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



FORM 10-Q



ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012.o

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


COMMISSION FILE NUMBER: 814-00841



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



Delaware(State or other jurisdiction of
incorporation or organization)

27-6822130(I.R.S. Employer
Identification No.)Cira Centre
2929 Arch Street, Suite 675
Philadelphia, Pennsylvania 19104(Address of principal executive office)


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



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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer", "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 Exchange
Act). Yes o    No ý.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

The
issuer has 36,187,116 common shares of beneficial interest outstanding as of August 13, 2012.





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TABLE OF CONTENTS



PagePART IFINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTS


1Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011


1Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2011


2Unaudited Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2012 and 2011


3Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011


4Consolidated Schedules of Investments as of June 30, 2012 (Unaudited) and December 31, 2011


5Notes to Unaudited Consolidated Financial Statements


9ITEM 2.

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


32ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


56ITEM 4.

CONTROLS AND PROCEDURES


58PART IIOTHER INFORMATIONITEM 1.

LEGAL PROCEEDINGS


59ITEM 1A.

RISK FACTORS


59ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


59ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


59ITEM 4.

MINE SAFETY DISCLOSURES


59ITEM 5.

OTHER INFORMATION


59ITEM 6.

EXHIBITS


60SIGNATURES


62


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Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    Financial Statements.



FS Energy and Power Fund        Consolidated Balance Sheets        (in thousands, except share and per share amounts)

June 30, 2012
(Unaudited)

December 31,
2011AssetsInvestments, at fair value (amortized cost$238,510 and $91,808, respectively)

$
237,859

$
91,642Cash


42,605


10,810Due from counterparty


27,529


7,878Receivable for overfunded investment





434Reimbursement due from sponsor(1)


631


533Interest receivable


3,271


656Receivable for common shares purchased


177


99Deferred financing costs


256


222Receivable due on total return swap(2)


154


260Unrealized appreciation on total return swap(2)


732


121Prepaid expenses and other assets


71


77Total assets

$
313,285

$
112,732LiabilitiesPayable for investments purchased

$
25,053

$
23,503Credit facility payable


35,500


20,518Shareholder distributions payable


1,384


374Management fees payable


1,277


346Accrued capital gains incentive fee(3)


301


67Administrative services expense payable


21


52Interest payable


137


109Other accrued expenses and liabilities


400


78Total liabilities


64,073


45,047Shareholders' 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, 28,082,060 and 7,746,643 shares issued and outstanding, respectively(4)


28


8Capital in excess of par value


249,072


68,171Accumulated undistributed net realized gains on investments and total return swap and gain/loss on foreign currency


487


Accumulated distributions in excess of net investment income(5)


(436
)

(432
)Net unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency


61


(62
)Total shareholders' equity


249,212


67,685Total liabilities and shareholders' equity

$
313,285

$
112,732Net asset value per common share at period end

$
8.87

$
8.74


(1)See
Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates.(2)See
Note 8 for a discussion of the Company's total return swap agreement.(3)See
Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.(4)As
discussed in Note 5, the Company paid a 1% share distribution in February 2012. The outstanding shares and net asset value per share reflect this
distribution on a retroactive basis.(5)See
Note 5 for a discussion of the source of distributions paid by the Company.




See notes to unaudited consolidated financial statements.

1

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FS Energy and Power Fund        Unaudited Consolidated Statements of Operations        (in thousands, except share and per share amounts)

Three Months Ended
June 30,

Six Months Ended
June 30,2012

2011

2012

2011Investment IncomeInterest income

$
4,337

$


$
7,055

$
Total investment income


4,337





7,055


Operating expensesManagement fees


1,277





2,052


Capital gains incentive fees(1)


(285
)




234


Administrative services expenses


139





201


Share transfer agent fees


120





179


Accounting and administrative fees


42





80


Interest expense


264





533


Organization costs





74





167Other general and administrative expenses


310





567


Total operating expenses


1,867


74


3,846


167Less: Expense reimbursement from sponsor(2)


(631
)




(1,432
)

Net expenses


1,236


74


2,414


167Net investment income (loss)


3,101


(74
)

4,641


(167
)Realized and unrealized gain/lossNet realized gain (loss) on investments


224





554


Net realized gain (loss) on total return swap(3)


368





487


Net realized gain (loss) on foreign currency








9Net change in unrealized appreciation (depreciation) on investments


(2,327
)




(485
)

Net change in unrealized appreciation (depreciation) on total return swap(3)


311





611


Net change in unrealized gain (loss) on foreign currency


(6
)




(3
)

Total net realized and unrealized gain/loss on investments


(1,430
)




1,173


Net increase (decrease) in net assets resulting from operations

$
1,671

$
(74
)
$
5,814

$
(167
)Per share informationbasic and diluted(4)Net increase (decrease) in net assets resulting from operations

$
0.08

$
(3.30
)
$
0.37

$
(7.44
)Weighted average shares outstanding


20,784,076


22,444


15,837,971


22,444


(1)See
Note 2 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.(2)See
Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates.(3)See
Note 8 for a discussion of the Company's total return swap agreement.(4)As
discussed in Note 5, the Company paid a 1% share distribution in February 2012. The weighted average shares used in the per share computation of
the net increase (decrease) in net assets resulting from operations is based on the weighted average shares outstanding during the three and six months ended June 30, 2012 and reflects the
share distribution on a retroactive basis.




See notes to unaudited consolidated financial statements.

2

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FS Energy and Power Fund        Unaudited Consolidated Statements of Changes in Net Assets        (in thousands)

Six Months
Ended June 30,2012

2011OperationsNet investment income (loss)

$
4,641

$
(167
)Net realized gain (loss) on investments, total return swap and foreign currency


1,050


Net change in unrealized appreciation (depreciation) on investments


(485
)

Net change in unrealized appreciation (depreciation) on total return swap(1)


611


Net change in unrealized gain (loss) on foreign currency


(3
)

Net increase (decrease) in net assets resulting from operations


5,814


(167
)Shareholder distributions(2)Distributions from net investment income


(4,645
)

Distributions from net realized gain on investments


(563
)

Net decrease in net assets resulting from shareholder distributions


(5,208
)

Capital share transactionsIssuance of common shares


181,101


Reinvestment of shareholder distributions


2,271


Offering costs


(905
)

(777
)Reimbursement of investment adviser(3)


(2,051
)

Capital contributions of investment adviser


505


944Net increase in net assets resulting from capital share transactions


180,921


167Total increase in net assets


181,527


Net assets at beginning of period


67,685


200Net assets at end of period

$
249,212

$
200


(1)See
Note 8 for a discussion of the Company's total return swap agreement.(2)See
Note 5 for a discussion of the source of distributions paid by the Company.(3)See
Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.




See notes to unaudited consolidated financial statements.

3

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FS Energy and Power Fund        Unaudited Consolidated Statements of Cash Flows        (in thousands)

Six Months
Ended June 30,2012

2011Cash flows from operating activitiesNet increase (decrease) in net assets resulting from operations

$
5,814

$
(167
)Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:Purchases of investments


(207,590
)

Proceeds from sales and repayments of investments


61,776


Net realized (gain) loss on investments


(554
)

Net change in unrealized (appreciation) depreciation on investments


485


Net change in unrealized (appreciation) depreciation on total return swap(1)


(611
)

Accretion of discount


(334
)

Amortization of deferred financing costs


91


(Increase) decrease in due from counterparty


(19,651
)

(Increase) decrease in receivable for overfunded investment


434


(Increase) decrease in reimbursement due from sponsor(2)


(98
)

(Increase) decrease in interest receivable


(2,615
)

(Increase) decrease in receivable due on total return swap(1)


106


(Increase) decrease in prepaid expenses and other assets


6


Increase (decrease) in payable for investments purchased


1,550


Increase (decrease) in management fees payable


931


Increase (decrease) in accrued capital gains incentive fee


234


Increase (decrease) in administrative services expense payable


(31
)

Increase (decrease) in interest payable


28


Increase (decrease) in other accrued expenses and liabilities


322


Net cash used in operating activities


(159,707
)

(167
)Cash flows from financing activitiesIssuance of common shares


181,023


Reinvestment of shareholder distributions


2,271


Offering costs


(905
)

(777
)Capital contributions of investment adviser


505


944Reimbursement of investment adviser(3)


(2,051
)

Shareholder distributions


(4,198
)

Borrowings under credit facility(4)


29,482


Repayments of credit facility


(14,500
)Deferred financing costs paid


(125
)

(20
)Net cash provided by financing activities


191,502


147Total increase (decrease) in cash


31,795


(20
)Cash at beginning of period


10,810


200Cash at end of period

$
42,605

$
180


(1)See
Note 8 for a discussion of the Company's total return swap agreement.(2)See
Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates.(3)See
Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.(4)During
the six months ended June 30, 2012, the Company paid $414 in interest expense on the credit facility.




See notes to unaudited consolidated financial statements.

4

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FS Energy and Power Fund        Unaudited Consolidated Schedule of Investments        As of June 30, 2012        (in thousands, except share amounts)

Portfolio Company(a)

Industry

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured LoansFirst Lien26.4%Crestwood Holdings LLC, L+825, 1.5% LIBOR Floor, 3/26/18(d)(e)

Midstream

$
20,206

$
20,312

$
20,357Dynegy Holdings Inc. (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)

Power


5,690


5,772


5,842Dynegy Holdings Inc. (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)

Power


6,590


6,653


6,864Frac Tech International, LLC, L+475, 1.5% LIBOR Floor, 5/6/16(d)

Service & Equipment


9,537


9,164


8,737FREIF North American Power I LLC (TLB), L+450, 1.5% LIBOR Floor, 3/2/19

Power


2,801


2,747


2,797FREIF North American Power I LLC (TLC), L+450, 1.5% LIBOR Floor, 3/2/19

Power


440


432


440Hudson Products Holdings Inc., Prime+500, 4.0% Prime Floor, 8/25/15

Service & Equipment


1,680


1,613


1,613LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19(d)(e)

Power


3,966


3,866


3,931NANA Development Corp., L+500, 1.5% LIBOR Floor, 7/22/16(e)

Service & Equipment


1,713


1,683


1,691PL Propylene LLC, L+575, 1.3% LIBOR Floor, 3/23/17(f)

Downstream


2,993


2,936


3,028Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17(d)

Upstream


4,464


4,417


4,473Total Safety U.S., Inc., L+625, 1.3% LIBOR Floor, 4/28/18(d)

Service & Equipment


2,985


2,874


2,990Willbros Group, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(f)

Service & Equipment


2,938


2,930


2,935Total Senior Secured LoansFirst Lien







65,399


65,698Senior Secured LoansSecond Lien7.9%Astoria Generating Co., L.P., L+375, 8/23/13(d)

Power


2,000


1,892


1,790Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d)(e)

Service & Equipment


8,360


8,347


8,276EquiPower Resources Holdings, LLC, L+850, 1.5% LIBOR Floor, 6/20/19(e)

Power


8,000


7,839


8,023Southern Pacific Resource Corp., Prime+750, 1/7/16(d)(f)

Upstream


1,485


1,497


1,496Total Senior Secured LoansSecond Lien







19,575


19,585Senior Secured Bonds0.4%United Refining Co., 10.5%, 2/28/18(d)

Downstream


1,000


1,026


1,015Total Senior Secured Bonds







1,026


1,015Subordinated Debt44.1%Alta Mesa Holdings, L.P., 9.6%, 10/15/18(d)(e)

Upstream


12,531


12,571


12,468Antero Resources Corp., 9.4%, 12/1/17(d)

Upstream


2,000


2,162


2,206Aurora USA Oil & Gas, Inc., 9.9%, 2/15/17(d)(f)

Upstream


2,000


1,972


2,064Chaparral Energy Inc., 8.3%, 9/1/21(d)

Upstream


3,500


3,545


3,708Chaparral Energy Inc., 7.6%, 11/15/22(d)

Upstream


4,000


4,079


4,075Chesapeake Energy Corp., L+700, 1.5% LIBOR Floor, 12/2/17(d)(f)

Upstream


10,000


9,727


9,930Comstock Resources, Inc., 9.5%, 6/15/20(d)(f)

Upstream


12,000


11,439


11,830Everest Acquisition LLC, 9.4%, 5/1/20(d)

Upstream


14,250


14,250


14,721GulfMark Offshore, Inc., 6.4%, 3/15/22(d)(f)

Service & Equipment


3,500


3,500


3,526Laredo Petroleum, Inc., 7.4%, 5/1/22(d)(f)

Upstream


750


750


782Lone Pine Resources Canada Ltd., 10.4%, 2/15/17(d)(f)

Upstream


2,000


1,973


1,900NRG Energy, Inc., 8.3%, 9/1/20(d)(f)

Power


4,750


4,673


4,938Penn Virginia Resource Partners, L.P., 8.4%, 6/1/20(f)

Midstream


5,250


5,250


5,355Quicksilver Resources Inc., 7.1%, 4/1/16(d)(f)

Upstream


2,250


2,143


1,763Resolute Energy Corp., 8.5%, 5/1/20(d)(f)

Upstream


1,500


1,500


1,501Samson Investment Co., 9.8%, 2/15/20(d)(e)

Upstream


20,500


20,529


20,509SandRidge Energy, Inc., 7.5%, 3/15/21(d)(f)

Upstream


1,250


1,307


1,231SandRidge Energy, Inc., 8.1%, 10/15/22(f)

Upstream


2,500


2,500


2,519Vanguard Natural Resources, LLC, 7.9%, 4/1/20(f)

Upstream


5,000


4,966


5,002Total Subordinated Debt







108,836


110,028




See notes to unaudited consolidated financial statements.

5

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Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (Continued)

As of June 30, 2012

(in thousands, except share amounts)

Portfolio Company(a)

Industry

Number of
Shares

Amortized
Cost

Fair
Value(c)Equity/Other16.7%(g)Fortune Creek Co-Invest I L.P., LP Interest(f)(h)

Midstream


N/A

$
22,846

$
20,997Plains Offshore Operations Inc., Preferred Equity(d)

Upstream


206,358


20,139


19,847Plains Offshore Operations Inc., Strike: $20.00, Warrants(d)

Upstream


405,378


689


689Total Equity/Other







43,674


41,533TOTAL INVESTMENTS95.5%






$
238,510


237,859ASSETS IN EXCESS OF OTHER LIABILITIES4.5%










11,353NET ASSETS100.0%









$
249,212




Total Return Swap

Notional
Amount

Unrealized
AppreciationCitibank TRS Facility (Note 8)(f)

$
65,763

$
732


(a)Security
may be an obligation of one or more entities affiliated with the named company.(b)Denominated
in U.S. dollars unless otherwise noted.(c)Fair
value determined by the Company's board of trustees (see Note 7).(d)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 Notes 10 and 11).(e)Position
or portion thereof unsettled as of June 30, 2012.(f)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 qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. As of June 30, 2012, 73.9% of the Company's
total assets represented qualifying assets. In addition, as described in Note 8, the Company also calculates its compliance with the qualifying asset test on a "look through" basis by
disregarding the value of the Company's total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the
obligor is an eligible portfolio company. On this basis, 72.8% of the Company's total assets represented qualifying assets as of June 30, 2012.(g)Listed
investments may be treated as debt for GAAP or tax purposes.(h)Investment
denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of June 30, 2012.




See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund        Consolidated Schedule of Investments        As of December 31, 2011        (in thousands)

Portfolio Company(a)

Industry

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured LoansFirst Lien33.6%Dalbo Holdings, Inc., L+500, 2.0% LIBOR Floor, 8/27/12(d)

Service & Equipment

$
1,906

$
1,864

$
1,798Dynegy Holdings Inc. (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)

Power


1,571


1,542


1,585Dynegy Holdings Inc. (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)(e)

Power


4,414


4,392


4,485First Reserve Crestwood Holdings LLC, L+850, 2.0% LIBOR Floor, 10/3/16

Midstream


2,446


2,458


2,488Frac Tech International, LLC, L+475, 1.5% LIBOR Floor, 5/6/16(d)(e)

Service & Equipment


4,537


4,495


4,484Hudson Products Holdings Inc., L+500, 3.0% LIBOR Floor, 8/25/15

Service & Equipment


1,684


1,607


1,478Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17(d)

Upstream


3,500


3,454


3,507Total Safety U.S., Inc., L+625, 1.3% LIBOR Floor, 4/28/18(d)

Service & Equipment


3,000


2,882


2,895Total Senior Secured LoansFirst Lien







22,694


22,720Senior Secured LoansSecond Lien8.2%Astoria Generating Co., L.P., L+375, 8/23/13(d)

Power


2,000


1,849


1,769Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d)

Service & Equipment


2,500


2,571


2,307Southern Pacific Resource Corp., L+850, 2.0% LIBOR Floor, 1/7/16(d)(f)

Upstream


1,492


1,506


1,501Total Senior Secured LoansSecond Lien







5,926


5,577Senior Secured Bonds7.2%Hexion Specialty Chemicals, Inc., 8.9%, 2/1/18(d)

Service & Equipment


2,750


2,486


2,598Homer City Funding LLC, 8.1%, 10/1/19(d)

Power


1,525


1,431


1,335United Refining Co., 10.5%, 2/28/18(d)

Downstream


1,000


1,028


942Total Senior Secured Bonds







4,945


4,875Subordinated Debt52.9%Antero Resources Corp., 9.4%, 12/1/17(d)

Upstream


2,000


2,185


2,161Chaparral Energy Inc., 8.3%, 9/1/21(d)

Upstream


3,500


3,547


3,553Chaparral Energy Inc., 8.9%, 2/1/17(d)

Upstream


1,750


1,806


1,817NRG Energy, Inc., 8.3%, 9/1/20(d)(f)

Power


4,750


4,671


4,770Quicksilver Resources Inc., 7.1%, 4/1/16(d)(f)

Upstream


2,250


2,133


2,250Samson Investment Co., L+650, 1.5% LIBOR Floor, 12/27/12(d)(e)

Upstream


20,000


20,000


20,000SandRidge Energy, Inc., 7.5%, 3/15/21(d)(f)

Upstream


1,250


1,310


1,238Total Subordinated Debt







35,652


35,789




Equity/Other33.5%(g)



Number of
Shares

Amortized
Cost

Fair
ValueFortune Creek Co-Invest I L.P., LP Interest(f)(h)

Midstream


N/A


22,591


22,681Total Equity/Other







22,591


22,681TOTAL INVESTMENTS135.4%






$
91,808


91,642LIABILITIES IN EXCESS OF OTHER ASSETS(35.4)%










(23,957
)NET ASSETS100.0%









$
67,685




See notes to unaudited consolidated financial statements.

7

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Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (Continued)

As of December 31, 2011

(in thousands)

Total Return Swap

Notional
Amount

Unrealized
AppreciationCitibank TRS Facility (Note 8)(f)

$
12,205

$
121


(a)Security
may be an obligation of one or more entities affiliated with the named company.(b)Denominated
in U.S. dollars.(c)Fair
value determined by the Company's board of trustees (see Note 7).(d)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 Notes 10 and 11).(e)Position
or portion thereof unsettled as of December 31, 2011.(f)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 qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets.(g)Listed
investments may be treated as debt for GAAP or tax purposes.(h)Investment
denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of the acquisition date and as of
December 31, 2011, respectively.




See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund        Notes to Unaudited 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 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 are 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. Prior to satisfying the minimum offering requirement,
the Company had no operations except for matters relating to its organization and registration as a non-diversified, closed-end management investment 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 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 June 30, 2012, the Company had two wholly-owned
financing subsidiaries, FSEP Term Funding, LLC, or FSEP Funding, which was established on June 16, 2011, and EP Investments LLC, or EP Investments, which was established on
June 24, 2011. The consolidated financial statements include both the Company's accounts and the accounts of its wholly-owned financing subsidiaries. All significant intercompany transactions
have been eliminated in consolidation.

Since
commencing its continuous public offering and through August 13, 2012, the Company has sold 33,919,797 common shares (as adjusted for share distributions) for gross proceeds
of $335,141. As of August 13, 2012, the Company had raised total gross proceeds of $355,345, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and
$20,004 in proceeds raised from 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 sub-adviser to FS Advisor, in a private placement conducted in April 2011 (see Note 4). During the six months
ended June 30, 2012, the Company sold 20,335,417 common shares (as adjusted for share distributions) for gross proceeds of $201,019 at an average price per share of $9.89. The gross proceeds
received during the six months ended June 30, 2012 include reinvested shareholder distributions of $2,271 for which the Company issued 251,579 common shares (as adjusted for share
distributions). During the period from July 1, 2012 to August 13, 2012, the Company sold 8,105,056 common shares for gross proceeds of $80,750 at an average price per share of $9.96.

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 $17,647 for the six months ended June 30, 2012.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation:The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance
with U.S.
generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (Continued)

GAAP
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a
more complete discussion of significant accounting policies and certain other information, the Company's interim unaudited consolidated financial statements should be read in conjunction with its
audited financial statements as of and for the year ended December 31, 2011 included in the Company's annual report on Form 10-K. Operating results for the three and six
months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The December 31, 2011 balance sheet and
schedule of investments are derived from the 2011 audited financial statements. 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 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.

Reclassifications:Certain amounts in the 2011 financial statements have been reclassified to conform to the classifications used to
prepare the 2012
financial statements. These reclassifications had no material impact on the Company's consolidated financial position, results of operations or cash flows as previously reported.

Capital Gains Incentive Fee:The Company has entered into an investment advisory and administrative services agreement with FS Advisor,
which was
amended on August 10, 2012 (and which, as amended, is
referred to herein as the investment advisory and administrative services agreement). For additional information regarding the amendment to this agreement, see Note 13. Pursuant to the terms of
the investment advisory and administrative services agreement, the incentive fee on capital gains earned on liquidated investments of the Company's portfolio 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). Such fee will equal 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, 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.

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 for Certified Public Accountants, or AICPA, 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 if the
Company's entire portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (Continued)

entitled
to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. During the year ended December 31, 2011, the Company accrued capital gains
incentive fees of $67 based on the performance of its portfolio, all of which were based on unrealized gains and none of which were payable to FS Advisor. During the six months ended June 30,
2012, the Company accrued capital gains incentive fees of $234 based on the performance of the Company's portfolio, all of which were based on unrealized gains and none of which are payable to FS
Advisor.

Note 3. Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update No. 2011-04,Fair Value Measurement
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance represents the converged guidance of
the FASB and the International Accounting Standards Board, or collectively, the Accounting Boards, on fair value measurement. The collective efforts of the Accounting Boards reflected in this guidance
have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value" and enhanced
disclosure requirements for investments that do not have readily determinable fair values. The Accounting Boards have concluded the common requirements will result in greater comparability of fair
value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments to the FASB codification in this
guidance are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company has implemented this
guidance and it did not have a material impact on its consolidated financial statements, except for enhanced disclosures around fair value measurements.

Note 4. Related Party Transactions

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
incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0%
of "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, as defined in the investment
advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor will 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%. Once the Company's pre-incentive fee net investment income in any quarter exceeds the hurdle rate,
FS Advisor will be 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 the hurdle rate. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is an incentive fee on capital gains earned
on liquidated investments from the Company's portfolio and is determined and payable in

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (Continued)

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 commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of the Company's operations. Management
fees are paid on a quarterly basis in arrears. As of December 31, 2011, $346 in base management fees were payable to FS Advisor. During the six months ended June 30, 2012, the Company
accrued $2,052 in base management fees payable to FS Advisor, including $1,277 in base management fees accrued during the three months ended June 30, 2012. During the six months ended
June 30, 2012, $1,121 in base management fees were applied to offset the liability of Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate
of FS Advisor, under the expense reimbursement agreement discussed below. Of the $1,277 in base management fees accrued and payable as of June 30, 2012, it is intended that $631 of such fees
will be applied to offset the liability of Franklin Square Holdings under the expense reimbursement agreement as of June 30, 2012 and the balance, $646, will be paid to FS Advisor.

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. During the three months ended June 30, 2012, the Company reversed $285 in capital gains incentive fees previously accrued by
the Company based on the performance of its portfolio. During the six months ended June 30, 2012, the Company accrued capital gains incentive fees of $234 based on the performance of the
Company's portfolio, all of which were based on unrealized gains and none of which are payable to FS Advisor.

The
Company reimburses FS Advisor for expenses necessary to perform services related to the Company's administration and operations. 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 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 objective factors such as total assets, revenues, time records
and other reasonable metrics. The Company's board of trustees then assesses the reasonableness of such reimbursements 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 and, at least annually, the board of trustees 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.

As
of December 31, 2011, the Company had $52 of administrative services expense payable to FS Advisor. During the six months ended June 30, 2012, the Company incurred
administrative services

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (Continued)

expenses
of $201 attributable to FS Advisor, of which $144 related to the allocation of costs of administrative personnel for services rendered to the Company by employees of FS Advisor and the
remainder related to other reimbursable expenses. During the six months ended June 30, 2012, the Company paid $232 of administrative services expenses to FS Advisor. As of June 30, 2012,
the Company had $21 in administrative services expense payable to FS Advisor.

Franklin
Square Holdings funded offering costs and organization costs in the amount of $505 and $944 for the six months ended June 30, 2012 and June 30, 2011, respectively.
These costs have been 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. Since inception through June 30, 2012, Franklin Square Holdings has funded $3,143 in offering and organization costs.

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. During
the six months ended June 30, 2012, FS2 retained $3,666 for selling commissions and dealer manager fees in connection with the sale of the Company's common shares.

Under
the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of
gross proceeds raised in the Company's continuous public offering until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) have been
recovered. On July 18, 2011, the Company satisfied the minimum offering requirement. The Company paid total reimbursements of $2,051 to FS Advisor and its affiliates during the six months ended
June 30, 2012. The reimbursements are recorded as a reduction of capital. As of June 30, 2012, no amounts remain payable to FS Advisor and its affiliates under this arrangement.

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.

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (Continued)

FS
Advisor's senior management team is comprised of the same personnel as the senior management teams of FB Income Advisor, LLC and FSIC II Advisor, LLC, the investment
advisers to Franklin Square Holdings' other affiliated BDCs, FS Investment Corporation and FS Investment Corporation II, respectively. As a result, such personnel provide investment advisory services
to each of the Company, FS Investment Corporation and FS Investment Corporation II. While none of FS Advisor, FB Income Advisor, LLC or FSIC II Advisor, LLC is currently making private
corporate debt investments for clients other than the Company, FS Investment Corporation and FS Investment Corporation II, 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 strategies, 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 and/or FS Investment Corporation II rather than to the
Company.

Prior
to February 14, 2012, Franklin Square Holdings agreed to reimburse the Company for expenses in an amount that was sufficient to ensure that, for tax purposes, the Company's
net investment income and net capital gains were equal to or greater than the cumulative distributions paid to its shareholders in each quarter. This arrangement was designed to ensure that no portion
of the Company's distributions represented a return of capital for its shareholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of the Company's
expenses.

Pursuant
to an expense support and conditional reimbursement agreement, dated as of February 14, 2012, 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 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 income for tax purposes, net capital gains and dividends and other distributions paid to the
Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in
each quarter.

Pursuant
to the expense reimbursement agreement, the Company will 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

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (Continued)

of
the date on which Franklin Square Holdings funded such amount, the sum of the Company's net investment income for tax purposes, 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 income or net capital gains for tax
purposes) exceeds the distributions paid by the Company to shareholders.

The
Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such
reimbursements until it deems that the Company has achieved economies of scale sufficient to ensure that the Company bears a reasonable level of expenses in relation to its income. If the Company
terminates the investment advisory and administrative services agreement with FS Advisor, the Company will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square
Holdings within three years of the date of termination.

The
specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. 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, 2011, $533 of reimbursements were payable to the Company from Franklin Square Holdings. During the six months ended June 30, 2012, the Company accrued
$1,432 of reimbursements that Franklin Square Holdings has agreed to pay, including $631 in reimbursements for the three months ended June 30, 2012. As discussed more fully above, it is
intended that these reimbursements will be funded, in part, through the offset of management fees payable by the Company to FS Advisor. During the six months ended June 30, 2012, the Company
received $213 from Franklin Square Holdings for reimbursements and offset $1,121 in base management fees payable by the Company to FS Advisor under the investment advisory and administrative services
agreement against reimbursements due from Franklin Square Holdings. As of June 30, 2012, the Company had $631 in reimbursements due from Franklin Square Holdings, which the Company expects to
offset against management fees payable by the Company to FS Advisor.

Under
the expense reimbursement agreement, amounts reimbursed to the Company by Franklin Square Holdings may become subject to repayment by the Company in the future. As of
June 30, 2012, $1,432 of reimbursements may become subject to repayment by the Company to Franklin Square Holdings in the future.

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

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 six months ended June 30, 2012:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2012March 31, 2012(1)

$
0.1555

$
1,789June 30, 2012

$
0.1563

$
3,419


(1)The
per share distributions during the three months ended March 31, 2012 have been retroactively adjusted, as necessary, to reflect the share
distribution declared in February 2012 as discussed below.


On
July 10, 2012, the Company's board of trustees declared two regular semi-monthly cash distributions of $0.02605 per share each, which were paid on July 31,
2012 to shareholders of record on July 13, 2012 and July 30, 2012, respectively. On August 6, 2012, the Company's board of trustees declared two regular semi-monthly
cash distributions of $0.02605 per share
each, which will be paid on August 31, 2012 to shareholders of record on August 15, 2012 and August 30, 2012, respectively. 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 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.

The
Company may fund its cash distributions to shareholders from any sources of funds 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 it 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. The following table

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (Continued)

reflects
the sources of the cash distributions that the Company has paid on its common shares during the six months ended June 30, 2012:

Six Months Ended
June 30, 2012Source of Distribution

Distribution
Amount

PercentageOffering proceeds

$



Borrowings





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


2,634


51
%Capital gains proceeds from the sale of assets


563


11
%Non-capital gains proceeds from the sale of assets





Distributions on account of limited partnership interest


579


11
%Expense reimbursement from sponsor


1,432


27
%Total

$
5,208


100
%


(1)During
the six months ended June 30, 2012, 89% of the Company's gross investment income was attributable to cash interest earned and 11% was
attributable to non-cash accretion of discount.


The
Company's net investment income on a tax basis for the six months ended June 30, 2012 was $4,066. The Company distributed all of its tax-basis net investment
income earned as of June 30, 2012.

The
difference between the Company's GAAP-basis net investment income and its tax-basis net investment income is due to the accrual for GAAP purposes of income on
a limited partnership interest, the tax-basis amortization of organization costs incurred prior to the commencement of the Company's operations, 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, the inclusion of realized gains on the Company's total return
swap in tax-basis net investment income and the accretion of discount on the total return swap. The following table sets forth a reconciliation between GAAP-basis net
investment income and tax-basis net investment income during the six months ended June 30, 2012:

Six Months Ended
June 30, 2012GAAP-basis net investment income

$
4,641Income on limited partnership interest


(1,304
)Amortization of organization costs


(12
)Reversal of incentive fee accrual on unrealized gains


234GAAP realized gains on total return swap


487Accretion of discount on total return swap


20Tax-basis net investment income

$
4,066


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

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (Continued)

distributions
paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company's distributions for a full year. The
actual tax characteristics of distributions to shareholders are reported to shareholders annually on a Form 1099-DIV.

The
following table reflects the share distribution per share that the Company has declared on its common shares through June 30, 2012:

Date Declared

Record Date

Distribution Date

Distribution
Percentage

Shares IssuedFebruary 14, 2012

February 15, 2012

February 16, 2012


1.0
%

106,133


The
purpose of this special share distribution was to maintain a net asset value per share that was below the then-current offering price, after deducting selling commissions
and dealer manager fees, as required by the 1940 Act, subject to certain limited exceptions. The Company's board of trustees determined that the Company's portfolio performance sufficiently warranted
taking this action.

The
share distribution increased the number of common shares outstanding, thereby reducing the Company's net asset value per share. However, because the share distribution was issued to
all shareholders as of the record date in proportion to their holdings, the reduction in net asset value per share as a result of the share distribution was offset exactly by the increase in the
number of common shares owned by each investor. As the overall value to an investor's position was not reduced as a result of the special share distribution, the Company's board of trustees determined
that this issuance would not be dilutive to shareholders as of the record date. As the share distribution did not change any shareholder's proportionate interest in the Company, it is not expected to
represent a taxable distribution. Specific tax characteristics of all distributions are reported to shareholders annually on Form 1099-DIV.

As
of June 30, 2012 and December 31, 2011, the components of accumulated earnings on a tax basis were as follows:

June 30, 2012
(Unaudited)

December 31, 2011Distributable ordinary income net of cash received on limited partnership interest

$


$
Distribution receivable on limited partnership interest


470


Incentive fee accrual on unrealized gains


(301
)

(67
)Unamortized organization costs


(326
)

(338
)Net unrealized appreciation (depreciation) on investments and total return swap and loss on foreign currency(1)


269


(89
)$
112

$
(494
)


(1)As
of June 30, 2012 and December 31, 2011, the gross unrealized appreciation on the Company's investments and total return swap was $3,441 and
$761, respectively. As of June 30, 2012 and December 31, 2011, the gross unrealized depreciation on the Company's investments and loss on foreign currency was $3,172 and $850,
respectively.


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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (Continued)

The aggregate cost of the Company's investments for federal income tax purposes totaled $238,255 and $91,808 as of June 30, 2012 and December 31, 2011, respectively. The
aggregate net unrealized appreciation (depreciation) on a tax basis, including the Company's total return swap, or TRS, with Citibank, N.A., or Citibank, was $289 and ($72) as of June 30, 2012
and December 31, 2011, respectively.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of June 30, 2012 and December 31, 2011:

June 30, 2012
(Unaudited)

December 31, 2011Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
65,399

$
65,698


28
%
$
22,694

$
22,720


25
%Senior Secured LoansSecond Lien


19,575


19,585


8
%

5,926


5,577


6
%Senior Secured Bonds


1,026


1,015


1
%

4,945


4,875


5
%Subordinated Debt


108,836


110,028


46
%

35,652


35,789


39
%Equity/Other


43,674


41,533


17
%

22,591


22,681


25
%$
238,510

$
237,859


100
%
$
91,808

$
91,642


100
%


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


The Company does not "control" and is not an "affiliate" of any of its portfolio companies, each 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 and would be an "affiliate" of a portfolio company if it owned 5% or more of
its voting securities.

The
Company's investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested
by portfolio
companies in accordance with the terms of the underlying loan agreements. As of June 30, 2012, the Company had no such investments.

19

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 6. Investment Portfolio (Continued)

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 June 30, 2012
and December 31, 2011:

June 30, 2012
(Unaudited)

December 31, 2011Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
122,714


52
%
$
36,027


39
%Midstream


46,709


19
%

25,169


28
%Downstream


4,043


2
%

942


1
%Service & Equipment


29,768


12
%

15,560


17
%Power


34,625


15
%

13,944


15
%Total

$
237,859


100
%
$
91,642


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 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.

20

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (Continued)

As
of June 30, 2012 and December 31, 2011, the Company's investments were categorized as follows in the fair value hierarchy:

June 30, 2012
(Unaudited)

December 31, 2011Valuation Inputs

Investments

Total Return Swap

Investments

Total Return SwapLevel 1Price quotations in active markets

$


$


$


$
Level 2Significant other observable inputs











Level 3Significant unobservable inputs


237,859


732


91,642


121$
237,859

$
732

$
91,642

$
121


The Company's investments as of June 30, 2012 and December 31, 2011 consisted primarily of debt securities that are traded on a
private over-the-counter market for institutional investors. Except as described below, the Company valued all of its investments as of the applicable period end by using an
independent third-party pricing service, which provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end.

As
of June 30, 2012, the Company's three 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 interests, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash
flows and net income. As of December 31, 2011, the Company's one equity investment and one of its subordinated debt investments, both of which were purchased near December 31, 2011, were
valued at cost, as the Company's board of trustees determined that the cost of these investments was the best indication of their fair value.

As
of June 30, 2012 and December 31, 2011, the Company valued its TRS in accordance with the agreements between EP Investments and Citibank which collectively establish the
TRS and are collectively referred to herein as the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS,
together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation on the
indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the
Company for review and testing. The Company's valuation committee and board of trustees review and approve the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly
basis as part of their quarterly determination of net asset value. To the extent the Company's valuation committee or board of trustees has any questions or concerns regarding the valuation of the
loans underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on the Company's TRS, see Note 8.

The
Company periodically benchmarks the bid and ask prices it receives from the third-party pricing service 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

21

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (Continued)

within
the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through its third-party pricing
service or independent dealers, including the use of an independent valuation firm. The Company will periodically benchmark the valuations provided by the independent valuation firm against the actual
prices at which it purchases and sells its investments. The Company's valuation committee and board of trustees reviewed and approved the valuation determinations made with respect to these
investments in a manner consistent with the Company's valuation process.

The
following is a reconciliation for the six months ended June 30, 2012 of investments for which significant unobservable inputs (Level 3) were used in determining fair
value:

For the Six Months Ended June 30, 2012Senior
Secured
Loans
First Lien

Senior
Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
22,720

$
5,577

$
4,875

$
35,789

$
22,681

$
91,642Accretion of discount (amortization of premium)


56


36


5


(18
)

255


334Net realized gain (loss)


135





312


107





554Net change in unrealized appreciation (depreciation)


273


359


59


1,055


(2,231
)

(485
)Purchases


72,850


13,621





99,931


21,188


207,590Sales and redemptions


(30,336
)

(8
)

(4,236
)

(26,836
)

(360
)

(61,776
)Net transfers in or out of Level 3

















Fair value at end of period

$
65,698

$
19,585

$
1,015

$
110,028

$
41,533

$
237,859The 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

$
251

$
359

$
75

$
1,065

$
(2,231
)
$
(481
)


The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of
June 30, 2012 were as follows:

Type of Investment

Fair Value at
June 30, 2012(1)

Valuation Technique(2)

Unobservable Input

RangeEquity/Other

$
41,533

Market Comparables

Market Yield (%)

15.5% - 16.0%Discounted Cash Flow

Discount Rate (%)

12.8% - 17.5%Option Valuation Model

Volatility (%)

40.0%


(1)Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using an independent third-party pricing service, which
provided prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end. The TRS was valued in accordance with the TRS Agreement as
discussed above.(2)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. 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.


22

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 8. Total Return Swap

On August 11, 2011, EP Investments entered into a TRS for one or more senior secured floating rate loans with Citibank. On May 11, 2012, EP Investments entered into an
amendment to the TRS to increase the maximum market value of the aggregate amount of loans which may be subject to the TRS from $25,000 to $100,000.

A
TRS 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 assets underlying the TRS, which may include a
specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds 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. Because of the unique structure
of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

The
TRS with Citibank enables the Company, through its ownership of EP Investments, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them,
in return for an interest-type payment to Citibank. As such, the TRS is analogous to EP Investments borrowing funds to acquire loans and incurring interest expense to a lender.

The
obligations of EP Investments under the TRS are non-recourse to the Company and the Company's exposure under the TRS is limited to the value of the Company's investment
in EP Investments, which generally will equal the value of cash collateral provided by EP Investments under the TRS. Pursuant to the terms of the TRS, EP Investments may select one or more loans with
a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $100,000, or such greater amount as may be agreed to by Citibank. Loans proposed by EP
Investments to be included in the TRS will be approved or rejected by Citibank, in its sole discretion, on a trade-by-trade basis. EP Investments is required to initially cash
collateralize a percentage of each loan (such percentage to be proposed in each instance by EP Investments and accepted or rejected by Citibank in its sole discretion) included under the TRS in
accordance with margin requirements described in the TRS Agreement. Under the terms of the TRS, EP Investments has agreed not to draw upon, or post as collateral, such cash collateral in respect of
other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral nor any other assets of EP Investments are available to pay the Company's debts.

Pursuant
to the terms of an investment management agreement that the Company has entered into with EP Investments, the Company acts as the manager of the rights and obligations of EP
Investments under the TRS, including selecting the specific loans to be included in the TRS. Accordingly, the loans selected by EP Investments for purposes of the TRS are selected by the Company in
accordance with its investment objectives and strategy to generate current income and long-term capital appreciation. In addition, pursuant to the terms of the TRS, EP Investments may
select any loan or obligation available in the market to be included in the TRS that meets the obligation criteria set forth in the TRS Agreement.

Each
loan included in the TRS must meet criteria described in the TRS Agreement, including a requirement that each loan be rated by Moody's Investors Service, or Moody's, and
Standard & Poor's Corporation, or S&P, and quoted by a nationally-recognized pricing service. EP Investments receives from Citibank all interest and fees payable in respect of the loans
included in the TRS. EP Investments pays to Citibank interest at a rate equal to the one-month London Interbank Offered Rate, or

23

---



Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 8. Total Return Swap (Continued)

LIBOR, + 1.30%
per annum (which rate was one-month LIBOR + 1.35% per annum prior to the increase in the size of the TRS to $100,000) on the full notional amount
of loans subject to the TRS. In addition, upon the termination or repayment of any loan subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such loan
or pay to Citibank any depreciation in the value of such loan.

Under
the terms of the TRS, EP Investments may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the
value of the underlying loans after such value decreases below a specified amount. The amount of collateral that may be required to be posted by EP Investments is determined primarily on the basis of
the aggregate value of the underlying loans. The limit on the additional collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional
amount of the loans underlying the TRS and the amount of cash collateral already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included
in the TRS).

The
Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. The Company may, but is not obligated to, increase its
equity investment in EP Investments for the purpose of funding any additional collateral or payment obligations for which EP Investments may become obligated during the term of the TRS. If the Company
does not make any such additional investment in EP Investments and EP Investments fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash
collateral posted by EP Investments under the TRS.

Citibank
may terminate the TRS on or after May 11, 2013. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon
providing no more than 30 days, and no less than 7 days, prior notice to Citibank. EP Investments will pay Citibank customary fees in connection with the establishment and maintenance of
the TRS.

The
value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values
each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank
reports the mark-to-market values of the underlying loans to EP Investments. As of June 30, 2012 and December 31, 2011, the fair value of the TRS was $732 and
$121, respectively. The fair value of the TRS is reflected as an unrealized gain on the consolidated balance sheets. The change in value of the TRS is reflected in the consolidated statements of
operations as net change in unrealized appreciation on total return swap. As of June 30, 2012, EP Investments had selected 16 underlying loans with a total notional amount of $65,763 and posted
$27,529 in cash collateral held by Citibank (of which only $26,850 was required to be posted), which is reflected in due from counterparty on the consolidated balance sheets. As of December 31,
2011, EP Investments had selected 6 underlying
loans with a total notional amount of $12,205 and posted $7,878 in cash collateral held by Citibank (of which only $5,096 was required to be posted), which is reflected in due from counterparty on the
consolidated balance sheets.

24

---



Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 8. Total Return Swap (Continued)

As of June 30, 2012, the Company incurred costs of $16 in connection with obtaining the TRS, which the Company has recorded as deferred financing costs on its consolidated balance
sheets. As of June 30, 2012, all of such deferred financing costs have been amortized to interest expense.

For
purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding notional amount of the TRS, less the initial amount of any cash
collateral required to be posted by EP Investments under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in
accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

Further,
for purposes of Section 55(a) under the 1940 Act, the Company treats each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible
portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in
accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

The
following is a summary of the underlying loans subject to the TRS as of June 30, 2012:

Underlying Asset(1)

Industry

Notional
Amount

Market
Value

Unrealized
Appreciation /
(Depreciation)Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17

Service & Equipment

$
2,903

$
2,873

$
(30
)BRSP LLC, L+450, 3.0% LIBOR Floor, 6/4/14

Power


2,397


2,413


16Buffalo Gulf Coast Terminals LLC, L+600, 1.5% LIBOR Floor, 10/31/17

Midstream


2,025


2,000


(25
)Chaparral Energy Inc., 7.6%, 11/15/22

Upstream


2,000


2,033


33Chesapeake Energy Corp., L+700, 1.5% LIBOR Floor, 12/2/17(2)

Upstream


9,700


9,925


225Dynegy Holdings Inc. (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16

Power


2,991


3,059


68Dynegy Holdings Inc. (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16

Power


3,105


3,109


4Everest Acquisition LLC, L+525, 1.3% LIBOR Floor, 4/24/18

Upstream


3,300


3,361


61Hercules Offshore, Inc., 7.1%, 4/1/17(2)

Service & Equipment


1,000


967


(33
)Hilcorp Energy I, L.P., 8.0%, 2/15/20

Upstream


7,528


7,543


15La Paloma Generating Co., LLC, L+550, 1.5% LIBOR Floor, 5/15/18

Power


1,645


1,712


67NANA Development Corp., L+500, 1.5% LIBOR Floor, 7/22/16

Service & Equipment


4,913


4,913


Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17

Upstream


9,967


9,974


7Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18

Power


4,950


4,821


(129
)UTEX Industries, Inc., L+550, 1.5% LIBOR Floor, 12/15/16

Service & Equipment


3,173


3,146


(27
)Willbros Group, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(2)

Service & Equipment


4,166


4,136


(30
)TOTAL



$
65,763

$
65,985


222Total TRS Accrued Income and Liabilities:


510Total TRS Fair Value:

$
732


(1)Security
may be an obligation of one or more entities affiliated with the named company.(2)The
investment is not a qualifying asset under the 1940 Act. A BDC may not acquire any asset other than qualifying assets, unless, at the time the
acquisition is made, qualifying assets represent at least 70% of the company's total assets.


25

---



Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 8. Total Return Swap (Continued)

The following is a summary of the underlying loans subject to the TRS as of December 31, 2011:

Underlying Loan(1)(2)

Industry

Notional
Amount

Market
Value

Unrealized
Appreciation /
(Depreciation)Allison Transmission, Inc., L+275, 8/15/14

Service & Equipment

$
1,844

$
1,934

$
90Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17

Service & Equipment


3,007


2,893


(114
)BRSP LLC, L+450, 3.0% LIBOR Floor, 6/4/14

Power


2,413


2,431


18La Paloma Generating Co., LLC, L+550, 1.5% LIBOR Floor, 5/15/18

Power


1,653


1,691


38Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17

Upstream


973


1,000


27Willbros Group, Inc., L+750, 2.0% LIBOR Floor, 6/30/14

Service & Equipment


2,315


2,290


(25
)TOTAL



$
12,205

$
12,239


34Total TRS Accrued Income and Liabilities:


87Total TRS Fair Value:

$
121


(1)Security
may be an obligation of one or more entities affiliated with the named company.(2)All
investments are qualifying assets under the 1940 Act. A BDC may not acquire any asset other than qualifying assets, unless, at the time the acquisition
is made, qualifying assets represent at least 70% of the company's total assets.


Note 9. Share Repurchase Program

Beginning with the third calendar quarter of 2012, and on a quarterly basis thereafter, the Company intends to offer to repurchase common shares on such terms as may be determined by the
Company's board of trustees in its complete and absolute discretion unless, in the judgment of the independent trustees of the Company's board of trustees, such repurchases would not be in the best
interest of the Company's shareholders or would violate applicable law. The Company will conduct such repurchase offers in accordance with the requirements of Rule 13e-4 of the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and the 1940 Act. In months in which the Company repurchases common shares, it intends to conduct repurchases on the same date that it
holds its first semi-monthly closing for the sale of common shares in its continuous public offering. The offer to repurchase common shares will be conducted solely through tender offer
materials mailed to each shareholder.

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:



26

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 9. Share Repurchase Program (Continued)



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 sale 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 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 each date of repurchase. The Company's board of trustees may amend, suspend or terminate the repurchase program at any time, upon 30 days' notice.

Note 10. Revolving Credit Facility

On June 24, 2011, FSEP Funding entered into a revolving credit facility, or the credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank. Deutsche Bank is the
sole lender and serves as administrative agent under the credit facility. On May 30, 2012, FSEP Funding entered into an amendment to the credit facility to increase the aggregate borrowings
available under the credit facility by $50,000 to $100,000 on a committed basis.

The
Company may contribute cash or securities to FSEP Funding from time to time and will retain a residual interest in any assets contributed through its ownership of FSEP Funding. 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 Deutsche Bank 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 credit facility are non-recourse to the Company.

Pursuant
to the terms of the credit facility, borrowings thereunder may be designated as Tranche A borrowings in an amount up to $50,000 (referred to herein as the
Tranche A Commitment) or as Tranche B borrowings in an amount up to $50,000 (referred to herein as the Tranche B Commitment). Pricing under the credit facility is based on LIBOR
for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, with Tranche A Commitments bearing interest at the rate of
LIBOR + 1.60% per annum and Tranche B Commitments bearing interest at the rate of LIBOR + 1.85% per annum. Interest is payable quarterly in arrears. Any amounts
borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2013.

As
of June 30, 2012, $35,500 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. As of
June 30, 2012, the Company incurred costs of $382 in connection with obtaining and amending the credit facility, which the Company has recorded as deferred financing costs on its consolidated
balance sheets and amortizes

27

---



Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 10. Revolving Credit Facility (Continued)

to
interest expense over the life of the credit facility. As of June 30, 2012, $256 of such deferred financing costs have yet to be amortized to interest expense.

The
effective interest rate under the credit facility as of June 30, 2012 was 2.04% per annum. Interest is paid quarterly in arrears, and commenced November 20, 2011. The
Company recorded interest expense of $261 and $524 for the three and six months ended June 30, 2012, respectively, of which $46 and $82, respectively, related to the amortization of deferred
financing costs and $24 and $44, respectively, related to commitment fees on the unused portion of the credit facility. The Company paid $414 in interest expense for the six months ended
June 30, 2012. The average borrowings under the credit facility for the six months ended June 30, 2012 were $38,289, with a weighted average interest rate of 2.31%, which includes
commitment fees on the unused portion of the credit facility.

Borrowings
under the 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 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 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. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default:
(a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the credit 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 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 of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.

28

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 11. FSEP Term Funding, LLC

The financial statements of FSEP Funding are maintained separately from those of the Company. The assets of FSEP Funding are pledged as collateral supporting the amounts outstanding
under the credit facility and, as such, are not available to pay the debts of the Company. The following are the balance sheets of FSEP Funding as of June 30, 2012 and December 31, 2011:

June 30, 2012
(Unaudited)

December 31, 2011AssetsInvestments, at fair value (amortized cost$164,110 and $65,152, respectively)

$
164,796

$
64,995Cash


1,065


953Interest receivable


2,199


633Deferred financing costs


256


213Total assets

$
168,316

$
66,794LiabilitiesPayable for investments purchased

$
15,530

$
23,503Credit facility payable


35,500


20,518Due to FS Energy and Power Fund


56


50Interest payable


137


109Accrued expenses


10


12Total liabilities


51,233


44,192Member's equity


117,083


22,602Total liabilities and member's equity

$
168,316

$
66,794


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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 12. Financial Highlights

The following is a schedule of financial highlights of the Company for the six months ended June 30, 2012 and the year ended December 31, 2011.

Six Months Ended
June 30, 2012
(Unaudited)

Year Ended
December 31, 2011Per Share Data:(1)Net asset value, beginning of period

$
8.74

$
8.91Results of operations(2)Net investment income


0.29


0.16Net realized and unrealized appreciation (depreciation) on investments and total return swap and loss on foreign currency


0.08


0.07Net increase (decrease) in net assets resulting from operations


0.37


0.23Shareholder distributions(3)Distributions from net investment income


(0.28
)

(0.27
)Distributions from net realized gain on investments


(0.03
)

(0.01
)Net decrease in net assets resulting from shareholder distributions


(0.31
)

(0.28
)Capital share transactionsIssuance of common shares(4)


0.23


0.10Offering costs(2)


(0.06
)

(0.39
)Reimbursement to investment adviser(2)


(0.13
)

(0.26
)Capital contributions of investment adviser(2)


0.03


0.43Net increase (decrease) in net assets resulting from capital share transactions


0.07


(0.12
)Net asset value, end of period

$
8.87

$
8.74Shares outstanding, end of period


28,082,060


7,746,643Total return(5)


5.11
%

1.23
%Ratio/Supplemental Data:Net assets, end of period

$
249,212

$
67,685Ratio of net investment income to average net assets(6)


3.29
%

1.83
%Ratio of accrued incentive fees to average net assets(6)


0.17
%

0.19
%Ratio of interest expense to average net assets(6)


0.38
%

0.79
%Ratio of operating expenses to average net assets(6)


2.72
%

4.11
%Ratio of expenses reimbursed by sponsor to average net assets(6)


(1.02
%)

(2.03
%)Ratio of net operating expenses to average net assets(6)


1.70
%

2.08
%Portfolio turnover(6)


40.01
%

12.77
%


(1)The
share information utilized to determine per share data has been retroactively adjusted to reflect the share distribution discussed in Note 5.


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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share amounts)

Note 12. Financial Highlights (Continued)

(2)The
per share data was derived by using the weighted average shares outstanding during the six months ended June 30, 2012 and the period from
July 18, 2011 (commencement of operations) through December 31, 2011.(3)The
per share data for distributions reflects the actual amount of distributions paid per share (as adjusted for share distributions) during the period.(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 sales 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
total return for the six months ended June 30, 2012 was calculated by taking the net asset value per share as of June 30, 2012, adding the
cash distributions per share which were declared during the period (as adjusted for share distributions) and dividing the total by the net asset value per share on December 31, 2011. 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 Note 5. The 2011 total return was calculated by taking the net asset value per share as of December 31, 2011, adding the cash
distributions per share which were declared during the calendar year and dividing the total by the net asset value per share at the beginning of the period. 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.(6)Weighted
average net assets during the six months ended June 30, 2012 and the period from July 18, 2011 (commencement of operations) through
December 31, 2011 was used for this calculation. Ratios and portfolio turnover are not annualized.


Note 13. Subsequent Events

On August 10, 2012, the Company and FS Advisor entered into an amendment to the investment advisory and administrative services agreement, dated April 28, 2011, to
eliminate the third part of the incentive fee, also referred to as the subordinated liquidation incentive fee, which entitled FS Advisor to 20.0% of the net proceeds from a liquidation of the Company
in excess of adjusted capital, as calculated immediately prior to liquidation. As a result, pursuant to the amendment, the incentive fee under the investment advisory and administrative services
agreement consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0% of
"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, as defined in the
investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. The second part of the incentive fee, which is referred to as the
incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from the Company's portfolio and 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. No other material terms of the investment advisory and administrative services agreement changed in
connection with the amendment.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.  (in thousands, except share and per share amounts)

The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and
related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us" and "our" refer to FS Energy and Power Fund.

Forward-Looking Statements

Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they
relate to future events or
our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q 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 quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or
expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially include:



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We
have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on
Form 10-Q, and we assume no obligation to update any such forward-looking statements. 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 quarterly report on Form 10-Q 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
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 are 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 federal income tax purposes, and intends to qualify annually, as a RIC under the Code. Prior to satisfying the minimum offering requirement, we had no operations except for matters
relating to our organization and registration as a non-diversified, closed-end management investment company.

Our
investment policy is to invest, under normal circumstances, at least 80% of our assets in securities of energy and power, or Energy, related companies. 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. 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 objectives are to generate current income and long-term capital appreciation. 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 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. In connection with certain of our debt
investments, we may on occasion receive equity interests such as warrants or options as additional consideration. Once we raise sufficient capital, we expect that our investments will generally range
between $5,000 and $25,000 each, although investments may vary 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. Prior to raising sufficient capital, we may make smaller investments due to liquidity constraints.

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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. See "Contractual Obligations" for a
description of the fees to which FS Advisor is entitled.

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 asset allocation and other guidelines set by FS Advisor. GSO, a registered investment adviser under the Advisers Act, is the credit platform of The Blackstone
Group L.P., a leading global alternative asset manager and provider of financial advisory services. GSO is one of the world's largest credit platforms in the alternative asset business with
approximately $50.5 billion in assets under management as of June 30, 2012.



The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net
investment income, net realized gain on investments, net realized gain on total return swap, net unrealized appreciation and depreciation on investments, net unrealized appreciation and depreciation
on total return swap and net unrealized gain and loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our
operating expenses. Net realized gain on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. Net realized gain on total return
swap is the net monthly settlement payments received on the TRS. Net unrealized appreciation and depreciation on investments is the net change in the fair value of our investment portfolio. Net
unrealized appreciation and depreciation on total return swap is the net change in fair value of the TRS. Net unrealized gain and loss on foreign currency is the net change in the value of receivables
or accruals due to the impact of foreign currency fluctuations.

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



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 facilities 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. 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 objective factors such as total assets, revenues, time records and other reasonable metrics. Our board
of trustees then assesses the reasonableness of such reimbursements 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 and, at least annually,

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Table of Contents

our
board of trustees 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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Portfolio Investment Activity for the Six Months Ended June 30, 2012 and for the Period from July 18, 2011
(Commencement of Operations) through December 31, 2011

During the six months ended June 30, 2012, we made investments in portfolio companies totaling $207,590. During
the same period, we sold investments totaling $37,080 and received principal repayments of $24,696.

As
of June 30, 2012, our investment portfolio, with a total fair value of $237,859, consisted of interests in 36 portfolio companies (28% in first lien senior secured loans, 8% in
second lien senior secured loans, 1% in senior secured bonds, 46% in subordinated debt and 17% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average
annual EBITDA of approximately $445.1 million. As of June 30, 2012, the investments in our portfolio were purchased at a weighted average price of 99.0% of par or stated value, as
applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 79.3% of our portfolio based on the fair value of our investments) was B2
based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage, was 10.1% based upon the purchase price of our investments.

As
of December 31, 2011, our investment portfolio, with a total fair value of $91,642, consisted of interests in 21 portfolio companies (25% in first lien senior secured loans, 6%
in second lien senior secured loans, 5% in senior secured bonds, 39% in subordinated debt and 25% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average
annual EBITDA of approximately $374.8 million. As of December 31, 2011, the investments in our portfolio were purchased at a weighted average price of 99.5% of par or stated value, as
applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 48.1% of our portfolio based on the fair value of our investments) was B3
based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage, was 9.8% based upon the purchase price of our investments.

The
following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2012 and December 31, 2011:

June 30, 2012
(Unaudited)

December 31, 2011Amortized
Cost(1)

Fair
Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair
Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
65,399

$
65,698


28
%
$
22,694

$
22,720


25
%Senior Secured LoansSecond Lien


19,575


19,585


8
%

5,926


5,577


6
%Senior Secured Bonds


1,026


1,015


1
%

4,945


4,875


5
%Subordinated Debt


108,836


110,028


46
%

35,652


35,789


39
%Equity/Other


43,674


41,533


17
%

22,591


22,681


25
%$
238,510

$
237,859


100
%
$
91,808

$
91,642


100
%


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


We
do not "control" and are not an "affiliate" of any of our portfolio companies, each 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 and would be an "affiliate" of a portfolio company if we owned 5% or more of its voting securities.

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Our
investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio
companies in accordance with the terms of the underlying loan agreements. As of June 30, 2012, we had no such investments.

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 June 30, 2012
and December 31, 2011:

June 30, 2012
(Unaudited)

December 31, 2011Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
122,714


52
%
$
36,027


39
%Midstream


46,709


19
%

25,169


28
%Downstream


4,043


2
%

942


1
%Service & Equipment


29,768


12
%

15,560


17
%Power


34,625


15
%

13,944


15
%Total

$
237,859


100
%
$
91,642


100
%


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 expected, but still expecting a positive return on investment.5

Underperforming investment with expected loss of interest and some principal.


The
following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2012 and December 31, 2011:

June 30, 2012

December 31, 2011Investment Rating

Investments at
Fair Value

Percentage
of Portfolio

Investments at
Fair Value

Percentage
of Portfolio1

$
12,612


5
%
$
5,087


5
%2


214,747


90
%

85,077


93
%3


10,500


5
%

1,478


2
%4











5











$
237,859


100
%
$
91,642


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.

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Results of Operations

We commenced operations on July 18, 2011, when we raised in excess of $2,500 from persons who are not affiliated with us or FS
Advisor. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization and registration as a non-diversified,
closed-end management investment company. As a result, no comparisons with the comparable 2011 periods have been included. For the three and six months ended June 30, 2011, we
incurred organization costs of $74 and $167, respectively, and offering costs of $591 and $777, respectively, which were funded by Franklin Square Holdings and recorded as a contribution to capital.

Results of Operations for the Three and Six Months Ended June 30, 2012



We generated investment income of $4,337 and $7,055 for the three and six months ended June 30, 2012, respectively, in the form
of interest earned on senior secured loans, senior secured bonds, subordinated debt and other investments in our portfolio. Such revenues represent $3,970 and $6,251 of cash income earned as well as
$367 and $804 in non-cash portions relating to accretion of discount and accrual of limited partnership income for the three and six months ended June 30, 2012, 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 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.



Our total operating expenses were $1,867 and $3,846 for the three and six months ended June 30, 2012, respectively. Our
operating expenses include base management fees of $1,277 and $2,052 and administrative services expenses attributed to FS Advisor of $139 and $201 for the three and six months ended June 30,
2012, respectively.

FS
Advisor is eligible to receive incentive fees based on performance. During the three months ended June 30, 2012, we reversed $285 in capital gains incentive fees previously
accrued by us based on the performance of our portfolio. We accrued capital gains incentive fees during the six months ended June 30, 2012 of $234, all of which were based on unrealized gains.
No such 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 $264 and $533 for the three and six months ended June 30, 2012, respectively, in connection with our credit facility and the amortization of
deferred financing charges on our TRS. For the three and six months ended June 30, 2012, fees and expenses incurred with our fund administrator, which provides various accounting and
administrative services to us, totaled $42 and $80, respectively, and fees and expenses incurred with our share transfer agent totaled $120 and $179, respectively.

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Our
other general and administrative expenses totaled $310 and $567 for the three and six months ended June 30, 2012, respectively, and consisted of the following:

Three Months Ended
June 30, 2012

Six Months Ended
June 30, 2012Expenses associated with our independent audit and related fees

$
89

$
173Compensation of our chief compliance officer


20


32Legal fees


67


98Printing fees


13


27Insurance expense


21


41Trustee fees


81


163Other


19


33Total

$
310

$
567


We
generally expect our operating expenses related to our ongoing operations to increase because of the anticipated growth in the size of our asset base. During the three and six months
ended June 30,
2012, the ratio of our operating expenses to our average net assets was 1.01% and 2.72%, respectively, and the ratio of our net operating expenses to our average net assets, which includes $631 and
$1,432, respectively, of expense reimbursements from Franklin Square Holdings, was 0.67% and 1.70%, respectively. During the three and six months ended June 30, 2012, our ratio of operating
expenses to average net assets included expenses of $264 and $533, respectively, related to interest expense on our credit facility and TRS. Without such interest expense, our ratio of expenses to
average net assets would have been 0.87% and 2.34% for the three and six months ended June 30, 2012, respectively. Incentive fees, interest expense and costs relating to our continuous public
offering, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark
interest rates such as LIBOR and offerings of our securities, among other factors.



Prior to February 14, 2012, Franklin Square Holdings agreed to reimburse us for expenses in an amount that was sufficient to
ensure that, for tax purposes, our net investment income and net capital gains were equal to or greater than the cumulative distributions paid to our shareholders in each quarter. This arrangement was
designed to ensure that no portion of our distributions represented a return of capital for our shareholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any
portion of our expenses.

Pursuant
to the expense reimbursement agreement entered into on February 14, 2012, 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 for expenses in an amount equal to the difference between our cumulative distributions paid to our

39

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shareholders
in each quarter, less the sum of our net investment income for tax purposes, 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 income or net capital gains for tax purposes) in each quarter.

Pursuant
to the expense reimbursement agreement, we will 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
income for tax purposes, 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 income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders.

We
or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until
it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income. If we terminate the investment advisory and administrative
services agreement with FS Advisor, we will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square Holdings within three years of the date of termination.

The
specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. 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, 2011, $533 of reimbursements were payable to us from Franklin Square Holdings. During the six months ended June 30, 2012, we accrued $1,432 of
reimbursements that Franklin Square Holdings has agreed to pay, including $631 in reimbursements for the three months ended June 30, 2012. As discussed more fully above, it is intended that
these reimbursements will be funded, in part, through the offset of management fees payable by us to FS Advisor. During the six months ended June 30, 2012, we received $213 from Franklin Square
Holdings for reimbursements and offset $1,121 in base management fees payable by us to FS Advisor under the investment advisory and administrative services agreement against reimbursements due from
Franklin Square Holdings. As of June 30, 2012, we had $631 in reimbursements due from Franklin Square Holdings, which we expect to offset against management fees payable by us to FS Advisor.

Under
the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future. As of June 30, 2012, $1,432 of
reimbursements may become subject to repayment by us to Franklin Square Holdings in the future.



Our net investment income totaled $3,101 and $4,641 for the three and six months ended June 30, 2012, respectively.



We sold investments and received principal repayments of $33,110 and $61,776 during the three and six months ended June 30,
2012, respectively, from which we realized net gains of $224 and $554, respectively. During the three and six months ended June 30, 2012, we earned $368 and $487, respectively, from periodic
net settlement payments on our TRS which are reflected as realized gains, and $0 and $9, respectively, from settlements on foreign currency.

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For the three and six months ended June 30, 2012, the net change in unrealized appreciation (depreciation) on investments
totaled ($2,327) and ($485), respectively, and the net change in unrealized gain (loss) on foreign currency was ($6) and ($3), respectively. The change in unrealized appreciation (depreciation) on our
TRS was $311 and $611 for the three and six months ended June 30, 2012, respectively. The change in unrealized appreciation (depreciation) on our investments was primarily driven by
deterioration of certain energy market fundamentals during the three months ended June 30, 2012.



For the three and six months ended June 30, 2012, the net increase (decrease) in net assets resulting from operations was $1,671
and $5,814, respectively.

Financial Condition, Liquidity and Capital Resources

During the six months ended June 30, 2012, we sold 20,335,417 common shares (as adjusted for share distributions) for gross
proceeds of $201,019. The gross proceeds received during the six months ended June 30, 2012 include reinvested shareholder distributions of $2,271 for which we issued 251,579 common shares (as
adjusted for share distributions). During the six months ended June 30, 2012, we also incurred offering costs of $905 in connection with the sale of our common shares, which consisted primarily
of legal, due diligence and printing fees. Franklin Square Holdings funded $505 of these offering costs, which were recorded as a contribution of capital. The offering costs were offset against
capital in excess of par value in our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $17,647 for the six months ended
June 30, 2012. These sales commissions and fees include $3,666 retained by the dealer manager, FS2, which is one of our affiliates.

Since
commencing our continuous public offering and through August 13, 2012, we have sold 33,919,797 common shares (as adjusted for share distributions) for gross proceeds of
$335,141. As of August 13, 2012, we have raised total gross proceeds of $355,345, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in
proceeds raised from 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
semi-monthly closings at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.

Prior
to investing in securities of portfolio companies, we invest the net proceeds from 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, consistent with our BDC election and our election to be taxed as a RIC.

As
of June 30, 2012, we had $42,605 in cash, which we hold in a custodian account, and $27,529 in cash held as collateral by Citibank under the terms of the TRS.

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On June 24, 2011, our wholly-owned, special purpose financing subsidiary, FSEP Funding, entered into the credit facility with
Deutsche Bank. Deutsche Bank is the sole lender and serves as administrative agent under the credit facility. On May 30, 2012, FSEP Funding entered into an amendment to the credit facility to
increase the aggregate borrowings available under the credit facility by $50,000 to $100,000 on a committed basis.

We
may contribute cash or securities to FSEP Funding from time to time and will retain a residual interest in any assets contributed through our ownership of FSEP Funding. 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 Deutsche Bank 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 credit facility are non-recourse to us.

Pursuant
to the terms of the credit facility, borrowings thereunder may be designated as Tranche A borrowings in an amount up to $50,000 or as Tranche B borrowings in an
amount up to $50,000. Pricing under the credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, with
Tranche A Commitments bearing interest at the rate of LIBOR + 1.60% per annum and Tranche B Commitments bearing interest at the rate of LIBOR + 1.85% per
annum. Interest is payable quarterly in arrears. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24,
2013.

As
of June 30, 2012, $35,500 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. As of
June 30, 2012, we
incurred costs of $382 in connection with obtaining and amending the credit facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest
expense over the life of the credit facility. As of June 30, 2012, $256 of such deferred financing costs have yet to be amortized to interest expense.

The
effective interest rate under the credit facility as of June 30, 2012 was 2.04% per annum. Interest is paid quarterly in arrears and commenced November 20, 2011. We
recorded interest expense of $261 and $524 for the three and six months ended June 30, 2012, respectively, of which $46 and $82, respectively, related to the amortization of deferred financing
costs and $24 and $44, respectively, related to commitment fees on the unused portion of the credit facility. We paid $414 in interest expense for the six months ended June 30, 2012. The
average borrowings under the credit facility for the six months ended June 30, 2012 were $38,289, with a weighted average interest rate of 2.31%, which includes commitment fees on the unused
portion of the credit facility.

Borrowings
under the 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 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) our 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.

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In
connection with the 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. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default:
(a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the credit 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) our 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. FSEP Funding was in compliance with the terms of the credit facility as of June 30,
2012.

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.



On August 11, 2011, our wholly-owned, special purpose financing subsidiary, EP Investments, entered into a TRS for one or more
senior secured floating rate loans with Citibank. On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of loans
which may be subject to the TRS from $25,000 to $100,000.

The
TRS with Citibank enables us, through our ownership of EP Investments, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return
for an interest-type payment to Citibank. As such, the TRS is analogous to EP Investments borrowing funds to acquire loans and incurring interest expense to a lender.

The
obligations of EP Investments under the TRS are non-recourse to us and our exposure under the TRS is limited to the value of our investment in EP Investments, which
generally will equal the value of cash collateral provided by EP Investments under the TRS. Pursuant to the terms of the TRS, EP Investments may select one or more loans with a maximum aggregate
market value (determined at the time each such loan becomes subject to the TRS) of $100,000, or such greater amount as may be agreed to by Citibank. Loans proposed by EP Investments to be included in
the TRS will be approved or rejected by Citibank, in its sole discretion, on a trade-by-trade basis. EP Investments is required to initially cash collateralize a percentage of
each loan (such percentage to be proposed in each instance by EP Investments and accepted or rejected by Citibank in its sole discretion) included under the TRS in accordance with margin requirements
described in the TRS Agreement. Under the terms of the TRS, EP Investments has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating
requirements prior to the termination of the TRS. Neither the cash collateral nor any other assets of EP Investments are available to pay our debts.

Pursuant
to the terms of an investment management agreement that we entered into with EP Investments, we act as the manager of the rights and obligations of EP Investments under the TRS,
including selecting the specific loans to be included in the TRS. Accordingly, the loans selected by EP Investments for purposes of the TRS are selected by us in accordance with our investment
objectives and strategy to generate current income and long-term capital appreciation. In addition, pursuant to the terms of the TRS, EP Investments may select any loan or obligation
available in the market to be included in the TRS that meets the obligation criteria set forth in the TRS Agreement.

Each
loan included in the TRS must meet criteria described in the TRS Agreement, including a requirement that each loan be rated by Moody's and S&P and quoted by a nationally-recognized
pricing service. EP Investments receives from Citibank all interest and fees payable in respect of the loans included in the TRS. EP Investments pays to Citibank interest at a rate equal to
one-month

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LIBOR + 1.30%
per annum (which rate was one-month LIBOR + 1.35% per annum prior to the increase in the size of the TRS to $100,000) on the full notional amount
of loans subject to the TRS. In addition, upon the termination or repayment of any loan subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such loan
or pay to Citibank any depreciation in the value of such loan.

Under
the terms of the TRS, EP Investments may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the
value of the underlying loans after such value decreases below a specified amount. The amount of collateral that may be required to be posted by EP Investments is determined primarily on the basis of
the aggregate value of the underlying loans. The limit on the additional collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional
amount of the loans underlying the TRS and the amount of cash collateral already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included
in the TRS).

We
have no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. We may, but are not obligated to, increase our equity investment in
EP Investments for the purpose of funding any additional collateral or payment obligations for which EP Investments may become obligated during the term of the TRS. If we do not make any such
additional investment in EP Investments and EP Investments fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by
EP Investments under the TRS.

Citibank
may terminate the TRS on or after May 11, 2013. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon
providing no more than 30 days, and no less than 7 days, prior notice to Citibank. EP Investments will pay Citibank customary fees in connection with the establishment and maintenance of
the TRS.

The
value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values
each underlying loan in good faith on a mark-to-market basis by determining how much
Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to EP Investments. As of
June 30, 2012 and December 31, 2011, the fair value of the TRS was $732 and $121, respectively. The fair value of the TRS is reflected as an unrealized gain on our consolidated balance
sheets. The change in value of the TRS is reflected in our consolidated statements of operations as net change in unrealized appreciation on total return swap. As of June 30, 2012, EP
Investments had selected 16 underlying loans with a total notional amount of $65,763 and posted $27,529 in cash collateral held by Citibank (of which only $26,850 was required to be posted), which is
reflected in due from counterparty on our consolidated balance sheets. As of December 31, 2011, EP Investments had selected 6 underlying loans with a total notional amount of $12,205 and posted
$7,878 in cash collateral held by Citibank (of which only $5,096 was required to be posted), which is reflected in due from counterparty on our consolidated balance sheets.

As
of June 30, 2012, we incurred costs of $16 in connection with obtaining the TRS, which we have recorded as deferred financing costs on our consolidated balance sheets. As of
June 30, 2012, all of such deferred financing costs have been amortized to interest expense.

For
purposes of the asset coverage ratio test applicable to us as a BDC, we treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to
be posted by EP Investments under the TRS, as a senior security for the life of that instrument. We may, however, accord different treatment to the TRS in the future in accordance with any applicable
new rules or interpretations adopted by the staff of the SEC.

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Further, for purposes of Section 55(a) under the 1940 Act, we treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an
eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. We may, however, accord different treatment to the TRS in the future in
accordance with any applicable new rules or interpretations adopted by the staff of the SEC.

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.

RIC Status and Distributions

We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of
the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our "investment company taxable income," as defined by the Code, each year. As long as the distributions
are declared by the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the
distributions paid in such tax year. We intend to make sufficient distributions to our shareholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal
excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no
federal income taxes.

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 either a semi-monthly or monthly 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 each 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 may
represent a return of capital for tax purposes. 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. Each year

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a
statement on Form 1099-DIV identifying the source of the distributions will be mailed to our shareholders.

We
intend to continue to make our ordinary distributions in the form of cash out of assets legally available for distribution, unless shareholders elect to receive their distributions in
additional common shares under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. shareholder.

The
following table reflects the cash distributions per share that we have declared and paid on our common shares during the six months ended June 30, 2012:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2012March 31, 2012(1)

$
0.1555

$
1,789June 30, 2012

$
0.1563

$
3,419


(1)The
per share distributions during the three months ended March 31, 2012 have been retroactively adjusted, as necessary, to reflect the share
distribution declared in February 2012 as discussed below.


On
July 10, 2012, our board of trustees declared two regular semi-monthly cash distributions of $0.02605 per share each, which were paid on
July 31, 2012 to shareholders of record on July 13, 2012 and July 30, 2012, respectively. On August 6, 2012, our board of trustees declared two regular
semi-monthly cash distributions of $0.02605 per share each, which will be paid on August 31, 2012 to shareholders of record on August 15, 2012 and August 30, 2012,
respectively. 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 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 additional common shares.

We
may fund our cash distributions to shareholders from any sources of funds 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. The following table reflects

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the
sources of the cash distributions that we have paid on our common shares during the six months ended June 30, 2012:

Six Months Ended
June 30, 2012Source of Distribution

Distribution
Amount

PercentageOffering proceeds

$



Borrowings





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


2,634


51
%Capital gains proceeds from the sale of assets


563


11
%Non-capital gains proceeds from the sale of assets





Distributions on account of limited partnership interest


579


11
%Expense reimbursement from sponsor


1,432


27
%Total

$
5,208


100
%


(1)During
the six months ended June 30, 2012, 89% of our gross investment income was attributable to cash interest earned and 11% was attributable to
non-cash accretion of discount.


Our
net investment income on a tax basis for the six months ended June 30, 2012 was $4,066. As of June 30, 2012, we distributed all of our
tax-basis net investment income earned as of June 30, 2012.

The
difference between our GAAP-basis net investment income and our tax-basis net investment income is due to the accrual for GAAP purposes of income on a limited
partnership interest, the tax-basis amortization of organization costs incurred prior to the commencement of our operations, 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 us, the inclusion of realized gains on the TRS in tax-basis net investment income
and the accretion of discount on the TRS. The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during
the six months ended June 30, 2012:

Six Months Ended
June 30, 2012GAAP-basis net investment income

$
4,641Income on limited partnership interest


(1,304
)Amortization of organization costs


(12
)Reversal of incentive fee accrual on unrealized gains


234GAAP realized gains on total return swap


487Accretion of discount on total return swap


20Tax-basis net investment income

$
4,066


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. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. The actual tax
characteristics of distributions to shareholders are reported to shareholders annually on a Form 1099-DIV.

The
following table reflects the share distribution per share that we have declared on our common shares through June 30, 2012:

Date Declared

Record Date

Distribution Date

Distribution
Percentage

Shares
IssuedFebruary 14, 2012

February 15, 2012

February 16, 2012


1.0
%

106,133


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The
purpose of this special share distribution was to maintain a net asset value per share that was below the then-current offering price, after deducting selling commissions
and dealer manager fees, as required by the 1940 Act, subject to certain limited exceptions. Our board of trustees determined that our portfolio performance sufficiently warranted taking this action.

The
share distribution increased the number of common shares outstanding, thereby reducing our net asset value per share. However, because the share distribution was issued to all
shareholders as of the record date in proportion to their holdings, the reduction in net asset value per share as a result of the share distribution was offset exactly by the increase in the number of
common shares owned by each investor. As the overall value to an investor's position was not reduced as a result of the special share distribution, our board of trustees determined that this issuance
would not be dilutive to shareholders as of the record date. As the share distribution did not change any shareholder's proportionate interest in us, it is not expected to represent a taxable
distribution. Specific tax characteristics of all distributions are reported to shareholders annually on Form 1099-DIV.

As
of June 30, 2012 and December 31, 2011, the components of accumulated earnings on a tax basis were as follows:

June 30, 2012
(Unaudited)

December 31, 2011Distributable ordinary income net of cash received on limited partnership interest

$


$
Distribution receivable on limited partnership interest


470


Incentive fee accrual on unrealized gains


(301
)

(67
)Unamortized organization costs


(326
)

(338
)Net unrealized appreciation (depreciation) on investments and total return swap and loss on foreign currency(1)


269


(89
)$
112

$
(494
)


(1)As
of June 30, 2012 and December 31, 2011, the gross unrealized appreciation on our investments and total return swap was $3,441 and $761,
respectively. As of June 30, 2012 and December 31, 2011, the gross unrealized depreciation on our investments and loss on foreign currency was $3,172 and $850, respectively.


The
aggregate cost of our investments for federal income tax purposes totaled $238,255 and $91,808 as of June 30, 2012 and December 31, 2011, respectively. The aggregate
net unrealized appreciation (depreciation) on a tax basis, including our TRS, was $289 and ($72) as of June 30, 2012 and December 31, 2011, 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

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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.



We determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded are valued at the
reported closing price on the valuation date. Securities that are not publicly-traded are valued at fair value as determined in good faith by our board of trustees. In connection with that
determination, FS Advisor prepares portfolio company valuations using 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 third-party valuation services.

Accounting
Standards Codification Topic 820,Fair Value Measurements and Disclosure, or ASC Topic 820, issued by 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. Below is a description of factors that our board of trustees may consider when valuing
our debt and equity 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

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available
market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of trustees may consider 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 will generally approximate the fair value of the debt plus the fair value of an option to purchase the underlying security (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.

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 analysis 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.

Our
board of trustees may also look to 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. Our board of trustees may also consider the size and scope of a portfolio company and its specific strengths and
weaknesses, as well as any other factors it deems relevant in assessing the 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.

If
we receive warrants or other equity securities at nominal or no additional cost in connection with an investment in a debt security, our board of trustees will allocate the cost basis
in the investment between the debt securities and any such warrants or other equity securities received at the time of origination. Our board of trustees will subsequently value these warrants or
other equity securities received at 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
investments as of June 30, 2012 and December 31, 2011 consisted primarily of debt securities that are traded on a private over-the-counter
market for institutional investors. Except as described below, we valued all of our investments as of the applicable period end by using an independent third-party pricing service, which provided
prevailing bid and ask prices that were screened for validity by the service from dealers on the date of the relevant period end.

As
of June 30, 2012, our three 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 interests, as well as various income scenarios and multiples of EBITDA, cash flows and net income. As of December 31, 2011, our one equity
investment and one of our subordinated debt investments, both of which were purchased near December 31, 2011, were valued at cost, as our board of trustees determined that the cost of these
investments was the best indication of their fair value.

As
of June 30, 2012 and December 31, 2011, we valued the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is based on the
increase or
decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are
valued

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by
Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be
willing to pay. These valuations are sent to us for review and testing. Our valuation committee and board of trustees review and approve the value of the TRS, as well as the value of the loans
underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent our valuation committee or board of trustees has any questions or concerns regarding
the valuation of the loans underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on the TRS, see "Financial
Condition, Liquidity and Capital ResourcesTotal Return Swap."

We
periodically benchmark the bid and ask prices we receive from the third-party pricing service 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 to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing service or independent dealers,
including the use of an independent valuation firm. We will periodically benchmark the valuations provided by the independent valuation firm 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 process.



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. 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.
Upon prepayment of a loan or security, any unamortized loan origination fees are recorded as interest income. We record prepayment premiums on loans and securities as interest income when we receive
such amounts.



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 upfront 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. Net change in unrealized gains or losses on foreign currency reflects the change in the value of
receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.



Pursuant to the terms of the investment advisory and administrative services agreement we entered into with FS Advisor, the incentive
fee on capital gains earned on liquidated investments of our portfolio 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). Such fee will equal 20.0% of our

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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, 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 AICPA 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 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. During the year ended December 31, 2011, we accrued capital
gains incentive fees of $67 based on the performance of our portfolio, all of which were based on unrealized gains and none of which were payable to FS Advisor. During the six months ended
June 30, 2012, we accrued capital gains incentive fees of $234 based on the performance of our portfolio, all of which were based on unrealized gains and none of which are payable to FS
Advisor.



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 the 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 six months ended June 30, 2012,
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 is required to provide such services, our sub-adviser, are reimbursed for administrative expenses
incurred on our behalf. For the three and six months ended June 30, 2012, we incurred $1,277 and $2,052, respectively, in base management fees and $139 and $201, respectively, in administrative
services expenses under the investment advisory and administrative services agreement. In addition, FS Advisor is eligible to receive incentive fees based on performance. During the three months ended
June 30, 2012, we reversed $285 in capital gains incentive fees previously accrued by us based on the performance of our portfolio. During the six months ended June 30, 2012, we accrued
$234 in capital gains incentive fees, all of which were based on unrealized gains and none of which are payable to FS Advisor.

As
of June 30, 2012, $35,500 was outstanding under the credit facility between FSEP Funding and Deutsche Bank. All such amounts will mature, and all accrued and unpaid interest
thereunder will be due and payable, on June 24, 2013.

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A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the credit facility between FSEP Funding and
Deutsche Bank at June 30, 2012 is as follows:

Payments Due By PeriodTotal

Less than
1 year

1-3 years

3-5 years

More than
5 yearsBorrowings(1)

$
35,500

$
35,500











(1)At
June 30, 2012, $64,500 remained unused under the revolving credit facility.


On
August 10, 2012, we and FS Advisor entered into an amendment to the investment advisory and administrative services agreement to eliminate the third part of the incentive fee,
also referred to as the subordinated liquidation incentive fee, which entitled FS Advisor to 20.0% of the net proceeds in excess of adjusted capital from our liquidation, as calculated immediately
prior to liquidation. For additional information regarding the amendment to the investment advisory and administrative services agreement, see "Item 5. Other Information."

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 May 2011, the FASB issued Accounting Standards Update No. 2011-04,Fair Value Measurement
(Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance represents the converged guidance of
the Accounting Boards on fair value measurement. The collective efforts of the Accounting Boards reflected in this guidance have resulted in common requirements for measuring fair value and for
disclosing information about fair value measurements, including a consistent meaning of the term "fair value" and enhanced disclosure requirements for investments that do not have readily determinable
fair values. The Accounting Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in
accordance with GAAP and International Financial Reporting Standards. The amendments to the FASB codification in this guidance are to be applied prospectively. For public entities, the amendments are
effective during interim and annual periods beginning after December 15, 2011. We have implemented this guidance and it did not have a material impact on our consolidated financial statements,
except for enhanced disclosures around fair value measurements.

Related Party Transactions

We have entered into an investment advisory and administrative services agreement with FS Advisor. 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 of 20.0% of net investment income,
subject to an annualized 6.5% hurdle, and 20.0% of net realized capital gains, if applicable.

We
commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of our operations. Management fees are paid on a
quarterly basis in arrears. As of December 31, 2011, $346 in base management fees were payable to FS Advisor. During the six months ended June 30, 2012, we accrued $2,052 in base
management fees payable to FS Advisor, including $1,277 in base management fees accrued during the three months ended June 30, 2012. During the six months ended June 30, 2012, $1,121 in
base management fees were applied to

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offset
the liability of Franklin Square Holdings under the expense reimbursement agreement discussed below. Of the $1,277 in base management fees accrued and payable as of June 30, 2012, it is
intended that $631 of such fees will be applied to offset the liability of Franklin Square Holdings under the expense reimbursement agreement as of June 30, 2012 and the balance, $646, will be
paid to FS Advisor.

We
accrue for the capital gains incentive fee, which, if earned, is paid annually. We accrue the 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. During the three months ended June 30, 2012, we reversed $285 in capital gains incentive fees previously accrued by us based on the performance of our portfolio.
During the six months ended June 30, 2012, we accrued capital gains incentive fees of $234 based on the performance of our portfolio, all of which were based on unrealized gains and none of
which are payable to FS Advisor.

We
reimburse FS Advisor for expenses necessary to perform services related to our administration and operations. 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 objective factors such as total assets, revenues, time records and other reasonable metrics. Our board
of trustees then assesses the reasonableness of such reimbursements 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 and, at least annually, our board of trustees 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.

As
of December 31, 2011, we had $52 of administrative services expense payable to FS Advisor. During the six months ended June 30, 2012, we incurred administrative services
expenses of $201 attributable to FS Advisor, of which $144 related to the allocation of costs of administrative personnel for services
rendered to us by employees of FS Advisor and the remainder related to other reimbursable expenses. During the six months ended June 30, 2012, we paid $232 of administrative services expenses
to FS Advisor. As of June 30, 2012, we had $21 in administrative services expense payable to FS Advisor.

Franklin
Square Holdings funded offering costs and organization costs in the amount of $505 and $944 for the six months ended June 30, 2012 and June 30, 2011, respectively.
These costs have been 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. Since inception through June 30, 2012, Franklin Square Holdings has funded $3,143 in offering and organization costs.

The
dealer manager for our continuous public offering is FS2, which is one of our affiliates. During the six months ended June 30, 2012, FS2 retained
$3,666 for selling commissions and dealer manager fees in connection with the sale of our common shares.

Under
the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of
gross proceeds raised in our continuous public offering until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) have been recovered.
On July 18, 2011, we satisfied the minimum offering requirement. We paid total reimbursements of $2,051 to FS Advisor and its affiliates during the six months ended June 30, 2012. The
reimbursements are recorded

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as
a reduction of capital. As of June 30, 2012, no amounts remain payable to FS Advisor and its affiliates under this arrangement.

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.

FS
Advisor's senior management team is comprised of the same personnel as the senior management teams of FB Income Advisor, LLC and FSIC II Advisor, LLC, the investment
advisers to Franklin Square Holdings' other affiliated BDCs, FS Investment Corporation and FS Investment Corporation II, respectively. As a result, such personnel provide investment advisory services
to us and each of FS Investment Corporation and FS Investment Corporation II. While none of FS Advisor, FB Income Advisor, LLC or FSIC II Advisor, LLC is currently making private
corporate debt investments for clients other than us, FS Investment Corporation and FS Investment Corporation II, 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 strategies, 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 and/or FS Investment Corporation II rather than to us.

Prior
to February 14, 2012, Franklin Square Holdings agreed to reimburse us for expenses in an amount that was sufficient to ensure that, for tax purposes, our net investment
income and net capital gains were equal to or greater than the cumulative distributions paid to our shareholders in each quarter. This arrangement was designed to ensure that no portion of our
distributions represented a return of capital for our shareholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of our expenses.

Pursuant
to the expense reimbursement agreement entered into on February 14, 2012, 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

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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 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 income for tax purposes, 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 income or net capital gains for tax purposes) in each quarter.

Pursuant
to the expense reimbursement agreement, we will 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
income for tax purposes, 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 income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders.

We
or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until
it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income. If we terminate the investment advisory and administrative
services agreement with FS Advisor, we will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square Holdings within three years of the date of termination.

The
specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. 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, 2011, $533 of reimbursements were payable to us from Franklin Square Holdings. During the six months ended June 30, 2012, we accrued $1,432 of
reimbursements that Franklin Square Holdings has agreed to pay, including $631 in reimbursements for the three months ended June 30, 2012. As discussed more fully above, it is intended that
these reimbursements will be funded, in part, through the offset of management fees payable by us to FS Advisor. During the six months ended June 30, 2012, we received $213 from Franklin Square
Holdings for reimbursements and offset $1,121 in base management fees payable by us to FS Advisor under the investment advisory and administrative
services agreement against reimbursements due from Franklin Square Holdings. As of June 30, 2012, we had $631 in reimbursements due from Franklin Square Holdings, which we expect to offset
against management fees payable by us to FS Advisor.

Under
the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future. As of June 30, 2012, $1,432 of
reimbursements may become subject to repayment by us to Franklin Square Holdings in the future.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of June 30, 2012, 40% of our portfolio
investments (based on fair value) paid variable interest rates and the remainder (60%) paid fixed interest rates. A rise in the general level of interest rates can be expected to lead to higher
interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. To the extent that a substantial portion of our investments may
be

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in
variable rate investments, an increase in interest rates would make it easier for us to meet or exceed our incentive fee hurdle rate, as described in the investment advisory and administrative
services agreement we have entered into with FS Advisor, 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 $100,000 (which amount was $50,000 prior to May 30, 2012) credit facility which FSEP Funding maintains with Deutsche Bank, FSEP Funding borrows at a
floating rate based on LIBOR. Under the terms of the TRS between EP Investments and Citibank, EP Investments pays fees to Citibank at a floating rate based on LIBOR in exchange for the right to
receive the economic benefit of one or more loans having a maximum notional amount of $100,000 (which maximum notional amount was $25,000 prior to May 11, 2012), or such greater amount as may
be agreed to by Citibank. We expect any future credit facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries may enter into will also be based on a
floating interest rate. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates, when we or our subsidiaries have debt outstanding or
swap agreements 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 our
investment portfolio and borrowing arrangements in effect as of June 30, 2012:

LIBOR Basis Point Change

Increase
(Decrease) in
Interest
Income(1)

Increase
(Decrease) in
Interest
Expense

Increase
(Decrease) in
Net Interest
Income

Percentage
Change in Net
Interest IncomeDown 50 basis points

$
319

$
(177
)
$
496


1.9%Current LIBOR











Up 100 basis points


(604
)

355


(959
)

(3.9%
)Up 300 basis points


683


1,065


(382
)

(1.5%
)Up 500 basis points


2,135


1,775


360


1.4%


(1)Includes
the net effect of the change in interest rates on the unrealized appreciation (depreciation) on the TRS. Pursuant to the TRS, EP Investments
receives from Citibank all interest payable in respect of the loans included in the TRS and pays to Citibank interest at a rate equal to one-month LIBOR + 1.30% per annum on the full
notional amount of loans subject to the TRS. As of June 30, 2012, 84% of the loans underlying the TRS paid variable interest rates. Assumes no change in defaults or prepayments by portfolio
companies.


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 condition and results of operations. During the six months ended June 30,
2012, we did not engage in interest rate hedging activities.

In
addition, we may have risk regarding portfolio valuation. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of
OperationsCritical Accounting PoliciesValuation of Portfolio Investments."

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Item 4.    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 Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the
chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2012. Based on the foregoing, our
chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

There
was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during
the three months ended June 30, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding 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 these proceedings will have a material adverse effect upon our financial
condition or results of operations.

Item 1A.    Risk Factors.

There have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2011, as amended by the risk factor set forth in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

Not applicable.

Item 3.    Defaults upon Senior Securities.

Not applicable.

Item 4.    Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

On August 10, 2012, we and FS Advisor entered into an amendment to the investment advisory and administrative services
agreement, dated April 28, 2011, to eliminate the third part of the incentive fee, also referred to as the subordinated liquidation incentive fee, which entitled FS Advisor to 20.0% of the net
proceeds in excess of adjusted capital from our liquidation, as calculated immediately prior to liquidation. As a result, pursuant to the amendment, the incentive fee under the investment advisory and
administrative services agreement consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals
20.0% of "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, as defined in
the investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. The second part of the incentive fee, which is referred to as the
incentive fee on capital gains, is an incentive fee on capital gains earned on liquidated investments from our portfolio and 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 our incentive fee capital gains, which equal 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. No other material terms of the investment advisory and administrative services agreement changed in connection with the amendment. The
foregoing description of the investment advisory and administrative services agreement and the amendment is a summary only and is qualified in all respects by the provisions of the investment advisory
and administrative services agreement and the amendment, copies of which are attached hereto as Exhibits 10.1 and 10.2, respectively, and are incorporated by reference herein.

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Item 6.    Exhibits.

3.1

Third Amended and Restated Declaration of Trust of the Company.(Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on March 13,
2012.)3.2

Amended and Restated Bylaws of the Company.(Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on March 13, 2012.)4.1

Form of Subscription Agreement.(Incorporated by reference to Appendix A to the prospectus filed with Post-Effective Amendment No. 2 to the Company's registration statement on
Form N-2 (File No. 333-169679) filed on May 11, 2012.)4.2

Amended and Restated Distribution Reinvestment Plan of the Company.(Incorporated by reference to Exhibit 4.1 to the Company'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 the Company and FS Investment Advisor, LLC.(Incorporated by reference to
Exhibit (g)(1) filed with Amendment No. 3 to the Company'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 the Company and FS Investment Advisor,
 LLC.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 the Company'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 the Company and FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)(1) filed with
Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.5

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 the
Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.6

Custodian Agreement, dated as of November 14, 2011, by and between State Street Bank and Trust Company and the Company.(Incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q filed on November 14, 2011.)10.7

Escrow Agreement, dated as of March 29, 2011, by and between the Company and UMB Bank, N.A.(Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to the Company's
registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.8

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 the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.9

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 the Company's Current Report on Form 8-K filed on May 30, 2012.)


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10.10

Asset Contribution Agreement, dated as of June 24, 2011, by and between the Company and FSEP Term Funding, LLC.(Incorporated by reference to Exhibit 10.8 to the Company's Quarterly
Report on Form 10-Q filed on June 27, 2011.)10.11

Investment Management Agreement, dated as of June 24, 2011, by and between the Company and FSEP Term Funding, LLC.(Incorporated by reference to Exhibit 10.9 to the Company's
Quarterly Report on Form 10-Q filed on June 27, 2011.)10.12

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 the
Company's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.13

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 the Company's Quarterly Report on Form 10-Q filed on August 15, 2011.)10.14

Confirmation Letter Agreement, dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q filed on August 15, 2011.)10.15

Guarantee, dated as of August 11, 2011, by the Company in favor of Citibank, N.A.(Incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q filed
on August 15, 2011.)10.16

Investment Management Agreement, dated as of August 11, 2011, by and between the Company and EP Investments LLC.(Incorporated by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q filed on August 15, 2011.)10.17

Termination and Release Acknowledgement, dated as of May 11, 2012, by Citibank N.A. in favor of the Company.(Incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q filed on May 15, 2012.)10.18

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 the Company's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.19

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
the Company's Quarterly Report on Form 10-Q filed on May 15, 2012.)31.1
*
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.31.2
*
Certification of Chief Financial Officer pursuant to Rule 13a-14 of 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.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on August 14, 2012.

FS ENERGY AND POWER FUNDBy:

/s/ MICHAEL C. FORMAN Michael C. Forman Chief Executive Officer
(Principal Executive Officer)By:

/s/ WILLIAM GOEBEL William Goebel Chief Financial Officer
(Principal Financial and Accounting Officer)


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