/Other


39,260


3
%

166,718


7
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
1,195,947


100
%
$
2,437,689


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


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The
following table summarizes the composition of our investment portfolio at cost and fair value as of December 31, 2015 and 2014:

December 31, 2015

December 31, 2014Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured Loans
First Lien

$
1,055,070

$
929,790


30
%
$
881,945

$
854,825


25
%Senior Secured Loans
Second Lien


1,213,716


923,402


30
%

1,059,981


989,972


29
%Senior Secured Bonds


445,475


323,948


11
%

324,963


285,485


9
%Subordinated Debt


860,872


579,740


19
%

1,124,512


940,313


28
%Equity/Other


319,274


312,618


10
%

271,649


304,582


9
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
3,894,407

$
3,069,498


100
%
$
3,663,050

$
3,375,177


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


(1)Amortized
cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.


The
following table presents certain selected information regarding the composition of our investment portfolio as of December 31, 2015 and 2014:

December 31,
2015

December 31,
2014Number of Portfolio Companies


90


125% Variable Rate (based on fair value)


50.9
%

51.8
%% Fixed Rate (based on fair value)


38.9
%

39.2
%% Income Producing Equity or Other Investments (based on fair value)


5.9
%

4.0
%% Non-Income Producing Equity or Other Investments (based on fair value)


4.3
%

5.0
%Average Annual EBITDA of Portfolio Companies

$
244,789

$
233,303Weighted Average Purchase Price of Investments (as a % of par value)


98.4
%

99.1
%% of Investments on Non-Accrual (based on fair value)


0.1
%

Gross Portfolio Yield Prior to Leverage (based on amortized cost)


9.3
%

8.8
%Gross Portfolio Yield Prior to Leverage (based on amortized cost)Excluding Non-Income Producing Assets


9.8
%

9.1
%


Direct Originations

The following tables present certain selected information regarding our direct originations for the three months and year ended
December 31, 2015:

Net Direct Originations

For the
Three Months
Ended
December 31,
2015

For the Year
Ended
December 31,
2015Total Commitments (including Unfunded Commitments)

$
29,722

$
555,867Exited Investments (including partial paydowns)


(12,250
)

(27,257
)​
​
​
​
​
​
​
​Net Direct Originations

$
17,472

$
528,610​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​




For the Three Months
Ended December 31, 2015

For the Year Ended
December 31, 2015New Direct Originations by Asset Class
(including Unfunded Commitments)

Commitment
Amount

Percentage

Commitment
Amount

PercentageSenior Secured LoansFirst Lien

$
434


1
%
$
186,513


34
%Senior Secured LoansSecond Lien








252,532


45
%Senior Secured Bonds








62,400


11
%Subordinated Debt








6,997


1
%Equity/Other


29,288


99
%

47,425


9
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
29,722


100
%
$
555,867


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


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For the
Three Months
Ended
December 31,
2015

For the Year
Ended
December 31,
2015Average New Direct Origination Commitment Amount

$
14,861

$
34,742Weighted Average Maturity for New Direct Originations


5/31/20


6/12/20Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during Period


6.2
%

10.4
%Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations Funded during PeriodExcluding Non-Income Producing
Assets


10.9
%

10.8
%Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period


12.2
%

10.7
%


The
following table presents certain selected information regarding our direct originations as of December 31, 2015 and 2014:

Characteristics of All Direct Originations held in Portfolio

December 31,
2015

December 31,
2014Number of Portfolio Companies


27


22Average Annual EBITDA of Portfolio Companies

$
82,111

$
29,450Average Leverage Through Tranche of Portfolio CompaniesExcluding Equity/Other Securities


4.8x


4.0x% of Investments on Non-Accrual (based on fair value)


0.1
%

Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations


9.9
%

9.1
%Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct OriginationsExcluding Non-Income Producing Assets


10.9
%

10.1
%


Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the
total portfolio assets in such strategies as of December 31, 2015 and 2014:

December 31, 2015

December 31, 2014Portfolio Composition by Strategy

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioDirect Originations

$
1,975,269


64
%
$
1,371,063


41
%Opportunistic


567,149


19
%

892,154


26
%Broadly Syndicated/Other


527,080


17
%

1,111,960


33
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
3,069,498


100
%
$
3,375,177


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


The
table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of December 31,
2015 and 2014:

December 31, 2015

December 31, 2014Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
1,689,705


55
%
$
1,815,456


54
%Midstream


215,906


7
%

233,836


7
%Downstream


12,195


0
%

12,494


0
%Power


519,593


17
%

326,773


10
%Service & Equipment


632,099


21
%

986,618


29
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
3,069,498


100
%
$
3,375,177


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


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As of December 31, 2015, except for FourPoint Energy, LLC, in which we held a senior secured bond and two equity/other investments, Sunnova
Holdings, LLC, in which we held one equity/other investment and its wholly-owned subsidiary Sunnova Asset Portfolio 5 Holdings, LLC, in which we held one first lien senior secured loan,
we were not an "affiliated person" of any of our portfolio companies, as defined in the 1940 Act. As of December 31, 2015, except for Sunnova Holdings, LLC, in which we held one
equity/other investment and its wholly-owned subsidiary Sunnova Asset Portfolio 5 Holdings, LLC, in which we held one first lien senior secured loan, we did not "control" any of our portfolio
companies, as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to "control" a portfolio company if we owned 25% or more of its voting securities or we had the power to
exercise control over the management or policies of a portfolio company, and would be an "affiliated person" of a portfolio company if we owned 5% or more of its voting securities.

Our
investment portfolio may contain loans or bonds that are in the form of lines of credit or revolving credit facilities, or other investments, which may require us to provide funding
when requested by portfolio companies in accordance with the terms of the underlying agreements. As of December 31, 2015, we had four senior secured loan investments with aggregate unfunded
commitments of $67,365, one senior secured bond investment with an unfunded commitment of $18,470 and five equity/other investments with aggregate unfunded commitments of $33,890. As of
December 31, 2015, these unfunded equity/other investments were Altus Power America Holdings, LLC, BL Sand Hills Unit, L.P.,
net profits interest, BL Sand Hills Unit, L.P., overriding royalty interest, Sunnova Holdings, LLC and Synergy Offshore LLC. As of December 31, 2014, we had four senior
secured loan investments with aggregate unfunded commitments of $218,120, one senior secured bond investment with an unfunded commitment of $86,192 and three equity/other investments with aggregate
unfunded commitments of $26,109. As of December 31, 2014, these unfunded equity/other investments were Altus Power America Holdings, LLC, BL Sand Hills Unit, L.P., net profits
interest and BL Sand Hills Unit, L.P., overriding royalty interest. We maintain sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the
need arise.

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FS Advisor uses an investment rating system to characterize and monitor
the expected level of returns on each investment in our portfolio. FS Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each
investment rating:

Investment
Rating

Summary Description1

Investment exceeding expectations and/or capital gain expected.2

Performing investment generally executing in accordance with the portfolio company's business planfull return of principal and
interest expected.3

Performing investment requiring closer monitoring.4

Underperforming investmentsome loss of interest or dividend possible, but still expecting a positive return on investment.5

Underperforming investment with expected loss of interest and some principal.


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The
following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of December 31, 2015 and 2014:

December 31, 2015

December 31, 2014Investment Rating

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of Portfolio1

$
159,204


5
%
$
119,174


4
%2


1,340,637


44
%

2,630,119


78
%3


1,288,144


42
%

586,116


17
%4


203,084


7
%

39,768


1
%5


78,429


2
%




​
​
​
​
​
​
​
​
​
​
​
​
​
​$
3,069,498


100
%
$
3,375,177


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


The
amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new
investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values. As of
December 31, 2015, 42% of our portfolio, based on fair value, consisted of investments with an investment rating of three, 7% of our portfolio, based on fair value, consisted of investments
with an investment rating of four and 2% of our portfolio, based on fair value, consisted of investments with an investment rating of five. The increase in the amount of our investments rated a three
or four and the investment now rated a five is due primarily to the pronounced decline in the price of oil and the increased volatility seen specifically in the energy credit markets during the year
ended December 31, 2015.

Results of Operations

Comparison of the Years Ended December 31, 2015 and 2014

The performance of our portfolio during the year ended December 31, 2015 was primarily driven by a widening of credit spreads in
the high yield energy market over the last seven months of 2015. As of May 31, 2015, high yield credit spreads had tightened from the beginning of the year; however, in June, spreads reversed
course due in large part to the dramatic decline in oil and natural gas prices. For example, the "spread-to-worst" of the Bank of America Merrill Lynch High Yield Energy Index, which measures the
difference from the worst performing security to the best, increased from 756 basis points as of December 31, 2014 to 1,405 basis points as of December 31, 2015, which was the highest
annual year-end spread on record. Overall, the Bank of America Merrill Lynch High Yield Energy Index ended 2015 with a yield-to-worst of 15.9%, a year-end historic high.

With
the decline in oil and gas prices resulting in a re-pricing of risk, the high yield energy market changed dramatically during the course of 2015. Exploration and production, or E&P,
and oil field service companies were especially impacted during the year. The average par weighted price of bonds issued by E&P and oil field service companies decreased from approximately $83 and
$83, respectively, to begin the year, to approximately $53 and $57, respectively, on December 31, 2015. This broad sector write-down impacted our reported unrealized depreciation for the year
ended December 31, 2015.

As
a result of oil and natural gas price volatility, high yield energy credit new issuance declined year over year after a robust start to 2015. According to JP Morgan, through May 2015,
energy credit issuance (USD, global) totaled approximately $25 billion, or 14.9% of total new credit issue volume. Given the volatility and uncertainty in the market, we deployed less capital
in 2015 than in 2014.

Revenues

We generated investment income of $379,653 and $289,970 for the years ended December 31, 2015 and 2014, respectively, in the
form of interest and fees earned on senior secured loans (first and second lien), senior secured bonds and subordinated debt investments in our portfolio and dividends and other distributions earned
on equity/other investments. Such revenues represent $343,792 and $264,570 of cash income earned as well as $35,861 and $25,400 in non-cash portions relating to accretion of discount, PIK interest and
accrual of limited partnership income for the years ended December 31,

71

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2015
and 2014, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized.

The
level of investment income we receive is directly related to the balance of income-producing investments multiplied by the weighted average yield of our investments. We expect the
dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases and the proportion of directly originated investments in our portfolio
increases.

During
the years ended December 31, 2015 and 2014, we generated $31,682 and $31,889 of fee income, which represented 8.3% and 11.0%, respectively of total investment income. Such
fee income is transaction based, and typically consists of amendment and consent fees, prepayment fees, structuring fees, upfront fees and other non-recurring fees. As such, future fee income is
generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.

Expenses

Our total expenses were $152,058 and $115,081 for the years ended December 31, 2015 and 2014, respectively. Our expenses include
base management fees attributed to FS Advisor of $75,997 and $61,970 for the years ended December 31, 2015 and 2014, respectively. Our expenses also include administrative services expenses
attributed to FS Advisor of $4,056 and $3,831 for the years ended December 31, 2015 and 2014, respectively.

FS
Advisor is eligible to receive incentive fees based on our performance. During the years ended December 31, 2015 and 2014, we accrued a subordinated incentive fee on income of
$31,016 and $32,072, respectively. During the year ended December 31, 2015, we did not accrue any capital gains incentive fees. During the year ended December 31, 2014, we reversed
$10,993 of capital gains incentive fees previously accrued based on the performance of our portfolio, which was primarily driven by increased volatility and a widening of credit spreads in the energy
high yield and leveraged loan markets over the six month period ended December 31, 2014.

We
recorded interest expense of $30,703 and $19,069 for the years ended December 31, 2015 and 2014, respectively, in connection with our financing arrangements. For the years
ended December 31, 2015 and 2014, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $1,405 and $1,211,
respectively, and fees and expenses incurred with our share transfer agent totaled $2,757 and $2,541, respectively. Fees for our board of trustees were $970 and $853 for the years ended
December 31, 2015 and 2014, respectively.

Our
other general and administrative expenses totaled $4,841 and $3,615 for the years ended December 31, 2015 and 2014, respectively, and consisted of the following:

Year Ended
December 31,2015

2014Expenses associated with our independent audit and related fees

$
552

$
399Compensation of our chief compliance officer(1)


10


80Legal fees


686


882Printing fees


1,717


469Insurance expense


316


221Other


1,560


1,564​
​
​
​
​
​
​
​Total

$
4,841

$
3,615​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


(1)On
April 1, 2015, James F. Volk was appointed as our chief compliance officer. Prior to that date, we had contracted with Vigilant
Compliance, LLC to provide the services of Salvatore Faia as our chief compliance officer. Mr. Volk is employed by Franklin Square Holdings and will not receive any direct compensation
from us in this capacity.


During
the years ended December 31, 2015 and 2014, we accrued $313 and $912, respectively, for income and excise taxes.

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During
the years ended December 31, 2015 and 2014, the ratio of our total expenses to our average net assets was 5.55% and 5.07%, respectively. During the years ended
December 31, 2015 and 2014, our ratio of total expenses to average net assets included $30,703 and $19,069, respectively, related to interest expense, $31,016 and $21,079, respectively, related
to accruals for (or reversals of previously accrued) incentive fees and $313 and $912, respectively, related to accruals for income and excise taxes. Without such expenses, our ratio of expenses to
average net assets would have been 3.29% and 3.26% for the years ended December 31, 2015 and 2014, respectively. Incentive fees and interest expense, among other things, may increase or
decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.

Net Investment Income

Our net investment income totaled $227,595 ($0.67 per share) and $174,889 ($0.74 per share) for the years ended December 31,
2015 and 2014, respectively. The decrease in net investment income on a per share basis can be attributed primarily to an increase in accruals for incentive fees and interest expense during the
period.

Net Realized Gains or Losses

We sold investments and received principal repayments of $590,726 and $209,808, respectively, during the year ended December 31,
2015, from which we realized a net loss of $201,559. During the year ended December 31, 2015, we realized a net loss of $210 from settlements on foreign currency. We sold investments and
received principal repayments of $462,170 and $582,141, respectively, during the year ended December 31, 2014, from which we realized a net loss of $5,682. During the year ended
December 31, 2014, we realized a net loss of $636 from settlements on foreign currency.

Net Change in Unrealized Appreciation (Depreciation) on Investments and Unrealized Gain (Loss) on Foreign Currency

For the years ended December 31, 2015 and 2014, the net change in unrealized appreciation (depreciation) on investments totaled
$(537,036) and $(338,120), respectively, and the net change in unrealized gain (loss) on foreign currency was $(89) and $40, respectively. The net change in unrealized appreciation (depreciation) on
our investments during the year ended December 31, 2015 was primarily driven by a general widening of credit spreads in Energy markets and by the performance of our directly originated and
opportunistic investments. The net change in unrealized appreciation (depreciation) on our investments during the year ended December 31, 2014 was primarily driven by increased volatility and a
widening of credit spreads in the energy high yield and leveraged loan markets over the final six months of 2014.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the years ended December 31, 2015 and 2014, the net increase (decrease) in net assets resulting from operations was
$(511,299) ($(1.51) per share) and $(169,509) ($(0.72) per share), respectively.

Comparison of the Years Ended December 31, 2014 and 2013

The performance of our portfolio during the year ended December 31, 2014 was primarily driven by increased volatility and a
widening of credit spreads in the energy high yield and leveraged loan markets over the final six months of 2014. While the first half of 2014 was characterized by low volatility and a tightening of
credit spreads, the second half of the year reversed course, as volatility increased due in large part to the significant decline in oil prices. For example, the "spread-to-worst" of the Bank of
America Merrill Lynch High Yield Energy Index, which measures the difference from the worst performing security to the best, increased from 422 basis points as of December 31, 2013 to 756 basis
points as of December 31, 2014, which was the highest annual year-end spread since December 2008. Overall, the Bank of America Merrill Lynch High Yield Energy Index finished 2014 with a
yield-to-worst of 9.33%, representing the index's highest level since August 2009.

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With the significant re-pricing of risk, the high yield energy market changed dramatically in 2014, specifically among exploration and production, or E&P, and oil
field service companies. The average par weighted price of bonds issued by E&P and oil field service companies decreased from approximately $102 and $104, respectively, to begin the year, to
approximately $83 and $83, respectively, on December 31, 2014. This broad sector write-down impacted our reported unrealized depreciation for the year ended December 31, 2014.

Revenues

We generated investment income of $289,970 and $132,002 for the years ended December 31, 2014 and 2013, respectively, in the
form of interest and fees earned on senior secured loans (first and second lien), senior secured bonds and subordinated debt investments in our portfolio and dividends and other distributions earned
on equity/other investments. Such revenues represent $264,570 and $124,987 of cash income earned as well as $25,400 and $7,015 in non-cash portions relating to accretion of discount, PIK interest and
accrual of limited partnership income for
the years ended December 31, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are
recognized.

The
level of investment income we receive is directly related to the balance of income-producing investments multiplied by the weighted average yield of our investments. We expect the
dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases and the proportion of directly originated investments in our portfolio
increases.

During
the years ended December 31, 2014 and 2013, we generated $31,889 and $16,600 of fee income, which represented 11.0% and 12.6%, respectively, of total investment income.
Such fee income is transaction based, and typically consists of amendment and consent fees, prepayment fees, structuring fees, upfront fees and other non-recurring fees. As such, future fee income is
generally dependent on new direct origination investments and the occurrence of events at existing portfolio companies resulting in such fees.

Expenses

Our total expenses were $115,081 and $65,198 for the years ended December 31, 2014 and 2013, respectively. Our expenses include
base management fees attributed to FS Advisor of $61,970 and $30,840 for the years ended December 31, 2014 and 2013, respectively. Our expenses also include administrative services expenses
attributed to FS Advisor of $3,831 and $2,246 for the years ended December 31, 2014 and 2013, respectively.

FS
Advisor is eligible to receive incentive fees based on our performance. During the years ended December 31, 2014 and 2013, we accrued a subordinated incentive fee on income of
$32,072 and $7,634, respectively. During the year ended December 31, 2014, we reversed $10,993 of capital gains incentive fees previously accrued based on the performance of our portfolio,
which was primarily driven by increased volatility and a widening of credit spreads in the energy high yield and leveraged loan markets over the six month period ended December 31, 2014. During
the year ended December 31, 2013, we accrued capital gains incentive fees of $8,321 based on the performance of our portfolio, of which $5,464 was based on unrealized gains and $2,857 was based
on realized gains. No capital gains incentive fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See "Critical
Accounting PoliciesCapital Gains Incentive Fee."

We
recorded interest expense of $19,069 and $9,297 for the years ended December 31, 2014 and 2013, respectively, in connection with our financing arrangements. For the years ended
December 31, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $1,211 and $741, respectively,
and fees and expenses incurred with our share transfer agent totaled $2,541 and $2,010, respectively. Fees for our board of trustees were $853 and $870 for the years ended December 31, 2014 and
2013, respectively.

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Our
other general and administrative expenses totaled $3,615 and $2,439 for the years ended December 31, 2014 and 2013, respectively, and consisted of the following:

Year Ended
December 31,2014

2013Expenses associated with our independent audit and related fees

$
399

$
365Compensation of our chief compliance officer


80


80Legal fees


882


944Printing fees


469


355Insurance expense


221


143Other


1,564


552​
​
​
​
​
​
​
​Total

$
3,615

$
2,439​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


During
the years ended December 31, 2014 and 2013, we accrued $912 and $800, respectively for income and excise taxes.

During
the years ended December 31, 2014 and 2013, the ratio of our total expenses to our average net assets was 5.07% and 5.89%, respectively. During the years ended
December 31, 2014 and 2013, our ratio of total expenses to average net assets included $19,069 and $9,297, respectively, related to interest expense, $21,079 and $15,955, respectively, related
to accruals for (or reversals of previously accrued) incentive fees and $912 and $800, respectively, related to accruals for income and excise taxes. Without such expenses, our ratio of expenses to
average net assets would have been 3.26% and 3.54% for the years ended December 31, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or
decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.

Expense Reimbursement

As of December 31, 2014 and 2013, we had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement
agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment in the future. During the year ended December 31, 2013, we paid $1,083 in expense recoupments to
Franklin Square Holdings. As of December 31, 2014 and 2013, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future.

Net Investment Income

Our net investment income totaled $174,889 ($0.74 per share) and $66,804 ($0.58 per share) for the years ended December 31, 2014
and 2013, respectively. The increase in net investment income on a per share basis can be attributed primarily to the growth of our portfolio and an increase in the amount of our directly originated
and opportunistic investments.

Net Realized Gains or Losses

We sold investments and received principal repayments of $462,170 and $582,141, respectively, during the year ended December 31,
2014, from which we realized a net loss of $5,682. During the year ended December 31, 2014, we realized a net loss of $636 from settlements on foreign currency. We sold investments and received
principal repayments of $521,048 and $214,625, respectively, during the year ended December 31, 2013, from which we realized a net gain of $5,091. During the year ended December 31,
2013, we earned $12,736 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains, and realized a net loss of $77 from settlements on
foreign currency.

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Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and
Unrealized Gain (Loss) on Foreign Currency

For the years ended December 31, 2014 and 2013, the net change in unrealized appreciation (depreciation) on investments totaled
$(338,120) and $26,994, respectively, and the net change in unrealized gain (loss) on foreign currency was $40 and $(37), respectively. The net change in unrealized appreciation (depreciation) on our
TRS for the year ended December 31, 2013 was $(3,141). The net change in unrealized appreciation (depreciation) on our investments during the year ended December 31, 2014 was primarily
driven by increased volatility and a widening of credit spreads in the energy high yield and leveraged loan markets over the final six months of 2014. The net change in unrealized appreciation
(depreciation) on our investments during the year ended December 31, 2013 was primarily driven by a general tightening of credit spreads and by the performance of our directly originated and
opportunistic investments. The net change in unrealized appreciation (depreciation) on our TRS during the year ended December 31, 2013 was primarily driven by the termination of our TRS on
May 24, 2013, which converted unrealized gains into realized gains.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the years ended December 31, 2014 and 2013, the net increase (decrease) in net assets resulting from operations was
$(169,509) ($(0.72) per share) and $108,370 ($0.94 per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of December 31, 2015, we had $368,867 in cash, which we held in custodial accounts, and $371,679 in borrowings available
under our financing arrangements. To seek to enhance our returns, we employ leverage as market conditions permit and at the discretion of FS Advisor, but in no event may leverage employed exceed 50%
of the value of our assets, as required by the 1940 Act. See "Financing Arrangements."

During
the year ended December 31, 2015, we sold 77,649,795 common shares for gross proceeds of $699,582 at an average price per share of $9.01. The gross proceeds received during
the year ended December 31, 2015 include reinvested shareholder distributions of $152,401, for which we issued 18,641,269 common shares. During the year ended December 31, 2015, we also
incurred offering costs of $8,950 in connection with the sale of our common shares, which consisted primarily of legal, accounting, printing and other expenses, including costs associated with
technology integration between our systems and those of our selected broker-dealers, marketing expenses and due diligence fees. The offering costs were offset against capital in excess of par value on
our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $48,351 for the year ended December 31, 2015. These sales
commissions and fees include $9,251 retained by the dealer manager, FS2, which is one of our affiliates.

Since
commencing our continuous public offering and through March 1, 2016, we have sold 386,582,293 common shares (as adjusted for share distributions) for gross proceeds of
$3,896,873, including common shares issued under our distribution reinvestment plan. As of March 1, 2016, we have raised total gross proceeds of $3,917,077, including $200 of seed capital
contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from the principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain
members of our board of trustees and certain individuals and entities affiliated with GSO in a private placement conducted in April 2011.

We
generate cash primarily from the net proceeds of our continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal
repayments and proceeds from sales of our investments. We are engaged in a continuous public offering of our common shares. We accept subscriptions on a continuous basis and issue common shares at
weekly closings. Shares are issued at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.

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Prior
to investing in securities of portfolio companies, we invest the net proceeds from our continuous public offering and from sales and paydowns of existing investments primarily in
cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election
and our election to be taxed as a RIC.

To
provide our shareholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in August 2012, and
the repurchase occurred in connection with our October 1, 2012 semi-monthly closing.

The
following table provides information concerning our repurchases of common shares pursuant to our share repurchase program during the years ended December 31, 2015, 2014 and
2013:

For the Three Months Ended

Repurchase Date

Shares
Repurchased

Percentage of
Shares
Tendered
That Were
Repurchased

Repurchase
Price Per
Share

Aggregate
Consideration
for
Repurchased
SharesFiscal 2013December 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228March 31, 2013

April 1, 2013


82,689


100
%
$
9.540

$
789June 30, 2013

July 1, 2013


76,858


100
%
$
9.675

$
744September 30, 2013

October 2, 2013


156,300


100
%
$
9.675

$
1,512Fiscal 2014December 31, 2013

January 2, 2014


174,181


100
%
$
9.720

$
1,693March 31, 2014

April 2, 2014


158,723


100
%
$
9.810

$
1,557June 30, 2014

July 2, 2014


401,302


100
%
$
9.900

$
3,973September 30, 2014

October 1, 2014


306,972


100
%
$
9.900

$
3,039Fiscal 2015December 31, 2014

January 7, 2015


450,293


100
%
$
8.820

$
3,972March 31, 2015

April 1, 2015


716,857


100
%
$
8.730

$
6,258June 30, 2015

July 1, 2015


955,664


100
%
$
8.820

$
8,429September 30, 2015

October 7, 2015


2,711,088


100
%
$
7.875

$
21,350


On
January 6, 2016, we repurchased 2,716,924 common shares (representing 100% of common shares tendered for repurchase) at $6.75 per share for aggregate consideration totaling
$18,339.

Financing Arrangements

The following table presents a summary of information with respect to our outstanding financing arrangements as of December 31,
2015:

Facility

Type of
Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity DateBNP Facility

Prime Brokerage

L+1.10%

$
113,737

$
186,263

September 26, 2016(1)Deutsche Bank Credit Facility

Revolving

L+1.80%

$
280,000

$
60,000

June 11, 2016Fortress Facility

Term

L+5.00%(2)

$
89,600

$
65,400

November 6, 2020Goldman Facility

Repurchase

L+2.75%

$
324,984

$
16

September 15, 2017Natixis Credit Facility

Revolving

CP+2.25%

$
92,173




July 11, 2023Wells Fargo Credit Facility

Revolving

L+2.50% to 2.75%

$
140,000

$
60,000

September 9, 2019


(1)As
described below, the BNP facility generally is terminable upon 270 days' notice by either party. As of December 31, 2015, neither Berwyn
Funding nor BNP had provided notice of its intent to terminate the facility.(2)As
described below, borrowings under the Fortress facility accrue interest at a rate equal to LIBOR plus 5.00%, subject to a floor of 0.75%.


Our
average borrowings and weighted average interest rate, including the effect of non-usage fees, for the year ended December 31, 2015 were $1,010,699 and 2.77%, respectively. As
of December 31, 2015, our weighted average effective interest rate on borrowings was 2.95%.

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BNP Facility

On December 11, 2013, Berwyn Funding our wholly-owned, special-purpose financing subsidiary, entered into the BNP facility. As
amended to date, Berwyn Funding can borrow, from time to time, up to $300,000 from BNP. The BNP facility was effected through a committed facility agreement by and between Berwyn Funding and BNP, or
the committed facility agreement, a U.S. PB Agreement by and between Berwyn Funding and BNP and a special custody and pledge agreement by and among Berwyn Funding, BNP and State Street, as custodian,
each dated as of December 11, 2013, and which are collectively referred to herein as the BNP financing agreements.

We
may contribute securities to Berwyn Funding from time to time, subject to certain restrictions set forth in the committed facility agreement, and will retain a residual interest in
any securities contributed through our ownership of Berwyn Funding or will receive fair market value for any securities sold to Berwyn Funding. Berwyn Funding may purchase additional securities from
various sources. Berwyn Funding has appointed us to manage its portfolio of securities pursuant to the terms of an investment management agreement. Berwyn Funding will pledge certain of its securities
as collateral
to secure borrowings under the BNP facility. Such pledged securities will be held in a segregated custody account with State Street. The value of securities required to be pledged by Berwyn Funding is
determined in accordance with the margin requirements described in the BNP financing agreements. Berwyn Funding's obligations to BNP under the facility are secured by a first priority security
interest in substantially all of the assets of Berwyn Funding, including its portfolio of securities. The obligations of Berwyn Funding under the facility are non-recourse to us and our exposure under
the facility is limited to the value of our investment in Berwyn Funding.

Borrowings
under the BNP facility accrue interest at a rate equal to three-month LIBOR plus 1.10% per annum. Berwyn Funding is required to pay a non-usage fee of 0.55% per annum to the
extent the aggregate principal amount available under the facility is not borrowed. Berwyn Funding may terminate the committed facility agreement upon 270 days' notice. Subject to certain
cancellation rights, and absent a default or facility termination event, BNP is required to provide Berwyn Funding with 270 days' notice prior to terminating or amending the committed facility
agreement.

As
of December 31, 2015 and 2014, $113,737 and $223,000, respectively, was outstanding under the BNP facility. The carrying amount outstanding under the facility approximates its
fair value. We incurred costs of $449 in connection with obtaining and amending the facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortized to
interest expense over the 270 day period following the closing date of the BNP facility or the amendment thereto, as applicable. As of December 31, 2015, all of the deferred financing
costs had been amortized to interest expense.

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the BNP facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
2,983

$
1,822

$
28Non-usage fees


507


573


50Amortization of deferred financing costs


76


349


24​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
3,566

$
2,744

$
102​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


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For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
BNP facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
3,528

$
2,132

$
Average borrowings under the facility(2)

$
209,117

$
134,436

$
38,000Effective interest rate on borrowings


1.71
%

1.36
%

1.35
%Weighted average interest rate (including the effect of non-usage fees)


1.67
%

1.78
%

3.52
%


(1)Interest
under the BNP facility is paid monthly in arrears.(2)Average
borrowings for the year ended December 31, 2013 are calculated for the period since we commenced borrowings thereunder to December 31,
2013.


In
connection with the BNP facility, Berwyn Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other
customary requirements for similar facilities. The BNP facility contains customary events of default and other termination events for similar financing transactions, including: (a) the
occurrence of a default or similar condition under certain third-party contracts by us and Berwyn Funding; (b) any change in BNP's interpretation of applicable law that, in the reasonable
opinion of counsel to BNP, has the effect of impeding or prohibiting the facility; (c) certain events of insolvency or bankruptcy by us or Berwyn Funding; (d) specified material
reductions in our or Berwyn Funding's net asset value; (e) any change in
our fundamental or material investment policies; and (f) the termination of the investment advisory and administrative services agreement or if FS Advisor otherwise ceases to act as investment
adviser to us and is not immediately replaced by an affiliate or other investment adviser acceptable to BNP.

Under
the terms of the BNP financing agreements, BNP has the ability to borrow a portion of the pledged collateral, or, collectively, the rehypothecated securities, subject to certain
limits. Berwyn Funding may designate any security within the pledged collateral as ineligible to be a rehypothecated security, provided there remain securities eligible to be rehypothecated within the
segregated custody account in an amount equal to the outstanding borrowings owed by Berwyn Funding to BNP. Berwyn Funding may recall any rehypothecated security at any time and BNP must return such
security or an equivalent security within a commercially reasonable period. In the event BNP does not return the security, Berwyn Funding will have the right to, among other things, apply and set off
an amount equal to 100% of the then-current fair market value of such rehypothecated securities against any outstanding borrowings owed to BNP under the facility. Rehypothecated securities are
marked-to-market daily and if the value of all rehypothecated securities exceeds 100% of the outstanding borrowings owed by Berwyn Funding under the facility, BNP may either reduce the amount of
rehypothecated securities to eliminate such excess or deposit into the segregated custody account an amount of cash equal to such excess. Berwyn Funding will continue to receive interest and the
scheduled repayment of principal balances on rehypothecated securities. For the years ended December 31, 2015, 2014 and 2013, Berwyn Funding received a fee of $1, $19 and $0, respectively from
BNP for securities that had been rehypothecated pursuant to the BNP financing agreements. As of December 31, 2015 and 2014, the fair value of those securities rehypothecated by BNP was $108,340
and $68,487, respectively.

Borrowings
of Berwyn Funding will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Citibank Credit Facility

On March 24, 2015, EP Funding LLC, or EP Funding, our wholly-owned, special-purpose financing subsidiary, repaid and
terminated the Citibank credit facility with Citibank as administrative agent, and the financial institutions and other lenders from time to time party thereto. The Citibank credit facility provided
for borrowings in an aggregate principal amount up to $175,000 on a committed basis. Prior to the termination of the Citibank credit facility, borrowings under the facility accrued interest at a rate
equal to three-month LIBOR plus 2.75% per annum. Under the Citibank credit facility, EP Funding

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was
subject to a non-usage fee of 0.50% per annum to the extent that the aggregate principal amount available under the facility was not borrowed.

As
of December 31, 2015, no amounts remained outstanding under the Citibank credit facility. As of December 31, 2014, $128,300 was outstanding under the Citibank credit
facility. The carrying amount outstanding under the facility approximated its fair value. We incurred costs of $657 in connection with obtaining the facility, which we recorded as deferred financing
costs on our consolidated balance sheets and amortized to interest expense over the life of the facility.

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the Citibank credit facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
471

$
4,763

$
2,222Non-usage fees





1


30Amortization of deferred financing costs


130


328


199​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
601

$
5,092

$
2,451​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Citibank credit facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
1,011

$
4,903

$
1,573Average borrowings under the facility(2)

$
70,020

$
171,151

$
140,217Effective interest rate on borrowings





2.98
%

2.81
%Weighted average interest rate (including the effect of non-usage fees)


2.99
%

2.78
%

2.90
%


(1)Interest
under the Citibank credit facility was paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2015 were calculated for the period from January 1, 2015 to the date on which we repaid and
terminated the facility. Average borrowings for the year ended December 31, 2013 were calculated for the period since we commenced borrowings thereunder to December 31, 2013.


Borrowings
of EP Funding were considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Deutsche Bank Credit Facility

On June 24, 2011, FSEP Funding, our wholly-owned, special-purpose financing subsidiary, entered into a revolving credit
facility, or the Deutsche Bank credit facility, with Deutsche Bank, as administrative agent and the lender party thereto. The Deutsche Bank credit facility subsequently was amended to increase the
maximum commitments under the facility to $340,000 and extend the maturity date to June 11, 2016.

Under
the Deutsche Bank credit facility, we have transferred from time to time cash or securities to FSEP Funding as a contribution to capital and retain a residual interest in the
contributed cash or securities through our ownership of FSEP Funding. We may contribute additional cash or securities to FSEP Funding from time to time and FSEP Funding may purchase additional
securities from various sources. FSEP Funding has appointed us to manage its portfolio of securities pursuant to the terms of an investment management agreement. FSEP Funding's obligations to the
lenders under the facility are secured by a first priority security interest in substantially all of the assets of FSEP Funding, including its portfolio of securities. The obligations of FSEP Funding
under the facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in FSEP Funding.

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Pricing
under the Deutsche Bank credit facility is based on LIBOR for an interest period closest to the weighted average LIBOR interest period of eligible securities owned by FSEP
Funding, plus 1.80% per annum. FSEP Funding is subject to a non-usage fee of 0.75% per annum to the extent that the aggregate principal amount available under the facility is not borrowed. Any amounts
borrowed under the Deutsche Bank credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 11, 2016.

As
of December 31, 2015 and 2014, $280,000 was outstanding under the Deutsche Bank credit facility. The carrying amount outstanding under the facility approximates its fair value.
We incurred costs of $3,340 in connection with obtaining and amending the facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest
expense over the life of the facility. As of December 31, 2015, $529 of such deferred financing costs had yet to be amortized to interest expense.

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the Deutsche Bank credit facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
5,951

$
5,046

$
4,509Non-usage fees


456


385


191Amortization of deferred financing costs


1,036


763


637​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
7,443

$
6,194

$
5,337​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Deutsche Bank credit facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
6,316

$
5,294

$
4,546Average borrowings under the facility

$
280,000

$
245,260

$
216,410Effective interest rate on borrowings


2.30
%

2.04
%

2.04
%Weighted average interest rate (including the effect of non-usage fees)


2.29
%

2.21
%

2.17
%


(1)Interest
under the Deutsche Bank credit facility is paid quarterly in arrears.


Borrowings
under the Deutsche Bank credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to FSEP Funding varies depending upon
the types of assets in FSEP Funding's portfolio. The occurrence of certain events described as "Super-Collateralization Events" in the credit agreement that governs the Deutsche Bank credit facility,
or a decline in our net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without
limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of GSO; (ii) the bankruptcy or insolvency of GSO or FS Advisor;
(iii) GSO ceasing to act as our sub-adviser or FS Advisor ceasing to act as our investment adviser; (iv) us ceasing to act as FSEP Funding's investment manager, becoming bankrupt or
insolvent, defaulting on certain material agreements or failing to maintain a net asset value above a specified threshold; and (v) us, GSO or FS Advisor committing fraud or other illicit acts
in our or their investment advisory capacities.

In
connection with the Deutsche Bank credit facility, FSEP Funding has made certain representations and warranties and is required to comply with various covenants, reporting
requirements and other customary requirements for similar facilities. The Deutsche Bank credit facility contains customary events of default for similar financing transactions, including:
(a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the facility exceeding the applicable advance rates;
(c) the purchase by FSEP Funding of certain ineligible assets; (d) the insolvency or bankruptcy of FSEP Funding or us; (e) us

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ceasing
to act as investment manager of FSEP Funding's assets; (f) the decline of our net asset value below a specified threshold; and (g) fraud or other illicit acts by us, FS Advisor
or GSO in our or their investment advisory capacities. During the continuation of an event of default, FSEP Funding must pay interest at a default rate.

Borrowings
of FSEP Funding will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Fortress Facility

On November 6, 2015, Foxfields Funding, our wholly-owned financing subsidiary, entered into a senior secured multiple draw term
loan facility with Fortress, the lenders from time to time party thereto and the other loan parties from time to time party thereto. The Fortress facility, as amended, provides for $155,000 of term
loans available to be borrowed during the first two years after the initial closing date of November 6, 2015 with an option for us to request, at one or more times during the first two years
after the closing date, that existing or new lenders, at their election provide up to $45,000 of additional commitments.

Interest
under the Fortress facility for (i) loans bearing interest by reference to LIBOR accrues at a rate equal to LIBOR (subject to a floor of 0.75%) plus 5.00% per annum, and
(ii) loans bearing interest by reference to the base rate accrues at 4.00% per annum plus the greater of: (x) the per annum rate of interest announced, from time to time, within Wells
Fargo Bank, National Association at its principal office in San Francisco as its "prime rate," and (y) 1.75% per annum. Interest is payable quarterly in arrears beginning with the quarter
ending March 31, 2016. During the first year after the closing date, Foxfields Funding is subject to a commitment fee at a rate equal to 100 basis points on the average daily undrawn initial
facility amount of $125,000. Under certain conditions, Foxfields Funding will be subject to a prepayment premium if all or any part of the principal balance of the borrowings is prepaid prior to a
date that is two years after the closing date. Foxfields Funding incurred certain customary fees, costs and expenses in connection with obtaining the facility.

As
of December 31, 2015, $89,600 was outstanding under the Fortress facility. The carrying amount outstanding under the facility approximates its fair value. We incurred costs of
$1,121 in connection with obtaining and amending the Fortress facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the
life of the facility. As of December 31, 2015, $1,094 of such deferred financing costs had yet to be amortized to interest expense.

For
the year ended December 31, 2015, the components of total interest expense for the Fortress facility were as follows:

Year Ended
December 31, 2015Direct interest expense

$
507Non-usage fees


140Amortization of deferred financing costs


27​
​
​
​
​Total interest expense

$
674​
​
​
​
​​
​
​
​
​​
​
​
​
​


For
the year ended December 31, 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Fortress facility
were as follows:

Year Ended
December 31, 2015Cash paid for interest expense(1)

$
Average borrowings under the facility(2)

$
56,714Effective interest rate on borrowings


5.75
%Weighted average interest rate (including the effect of non-usage fees)


7.33
%


(1)Interest
under the Fortress facility is paid quarterly in arrears and will commence on March 31, 2016.(2)Average
borrowings for the year ended December 31, 2015 are calculated for the period since we commenced borrowings thereunder to December 31,
2015.


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In connection with the Fortress facility, Foxfields Funding has made certain representations and warranties and must comply with various covenants and reporting
requirements customary for facilities of this type, including the following financial covenants: (a) our minimum consolidated shareholders' equity, as determined in accordance with GAAP and
measured as of each fiscal quarter-end, must be greater than $1,500,000; (b) we must maintain at all times a 200% asset coverage ratio; (c) Foxfields Funding must maintain, as of each
quarter-end, an asset coverage ratio of either 300% or 325% depending on the relative composition of its portfolio between debt and equity investments; and (d) the portfolio investments must be
issued by not fewer than 10 unrelated obligors at all times, measured as of each quarter-end.

The
Fortress facility contains events of default customary for facilities of this type as described in the loan documentation. Upon the occurrence of an event of default, Fortress, at
the instruction or with the consent of the lenders, may terminate the commitments and declare the outstanding advances and all other obligations under the facility immediately due and payable. During
the continuation of certain events of default, we must pay interest at a default rate.

Borrowings
of Foxfields Funding will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Goldman Financing

On September 11, 2014, through our two wholly-owned, special-purpose financing subsidiaries, Gladwyne Funding and Strafford
Funding, we entered into a debt financing arrangement with Goldman. The amount available under the financing arrangement, as amended, is $325,000. We elected to structure the financing in the manner
described more fully below in order to, among other things, obtain such financing at a lower cost than would have been available through alternate arrangements.

Under
the financing arrangement, assets in our portfolio may be sold and/or contributed by us from time to time to Gladwyne Funding, pursuant to an Amended and Restated Sale and
Contribution Agreement, dated as of September 11, 2014, between us and Gladwyne Funding, or the Sale and Contribution Agreement. As of December 31, 2015, the fair value of assets held by
Gladwyne Funding was $642,954, which includes an initial contribution by us of a portfolio of assets with an aggregate par value of $427,061. The assets held by Gladwyne Funding secure the obligations
of Gladwyne Funding under the Notes to be issued from time to time by Gladwyne Funding to Strafford Funding under the Indenture with Citibank, as trustee. Pursuant to the Indenture, the aggregate
principal amount of Notes that may be issued by Gladwyne Funding from time to time is $577,750. Interest on the Notes under the Indenture accrues at three-month LIBOR plus a spread of 4.00% per annum.
Principal and any unpaid interest on the Notes will be due and payable on the stated maturity date of November 15, 2025. As of December 31, 2015, Strafford Funding had purchased $577,750
of Notes, the maximum principal amount of Notes that may be purchased under the Goldman facility. Strafford Funding purchased $241,550 of Notes during the year ended December 31, 2015.

Pursuant
to the Indenture, Gladwyne Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary
requirements for similar transactions. The Indenture contains customary events of default for similar financing transactions, including: (a) the failure to make principal payments on the Notes
at their stated maturity or any earlier redemption date or to make interest payments on the Notes within five business days of when due; (b) the failure to disburse amounts in excess of $1 in
accordance with the priority of payments; and (c) the occurrence of certain bankruptcy and insolvency events with respect to Gladwyne Funding.

Strafford
Funding, in turn, entered into a repurchase transaction with Goldman, pursuant to the Goldman facility. Pursuant to the Goldman facility, on one or more occasions beginning
December 15, 2014, Goldman began purchasing Notes held by Strafford Funding for an aggregate purchase price equal to approximately 56.25% of the principal amount of the Notes purchased. As of
December 31, 2015, Goldman had purchased Notes in the principal amount of $577,750 from Strafford Funding, the maximum principal amount of Notes available to be purchased under the Goldman
facility, for a total purchase price equal to $324,984.

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Strafford
Funding will repurchase the Notes sold to Goldman under the Goldman facility no later than September 15, 2017. The repurchase price paid by Strafford Funding to Goldman
will be equal to the purchase price paid by Goldman for the repurchased Notes, plus financing fees accrued at the applicable pricing rate under the Goldman facility. Through March 15, 2015,
financing fees accrued on the greater of $225,000 or the aggregate purchase price paid by Goldman for such Notes. Thereafter, financing fees began to accrue on $325,000 (even in prior periods when the
aggregate purchase price paid for Notes purchased by Goldman was less than that amount), unless and until the outstanding amount is reduced in accordance with the terms of the Goldman facility.

If
the Goldman facility is accelerated prior to September 15, 2017 due to an event of default or the failure of Gladwyne Funding to commit to sell any underlying assets that
become defaulted obligations within 30 days and thereafter to use commercially reasonable efforts to sell any such defaulted obligations, then Strafford Funding must pay to Goldman a fee equal
to the present value of the aggregate amount of the financing fees that would have been payable to Goldman through September 15, 2017 had the acceleration not occurred. The financing fee under
the Goldman facility is equal to three-month LIBOR plus a spread of up to 2.75% per annum for the relevant period.

Pursuant
to the Goldman facility, Strafford Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other
customary requirements for similar transactions. The Goldman facility contains customary events of default for similar financing transactions, including: (a) failure to transfer the Notes to
Goldman on the applicable purchase date or repurchase the Notes from Goldman on the applicable repurchase date; (b) failure to pay certain fees and make-whole amounts when due;
(c) failure to post cash collateral as required; (d) the occurrence of insolvency events with respect to Strafford Funding; and (e) the admission by Strafford Funding of its
inability to, or its intention not to, perform any of its obligations under the Goldman facility.

Goldman
may require Strafford Funding to post cash collateral if the market value of the Notes (measured by reference to the market value of Gladwyne Funding's portfolio of assets)
declines and is less than the required margin amount under the Goldman facility. In such event, in order to satisfy any such margin-posting requirements, Strafford Funding has the option to borrow
funds from us pursuant to the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement may not exceed $325,000 and will accrue interest at a rate equal to one-month LIBOR plus a
spread of 0.75% per annum.

As
of December 31, 2015, Notes in an aggregate principal amount of $577,750 had been purchased by Strafford Funding from Gladwyne Funding and subsequently sold to Goldman under
the Goldman facility for aggregate proceeds of $324,984. The carrying amount outstanding under the Goldman facility approximates its fair value. We funded each purchase of Notes by Strafford Funding
through a capital contribution to Strafford Funding. As of December 31, 2015, Strafford Funding's liability under the Goldman facility was $324,984, plus $474 of accrued interest expense. The
Notes issued by Gladwyne Funding and purchased by Strafford Funding eliminate in consolidation on our financial statements.

We
incurred costs of $380 in connection with obtaining and amending the Goldman facility, which we have recorded as deferred financing costs on our consolidated balance sheets and
amortize to interest expense over the life of the facility. As of December 31, 2015, $220 of such deferred financing costs had yet to be amortized to interest expense.

For
the years ended December 31, 2015 and 2014, the components of total interest expense for the Goldman facility were as follows:

Year Ended
December 31,2015

2014Direct interest expense

$
9,448

$
445Amortization of deferred financing costs


128


32​
​
​
​
​
​
​
​Total interest expense

$
9,576

$
477​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


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For
the years ended December 31, 2015 and 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Goldman
facility were as follows:

Year Ended
December 31,2015

2014Cash paid for interest expense(1)

$
9,419

$
Average borrowings under the facility(2)

$
251,427

$
49,721Effective interest rate on borrowings


3.09
%

2.98
%Weighted average interest rate


3.76
%

2.98
%


(1)Interest
under the Goldman facility is paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2014 are calculated for the period since we commenced borrowings thereunder to December 31,
2014.


In
connection with the Notes and the Indenture, Gladwyne Funding also entered into (i) an amended and restated investment management agreement with us, as investment manager,
dated as of September 11, 2014, pursuant to which we will manage the assets of Gladwyne Funding; and (ii) a collateral administration agreement with Virtus Group, LP, or Virtus,
as collateral administrator, dated as of September 11, 2014, pursuant to which Virtus will perform certain administrative services with respect to the assets of Gladwyne Funding.

Amounts
outstanding under the Goldman facility will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Natixis Credit Facility

On July 11, 2013, Energy Funding, our wholly-owned, special-purpose financing subsidiary, entered into a revolving credit
facility, or the Natixis credit facility, with Natixis, as administrative agent and lender, Wells Fargo, as collateral agent and custodian, and the other lenders from time to time party thereto. The
Natixis credit facility provided for revolving borrowings through January 11, 2015 in an aggregate principal amount up to $150,000 on a committed basis. After that date, we were no longer
permitted to borrow under the facility and outstanding amounts began to amortize. During the year ended December 31, 2015, we repaid $57,827 of outstanding borrowings under the facility.

We
contributed cash and debt securities to Energy Funding from time to time prior to the commencement of the amortization period under the facility, subject to certain restrictions set
forth in the Natixis credit facility. We continue to retain a residual interest in any assets contributed through our ownership of Energy Funding or we received fair market value for any debt
securities sold to Energy Funding. Energy Funding was also permitted to purchase additional debt securities from various sources prior to the commencement of the amortization period under the
facility. Energy Funding has appointed us to manage its portfolio of debt securities pursuant to the terms of a collateral management agreement. Energy Funding's obligations to the lenders under the
facility are secured by a first priority security interest in substantially all of the assets of Energy Funding, including its portfolio of debt securities. The obligations of Energy Funding under the
facility are non-recourse to us and our exposure under the facility is limited to the value of our investment in Energy Funding.

Borrowings
under the Natixis credit facility accrue interest at a rate equal to the applicable commercial paper rate plus 2.25% per annum. Prior to the commencement of the amortization
period, Energy Funding was subject to a non-usage fee of 1.00% per annum to the extent that the aggregate principal amount available under the Natixis credit facility had not been borrowed. Any
amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 11, 2023.

As
of December 31, 2015 and 2014, $92,173 and $150,000, respectively, was outstanding under the Natixis credit facility. The carrying amount outstanding under the facility
approximates its fair value. We incurred costs of $2,544 in connection with obtaining the facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize
to interest expense over the

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life
of the facility. As of December 31, 2015, $1,386 of such deferred financing costs had yet to be amortized to interest expense.

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the Natixis credit facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
3,041

$
3,733

$
1,102Non-usage fees








185Amortization of deferred financing costs


782


256


120​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
3,823

$
3,989

$
1,407​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Natixis credit facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
3,195

$
3,810

$
771Average borrowings under the facility(2)

$
116,357

$
150,000

$
118,820Effective interest rate on borrowings


2.77
%

2.57
%

2.94
%Weighted average interest rate (including the effect of non-usage fees)


2.61
%

2.54
%

2.99
%


(1)Interest
under the Natixis credit facility is paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2013 are calculated for the period since we commenced borrowings thereunder to December 31,
2013.


In
connection with the Natixis credit facility, Energy Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements
and other customary requirements for similar facilities. The Natixis credit facility contains customary events of default for similar financing transactions, including: (a) the failure to make
principal payments when due or interest payments within five business days of when due; (b) Energy Funding becoming an investment company required to be registered under the 1940 Act;
(c) certain events of insolvency or bankruptcy of Energy Funding; (d) the resignation or removal of us as Energy Funding's collateral manager; (e) FS Advisor or any replacement
thereof approved in writing by the majority lenders no longer serving as the investment adviser to us; and (f) GSO or any replacement thereof approved in writing by the majority lenders no
longer serving as the investment sub-adviser to us. Upon the occurrence of an event of default, the majority lenders or Natixis (acting at the direction of the majority lenders) may declare the
outstanding principal and interest and all other amounts owing under the facility immediately due and payable. During the continuation of an event of default, Energy Funding must pay interest at a
default rate.

Borrowings
of Energy Funding will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Wells Fargo Credit Facility

On September 9, 2014, Wayne Funding, our wholly-owned, special purpose financing subsidiary, entered into a revolving credit
facility, or the Wells Fargo credit facility, with Wells Fargo, as administrative agent, each of the conduit lenders and institutional lenders from time to time party thereto and as the collateral
agent, account bank and collateral custodian under the Wells Fargo credit facility. The Wells Fargo credit facility provided for borrowings in an aggregate principal amount up to $200,000 on a
committed basis. On February 23, 2016, Wayne Funding and Wells Fargo entered into an amendment to reduce the aggregate borrowings available under the facility to $125,000.

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We
may contribute cash, loans or bonds to Wayne Funding from time to time and will retain a residual interest in any assets contributed through our ownership of Wayne Funding or will
receive fair market value for any assets sold to Wayne Funding. Wayne Funding may purchase additional assets from various sources. Wayne Funding has appointed us to manage its portfolio of assets
pursuant to the terms of a collateral management agreement. Wayne Funding's obligations to Wells Fargo under the Wells Fargo credit facility are secured by a first priority security interest in
substantially all of the assets of Wayne Funding, including its portfolio of assets. The obligations of Wayne Funding under the Wells Fargo credit facility are non-recourse to us and our exposure
under the facility is limited to the value of our investment in Wayne Funding.

Borrowings
under the Wells Fargo credit facility accrue interest at a rate equal to three-month LIBOR plus a spread ranging between 2.50% and 2.75% per annum, depending on the
composition of the portfolio of assets for the relevant period. During the period beginning October 10, 2014 through June 5, 2015, Wayne Funding was subject to a non-usage fee to the
extent the aggregate principal amount available under the Wells Fargo credit facility was not borrowed. Beginning June 6, 2015, the non-usage fee increased to the sum of (a) 0.50% per
annum on the first $40,000 of unborrowed principal amount available under the Wells Fargo credit facility and (b) 2.00% on any unborrowed principal amount available under the facility in excess
of $40,000. Any amounts borrowed under the Wells Fargo credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 9, 2019. Borrowings
under the Wells Fargo credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to Wayne Funding varies depending upon the types of assets in
Wayne Funding's portfolio.

As
of December 31, 2015 and 2014, $140,000 and $120,000, respectively, was outstanding under the Wells Fargo credit facility. The carrying amount outstanding under the facility
approximates its fair value. We incurred costs of $2,641 in connection with obtaining the facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize
to interest expense over the life of the facility. As of December 31, 2015, $1,950 of such deferred financing costs had yet to be amortized to interest expense.

For
the years ended December 31, 2015 and 2014, the components of total interest expense for the Wells Fargo credit facility were as follows:

Year Ended
December 31,2015

2014Direct interest expense

$
3,917

$
219Non-usage fees


575


191Amortization of deferred financing costs


528


163​
​
​
​
​
​
​
​Total interest expense

$
5,020

$
573​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


For
the years ended December 31, 2015 and 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Wells
Fargo credit facility were as follows:

Year Ended
December 31,2015

2014Cash paid for interest expense(1)

$
4,369

$
156Average borrowings under the facility(2)

$
129,575

$
120,000Effective interest rate on borrowings


3.23
%

2.74
%Weighted average interest rate (including the effect of non-usage fees)


3.47
%

2.27
%


(1)Interest
under the Wells Fargo credit facility is paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2014 are calculated for the period since we commenced borrowings thereunder to December 31,
2014.


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In connection with the Wells Fargo credit facility, Wayne Funding has made certain representations and warranties and is required to comply with various
covenants, reporting requirements and other customary requirements for similar facilities. The Wells Fargo credit facility contains customary events of default for similar financing transactions,
including: (a) the failure to make principal or interest payments within three business days of when due; (b) a borrowing base deficiency that is not cured in accordance with the terms
of the facility; (c) the insolvency or bankruptcy of Wayne Funding or us; (d) the resignation or removal of us as collateral manager; (e) the failure of us to maintain an asset
coverage ratio of greater than or equal to 2:1; (f) the failure of us to have a net asset value of at least $300,000; and (g) the failure of Wayne Funding to qualify as a
bankruptcy-remote entity. Upon the occurrence and during the continuation of an event of default, Wells Fargo may declare the outstanding advances and all other obligations under the facility
immediately due and payable. During the continuation of an event of default, Wayne Funding must pay interest at a default rate.

In
addition, the occurrence of certain events described as "Collateral Manager Events of Default" in the loan and servicing agreement which governs the Wells Fargo credit facility may
trigger (i) a requirement that Wayne Funding obtain the consent of Wells Fargo prior to entering into any transaction with respect to portfolio assets and (ii) the right of Wells Fargo
to direct Wayne Funding to enter into transactions with respect to any portfolio assets, in each case in Wells Fargo's sole discretion. Collateral Manager Events of Default include non-performance of
any obligation under the transaction
documents by Wayne Funding, us, FS Advisor or GSO, and other events with respect to such entities that are adverse to Wells Fargo and the secured parties under the Wells Fargo credit facility.

Borrowings
of Wayne Funding will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Capital Contribution by FS Advisor and GSO

In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of $200 to purchase
22,444 common shares (as adjusted for share distributions) at $8.91 per share, which represents the initial public offering price (as adjusted for share distributions), net of selling commissions and
dealer manager fees. The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains our investment adviser.

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains our investment adviser. In connection with the same private placement, certain members of our board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase
1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions),
in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, we issued an aggregate of 2,244,875 common shares (as adjusted for share
distributions) for aggregate proceeds of $20,004 upon satisfaction of the minimum offering requirement on July 18, 2011. As of March 1, 2016, we have issued an aggregate of 4,491,309
common shares (as adjusted for share distributions) for aggregate gross proceeds of approximately $40,131 to members of our board of trustees and individuals and entities affiliated with FS Advisor
and GSO, including common shares sold in the private placement conducted in April 2011.

RIC Tax Treatment and Distributions

We have elected to be treated for U.S. federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M
of the Code. As a RIC, we generally do not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that we distribute as dividends to our shareholders. To
maintain our qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements. In addition, in order to maintain RIC tax treatment, we must
distribute to our shareholders, for each tax year, dividends generally of an amount at least equal to 90% of our "investment company taxable income," which is generally the sum of our net ordinary
income plus the excess, if any, of realized net short-term capital gains over realized net

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long-term
capital losses, determined without regard to any deduction for dividends paid. In addition, we may, in certain cases, satisfy the Annual Distribution Requirement by distributing dividends
relating to a tax year after the close of such tax year under the "spillover dividend" provisions of Subchapter M of the Code. If we distribute a spillover dividend, such dividend will be included in
a shareholder's gross income for the tax year in which the spillover distribution is paid. We intend to make sufficient distributions to our shareholders to maintain our RIC tax treatment each tax
year. We will also be subject to nondeductible U.S. federal excise taxes on certain undistributed income unless we distribute in a timely manner to our shareholders of an amount at least equal to the
sum of (1) 98% of our net ordinary taxable income (taking into account certain deferrals and elections) for the calendar year, (2) 98.2% of our capital gain net income, which is the
excess of capital gains over capital losses (adjusted for certain ordinary losses), for the one-year period ending October 31 of that calendar year and (3) any ordinary income and
capital gain net income for the preceding years that were not distributed during such years and on which we paid no U.S. federal income tax. Any distribution declared by us during October, November or
December of any calendar year, payable to our shareholders of record on a specified date in such a month and actually paid during January of the following calendar year, will be treated as if it had
been paid by us, as well as received by our U.S. shareholders, on December 31 of the calendar year in which the distribution was declared. We generally will endeavor in each tax year to avoid
any material U.S. federal excise tax on our earnings.

We
authorize and declare ordinary cash distributions on a weekly basis, while continuing to pay such distributions on a monthly basis, in each case subject to our board of trustees'
discretion and applicable legal restrictions. We will calculate each shareholder's specific distribution amount for the period using record and declaration dates and each shareholder's distributions
will begin to accrue on the date we accept such shareholder's subscription for our common shares. From time to time, we may also pay special interim distributions in the form of cash or common shares
at the discretion of our board of trustees.

During
certain periods, our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our continuous public offering of
common shares. As a result, it is possible that a portion of the distributions we make will represent a return of capital. A return of capital generally is a return of an investor's investment rather
than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including
any fees payable to FS Advisor. Moreover, a return of capital will generally not be taxable, but will reduce each shareholder's cost basis in our common shares, and will result in a higher reported
capital gain or lower reported capital loss when the common shares on which such return of capital was received are sold. Each year a statement on Form 1099-DIV identifying the sources of the
distributions will be mailed to our shareholders. No portion of the distributions paid during the year ended December 31, 2015 represented a return of capital.

The
following table reflects the cash distributions per share that we have declared and paid on our common shares during the years ended December 31, 2015, 2014 and 2013:

DistributionFor the Year Ended December 31,

Per Share

Amount2013

$
0.6616

$
77,8152014

$
0.6882

$
163,0432015

$
0.7085

$
238,833


On
November 11, 2015 and March 9, 2016, our board of trustees declared regular weekly cash distributions for January 2016 through March 2016 and April 2016 through June
2016, respectively. These distributions have been or will be paid monthly to shareholders of record as of weekly record dates previously determined by our board of trustees in the amount of $0.013625
per share. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.

We
have adopted an "opt in" distribution reinvestment plan for our shareholders. As a result, if we make a cash distribution, our shareholders will receive distributions in cash unless
they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in

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additional
common shares. However, certain state authorities or regulators may impose restrictions from time to time that may prevent or limit a shareholder's ability to participate in the
distribution reinvestment plan. Although distributions paid in the form of additional common shares will generally be subject to U.S. federal, state and local taxes in the same manner as cash
distributions, shareholders who elect to participate in our distribution reinvestment plan will not receive any corresponding cash distributions with which to pay any such applicable taxes.
Shareholders receiving distributions in the form of additional common shares will generally be treated as receiving a distribution in the amount of the fair market value of our common shares.

We
may fund our cash distributions to shareholders from any sources of funds legally available to us, including offering proceeds, borrowings, net investment income from operations,
capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in
portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.

For
a period of time following commencement of our continuous public offering, substantial portions of our distributions were funded through the reimbursement of certain expenses by
Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that were subject to repayment by us within three years. The purpose of
this arrangement was to ensure that no portion of our distributions to shareholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or
waivers of advisory fees were not based on our investment performance.

No
portion of the distributions paid during the years ended December 31, 2015, 2014 and 2013 was funded through the reimbursement of operating expenses by Franklin Square
Holdings. However, our repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that shareholders may otherwise have received
during the year ended December 31, 2013. During the years ended December 31, 2015 and 2014, we did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or
waived. There can be no assurance that we will continue to achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all.
Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

The
following table reflects the sources of the cash distributions on a tax basis that we paid on our common shares during the years ended December 31, 2015, 2014 and 2013:

Year Ended December 31,2015

2014

2013Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$





$



Borrowings

















Net investment income (prior to expense reimbursement)(1)


224,586


94
%

145,745


89
%

76,383


98
%Short-term capital gains proceeds from the sale of assets








10,509


7
%

1,432


2
%Long-term capital gains proceeds from the sale of assets


14,247


6
%

6,789


4
%




Non-capital gains proceeds from the sale of assets

















Distributions on account of limited partnership interest

















Expense reimbursement from sponsor

















​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
238,833


100
%
$
163,043


100
%
$
77,815


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


(1)During
the years ended December 31, 2015, 2014 and 2013, 90.5%, 91.3% and 94.7%, respectively, of our gross investment income was attributable to
cash income earned, 2.2%, 3.5% and 2.9%, respectively, was attributable to non-cash accretion of discount and 7.3%, 5.2% and 2.4%, respectively, was attributable to PIK interest.


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Our
net investment income on a tax basis for the years ended December 31, 2015, 2014 and 2013 was $234,163, $145,745 and $76,383, respectively. As of December 31, 2015, we
had $9,578 of undistributed ordinary income on a tax basis. As of December 31, 2014, we had $14,247 of undistributed net realized gains on a tax basis.

For
the year ended December 31, 2015 the difference between our GAAP-basis net investment income and our tax-basis net investment income was primarily due to the amount by which
tax-basis income on a limited partnership interest differs from our GAAP-basis income, the reclassification of unamortized original issue discount and prepayment fees recognized upon prepayment of
loans from income for GAAP purposes to realized gains for tax purposes, the impact of certain subsidiaries that were consolidated for purposes of computing GAAP-basis net investment income but were
not consolidated for purposes of computing tax-basis net investment income, income recognized for tax purposes not recorded for GAAP, and, with respect to the years ended December 31, 2014 and
2013, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains were payable by us and the reversal of
non-deductible excise taxes. During the year ended December 31, 2013, the inclusion of a portion of the periodic net settlement payments due on our total return swap in tax-basis net investment
income was also a factor that resulted in the difference between our GAAP-basis net investment income and our tax-basis net investment income.

The
following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the years ended December 31, 2015, 2014 and
2013:

Year Ended December 31,2015

2014

2013GAAP-basis net investment income

$
227,595

$
174,889

$
66,804Income on limited partnership interest


(82
)

(1,271
)

(802
)Reversal of incentive fee accrual on unrealized gains





(10,993
)

5,464Excise Taxes





560


300Reclassification of unamortized original issue discount and prepayment fees


(10,185
)

(19,579
)

(1,166
)GAAP vs. tax-basis consolidation of subsidiaries


9,252


2,798


(733
)Income recognized for tax purposes not recorded for GAAP purposes


9,396





Tax-basis net investment income portion of total return swap payments








6,602Other miscellaneous differences


(1,813
)

(659
)

(86
)​
​
​
​
​
​
​
​
​
​
​Tax-basis net investment income

$
234,163

$
145,745

$
76,383​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


We
may make certain adjustments to the classification of shareholders' equity as a result of permanent book-to-tax differences. During the year ended December 31, 2015, we
increased accumulated undistributed net investment income and accumulated undistributed net realized gains (losses) on investments and gain/loss on foreign currency by $6,674 and $8,299, respectively,
and reduced capital in excess of par value by $14,973. During the year ended December 31, 2014, we increased accumulated undistributed net realized gains (losses) on investments and gain/loss
on foreign currency by $20,215, and reduced capital in excess of par value and accumulated undistributed net investment income by $3,358 and $16,857, respectively.

The
determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for
the full year. The actual tax characteristics of distributions to shareholders are reported to shareholders annually on Form 1099-DIV.

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As
of December 31, 2015 and 2014, the components of accumulated earnings on a tax basis were as follows:

December 31,2015

2014Distributable ordinary income (income and short-term capital gains)

$
9,578

$
Distributable capital gains (accumulated capital losses)(1)


(200,191
)

13,591Deferral of late year capital losses





(6,094
)Distribution receivable on limited partnership interest


301


57Unamortized organization costs


(245
)

(268
)Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency(2)


(831,920
)

(283,310
)​
​
​
​
​
​
​
​Total

$
(1,022,477
)
$
(276,024
)​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


(1)Under
the Regulated Investment Company Modernization Act of 2010, net capital losses recognized for tax years beginning after December 22, 2010, may
be carried forward indefinitely, and their character is retained as short-term or long-term capital losses, as applicable. As of December 31, 2015, we had short-term and long-term capital loss
carryforwards available to offset future realized capital gains of $76,138 and $124,053, respectively.(2)As
of December 31, 2015 and 2014, the gross unrealized appreciation on our investments and unrealized gain on foreign currency was $44,089 and
$50,887, respectively. As of December 31, 2015 and 2014, the gross unrealized depreciation on our investments and unrealized loss on foreign currency was $876,009 and $334,197, respectively.


The
aggregate cost of our investments for federal income tax purposes totaled $3,895,733 and $3,658,498 as of December 31, 2015 and 2014, respectively. The aggregate net
unrealized appreciation (depreciation) on a tax basis was $(831,920) and $(283,310) as of December 31, 2015 and 2014, respectively.

Critical Accounting Policies

Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are
those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently
uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available
information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality.
Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in
similar businesses. As we execute our operating plans, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.

Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities are valued at fair value as determined in good
faith by our board of trustees. In connection with that determination, FS Advisor provides our board of trustees with portfolio company valuations which are based on relevant inputs, including, but
not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by independent third-party valuation services.

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Accounting
Standards Codification Topic 820,Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting
Standards Board, or the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and
annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These
tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active
markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as
unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.

With
respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described
below:



Determination
of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the
possible effect of such valuations and any change in such valuations on our consolidated financial statements. In making its determination of fair value, our board of trustees may use any approved
independent third-party pricing or valuation services. However, our board of trustees is not required to determine fair value in accordance with the valuation provided by any single source, and may
use any relevant data, including information obtained from FS Advisor or any approved independent third-party valuation or pricing service that our board of trustees deems to be reliable in
determining fair value under the circumstances. Below is a description of factors that FS Advisor's management team, any approved independent third-party valuation services and our board of trustees
may consider when determining the fair value of our investments.

Valuation
of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility
in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted
cash flow models to arrive at fair value. Other factors that may be considered include the borrower's ability to adequately service its debt, the fair market value of the portfolio company in relation
to the face amount of its outstanding debt and the quality of collateral securing our debt investments.

For
convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e., the
security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

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Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of trustees, in its determination of
fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject
to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous
owners or acquisition, recapitalization, restructuring or other related items.

FS
Advisor's management team, any approved independent third-party valuation services and our board of trustees may also consider private merger and acquisition statistics, public
trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. FS Advisor's
management team, any approved independent third-party valuation services and our board of trustees may also consider the size and scope of a portfolio company and its specific strengths and
weaknesses, and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the smaller size of portfolio companies relative to comparable firms, as
well as such other factors as our board of trustees, in consultation with FS Advisor's management team and any approved independent third-party valuation services, if applicable, may consider relevant
in assessing fair value. Generally, the value of our equity interests in public companies for which market quotations are readily available is
based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

When
we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will be
allocated between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of trustees subsequently values these warrants or other equity
securities received at their fair value.

The
fair values of our investments are determined in good faith by our board of trustees. Our board of trustees is solely responsible for the valuation of our portfolio investments at
fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process. Our board of trustees has delegated day-to-day responsibility for implementing our
valuation policy to FS Advisor's management team, and has authorized FS Advisor's management team to utilize independent third-party valuation and pricing services that have been approved by our board
of trustees. The valuation committee is responsible for overseeing FS Advisor's implementation of the valuation process.

Our
investments as of December 31, 2015 consisted primarily of debt investments that were acquired directly from the issuer. Twenty senior secured loan investments, two senior
secured bond investments and five subordinated debt investments were valued by independent valuation firms, which determined the fair value of such investments by considering, among other factors, the
borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms of the debt. All of our equity/other
investments were also valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments,
as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Except as described above, we valued our other
investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and
screened for validity by such service.

Our
investments as of December 31, 2014 consisted primarily of debt investments that were traded on a private over-the-counter market for institutional investors. Seventeen senior
secured loan investments, one senior secured bond investment and two subordinated debt investments were valued by an independent valuation firm, which determined the fair value of such investments by
considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms
of the debt. All of our equity/other investments were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual
rights ascribed to such

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investments,
as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Except as described above, we
valued our other investments by using the midpoint of the prevailing bid and ask prices from dealers on the
date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service.

We
periodically benchmark the bid and ask prices we receive from third-party pricing services and/or dealers, as applicable, against the actual prices at which we purchase and sell our
investments. Based on the results of the benchmark analysis and the experience of our management in purchasing and selling these investments, we believe that these prices are reliable indicators of
fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3
within the fair value hierarchy. We may also use other methods, including the use of independent valuation firms, to determine fair value for securities for which we cannot obtain prevailing bid and
ask prices through third-party pricing services or independent dealers or where our board of trustees otherwise determines that the use of such other method is appropriate. We periodically benchmark
the valuations provided by the independent valuation firms against the actual prices at which we purchase and sell our investments. Our valuation committee and board of trustees reviewed and approved
the valuation determinations made with respect to these investments in a manner consistent with our valuation policy.

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect
to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to
collect such income. Our policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. We consider many factors relevant to an investment
when placing it on or removing it from non-accrual status including, but not limited to, the delinquency status of the investment, economic and business conditions, the overall financial condition of
the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to the investment. If there is reasonable doubt that we will
receive any previously accrued interest, then the previously recognized interest income will be written-off. Payments received on non-accrual investments may be recognized as income or applied to
principal depending upon the collectability of the remaining principal and interest. Non-accrual investments may be restored to accrual status when principal and interest payments become current and
are likely to remain current based on our judgment.

Loan
origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or security. Upon
the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Structuring and other non-recurring upfront fees are recorded
as fee income when earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.

Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change
in Unrealized Gains or Losses on Foreign Currency

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or
losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously
recognized, but considering unamortized fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any
reversal of previously recorded unrealized gains or losses when gains or losses are realized and the respective unrealized gain or loss on foreign currency for any foreign denominated investments we
may hold. Net change in unrealized gains or losses on foreign currency reflects the change in the value of foreign currency held, receivables or accruals during the reporting period due to the impact
of foreign currency fluctuations.

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Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is
determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee equals 20.0% of our incentive fee capital gains (i.e., our realized
capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative
basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and
payable as of the end of such period.

While
the investment advisory and administrative services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital
gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, we include unrealized gains in the
calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FS Advisor as if our entire
portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are
actually realized.

In
addition, we historically treated all net settlement payments received by us pursuant to our TRS (which was terminated on May 24, 2013) as realized capital gains and included
only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee
payable to FS Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC informed us that it is their
interpretation of the applicable language in the Advisers Act that we should "look through" the TRS in calculating our capital gains incentive fee. Under this "look through" methodology, the portion
of the net settlement payments received by us pursuant to the TRS which would have represented net investment income to us had we held the loans or securities underlying the TRS directly would be
treated as net investment income subject to the subordinated incentive fee on income payable to FS Advisor pursuant to the investment advisory and administrative services agreement, rather than as
realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FS
Advisor with respect to realized gains. FS Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of
the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a "look through" basis under which
we treat the reference assets underlying the TRS as our investments and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FS Advisor with
respect to the portion of the net settlement payments received by us pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a "look through" basis.
As of June 30, 2013, the aggregate capital gains incentive fees paid to FS Advisor in prior periods and accrued as of such date with respect to realized gains in accordance with GAAP were less
than the fees which would have been payable in accordance with the "look through" methodology.

Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be entitled to receive a subordinated
incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of our "pre-incentive fee net investment income" for the
immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS
Advisor does not earn this incentive fee for any quarter until our pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. For purposes of this fee, "adjusted
capital" means cumulative gross proceeds generated from sales of our common shares (including proceeds from our distribution reinvestment plan) reduced for distributions from non-liquidating
dispositions of our investments paid to shareholders and amounts paid for share repurchases pursuant to our share repurchase program. Once our pre-incentive fee net investment income in any quarter
exceeds the hurdle rate, FS Advisor is entitled to a "catch-up" fee equal to the

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amount
of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted
capital. Thereafter, FS Advisor is entitled to receive 20.0% of pre-incentive fee net investment income.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with
accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements.
Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing
authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the years ended
December 31, 2015, 2014 and 2013, we did not incur any interest or penalties.

Contractual Obligations

We have entered into an agreement with FS Advisor to provide us with investment advisory and administrative services. Payments for
investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets
and (b) an incentive fee based on our performance. FS Advisor, and to the extent it provides such services, GSO, are reimbursed for administrative expenses incurred on our behalf. See
"Related Party TransactionsCompensation of the Investment Adviser and Dealer Manager" for a discussion of these agreements and for the amount of fees and expenses accrued
under these agreements during the years ended December 31, 2015, 2014 and 2013.

A
summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the BNP facility, the Deutsche Bank credit facility, the Fortress facility,
the Goldman facility, the Natixis credit facility and the Wells Fargo credit facility at December 31, 2015 is as follows:

Payments Due By PeriodTotal

Less than 1 year

1-3 years

3-5 years

More than 5 yearsBNP Facility(1)

$
113,737

$
113,737








Deutsche Bank Credit Facility(2)

$
280,000

$
280,000








Fortress Facility(3)

$
89,600







$
89,600


Goldman Facility(4)

$
324,984




$
324,984





Natixis Credit Facility(5)

$
92,173










$
92,173Wells Fargo Credit Facility(6)

$
140,000







$
140,000





(1)At
December 31, 2015, $186,263 remained unused under the BNP facility. The BNP facility generally is terminable upon 270 days' notice by
either party. As of December 31, 2015, neither Berwyn Funding nor BNP had provided notice of its intent to terminate the facility.(2)At
December 31, 2015, $60,000 remained unused under the Deutsche Bank credit facility. All amounts borrowed under the facility will mature, and all
accrued and unpaid interest thereunder will be due and payable, on June 11, 2016.(3)At
December 31, 2015, $65,400 remained unused under the Fortress facility. All amounts borrowed under the facility will mature, and all accrued and
unpaid interest thereunder will be due and payable, on November 6, 2020.(4)At
December 31, 2015, $16 remained unused under the Goldman facility. Strafford Funding will repurchase all Notes sold to Goldman under the Goldman
facility and will owe all accrued and unpaid interest thereunder, on September 15, 2017.


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(5)At
December 31, 2015, no amounts remained unused under the Natixis credit facility. All amounts borrowed under the facility will mature, and all
accrued and unpaid interest thereunder will be due and payable, on July 11, 2023.(6)At
December 31, 2015, $60,000 remained unused under the Wells Fargo credit facility. All amounts borrowed under the facility will mature, and all
accrued and unpaid interest thereunder will be due and payable, on September 9, 2019.


Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.

Recently Issued Accounting Standards

In April 2015, the FASB issued ASU No. 2015-03,InterestImputation of
Interestto simplify the presentation in the financial statements of debt issuance costs. Under existing guidance, debt issuance costs are recognized as a deferred charge and
presented as an asset on the balance sheet. The amendments to the guidance require that debt issuance costs related to a recognized liability for indebtedness be presented in the balance sheet as a
direct deduction from the carrying amount of that liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15,
InterestImputation of Interestto update the guidance to include SEC views regarding the presentation and subsequent measurement of debt issuance costs related to
line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC has indicated that it would not
object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement,
regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs is not affected by the amendments to the
guidance. The amendments to the FASB codification guidance are to be applied retrospectively with applicable disclosures for a change in accounting principle upon transition. For public entities, the
amendments are effective during interim and annual periods beginning after December 15, 2015. Early application by public entities is permitted. We are currently assessing the impact of this
guidance on our consolidated financial statements.

Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FS Advisor is entitled to an annual base management fee of
2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on
July 18, 2011, upon commencement of our investment operations. Base management fees are paid on a quarterly basis in arrears.

The
incentive fee consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in
arrears, equals 20.0% of our "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to
1.625% per quarter, or an annualized hurdle rate of 6.5%. For purposes of this fee, "adjusted capital" means cumulative gross proceeds generated from sales of our common shares (including proceeds
from our distribution reinvestment plan) reduced for distributions from non-liquidating dispositions of our investments paid to shareholders and amounts paid for share repurchases pursuant to our
share repurchase program. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a cumulative basis and, if earned, is paid annually. We
accrue this incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FS Advisor is based
on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See
"Critical Accounting PoliciesCapital Gains Incentive Fee" for a discussion of
the treatment of the TRS with respect to the calculation of the capital gains incentive fee.

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We
reimburse FS Advisor for expenses necessary to perform services related to our administration and operations, including FS Advisor's allocable portion of the compensation and related
expenses of certain personnel of Franklin Square Holdings providing administrative services to us on behalf of FS Advisor. The amount of the reimbursement payable to FS Advisor is the lesser of
(1) FS Advisor's actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in
the same geographic location. FS Advisor is required to allocate the cost of such services to us based on factors such as assets, revenues, time allocations and/or other reasonable metrics. Our board
of trustees reviews the methodology employed in determining how the expenses are allocated to us and the proposed allocation of the administrative expenses among us and certain affiliates of FS
Advisor. Our board of trustees then assesses the reasonableness of such reimbursements for expenses allocated to us based on the breadth, depth and quality of such services as compared to the
estimated cost to us of obtaining similar services from third-party providers known to be available. In addition, our board of trustees considers whether any single third-party service provider would
be capable of providing all such services at comparable cost and quality. Finally, our board of trustees, among other things, compares the total amount paid to FS Advisor for such services as a
percentage of our net assets to the same ratio as reported by other comparable BDCs. We will not reimburse FS Advisor for any services for which it receives a separate fee, or for rent, depreciation,
utilities, capital equipment or other administrative items allocated to a controlling person of FS Advisor.

Under
the investment advisory and administrative services agreement, we, either directly or through reimbursement to FS Advisor or its affiliates, are responsible for our organization
and offering costs in an amount up to 1.5% of gross proceeds raised in our continuous public offering. Organization and offering costs primarily include legal, accounting, printing and other expenses
relating to our continuous public offering, including costs associated with technology integration between our systems and those of our selected broker-dealers, marketing expenses, salaries and direct
expenses of FS Advisor's personnel, employees of its affiliates and others while engaged in registering and marketing our common shares, which includes the development of marketing materials and
presentations, training and educational meetings, and generally coordinating the marketing process for us.

Prior
to satisfaction of the minimum offering requirement and for a period of time thereafter, Franklin Square Holdings funded certain of our organization and offering costs. Following
this period, we have paid certain of our organization and offering costs directly and reimbursed FS Advisor for offering costs incurred by FS Advisor on our behalf, including marketing expenses,
salaries and other direct expenses of FS Advisor's personnel and employees of its affiliates while engaged in registering and marketing our common shares. Organization and offering costs funded
directly by Franklin Square Holdings were recorded by us as a contribution to capital. The offering costs were offset against capital in excess of par value on our consolidated financial statements
and the organization costs were charged to expense as incurred by us. All other offering costs, including costs incurred directly by us, amounts reimbursed to FS Advisor for ongoing offering costs and
any reimbursements paid to Franklin Square Holdings for organization and offering costs previously funded, are recorded as a reduction of capital.

The
dealer manager for our continuous public offering is FS2, which is one of our affiliates. Under the dealer manager agreement among us, FS Advisor and FS2,
or the dealer manager agreement, FS2 is entitled to receive sales commissions and dealer manager fees in connection with the sale of common shares in our continuous public offering, all
or a portion of which may be re-allowed to selected broker-dealers and financial representatives.

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The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the years ended
December 31, 2015, 2014 and 2013:

Year Ended December 31,Related PartySource Agreement

Description

2015

2014

2013FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
75,997

$
61,970

$
30,840FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)




$
(10,993
)
$
8,321FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$
31,016

$
32,072

$
7,634FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
4,056

$
3,831

$
2,246FS Advisor

Investment Advisory and Administrative Services Agreement

Offering Costs(5)

$
4,238

$
3,279

$
2,737FS2

Dealer Manager Agreement

Dealer Manager Fee(6)

$
9,251

$
22,194

$
20,016


(1)During
the years ended December 31, 2015, 2014 and 2013, $75,571, $54,809 and $23,611, respectively, in base management fees were paid to FS Advisor.
As of December 31, 2015, $18,338 in base management fees were payable to FS Advisor.(2)During
the year ended December 31, 2015, we did not accrue any capital gains incentive fees. During the year ended December 31, 2014, we
reversed $10,993 of capital gains incentive fees previously accrued based on the performance of our portfolio. During the year ended December 31, 2013, we accrued capital gains incentive fees
of $8,321, of which $5,464 was based on unrealized gains and $2,857 was based on realized gains. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and
until those gains are actually realized. We did not pay any capital gains incentive fees to FS Advisor during the year ended December 31, 2015. We paid FS Advisor $2,857 and $953 in capital
gains incentive fees during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015, we did not have any accrued capital gains incentive fees.(3)During
the years ended December 31, 2015, 2014 and 2013, $31,110, $26,716 and $848, respectively, of subordinated incentive fees on income were paid
to FS Advisor. As of December 31, 2015, a subordinated incentive fee on income of $12,048 was payable to FS Advisor.(4)During
the years ended December 31, 2015, 2014 and 2013, $3,784, $3,508 and $1,854, respectively, of administrative services expenses related to the
allocation of costs of administrative personnel for services rendered to us by FS Advisor and the remainder related to other reimbursable expenses. We paid $3,837, $2,596 and $1,987, respectively, in
administrative services expenses to FS Advisor during the years ended December 31, 2015, 2014 and 2013.(5)During
the years ended December 31, 2015, 2014 and 2013, we incurred offering costs of $8,950, $7,536 and $6,000, respectively, of which $4,238,
$3,279 and $2,737, respectively, related to reimbursements to FS Advisor for offering costs incurred on our behalf, including marketing expenses, salaries and other direct expenses of FS Advisor's
personnel and employees of its affiliates while engaged in registering and marketing our common shares.(6)Represents
aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers or financial representatives.


Capital Contribution by FS Advisor and GSO

In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of $200 to purchase
22,444 common shares (as
adjusted for share distributions) at $8.91 per share, which represents the initial public offering price (as adjusted for share distributions), net of selling commissions and dealer manager fees. The
principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains our investment adviser.

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains our investment adviser. In connection with the same private placement, certain members of our board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase
1,459,320

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common
shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions), in each
case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, we issued an aggregate of 2,244,875 common shares (as adjusted for share
distributions) for aggregate proceeds of $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of March 1, 2016, we have issued an aggregate of 4,491,309
common shares (as adjusted for share distributions) for aggregate gross proceeds of $40,131 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO,
including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.

Potential Conflicts of Interest

FS Advisor's senior management team is comprised of substantially the same personnel as the senior management teams of FB Income
Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings'
other affiliated BDCs and affiliated closed-end management investment company. As a result, such personnel provide investment advisory services to us and each of FS Investment Corporation, FS
Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV, and FS Global Credit Opportunities Fund. While none of FS Advisor, FB Income Advisor, LLC, FSIC II
Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC or FS Global Advisor, LLC is currently making private corporate debt investments for clients other than us, FS
Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in
the future. In the event that FS Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable
manner consistent with our investment objectives and strategy, if necessary, so that we will not be disadvantaged in relation to any other client of FS Advisor or its management team. In addition,
even in the absence of FS Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation, FS Investment Corporation II, FS
Investment Corporation III, FS Investment Corporation IV and/or FS Global Credit Opportunities Fund rather than to us.

Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain
conditions, to co-invest in certain privately negotiated investment transactions with our co-investment affiliates. We believe this relief has and may continue to enhance our ability to further our
investment objectives and strategy. We believe this relief may also increase favorable investment opportunities for us, in part, by allowing us to participate in larger investments, together with our
co-investment affiliates, than would be available to us if such relief had not been obtained. Because we did not seek exemptive relief to engage in co-investment transactions with our investment
sub-adviser, GSO, and its affiliates, we will continue to be permitted to co-invest with GSO and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is
sufficient to ensure that no portion of our distributions to shareholders will be paid from our offering proceeds or borrowings. See "OverviewExpense Reimbursement" for a
detailed description of the expense reimbursement agreement.

As
of December 31, 2015 and 2014, we had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed to us by Franklin
Square Holdings may become subject to repayment in the future. During the year ended December 31, 2013, $1,083 of expense recoupments was paid to Franklin Square Holdings. As of
December 31, 2015 and 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future.

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FS Benefit Trust

On May 30, 2013, FS Benefit Trust was formed as a Delaware statutory trust for the purpose of awarding equity incentive
compensation to employees of Franklin Square
Holdings and its affiliates. During the years ended December 31, 2015, 2014 and 2013, FS Benefit Trust purchased $104, $49 and $43, respectively, of our common shares at a purchase price equal
to 90% of the offering price in effect on the applicable purchase date.

Recent Developments

During the period from January 1, 2016 to March 1, 2016, we sold 10,379,833 common shares for gross proceeds of $70,555
at an average price per share of $6.80. We anticipate that we will close our public offering to new investors during the second quarter of 2016.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of December 31, 2015, 50.9% of our portfolio
investments (based on fair value) paid variable interest rates, 38.9% paid fixed interest rates, 5.9% were income producing equity or other investments and the remainder (4.3%) consisted of non-income
producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to the variable rate investments we hold and to
declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from increasing
until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates beyond
this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income and may result in a substantial increase in our net investment
income and to the amount of incentive fees payable to FS Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant
to the terms of the BNP facility, Deutsche Bank credit facility, Fortress facility, Goldman facility, Natixis credit facility and Wells Fargo credit facility, Berwyn Funding,
FSEP Funding, Foxfields Funding, Strafford Funding, Energy Funding and Wayne Funding, respectively, borrow at a floating rate based on a benchmark interest rate. To the extent that any present or
future credit facilities or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market
interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding or financing arrangements in effect, our interest expense would increase, which could reduce
our net investment income, especially to the extent we hold fixed rate investments.

The
following table shows the effect over a twelve-month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the
composition of our investment portfolio, including the accrual status of our investments, and our borrowing arrangements in effect as of December 31, 2015 (dollar amounts are presented in
thousands):

Basis Point Change in Interest Rates

Increase
(Decrease)
in Interest
Income

Increase
(Decrease)
in Interest
Expense

Increase
(Decrease)
in Net
Interest
Income

Percentage
Change in
Net Interest
IncomeDown 60 basis points

$
(18
)
$
(6,147
)
$
6,129


1.9
%No Change











Up 100 basis points


7,913


10,245


(2,332
)

(0.7
)%Up 300 basis points


46,110


30,735


15,375


4.7
%Up 500 basis points


85,027


51,225


33,802


10.3
%


We
expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize
our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes
in interest rates or hedging transactions could have a material adverse effect on our business, financial

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condition
and results of operations. During the years ended December 31, 2015, 2014 and 2013, we did not engage in interest rate hedging activities.

In
addition, we may have risk regarding portfolio valuation. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting PoliciesValuation of Portfolio Investments."

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Item 8.    Financial Statements and Supplementary Data.

Index to Financial Statements



PageManagement's Report on Internal Control over Financial Reporting

105Report of Independent Registered Public Accounting Firm

106Report of Independent Registered Public Accounting Firm

107Consolidated Balance Sheets as of December 31, 2015 and 2014

108Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013

109Consolidated Statements of Changes in Net Assets for the years ended December 31, 2015, 2014 and 2013

110Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013

111Consolidated Schedules of Investments as of December 31, 2015 and 2014

112Notes to Consolidated Financial Statements

126


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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our
management is responsible for establishing and maintaining adequate internal control over financial reporting. In connection with the preparation of our annual financial statements,
management has conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework set forth inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Management's assessment included an evaluation
of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. Based on this evaluation, we have concluded that, as of
December 31, 2015, our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. Our
internal control over financial reporting as of December 31, 2015 has been audited by our independent registered public accounting firm.

105

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Trustees and Shareholders
FS Energy and Power Fund
Philadelphia, Pennsylvania

We
have audited FS Energy and Power Fund's internal control over financial reporting as of December 31, 2015, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. FS Energy and Power Fund's management is
responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying
Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, FS Energy and Power Fund maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets, including the consolidated
schedules of investments, of FS Energy and Power Fund as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in net assets and cash flows for each of
the three years in the period ended December 31, 2015 and our report dated March 11, 2016 expressed an unqualified opinion.

/s/
RSM US LLP

Blue
Bell, Pennsylvania
March 11, 2016

106

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Trustees and Shareholders
FS Energy and Power Fund
Philadelphia, Pennsylvania

We
have audited the accompanying consolidated balance sheets, including the consolidated schedules of investments, of FS Energy and Power Fund (the "Company") as of December 31,
2015 and 2014, and the related consolidated statements of operations, changes in net assets and cash flows for each of the three years in the period ended December 31, 2015. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2015 and 2014 by correspondence with the custodians and brokers, or by other appropriate auditing procedures where replies from
custodians and brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FS Energy and Power Fund as of
December 31, 2015 and 2014 and the results of their operations, their cash flows and the changes in their net assets for each of the three years in the period ended December 31, 2015, in
conformity with U.S. generally accepted accounting principles.

We
have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), FS Energy and Power Fund's internal control over financial
reporting as of December 31, 2015, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 11, 2016 expressed an unqualified opinion on the effectiveness of FS Energy and Power Fund's internal
control over financial reporting.

/s/
RSM US LLP

Blue
Bell, Pennsylvania
March 11, 2016

107

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Table of Contents



FS Energy and Power Fund

Consolidated Balance Sheets

(in thousands, except share and per share amounts)



December 31,2015

2014AssetsInvestments, at fair valueNon-controlled/unaffiliated investments (amortized cost$3,267,830 and $3,375,716, respectively)

$
2,518,595

$
3,089,068Non-controlled/affiliated investments (amortized cost$356,188 and $287,334, respectively)


276,993


286,109Controlled/affiliated investments (amortized cost$270,389 and $0, respectively)


273,910


​
​
​
​
​
​
​
​Total investments, at fair value (amortized cost$3,894,407 and $3,663,050, respectively)


3,069,498


3,375,177Cash


368,867


225,130Receivable for investments sold and repaid


13,792


51,253Interest receivable


34,921


47,197Receivable for common shares purchased


6,915


9,989Deferred financing costs


5,179


5,575Prepaid expenses and other assets


247


30​
​
​
​
​
​
​
​Total assets

$
3,499,419

$
3,714,351​
​
​
​
​
​
​
​LiabilitiesPayable for investments purchased

$


$
20,094Credit facilities payable


715,510


901,300Repurchase agreement payable(1)


324,984


189,113Shareholder distributions payable


48


50Management fees payable


18,338


17,912Subordinated income incentive fees payable(2)


12,048


12,142Administrative services expense payable


1,872


1,653Interest payable


3,046


2,888Trustees' fees payable


254


229Other accrued expenses and liabilities


5,458


3,249​
​
​
​
​
​
​
​Total liabilities


1,081,558


1,148,630​
​
​
​
​
​
​
​Commitments and contingencies(3)Shareholders' equityPreferred shares, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding





Common shares, $0.001 par value, 450,000,000 shares authorized, 372,210,264 and 299,394,371 shares issued and outstanding, respectively


372


299Capital in excess of par value


3,428,672


2,841,446Accumulated undistributed net realized gains (losses) on investments and gain/loss on foreign currency(4)


(200,220
)

7,497Accumulated undistributed net investment income(4)


14,024


4,341Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency


(824,987
)

(287,862
)​
​
​
​
​
​
​
​Total shareholders' equity


2,417,861


2,565,721​
​
​
​
​
​
​
​Total liabilities and shareholders' equity

$
3,499,419

$
3,714,351​
​
​
​
​
​
​
​Net asset value per common share at year end

$
6.50

$
8.57


(1)See
Note 8 for a discussion of the Company's repurchase transaction.(2)See
Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the subordinated income incentive fees.(3)See
Note 9 for a discussion of the Company's commitments and contingencies.(4)See
Note 5 for a discussion of the sources of distributions paid by the Company.




See notes to consolidated financial statements.

108

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Table of Contents



FS Energy and Power Fund

Consolidated Statements of Operations

(in thousands, except share and per share amounts)



Year Ended December 31,2015

2014

2013Investment incomeFrom non-controlled/unaffiliated investments:Interest income

$
305,035

$
251,827

$
115,402Fee income


22,316


29,661


16,600Dividend income


1,483





From non-controlled/affiliated investments:Interest income


21,503


6,254


Fee income


681


2,228


From controlled/affiliated investments:Interest income


19,950





Fee income


8,685





​
​
​
​
​
​
​
​
​
​
​Total investment income


379,653


289,970


132,002​
​
​
​
​
​
​
​
​
​
​Operating expensesManagement fees


75,997


61,970


30,840Capital gains incentive fees(1)





(10,993
)

8,321Subordinated income incentive fees(1)


31,016


32,072


7,634Administrative services expenses


4,056


3,831


2,246Share transfer agent fees


2,757


2,541


2,010Accounting and administrative fees


1,405


1,211


741Interest expense


30,703


19,069


9,297Trustees' fees


970


853


870Other general and administrative expenses


4,841


3,615


2,439​
​
​
​
​
​
​
​
​
​
​Total operating expenses


151,745


114,169


64,398Income and excise taxes


313


912


800​
​
​
​
​
​
​
​
​
​
​Total expenses


152,058


115,081


65,198​
​
​
​
​
​
​
​
​
​
​Net investment income


227,595


174,889


66,804​
​
​
​
​
​
​
​
​
​
​Realized and unrealized gain/lossNet realized gain (loss) on investmentsnon-controlled/unaffiliated


(201,559
)

(5,682
)

5,091Net realized gain (loss) on total return swap(2)








12,736Net realized gain (loss) on foreign currency


(210
)

(636
)

(77
)Net change in unrealized appreciation (depreciation) on investments:Non-controlled/unaffiliated


(462,587
)

(336,895
)

26,994Non-controlled/affiliated


(77,970
)

(1,225
)

Controlled/affiliated


3,521





Net change in unrealized appreciation (depreciation) on total return swap(2)








(3,141
)Net change in unrealized gain (loss) on foreign currency


(89
)

40


(37
)​
​
​
​
​
​
​
​
​
​
​Total net realized and unrealized gain (loss) on investments


(738,894
)

(344,398
)

41,566​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations

$
(511,299
)
$
(169,509
)
$
108,370​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​Per share informationbasic and dilutedNet increase (decrease) in net assets resulting from operations (Earnings per Share)

$
(1.51
)
$
(0.72
)
$
0.94​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​Weighted average shares outstanding


337,879,830


236,753,647


115,827,352​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


(1)See
Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and
subordinated income incentive fees.(2)On
May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.




See notes to consolidated financial statements.

109

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Table of Contents



FS Energy and Power Fund

Consolidated Statements of Changes in Net Assets
(in thousands)



Year Ended December 31,2015

2014

2013OperationsNet investment income

$
227,595

$
174,889

$
66,804Net realized gain (loss) on investments, total return swap and foreign currency(1)


(201,769
)

(6,318
)

17,750Net change in unrealized appreciation (depreciation) on investments


(537,036
)

(338,120
)

26,994Net change in unrealized appreciation (depreciation) on total return swap(1)








(3,141
)Net change in unrealized gain (loss) on foreign currency


(89
)

40


(37
)​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations


(511,299
)

(169,509
)

108,370​
​
​
​
​
​
​
​
​
​
​Shareholder distributions(2)Distributions from net investment income


(224,586
)

(145,745
)

(76,383
)Distributions from net realized gain on investments


(14,247
)

(17,298
)

(1,432
)​
​
​
​
​
​
​
​
​
​
​Net decrease in net assets resulting from shareholder distributions


(238,833
)

(163,043
)

(77,815
)​
​
​
​
​
​
​
​
​
​
​Capital share transactionsIssuance of common shares(3)


498,830


1,129,068


1,007,156Reinvestment of shareholder distributions(3)


152,401


110,766


44,910Repurchases of common shares(3)


(40,009
)

(10,262
)

(3,273
)Offering costs


(8,950
)

(7,536
)

(6,000
)​
​
​
​
​
​
​
​
​
​
​Net increase in net assets resulting from capital share transactions


602,272


1,222,036


1,042,793​
​
​
​
​
​
​
​
​
​
​Total increase (decrease) in net assets


(147,860
)

889,484


1,073,348Net assets at beginning of year


2,565,721


1,676,237


602,889​
​
​
​
​
​
​
​
​
​
​Net assets at end of year

$
2,417,861

$
2,565,721

$
1,676,237​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​Accumulated undistributed (distributions in excess of) net investment income(2)

$
14,024

$
4,341

$
(7,946
)​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


(1)On
May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.(2)See
Note 5 for a discussion of the sources of distributions paid by the Company.(3)See
Note 3 for a discussion of transactions with respect to the Company's common shares during the years ended December 31, 2015, 2014 and
2013.




See notes to consolidated financial statements.

110

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Table of Contents



FS Energy and Power Fund

Consolidated Statements of Cash Flows

(in thousands)



Year Ended December 31,2015

2014

2013Cash flows from operating activitiesNet increase (decrease) in net assets resulting from operations

$
(511,299
)
$
(169,509
)
$
108,370Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash provided by (used in) operating
activities:Purchases of investments


(1,195,947
)

(2,437,689
)

(2,295,602
)Paid-in-kind interest


(27,585
)

(15,125
)

(3,190
)Proceeds from sales and repayments of investments


800,534


1,044,311


735,673Net realized (gain) loss on investments


201,559


5,682


(5,091
)Net change in unrealized (appreciation) depreciation on investments


537,036


338,120


(26,994
)Net change in unrealized (appreciation) depreciation on total return swap(1)








3,141Accretion of discount


(9,918
)

(10,275
)

(3,825
)Amortization of deferred financing costs


2,707


1,891


980(Increase) decrease in due from counterparty








56,876(Increase) decrease in receivable for investments sold and repaid


37,461


(42,947
)

1,068(Increase) decrease in interest receivable


12,276


(21,730
)

(16,392
)(Increase) decrease in receivable due on total return swap(1)








329(Increase) decrease in prepaid expenses and other assets


(217
)

(9
)

154Increase (decrease) in payable for investments purchased


(20,094
)

(61,415
)

55,953Increase (decrease) in management fees payable


426


7,161


7,229Increase (decrease) in expense recoupment payable to sponsor(2)








(1,083
)Increase (decrease) in accrued capital gains incentive fees





(13,850
)

7,368Increase (decrease) in subordinated income incentive fees payable


(94
)

5,356


6,786Increase (decrease) in administrative services expense payable


219


1,235


259Increase (decrease) in interest payable


158


883


1,427Increase (decrease) in trustees' fees payable


25


(22
)

251Increase (decrease) in other accrued expenses and liabilities


2,209


1,271


1,334​
​
​
​
​
​
​
​
​
​
​Net cash provided by (used in) operating activities


(170,544
)

(1,366,661
)

(1,364,979
)​
​
​
​
​
​
​
​
​
​
​Cash flows from financing activitiesIssuance of common shares


501,904


1,119,214


1,007,062Reinvestment of shareholder distributions


152,401


110,766


44,910Repurchases of common shares


(40,009
)

(10,262
)

(3,273
)Offering costs


(8,950
)

(7,536
)

(6,000
)Shareholder distributions


(238,835
)

(173,693
)

(70,464
)Borrowings under credit facilities(3)


109,600


323,826


438,942Borrowings under repurchase agreement(4)


135,871


189,113


Repayments of credit facilities(3)


(295,390
)

(46,700
)

Deferred financing costs paid


(2,311
)

(4,021
)

(4,100
)​
​
​
​
​
​
​
​
​
​
​Net cash provided by financing activities


314,281


1,500,707


1,407,077​
​
​
​
​
​
​
​
​
​
​Total increase (decrease) in cash


143,737


134,046


42,098Cash at beginning of year


225,130


91,084


48,986​
​
​
​
​
​
​
​
​
​
​Cash at end of year

$
368,867

$
225,130

$
91,084​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​Supplemental disclosureExcise and state taxes paid

$
400

$
264

$
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


(1)On
May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.(2)See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
paid by the Company to its investment adviser and affiliates.(3)See
Note 8 for a discussion of the Company's credit facilities. During the years ended December 31, 2015, 2014 and 2013, the Company paid
$18,419, $16,295 and $6,890, respectively, in interest expense on the credit facilities.(4)See
Note 8 for a discussion of the Company's repurchase transaction. During the year ended December 31, 2015, the Company paid $9,419 in
interest expense pursuant to the repurchase agreement. During the year ended December 31, 2014, the Company did not pay any interest expense pursuant to the repurchase agreement.




See notes to consolidated financial statements.

111

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Table of Contents



FS Energy and Power Fund
Consolidated Schedule of Investments
As of December 31, 2015
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Senior Secured LoansFirst Lien38.5%Abaco Energy Technologies LLC

(g)(i)(j)

Service & Equipment

L+700


1.0
%
11/20/20

$
60,938

$
57,911

$
31,383Allied Wireline Services, LLC

(g)(i)(j)(k)

Service & Equipment

L+400, 5.5% PIK (5.5% Max PIK)


1.5
%
2/28/19


103,061


101,930


96,234Alon USA Partners, L.P.

(g)(i)(l)

Downstream

L+800


1.3
%
11/26/18


7,158


7,342


7,140Altus Power America, Inc.

(j)

Power

L+750


1.5
%
10/10/21


46,555


46,555


46,090Altus Power America, Inc.

(e)

Power

L+750


1.5
%
10/10/21


37,820


37,820


37,441AP Exhaust Acquisition, LLC

(g)

Service & Equipment

L+775


1.5
%
1/16/21


15,811


15,811


14,842BBH Operating LLC



Upstream

Prime+500 PIK (8.25% Max PIK)


3.3
%
2/26/16


24,441


24,441


17,719BBH Operating LLC

(e)

Upstream

Prime+500 PIK (8.25% Max PIK)


3.3
%
2/26/16


5,559


5,559


4,031BL Sand Hills Unit, L.P.



Upstream

Prime+650


3.5
%
12/17/17


36,626


31,807


34,016BL Sand Hills Unit, L.P.

(e)

Upstream

Prime+650


3.5
%
12/17/17


19,367


16,819


17,987Cactus Wellhead, LLC

(g)(i)(j)

Service & Equipment

L+600


1.0
%
7/31/20


51,844


51,012


37,457Cimarron Energy Inc.

(g)

Service & Equipment

L+775, 0.0% PIK (3.75% Max PIK)


1.0
%
12/15/19


24,250


24,250


24,129Crestwood Holdings LLC

(f)(g)(j)

Midstream

L+600


1.0
%
6/19/19


30,565


30,689


19,816EnergySolutions, LLC

(i)(j)

Service & Equipment

L+575


1.0
%
5/29/20


20,462


20,150


18,211EP Acquisition LLC

(q)(y)

Upstream

Prime+500 PIK (8.25% Max PIK)


3.3
%
2/26/16


525


525


Industrial Group Intermediate Holdings, LLC

(i)

Service & Equipment

L+800


1.3
%
5/31/20


14,951


14,951


14,801MB Precision Holdings LLC

(g)

Service & Equipment

L+725


1.3
%
1/23/20


12,855


12,855


12,726Moxie Liberty LLC

(g)(j)

Power

L+650


1.0
%
8/21/20


32,432


32,540


30,162Panda Sherman Power, LLC

(g)(j)

Power

L+750


1.5
%
9/14/18


22,643


22,937


20,492Panda Temple Power, LLC

(j)

Power

L+625


1.0
%
3/6/22


9,925


9,747


8,188Panda Temple Power II, LLC

(g)(j)

Power

L+600


1.3
%
4/3/19


27,809


28,132


24,750ProPetro Services, Inc.

(i)

Service & Equipment

L+625


1.0
%
9/30/19


11,612


11,599


7,838Stallion Oilfield Holdings, Inc.

(g)(i)(j)

Service & Equipment

L+675


1.3
%
6/19/18


45,025


45,045


24,404Stonewall Gas Gathering LLC

(j)

Midstream

L+775


1.0
%
1/28/22


26,794


25,803


26,727Sunnova Asset Portfolio 5 Holdings, LLC

(j)(z)

Power

12.0% PIK (12.0% Max PIK)




11/14/21


250,138


245,363


244,510Sunnova Asset Portfolio 5 Holdings, LLC

(e)(z)

Power

12.0% PIK (12.0% Max PIK)




11/14/21


7,167


7,167


7,006Swift Worldwide Resources US Holdings Corp.

(g)(j)

Service & Equipment

L+800


1.3
%
4/30/19


59,057


59,057


59,057UTEX Industries, Inc.

(f)

Service & Equipment

L+400


1.0
%
5/21/21


4,485


3,443


3,091Warren Resources, Inc.

(k)

Upstream

L+850


1.0
%
5/22/20


131,175


131,175


106,907​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansFirst Lien
















1,122,435


997,155Unfunded Loan Commitments
















(67,365
)

(67,365
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Senior Secured LoansFirst Lien
















1,055,070


929,790​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to consolidated financial statements.

112

---



Table of Contents

FS Energy and Power Fund
Consolidated Schedule of Investments (Continued)
As of December 31, 2015
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Senior Secured LoansSecond Lien38.2%Alison US LLC

(f)(j)(l)

Service & Equipment

L+850


1.0
%
8/29/22

$
17,222

$
16,641

$
13,993American EnergyMarcellus, LLC



Upstream

L+750


1.0
%
8/4/21


10,000


9,874


233Ameriforge Group Inc.

(f)(g)

Service & Equipment

L+750


1.3
%
12/21/20


35,950


36,433


2,831AP Exhaust Acquisition, LLC



Service & Equipment

12.0%, 0.0% PIK (12.0% Max PIK)




9/28/21


3,243


3,243


2,959Arena Energy, LP

(i)(k)

Upstream

L+1000


1.0
%
1/24/21


65,000


65,000


59,854Ascent ResourcesUtica, LLC

(g)(j)(k)

Upstream

L+950, 2.0% PIK (2.0% Max PIK)


1.5
%
9/30/18


280,735


279,572


251,258Atlas Resource Partners, L.P.

(i)(k)

Upstream

L+900


1.0
%
2/23/20


100,000


97,489


79,986BlackBrush Oil & Gas, L.P.

(f)(i)

Upstream

L+650


1.0
%
7/30/21


31,519


30,708


25,268Brock Holdings III, Inc.

(f)(g)(j)

Service & Equipment

L+825


1.8
%
3/16/18


29,605


29,766


22,796Chief Exploration & Development LLC

(f)(i)

Upstream

L+650


1.0
%
5/16/21


19,576


19,504


13,143Consolidated Precision Products Corp.

(g)(j)

Service & Equipment

L+775


1.0
%
4/30/21


11,574


11,529


10,532Emerald Performance Materials, LLC

(j)

Downstream

L+675


1.0
%
8/1/22


5,319


5,296


5,055Extraction Oil & Gas Holdings, LLC

(i)(j)

Upstream

11.0%




5/29/19


74,186


74,186


74,650Extraction Oil & Gas Holdings, LLC

(i)(j)

Upstream

10.0%




5/29/19


32,462


32,462


32,259Fieldwood Energy LLC

(f)(i)

Upstream

L+713


1.3
%
9/30/20


41,047


41,951


6,547Granite Intermediate Holdings, Inc.

(f)

Power

L+725


1.0
%
10/15/22


13,150


13,047


10,257Gruden Acquisition, Inc.

(j)

Service & Equipment

L+850


1.0
%
8/18/23


15,000


14,281


14,288Horn Intermediate Holdings, Inc.

(g)

Service & Equipment

L+775


1.3
%
10/2/18


50,250


50,250


49,496Jonah Energy LLC

(i)(j)

Upstream

L+650


1.0
%
5/12/21


25,133


24,821


15,960MD America Energy, LLC

(f)(g)(j)

Upstream

L+850


1.0
%
8/4/19


41,612


40,121


34,815Neff Rental LLC

(j)

Service & Equipment

L+625


1.0
%
6/9/21


15,145


15,182


12,570Oxbow Carbon LLC

(g)

Midstream

L+700


1.0
%
1/19/20


15,000


14,904


12,631P2 Upstream Acquisition Co.

(g)(j)

Service & Equipment

L+800


1.0
%
4/30/21


32,599


32,862


27,302Templar Energy LLC

(f)(g)(i)

Upstream

L+750


1.0
%
11/25/20


89,923


88,451


10,903Total Safety U.S., Inc.

(f)(g)(j)

Service & Equipment

L+800


1.3
%
9/13/20


14,795


14,978


8,335UTEX Industries, Inc.

(f)(j)

Service & Equipment

L+725


1.0
%
5/20/22


36,192


36,232


23,706Vantage Energy, LLC

(i)(j)

Upstream

L+750


1.0
%
12/20/18


30,078


29,933


19,325Vantage Energy II, LLC

(i)(j)

Upstream

L+750


1.0
%
5/8/17


85,000


85,000


82,450​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansSecond Lien
















1,213,716


923,402​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to consolidated financial statements.

113

---



Table of Contents

FS Energy and Power Fund
Consolidated Schedule of Investments (Continued)
As of December 31, 2015
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Senior Secured Bonds13.4%American EnergyWoodford, LLC

(h)(q)(y)

Upstream

12.0% PIK (12.0% Max PIK)




12/30/20

$
7,806

$
5,662

$
1,112FourPoint Energy, LLC

(j)(k)(o)

Upstream

8.0%




12/31/20


290,813


282,012


226,107FourPoint Energy, LLC

(e)(o)

Upstream

8.0%




12/31/20


18,563


18,470


14,432Gastar Exploration USA, Inc.

(h)

Upstream

8.6%




5/15/18


5,690


5,393


2,902Light Tower Rentals, Inc.

(h)(n)

Service & Equipment

8.1%




8/1/19


17,500


17,313


8,947Lightstream Resources Ltd.

(k)(l)

Upstream

9.9%




6/15/19


62,400


62,400


52,104Mirant Mid-Atlantic Trust

(f)(h)(n)

Power

10.1%




12/30/28


23,344


26,097


22,556SandRidge Energy, Inc.

(h)(n)

Upstream

8.8%




6/1/20


46,700


46,598


14,258​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured Bonds
















463,945


342,418Unfunded Bond Commitment
















(18,470
)

(18,470
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Senior Secured Bonds
















445,475


323,948​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Subordinated Debt24.0%Alta Mesa Holdings, LP

(h)(n)

Upstream

9.6%




10/15/18


18,451


18,376


6,481Archrock Partners, L.P.

(h)(l)

Midstream

6.0%




4/1/21


3,055


2,625


2,452Archrock Partners, L.P.

(h)(l)

Midstream

6.0%




10/1/22


10,533


8,858


8,124Atlas Energy Holdings Operating Co., LLC

(h)

Upstream

7.8%




1/15/21


28,285


25,869


5,648Atlas Energy Holdings Operating Co., LLC

(h)

Upstream

9.3%




8/15/21


24,460


23,574


5,022Bellatrix Exploration Ltd.

(f)(h)(l)

Upstream

8.5%




5/15/20


45,590


44,731


30,716Brand Energy & Infrastructure Services, Inc.

(f)(h)

Service & Equipment

8.5%




12/1/21


27,500


27,261


23,684Calpine Corp.

(f)(l)

Power

5.8%




1/15/25


5,100


5,093


4,501Canbriam Energy Inc.

(h)(j)(l)

Upstream

9.8%




11/15/19


115,200


111,556


104,256Chaparral Energy Inc.

(h)(n)

Upstream

7.6%




11/15/22


15,225


16,150


3,191Compressco Partners, LP

(f)(h)(l)

Service & Equipment

7.3%




8/15/22


20,050


19,889


14,862Crestwood Equity Partners L.P.

(f)(l)

Midstream

6.1%




3/1/22


5,500


5,500


3,827Dynegy Finance I/II Inc.

(f)(l)

Power

7.6%




11/1/24


17,080


16,654


14,603Eclipse Resources Corp.

(h)(l)

Upstream

8.9%




7/15/23


27,500


26,949


13,234EV Energy Partners, L.P.

(h)(n)

Upstream

8.0%




4/15/19


25,560


21,221


12,716Everest Acquisition LLC

(f)(l)

Upstream

9.4%




5/1/20


14,250


14,250


9,054


See notes to consolidated financial statements.

114

---



Table of Contents

FS Energy and Power Fund
Consolidated Schedule of Investments (Continued)
As of December 31, 2015
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Genesis Energy, L.P.

(f)(l)

Midstream

6.8%




8/1/22

$
12,100

$
11,688

$
10,179GenOn Energy, Inc.

(f)(h)(n)

Power

9.9%




10/15/20


42,698


44,669


31,383GenOn Energy, Inc.

(h)

Power

7.9%




6/15/17


5,000


4,795


4,371Global Jet Capital Inc.



Service & Equipment

15.0% PIK (15.0% Max PIK)




1/30/25


635


635


635Global Jet Capital Inc.



Service & Equipment

15.0% PIK (15.0% Max PIK)




4/30/25


4,030


4,030


4,030Global Jet Capital Inc.



Service & Equipment

15.0% PIK (15.0% Max PIK)




9/3/25


828


828


828Global Jet Capital Inc.



Service & Equipment

15.0% PIK (15.0% Max PIK)




9/29/25


779


779


779Global Partners L.P.

(f)(h)(l)(n)

Midstream

6.3%




7/15/22


68,350


68,350


54,424Jones Energy, Inc.

(h)(n)

Upstream

6.8%




4/1/22


8,000


8,000


4,345Jupiter Resources Inc.

(h)(l)

Upstream

8.5%




10/1/22


71,125


67,291


28,539Kenan Advantage Group, Inc.

(f)

Service & Equipment

7.9%




7/31/23


11,970


11,970


11,820Legacy Reserves LP

(h)

Upstream

8.0%




12/1/20


16,750


16,499


3,371Legacy Reserves LP

(h)

Upstream

6.6%




12/1/21


14,000


13,847


3,028Lonestar Resources America Inc.

(h)(n)

Upstream

8.8%




4/15/19


21,500


21,591


13,231Martin Midstream Partners L.P.

(f)(l)

Midstream

7.3%




2/15/21


15,658


16,144


13,877Memorial Production Partners L.P.

(h)

Upstream

6.9%




8/1/22


12,250


12,059


3,690ONEOK, Inc.

(f)(h)(l)(n)

Midstream

7.5%




9/1/23


28,000


26,771


23,363Seven Generations Energy Ltd.

(f)(l)

Upstream

6.8%




5/1/23


6,150


5,612


5,220Talos Production LLC

(f)(h)(n)

Upstream

9.8%




2/15/18


43,250


43,258


17,841Tenrgys, LLC

(i)(j)

Upstream

L+900


2.5
%
12/23/18


75,000


75,000


64,875Whiting Petroleum Corp.

(f)(l)

Upstream

5.0%




3/15/19


4,685


4,124


3,562Zachry Holdings, Inc.

(f)

Service & Equipment

7.5%




2/1/20


14,300


14,376


13,978​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Subordinated Debt
















860,872


579,740​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to consolidated financial statements.

115

---



Table of Contents

FS Energy and Power Fund
Consolidated Schedule of Investments (Continued)
As of December 31, 2015
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Number of
Shares

Amortized
Cost

Fair
Value(d)Equity/Other12.9%(m)Abaco Energy Technologies LLC, Common Equity

(q)

Service & Equipment


6,944,444

$
6,944

$
1,042Allied Downhole Technologies, LLC, Common Equity

(k)(p)(q)

Service & Equipment


6,600,000


6,600


4,950Allied Downhole Technologies, LLC, Warrants, 2/28/2019

(k)(p)(q)

Service & Equipment


5,344,680


1,865


4,009Altus Power America Holdings, LLC, Preferred Equity



Power


15,518,478


15,464


28,709Altus Power America Management, LLC, Class B Units

(q)(r)

Power


2,250





AP Exhaust Holdings, LLC, Common Equity

(k)(p)(q)

Service & Equipment


811


811


405Ascent Resources Utica Holdings, LLC, Common Equity

(q)(s)

Upstream


15,657,194


14,900


3,131BBH Operating LLC, Common Equity

(q)(t)

Upstream


1,000


1,000


BL Sand Hills Unit, L.P., Net Profits Interest

(q)(u)

Upstream


N/A


4,677


5,966BL Sand Hills Unit, L.P., Overriding Royalty Interest

(u)

Upstream


N/A


668


227Cimarron Energy Holdco Inc., Common Equity

(q)

Service & Equipment


2,500,000


2,500


1,750Extraction Oil & Gas Holdings, LLC, Common Equity

(k)(p)(q)

Upstream


4,191,800


11,250


15,090Fortune Creek Co-Invest I L.P., LP Interest

(l)(q)(v)(y)

Midstream


N/A


16,697


3,281FourPoint Energy, LLC, Common Equity, Class C Units

(k)(o)(p)(q)

Upstream


66,000


66,000


46,200FourPoint Energy, LLC, Common Equity, Class D Units

(k)(o)(p)(q)

Upstream


12,374


8,176


8,724Global Jet Capital Holdings, LP, Preferred Equity

(q)

Service & Equipment


2,448,883


2,449


2,449Industrial Group Intermediate Holdings, LLC, Common Equity

(k)(p)(q)

Service & Equipment


371,901


372


614MB Precision Investment Holdings LLC, Class A-2 Units

(q)

Service & Equipment


490,213


490


466Plains Offshore Operations Inc., Preferred Equity

(f)

Upstream


21,067


26,321


25,869Plains Offshore Operations Inc., Warrants, 11/18/2019

(f)(q)

Upstream


427,005


689


Summit Midstream Partners, LLC, Preferred Equity



Midstream


39,163


39,163


37,205Sunnova Holdings, LLC, Common Equity

(q)(z)

Power


1,074,951


25,026


29,561Swift Worldwide Resources Holdco Limited, Common Equity

(l)(q)(w)

Service & Equipment


3,750,000


6,029


3,870Synergy Offshore LLC, Preferred Equity

(k)(x)

Upstream


50,000


61,183


89,100​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Equity/Other









319,274


312,618​
​
​
​
​
​
​
​
​
​
​
​
​
​
​TOTAL INVESTMENTS127.0%








$
3,894,407


3,069,498​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​LIABILITIES IN EXCESS OF OTHER ASSETS(27.0%)












(651,637
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​NET ASSETS100.0%











$
2,417,861​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to consolidated financial statements.

116

---



Table of Contents

Table of Contents

FS Energy and Power Fund
Consolidated Schedule of Investments (Continued)
As of December 31, 2015
(in thousands, except share amounts)

(a)

Security may be an obligation of one or more entities affiliated with the named company.(b)

Certain variable rate securities in the Company's portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of December 31, 2015, the three-month London Interbank
Offered Rate was 0.61% and the U.S. Prime Lending Rate was 3.50%.(c)

Denominated in U.S. dollars, unless otherwise noted.(d)

Fair value determined by the Company's board of trustees (see Note 7).(e)

Security is an unfunded commitment.(f)

Security or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see
Note 8).(g)

Security or portion thereof held within Energy Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Natixis, New York Branch (see
Note 8).(h)

Security or portion thereof held within Berwyn Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage, Inc., or BNP.
Securities held within Berwyn Funding LLC may be rehypothecated from time to time as permitted under Rule 15c-1(a)(1) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, subject to the terms and conditions governing the
prime brokerage facility with BNP (see Note 8).(i)

Security or portion thereof held within Wayne Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Wells Fargo Securities, LLC (see
Note 8).(j)

Security or portion thereof held within Gladwyne Funding LLC and is pledged as collateral supporting the obligations outstanding under the repurchase transaction with Goldman Sachs Bank USA (see
Note 8).(k)

Security or portion thereof held within Foxfields Funding LLC and is pledged as collateral supporting the obligations outstanding under the term loan facility with Fortress Credit Co LLC (see
Note 8).(l)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended, or the 1940 Act. A business development company may not acquire any asset other than a qualifying asset, unless, at the time
the acquisition is made, qualifying assets represent at least 70% of the business development company's total assets. As of December 31, 2015, 87.8% of the Company's total assets represented qualifying assets.(m)

Listed investments may be treated as debt for U.S. generally accepted accounting principles, or GAAP, or tax purposes.(n)

Security or portion thereof held within Berwyn Funding LLC has been rehypothecated under Rule 15c-1(a)(1) of the Exchange Act, subject to the terms and conditions governing the prime brokerage facility with BNP
(see Note 8). As of December 31, 2015, the fair value of securities rehypothecated by BNP was $108,340.(o)

Under the 1940 Act, the Company generally is deemed to be an "affiliated person" of a portfolio company if it owns 5% or more of the portfolio company's voting securities. As of December 31, 2015, the Company held
investments in a portfolio company of which it is deemed to be an "affiliated person" but is not deemed to "control." The following table presents certain information with respect to such portfolio company for the year ended December 31,
2015:




Portfolio Company

Purchases

Sales and
Repayments

Interest
Income

Fee
Income

Net
Realized
Gain (Loss)

Net Change
in Unrealized
Appreciation
(Depreciation)Senior Secured BondsFourPoint Energy, LLC

$
67,722




$
21,503

$
681




$
(32,843
)Equity/OtherFourPoint Energy, LLC, Common Equity, Class C Units
















$
(37,950
)FourPoint Energy, LLC, Common Equity, Class D Units
















$
(7,177
)


See notes to consolidated financial statements.

117

---



Table of Contents

FS Energy and Power Fund
Consolidated Schedule of Investments (Continued)
As of December 31, 2015
(in thousands, except share amounts)

(p)

Security held within FSEP Investments, Inc., a wholly-owned subsidiary of Foxfields Funding LLC.(q)

Security is non-income producing.(r)

Security is held within EP Altus Investments, LLC, a wholly-owned subsidiary of the Company.(s)

Security held within EP American Energy Investments, Inc., a wholly-owned subsidiary of the Company.(t)

Security held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.(u)

Security held within EP Burnett Investments, Inc., a wholly-owned subsidiary of the Company.(v)

Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2015.(w)

Investment denominated in British pounds. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2015.(x)

Security held within EP Synergy Investments, Inc., a wholly-owned subsidiary of Foxfields Funding LLC.(y)

Security was on non-accrual as of December 31, 2015.(z)

Under the 1940 Act, the Company generally is deemed to "control" a portfolio company if it owns 25% or more of the portfolio company's voting securities or it has the power to exercise control over the management or
policies of a portfolio company. As of December 31, 2015, the Company held investments in a portfolio company of which it is deemed to be an "affiliated person" and is also deemed to "control." The following table presents certain information
with respect to such portfolio company for the year ended December 31, 2015:




Portfolio Company

Purchases

Sales and
Repayments

Interest
Income

Fee
Income

Net
Realized
Gain (Loss)

Net Change
in Unrealized
Appreciation
(Depreciation)Senior Secured LoansFirst LienSunnova Asset Portfolio 5 Holdings, LLC

$
187,636




$
19,950

$
2,162




$
(1,014
)Equity/OtherSunnova Holdings, LLC, Common Equity

$
25,026







$
6,523




$
4,535


See notes to consolidated financial statements.

118

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments
As of December 31, 2014
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Senior Secured LoansFirst Lien33.3%Abaco Energy Technologies LLC

(h)(j)(k)

Service & Equipment

L+700


1.0
%
11/20/20

$
62,500

$
58,795

$
59,063Allied Wireline Services, LLC

(h)(j)(k)

Service & Equipment

L+800


1.5
%
2/28/19


105,875


104,405


105,081Alon USA Partners, L.P.

(h)(j)(m)

Downstream

L+800


1.3
%
11/26/18


7,231


7,468


7,308Altus Power America, Inc.

(k)

Power

L+750


1.5
%
10/10/21


20,568


20,568


20,568Altus Power America, Inc.

(e)

Power

L+750


1.5
%
10/10/21


63,807


63,807


63,807AP Exhaust Acquisition, LLC

(h)

Service & Equipment

L+775


1.5
%
1/16/21


14,595


14,595


14,157Atlas Energy, L.P.

(g)(m)

Midstream

L+550


1.0
%
7/31/19


5,486


5,443


5,404Azure Midstream Energy LLC

(g)

Midstream

L+550


1.0
%
11/15/18


12,825


12,669


11,543BBH Operating LLC



Upstream

Prime+500


3.3
%
2/26/15


19,850


19,850


18,957BBH Operating LLC

(e)

Upstream

Prime+500


3.3
%
2/26/15


10,150


10,150


9,693BL Sand Hills Unit, L.P.



Upstream

Prime+650


3.5
%
12/17/17


20,206


17,548


19,423BL Sand Hills Unit, L.P.

(e)

Upstream

Prime+650


3.5
%
12/17/17


38,292


33,254


36,808Boomerang Tube, LLC

(f)(g)

Service & Equipment

L+950


1.5
%
10/11/17


18,584


18,441


16,122Cactus Wellhead, LLC

(g)(h)(j)(k)

Service & Equipment

L+600


1.0
%
7/31/20


52,369


51,384


42,550Cimarron Energy Inc.

(h)

Service & Equipment

L+775


1.0
%
12/15/19


25,000


25,000


25,000Crestwood Holdings LLC

(g)(h)(k)

Midstream

L+600


1.0
%
6/19/19


32,255


32,406


30,622EnergySolutions, LLC

(f)(j)

Service & Equipment

L+575


1.0
%
5/29/20


21,709


21,314


21,702EP Acquisition LLC



Upstream

Prime+500


3.3
%
3/31/15


750


750


720FR Dixie Acquisition Corp.

(g)

Service & Equipment

L+475


1.0
%
12/18/20


10,173


10,184


8,443FR Utility Services LLC

(g)

Service & Equipment

L+575


1.0
%
10/18/19


15,009


14,919


14,952Harvey Gulf International Marine, LLC

(g)

Service & Equipment

L+450


1.0
%
6/18/20


1,910


1,893


1,551Hudson Products Holdings Inc.

(g)

Service & Equipment

L+400


1.0
%
3/15/19


1,773


1,769


1,720Industrial Group Intermediate Holdings, LLC

(j)

Service & Equipment

L+800


1.3
%
5/31/20


14,886


14,886


14,886Larchmont Resources, LLC

(g)(j)

Upstream

L+725


1.0
%
8/7/19


20,370


20,379


19,809MB Precision Holdings LLC

(h)

Service & Equipment

L+725


1.3
%
1/23/20


13,365


13,365


13,231Moxie Liberty LLC

(g)(h)(k)

Power

L+650


1.0
%
8/21/20


32,432


32,562


32,270Moxie Patriot LLC

(k)

Power

L+575


1.0
%
12/19/20


2,000


2,041


1,990Panda Sherman Power, LLC

(g)(h)

Power

L+750


1.5
%
9/14/18


19,872


20,258


19,773Panda Temple Power, LLC (TLA)

(k)

Power

L+700


1.5
%
7/17/18


13,949


13,799


14,141Panda Temple Power, LLC (TLB)

(g)(h)(k)

Power

L+1000


1.5
%
7/17/18


40,000


39,447


40,600Panda Temple Power II, LLC

(g)(h)

Power

L+600


1.3
%
4/3/19


23,809


24,274


23,452PeroxyChem LLC

(h)(k)

Service & Equipment

L+650


1.0
%
2/28/20


11,900


11,793


11,781ProPetro Services, Inc.

(j)(l)

Service & Equipment

L+625


1.0
%
9/30/19


12,267


12,246


11,899RGL Reservoir Operations Inc.

(g)(m)

Service & Equipment

L+500


1.0
%
8/13/21


9,120


8,859


7,357Southcross Holdings Borrower LP

(g)(j)

Midstream

L+500


1.0
%
8/4/21


18,952


18,862


16,962Sprint Industrial Holdings LLC

(h)

Service & Equipment

L+575


1.3
%
11/14/19


14,775


14,760


14,110Stallion Oilfield Holdings, Inc.

(f)(g)(h)(j)(k)

Service & Equipment

L+675


1.3
%
6/19/18


63,538


63,425


54,404Sunnova Asset Portfolio 5 Holdings, LLC

(k)

Power

12.0% PIK (12.0% Max PIK)




11/14/21


62,502


62,502


62,502Sunnova Asset Portfolio 5 Holdings, LLC

(e)

Power

12.0% PIK (12.0% Max PIK)




11/14/21


110,909


110,909


110,909


See notes to consolidated financial statements.

119

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (Continued)
As of December 31, 2014
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Swift Worldwide Resources US Holdings Corp.

(h)(k)

Service & Equipment

L+800


1.3
%
4/30/19

$
59,660

$
59,660

$
58,467Total Safety U.S., Inc.

(g)

Service & Equipment

L+450


1.3
%
3/13/20


4,394


4,451


4,240United Components, Inc.

(h)(l)

Service & Equipment

L+400


1.5
%
7/26/17


4,987


4,975


4,968​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansFirst Lien
















1,100,065


1,072,945Unfunded Loan Commitments
















(218,120
)

(218,120
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Senior Secured LoansFirst Lien
















881,945


854,825​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Senior Secured LoansSecond Lien38.6%Alison US LLC

(f)(m)

Service & Equipment

L+850


1.0
%
8/29/22


22,222


21,363


20,806American EnergyMarcellus, LLC

(g)

Upstream

L+750


1.0
%
8/4/21


10,000


9,858


9,200American EnergyUtica, LLC

(h)(k)

Upstream

L+400, 5.5% PIK (5.5% Max PIK)


1.5
%
9/30/18


122,646


122,646


120,194American EnergyUtica, LLC



Upstream

L+400, 5.5% PIK (5.5% Max PIK)


1.5
%
9/30/18


83,297


83,297


81,631Ameriforge Group Inc.

(f)(h)(k)

Service & Equipment

L+750


1.3
%
12/21/20


35,950


36,516


35,478BlackBrush Oil & Gas, L.P.

(f)(j)

Upstream

L+650


1.0
%
7/30/21


27,500


27,286


22,825Brock Holdings III, Inc.

(f)(h)(k)

Service & Equipment

L+825


1.8
%
3/16/18


29,605


29,829


23,832Callon Petroleum Co.

(j)(m)

Upstream

L+750


1.0
%
8/29/21


10,000


9,804


9,475Chief Exploration & Development LLC

(j)(k)

Upstream

L+650


1.0
%
5/16/21


19,576


19,494


17,717Consolidated Precision Products Corp.

(f)(g)(h)(k)

Service & Equipment

L+775


1.0
%
4/30/21


28,500


28,375


27,218Drew Marine Group Inc.

(k)(m)

Service & Equipment

L+700


1.0
%
5/19/21


10,000


9,978


9,950Emerald Performance Materials, LLC

(k)

Downstream

L+675


1.0
%
8/1/22


5,319


5,294


5,186Extraction Oil & Gas Holdings, LLC

(j)(k)

Upstream

11.0%




5/29/19


74,186


74,186


74,928Extraction Oil & Gas Holdings, LLC

(j)(k)

Upstream

10.0%




5/29/19


32,462


32,462


32,137Fieldwood Energy LLC

(f)(j)(k)

Upstream

L+713


1.3
%
9/30/20


41,047


42,100


30,298Filtration Group Corp.

(g)

Service & Equipment

L+725


1.0
%
11/21/21


2,632


2,608


2,635Granite Intermediate Holdings, Inc.

(f)(k)(l)

Power

L+725


1.0
%
10/15/22


10,150


10,049


10,254Horn Intermediate Holdings, Inc.

(h)

Service & Equipment

L+775


1.3
%
10/2/18


57,750


57,750


56,306Husky Injection Molding Systems Ltd.

(f)(m)

Service & Equipment

L+625


1.0
%
6/30/22


4,000


4,048


3,850Jonah Energy LLC

(j)(k)

Upstream

L+650


1.0
%
5/8/21


26,185


25,808


22,650Magnum Hunter Resources Corp.

(j)(m)

Upstream

L+750


1.0
%
10/17/19


6,983


6,780


6,878MD America Energy, LLC

(f)(g)(h)(k)

Upstream

L+850


1.0
%
8/4/19


78,000


74,506


74,879Neff Rental LLC

(f)(k)

Service & Equipment

L+625


1.0
%
6/9/21


17,989


18,019


18,068Oxbow Carbon LLC

(h)

Midstream

L+700


1.0
%
1/19/20


15,000


14,874


13,325P2 Upstream Acquisition Co.

(f)(h)(k)

Service & Equipment

L+800


1.0
%
4/30/21


32,599


32,901


31,377Power Buyer, LLC

(g)

Service & Equipment

L+725


1.0
%
11/6/20


2,500


2,520


2,422Templar Energy LLC

(f)(h)(j)(k)

Upstream

L+750


1.0
%
11/25/20


89,923


88,196


65,014Total Safety U.S., Inc.

(g)(h)

Service & Equipment

L+800


1.3
%
9/13/20


14,795


15,013


14,352UTEX Industries, Inc.

(g)(k)

Service & Equipment

L+725


1.0
%
5/20/22


39,192


39,224


35,469Vantage Energy II, LLC

(j)(k)

Upstream

L+750


1.0
%
5/8/17


85,000


85,000


84,575Vantage Energy, LLC

(j)(k)

Upstream

L+750


1.0
%
12/20/18


30,385


30,197


27,043​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansSecond Lien
















1,059,981


989,972​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to consolidated financial statements.

120

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (Continued)
As of December 31, 2014
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Senior Secured Bonds11.1%FourPoint Energy, LLC

(j)(k)(p)

Upstream

8.0%




12/31/20

$
222,750

$
213,158

$
196,020FourPoint Energy, LLC

(e)(p)

Upstream

8.0%




12/31/20


86,625


86,192


76,230Gastar Exploration USA, Inc.

(i)

Upstream

8.6%




5/15/18


22,000


21,548


18,855Globe Luxembourg SCA

(f)(m)

Service & Equipment

9.6%




5/1/18


10,000


9,706


7,748Light Tower Rentals, Inc.

(j)

Service & Equipment

8.1%




8/1/19


17,500


17,273


14,000Mirant Mid-Atlantic Trust

(f)(i)

Power

10.1%




12/30/28


33,087


37,072


34,990Permian Tank & Manufacturing, Inc.

(g)

Service & Equipment

10.5%




1/15/18


3,499


3,562


2,712Prince Mineral Holding Corp.

(i)(o)

Service & Equipment

11.5%




12/15/19


15,345


16,748


15,671Ryerson Inc.

(f)(g)

Service & Equipment

9.0%




10/15/17


2,300


2,362


2,371Tervita Corp.

(i)(m)

Service & Equipment

8.0%




11/15/18


3,500


3,534


3,080​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured Bonds
















411,155


371,677Unfunded Bond Commitments
















(86,192
)

(86,192
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Senior Secured Bonds
















324,963


285,485​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Subordinated Debt36.6%Alta Mesa Holdings, L.P.

(f)(i)

Upstream

9.6%




10/15/18


34,951


34,870


29,637American EnergyWoodford, LLC

(i)

Upstream

9.0%




9/15/22


10,500


10,078


6,602Atlas Energy Holdings Operating Co., LLC

(f)(i)(m)

Upstream

7.8%




1/15/21


21,450


20,713


15,551Atlas Energy Holdings Operating Co., LLC

(f)(i)(m)

Upstream

9.3%




8/15/21


19,763


20,040


15,193Brand Energy & Infrastructure Services, Inc.

(f)(i)(o)

Service & Equipment

8.5%




12/1/21


25,000


25,000


22,625BWAY Holding Co.

(f)

Service & Equipment

9.1%




8/15/21


3,100


3,080


3,116Calpine Corp.

(f)(m)

Power

5.8%




1/15/25


7,100


7,100


7,224Canbriam Energy Inc.

(f)(i)(m)

Upstream

9.8%




11/15/19


88,200


82,990


83,349Chaparral Energy Inc.

(f)

Upstream

8.3%




9/1/21


2,000


2,053


1,319Chaparral Energy Inc.

(f)(g)

Upstream

7.6%




11/15/22


15,225


16,254


10,011CHC Helicopter S.A.

(f)(i)(m)(o)

Service & Equipment

9.4%




6/1/21


8,125


8,276


7,698Clayton Williams Energy, Inc.

(i)(m)

Upstream

7.8%




4/1/19


9,300


9,288


7,797Compressco Partners, LP

(f)(i)(m)

Service & Equipment

7.3%




8/15/22


20,000


19,830


17,338Comstock Resources, Inc.

(f)(m)

Upstream

9.5%




6/15/20


5,000


4,821


3,375Crestwood Midstream Partners L.P.

(i)(m)

Midstream

6.1%




3/1/22


5,500


5,500


5,207Crew Energy Inc.

(i)(m)(v)

Upstream

8.4%




10/21/20

C$
10,343


11,502


10,085CrownRock, L.P.

(f)(i)

Upstream

7.1%




4/15/21

$
37,500


37,500


35,257Dynegy Finance I/II Inc.

(f)(m)

Power

7.4%




11/1/22


1,950


1,950


1,999Dynegy Finance I/II Inc.

(f)(m)

Power

6.8%




11/1/19


950


950


969Dynegy Finance I/II Inc.

(f)(m)

Power

7.6%




11/1/24


8,680


8,710


8,886Eco Services Operations LLC

(f)

Service & Equipment

8.5%




11/1/22


5,000


5,000


5,075Energy XXI Gulf Coast, Inc.

(i)(m)(o)

Upstream

7.5%




12/15/21


4,000


3,983


2,200Energy XXI Gulf Coast, Inc.

(i)(m)

Upstream

9.3%




12/5/17


5,000


5,145


3,325Era Group Inc.

(f)(m)

Service & Equipment

7.8%




12/15/22


7,750


7,638


8,060Everest Acquisition LLC

(f)

Upstream

9.4%




5/1/20


14,250


14,250


14,468


See notes to consolidated financial statements.

121

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (Continued)
As of December 31, 2014
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Gardner Denver, Inc.

(f)

Service & Equipment

6.9%




8/15/21

$
8,948

$
9,426

$
8,501GenOn Energy, Inc.

(f)(i)(o)

Power

9.9%




10/15/20


40,698


42,923


40,299Global Jet Capital, Inc.



Service & Equipment

8.0% PIK (8.0% Max PIK)




1/30/15


313


313


313Global Partners L.P.

(f)(i)(m)

Midstream

6.3%




7/15/22


83,350


83,350


81,266The Hillman Group, Inc.

(f)

Service & Equipment

6.4%




7/15/22


5,000


5,024


4,825Ithaca Energy Inc.

(i)(m)

Upstream

8.1%




7/1/19


2,000


2,000


1,518Jones Energy, Inc.

(i)

Upstream

6.8%




4/1/22


8,000


8,000


6,120Jupiter Resources Inc.

(f)(i)(m)

Upstream

8.5%




10/1/22


67,125


63,660


50,344The Kenan Advantage Group, Inc.

(f)(i)

Service & Equipment

8.4%




12/15/18


18,000


18,447


18,585Legacy Reserves L.P.

(f)(m)

Upstream

8.0%




12/1/20


16,750


16,460


13,999Legacy Reserves L.P.

(f)(i)(m)

Upstream

6.6%




12/1/21


14,000


13,827


11,486Lightstream Resources Ltd.

(f)(i)(m)(o)

Upstream

8.6%




2/1/20


48,745


49,119


34,358Lonestar Resources America Inc.

(i)

Upstream

8.8%




4/15/19


21,500


21,615


16,206Martin Midstream Partners L.P.

(f)(m)

Midstream

7.3%




2/15/21


18,607


19,172


17,486Memorial Production Partners L.P.

(i)(m)

Upstream

7.6%




5/1/21


7,000


6,815


5,653Memorial Production Partners L.P.

(i)(m)

Upstream

6.9%




8/1/22


12,500


12,284


9,469The Pantry Inc.

(f)(m)

Service & Equipment

8.4%




8/1/20


250


270


275Resolute Energy Corp.

(i)(o)

Upstream

8.5%




5/1/20


6,230


6,550


2,951RKI Exploration & Production, LLC

(f)(i)(o)

Upstream

8.5%




8/1/21


58,704


58,655


47,848Samson Investment Co.

(i)

Upstream

9.8%




2/15/20


56,300


52,952


23,646Sanchez Energy Corp.

(i)(m)

Upstream

7.8%




6/15/21


14,500


14,265


13,731SandRidge Energy, Inc.

(i)(m)

Upstream

8.8%




1/5/20


22,075


20,428


15,066SandRidge Energy, Inc.

(i)(m)

Upstream

8.1%




10/15/22


3,500


3,314


2,301SandRidge Energy, Inc.

(i)(m)

Upstream

7.5%




3/15/21


5,000


4,487


3,244SandRidge Energy, Inc.

(i)(m)

Upstream

7.5%




2/15/23


2,500


2,371


1,597Sidewinder Drilling Inc.

(i)

Service & Equipment

9.8%




11/15/19


18,700


18,783


10,940Silver II US Holdings, LLC

(f)

Service & Equipment

7.8%




12/15/20


1,835


1,968


1,743Swift Energy Co.

(f)(i)(o)

Upstream

7.9%




3/1/22


20,000


20,045


10,253Talos Production LLC

(f)(i)(o)

Upstream

9.8%




2/15/18


43,250


43,267


39,140Teine Energy Ltd.

(i)(m)

Upstream

6.9%




9/30/22


12,900


12,802


10,303Tenrgys, LLC

(j)(k)

Upstream

L+900


2.5
%
12/23/18


75,000


75,000


74,250Warren Resources, Inc.

(f)(i)

Upstream

9.0%




8/1/22


38,900


38,377


24,313Zachry Holdings, Inc.

(f)

Service & Equipment

7.5%




2/1/20


11,800


12,022


11,918​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Subordinated Debt
















1,124,512


940,313​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to consolidated financial statements.

122

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Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (Continued)
As of December 31, 2014
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry







Number of
Shares

Amortized
Cost

Fair
Value(d)Equity/Other11.9%(n)Abaco Energy Technologies LLC, Common Equity

(r)

Service & Equipment









6,944,444

$
6,944

$
6,944Allied Downhole Technologies, LLC, Common Equity

(q)(r)

Service & Equipment









6,600,000


6,600


10,890Allied Downhole Technologies, LLC, Warrants

(q)(r)

Service & Equipment









5,344,680


1,865


4,810Altus Power America Holdings, LLC, Preferred Equity

(r)

Power









6,855,978


6,856


6,856American Energy Appalachia Holdings, LLC, Common Equity

(r)(s)

Upstream









15,657,194


14,900


15,657AP Exhaust Holdings, LLC, Common Equity

(q)(r)

Service & Equipment









811


811


580BBH Operating LLC, Common Equity

(r)(t)

Upstream









1,000


1,000


931BL Sand Hills Unit, L.P., Net Profits Interest

(r)(u)

Upstream









N/A


2,499


2,614BL Sand Hills Unit, L.P., Overriding Royalty Interest

(u)

Upstream









N/A


357


322Cimarron Energy Inc., Common Equity

(r)

Service & Equipment









2,500,000


2,500


2,500Extraction Oil & Gas Holdings, LLC, Common Equity

(q)(r)

Upstream









4,191,800


11,250


10,480Fortune Creek Co-Invest I L.P., LP Interest

(m)(v)

Midstream









N/A


16,904


15,111FourPoint Energy, LLC, Common Equity, Class C Units

(p)(q)(r)

Upstream









66,000


66,000


84,150FourPoint Energy, LLC, Common Equity, Class D Units

(p)(q)(r)

Upstream









12,374


8,176


15,901Industrial Group Intermediate Holdings, LLC, Common Equity

(q)(r)

Service & Equipment









371,901


372


521MB Precision Holdings LLC, Common Equity

(r)

Service & Equipment









490,213


490


490Plains Offshore Operations Inc., Preferred Equity

(f)

Upstream









21,067


24,689


26,712Plains Offshore Operations Inc., Warrants

(f)(r)

Upstream









427,005


689


811Summit Midstream Partners, LLC, Preferred Equity



Midstream









37,095


37,095


36,910


See notes to consolidated financial statements.

123

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Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (Continued)
As of December 31, 2014
(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Number of
Shares

Amortized
Cost

Fair
Value(d)Swift Worldwide Resources Holdco Limited, Common Equity

(m)(r)(w)

Service & Equipment









3,750,000

$
6,029

$
5,842Synergy Offshore LLC, Preferred Equity

(x)

Upstream









50,000


55,623


55,550​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Equity/Other
















271,649


304,582​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​TOTAL INVESTMENTS131.5%















$
3,663,050


3,375,177​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​LIABILITIES IN EXCESS OF OTHER ASSETS(31.5%)



















(809,456
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​NET ASSETS100.0%


















$
2,565,721​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


(a)Security
may be an obligation of one or more entities affiliated with the named company.(b)Certain
variable rate securities in the Company's portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread.
As of December 31, 2014, the three-month London Interbank Offered Rate was 0.26% and the U.S. Prime Lending Rate was 3.25%.(c)Denominated
in U.S. dollars, unless otherwise noted.(d)Fair
value determined by the Company's board of trustees (see Note 7).(e)Security
is an unfunded commitment.(f)Security
or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving
credit facility with Deutsche Bank AG, New York Branch (see Note 8).(g)Security
or portion thereof held within EP Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit
facility with Citibank, N.A. (see Note 8).(h)Security
or portion thereof held within Energy Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit
facility with Natixis, New York Branch (see Note 8).(i)Security
or portion thereof held within Berwyn Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage
facility with BNP Paribas Prime Brokerage, Inc., or BNP. Securities held within Berwyn Funding LLC may be rehypothecated from time to time as permitted under Rule 15c-1(a)(1) of
the Securities Exchange Act of 1934, as amended, subject to the terms and conditions governing the prime brokerage facility with BNP (see Note 8).(j)Security
or portion thereof held within Wayne Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit
facility with Wells Fargo Securities, LLC (see Note 8).(k)Security
or portion thereof held within Gladwyne Funding LLC and is pledged as collateral supporting the obligations outstanding under the repurchase
transaction with Goldman Sachs Bank USA (see Note 8).(l)Position
or portion thereof unsettled as of December 31, 2014.(m)The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company's total assets. As of December 31, 2014,
84.5% of the Company's total assets represented qualifying assets.(n)Listed
investments may be treated as debt for GAAP or tax purposes.


See notes to consolidated financial statements.

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Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (Continued)
As of December 31, 2014
(in thousands, except share amounts)




(o)Security
or portion thereof held within Berwyn Funding LLC has been rehypothecated under Rule 15c-1(a)(1) of the Securities Exchange Act of
1934, as amended, subject to the terms and conditions governing the prime brokerage facility with BNP. (see Note 8). As of December 31, 2014, the fair value of securities rehypothecated
by BNP was $68,487.(p)Under
the Investment Company Act of 1940, as amended, the Company generally is deemed to be an "affiliated person" of a portfolio company if it owns 5% or
more of the portfolio company's voting securities and generally is deemed to "control" a portfolio company if it owns 25% or more of the portfolio company's voting securities or it has the power to
exercise control over the management or policies of such portfolio company. During the year ended December 31, 2014, the Company made an investment in and, in connection with such investment is
deemed to be an "affiliated person" of (but would not be deemed to "control"), the following portfolio company:




Portfolio Company

Purchases

Sales and
Repayments

Interest Income

Fee Income

Net Realized Gain (Loss)

Net Change in Unrealized
Appreciation (Depreciation)Senior Secured BondsFourPoint Energy, LLC

$
212,346




$
6,254

$
2,228




$
(27,100
)Equity/OtherFourPoint Energy, LLC, Common Equity, Class C Units

$
66,000













$
18,150FourPoint Energy, LLC, Common Equity, Class D Units

$
8,176













$
7,725


(q)Security
held within FSEP Investments, Inc., a wholly-owned subsidiary of the Company.(r)Security
is non-income producing.(s)Security
held within EP American Energy Investments, Inc., a wholly-owned subsidiary of the Company.(t)Security
held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.(u)Security
held within EP Burnett Investments, Inc., a wholly-owned subsidiary of the Company.(v)Investment
denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2014.(w)Investment
denominated in British pounds. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2014.(x)Security
held within EP Synergy Investments, Inc., a wholly-owned subsidiary of the Company.


See notes to consolidated financial statements.

125

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Table of Contents



FS Energy and Power Fund        Notes to Consolidated Financial Statements  (in thousands, except share and per share amounts)

Note 1. Principal Business and Organization

FS Energy and Power Fund, or the Company, was formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced investment
operations on July 18, 2011 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of its common shares of beneficial interest, or common shares, in
its continuous public offering to persons who were not affiliated with the Company or the Company's investment adviser, FS Investment Advisor, LLC, or FS Advisor, a private investment firm that
is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company.

The
Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally
managed, non-diversified, closed-end management investment company that has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a regulated investment
company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of December 31, 2015, the Company had seven wholly-owned financing
subsidiaries, and six wholly-owned subsidiaries through which it holds interests in certain non-controlled portfolio companies. The audited consolidated financial statements include both the Company's
accounts and the accounts of its wholly-owned subsidiaries as of December 31, 2015. All significant intercompany transactions have been eliminated in consolidation. Certain of the Company's
consolidated subsidiaries are subject to U.S. federal and state income taxes.

The
Company's investment objective is to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power
industry. The Company's investment policy is to invest, under normal circumstances, at least 80% of its total assets in securities of energy and power related, or Energy, companies. The Company
considers Energy companies to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or
marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power, including those companies that provide equipment or services to companies engaged in any of the foregoing.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation:The accompanying audited consolidated financial statements of the Company have been prepared in accordance with
U.S. generally
accepted accounting principles, or GAAP. The Company is considered an investment company under GAAP and follows the accounting and reporting guidance applicable to investment companies. The Company
has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.

Use of Estimates:The preparation of the audited consolidated financial statements in conformity with GAAP requires management to make
estimates and
assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.

Cash and Cash Equivalents:The Company considers all highly liquid investments with original maturities of three months or less to be
cash
equivalents. The Company's cash and cash equivalents are maintained with high credit quality financial institutions, which are members of the Federal Deposit Insurance Corporation.

126

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (Continued)

Valuation of Portfolio Investments:The Company determines the net asset value of its investment portfolio each quarter. Securities are
valued at
fair value as determined in good faith by the Company's board of trustees. In connection with that determination, FS Advisor provides the Company's board of trustees with portfolio company valuations
which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations
prepared by independent third-party valuation services.

Accounting
Standards Codification Topic 820,Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting
Standards Board, or the FASB, clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and
annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These
tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active
markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists,
therefore requiring an entity to develop its own assumptions.

With
respect to investments for which market quotations are not readily available, the Company undertakes a multi-step valuation process each quarter, as described
below:



Determination
of fair value involves subjective judgments and estimates. Accordingly, the notes to the Company's consolidated financial statements refer to the uncertainty with respect
to the possible effect of such valuations and any change in such valuations on the Company's consolidated financial statements. In making its determination of fair value, the Company's board of
trustees may use any approved independent third-party pricing or valuation services. However, the Company's board of trustees is not required to determine fair value in accordance with the valuation
provided by any single source, and may use any relevant data, including information obtained from FS Advisor or any approved independent third-party valuation or pricing service that it deems to be
reliable in determining fair value under the circumstances. Below is a description of factors that FS Advisor's

127

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (Continued)

management
team, any approved independent third-party valuation services and the Company's board of trustees may consider when determining the fair value of its investments.

Valuation
of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility
in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, the Company may incorporate these factors into
discounted cash flow models to arrive at fair value. Other factors that may be considered include the borrower's ability to adequately service its debt, the fair market value of the portfolio company
in relation to the face amount of its outstanding debt and the quality of collateral securing its debt investments.

For
convertible debt securities, fair value generally approximates the fair value of the debt plus the fair value of an option to purchase the underlying security (i.e. the
security into which the debt may convert) at the conversion price. To value such an option, a standard option pricing model may be used.

The
Company's equity interests in portfolio companies for which there is no liquid public market are valued at fair value. The Company's board of trustees, in its determination of fair
value, may consider various factors, such as multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book
value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or the Company's actual investment position. For example,
adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.

FS
Advisor's management team, any approved independent third-party valuation services and the Company's board of trustees may also consider private merger and acquisition statistics,
public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. FS
Advisor's management team, any approved independent third-party valuation services and the Company's board of trustees may also consider the size and scope of a portfolio company and its specific
strengths and weaknesses and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the smaller size of portfolio companies relative to
comparable firms, as well as such other factors as its board of trustees, in consultation with FS Advisor's management team and any approved independent third-party valuation services, if applicable,
may consider relevant in assessing fair value. Generally, the value of the Company's equity interests in public companies for which market quotations are readily available is based upon the most
recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

When
the Company receives warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, the cost basis in the investment will
be allocated between the debt securities and any such warrants or other equity securities received at the time of origination. The Company's board of trustees subsequently values these warrants or
other equity securities received at their fair value.

The
fair values of the Company's investments are determined in good faith by its board of trustees. The Company's board of trustees is solely responsible for the valuation of the
Company's portfolio investments at fair value as determined in good faith pursuant to the Company's valuation policy and consistently applied valuation process. The Company's board of trustees has
delegated day-to-day responsibility for implementing its valuation policy to FS Advisor's management team, and has authorized FS Advisor's management team to utilize independent third-party valuation
and pricing

128

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (Continued)

services
that have been approved by its board of trustees. The valuation committee is responsible for overseeing FS Advisor's implementation of the valuation process.

Revenue Recognition:Security transactions are accounted for on the trade date. The Company records interest income on an accrual basis
to the extent
that it expects to collect such amounts. The Company records dividend income on the ex-dividend date. The Company does not accrue as a receivable interest or dividends on loans and securities if it
has reason to doubt its ability to collect such income. The Company's policy is to place investments on non-accrual status when there is reasonable doubt that interest income will be collected. The
Company considers many factors relevant to an investment when placing it on or removing it from non-accrual status including, but not limited to, the delinquency status of the investment, economic and
business conditions, the overall financial condition of the underlying investment, the value of the underlying collateral, bankruptcy status, if any, and any other facts or circumstances relevant to
the investment. If there is reasonable doubt that the Company will receive any previously accrued interest, then the previously recognized interest income will be written-off. Payments received on
non-accrual investments may be recognized as income or applied to principal depending upon the collectability of the remaining principal and interest. Non-accrual investments may be restored to
accrual status when principal and interest payments become current and are likely to remain current based on the Company's judgment.

Loan
origination fees, original issue discount and market discount are capitalized and the Company amortizes such amounts as interest income over the respective term of the loan or
security. Upon the prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as interest income. Structuring and other non-recurring upfront fees
are recorded as fee income when earned. The Company records prepayment premiums on loans and securities as fee income when it receives such amounts.

Net Realized Gains or Losses, Net Change in Unrealized Appreciation or Depreciation and Net Change in Unrealized Gains or Losses on Foreign
Currency:Gains or losses on the sale of investments are calculated by using the specific identification method. The Company measures realized gains or losses by
the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously recognized, but
considering unamortized fees. Net change in unrealized appreciation or depreciation reflects the change in portfolio investment values during the reporting period, including any reversal of previously
recorded unrealized gains or losses when gains or losses are realized and the respective unrealized gain or loss on foreign currency for any foreign denominated investments it may hold. Net change in
unrealized gains or losses on foreign currency reflects the change in the value of foreign currency held, receivables or accruals during the reporting period due to the impact of foreign currency
fluctuations.

Capital Gains Incentive Fee:The Company entered into an investment advisory and administrative services agreement with FS Advisor,
dated as of
April 28, 2011, which was amended on August 10, 2012, and which, as amended, is referred to herein as the investment advisory and administrative services agreement. Pursuant to the terms
of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of
such agreement). Such fee equals 20.0% of the Company's incentive fee capital gains (i.e., the Company's realized capital gains on a cumulative basis from inception, calculated as of the end of
the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive
fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

129

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (Continued)

While
the investment advisory and administrative services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital
gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants Technical Practice Aid for investment companies, the Company includes unrealized gains in
the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FS Advisor as if the
Company's entire portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until
such gains are actually realized.

In
addition, the Company historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which was terminated on May 24, 2013),
as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FS Advisor with respect to
realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC informed the Company that it is their interpretation of the applicable
language in the Advisers Act that the Company should "look through" the TRS in calculating its capital gains incentive fee. Under this "look through" methodology, the portion of the net settlement
payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities underlying the TRS directly would be
treated as net investment income subject to the subordinated incentive fee on income payable to FS Advisor pursuant to the investment advisory and administrative services agreement, rather than as
realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains incentive fee payable to FS
Advisor with respect to realized gains. FS Advisor voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of
the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a "look through" basis under which
the Company treats the reference assets underlying the TRS as investments of the Company and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to
FS Advisor with respect to the portion of the net settlement payments received by the Company pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on
a "look through" basis. As of June 30, 2013, the aggregate capital gains incentive fees paid to FS Advisor in prior periods and accrued as of such date with respect to realized gains in
accordance with GAAP were less than the fees which would have been payable in accordance with the "look through" methodology.

Subordinated Income Incentive Fee:Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be
entitled to
receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of the Company's "pre-incentive fee net
investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital equal to 1.625% per quarter, or an annualized hurdle rate of
6.5%. As a result, FS Advisor does not earn this incentive fee for any quarter until the Company's pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. For
purposes of this fee, "adjusted capital" means cumulative gross proceeds generated from sales of the Company's common shares (including its distribution reinvestment plan) reduced for distributions
from non-liquidating dispositions of the Company's investments paid to shareholders and amounts paid for share repurchases pursuant to the
Company's share repurchase program. Once the Company's pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS Advisor is entitled to a "catch-up" fee equal to the amount of
the pre-incentive fee net investment income in excess of the hurdle rate, until the Company's

130

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (Continued)

pre-incentive
fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. Thereafter, FS Advisor is entitled to receive 20.0% of pre-incentive fee net investment
income.

Offering Costs:The Company's offering costs primarily include, among other things, marketing expenses and printing, legal and due
diligence fees and
other costs pertaining to the Company's continuous public offering of its common shares. The Company has charged offering costs against capital in excess of par value on the consolidated balance
sheets.

Income Taxes:The Company has elected to be treated for U.S. federal income tax purposes, and intends to qualify annually, as a RIC
under
Subchapter M of the Code. To maintain qualification as a RIC and maintain RIC tax treatment, the Company must, among other things, meet certain source-of-income and asset diversification
requirements, as well as distribute to its shareholders, in respect of each tax year, dividends of an amount generally at least equal to 90% of its "investment company taxable income," which is
generally the Company's net ordinary income plus the excess, if any, of realized net short-term capital gains over realized net long-term capital losses, determined without regarding to any deduction
for dividends paid. As a RIC, the Company will not have to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes as dividends to its shareholders.
The Company intends to make distributions in an amount sufficient to qualify for and maintain its RIC tax treatment each tax year and to not pay any U.S. federal income taxes on income so distributed.
The Company will also be subject to nondeductible U.S. federal excise taxes if it does not timely distribute dividends each calendar year of an amount at least equal to the sum of 98% of ordinary
income (taking into account certain deferrals and elections) for the calendar year, 98.2% of any capital gain net income (adjusted for certain ordinary losses) for the one-year period ending on
October 31 of such calendar year, and any recognized and undistributed ordinary income from prior years for which it paid no income taxes. Certain of the Company's consolidated subsidiaries are
subject to U.S. federal and state income taxes. During the years ended December 31, 2015, 2014 and 2013, the Company accrued $313, $912 and $800, respectively, in estimated income and excise
taxes payable in respect of income received.

Uncertainty in Income Taxes:The Company evaluates its tax positions to determine if the tax positions taken meet the minimum
recognition threshold
in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in the consolidated
financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming
examination by taxing authorities. The Company recognizes interest and
penalties, if any, related to unrecognized tax liabilities as income tax expense in the consolidated statements of operations. During the years ended December 31, 2015, 2014 and 2013, the
Company did not incur any such interest or penalties.

The
Company has analyzed the tax positions taken on federal and state income tax returns for all open tax years, and has concluded that no provision for income tax is required in the
Company's financial statements. The Company's federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to
examination by the Internal Revenue Service and state departments of revenue.

Distributions:Distributions to the Company's shareholders are recorded as of the record date. Subject to the discretion of the
Company's board of
trustees and applicable legal restrictions, the Company intends to authorize and declare ordinary cash distributions on either a weekly or monthly basis and pay such distributions on a monthly basis.
Net realized capital gains, if any, are distributed or deemed distributed at least annually.

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (Continued)

Reclassifications:Certain amounts in the consolidated financial statements for the years ended December 31, 2014 and 2013 have
been
reclassified to conform to the classifications used to prepare the consolidated financial statements for the year ended December 31, 2015. These reclassifications had no material impact on the
Company's consolidated financial position, results of operations or cash flows as previously reported.

Note 3. Share Transactions

Below is a summary of transactions with respect to the Company's common shares during the years ended December 31, 2015, 2014 and 2013:

Year Ended December 31,2015

2014

2013Shares

Amount

Shares

Amount

Shares

AmountGross Proceeds from Offering


59,008,526

$
547,181


115,484,191

$
1,243,930


104,681,518

$
1,105,083Reinvestment of Distributions


18,641,269


152,401


11,419,099


110,766


4,665,928


44,910​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Gross Proceeds


77,649,795


699,582


126,903,290


1,354,696


109,347,446


1,149,993Commissions and Dealer Manager Fees





(48,351
)




(114,862
)




(97,927
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Proceeds to Company


77,649,795


651,231


126,903,290


1,239,834


109,347,446


1,052,066Share Repurchase Program


(4,833,902
)

(40,009
)

(1,041,178
)

(10,262
)

(340,096
)

(3,273
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Proceeds from Share Transactions


72,815,893

$
611,222


125,862,112

$
1,229,572


109,007,350

$
1,048,793​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


Status of Continuous Public Offering

Since commencing its continuous public offering and through March 1, 2016, the Company has sold 386,582,293 common shares (as
adjusted for share distributions) for gross proceeds of $3,896,873, including common shares issued under its distribution reinvestment plan. As of March 1, 2016, the Company had raised total
gross proceeds of $3,917,077, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from the principals of FS Advisor, other
individuals and entities affiliated with FS Advisor, certain members of the Company's board of trustees and certain individuals and entities affiliated with GSO Capital Partners LP, or GSO, the
Company's investment sub-adviser, in a private placement conducted in April 2011 (see Note 4).

During
the years ended December 31, 2015, 2014 and 2013, the Company sold 77,649,795, 126,903,290 and 109,347,446 common shares (as adjusted for share distributions) for gross
proceeds of $699,582, $1,354,696 and $1,149,993, respectively, at an average price per share of $9.01, $10.68 and $10.52, respectively. The gross proceeds received during the years ended
December 31, 2015, 2014 and 2013 include reinvested shareholder distributions of $152,401, $110,766 and $44,910, respectively, for which the Company issued 18,641,269, 11,419,099 and 4,665,928
common shares (as adjusted for share distributions), respectively. During the period from January 1, 2016 to March 1, 2016, the Company sold 10,379,833 common shares for gross proceeds
of $70,555 at an average price per share of $6.80.

The
proceeds from the issuance of common shares as presented on the Company's consolidated statements of changes in net assets and consolidated statements of cash flows are presented net
of selling commissions and dealer manager fees of $48,351, $114,862 and $97,927 for the years ended December 31, 2015, 2014 and 2013, respectively.

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 3. Share Transactions (Continued)

Share Repurchase Program

The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company's board of trustees will
consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase common shares and under what
terms:



The
Company currently intends to limit the number of common shares to be repurchased during any calendar year to the number of common shares it can repurchase with the proceeds it
receives from the issuance of common shares under its distribution reinvestment plan. At the discretion of the Company's
board of trustees, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase
common shares. In addition, the Company will limit the number of common shares to be repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior
calendar year, or 2.5% in each quarter, though the actual number of common shares that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to
offer to repurchase such common shares on each date of repurchase at a price equal to 90% of the offering price in effect on the date of repurchase. In months in which the Company repurchases common
shares pursuant to its share repurchase program, it expects to conduct repurchases on the same date that it holds its first weekly closing in such month for the sale of common shares in its public
offering. The Company's board of trustees may amend, suspend or terminate the share repurchase program at any time, upon 30 days' notice.

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 3. Share Transactions (Continued)

The
following table provides information concerning the Company's repurchases of common shares pursuant to its share repurchase program during the years ended December 31, 2015,
2014 and 2013:

For the Three Months Ended

Repurchase Date

Shares
Repurchased

Percentage
of Shares
Tendered
That Were
Repurchased

Repurchase
Price
Per Share

Aggregate
Consideration
for Repurchased
SharesFiscal 2013December 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228March 31, 2013

April 1, 2013


82,689


100
%
$
9.540

$
789June 30, 2013

July 1, 2013


76,858


100
%
$
9.675

$
744September 30, 2013

October 2, 2013


156,300


100
%
$
9.675

$
1,512Fiscal 2014December 31, 2013

January 2, 2014


174,181


100
%
$
9.720

$
1,693March 31, 2014

April 2, 2014


158,723


100
%
$
9.810

$
1,557June 30, 2014

July 2, 2014


401,302


100
%
$
9.900

$
3,973September 30, 2014

October 1, 2014


306,972


100
%
$
9.900

$
3,039Fiscal 2015December 31, 2014

January 7, 2015


450,293


100
%
$
8.820

$
3,972March 31, 2015

April 1, 2015


716,857


100
%
$
8.730

$
6,258June 30, 2015

July 1, 2015


955,664


100
%
$
8.820

$
8,429September 30, 2015

October 7, 2015


2,711,088


100
%
$
7.875

$
21,350


On
January 6, 2016, the Company repurchased 2,716,924 common shares (representing 100% of common shares tendered for repurchase) at $6.75 per share for aggregate consideration
totaling $18,339.

Note 4. Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FS Advisor is entitled to an annual base management fee of
2.0% of the average value of the Company's gross assets and an incentive fee based on the Company's performance. The Company commenced accruing fees under the investment advisory and administrative
services agreement on
July 18, 2011, upon commencement of the Company's investment operations. Base management fees are paid on a quarterly basis in arrears.

The
incentive fee consists of two parts. The first part of the incentive fee, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in
arrears, equals 20.0% of the Company's "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted
capital, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor does not earn this incentive fee for any quarter until the Company's pre-incentive fee net
investment income for such quarter exceeds the hurdle rate of 1.625%. For purposes of this fee, "adjusted capital" means cumulative gross proceeds generated from sales of the Company's common shares
(including proceeds from its distribution reinvestment plan) reduced for distributions from non-liquidating dispositions of the Company's investments paid to shareholders and amounts paid for share
repurchases pursuant to the Company's share repurchase program. Once the Company's pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS Advisor is entitled to a
"catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company's pre-incentive fee net investment income for such quarter equals
2.031%, or 8.125% annually, of adjusted capital. This "catch-up" feature allows FS Advisor to recoup the fees foregone as a result of the existence of

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (Continued)

the
hurdle rate. Thereafter, FS Advisor is entitled to receive 20.0% of pre-incentive fee net investment income.

The
second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon
termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Company's incentive fee capital gains, which equal the Company's realized capital gains on a
cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the
aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the capital gains
incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FS Advisor is based on realized
gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See Note 2 for a discussion of the treatment of the TRS with respect to the
calculation of the capital gains incentive fee.

The
Company reimburses FS Advisor for expenses necessary to perform services related to the Company's administration and operations, including FS Advisor's allocable portion of the
compensation and related expenses of certain personnel of Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate of FS Advisor, providing
administrative services to the Company on behalf of FS Advisor. The amount of the reimbursement payable to FS Advisor is the lesser of (1) FS Advisor's actual costs incurred in providing such
services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FS Advisor is required
to allocate the cost of such services to the Company based on factors such as assets, revenues, time allocations and/or other reasonable metrics. The Company's board of trustees reviews the
methodology employed in determining how the expenses are allocated to the Company and the proposed allocation of the administrative expenses among the
Company and certain affiliates of FS Advisor. The Company's board of trustees then assesses the reasonableness of such reimbursements for expenses allocated to the Company based on the breadth, depth
and quality of such services as compared to the estimated cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Company's board of
trustees considers whether any single third-party service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company's board of trustees, among other
things, compares the total amount paid to FS Advisor for such services as a percentage of the Company's net assets to the same ratio as reported by other comparable BDCs. The Company will not
reimburse FS Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of
FS Advisor.

Under
the investment advisory and administrative services agreement, the Company, either directly or through reimbursement to FS Advisor or its affiliates, is responsible for its
organization and offering costs in an amount up to 1.5% of gross proceeds raised in the Company's continuous public offering. Organization and offering costs primarily include legal, accounting,
printing and other expenses relating to the Company's continuous public offering, including costs associated with technology integration between the Company's systems and those of its selected
broker-dealers, marketing expenses, salaries and direct expenses of FS Advisor's personnel, employees of its affiliates and others while engaged in registering and marketing the Company's common
shares, which includes the development of marketing materials and presentations, training and educational meetings, and generally coordinating the marketing process for the Company.

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (Continued)

Prior to satisfaction of the minimum offering requirement and for a period of time thereafter, Franklin Square Holdings funded certain of the Company's organization and offering costs.
Following this period, the Company paid certain of its organization and offering costs directly and reimbursed FS Advisor for offering costs incurred by FS Advisor on the Company's behalf, including
marketing expenses, salaries and other direct expenses of FS Advisor's personnel and employees of its affiliates while engaged in registering and marketing the Company's common shares. Organization
and offering costs funded directly by Franklin Square Holdings were recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the
consolidated financial statements and the organization costs were charged to expense as incurred by the Company. All other offering costs, including costs incurred directly by the Company, amounts
reimbursed to FS Advisor for ongoing offering costs and any reimbursements paid to Franklin Square Holdings for organization and offering costs previously funded, are recorded as a reduction of
capital.

The
dealer manager for the Company's continuous public offering is FS2 Capital Partners, LLC, or FS2, which is one of the Company's affiliates. Under
the dealer manager agreement among the Company, FS Advisor and FS2, or the dealer manager agreement, FS2 is entitled to receive sales commissions and dealer manager fees in
connection with the sale of common shares in the Company's continuous public offering, all or a portion of which may be re-allowed to selected broker-dealers and financial representatives.

The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the years ended
December 31, 2015, 2014 and 2013:

Year Ended December 31,Related PartySource Agreement

Description

2015

2014

2013FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
75,997

$
61,970

$
30,840FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)




$
(10,993
)
$
8,321FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$
31,016

$
32,072

$
7,634FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
4,056

$
3,831

$
2,246FS Advisor

Investment Advisory and Administrative Services Agreement

Offering Costs(5)

$
4,238

$
3,279

$
2,737FS2

Dealer Manager Agreement

Dealer Manager Fee(6)

$
9,251

$
22,194

$
20,016


(1)During
the years ended December 31, 2015, 2014 and 2013, $75,571, $54,809 and $23,611, respectively, in base management fees were paid to FS Advisor.
As of December 31, 2015, $18,338 in base management fees were payable to FS Advisor.(2)During
the year ended December 31, 2015, the Company did not accrue any capital gains incentive fees. During the year ended December 31, 2014,
the Company reversed $10,993 of capital gains incentive fees previously accrued based on the performance of its portfolio. During the year ended December 31, 2013, the Company accrued capital
gains incentive fees of $8,321, of which $5,464 was based on unrealized gains and $2,857 was based on realized gains. No capital gains incentive fees are actually payable by the Company with respect
to unrealized gains unless and until those gains are actually realized. The Company did not pay any capital gains incentive fees to FS Advisor during the year ended December 31, 2015. The
Company paid FS Advisor $2,857 and $953 in capital gains incentive fees during the years ended December 31, 2014 and 2013, respectively. As of December 31, 2015, the Company did not have
any accrued capital gains incentive fees.


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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (Continued)

(3)During
the years ended December 31, 2015, 2014 and 2013, $31,110, $26,716 and $848, respectively, of subordinated incentive fees on income were paid
to FS Advisor. As of December 31, 2015, a subordinated incentive fee on income of $12,048 was payable to FS Advisor.(4)During
the years ended December 31, 2015, 2014 and 2013, $3,784, $3,508 and $1,854, respectively, of administrative services expenses related to the
allocation of costs of administrative personnel for services rendered to the Company by FS Advisor and the remainder related to other reimbursable expenses. The Company paid $3,837, $2,596 and $1,987,
respectively, in administrative services expenses to FS Advisor during the years ended December 31, 2015, 2014 and 2013.(5)During
the years ended December 31, 2015, 2014 and 2013, the Company incurred offering costs of $8,950, $7,536 and $6,000, respectively, of which
$4,238, $3,279 and $2,737, respectively, related to reimbursements to FS Advisor for offering costs incurred on the Company's behalf, including marketing expenses, salaries and other direct expenses
of FS Advisor's personnel and employees of its affiliates while engaged in registering and marketing the Company's common shares.(6)Represents
aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers and financial representatives.


Capital Contribution by FS Advisor and GSO

In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of $200 to purchase
22,444 common shares (as adjusted for share distributions) at $8.91 per share, which represents the initial public offering price (as adjusted for share distributions), net of selling commissions and
dealer manager fees. The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains the Company's investment adviser.

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains the Company's investment adviser. In connection with the same private placement, certain members of the Company's board of trustees and other individuals and entities affiliated with FS
Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted
for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, the Company issued an aggregate of 2,244,875
common shares (as adjusted for share distributions) for aggregate proceeds of $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of March 1, 2016, the
Company has issued an aggregate of 4,491,309 common shares (as adjusted for share distributions) for aggregate gross proceeds of $40,131 to members of its board of trustees and individuals and
entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.

Potential Conflicts of Interest

FS Advisor's senior management team is comprised of substantially the same personnel as the senior management teams of FB Income
Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings'
other affiliated BDCs and affiliated closed-end management investment company. As a result, such personnel provide investment advisory services to the Company and each of FS Investment Corporation, FS
Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV and FS Global Credit Opportunities Fund. While none of FS Advisor, FB Income Advisor, LLC,

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (Continued)

FSIC
II Advisor, LLC, FSIC III Advisor, LLC, FSIC IV Advisor, LLC or FS Global Advisor, LLC is currently making private corporate debt investments for clients other than
the Company, FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV or FS Global Credit Opportunities Fund, respectively, any, or all, may
do so in the future. In the event that FS Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and
equitable manner consistent with the Company's investment objectives and strategy, if necessary, so that the Company will not be disadvantaged in relation to any other client of FS Advisor or its
management team. In addition, even in the absence of FS Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation, FS
Investment Corporation II, FS Investment Corporation III, FS Investment Corporation IV and/or FS Global Credit Opportunities Fund rather than to the Company.

Exemptive Relief

As a BDC, the Company is subject to certain regulatory restrictions in making its investments. For example, BDCs generally are not
permitted to co-invest with certain affiliated entities in transactions originated by the BDC or its affiliates in the absence of an exemptive order from the SEC. However, BDCs are permitted to, and
may, simultaneously co-invest in transactions where price is the only negotiated point. In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the
satisfaction of certain conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of FS Advisor, including FS Investment Corporation, FS Investment
Corporation II, FS Investment Corporation III, FS Investment Corporation IV, and any future BDCs that are advised by FS Advisor or its affiliated investment advisers, or collectively the Company's
co-investment affiliates. The Company believes this relief has and may continue to enhance its ability to further its investment objectives and strategy. The Company believes this relief may also
increase favorable investment opportunities for the Company, in part, by allowing it to participate in larger investments, together with the Company's co-investment affiliates, than would be available
to it if such relief had not been obtained. Because the Company did not seek exemptive relief to engage in co-investment transactions with its investment sub-adviser, GSO, and its affiliates, it will
continue to be permitted to co-invest with GSO and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

Pursuant to an expense support and conditional reimbursement agreement, amended and restated as of May 16, 2013, or the expense
reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company's distributions to
shareholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends
and other distributions to
the Company that are treated for tax purposes as a return of capital, a portion of the Company's distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to
the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse the
Company for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent
tax-advantaged distributions to shareholders.

Under
the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company quarterly for expenses in an amount equal to the difference between the Company's
cumulative distributions paid to its shareholders in each quarter, less the sum of the Company's net investment company taxable income, net capital gains and dividends and other distributions paid to
the

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (Continued)

Company
on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment company taxable income or net capital gains) in each
quarter.

Pursuant
to the expense reimbursement agreement, the Company has a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under
such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Company's net
investment company taxable income, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio
companies (to the extent not included in net investment company taxable income or net capital gains) exceeds the distributions paid by the Company to its shareholders; provided, however, that
(i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after
July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause "other operating expenses" (as defined
below) (on an annualized basis and net of any expense support payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Company's average net assets
attributable to its common shares for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Company's average net assets attributable to its
common shares represented by "other operating expenses" during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this
clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company
will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar
quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made the expense support payment to which such
reimbursement relates. The Company is not obligated to pay interest on the payments it receives from Franklin Square Holdings. "Other operating expenses" means the Company's total "operating expenses"
(as defined below), excluding base management fees, incentive fees, organization and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses.
"Operating expenses" means all operating costs and expenses incurred, as determined in accordance with GAAP for investment companies.

The
Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. The specific amount of expenses reimbursed by Franklin Square Holdings, if any,
will be determined at the end of each quarter. Upon termination of the expense reimbursement agreement by Franklin Square Holdings, Franklin Square Holdings will be required to fund any amounts
accrued thereunder as of the date of termination. Similarly, the Company's conditional obligation to reimburse Franklin Square Holdings pursuant to the terms of the expense reimbursement agreement
shall survive the termination of such agreement by either party.

Franklin
Square Holdings is controlled by the Company's chairman, president and chief executive officer, Michael C. Forman, and the Company's vice-chairman, David J. Adelman. There can
be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Company's expenses in future quarters.

As
of December 31, 2015 and 2014, the Company had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed to the Company
by Franklin Square Holdings may become subject to repayment in the future. During the year ended December 31, 2013, $1,083 of expense recoupments was paid to Franklin Square Holdings. As of

139

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (Continued)

December 31,
2015 and 2014, no further amounts remained subject to repayment by the Company to Franklin Square Holdings in the future.

FS Benefit Trust

On May 30, 2013, FS Benefit Trust was formed as a Delaware statutory trust for the purpose of awarding equity incentive
compensation to employees of Franklin Square Holdings and its affiliates. During the years ended December 31, 2015, 2014 and 2013, FS Benefit Trust purchased $104, $49 and $43, respectively, of
the Company's common shares at a purchase price equal to 90% of the offering price in effect on the applicable purchase date.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company has declared and paid on its common shares during the years ended December 31, 2015, 2014 and 2013:

DistributionFor the Year Ended December 31,

Per Share

Amount2013

$
0.6616

$
77,8152014

$
0.6882

$
163,0432015

$
0.7085

$
238,833


The
Company authorizes and declares ordinary cash distributions on a weekly basis and pays such distributions on a monthly basis. On November 11, 2015 and March 9, 2016,
the Company's board of trustees declared regular weekly cash distributions for January 2016 through March 2016 and April 2016 through June 2016, respectively. These distributions have been or will be
paid monthly to shareholders of record as of weekly record dates previously determined by the Company's board of trustees in the amount of $0.013625 per share. The timing and amount of any future
distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company's board of trustees.

The
Company has adopted an "opt in" distribution reinvestment plan for its shareholders. As a result, if the Company makes a cash distribution, its shareholders will receive
distributions in cash unless they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares. However, certain state
authorities or regulators may impose restrictions from time to time that may prevent or limit a shareholder's ability to participate in the distribution reinvestment plan.

The
Company may fund its cash distributions to shareholders from any sources of funds legally available to it, including offering proceeds, borrowings, net investment income from
operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common
equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to
make distributions.

For
a period of time following commencement of the Company's continuous public offering, substantial portions of the Company's distributions were funded through the reimbursement of
certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that were subject to repayment by the Company within
three years. The purpose of this arrangement was to ensure that no portion of the Company's distributions to shareholders was paid from offering proceeds or borrowings. Any such distributions funded
through

140

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 5. Distributions (Continued)

expense
reimbursements or waivers of advisory fees were not based on the Company's investment performance.

No
portion of the distributions paid during the years ended December 31, 2015, 2014 and 2013 was funded through the reimbursement of operating expenses by Franklin Square
Holdings. However, the Company's repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that shareholders may otherwise have
received during the year ended December 31, 2013. During the years ended December 31, 2015 and 2014, the Company did not repay any amounts to Franklin Square Holdings for expenses
previously reimbursed or waived. There can be no assurance that the Company will continue to achieve the performance necessary to sustain its distributions or that the Company will be able to pay
distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

The
following table reflects the sources of the cash distributions on a tax basis that the Company paid on its common shares during the years ended December 31, 2015, 2014 and
2013:

Year Ended December 31,2015

2014

2013Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$





$



Borrowings

















Net investment income (prior to expense reimbursement)(1)


224,586


94
%

145,745


89
%

76,383


98
%Short-term capital gains proceeds from the sale of assets








10,509


7
%

1,432


2
%Long-term capital gains proceeds from the sale of assets


14,247


6
%

6,789


4
%

Non-capital gains proceeds from the sale of assets

















Distributions on account of limited partnership interest

















Expense reimbursement from sponsor

















​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
238,833


100
%
$
163,043


100
%
$
77,815


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


(1)During
the years ended December 31, 2015, 2014 and 2013, 90.5%, 91.3% and 94.7%, respectively, of the Company's gross investment income was
attributable to cash income earned, 2.2%, 3.5% and 2.9%, respectively, was attributable to non-cash accretion of discount and 7.3%, 5.2% and 2.4%, respectively, was attributable to paid-in-kind, or
PIK, interest.


The
Company's net investment income on a tax basis for the years ended December 31, 2015, 2014 and 2013 was $234,163, $145,745 and $76,383, respectively. As of December 31,
2015, the Company had $9,578 of undistributed ordinary income on a tax basis. As of December 31, 2014, the Company had $14,247 of undistributed net realized gains on a tax basis, all of which
was distributed during the year ended December 31, 2015.

For
the year ended December 31, 2015 the difference between the Company's GAAP-basis net investment income and its tax-basis net investment income was primarily due to the amount
by which tax-basis income on a limited partnership interest differed from its GAAP-basis income, the reclassification of unamortized original issue discount and prepayment fees recognized upon

141

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 5. Distributions (Continued)

prepayment
of loans from income for GAAP purposes to realized gains for tax purposes, the impact of certain subsidiaries that were consolidated for purposes of computing GAAP-basis net investment
income but were not consolidated for purposes of computing tax-basis net investment income, income recognized for tax purposes not recorded for GAAP, and, with respect to the years ended
December 31, 2014 and 2013, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by
the Company and the reversal of non-deductible excise taxes. During the year ended December 31, 2013, the inclusion of a portion of the periodic net settlement payments due on the Company's
total return swap in tax-basis net investment income was also a factor that resulted in the difference between the Company's GAAP-basis net investment income and its tax-basis net investment income.

The
following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the years ended December 31, 2015, 2014 and
2013:

Year Ended December 31,2015

2014

2013GAAP-basis net investment income

$
227,595

$
174,889

$
66,804Income on limited partnership interest


(82
)

(1,271
)

(802
)Reversal of incentive fee accrual on unrealized gains





(10,993
)

5,464Excise taxes





560


300Reclassification of unamortized original issue discount and prepayment fees


(10,185
)

(19,579
)

(1,166
)GAAP vs. tax-basis consolidation of subsidiaries


9,252


2,798


(733
)Income recognized for tax purposes not recorded for GAAP purposes


9,396





Tax-basis net investment income portion of total return swap payments








6,602Other miscellaneous differences


(1,813
)

(659
)

(86
)​
​
​
​
​
​
​
​
​
​
​Tax-basis net investment income

$
234,163

$
145,745

$
76,383​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


The
Company may make certain adjustments to the classification of shareholders' equity as a result of permanent book-to-tax differences. During the year ended December 31, 2015,
the Company increased accumulated undistributed net investment income and accumulated undistributed net realized gains (losses) on investments and gain/loss on foreign currency by $6,674 and $8,299,
respectively, and reduced capital in excess of par value by $14,973. During the year ended December 31, 2014, the Company increased accumulated undistributed net realized gains (losses) on
investments and gain/loss on foreign currency by $20,215, and reduced capital in excess of par value and accumulated undistributed net investment income by $3,358 and $16,857, respectively.

The
determination of the tax attributes of the Company's distributions is made annually as of the end of the Company's fiscal year based upon the Company's taxable income for the full
year and distributions paid for the full year. The actual tax characteristics of distributions to shareholders are reported to shareholders annually on Form 1099-DIV.

142

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 5. Distributions (Continued)

As
of December 31, 2015 and 2014, the components of accumulated earnings on a tax basis were as follows:

December 31,2015

2014Distributable ordinary income (income and short-term capital gains)

$
9,578

$
Distributable capital gains (accumulated capital losses)(1)


(200,191
)

13,591Deferral of late year capital losses





(6,094
)Distribution receivable on limited partnership interest


301


57Unamortized organization costs


(245
)

(268
)Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency(2)


(831,920
)

(283,310
)​
​
​
​
​
​
​
​Total

$
(1,022,477
)
$
(276,024
)​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


(1)Under
the Regulated Investment Company Modernization Act of 2010, net capital losses recognized for tax years beginning after December 22, 2010, may
be carried forward indefinitely, and their character is retained as short-term or long-term capital losses, as applicable. As of December 31, 2015, the Company had short-term and long-term
capital loss carryforwards available to offset future realized capital gains of $76,138 and $124,053, respectively.(2)As
of December 31, 2015 and 2014, the gross unrealized appreciation on the Company's investments and unrealized gain on foreign currency was $44,089
and $50,887, respectively. As of December 31, 2015 and 2014, the gross unrealized depreciation on the Company's investments and unrealized loss on foreign currency was $876,009 and $334,197,
respectively.


The
aggregate cost of the Company's investments for federal income tax purposes totaled $3,895,733 and $3,658,498 as of December 31, 2015 and 2014, respectively. The aggregate net
unrealized appreciation (depreciation) on a tax basis was $(831,920) and $(283,310), as of December 31, 2015 and 2014, respectively.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of December 31, 2015 and 2014:

December 31, 2015

December 31, 2014Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
1,055,070

$
929,790


30
%
$
881,945

$
854,825


25
%Senior Secured LoansSecond Lien


1,213,716


923,402


30
%

1,059,981


989,972


29
%Senior Secured Bonds


445,475


323,948


11
%

324,963


285,485


9
%Subordinated Debt


860,872


579,740


19
%

1,124,512


940,313


28
%Equity/Other


319,274


312,618


10
%

271,649


304,582


9
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​$
3,894,407

$
3,069,498


100
%
$
3,663,050

$
3,375,177


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


(1)Amortized
cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.


143

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 6. Investment Portfolio (Continued)

As
of December 31, 2015, except for FourPoint Energy, LLC, in which the Company held a senior secured bond and two equity/other investments, Sunnova Holdings, LLC,
in which it held one equity/other investment and its wholly-owned subsidiary Sunnova Asset Portfolio 5 Holdings, LLC, in which the Company held one first lien senior secured loan, the Company
was not an "affiliated person" of any of its portfolio companies, as defined in the 1940 Act. As of December 31, 2015, except for Sunnova Holdings, LLC, in which the Company held one
equity/other investment and its wholly-owned subsidiary Sunnova Asset Portfolio 5 Holdings, LLC, in which the Company held one first lien senior secured loan, the Company did not "control" any
of its portfolio companies, as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to "control" a portfolio company if it owned 25% or more of its voting securities
or it had the power to exercise control over the management or policies of a portfolio company, and would be an "affiliated person" of a portfolio company if it owned 5% or more of its voting
securities.

The
Company's investment portfolio may contain loans or bonds that are in the form of lines of credit or revolving credit facilities, or other investments, pursuant to which the Company
may be required to provide funding when requested by portfolio companies in accordance with the terms of the underlying agreements. As of December 31, 2015, the Company had four senior secured
loan investments with aggregate unfunded commitments of $67,365, one senior secured bond investment with an unfunded commitment of $18,470 and five equity/other investments with aggregate unfunded
commitments of $33,890. As of December 31, 2015, these unfunded equity/other investments were Altus Power America Holdings, LLC, BL Sand Hills Unit, L.P., net profits interest, BL
Sand Hills Unit, L.P., overriding royalty interest, Sunnova Holdings, LLC and Synergy Offshore LLC. As of December 31, 2014, the Company had four senior secured loan
investments with aggregate unfunded commitments of $218,120, one senior secured bond investment with an unfunded commitment of $86,192 and three equity/other investments with aggregate unfunded
commitments of $26,109. As of December 31, 2014, these unfunded equity/other investments were Altus Power America Holdings, LLC, BL Sand Hills Unit, L.P., net profits interest and
BL Sand Hills Unit, L.P., overriding royalty interest. The Company maintains sufficient cash on hand, available borrowings and liquid securities to fund such unfunded commitments should the
need arise.

The
table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of December 31,
2015 and 2014:

December 31, 2015

December 31, 2014Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
1,689,705


55
%
$
1,815,456


54
%Midstream


215,906


7
%

233,836


7
%Downstream


12,195


0
%

12,494


0
%Power


519,593


17
%

326,773


10
%Service & Equipment


632,099


21
%

986,618


29
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
3,069,498


100
%
$
3,375,177


100
%​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


Note 7. Fair Value of Financial Instruments

Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction
to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and
minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use

144

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (Continued)

in
pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in
pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use
in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following
hierarchy as defined by current accounting guidance:

Level 1:Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3:Inputs that are unobservable for an asset or liability.

A
financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As
of December 31, 2015 and 2014, the Company's investments were categorized as follows in the fair value hierarchy:

Valuation Inputs

December 31, 2015

December 31, 2014Level 1Price quotations in active markets

$


$
Level 2Significant other observable inputs





Level 3Significant unobservable inputs


3,069,498


3,375,177​
​
​
​
​
​
​
​Total

$
3,069,498

$
3,375,177​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


The
Company's investments as of December 31, 2015 consisted primarily of debt investments that were acquired directly from the issuer. Twenty senior secured loan investments, two
senior secured bond investments and five subordinated debt investments were valued by independent valuation firms, which determined the fair value of such investments by considering, among other
factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms of the debt. All of the
Company's equity/other investments were also valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights
ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. Except as
described above, the Company valued its other investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an
independent third-party pricing service and screened for validity by such service.

The
Company's investments as of December 31, 2014 consisted primarily of debt investments that were traded on a private over-the-counter market for institutional investors.
Seventeen senior secured loan investments, one senior secured bond investment and two subordinated debt investments, were valued by an independent valuation firm, which determined the fair value of
such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and
other relevant terms of the debt. All of the Company's equity/other investments were valued by an independent valuation firm, which determined the fair value of such investments by considering, among
other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA cash flows, net income, revenues or, in limited instances, book value or
liquidation value. Except as described above, the Company valued its other investments by using the midpoint of the prevailing bid

145

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (Continued)

and
ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service.

The
Company periodically benchmarks the bid and ask prices it receives from the third-party pricing service and/or dealers, as applicable, against the actual prices at which the Company
purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company's management in purchasing and selling these investments, the Company believes
that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that
these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods, including the use of independent valuation firms, to determine fair
value for securities for which it cannot obtain prevailing bid and ask prices through third-party pricing services or independent dealers or where the Company's board of trustees otherwise determines
that the use of such methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation firms against the actual prices at which it purchases and sells
its investments. The Company's valuation committee of the board of trustees, or the valuation committee, and the board of trustees
reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company's valuation policy.

The
following is a reconciliation for the years ended December 31, 2015 and 2014 of investments for which significant unobservable inputs (Level 3) were used in determining
fair value:

For the Year Ended December 31, 2015Senior Secured
Loans
First Lien

Senior Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
854,825

$
989,972

$
285,485

$
940,313

$
304,582

$
3,375,177Accretion of discount (amortization of premium)


3,300


2,101


1,376


1,716


1,425


9,918Net realized gain (loss)


(34,084
)

(2,776
)

(16,753
)

(147,946
)




(201,559
)Net change in unrealized appreciation (depreciation)


(98,160
)

(220,305
)

(82,049
)

(96,933
)

(39,589
)

(537,036
)Purchases


439,617


261,831


196,821


258,418


39,260


1,195,947Paid-in-kind interest


13,605


5,503


238


611


7,628


27,585Sales and redemptions


(249,313
)

(112,924
)

(61,170
)

(376,439
)

(688
)

(800,534
)Net transfers in or out of Level 3

















​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Fair value at end of period

$
929,790

$
923,402

$
323,948

$
579,740

$
312,618

$
3,069,498​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to
investments still held at the reporting date

$
(109,244
)
$
(243,622
)
$
(80,665
)
$
(226,309
)
$
(39,589
)
$
(699,429
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


146

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (Continued)



For the Year Ended December 31, 2014Senior Secured
Loans
First Lien

Senior Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
634,919

$
683,723

$
82,484

$
789,834

$
109,241

$
2,300,201Accretion of discount (amortization of premium)


2,009


3,936


622


1,886


1,822


10,275Net realized gain (loss)


(23
)

(1,284
)

(3,396
)

(64
)

(915
)

(5,682
)Net change in unrealized appreciation (depreciation)


(37,712
)

(80,220
)

(42,409
)

(206,950
)

29,171


(338,120
)Purchases


579,698


669,846


314,897


706,530


166,718


2,437,689Paid-in-kind interest


116


8,877








6,132


15,125Sales and redemptions


(324,182
)

(294,906
)

(66,713
)

(350,923
)

(7,587
)

(1,044,311
)Net transfers in or out of Level 3

















​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Fair value at end of period

$
854,825

$
989,972

$
285,485

$
940,313

$
304,582

$
3,375,177​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to
investments still held at the reporting date

$
(21,055
)
$
(61,138
)
$
(39,448
)
$
(161,668
)
$
32,206

$
(251,103
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


147

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (Continued)

The
valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements as of December 31, 2015 and 2014 were as follows:

Type of Investment

Fair Value at
December 31, 2015

Valuation Technique(1)

Unobservable Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
670,131

Market Comparables

Market Yield (%)

8.5% - 19.0%

13.0
%Production Multiples

$95,000.0 - $100,000.0

$97,500.0(Mmb/d)Proved Reserves

$7.8 - $8.3

$8.0Multiples (Mmboe)PV-10 Multiples (x)

0.4x - 0.4x

0.4x259,659

Market Quotes

Indicative Dealer

46.5% - 100.3%

77.8
%QuotesSenior Secured LoansSecond Lien


632,912

Market Comparables

Market Yield (%)

9.3% - 19.9%

14.8
%290,490

Market Quotes

Indicative Dealer

1.8% - 96.0%

73.1
%QuotesSenior Secured Bonds


274,173

Market Comparables

Market Yield (%)

14.0% - 16.5%

14.6
%49,775

Market Quotes

Indicative Dealer

14.0% - 96.8%

65.0
%QuotesSubordinated Debt


64,875

Market Comparables

Market Yield (%)

17.3% - 17.8%

17.5
%508,593

Market Quotes

Indicative Dealer

19.9% - 99.0%

73.2
%Quotes6,272

Other(2)

Other(2)

N/A

N/AEquity/Other


284,300

Market Comparables

Market Yield (%)

13.0% - 14.0%

13.5
%EBITDA Multiples (x)

5.0x - 14.3x

9.9xProduction Multiples

$50,000.0 - $100,000.0

$56,271.9(Mmb/d)Proved Reserves

$7.8 - $14.0

$9.0Multiples (Mmboe)PV-10 Multiples (x)

0.4x - 1.0x

0.5xCapacity Multiple

$2,000.0 - $2,500.0

$2,250.0($/kW)Discounted Cash Flow

Discount Rate (%)

12.0% - 31.3%

30.1
%28,318

Other(2)

Other(2)

N/A

N/A​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
3,069,498​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​


(1)Investments
using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the
relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. For investments utilizing a market comparables valuation technique, a
significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation
multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease)
in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement.(2)Fair
valued based on expected outcome of proposed corporate transactions, the expected value of the liquidation preference of the investment or other
factors.


148

---



Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (Continued)

Type of Investment

Fair Value at
December 31, 2014

Valuation Technique(1)

Unobservable Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
356,089

Market Comparables

Market Yield (%)

8.5% - 12.3%

10.2
%498,736

Market Quotes

Indicative Dealer

78.8% - 102.3%

93.9
%QuotesSenior Secured LoansSecond Lien


449,771

Market Comparables

Market Yield (%)

8.5% - 12.0%

10.6
%540,201

Market Quotes

Indicative Dealer

71.6% - 101.6%

89.6
%QuotesSenior Secured Bonds


186,058

Market Comparables

Market Yield (%)

10.5% - 11.0%

10.8
%99,427

Market Quotes

Indicative Dealer

76.5% - 106.3%

94.2
%QuotesSubordinated Debt


74,250

Market Comparables

Market Yield (%)

11.5% - 12.0%

11.8
%865,750

Market Quotes

Indicative Dealer

41.5% - 110.5%

84.9
%Quotes313

Other(2)

Other(2)

N/A

N/AEquity/Other


304,582

Market Comparables

Market Yield (%)

11.0% - 15.8%

13.1
%EBITDA Multiples (x)

4.5x - 10.5x

8.9xProduction Multiples

$37,500.0 - $174,000.0

$47,173.9(Mmb/d)Proved Reserves

$6.5 - $27.2

$7.2Multiples (Mmboe)PV-10 Multiples (x)

0.3x - 1.8x

1.2xDiscounted Cash Flow

Discount Rate (%)

11.5% - 30.3%

16.0
%Option Valuation Model

Volatility (%)

45.0% - 52.5%

51.6
%​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
3,375,177​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​


(1)Investments
using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the
relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. For investments utilizing a market comparables valuation technique, a
significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation
multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease)
in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant
increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.(2)Fair
valued based on expected outcome of proposed corporate transactions, the expected value of the liquidation preference of the investment or other
factors.


Note 8. Financing Arrangements

The following table presents a summary of information with respect to the Company's outstanding financing arrangements as of December 31, 2015:

Facility

Type of
Arrangement

Rate

Amount
Outstanding

Amount
Available

Maturity DateBNP Facility

Prime Brokerage

L+1.10%

$
113,737

$
186,263

September 26, 2016(1)Deutsche Bank Credit Facility

Revolving

L+1.80%

$
280,000

$
60,000

June 11, 2016Fortress Facility

Term

L+5.00%(2)

$
89,600

$
65,400

November 6, 2020Goldman Facility

Repurchase

L+2.75%

$
324,984

$
16

September 15, 2017Natixis Credit Facility

Revolving

CP+2.25%

$
92,173




July 11, 2023Wells Fargo Credit Facility

Revolving

L+2.50% to 2.75%

$
140,000

$
60,000

September 9, 2019


(1)As
described below, the BNP facility generally is terminable upon 270 days' notice by either party. As of December 31, 2015, neither Berwyn
Funding nor BNP had provided notice of its intent to terminate the facility.


149

---



Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

(2)As
described below, borrowings under the Fortress facility accrue interest at a rate equal to the London Interbank Offered Rate, or LIBOR, plus 5.00%,
subject to a floor of 0.75%.


The
Company's average borrowings and weighted average interest rate, including the effect of non-usage fees, for the year ended December 31, 2015 were $1,010,699 and 2.77%,
respectively. As of December 31, 2015, the Company's weighted average effective interest rate on borrowings was 2.95%.

BNP Facility

On December 11, 2013, Berwyn Funding LLC, or Berwyn Funding, the Company's wholly-owned, special-purpose financing
subsidiary, entered into a committed facility arrangement, or the BNP facility, with BNP Paribas Prime Brokerage, Inc., or BNP. As amended to
date, Berwyn Funding can borrow, from time to time, up to $300,000 from BNP. The BNP facility was effected through a committed facility agreement by and between Berwyn Funding and BNP, or the
committed facility agreement, a U.S. PB Agreement by and between Berwyn Funding and BNP and a special custody and pledge agreement by and among Berwyn Funding, BNP and State Street Bank and Trust
Company, or State Street, as custodian, each dated as of December 11, 2013, and which are collectively referred to herein as the BNP financing agreements.

The
Company may contribute securities to Berwyn Funding from time to time, subject to certain restrictions set forth in the committed facility agreement, and will retain a residual
interest in any securities contributed through its ownership of Berwyn Funding or will receive fair market value for any securities sold to Berwyn Funding. Berwyn Funding may purchase additional
securities from various sources. Berwyn Funding has appointed the Company to manage its portfolio of securities pursuant to the terms of an investment management agreement. Berwyn Funding will pledge
certain of its securities as collateral to secure borrowings under the BNP facility. Such pledged securities will be held in a segregated custody account with State Street. The value of securities
required to be pledged by Berwyn Funding is determined in accordance with the margin requirements described in the BNP financing agreements. Berwyn Funding's obligations to BNP under the facility are
secured by a first priority security interest in substantially all of the assets of Berwyn Funding, including its portfolio of securities. The obligations of Berwyn Funding under the facility are
non-recourse to the Company and the Company's exposure under the facility is limited to the value of the Company's investment in Berwyn Funding.

Borrowings
under the BNP facility accrue interest at a rate equal to three-month LIBOR plus 1.10% per annum. Berwyn Funding is required to pay a non-usage fee of 0.55% per annum to the
extent the aggregate principal amount available under the facility is not borrowed. Berwyn Funding may terminate the committed facility agreement upon 270 days' notice. Subject to certain
cancellation rights, and absent a default or facility termination event, BNP is required to provide Berwyn Funding with 270 days' notice prior to terminating or amending the committed facility
agreement.

As
of December 31, 2015 and 2014, $113,737 and $223,000, respectively, was outstanding under the BNP facility. The carrying amount outstanding under the facility approximates its
fair value. The Company incurred costs of $449 in connection with obtaining and amending the facility, which the Company recorded as deferred financing costs on its consolidated balance sheets and
amortized to interest expense over the 270 day period following the closing date of the BNP facility or the amendment thereto, as applicable. As of December 31, 2015, all of the deferred
financing costs had been amortized to interest expense.

150

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the BNP facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
2,983

$
1,822

$
28Non-usage fees


507


573


50Amortization of deferred financing costs


76


349


24​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
3,566

$
2,744

$
102​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
BNP facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
3,528

$
2,132

$
Average borrowings under the facility(2)

$
209,117

$
134,436

$
38,000Effective interest rate on borrowings


1.71
%

1.36
%

1.35
%Weighted average interest rate (including the effect of non-usage fees)


1.67
%

1.78
%

3.52
%


(1)Interest
under the BNP facility is paid monthly in arrears.(2)Average
borrowings for the year ended December 31, 2013 are calculated for the period since the Company commenced borrowings thereunder to
December 31, 2013


In
connection with the BNP facility, Berwyn Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other
customary requirements for similar facilities. The BNP facility contains customary events of default and other termination events for similar financing transactions, including (a) the
occurrence of a default or similar condition under certain third-party contracts by the Company and Berwyn Funding; (b) any change in BNP's interpretation of applicable law that, in the
reasonable opinion of counsel to BNP, has the effect of impeding or prohibiting the facility; (c) certain events of insolvency or bankruptcy by the Company or Berwyn Funding;
(d) specified material reductions in the Company's or Berwyn Funding's net asset
value; (e) any change in the Company's fundamental or material investment policies; and (f) the termination of the investment advisory and administrative services agreement or if FS
Advisor otherwise ceases to act as investment adviser to the Company and is not immediately replaced by an affiliate or other investment adviser acceptable to BNP.

151

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

Under the terms of the BNP financing agreements, BNP has the ability to borrow a portion of the pledged collateral, or, collectively, the rehypothecated securities, subject to certain
limits. Berwyn Funding may designate any security within the pledged collateral as ineligible to be a rehypothecated security, provided there remain securities eligible to be rehypothecated within the
segregated custody account in an amount equal to the outstanding borrowings owed by Berwyn Funding to BNP. Berwyn Funding may recall any rehypothecated security at any time and BNP must return such
security or an equivalent security within a commercially reasonable period. In the event BNP does not return the security, Berwyn Funding will have the right to, among other things, apply and set off
an amount equal to 100% of the then-current fair market value of such rehypothecated securities against any outstanding borrowings owed to BNP under the facility. Rehypothecated securities are
marked-to-market daily and if the value of all rehypothecated securities exceeds 100% of the outstanding borrowings owed by Berwyn Funding under the facility, BNP may either reduce the amount of
rehypothecated securities to eliminate such excess or deposit into the segregated custody account an amount of cash equal to such excess. Berwyn Funding will continue to receive interest and the
scheduled repayment of principal balances on rehypothecated securities. For the years ended December 31, 2015, 2014 and 2013, Berwyn Funding received a fee of $1, $19 and $0, respectively, from
BNP for securities that had been rehypothecated pursuant to the BNP financing agreements. As of December 31, 2015 and 2014, the fair value of those securities rehypothecated by BNP was $108,340
and $68,487, respectively.

Borrowings
of Berwyn Funding will be considered borrowings by the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Citibank Credit Facility

On March 24, 2015, EP Funding LLC, or EP Funding, the Company's wholly-owned, special-purpose financing subsidiary,
repaid and terminated the revolving credit facility, or the Citibank credit facility, with Citibank, N.A., or Citibank, as administrative agent, and the financial institutions and other lenders from
time to time party thereto. The Citibank credit facility provided for borrowings in an aggregate principal amount up to $175,000 on a committed basis. Prior to the termination of the Citibank credit
facility, borrowings under the facility accrued interest at a rate equal to three-month LIBOR plus 2.75% per annum. Under the Citibank credit facility, EP Funding
was subject to a non-usage fee of 0.50% per annum to the extent that the aggregate principal amount available under the facility was not borrowed.

As
of December 31, 2015, no amounts remained outstanding under the Citibank credit facility. As of December 31, 2014, $128,300 was outstanding under the Citibank credit
facility. The carrying amount outstanding under the facility approximated its fair value. The Company incurred costs of $657 in connection with obtaining the facility, which the Company recorded as
deferred financing costs on its consolidated balance sheets and amortized to interest expense over the life of the facility.

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the Citibank credit facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
471

$
4,763

$
2,222Non-usage fees





1


30Amortization of deferred financing costs


130


328


199​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
601

$
5,092

$
2,451​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


152

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Citibank credit facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
1,011

$
4,903

$
1,573Average borrowings under the facility(2)

$
70,020

$
171,151

$
140,217Effective interest rate on borrowings





2.98
%

2.81
%Weighted average interest rate (including the effect of non-usage fees)


2.99
%

2.78
%

2.90
%


(1)Interest
under the Citibank credit facility was paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2015 were calculated for the period from January 1, 2015 to the date on which the Company
repaid and terminated the facility. Average borrowings for the year ended December 31, 2013 were calculated for the period since the Company commenced borrowings thereunder to
December 31, 2013.


Borrowings
of EP Funding were considered borrowings by the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Deutsche Bank Credit Facility

On June 24, 2011, FSEP Term Funding, LLC, or FSEP Funding, the Company's wholly-owned, special-purpose financing
subsidiary, entered into a revolving credit facility, or the Deutsche Bank credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent and the lender party
thereto. The Deutsche Bank credit facility subsequently was amended to increase the maximum commitments under the facility to $340,000 and extend the maturity date to June 11, 2016.

Under
the Deutsche Bank credit facility, the Company has transferred from time to time cash or securities to FSEP Funding as a contribution to capital and retains a residual interest in
the contributed cash or securities through the Company's ownership of FSEP Funding. The Company may contribute additional cash or securities to FSEP Funding from time to time and FSEP Funding may
purchase additional securities from various sources. FSEP Funding has appointed the Company to manage its portfolio of securities pursuant to the terms of an investment management agreement. FSEP
Funding's obligations to the lenders under the facility are secured by a first priority security interest in substantially all of the assets of FSEP Funding, including its portfolio of securities. The
obligations of FSEP Funding under the facility are non-recourse to the Company and the Company's exposure under the facility is limited to the value of the Company's investment in FSEP Funding.

Pricing
under the Deutsche Bank credit facility is based on LIBOR for an interest period closest to the weighted average LIBOR interest period of eligible securities owned by FSEP
Funding, plus 1.80% per annum. FSEP Funding is subject to a non-usage fee of 0.75% per annum to the extent that the aggregate principal amount available under the facility is not borrowed. Any amounts
borrowed under the Deutsche Bank credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 11, 2016.

As
of December 31, 2015 and 2014, $280,000 was outstanding under the Deutsche Bank credit facility. The carrying amount outstanding under the facility approximates its fair value.
The Company incurred costs of $3,340 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes
to interest

153

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

expense
over the life of the facility. As of December 31, 2015, $529 of such deferred financing costs had yet to be amortized to interest expense.

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the Deutsche Bank credit facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
5,951

$
5,046

$
4,509Non-usage fees


456


385


191Amortization of deferred financing costs


1,036


763


637​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
7,443

$
6,194

$
5,337​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Deutsche Bank credit facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
6,316

$
5,294

$
4,546Average borrowings under the facility

$
280,000

$
245,260

$
216,410Effective interest rate on borrowings


2.30
%

2.04
%

2.04
%Weighted average interest rate (including the effect of non-usage fees)


2.29
%

2.21
%

2.17
%


(1)Interest
under the Deutsche Bank credit facility is paid quarterly in arrears.


Borrowings
under the Deutsche Bank credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to FSEP Funding varies depending upon
the types of assets in FSEP Funding's portfolio. The occurrence of certain events described as "Super-Collateralization Events" in the credit agreement that governs the Deutsche Bank credit facility,
or a decline in the Company's net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events
include, without limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of GSO; (ii) the bankruptcy or insolvency of GSO or FS
Advisor; (iii) GSO ceasing to act as the Company's sub-adviser or FS Advisor ceasing to act as the Company's investment adviser; (iv) the Company ceasing to act as FSEP Funding's
investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value above a specified threshold; and (v) the Company, GSO or
FS Advisor committing fraud or other illicit acts in its or their investment advisory capacities.

In
connection with the Deutsche Bank credit facility, FSEP Funding has made certain representations and warranties and is required to comply with various covenants, reporting
requirements and other customary requirements for similar facilities. The Deutsche Bank credit facility contains customary events of default for similar financing transactions, including
(a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the facility exceeding the applicable advance rates;
(c) the purchase by FSEP Funding of certain ineligible assets; (d) the insolvency or bankruptcy of FSEP Funding or the Company; (e) the Company ceasing to act as investment
manager of FSEP Funding's assets; (f) the decline of the Company's net asset value below a specified threshold; and (g) fraud or other illicit acts

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

by
the Company, FS Advisor or GSO in its or their investment advisory capacities. During the continuation of an event of default, FSEP Funding must pay interest at a default rate.

Borrowings
of FSEP Funding will be considered borrowings by the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Fortress Facility

On November 6, 2015, Foxfields Funding LLC, or Foxfields Funding, a wholly-owned financing subsidiary of the Company,
entered into a senior secured multiple draw term loan facility, or the Fortress facility, with Fortress Credit Co LLC as administrative agent, or Fortress, the lenders from time to time party
thereto and the other loan parties from time to time party thereto. The Fortress facility, as amended, provides for $155,000 of term loans available to be borrowed during the first two years after the
initial closing date of November 6, 2015 with an option for the Company to request, at one or more times during the first two years after the closing date, that existing or new lenders, at
their election provide up to $45,000 of additional commitments.

Interest
under the Fortress facility for (i) loans bearing interest by reference to LIBOR accrues at a rate equal to LIBOR (subject to a floor of 0.75%) plus 5.00% per annum, and
(ii) loans bearing interest by reference to the base rate accrues at 4.00% per annum plus the greater of: (x) the per annum rate of interest announced, from time to time, within Wells
Fargo Bank, National Association at its principal office in San Francisco as its "prime rate," and (y) 1.75% per annum. Interest is payable quarterly in arrears beginning with the quarter
ending March 31, 2016. During the first year after the closing date, Foxfields Funding is subject to a commitment fee at a rate equal to 100 basis points on the average daily undrawn initial
facility amount of $125,000. Under certain conditions, Foxfields Funding will be subject to a prepayment premium if all or any part of the principal balance of the borrowings is prepaid prior to a
date that is two years after the closing date. Foxfields Funding incurred certain customary fees, costs and expenses in connection with obtaining the facility.

As
of December 31, 2015, $89,600 was outstanding under the Fortress facility. The carrying amount outstanding under the facility approximates its fair value. The Company incurred
costs of $1,121 in connection with obtaining and amending the Fortress facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest
expense over the life of the facility. As of December 31, 2015, $1,094 of such deferred financing costs had yet to be amortized to interest expense.

For
the year ended December 31, 2015, the components of total interest expense for the Fortress facility were as follows:

Year Ended
December 31, 2015Direct interest expense

$
507Non-usage fees


140Amortization of deferred financing costs


27​
​
​
​
​Total interest expense

$
674​
​
​
​
​​
​
​
​
​​
​
​
​
​


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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

For
the year ended December 31, 2015, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Fortress facility
were as follows:

Year Ended
December 31, 2015Cash paid for interest expense(1)

$
Average borrowings under the facility(2)

$
56,714Effective interest rate on borrowings


5.75
%Weighted average interest rate (including the effect of non-usage fees)


7.33
%


(1)Interest
under the Fortress facility is paid quarterly in arrears and will commence on March 31, 2016.(2)Average
borrowings for the year ended December 31, 2015 are calculated for the period since the Company commenced borrowings thereunder to
December 31, 2015.


In
connection with the Fortress facility, Foxfields Funding has made certain representations and warranties and must comply with various covenants and reporting requirements customary
for facilities of this type, including the following financial covenants: (a) the Company's minimum consolidated shareholders' equity, as determined in accordance with GAAP and measured as of
each fiscal quarter-end, must be greater than $1,500,000; (b) the Company must maintain at all times a 200% asset coverage ratio; (c) Foxfields Funding must maintain, as of each
quarter-end, an asset coverage ratio of either 300% or 325% depending on the relative composition of its portfolio between debt and equity investments; and (d) the portfolio investments must be
issued by not fewer than 10 unrelated obligors at all times, measured as of each quarter-end.

The
Fortress facility contains events of default customary for facilities of this type as described in the loan documentation. Upon the occurrence of an event of default, Fortress, at
the instruction or with the consent of the lenders, may terminate the commitments and declare the outstanding advances and all other obligations under the facility immediately due and payable. During
the continuation of certain events of default, the Company must pay interest at a default rate.

Borrowings
of Foxfields Funding will be considered borrowings by the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Goldman Financing

On September 11, 2014, through its two wholly-owned, special-purpose financing subsidiaries, Gladwyne Funding LLC, or
Gladwyne Funding, and Strafford Funding LLC, or Strafford Funding, the Company entered into a debt financing arrangement with Goldman Sachs Bank USA, or Goldman. The amount available under the
financing arrangement, as amended, is $325,000. The Company elected to structure the financing in the manner described more fully below in order to, among other things, obtain such financing at a
lower cost than would have been available through alternate arrangements.

Under
the financing arrangement, assets in the Company's portfolio may be sold and/or contributed by it from time to time to Gladwyne Funding, pursuant to an Amended and Restated Sale
and Contribution Agreement, dated as of September 11, 2014, between the Company and Gladwyne Funding, or the Sale and Contribution Agreement. As of December 31, 2015, the fair value of
assets held by Gladwyne Funding was $642,954, which includes an initial contribution by the Company of a portfolio of assets with an aggregate par value of $427,061. The assets held by Gladwyne
Funding secure the obligations of Gladwyne Funding under certain Floating Rate Notes, or the Notes, to be issued from time to time by Gladwyne Funding to Strafford Funding, pursuant to an indenture,
dated

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

as
of September 11, 2014, as supplemented by the First Supplemental Indenture dated as of December 15, 2014, or the Indenture, with Citibank N.A., as trustee. Pursuant to the Indenture,
the aggregate principal amount of Notes that may be issued by Gladwyne Funding from time to time is $577,750. Interest on the Notes under the Indenture accrues at three-month LIBOR plus a spread of
4.00% per annum. Principal and any unpaid interest on the Notes will be due and payable on the stated maturity date of November 15, 2025. As of December 31, 2015, Strafford Funding had
purchased $577,750 of Notes, the maximum principal amount of Notes that may be purchased under the Goldman facility (as defined below). Strafford Funding purchased $241,550 of Notes during the year
ended December 31, 2015.

Pursuant
to the Indenture, Gladwyne Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary
requirements for similar transactions. The Indenture contains customary events of default for similar financing transactions, including: (a) the failure to make principal payments on the Notes
at their stated maturity or any earlier redemption date or to make interest payments on the Notes within five business days of when due; (b) the failure to disburse amounts in excess of $1 in
accordance with the priority of payments; and (c) the occurrence of certain bankruptcy and insolvency events with respect to Gladwyne Funding.

Strafford
Funding, in turn, entered into a repurchase transaction with Goldman, pursuant to the terms of a master repurchase agreement and the related annex thereto, each dated as of
September 11, 2014, and an amended and restated master confirmation dated as of December 15, 2014, or collectively, the Goldman facility. Pursuant to the Goldman facility, on one or more
occasions beginning December 15, 2014, Goldman began purchasing Notes held by Strafford Funding for an aggregate purchase price equal to approximately 56.25% of the principal amount of the
Notes purchased. As of December 31, 2015, Goldman had purchased Notes in the principal amount of $577,750 from Strafford Funding, the maximum principal amount of Notes available to be purchased
under the Goldman facility, for a total purchase price equal to $324,984.

Strafford
Funding will repurchase the Notes sold to Goldman under the Goldman facility no later than September 15, 2017. The repurchase price paid by Strafford Funding to Goldman
will be equal to the purchase price paid by Goldman for the repurchased Notes, plus financing fees accrued at the applicable pricing rate under the Goldman facility. Through March 15, 2015,
financing fees accrued on the greater of $225,000 or the aggregate purchase price paid by Goldman for such Notes. Thereafter, financing fees accrue on $325,000 (even in prior periods when the
aggregate purchase price paid for Notes purchased by Goldman was less than that amount), unless and until the outstanding amount is reduced in accordance with the terms of the Goldman facility.

If
the Goldman facility is accelerated prior to September 15, 2017 due to an event of default or the failure of Gladwyne Funding to commit to sell any underlying assets that
become defaulted obligations within 30 days and thereafter to use commercially reasonable efforts to sell any such defaulted obligations, then Strafford Funding must pay to Goldman a fee equal
to the present value of the aggregate amount of the financing fees that would have been payable to Goldman through September 15, 2017 had the acceleration not occurred. The financing fee under
the Goldman facility is equal to three-month LIBOR plus a spread of up to 2.75% per annum for the relevant period.

Pursuant
to the Goldman facility, Strafford Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other
customary requirements for similar transactions. The Goldman facility contains customary events of default for similar financing transactions, including: (a) failure to transfer the Notes to
Goldman on the applicable purchase date or repurchase the Notes from Goldman on the applicable repurchase date;

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

(b) failure
to pay certain fees and make-whole amounts when due; (c) failure to post cash collateral as required; (d) the occurrence of insolvency events with respect to Strafford
Funding; and (e) the
admission by Strafford Funding of its inability to, or its intention not to, perform any of its obligations under the Goldman facility.

Goldman
may require Strafford Funding to post cash collateral if the market value of the Notes (measured by reference to the market value of Gladwyne Funding's portfolio of assets)
declines and is less than the required margin amount under the Goldman facility. In such event, in order to satisfy any such margin-posting requirements, Strafford Funding has the option to borrow
funds from the Company pursuant to an uncommitted revolving credit agreement, dated as of September 11, 2014 and amended and restated on December 15, 2014, between Strafford Funding, as
borrower, and the Company, as lender, or the Revolving Credit Agreement. Borrowings under the Revolving Credit Agreement may not exceed $325,000 and will accrue interest at a rate equal to one-month
LIBOR plus a spread of 0.75% per annum.

As
of December 31, 2015, Notes in an aggregate principal amount of $577,750 had been purchased by Strafford Funding from Gladwyne Funding and subsequently sold to Goldman under
the Goldman facility for aggregate proceeds of $324,984. The carrying amount outstanding under the Goldman facility approximates its fair value. The Company funded each purchase of Notes by Strafford
Funding through a capital contribution to Strafford Funding. As of December 31, 2015, Strafford Funding's liability under the Goldman facility was $324,984, plus $474 of accrued interest
expense. The Notes issued by Gladwyne Funding and purchased by Strafford Funding eliminate in consolidation on the Company's financial statements.

The
Company incurred costs of $380 in connection with obtaining and amending the Goldman facility, which the Company has recorded as deferred financing costs on its consolidated balance
sheets and amortizes to interest expense over the life of the facility. As of December 31, 2015, $220 of such deferred financing costs had yet to be amortized to interest expense.

For
the years ended December 31, 2015 and 2014, the components of total interest expense for the Goldman facility were as follows:

Year Ended December 31,2015

2014Direct interest expense

$
9,448

$
445Amortization of deferred financing costs


128


32​
​
​
​
​
​
​
​Total interest expense

$
9,576

$
477​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

For the years ended December 31, 2015 and 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Goldman
facility were as follows:

Year Ended December 31,2015

2014Cash paid for interest expense(1)

$
9,419

$
Average borrowings under the facility(2)

$
251,427

$
49,721Effective interest rate on borrowings


3.09
%

2.98
%Weighted average interest rate


3.76
%

2.98
%


(1)Interest
under the Goldman facility is paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2014 are calculated for the period since the Company commenced borrowings thereunder to
December 31, 2014.


In
connection with the Notes and the Indenture, Gladwyne Funding also entered into (i) an amended and restated investment management agreement with the Company, as investment
manager, dated as of September 11, 2014, pursuant to which the Company will manage the assets of Gladwyne Funding; and (ii) a collateral administration agreement with Virtus
Group, LP, or Virtus, as collateral administrator, dated as of September 11, 2014, pursuant to which Virtus will perform certain administrative services with respect to the assets of
Gladwyne Funding.

Amounts
outstanding under the Goldman facility will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable
to BDCs.

Natixis Credit Facility

On July 11, 2013, Energy Funding LLC, or Energy Funding, the Company's wholly-owned, special-purpose financing
subsidiary, entered into a revolving credit facility, or the Natixis credit facility, with Natixis, New York Branch, or Natixis, as administrative agent and lender, Wells Fargo Bank, National
Association, as collateral agent and custodian, and the other lenders from time to time party thereto. The Natixis credit facility provided for revolving borrowings through January 11, 2015 in
an aggregate principal amount up to $150,000 on a committed basis. After that date, the Company was no longer permitted to borrow under the facility and outstanding amounts began to amortize. During
the year ended December 31, 2015, the Company repaid $57,827 of outstanding borrowings under the facility.

The
Company contributed cash and debt securities to Energy Funding from time to time, prior to the commencement of the amortization period under the facility, subject to certain
restrictions set forth in the Natixis credit facility. The Company continues to retain a residual interest in any assets contributed through its ownership of Energy Funding or it received fair market
value for any debt securities sold to Energy Funding. Energy Funding was also permitted to purchase additional debt securities from various sources prior to the commencement of the amortization period
under the facility. Energy Funding has appointed the Company to manage its portfolio of debt securities pursuant to the terms of a collateral management agreement. Energy Funding's obligations to the
lenders under the facility are secured by a first priority security interest in substantially all of the assets of Energy Funding, including its portfolio of debt securities. The obligations of Energy
Funding under the facility are non-recourse to the Company and the Company's exposure under the facility is limited to the value of the Company's investment in Energy Funding.

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

Borrowings
under the Natixis credit facility accrue interest at a rate equal to the applicable commercial paper rate plus 2.25% per annum. Prior to the commencement of the amortization
period, Energy Funding was subject to a non-usage fee of 1.00% per annum to the extent that the aggregate principal amount available under the Natixis credit facility had not been borrowed. Any
amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 11, 2023.

As
of December 31, 2015 and 2014, $92,173 and $150,000, respectively, was outstanding under the Natixis credit facility. The carrying amount outstanding under the facility
approximates its fair value. The Company incurred costs of $2,544 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance
sheets and amortizes to interest expense over the life of the facility. As of December 31, 2015, $1,386 of such deferred financing costs had yet to be amortized to interest expense.

For
the years ended December 31, 2015, 2014 and 2013, the components of total interest expense for the Natixis credit facility were as follows:

Year Ended December 31,2015

2014

2013Direct interest expense

$
3,041

$
3,733

$
1,102Non-usage fees








185Amortization of deferred financing costs


782


256


120​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
3,823

$
3,989

$
1,407​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​


For
the years ended December 31, 2015, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Natixis credit facility were as follows:

Year Ended December 31,2015

2014

2013Cash paid for interest expense(1)

$
3,195

$
3,810

$
771Average borrowings under the facility(2)

$
116,357

$
150,000

$
118,820Effective interest rate on borrowings


2.77
%

2.57
%

2.94
%Weighted average interest rate (including the effect of non-usage fees)


2.61
%

2.54
%

2.99
%


(1)Interest
under the Natixis credit facility is paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2013 are calculated for the period since the Company commenced borrowings thereunder to
December 31, 2013.


In
connection with the Natixis credit facility, Energy Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements
and other customary requirements for similar facilities. The Natixis credit facility contains customary events of default for similar financing transactions, including (a) the failure to make
principal payments when due or interest payments within five business days of when due; (b) Energy Funding becoming an investment company required to be registered under the 1940 Act;
(c) certain events of insolvency or bankruptcy of Energy Funding; (d) the resignation or removal of the Company as Energy Funding's collateral manager; (e) FS Advisor or any
replacement thereof approved in writing by the majority lenders no
longer serving as the investment adviser to the Company; and (f) GSO or any replacement thereof approved in writing by the majority lenders no longer serving as the investment sub-adviser to
the Company. Upon the occurrence of an event of default, the majority lenders or Natixis (acting at

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

the
direction of the majority lenders) may declare the outstanding principal and interest and all other amounts owing under the facility immediately due and payable. During the continuation of an
event of default, Energy Funding must pay interest at a default rate.

Borrowings
of Energy Funding will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Wells Fargo Credit Facility

On September 9, 2014, Wayne Funding LLC, or Wayne Funding, the Company's wholly-owned, special purpose financing
subsidiary, entered into a revolving credit facility, or the Wells Fargo credit facility, with Wells Fargo Securities, LLC, as administrative agent, each of the conduit lenders and
institutional lenders from time to time party thereto and Wells Fargo Bank, National Association, collectively referred to herein as Wells Fargo, as the collateral agent, account bank and collateral
custodian under the Wells Fargo credit facility. The Wells Fargo credit facility provided for borrowings in an aggregate principal amount up to $200,000 on a committed basis. On February 23,
2016, Wayne Funding and Wells Fargo entered into an amendment to reduce the aggregate borrowings available under the facility to $125,000.

The
Company may contribute cash, loans or bonds to Wayne Funding from time to time and will retain a residual interest in any assets contributed through its ownership of Wayne Funding or
will receive fair market value for any assets sold to Wayne Funding. Wayne Funding may purchase additional assets from various sources. Wayne Funding has appointed the Company to manage its portfolio
of assets pursuant to the terms of a collateral management agreement. Wayne Funding's obligations to Wells Fargo under the Wells Fargo credit facility are secured by a first priority security interest
in substantially all of the assets of Wayne Funding, including its portfolio of assets. The obligations of Wayne Funding under the Wells Fargo credit facility are non-recourse to the Company and the
Company's exposure under the facility is limited to the value of its investment in Wayne Funding.

Borrowings
under the Wells Fargo credit facility accrue interest at a rate equal to three-month LIBOR plus a spread ranging between 2.50% and 2.75% per annum, depending on the
composition of the portfolio of assets for the relevant period. During the period beginning October 10, 2014 through June 5, 2015, Wayne Funding was subject to a non-usage fee to the
extent the aggregate principal amount available under the Wells Fargo credit facility was not borrowed. Beginning June 6, 2015, the non-usage fee increased to the sum of (a) 0.50% per
annum on the first $40,000 of unborrowed principal amount
available under the Wells Fargo credit facility and (b) 2.00% on any unborrowed principal amount available under the facility in excess of $40,000. Any amounts borrowed under the Wells Fargo
credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on September 9, 2019. Borrowings under the Wells Fargo credit facility are subject to
compliance with a borrowing base, pursuant to which the amount of funds advanced to Wayne Funding varies depending upon the types of assets in Wayne Funding's portfolio.

As
of December 31, 2015 and 2014, $140,000 and $120,000, respectively, was outstanding under the Wells Fargo credit facility. The carrying amount outstanding under the facility
approximates its fair value. The Company incurred costs of $2,641 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance
sheets and amortizes to interest expense over the life of the facility. As of December 31, 2015, $1,950 of such deferred financing costs had yet to be amortized to interest expense.

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

For
the years ended December 31, 2015 and 2014, the components of total interest expense for the Wells Fargo credit facility were as follows:

Year Ended
December 31,2015

2014Direct interest expense

$
3,917

$
219Non-usage fees


575


191Amortization of deferred financing costs


528


163​
​
​
​
​
​
​
​Total interest expense

$
5,020

$
573​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


For
the years ended December 31, 2015 and 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Wells
Fargo credit facility were as follows:

Year Ended
December 31,2015

2014Cash paid for interest expense(1)

$
4,369

$
156Average borrowings under the facility(2)

$
129,575

$
120,000Effective interest rate on borrowings


3.23
%

2.74
%Weighted average interest rate (including the effect of non-usage fees)


3.47
%

2.27
%


(1)Interest
under the Wells Fargo credit facility is paid quarterly in arrears.(2)Average
borrowings for the year ended December 31, 2014 are calculated for the period since the Company commenced borrowings thereunder to
December 31, 2014.


In
connection with the Wells Fargo credit facility, Wayne Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements
and other customary requirements for similar facilities. The Wells Fargo credit facility contains customary events of default for similar financing transactions, including: (a) the failure to
make principal or interest payments within three business days of when due; (b) a borrowing base deficiency that is not cured in accordance with the terms of the facility; (c) the
insolvency or bankruptcy of Wayne Funding or the Company; (d) the resignation or removal of the Company as collateral manager; (e) the failure of the Company to maintain an asset
coverage ratio of greater than or equal to 2:1; (f) the failure of the Company to have a net asset value of at least $300,000; and (g) the failure of Wayne Funding to qualify as a
bankruptcy-remote entity. Upon the occurrence and during the continuation of an event of default, Wells Fargo may declare the outstanding advances and all other obligations under the facility
immediately due and payable. During the continuation of an event of default, Wayne Funding must pay interest at a default rate.

In
addition, the occurrence of certain events described as "Collateral Manager Events of Default" in the loan and servicing agreement which governs the Wells Fargo credit facility may
trigger (i) a requirement that Wayne Funding obtain the consent of Wells Fargo prior to entering into any transaction with respect to portfolio assets and (ii) the right of Wells Fargo
to direct Wayne Funding to enter into transactions with respect to any portfolio assets, in each case in Wells Fargo's sole discretion. Collateral Manager Events of Default include non-performance of
any obligation under the transaction documents by Wayne Funding, the Company, FS Advisor or GSO, and other events with respect to such entities that are adverse to Wells Fargo and the secured parties
under the Wells Fargo credit facility.

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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (Continued)

Borrowings
of Wayne Funding will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

Note 9. Commitments and Contingencies

The Company enters into contracts that contain a variety of indemnification provisions. The Company's maximum exposure under these arrangements is unknown; however, the Company has not
had prior claims or losses pursuant to these contracts. Management of FS Advisor has reviewed the Company's existing contracts and expects the risk of loss to the Company to be remote.

The
Company is not currently subject to any material legal proceedings and, to the Company's knowledge, no material legal proceedings are threatened against the Company. From time to
time, the Company may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of the Company's rights under contracts with its
portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, the Company does not expect that any such proceedings will have a material effect upon its financial
condition or results of operations.

See
Note 6 for a discussion of the Company's unfunded commitments.

Note 10. Senior Securities Asset Coverage

Information about the Company's senior securities is shown in the table below for the years ended December 31, 2015, 2014, 2013, 2012 and 2011.

Year Ended December 31,

Total Amount
Outstanding
Exclusive of Treasury
Securities(1)

Asset Coverage
Per Unit(2)

Involuntary
Liquidation
Preference
per Unit(3)

Average Market
Value per Unit
(Exclude Bank
Loans)(4)2011

$
27,627


3.45




N/A2012

$
263,299


3.29




N/A2013

$
624,174


3.69




N/A2014

$
1,090,413


3.35




N/A2015

$
1,040,494


3.32




N/A


(1)Total
amount of each class of senior securities outstanding at the end of the period presented. For purposes of the asset coverage test, the Company treated
the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted, as a senior security. The TRS was entered into on August 11, 2011 and was
terminated on May 24, 2013.(2)Asset
coverage per unit is the ratio of the carrying value of the Company's total consolidated assets, less all liabilities and indebtedness not represented
by senior securities, to the aggregate amount of senior securities representing indebtedness.(3)The
amount to which such class of senior security would be entitled upon the voluntary liquidation of the Company in preference to any security junior to
it. The "" in this column indicates that the SEC expressly does not require this information to be disclosed for certain types of senior
securities.(4)Not
applicable because senior securities are not registered for public trading on an exchange.


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FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 11. Financial Highlights

The following is a schedule of financial highlights of the Company for the years ended December 31, 2015, 2014, 2013, 2012 and 2011.

Year Ended December 31,2015

2014

2013

2012

2011Per Share Data:(1)Net asset value, beginning of period

$
8.57

$
9.66

$
9.34

$
8.74

$
8.91Results of operations(2)Net investment income (loss)


0.67


0.74


0.58


0.33


0.16Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency


(2.18
)

(1.46
)

0.36


1.05


0.07​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations


(1.51
)

(0.72
)

0.94


1.38


0.23​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Shareholder distributions(3)Distributions from net investment income


(0.67
)

(0.62
)

(0.65
)

(0.49
)

(0.27
)Distributions from net realized gain on investments


(0.04
)

(0.07
)

(0.01
)

(0.10
)

(0.01
)Distributions representing tax return of capital











(0.04
)

​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net decrease in net assets resulting from shareholder distributions


(0.71
)

(0.69
)

(0.66
)

(0.63
)

(0.28
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Capital share transactionsIssuance of common shares(4)


0.18


0.35


0.09


0.02


0.10Repurchases of common shares(5)














Offering costs(2)


(0.03
)

(0.03
)

(0.05
)

(0.12
)

(0.39
)Payments to investment adviser for organization and offering costs(2)











(0.07
)

(0.26
)Capital contributions of investment adviser(2)











0.02


0.43​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from capital share transactions


0.15


0.32


0.04


(0.15
)

(0.12
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net asset value, end of period

$
6.50

$
8.57

$
9.66

$
9.34

$
8.74​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Shares outstanding, end of period


372,210,264


299,394,371


173,532,259


64,524,909


7,746,643​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total return(6)


(15.87
)%

(4.14
)%

10.49
%

14.07
%

1.23
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Ratio/Supplemental Data:Net assets, end of period

$
2,417,861

$
2,565,721

$
1,676,237

$
602,889

$
67,685​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Ratio of net investment income to average net assets(7)


8.31
%

7.71
%

6.04
%

3.64
%

1.83
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Ratio of total expenses to average net assets(7)


5.55
%

5.07
%

5.89
%

7.09
%

4.11
%Ratio of expenses reimbursed by sponsor to average net assets(7)











(0.51
)%

(2.03
)%Ratio of expense recoupment payable to sponsor to average net assets(7)











0.51
%

​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Ratio of net expenses to average net assets(7)


5.55
%

5.07
%

5.89
%

7.09
%

2.08
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Portfolio turnover(8)


22.70
%

35.55
%

53.26
%

75.24
%

12.77
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total amount of senior securities outstanding, exclusive of treasury securities(9)

$
1,040,494

$
1,090,413

$
624,174

$
263,299

$
27,627​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Asset coverage per unit(10)


3.32


3.35


3.69


3.29


3.45


(1)Per
share data may be rounded in order to recompute the ending net asset value per share. The share information utilized to determine per share data for the
years ended December 31, 2012 and 2011 has been retroactively adjusted to reflect a share distribution of 1.0% declared in February 2012.(2)The
per share data was derived by using the weighted average shares outstanding during the applicable period.(3)The
per share data for distributions reflects the actual amount of distributions paid per share (as adjusted for share distributions) during the applicable
period.


164

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Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 11. Financial Highlights (Continued)

(4)The
issuance of common shares on a per share basis reflects the incremental net asset value changes as a result of the issuance of common shares in the
Company's continuous public offering and pursuant to the Company's distribution reinvestment plan. The issuance of common shares at an offering price, net of selling commissions and dealer manager
fees, that is greater than the net asset value per share results in an increase in net asset value per share.(5)The
per share impact of the Company's repurchases of common shares was a reduction to net asset value of less than $0.01 per share during each period.(6)The
total return for each year presented was calculated by taking the net asset value per share as of the end of the applicable year, adding the cash
distributions per share which were declared during the applicable calendar year and dividing the total by the net asset value per share at the beginning of the applicable year. The 2011 total return
is based on an initial investment at $8.91 per share, which represents the initial offering price per share, net of sales commissions and dealer manager fees, after taking into account the share
distribution to shareholders described above in footnote 1 to the Financial Highlights. The total return does not consider the effect of the sales load from the sale of the Company's common shares.
The total return includes the effect of the issuance of common shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The
historical calculation of total return in the table should not be considered a representation of the Company's future total return, which may be greater or less than the returns shown in the table due
to a number of factors, including the Company's ability or inability to make investments in companies that meet its investment criteria, the interest rates payable on the debt securities the Company
acquires, the level of the Company's expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its
markets and general economic conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return
calculations set forth above represent the total return on the Company's investment portfolio during the applicable period and do not represent an actual return to shareholders.(7)Weighted
average net assets during the years ended December 31, 2015, 2014, 2013 and 2012 and the period from July 18, 2011 (Commencement of
Investment Operations) through December 31, 2011 are used for this calculation. Ratios for the period from July 18, 2011 (Commencement of Investment Operations) through
December 31, 2011 are not annualized. The following is a schedule of supplemental ratios for the years ended December 31, 2015, 2014, 2013, 2012 and
2011:


Year Ended December 31,2015

2014

2013

2012

2011Ratio of accrued capital gains incentive fees to average net assets





(0.48
)%

0.75
%

2.30
%

0.19
%Ratio of subordinated income incentive fees to average net assets


1.13
%

1.41
%

0.69
%




Ratio of interest expense to average net assets


1.12
%

0.84
%

0.84
%

0.77
%

0.79
%Ratio of income and excise taxes to average net assets


0.01
%

0.04
%

0.07
%







165

---



Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 12. Selected Quarterly Financial Data (Unaudited)

The following is the quarterly results of operations for the years ended December 31, 2015 and 2014. The following information reflects all normal recurring adjustments necessary
for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.

Quarter EndedDecember 31,
2015

September 30,
2015

June 30,
2015

March 31,
2015Investment income

$
102,898

$
98,758

$
92,410

$
85,587Operating expensesTotal expenses


42,328


40,122


36,746


32,862​
​
​
​
​
​
​
​
​
​
​
​
​
​Net investment income


60,570


58,636


55,664


52,725Realized and unrealized gain (loss)


(407,886
)

(340,600
)

9,329


263​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations

$
(347,316
)
$
(281,964
)
$
64,993

$
52,988​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Per share information-basic and dilutedNet investment income

$
0.17

$
0.17

$
0.17

$
0.17​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations

$
(0.96
)
$
(0.81
)
$
0.20

$
0.17​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Weighted average shares outstanding


362,553,878


348,739,636


329,285,131


310,241,395​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​




Quarter EndedDecember 31,
2014

September 30,
2014

June 30,
2014

March 31,
2014Investment income

$
88,786

$
72,621

$
72,007

$
56,556Operating expensesTotal expenses


30,385


19,451


34,977


30,268​
​
​
​
​
​
​
​
​
​
​
​
​
​Net investment income


58,401


53,170


37,030


26,288Realized and unrealized gain (loss)


(337,427
)

(49,904
)

15,089


27,844​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations

$
(279,026
)
$
3,266

$
52,119

$
54,132​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Per share information-basic and dilutedNet investment income

$
0.20

$
0.21

$
0.17

$
0.14​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations

$
(0.98
)
$
0.01

$
0.24

$
0.29​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Weighted average shares outstanding


285,577,757


252,878,585


219,030,100


188,276,979​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


The
sum of quarterly per share amounts does not necessarily equal per share amounts reported for the years ended December 31, 2015 and 2014. This is due to changes in the number
of weighted average shares outstanding and the effects of rounding for each period.

166

---



Table of Contents

FS Energy and Power Fund

Notes to Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)



Note 13. Recently Issued Accounting Standards

In April 2015, the FASB, issued Accounting Standards Update, or ASU, No. 2015-03,InterestImputation of Interest,to
simplify the presentation in the financial statements of debt issuance costs. Under existing guidance, debt issuance costs are recognized as a deferred charge and presented as an asset on the balance
sheet. The amendments to the guidance require that debt issuance costs related to a recognized liability for indebtedness be presented in the balance sheet as a direct deduction from the carrying
amount of that liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15,InterestImputation of
Interest,to update the guidance to include SEC views regarding the presentation and subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given
the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC has indicated that it would not object to an entity deferring and
presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit
arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The recognition and measurement guidance for debt issuance costs is not affected by the
amendments to the guidance. The amendments to the FASB codification guidance are to be applied retrospectively with applicable disclosures for a change in accounting principle upon transition. For
public entities, the amendments are effective during interim and annual periods beginning after December 15, 2015. Early application by public entities is permitted. The Company is currently
assessing the impact of this guidance on its consolidated financial statements.

167

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Table of Contents

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.    Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to
our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the
disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired
control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As
required by Exchange Act Rule 13(a)-15(b), we carried out an evaluation under the supervision and with the participation of our management, including our chief executive
officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2015. Based on the foregoing, our chief
executive officer and chief financial officer concluded that our disclosure controls and procedures were (a) designed to ensure that the information we are required to disclose in our reports
under the Exchange Act is recorded, processed and reported in an accurate manner and on a timely basis and the information that we are required to disclose in our Exchange Act reports is accumulated
and communicated to management to permit timely decisions with respect to required disclosure and (b) operating in an effective manner.

Management's Annual Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in
Exchange Act Rules 13a-15(f) and 15d-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Our
internal control over financial reporting includes those policies and procedures that:

1.     Pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company's transactions and the dispositions of assets of the Company;

2.     Provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of our management and board of trustees; and

3.     Provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material
effect on the financial statements.

Because
of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and
presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management's
report on internal control over financial reporting is set forth above under the heading "Management's Report on Internal Control over Financial Reporting" in Item 8
of this annual report on Form 10-K.

168

---



Table of Contents

Attestation Report of the Registered Public Accounting Firm

Our registered public accounting firm has issued an attestation report on our internal control over financial reporting. This report
appears on page 106.

Changes in Internal Control Over Financial Reporting

During our fourth quarter of 2015, there has been no change in our internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) or 15d-15(f)) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.    Other Information.

None.

169

---



Table of Contents

PART III

The Company will file a definitive Proxy Statement for its 2016 Annual Meeting of Shareholders with the SEC, pursuant to
Regulation 14A promulgated under the Exchange Act, not later than 120 days after the end of its fiscal year. Accordingly, certain information required by Part III has been omitted
under General Instruction G(3) to Form 10-K. Only those sections of the Company's definitive Proxy Statement that specifically address the items set forth herein are incorporated by
reference.

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by Item 10 is hereby incorporated by reference from the Company's definitive Proxy Statement relating
to the Company's 2016 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of the Company's fiscal year.

Item 11.    Executive Compensation

The information required by Item 11 is hereby incorporated by reference from the Company's definitive Proxy Statement relating
to the Company's 2016 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of the Company's fiscal year.

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is hereby incorporated by reference from the Company's definitive Proxy Statement relating
to the Company's 2016 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of the Company's fiscal year.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is hereby incorporated by reference from the Company's definitive Proxy Statement relating
to the Company's 2016 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of the Company's fiscal year.

Item 14.    Principal Accountant Fees and Services

The information required by Item 14 is hereby incorporated by reference from the Company's definitive Proxy Statement relating
to the Company's 2016 Annual Meeting of Shareholders, to be filed with the SEC within 120 days following the end of the Company's fiscal year.

170

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Table of Contents

PART IV

Item 15.    Exhibits, Financial Statement Schedules

a. Documents Filed as Part of this Report

The following financial statements are set forth in Item 8:



PageManagement's Report on Internal Control over Financial Reporting

105Report of Independent Registered Public Accounting Firm

106Report of Independent Registered Public Accounting Firm

107Consolidated Balance Sheets as of December 31, 2015 and 2014

108Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and
2013

109Consolidated Statements of Changes in Net Assets for the years ended December 31, 2015, 2014 and
2013

110Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and
2013

111Consolidated Schedules of Investments as of December 31, 2015 and 2014

112Notes to Consolidated Financial Statements

126


b. Exhibits

Please note that the agreements included as exhibits to this annual report on Form 10-K are included to provide information
regarding their terms and are not intended to provide any other factual or disclosure information about FS Energy and Power Fund or the other parties to the agreements. The agreements contain
representations and warranties by each of the parties to the applicable agreement that have been made solely for the benefit of the other parties to the applicable agreement and may not describe the
actual state of affairs as of the date they were made or at any other time.

The
following exhibits are filed as part of this annual report or hereby incorporated by reference to exhibits previously filed with the SEC:

3.1

Third Amended and Restated Declaration of Trust of FS Energy and Power Fund.(Incorporated by reference to Exhibit 3.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on
March 13, 2012.)3.2

Amended and Restated Bylaws of FS Energy and Power Fund.(Incorporated by reference to Exhibit 3.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on March 13,
2012.)4.1

Form of Subscription Agreement.(Incorporated by reference to FS Energy and Power Fund's final prospectus filed on September 23, 2015 with the Securities and Exchange Commission pursuant to
Rule 497 of the Securities Act of 1933, as amended.)4.2

Amended and Restated Distribution Reinvestment Plan of FS Energy and Power Fund.(Incorporated by reference to Exhibit 4.1 to FS Energy and Power Fund's Current Report on Form 8-K
filed on November 14, 2011.)10.1

Investment Advisory and Administrative Services Agreement, dated as of April 28, 2011, by and between FS Energy and Power Fund and FS Investment Advisor, LLC.(Incorporated by
reference to Exhibit (g)(1) filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.2

Amendment No. 1 dated as of August 10, 2012, to Investment Advisory and Administrative Services Agreement, dated as of April 28, 2011, by and between FS Energy and Power Fund and FS Investment Advisor,
 LLC.(Incorporated by reference to Exhibit 10.2 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on August 14, 2012.)


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10.3

Investment Sub-advisory Agreement, dated as of April 28, 2011, by and between FS Investment Advisor, LLC and GSO Capital Partners LP.(Incorporated by reference to Exhibit (g)(2)
filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.4

Dealer Manager Agreement, dated as of April 28, 2011, by and between FS Energy and Power Fund and FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)(1)
 filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.5

Form of Follow-On Dealer Manager Agreement by and among FS Energy and Power Fund, FS Investment Advisor, LLC and FS2 Capital Partners, LLC.(Incorporated by reference to
Exhibit (h)(2) filed with Pre-Effective Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-184407) filed on May 10, 2013.)10.6

2014 Follow-On Dealer Manager Agreement, dated as of January 7, 2015, by and among FS Energy and Power Fund, FS Investment Advisor, LLC and FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)(3) filed with Post-Effective Amendment No. 1 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-199777) filed on April 1, 2015.)10.7

Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement).(Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to FS Energy
and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.8

Form of Follow-On Selected Dealer Agreement.(Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement.) (Incorporated by reference to Exhibit (h)(2) filed with
Pre-Effective Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2(File No. 333-184407) filed on May 10, 2013.)10.9

Custodian Agreement, dated as of November 14, 2011, by and between State Street Bank and Trust Company and FS Energy and Power Fund.(Incorporated by reference to Exhibit 10.6 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on November 14, 2011.)10.10

Escrow Agreement, dated as of March 29, 2011, by and between FS Energy and Power Fund and UMB Bank, N.A.(Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to FS
Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.11

Credit Agreement, dated as of June 24, 2011, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto.(Incorporated by reference to
Exhibit 10.7 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.12

First Amendment to Credit Agreement, dated as of May 30, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 30, 2012.)10.13

Second Amendment to Credit Agreement, dated as of August 28, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on August 30, 2012.)10.14

Third Amendment to Credit Agreement, dated as of October 18, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on October 18, 2012.)10.15

Fourth Amendment to Credit Agreement, dated as of June 24, 2013, by and among FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch.(Incorporated by reference to
Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on June 25, 2013.)


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10.16

Amended and Restated Credit Agreement, dated as of June 11, 2014, by and among FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch.(Incorporated by reference to Exhibit 10.1
to FS Energy and Power Fund's Current Report on Form 8-K filed on June 17, 2014.)10.17

First Amendment to Amended and Restated Credit Agreement, dated as of June 11, 2015, by and among FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch(Incorporated by
reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on June 15, 2015.)10.18

Asset Contribution Agreement, dated as of June 24, 2011, by and between FS Energy and Power Fund and FSEP Term Funding, LLC.(Incorporated by reference to Exhibit 10.8 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.19

Investment Management Agreement, dated as of June 24, 2011, by and between FS Energy and Power Fund and FSEP Term Funding, LLC.(Incorporated by reference to Exhibit 10.9 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.20

Security Agreement, dated as of June 24, 2011, by and between FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch.(Incorporated by reference to Exhibit 10.10 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.21

ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.11 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on August 15, 2011.)10.22

Termination and Release Acknowledgment, dated as of May 11, 2012, by Citibank N.A. in favor of FS Energy and Power Fund.(Incorporated by reference to Exhibit 10.15 to FS Energy and
Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.23

Amendment Agreement, dated as of May 11, 2012, to the ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, by and between EP Investments LLC and Citibank,
N.A.(Incorporated by reference to Exhibit 10.16 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.24

Amended and Restated Confirmation Letter Agreement, dated as of May 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.17 to
FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.25

Amended and Restated Confirmation Letter Agreement, dated as of October 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.1
to FS Energy and Power Fund's Current Report on Form 8-K filed on October 12, 2012.)10.26

Termination Acknowledgment (TRS), dated as of May 24, 2013, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power
Fund's Current Report on Form 8-K filed on May 31, 2013.)10.27

Loan Agreement, dated as of May 24, 2013, by and among EP Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)10.28

Account Control Agreement, dated as of May 24, 2013, by and among EP Funding LLC, Citibank, N.A. and Virtus Group, LP.(Incorporated by reference to Exhibit 10.2 to FS Energy
and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)10.29

Security Agreement, dated as of May 24, 2013, by and between EP Funding LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.3 to FS Energy and Power Fund's Current
Report on Form 8-K filed on May 29, 2013.)10.30

Investment Management Agreement, dated as of May 24, 2013, by and between FS Energy and Power Fund and EP Funding LLC.(Incorporated by reference to Exhibit 10.4 to FS Energy and
Power Fund's Current Report on Form 8-K filed on May 29, 2013.)


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10.31

Credit Agreement, dated as of July 11, 2013, by and among Energy Funding LLC, Natixis, New York Branch, Wells Fargo Bank, National Association and the other lenders from time to time party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)10.32

Securities Account Control Agreement, dated as of July 11, 2013, by and among Energy Funding LLC and Wells Fargo Bank, National Association.(Incorporated by reference to
Exhibit 10.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)10.33

Collateral Management Agreement, dated as of July 11, 2013, by and between FS Energy and Power Fund and Energy Funding LLC.(Incorporated by reference to Exhibit 10.3 to FS Energy
and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)10.34

Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated May 16, 2013, by and between FS Energy and Power Fund and Franklin Square Holdings, L.P.(Incorporated by reference to Exhibit 99.1 to FS Energy and Power Fund's Current report on Form 8-K filed on May 17, 2013.)10.35

Committed Facility Agreement, dated as of December 11, 2013, by and between Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc.(Incorporated by reference to
Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)10.36

First Amendment Agreement, dated as of August 18, 2014, between BNP Paribas Prime Brokerage, Inc., on behalf of itself and as agent for the BNPP Entities, and Berwyn Funding LLC.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on August 21, 2014.)10.37

U.S. PB Agreement, dated as of December 11, 2013, by and between Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc.(Incorporated by reference to Exhibit 10.2 to FS
Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)10.38

Special Custody and Pledge Agreement, dated as of December 11, 2013, by and among State Street Bank and Trust Company, Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc.(Incorporated by reference to Exhibit 10.3 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)10.39

Investment Management Agreement, dated as of December 11, 2013, by and between FS Energy and Power Fund and Berwyn Funding LLC.(Incorporated by reference to Exhibit 10.4 to FS
Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)10.40

Loan and Servicing Agreement, dated as of September 9, 2014, among Wayne Funding LLC, as borrower, Wells Fargo Securities, LLC, as administrative agent, Wells Fargo Bank, National Association, as
collateral agent, account bank and collateral custodian, and the other lenders and lender agents from time to time party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on
Form 8-K filed on September 15, 2014.)10.41

Purchase and Sale Agreement, dated as of September 9, 2014, by and between Wayne Funding LLC, as purchaser, and FS Energy and Power Fund, as seller.(Incorporated by reference to
Exhibit 10.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)10.42

Collateral Management Agreement, dated as of September 9, 2014, by and between Wayne Funding LLC and FS Energy and Power Fund, as collateral manager.(Incorporated by reference to
Exhibit 10.3 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)10.43

Securities Account Control Agreement, dated as of September 9, 2014, by and among Wayne Funding LLC, as pledgor, Wells Fargo Bank, National Association, as collateral agent, and Wells Fargo Bank, National
Association, as securities intermediary.(Incorporated by reference to Exhibit 10.4 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)


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10.44

Amended and Restated Sale and Contribution Agreement, dated as of September 11, 2014, by and between FS Energy and Power Fund and Gladwyne Funding LLC.(Incorporated by reference to
Exhibit 10.5 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)10.45

Indenture, dated as of September 11, 2014, by and between Gladwyne Funding LLC and Citibank, N.A., as trustee.(Incorporated by reference to Exhibit 10.6 to FS Energy and Power
Fund's Current Report on Form 8-K filed on September 15, 2014.)10.46

First Supplemental Indenture, dated as of December 15, 2014, by and between Gladwyne Funding LLC and Citibank, N.A., as trustee.(Incorporated by reference to Exhibit 10.1 of FS
Energy and Power Fund's Current Report on Form 8-K filed on December 19, 2014.)10.47

Gladwyne Funding LLC Floating Rate Notes due 2024.(Incorporated by reference to Exhibit 10.7 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15,
2014.)10.48

September 1996 Version Master Repurchase Agreement between Goldman Sachs Bank USA and Strafford Funding LLC, together with the related Annex and Master Confirmation thereto, each dated as of September 11,
2014.(Incorporated by reference to Exhibit 10.8 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)10.49

Amended and Restated Master Confirmation, dated as of December 15, 2014, by and between Goldman Sachs Bank USA and Strafford Funding LLC.(Incorporated by reference to
Exhibit 10.2 of FS Energy and Power Fund's Current Report on Form 8-K filed on December 19, 2014.)10.50

Revolving Credit Agreement, dated as of September 11, 2014, by and between FS Energy and Power Fund and Strafford Funding LLC.(Incorporated by reference to Exhibit 10.9 to FS
Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)10.51

Amended and Restated Revolving Credit Agreement, dated as of December 15, 2014, by and between FS Energy and Power Fund and Strafford Funding LLC.(Incorporated by reference to
Exhibit 10.3 of FS Energy and Power Fund's Current Report on Form 8-K filed on December 19, 2014.)10.52

Amended and Restated Investment Management Agreement, dated as of September 11, 2014, by and between Gladwyne Funding LLC and FS Energy and Power Fund.(Incorporated by reference to
Exhibit 10.10 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)10.53

Collateral Administration Agreement, dated as of September 11, 2014, by and among Gladwyne Funding LLC, FS Energy and Power Fund and Virtus Group, LP.(Incorporated by reference
to Exhibit 10.11 to FS Energy and Power Fund's Current Report on Form 8-K filed on September 15, 2014.)10.54

Term Loan and Security Agreement, dated as of November 6, 2015, by and among Foxfields Funding LLC, Fortress Credit Co LLC, as administrative agent, the lenders from time to time party thereto and the
other loan parties from time to time party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on November 12, 2015.)10.55

Contribution Agreement, dated as of November 6, 2015, by and between FS Energy and Power Fund and Foxfields Funding LLC.(Incorporated by reference to Exhibit 10.2 to FS Energy
and Power Fund's Current Report on Form 8-K filed on November 12, 2015.)10.56

Investment Management Agreement, dated as of November 6, 2015, by and between FS Energy and Power Fund and Foxfields Funding LLC.(Incorporated by reference to Exhibit 10.3 to FS
Energy and Power Fund's Current Report on Form 8-K filed on November 12, 2015.)10.57

Securities Account Control Agreement, dated as of November 6, 2015, by and among Foxfields Funding LLC, Fortress Credit Co LLC, as administrative agent and State Street Bank and Trust Company.(Incorporated by reference to Exhibit 10.4 to FS Energy and Power Fund's Current Report on Form 8-K filed on November 12, 2015.)


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10.58

Guaranty, dated as of November 6, 2015, by and between FS Energy and Power Fund and Fortress Credit Co LLC.(Incorporated by reference to Exhibit 10.5 to FS Energy and Power Fund's
Current Report on Form 8-K filed on November 12, 2015.)10.59

Pledge Agreement, dated as of November 6, 2015, by and between FS Energy and Power Fund and Fortress Credit Co LLC.(Incorporated by reference to Exhibit 10.6 to FS Energy and
Power Fund's Current Report on Form 8-K filed on November 12, 2015.)10.60

First Amendment to Term Loan and Security Agreement, dated as of November 25, 2015, by and among Foxfields Funding LLC, Fortress Credit Co LLC, as administrative agent, the lenders signatory thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 1, 2015.)21.1*

Subsidiaries of FS Energy and Power Fund.31.1*

Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.31.2*

Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.32.1*

Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*

Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*Filed
herewith.


c. Financial statement schedules

No financial statement schedules are filed herewith because (1) such schedules are not required or (2) the information
has been presented in the aforementioned consolidated financial statements.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

FS ENERGY AND POWER FUNDDate: March 11, 2016

/s/ Michael C. Forman Michael C. Forman
Chief Executive Officer


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Pursuant
to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacity and
on the dates indicated.

Date: March 11, 2016

/s/ Michael C. Forman Michael C. Forman
Chief Executive Officer and Trustee
(Principal Executive Officer)Date: March 11, 2016

/s/ Edward T. Gallivan, Jr. Edward T. Gallivan, Jr.
Chief Financial Officer
(Principal Accounting and Financial Officer)Date: March 11, 2016

/s/ David Adelman David Adelman
TrusteeDate: March 11, 2016

/s/ Sidney Brown Sidney Brown
TrusteeDate: March 11, 2016

/s/ Gregory P. Chandler Gregory P. Chandler
TrusteeDate: March 11, 2016

/s/ Richard Goldstein Richard Goldstein
TrusteeDate: March 11, 2016

/s/ Thomas J. Gravina Thomas J. Gravina
TrusteeDate: March 11, 2016

/s/ Michael Heller Michael Heller
TrusteeDate: March 11, 2016

/s/ Charles P. Pizzi Charles P. Pizzi
TrusteeDate: March 11, 2016

/s/ Richard W. Vague Richard W. Vague
TrusteeDate: March 11, 2016

/s/ R. Richard Williams R. Richard Williams
Trustee


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