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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, 2013o

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 126,352,749 common shares of beneficial interest outstanding as of August 13, 2013.





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TABLE OF CONTENTS



PagePART IFINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTS


1Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012


1Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2012


2Unaudited Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2013 and 2012


3Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012


4Consolidated Schedules of Investments as of June 30, 2013 (Unaudited) and December 31, 2012


5Notes to Unaudited Consolidated Financial Statements


13ITEM 2.

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


38ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


68ITEM 4.

CONTROLS AND PROCEDURES


69PART IIOTHER INFORMATIONITEM 1.

LEGAL PROCEEDINGS


70ITEM 1A.

RISK FACTORS


70ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


70ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


70ITEM 4.

MINE SAFETY DISCLOSURES


70ITEM 5.

OTHER INFORMATION


70ITEM 6.

EXHIBITS


71SIGNATURES


74


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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, 2013
(Unaudited)

December 31,
2012AssetsInvestments, at fair value (amortized cost$1,390,997 and $677,919, respectively)

$
1,411,171

$
701,172Cash


89,525


48,986Due from counterparty





56,876Receivable for investments sold and repaid


87,426


9,374Interest receivable


21,381


9,075Receivable for common shares purchased





41Deferred financing costs


1,213


325Receivable due on total return swap(1)





329Unrealized appreciation on total return swap(1)





3,141Prepaid expenses and other assets


88


175Total assets

$
1,610,804

$
829,494LiabilitiesPayable for investments purchased

$
170,086

$
25,556Credit facility payable


353,000


185,232Shareholder distributions payable


6,049


3,349Management fees payable


6,654


3,522Expense recoupment payable to sponsor(2)





1,083Accrued capital gains incentive fees(3)


7,518


6,482Administrative services expense payable


399


159Interest payable


764


578Trustee fees payable


240


Other accrued expenses and liabilities


950


644Total liabilities


545,660


226,605Shareholders' 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, 112,623,589 and 64,524,909 shares issued and outstanding, respectively(4)


113


65Capital in excess of par value(5)


1,036,718


579,776Accumulated undistributed net realized gains on investments and total return swap and gain/loss on foreign currency(5)


16,167


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


(8,006
)

(3,354
)Net unrealized appreciation on investments and total return swap and gain/loss on foreign currency


20,152


26,402Total shareholders' equity


1,065,144


602,889Total liabilities and shareholders' equity

$
1,610,804

$
829,494Net asset value per common share at period end

$
9.46

$
9.34


(1)See
Note 8 for a discussion of the Company's total return swap agreement, which was terminated on May 24, 2013.(2)See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
paid by the Company to its investment adviser and affiliates.(3)See
Note 2 and Note 4 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 sources of distributions paid by the Company.




See notes to unaudited consolidated financial statements.

1

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Table of Contents



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 30,2013

2012

2013

2012Investment IncomeInterest income

$
23,245

$
4,208

$
41,188

$
6,710Fee income


927


129


3,895


345Total investment income


24,172


4,337


45,083


7,055Operating expensesManagement fees


6,654


1,277


11,365


2,052Capital gains incentive fees(1)


(1,621
)

(285
)

1,989


234Subordinated income incentive fees(1)








753


Administrative services expenses


544


139


997


201Share transfer agent fees


475


120


875


179Accounting and administrative fees


168


42


308


80Interest expense


1,415


264


2,657


533Trustee fees


199


81


399


163Other general and administrative expenses


767


229


1,210


404Total operating expenses


8,601


1,867


20,553


3,846Less: Expense reimbursement from sponsor(2)





(631
)




(1,432
)Net expenses


8,601


1,236


20,553


2,414Net investment income


15,571


3,101


24,530


4,641Realized and unrealized gain/lossNet realized gain (loss) on investments


3,760


224


3,421


554Net realized gain (loss) on total return swap(3)


9,817


368


12,736


487Net realized gain (loss) on foreign currency








10


9Net change in unrealized appreciation (depreciation) on investments


(15,946
)

(2,327
)

(3,079
)

(485
)Net change in unrealized appreciation (depreciation) on total return swap(3)


(5,731
)

311


(3,141
)

611Net change in unrealized gain (loss) on foreign currency


(25
)

(6
)

(30
)

(3
)Total net realized and unrealized gain/loss on investments


(8,125
)

(1,430
)

9,917


1,173Net increase (decrease) in net assets resulting from operations

$
7,446

$
1,671

$
34,447

$
5,814Per share informationbasic and diluted(4)Net increase (decrease) in net assets resulting from operations (Earnings per Share)

$
0.07

$
0.08

$
0.39

$
0.37Weighted average shares outstanding


100,028,169


20,784,076


87,762,307


15,837,971


(1)See
Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and
subordinated income incentive fees.(2)See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
paid by the Company to its investment adviser and affiliates.(3)See
Note 8 for a discussion of the Company's total return swap agreement, which was terminated on May 24, 2013.(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 relevant period and reflects the share distribution on a retroactive
basis.




See notes to unaudited consolidated financial statements.

2

---



Table of Contents



FS Energy and Power Fund

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)



Six Months Ended
June 30,2013

2012OperationsNet investment income

$
24,530

$
4,641Net realized gain (loss) on investments, total return swap and foreign currency


16,167


1,050Net change in unrealized appreciation (depreciation) on investments


(3,079
)

(485
)Net change in unrealized appreciation (depreciation) on total return swap(1)


(3,141
)

611Net change in unrealized gain (loss) on foreign currency


(30
)

(3
)Net increase (decrease) in net assets resulting from operations


34,447


5,814Shareholder distributions(2)Distributions from net investment income


(29,182
)

(4,066
)Distributions from net realized gain on investments





(563
)Distributions representing tax return of capital





(579
)Net decrease in net assets resulting from shareholder distributions


(29,182
)

(5,208
)Capital share transactionsIssuance of common shares


443,853


181,101Reinvestment of shareholder distributions


16,554


2,271Repurchases of common shares


(1,017
)

Offering costs


(2,400
)

(905
)Reimbursement of investment adviser(3)





(2,051
)Capital contributions of investment adviser





505Net increase in net assets resulting from capital share transactions


456,990


180,921Total increase in net assets


462,255


181,527Net assets at beginning of period


602,889


67,685Net assets at end of period

$
1,065,144

$
249,212Accumulated distributions in excess of net investment income(2)

$
(8,006
)
$
(436
)


(1)See
Note 8 for a discussion of the Company's total return swap agreement, which was terminated on May 24, 2013.(2)See
Note 5 for a discussion of the sources 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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Table of Contents



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

Six Months Ended
June 30,2013

2012Cash flows from operating activitiesNet increase (decrease) in net assets resulting from operations

$
34,447

$
5,814Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:Purchases of investments


(1,056,798
)

(207,590
)Proceeds from sales and repayments of investments


348,473


61,776Net realized (gain) loss on investments


(3,421
)

(554
)Net change in unrealized (appreciation) depreciation on investments


3,079


485Net change in unrealized (appreciation) depreciation on total return swap(1)


3,141


(611
)Accretion of discount


(1,332
)

(334
)Amortization of deferred financing costs


369


91(Increase) decrease in due from counterparty


56,876


(19,651
)(Increase) decrease in receivable for overfunded investment





434(Increase) decrease in receivable for investments sold and repaid


(78,052
)

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





(98
)(Increase) decrease in interest receivable


(12,306
)

(2,615
)(Increase) decrease in receivable due on total return swap(1)


329


106(Increase) decrease in prepaid expenses and other assets


87


6Increase (decrease) in payable for investments purchased


144,530


1,550Increase (decrease) in management fees payable


3,132


931Increase (decrease) in expense recoupment payable to sponsor(2)


(1,083
)

Increase (decrease) in accrued capital gains incentive fees


1,036


234Increase (decrease) in administrative services expense payable


240


(31
)Increase (decrease) in interest payable


186


28Increase (decrease) in trustee fees payable


240


81Increase (decrease) in other accrued expenses and liabilities


306


241Net cash used in operating activities


(556,521
)

(159,707
)Cash flows from financing activitiesIssuance of common shares


443,894


181,023Reinvestment of shareholder distributions


16,554


2,271Repurchases of common shares


(1,017
)

Offering costs


(2,400
)

(905
)Capital contributions of investment adviser





505Reimbursement of investment adviser(3)





(2,051
)Shareholder distributions


(26,482
)

(4,198
)Borrowings under credit facilities(4)


167,768


29,482Repayments of credit facilities





(14,500
)Deferred financing costs paid


(1,257
)

(125
)Net cash provided by financing activities


597,060


191,502Total increase (decrease) in cash


40,539


31,795Cash at beginning of period


48,986


10,810Cash at end of period

$
89,525

$
42,605


(1)See
Note 8 for a discussion of the Company's total return swap agreement, which was terminated on May 24, 2013.(2)See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
paid by the Company to its investment adviser and affiliates.(3)See
Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.(4)See
Note 8 for a discussion of the Company's credit facilities. During the six months ended June 30, 2013 and 2012, the Company paid $2,102
and $414, respectively, in interest expense on the credit facilities.




See notes to unaudited consolidated financial statements.

4

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Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments

As of June 30, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured LoansFirst Lien41.6%Alon USA Partners, L.P.

(e)(g)

Downstream

L+800

1.3%

11/26/18

$
4,146

$
4,327

$
4,314BBH Operating LLC



Upstream

Prime+500

3.3%

2/26/15


30,000


30,000


30,000BlackBrush TexStar L.P.

(e)(f)

Midstream

L+650

1.3%

6/4/19


57,433


56,902


57,217Boomerang Tube, LLC

(d)(e)

Service & Equipment

L+950

1.5%

10/11/17


20,155


19,945


19,953Brock Holdings III, Inc.

(e)

Service & Equipment

L+450

1.5%

3/16/17


2,804


2,846


2,832Buffalo Gulf Coast Terminals LLC

(e)

Midstream

L+400

1.3%

10/31/17


6,587


6,719


6,686Cedar Bay Generating Co., L.P.



Power

L+500

1.3%

4/23/20


9,470


9,377


9,493Consolidated Precision Products Corp.



Service & Equipment

L+375

1.0%

12/28/19


4,987


5,030


4,980Crestwood Holdings LLC

(e)(f)

Midstream

L+600

1.0%

6/19/19


27,108


27,179


27,379Dynegy Inc.

(e)(g)

Power

L+300

1.0%

4/23/20


4,154


4,191


4,133EMG Utica, LLC

(e)

Midstream

L+375

1.0%

3/27/20


4,339


4,374


4,328EP Acquisition LLC



Upstream

Prime+500

3.3%

3/31/15


750


750


750Everest Acquisition LLC

(e)

Upstream

L+275

0.8%

5/24/18


1,528


1,543


1,518FREIF North American Power I LLC (TLB)



Power

L+375

1.0%

3/29/19


7,235


7,235


7,244FREIF North American Power I LLC (TLC)



Power

L+375

1.0%

3/29/19


1,332


1,332


1,334Harvey Gulf International Marine, LLC

(e)(f)

Service & Equipment

L+450

1.0%

6/18/20


7,000


6,895


7,018Hudson Products Holdings Inc.

(e)

Service & Equipment

L+400

1.3%

6/7/17


8,621


8,646


8,691La Frontera Generation, LLC

(e)

Power

L+350

1.0%

9/30/20


4,252


4,286


4,228LSP Madison Funding, LLC

(e)

Power

L+425

1.3%

6/28/19


1,759


1,784


1,775McJunkin Red Man Corp.

(e)(g)

Service & Equipment

L+475

1.3%

10/24/19


9,543


9,745


9,611Murray Energy Corp.



Upstream

L+375

1.0%

5/24/19


8,000


7,960


7,970Panda Sherman Power, LLC

(d)(e)

Power

L+750

1.5%

9/14/18


10,909


11,122


11,155Panda Temple Power, LLC (TLA)



Power

L+700

1.5%

7/17/18


15,000


14,735


15,300Panda Temple Power, LLC (TLB)

(e)

Power

L+1000

1.5%

7/17/18


40,000


39,287


40,850Panda Temple Power II, LLC

(e)

Power

L+600

1.3%

4/3/19


7,727


7,935


7,805Pinnacle Operating Corp.



Service & Equipment

L+375

1.0%

11/15/18


5,669


5,669


5,674Power Buyer, LLC



Service & Equipment

L+325

1.0%

5/6/20


8,000


8,003


7,940Prowler Acquisition Corp.

(e)

Service & Equipment

L+475

1.0%

3/19/19


5,000


4,950


4,975


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, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Sheridan Production Partners I-A, L.P.

(e)

Upstream

L+375

1.3%

10/1/19

$
7,925

$
8,003

$
7,905Sprint Industrial Holdings LLC



Service & Equipment

L+575

1.3%

5/10/19


12,071


12,041


12,162Stallion Oilfield Holdings, Inc.

(e)(f)

Service & Equipment

L+675

1.3%

6/19/18


51,500


50,985


51,822Star West Generation LLC

(e)(f)

Power

L+325

1.0%

3/13/20


6,975


7,029


7,014Texas Competitive Electric Holdings Co. LLC

(d)

Power

L+450



10/10/17


40,009


27,199


28,024Topaz Power Holdings, LLC

(e)

Power

L+400

1.3%

2/26/20


7,830


7,931


7,841Total Safety U.S., Inc.

(e)

Service & Equipment

L+450

1.3%

3/13/20


12,934


13,140


13,015UTEX Industries, Inc.

(e)

Service & Equipment

L+350

1.3%

4/10/20


9,257


9,372


9,230Westway Group, LLC

(e)

Service & Equipment

L+400

1.0%

2/27/20


9,000


9,106


9,022Willbros United States Holdings, Inc.

(e)(g)

Service & Equipment

L+750

2.0%

6/30/14


6,800


6,803


6,820Total Senior Secured LoansFirst Lien















464,376


468,008Unfunded Loan Commitments















(24,389
)

(24,389
)Net Senior Secured LoansFirst Lien















439,987


443,619Senior Secured LoansSecond Lien32.9%Ameriforge Group Inc.

(d)

Service & Equipment

L+750

1.3%

12/19/20


22,950


23,431


23,294Brand Energy & Infrastructure Services, Inc.

(d)(e)(f)

Service & Equipment

L+975

1.3%

10/23/19


27,700


26,938


28,453Brock Holdings III, Inc.

(d)(f)

Service & Equipment

L+825

1.8%

3/16/18


29,855


30,047


30,378Consolidated Precision Products Corp.

(d)(e)

Service & Equipment

L+925

1.3%

6/28/20


20,000


20,477


21,000EquiPower Resources Holdings, LLC

(d)(f)

Power

L+850

1.5%

6/21/19


8,000


7,862


8,220Pinnacle Operating Corp.



Service & Equipment

L+1025

1.3%

5/15/19


500


515


515Power Buyer, LLC

(e)

Service & Equipment

L+725

1.0%

11/6/20


7,500


7,495


7,406Rice Drilling B LLC

(f)

Upstream

L+725

1.3%

10/25/18


65,262


64,441


65,425Sabine Oil & Gas LLC

(d)(e)

Upstream

L+750

1.3%

12/31/18


35,702


36,631


35,702Samson Investment Co.

(e)

Upstream

L+475

1.3%

9/25/18


12,353


12,507


12,353Teine Energy Ltd.

(g)

Upstream

L+625

1.3%

5/17/19


16,459


16,215


16,335Total Safety U.S., Inc.

(e)(f)

Service & Equipment

L+800

1.3%

9/13/20


12,805


13,111


13,030UTEX Industries, Inc.

(e)

Service & Equipment

L+750

1.3%

4/10/21


23,514


23,699


23,617WildHorse Resources, LLC

(e)

Upstream

L+625

1.3%

12/13/18


64,500


63,212


64,822Total Senior Secured LoansSecond Lien















346,581


350,550


See notes to unaudited consolidated financial statements.

6

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Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured Bonds7.3%Edgen Murray Corp.

(d)(g)

Service & Equipment

8.8%



11/1/20

$
2,200

$
2,185

$
2,211Energy Future Intermediate Holding Co. LLC

(d)

Power

11.8%



3/1/22


12,000


12,784


13,230Energy Future Intermediate Holding Co. LLC

(d)

Power

6.9%



8/15/17


1,100


1,100


1,126Erickson Air-Crane Inc.

(g)

Service & Equipment

8.3%



5/1/20


10,000


10,000


9,815Gastar Exploration USA, Inc.



Upstream

8.6%



5/15/18


3,000


3,000


2,840Globe Luxembourg SCA

(g)

Service & Equipment

9.6%



5/1/18


10,000


9,607


9,970Iracore International Holdings, Inc.



Service & Equipment

9.5%



6/1/18


11,500


11,794


11,673Murray Energy Corp.



Upstream

8.6%



6/15/21


4,000


4,000


4,021Permian Tank & Manufacturing, Inc.

(e)

Service & Equipment

10.5%



1/15/18


5,000


5,126


4,800Prince Mineral Holding Corp.

(d)

Service & Equipment

11.5%



12/15/19


6,500


6,774


6,988Ryerson Inc.

(e)

Service & Equipment

9.0%



10/15/17


3,300


3,484


3,383Shale-Inland Holdings, LLC

(d)

Service & Equipment

8.8%



11/15/19


7,000


6,957


7,210Total Senior Secured Bonds















76,811


77,267Subordinated Debt46.2%Alta Mesa Holdings, L.P.

(d)

Upstream

9.6%



10/15/18


42,616


42,578


44,464Antero Resources Finance Corp.

(d)

Upstream

9.4%



12/1/17


4,753


5,043


5,059Approach Resources Inc.

(g)

Upstream

7.0%



6/15/21


10,000


10,000


10,123Athlon Holdings L.P.



Upstream

7.4%



4/15/21


5,000


5,000


4,982Aurora USA Oil & Gas, Inc.

(d)(g)

Upstream

9.9%



2/15/17


21,250


21,791


22,394BOE Intermediate Holding Corp.



Service & Equipment

9.8% PIK



11/1/17


3,250


3,218


3,134BreitBurn Energy Partners L.P.

(d)(g)

Upstream

7.9%



4/15/22


4,000


4,132


4,104Chaparral Energy Inc.

(d)(e)

Upstream

7.6%



11/15/22


18,500


19,734


18,882Chaparral Energy Inc.

(d)

Upstream

8.3%



9/1/21


4,000


4,084


4,227CHC Helicopter S.A.

(g)

Service & Equipment

9.4%



6/1/21


6,250


6,397


6,145Comstock Resources, Inc.

(d)(g)

Upstream

9.5%



6/15/20


10,000


9,573


10,930Crestwood Midstream Partners L.P.

(d)(g)

Midstream

7.8%



4/1/19


10,000


10,092


10,441CrownRock, L.P.

(d)

Upstream

7.1%



4/15/21


50,000


50,000


49,247


See notes to unaudited consolidated financial statements.

7

---



Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)EP Energy LLC

(d)

Upstream

7.8%



9/1/22

$
6,600

$
6,623

$
7,083EPE Holdings LLC

(d)

Upstream

8.1%



12/15/17


6,000


5,972


6,203Era Group Inc.

(d)(g)

Service & Equipment

7.8%



12/15/22


7,750


7,624


7,828Everest Acquisition LLC

(d)

Upstream

9.4%



5/1/20


19,250


19,901


21,771Foresight Energy LLC

(d)

Upstream

9.6%



8/15/17


4,000


4,106


4,280Forest Oil Corp.

(d)(g)

Upstream

7.5%



9/15/20


5,250


5,250


4,991Global Partners L.P.

(g)

Midstream

8.0%



2/14/18


70,000


68,018


70,000Hercules Offshore, Inc.

(d)(f)(g)

Service & Equipment

10.5%



10/15/17


5,000


5,048


5,325Hercules Offshore, Inc.

(g)

Service & Equipment

8.8%



7/15/21


7,000


7,000


7,000Legacy Reserves, L.P.

(g)

Upstream

6.6%



12/1/21


9,600


9,447


9,240Legacy Reserves, L.P.

(d)(g)

Upstream

8.0%



12/1/20


16,750


16,407


17,245Martin Midstream Partners L.P.

(d)(g)

Midstream

7.3%



2/15/21


3,000


3,000


3,025Memorial Production Partners, L.P.

(d)(g)

Upstream

7.6%



5/1/21


3,100


3,055


3,095QR Energy, L.P.

(d)(g)

Upstream

9.3%



8/1/20


13,000


13,134


13,438Rex Energy Corp.

(d)(g)

Upstream

8.9%



12/1/20


13,000


12,912


13,385Samson Investment Co.

(d)

Upstream

9.8%



2/15/20


23,000


23,031


24,358Sanchez Energy Corp.

(g)

Upstream

7.8%



6/15/21


4,000


4,000


3,990Seitel, Inc.

(d)

Service & Equipment

9.5%



4/15/19


5,000


5,000


4,974SemGroup Corp.

(g)

Midstream

7.5%



6/15/21


9,400


9,400


9,565Sidewinder Drilling Inc.

(d)

Service & Equipment

9.8%



11/15/19


21,500


21,602


21,250Summit Midstream Holdings, LLC

(g)

Midstream

7.5%



7/1/21


1,000


1,000


1,020Talos Production LLC

(d)

Upstream

9.8%



2/15/18


15,000


14,860


14,345The Kenan Advantage Group, Inc.

(d)

Service & Equipment

8.4%



12/15/18


10,250


10,420


10,660Zachry Holdings, Inc.

(d)

Service & Equipment

7.5%



2/1/20


13,150


13,424


13,544Total Subordinated Debt















481,876


491,747


See notes to unaudited consolidated financial statements.

8

---



Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry







Number of
Shares

Amortized
Cost

Fair
Value(c)Equity/Other4.5%(h)BBH Operating, LLC, Common Equity

(i)(j)

Upstream









1,000

$
1,000

$
919Fortune Creek Co-Invest I L.P., LP Interest

(g)(k)

Midstream









N/A


22,611


23,050Plains Offshore Operations Inc., Preferred Equity

(d)

Upstream









20,000


21,442


23,126Plains Offshore Operations Inc., Strike: $20.00, Warrants

(d)(j)

Upstream









405,378


689


893Total Equity/Other
















45,742


47,988TOTAL INVESTMENTS132.5%















$
1,390,997


1,411,171LIABILITIES IN EXCESS OF OTHER ASSETS(32.5%)



















(346,027
)NET ASSETS100.0%


















$
1,065,144


---

See notes to unaudited consolidated financial statements.

9

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments

As of December 31, 2012

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured LoansFirst Lien33.3%Boomerang Tube, LLC

(d)

Service & Equipment

L+950

1.5%

10/11/17

$
14,813

$
14,384

$
14,627Crestwood Holdings LLC

(d)

Midstream

L+825

1.5%

3/26/18


21,573


21,710


22,040Dynegy Midwest Generation LLC (CoalCo)

(d)

Power

L+775

1.5%

8/5/16


4,947


5,029


5,160Dynegy Power, LLC (GasCo)

(d)

Power

L+775

1.5%

8/5/16


5,052


5,129


5,298EquiPower Resources Holdings, LLC

(d)

Power

L+425

1.3%

12/21/18


1,995


2,002


2,027FREIF North American Power I LLC (TLB)



Power

L+450

1.5%

3/29/19


2,786


2,738


2,821FREIF North American Power I LLC (TLC)



Power

L+450

1.5%

3/29/19


440


432


446Hudson Products Holdings Inc.



Service & Equipment

Prime+475



6/7/17


1,671


1,671


1,677LSP Madison Funding, LLC

(d)

Power

L+425

1.3%

6/28/19


1,864


1,820


1,898NANA Development Corp.



Service & Equipment

L+550

1.5%

7/22/16


1,646


1,620


1,636Panda Sherman Power, LLC

(d)

Power

L+750

1.5%

9/14/18


909


896


925Panda Temple Power, LLC (TLA)



Power

L+700

1.5%

7/17/18


15,000


14,716


15,225Panda Temple Power, LLC (TLB)



Power

L+1000

1.5%

7/17/18


40,000


39,240


40,700Rice Drilling B LLC



Upstream

Prime+400

4.0%

6/30/14


45,000


44,179


45,000Star West Generation LLC

(d)

Power

L+450

1.5%

5/17/18


8,338


8,316


8,375Tallgrass Operations, LLC

(d)

Midstream

L+400

1.3%

11/13/18


2,342


2,319


2,369Texas Competitive Electric Holdings Co. LLC

(d)(e)

Power

L+450



10/10/17


40,009


26,229


26,756Total Safety U.S., Inc.

(d)

Service & Equipment

L+625

1.3%

10/31/17


8,211


8,132


8,321Willbros United States Holdings, Inc.

(d)(f)

Service & Equipment

L+750

2.0%

6/30/14


5,438


5,360


5,451Total Senior Secured LoansFirst Lien















205,922


210,752Unfunded Loan Commitments















(10,000
)

(10,000
)Net Senior Secured LoansFirst Lien















195,922


200,752Senior Secured LoansSecond Lien12.2%Brand Energy & Infrastructure Services, Inc.

(d)(e)

Service & Equipment

L+975

1.3%

10/23/19


23,000


22,039


22,732Brock Holdings III, Inc.

(d)

Service & Equipment

L+825

1.8%

3/16/18


17,693


17,663


17,826EquiPower Resources Holdings, LLC

(d)

Power

L+850

1.5%

6/21/19


8,000


7,850


8,233Southern Pacific Resource Corp.

(d)(f)

Upstream

Prime+750



1/7/16


4,470


4,523


4,530Venoco, Inc.



Upstream

L+700

1.5%

6/30/17


9,821


9,632


10,030WP CPP Holdings, LLC

(d)(e)

Service & Equipment

L+925

1.3%

6/28/20


10,000


9,900


10,100Total Senior Secured LoansSecond Lien















71,607


73,451Senior Secured Bonds5.8%CEMEX Finance LLC

(d)(f)

Service & Equipment

9.4%



10/12/22


4,900


5,089


5,539CVR Refining, LLC

(d)(f)

Downstream

6.5%



11/1/22


3,000


3,000


2,978Edgen Murray Corp.

(d)(f)

Service & Equipment

8.8%



11/1/20


2,200


2,185


2,222Energy Future Intermediate Holding Co. LLC

(d)

Power

6.9%



8/15/17


1,100


1,100


1,173Energy Future Intermediate Holding Co. LLC

(d)

Power

11.8%



3/1/22


10,000


10,525


11,175Prince Mineral Holding Corp.

(d)

Service & Equipment

11.5%



12/15/19


3,250


3,212


3,392Ryerson Inc.



Service & Equipment

9.0%



10/15/17


1,300


1,300


1,321Shale-Inland Holdings, LLC

(d)

Service & Equipment

8.8%



11/15/19


7,000


6,955


7,358Total Senior Secured Bonds















33,366


35,158


See notes to unaudited consolidated financial statements.

10

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Subordinated Debt57.4%Alta Mesa Holdings, L.P.

(d)

Upstream

9.6%



10/15/18

$
42,616

$
42,577

$
44,052Antero Resources Finance Corp.

(d)

Upstream

9.4%



12/1/17


4,753


5,123


5,245Atlas Pipeline Partners, L.P.

(d)(f)

Midstream

6.6%



10/1/20


1,300


1,300


1,353Aurora USA Oil & Gas, Inc.

(d)(f)

Upstream

9.9%



2/15/17


21,250


21,853


22,922BreitBurn Energy Partners L.P.

(d)(f)

Upstream

7.9%



4/15/22


4,000


4,137


4,170Chaparral Energy Inc.

(d)

Upstream

8.3%



9/1/21


4,000


4,087


4,340Chaparral Energy Inc.

(d)

Upstream

7.6%



11/15/22


9,000


9,299


9,450Comstock Resources, Inc.

(d)(f)

Upstream

9.5%



6/15/20


12,000


11,463


12,744Crestwood Midstream Partners L.P.

(d)(f)

Midstream

7.8%



4/1/19


10,000


10,098


10,413CrownRock, L.P.



Upstream

10.0%



8/15/16


10,000


10,689


10,738EP Energy LLC

(d)

Upstream

7.8%



9/1/22


6,600


6,624


7,054EPE Holdings LLC

(d)

Upstream

8.1%



12/15/17


6,000


5,970


5,948EPL Oil & Gas, Inc.

(d)(f)

Upstream

8.3%



2/15/18


3,200


3,169


3,300Era Group Inc.

(d)(f)

Service & Equipment

7.8%



12/15/22


9,750


9,586


9,628Everest Acquisition LLC

(d)

Upstream

9.4%



5/1/20


14,250


14,250


16,067Foresight Energy LLC

(d)

Upstream

9.6%



8/15/17


4,000


4,117


4,260Forest Oil Corp.

(d)(f)

Upstream

7.5%



9/15/20


5,250


5,250


5,502GulfMark Offshore, Inc.

(d)(f)

Service & Equipment

6.4%



3/15/22


5,925


5,954


6,118Halcón Resources Corp.

(d)(f)

Upstream

8.9%



5/15/21


11,750


11,791


12,535Heckmann Corp.

(d)(f)

Service & Equipment

9.9%



4/15/18


5,500


5,512


5,697Hercules Offshore, Inc.

(d)(f)

Service & Equipment

10.5%



10/15/17


5,000


5,053


5,438Hiland Partners, L.P.

(d)

Midstream

7.3%



10/1/20


1,750


1,750


1,881Legacy Reserves, L.P.

(d)(f)

Upstream

8.0%



12/1/20


16,750


16,390


17,169Lone Pine Resources Canada Ltd.

(d)(f)

Upstream

10.4%



2/15/17


2,000


1,975


1,871NRG Energy, Inc.

(d)(f)

Power

6.6%



3/15/23


6,750


6,750


7,215NRG Energy, Inc.

(d)(f)

Power

8.3%



9/1/20


4,750


4,676


5,338QR Energy, L.P.

(d)(f)

Upstream

9.3%



8/1/20


15,000


15,114


15,881Quicksilver Resources Inc.

(d)(f)

Upstream

7.1%



4/1/16


2,250


2,155


1,806Resolute Energy Corp.

(d)(f)

Upstream

8.5%



5/1/20


10,800


10,986


10,976Rex Energy Corp.

(d)(f)

Upstream

8.9%



12/1/20


15,000


14,896


15,113Samson Investment Co.

(d)

Upstream

9.8%



2/15/20


25,000


25,033


26,500Sidewinder Drilling Inc.

(d)

Service & Equipment

9.8%



11/15/19


19,500


19,587


19,573Silver II US Holdings, LLC

(d)(f)

Service & Equipment

7.8%



12/15/20


3,000


3,000


3,116The Kenan Advantage Group, Inc.

(d)

Service & Equipment

8.4%



12/15/18


7,250


7,250


7,496Vanguard Natural Resources, LLC

(d)(f)

Upstream

7.9%



4/1/20


4,750


4,750


4,940Total Subordinated Debt















332,214


345,849


See notes to unaudited consolidated financial statements.

11

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry







Number of
Shares

Amortized
Cost

Fair
Value(c)Equity/Other7.6%(g)Fortune Creek Co-Invest I L.P., LP Interest

(f)(h)

Midstream








N/A

$
23,345

$
22,619Plains Offshore Operations Inc., Preferred Equity

(d)

Upstream








209,227


20,776


22,370Plains Offshore Operations Inc., Strike: $20.00, Warrants

(d)(i)

Upstream








405,378


689


973Total Equity/Other















44,810


45,962TOTAL INVESTMENTS116.3%














$
677,919


701,172LIABILITIES IN EXCESS OF OTHER ASSETS(16.3%)


















(98,283
)NET ASSETS100.0%

















$
602,889




Total Return Swap











Notional
Amount



Unrealized
AppreciationCitibank TRS Facility (Note 8)

(f)









$
131,632




$
3,141


(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 credit
facility with Deutsche Bank AG, New York Branch (see Note 8).(e)Position
or portion thereof unsettled as of December 31, 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 December 31, 2012, 72.3% of the
Company's total assets represented qualifying assets. In addition, the Company also calculated 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 was an eligible portfolio company.
On this basis, 72.5% of the Company's total assets represented qualifying assets as of December 31, 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 December 31, 2012.(i)Security
is non-income producing.


See notes to unaudited consolidated financial statements.

12

---





Table of Contents

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 were not affiliated with the Company or the Company's investment adviser, FS Investment Advisor, LLC, or FS Advisor, a private investment firm that is
registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company. 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, 2013, the Company had three wholly-owned financing subsidiaries, FSEP
Term Funding, LLC, or FSEP Funding, EP Investments LLC, or EP Investments, and EP Funding LLC, or EP Funding, and a fourth wholly-owned subsidiary, FSEP-BBH, Inc., through
which it holds its common equity interest in BBH Operating, LLC, a non-controlled and non-affiliated portfolio company. The unaudited consolidated financial statements include both the
Company's accounts and the accounts of its wholly-owned subsidiaries as of June 30, 2013. All significant intercompany transactions have been eliminated in consolidation.

The
Company's investment objective is to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power
industry. The Company's investment policy is to invest, under normal circumstances, at least 80% of its total assets in securities of energy and power related, or Energy, companies. The Company
considers Energy companies to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or
marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power.

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 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 consolidated financial statements as of and for the year ended
December 31, 2012 included in the Company's annual report on Form 10-K. Operating results for the three and six months ended June 30, 2013 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2013. The December 31, 2012 consolidated balance sheet and consolidated schedule of

13

---



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)

investments
are derived from the Company's audited consolidated financial statements for the year ended December 31, 2012. 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 unaudited consolidated financial statements in conformity with GAAP requires management to
make estimates
and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share
amounts.

Capital Gains Incentive Fee:The Company has entered into an investment advisory and administrative services agreement with FS Advisor,
dated as of
April 28, 2011, which was amended on August 10, 2012, and which, as amended, is referred to herein as the investment advisory and administrative services agreement. Pursuant to the terms
of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of
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 neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive
fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, 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 entitled to an incentive fee with respect to unrealized gains unless and until such gains
are actually realized.

In
addition, the Company historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which is described more fully in
Note 8), as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FS Advisor
with respect to realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC, or the Staff, informed the Company that it is their
interpretation of the applicable language in the Advisers Act that the Company should "look through" the TRS in calculating its capital gains incentive fee. Under this "look through" methodology, the
portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities
underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FS

14

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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)

Advisor
pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or
securities underlying the TRS would further reduce the capital gains incentive fee payable to FS Advisor with respect to realized gains. FS Advisor voluntarily agreed to waive any capital gains
incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount
of capital gains incentive fee determined in respect of the TRS on a "look through" basis under which the Company treats the reference assets underlying the TRS as investments of the Company and
(ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FS Advisor with respect to the portion of the net settlement payments received by the Company
pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a "look through" basis. As of June 30, 2013, the aggregate capital gains incentive
fees paid to FS Advisor in prior periods and accrued as of such date with respect to realized gains in accordance with GAAP were less than the fees which would have been payable in accordance with the
"look through" methodology. On May 24, 2013, the Company terminated the TRS.

Subordinated Income Incentive Fee:Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be
entitled to
receive a subordinated incentive fee on income. The
subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of "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. Thereafter, FS
Advisor will receive 20.0% of pre-incentive fee net investment income.

Reclassifications:Certain amounts in the unaudited consolidated financial statements for the three and six months ended June 30,
2012 have
been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three and six months ended June 30, 2013. These reclassifications had
no material impact on the Company's consolidated financial position, results of operations or cash flows as previously reported.

15

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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 3. Share Transactions

Below is a summary of transactions with respect to the Company's common shares during the six months ended June 30, 2013 and 2012:

Six Months Ended June 30,2013

2012Shares

Amount

Shares

AmountGross Proceeds from Offering


46,470,564

$
486,802


20,083,838

$
198,748Reinvestment of Distributions


1,735,054


16,554


251,579


2,271Total Gross Proceeds


48,205,618


503,356


20,335,417


201,019Commissions and Dealer Manager Fees





(42,949
)




(17,647
)Net Proceeds to Company


48,205,618


460,407


20,335,417


183,372Share Repurchase Program


(106,938
)

(1,017
)




Net Proceeds from Share Transactions


48,098,680

$
459,390


20,335,417

$
183,372


Status of Continuous Public Offering

Since commencing its continuous public offering and through August 13, 2013, the Company has sold 124,313,565 common shares (as
adjusted for share distributions) for gross proceeds of $1,270,320. As of August 13, 2013, the Company had raised total gross proceeds of $1,290,524, 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, 2013 and 2012, the Company sold 48,205,618 and 20,335,417 common shares (as adjusted for share distributions) for gross proceeds of
$503,356 and $201,019 at an average price per share of $10.50 and $9.89, respectively. The gross proceeds received during the six months ended June 30, 2013 and 2012 include reinvested
shareholder distributions of $16,554 and $2,271, respectively, for which the Company issued 1,735,054 and 251,579 common shares (as adjusted for share distributions), respectively. During the period
from July 1, 2013 to August 13, 2013, the Company sold 13,806,018 common shares for gross proceeds of $144,917 at an average price per share of $10.50.

The
proceeds from the issuance of common shares as presented on the Company's unaudited consolidated statements of changes in net assets and unaudited consolidated statements of cash
flows are presented net of selling commissions and dealer manager fees of $42,949 and $17,647 for the six months ended June 30, 2013 and 2012, respectively.

Share Repurchase Program

The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company's board of trustees will
consider the following factors, among others, in making its

16

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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 3. Share Transactions (continued)

determination
regarding whether to cause the Company to offer to repurchase common shares and under what terms:



The
Company currently intends to limit the number of common shares to be repurchased during any calendar year to the number of common shares it can repurchase with the proceeds it
receives from the 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 the liquidation of securities investments as of the end of the applicable period to repurchase common shares. In addition, the Company will limit the number of common shares
to be repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of common shares
that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such common shares on each date of repurchase at a price equal to
90% of the offering price in effect on each date of repurchase. The Company's board of trustees may amend, suspend or terminate the share repurchase program at any time, upon 30 days' notice.
The first such tender offer commenced in August 2012, and the repurchase occurred in connection with the Company's October 1, 2012 semi-monthly closing.

The
following table sets forth the number of common shares repurchased by the Company under its share repurchase program during the six months ended June 30, 2013:

For the Three Months Ended

Repurchase Date

Shares
Repurchased

Percentage
of Shares
Tendered
That Were
Repurchased

Repurchase
Price
Per Share

Aggregate
Consideration
for Repurchased
SharesDecember 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228March 31, 2013

April 1, 2013


82,689


100
%
$
9.540

$
789


On
July 1, 2013, the Company repurchased 76,858 common shares (representing 100% of common shares tendered for repurchase) at $9.675 per share for aggregate consideration totaling
$744.

17

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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

Compensation of the Dealer Manager and Investment Adviser

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

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.
Thereafter, FS Advisor will receive 20.0% of the pre-incentive fee net investment income.

The
second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon
termination of the
investment advisory and administrative services agreement). This fee equals 20.0% of the Company's incentive fee capital gains, which equal the Company's realized capital gains on a cumulative basis
from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of
any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the capital gains incentive fee based
on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such
fee is payable with respect to unrealized gains unless and until such gains are actually realized. See Note 2 for a discussion of the treatment of the TRS with respect to the calculation of the
capital gains incentive fee.

The
Company reimburses FS Advisor for expenses necessary to perform services related to the Company's administration and operations. 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
allocations and/or 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. Finally, the Company's board of trustees

18

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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)

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.

Franklin
Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate of FS Advisor, has funded certain of the Company's offering costs and
organization costs. 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. 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. Since inception through
June 30, 2013, Franklin Square Holdings has funded $3,143 in offering and organization costs. During the six months ended June 30, 2013 and 2012, the Company paid total reimbursements of
$0 and $2,051, respectively, to FS Advisor and its affiliates. The reimbursements were recorded as a reduction of capital. As of June 30, 2013, no amounts remain reimbursable to FS Advisor and
its affiliates under this arrangement.

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

The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six
months ended June 30, 2013 and 2012:

Three Months
Ended
June 30,

Six Months
Ended
June 30,Related Party

Source Agreement

Description

2013

2012

2013

2012FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
6,654

$
1,277

$
11,365

$
2,052FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)

$
(1,621
)
$
(285
)
$
1,989

$
234FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$


$


$
753

$
FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
544

$
139

$
997

$
201FS2

Dealer Manager Agreement

Dealer Manager Fee(5)

$
4,747

$
2,390

$
8,922

$
3,666


(1)During
the six months ended June 30, 2013 and 2012, $8,233 and $0, respectively, in base management fees were paid to FS Advisor. During the six
months ended June 30, 2012, $1,121 in base management fees were applied to offset the liability of Franklin Square Holdings under the expense reimbursement agreement (see "Expense
Reimbursement").


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 4. Related Party Transactions (continued)

Of
the $6,654 in base management fees accrued and payable as of June 30, 2013, it is intended that the entire amount will be paid to FS Advisor. (2)During
the three months ended June 30, 2013 and 2012, the Company reversed $1,621 and $285, respectively, of capital gains incentive fees previously
accrued based on the performance of its portfolio. During the six months ended June 30, 2013 and 2012, the Company accrued capital gains incentive fees of $1,989 and $234, respectively, based
on the performance of its portfolio, of which $(33) and $234, respectively, was based on unrealized gains (or a decline in unrealized gains) and $2,022 and $0, respectively, was based on realized
gains. No such fees are actually payable by the Company with respect to such unrealized gains unless and until those gains are actually realized. As of December 31, 2012, $953 in capital gains
incentive fees were payable by the Company to FS Advisor, all of which was paid to FS Advisor during the six months ended June 30, 2013. The Company did not pay any amounts to FS Advisor in
respect of the capital gains incentive fee during the six months ended June 30, 2012.(3)During
the six months ended June 30, 2013, the Company accrued a subordinated incentive fee on income of $753 based upon the performance of its
portfolio. As of June 30, 2013, all of the subordinated incentive fee on income was paid to FS Advisor.(4)During
the six months ended June 30, 2013 and 2012, $857 and $144, respectively, of the accrued administrative services expenses related to the
allocation of costs of administrative personnel for services rendered to the Company by FS Advisor and the remainder related to other reimbursable expenses. The Company paid $757 and $232 in
administrative services expenses to FS Advisor during the six months ended June 30, 2013 and 2012, respectively.(5)Represents
aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers.


Capital Contribution by FS Advisor and GSO

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

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains the Company's investment adviser. In connection with the same private placement, certain members of the Company's board of trustees and other individuals and entities affiliated with FS
Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted
for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, the Company issued an aggregate of 2,244,875
common shares (as adjusted for share distributions) for aggregate proceeds of approximately $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of
August 13, 2013, the Company has sold an aggregate of 3,301,813 common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,646 to members of its board of trustees
and individuals and entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.

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 4. Related Party Transactions (continued)

Potential Conflicts of Interest

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 the Company 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 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.

Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain
conditions, to co-invest in certain privately negotiated investment transactions with affiliates of FS Advisor, including FS Investment Corporation and FS Investment Corporation II and any future BDCs
that are advised by FS Advisor or its affiliated investment advisers. Because the Company did not seek exemptive relief to engage in co-investment transactions with GSO and its affiliates, the Company
will be permitted to co-invest with GSO and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

Pursuant to an expense support and conditional reimbursement agreement, dated as of February 14, 2012 and amended as of
May 16, 2013, or, as amended, 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 its net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on
account of

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 4. Related Party Transactions (continued)

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 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; provided, however, that
(i) the Company will only reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after
July 1, 2013 to the extent that the payment of such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause "other operating expenses" (as defined
below) (on an annualized basis and net of any expense reimbursement payments received by the Company during such fiscal year) to exceed the lesser of (A) 1.75% of the Company's average net
assets attributable to its common shares for the fiscal year-to-date period after taking such payments into account and (B) the percentage of the Company's average net assets attributable to
its common shares represented by "other operating expenses" during the fiscal year in which such expense support payment from Franklin Square Holdings was made (provided, however, that this
clause (B) shall not apply to any reimbursement payment which relates to an expense support payment from Franklin Square Holdings made during the same fiscal year) and (ii) the Company
will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the aggregate amount of distributions per share declared by the Company in such calendar
quarter is less than the aggregate amount of distributions per share declared by the Company in the calendar quarter in which Franklin Square Holdings made the expense support
payment to which such reimbursement relates. "Other operating expenses" means the Company's total "operating expenses" (as defined below), excluding base management fees, incentive fees, organization
and offering expenses, financing fees and costs, interest expense, brokerage commissions and extraordinary expenses. "Operating expenses" means all operating costs and expenses incurred, as determined
in accordance with GAAP for investment companies.

The
Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. 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.

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

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

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 4. Related Party Transactions (continued)

During the six months ended June 30, 2012, the Company accrued $1,432 for reimbursements that Franklin Square Holdings had agreed to pay. As of June 30, 2013, the Company
had no reimbursements due from Franklin Square Holdings.

Under
the expense reimbursement agreement, amounts reimbursed to the Company by Franklin Square Holdings may become subject to repayment by the Company in the future. There were no
amounts accrued during the six months ended June 30, 2013 and 2012 for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, the Company had accrued $1,083
for expense recoupments payable to Franklin Square Holdings, all of which was paid to Franklin Square Holdings during the six months ended June 30, 2013. As of June 30, 2013, no further
amounts remain subject to repayment by the Company to Franklin Square Holdings in the future.

FS Benefit Trust

On May 30, 2013, FS Benefit Trust, or FS Trust, was formed as a Delaware statutory trust for the purpose of awarding equity
incentive compensation to employees of Franklin Square Holdings and its affiliates. In connection with the Company's semi-monthly closing occurring on June 17, 2013, FS Trust purchased
approximately $43 of the Company's shares at a purchase price equal to 90% of the offering price in effect on such date, or $9.675 per share.

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, 2013 and 2012:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2012March 31, 2012(1)

$
0.1555

$
1,789June 30, 2012

$
0.1563

$
3,419Fiscal 2013March 31, 2013

$
0.1617

$
12,496June 30, 2013

$
0.1634

$
16,686


(1)The
per share distribution has been retroactively adjusted to reflect the share distribution declared in February 2012 as discussed below.


On
July 1, 2013, the Company's board of trustees declared two regular semi-monthly cash distributions of $0.027334 per share each, which were paid on July 31, 2013 to
shareholders of record on July 15, 2013 and July 30, 2013, respectively. On August 8, 2013, the Company's board of trustees declared two regular semi-monthly cash distributions of
$0.027334 per share each, which will be paid on August 30, 2013 to shareholders of record on August 15, 2013 and August 29, 2013, 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 cash distribution, its shareholders will receive
distributions in cash

23

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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)

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 the Company on account of preferred and common equity
investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make
distributions.

The
Company expects that for a period of time following commencement of its continuous public offering, which time period may be significant, substantial portions of the Company's
distributions may be funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS
Advisor, that are subject to repayment by the Company within three years. The purpose of this arrangement is to ensure that no portion of the Company's distributions to shareholders will be paid from
offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on the Company's investment performance and can only be
sustained if the Company achieves positive investment performance in future periods and/or Franklin Square Holdings continues to make such reimbursements or waivers of such fees. The Company's future
repayments of amounts reimbursed or waived by Franklin Square Holdings and its affiliates will reduce the distributions that shareholders would otherwise receive in the future. There can be no
assurance that the Company will achieve the performance necessary to sustain its distributions or that the Company will be able to pay distributions at a specific rate or at all. Franklin Square
Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. For the six months ended June 30, 2013, no portion of the distributions
paid during such period was funded through the reimbursement of operating expenses by Franklin Square Holdings.

The
following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common shares during the six months ended June 30, 2013 and
2012:

Six Months Ended June 30,2013

2012Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$



Borrowings











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


29,182


100
%

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

$
29,182


100
%
$
5,208


100
%


(1)During
the six months ended June 30, 2013 and 2012, 97% and 89%, respectively, of the Company's gross investment income was attributable to cash
interest earned and 3% and 11%, respectively, was attributable to non-cash accretion of discount.


24

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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
Company's net investment income on a tax basis for the six months ended June 30, 2013 and 2012 was $29,827 and $4,066, respectively. As of June 30,
2013, the Company had $645 of undistributed net investment income on a tax basis. As of December 31, 2012, the Company had distributed all of its net investment income on a tax basis.

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 deferral and 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 a portion of the periodic net settlement payments due on the
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, 2013 and 2012:

Six Months Ended
June 30,2013

2012GAAP-basis net investment income

$
24,530

$
4,641Income on limited partnership interest


(1,274
)

(1,304
)Tax-basis deferral and amortization of organization costs


(12
)

(12
)Reversal of incentive fee accrual on unrealized gains


(33
)

234Tax-basis net investment income portion of total return swap payments


6,602


487Accretion of discount on total return swap


14


20Tax-basis net investment income

$
29,827

$
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 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 Form 1099-DIV.

The
following table reflects the share distribution that the Company has declared on its common shares through June 30, 2013:

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.

25

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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
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 did not represent a
taxable distribution. Specific tax characteristics of all distributions are reported to shareholders annually on Form 1099-DIV.

As
of June 30, 2013 and December 31, 2012, the components of accumulated earnings on a tax basis were as follows:

June 30, 2013
(Unaudited)

December 31, 2012Distributable ordinary income net of distributions received on limited partnership interest

$
10,209

$
171Distribution receivable on limited partnership interest


940


270Incentive fee accrual on unrealized gains


(5,496
)

(5,529
)Unamortized organization costs


(303
)

(315
)Net unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency(1)


22,963


28,451$
28,313

$
23,048


(1)As
of June 30, 2013 and December 31, 2012, the gross unrealized appreciation on the Company's investments and total return swap and gain on
foreign currency was $30,424 and $29,698, respectively. As of June 30, 2013 and December 31, 2012, the gross unrealized depreciation on the Company's investments and loss on foreign
currency was $7,461 and $1,247, respectively.


The
aggregate cost of the Company's investments for federal income tax purposes totaled $1,388,125 and $675,823 as of June 30, 2013 and December 31, 2012, respectively. The
aggregate net unrealized appreciation on a tax basis was $22,963 as of June 30, 2013. The aggregate net unrealized appreciation on a tax basis, including the Company's TRS with Citibank, N.A.,
or Citibank, was $28,451 as of December 31, 2012.

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 6. Investment Portfolio

The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of June 30, 2013 and December 31, 2012:

June 30, 2013
(Unaudited)

December 31, 2012Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
439,987

$
443,619


31
%
$
195,922

$
200,752


29
%Senior Secured LoansSecond Lien


346,581


350,550


25
%

71,607


73,451


10
%Senior Secured Bonds


76,811


77,267


6
%

33,366


35,158


5
%Subordinated Debt


481,876


491,747


35
%

332,214


345,849


49
%Equity/Other


45,742


47,988


3
%

44,810


45,962


7
%$
1,390,997

$
1,411,171


100
%
$
677,919

$
701,172


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, 2013, the Company had two such investments with an aggregate unfunded commitment of $24,389. As of
December 31, 2012, the Company had one such investment with an unfunded commitment of $10,000. The Company maintains sufficient cash on hand to fund such unfunded loan commitments should the
need arise.

The
table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2013
and December 31, 2012:

June 30, 2013
(Unaudited)

December 31, 2012Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
568,915


40
%
$
335,486


48
%Midstream


212,711


15
%

60,675


9
%Downstream


4,314


0
%

2,978


0
%Service & Equipment


456,459


33
%

159,268


23
%Power


168,772


12
%

142,765


20
%Total

$
1,411,171


100
%
$
701,172


100
%


27

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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

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.

As
of June 30, 2013 and December 31, 2012, the Company's investments were categorized as follows in the fair value hierarchy:

June 30, 2013
(Unaudited)

December 31, 2012Valuation Inputs

Investments

Investments

Total Return
SwapLevel 1Price quotations in active markets

$


$


$
Level 2Significant other observable inputs








Level 3Significant unobservable inputs


1,411,171


701,172


3,141$
1,411,171

$
701,172

$
3,141


The
Company's investments as of June 30, 2013 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 by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an
independent third-party pricing service and screened for validity by such service. Two senior secured loan investments and one subordinated debt investment, for which broker quotes were not available,
were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing
interest rates for like investments, call features and other relevant terms of the debt. All of the Company's equity/other investments were valued by the same independent valuation firm, which
determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before
interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or

28

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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)

liquidation
value. One subordinated debt investment, which was newly-issued and purchased near June 30, 2013, was valued at cost, as the Company's board of trustees determined that the cost of
such investment was the best indication of its fair value.

The
Company's investments as of December 31, 2012 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 by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an
independent third-party pricing service and screened for validity by such service. One senior secured loan investment, for which broker quotes were not available, was valued by an independent
valuation firm, which determined the fair value of such investment by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like
investments, call features and other relevant terms of the debt. All of the Company's equity/other investments were valued by the same independent valuation firm, which determined the fair value of
such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or,
in limited instances, book value or liquidation value. The Company valued its TRS in accordance with the agreements between EP Investments and Citibank which collectively established the TRS and are
collectively referred to herein as the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS was based on the increase or decrease in the value of the assets underlying the TRS, together
with accrued interest income, interest expense and certain other expenses incurred under the TRS. The assets underlying the TRS were valued by Citibank. Citibank based 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 were sent to the Company for
review and testing. The Company's valuation committee and board of trustees reviewed and approved the value of the TRS, as well as the value of the assets 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 had any questions or concerns regarding the valuation of the assets
underlying the TRS, such valuation was discussed or challenged pursuant to the terms of the TRS. For additional information 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 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.

29

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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)

The
following is a reconciliation for the six months ended June 30, 2013 and 2012 of investments for which significant unobservable inputs (Level 3) were used in
determining fair value:

For the Six Months Ended June 30, 2013Senior Secured
Loans
First Lien

Senior Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
200,752

$
73,451

$
35,158

$
345,849

$
45,962

$
701,172Accretion of discount (amortization of premium)


1,338


244


(46
)

(136
)

(68
)

1,332Net realized gain (loss)


879


(52
)

236


2,358





3,421Net change in unrealized appreciation (depreciation)


(1,198
)

2,125


(1,336
)

(3,764
)

1,094


(3,079
)Purchases


440,555


299,169


56,866


259,208


1,000


1,056,798Sales and redemptions


(198,707
)

(24,387
)

(13,611
)

(111,768
)




(348,473
)Net transfers in or out of Level 3

















Fair value at end of period

$
443,619

$
350,550

$
77,267

$
491,747

$
47,988

$
1,411,171The 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

$
883

$
2,732

$
(907
)
$
(1,333
)
$
1,094

$
2,469




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
)


30

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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)

The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets valued by an
independent valuation firm as of June 30, 2013 and December 31, 2012 were as follows:

Type of Investment

Fair Value at
June 30, 2013(1)
(Unaudited)

Valuation
Technique(2)

Unobservable
Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
30,750

Market Comparables

Market Yield (%)

8.0% - 8.5%

8.3%Subordinated Debt

$
70,000

Market Comparables

Market Yield (%)

7.8% - 8.3%

8.0%Equity/Other

$
47,988

Market Comparables

Market Yield (%)

15.3% - 15.8%

15.5%Production Multiples (Mmb/d)

$1,255.0 - $1,305.0

$1,280.0Proved Reserves Multiples (Mmboe)

$4.0x - $4.5x

$4.3PV-10 Multiples (x)

0.1x - 0.2x

0.2xDiscounted Cash Flow

Discount Rate (%)

10.3% - 17.3%

11.5%Option Valuation Model

Volatility (%)

40.8%

40.8%


(1)Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices
from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. One subordinated debt investment,
which was newly-issued and purchased near June 30, 2013, was valued at cost, as the Company's board of trustees determined that the cost of such investment was the best indication of its fair
value. As of June 30, 2013, $23,500 of the senior secured loans-first lien investments consisted of an unfunded loan commitment.(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, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value
measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher)
fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly
higher (lower) fair value measurement.


Type of Investment

Fair Value at
December 31, 2012(1)

Valuation
Technique(2)

Unobservable
Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
45,000

Market Comparables

Market Yield (%)

8.0%

8.0%Equity/Other

$
45,962

Market Comparables

Market Yield (%)

15.3% - 15.8%

15.5%Discounted Cash Flow

Discount Rate (%)

12.0% - 17.3%

15.2%Option Valuation Model

Volatility (%)

44.0%

44.0%


(1)Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices
from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. The TRS was valued in accordance with
the TRS Agreement as discussed above. As of December 31, 2012, $10,000 of the senior secured loans-first lien investment consisted of an unfunded loan commitment.(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.


31

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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. Financing Arrangements

The following table presents summary information with respect to the Company's outstanding financing arrangements as of June 30, 2013. For additional information regarding these
financing facilities, please see the notes to the Company's audited financial statements contained in its annual report on Form 10-K for the year ended December 31, 2012 and the
additional disclosure set forth in this Note 8.

Facility

Type of Facility

Rate

Amount
Outstanding

Amount
Available

Maturity DateEP Funding Credit Facility

Revolving


L + 2.50
%
$
113,000

$
62,000


May 24, 2015FSEP Funding Credit Facility

Revolving


L + 1.80
%
$
240,000

$



June 24, 2014


Total Return Swap

On May 24, 2013, the Company's wholly-owned, special-purpose financing subsidiary, EP Investments, and Citibank entered
into a Termination Acknowledgment (TRS), or the termination acknowledgment, pursuant to which EP Investments and Citibank agreed to immediately terminate the TRS Agreement and all transactions
thereunder.

The
TRS was for a portfolio of senior secured floating rate loans and other debt securities with a maximum notional amount of $200,000. EP Investments received from Citibank all interest
and fees payable in respect of the assets underlying the TRS. EP Investments paid to Citibank interest at a rate equal to the one-month London Interbank Offered Rate, or LIBOR, plus 1.30% per annum on
the full notional amount of the assets subject to the TRS. In addition, upon the termination or repayment of any asset subject to the TRS, EP Investments either received from Citibank the appreciation
in the value of such asset or paid to Citibank any depreciation in the value of such asset.

EP
Investments was permitted to terminate the TRS upon prior written notice to Citibank, and no termination fee was payable in connection with the termination of the TRS.

Upon
the termination of the TRS, the Company recognized $9,011 of gains, $2,467 of which represented periodic net settlement payments due on the TRS.

EP Funding Credit Facility

On May 24, 2013, EP Funding, the Company's newly formed, wholly-owned, special-purpose financing subsidiary, entered into a
revolving credit facility, or the EP Funding credit facility, with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The EP Funding
credit facility provides for borrowings in an aggregate principal amount up to $175,000 on a committed basis.

The
Company may contribute cash or debt securities to EP Funding from time to time, subject to certain restrictions set forth in the EP Funding credit facility, and will retain a
residual interest in any assets contributed through its ownership of EP Funding or will receive fair market value for any debt securities sold to EP Funding. EP Funding may purchase additional debt
securities from various sources. EP Funding has appointed the Company to manage its portfolio of debt securities pursuant to the terms of an investment management agreement. EP Funding's obligations
to Citibank under the facility are secured by a first priority security interest in substantially all of the assets of EP Funding, including its portfolio of debt securities. The obligations of EP
Funding under the facility are

32

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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. Financing Arrangements (continued)

non-recourse
to the Company and the Company's exposure under the facility is limited to the value of the Company's investment in EP Funding.

Borrowings
under the EP Funding credit facility accrue interest at a rate equal to three-month LIBOR plus 2.50% per annum during the first eighteen months of the facility and three-month
LIBOR plus 2.75% per annum thereafter. Borrowings under the facility are subject to compliance with an equity coverage ratio with respect to the current value of EP Funding's portfolio and a loan
compliance test with respect to the initial acquisition of each debt security in EP Funding's portfolio.

Beginning
August 21, 2013, EP Funding will be required to pay a non-usage fee to the extent the aggregate principal amount available under the EP Funding credit facility has not
been borrowed. Outstanding borrowings under the facility will be amortized beginning six months prior to the scheduled maturity date of May 24, 2015. Any amounts borrowed under the facility
will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 24, 2015.

As
of June 30, 2013, $113,000 was outstanding under the EP Funding credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value.
The Company incurred costs of $657 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest
expense over the life of the facility. As of June 30, 2013, $623 of such deferred financing costs had yet to be amortized to interest expense.

The
effective interest rate under the EP Funding credit facility was 2.85% per annum as of June 30, 2013. Interest is payable quarterly in arrears. The Company recorded interest
expense of $134 for the three and six months ended June 30, 2013, of which $34 related to the amortization of deferred financing costs. The Company did not pay any interest expense for the six
months ended June 30, 2013. The average borrowings under the facility for the period since the Company commenced borrowing thereunder to June 30, 2013 were $69,667, with a weighted
average interest rate of 2.86%.

Under
the EP Funding credit facility, EP 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 facility contains the following events of default: (a) the
failure to make principal or interest payments within five business days of when due; (b) the insolvency or bankruptcy of EP Funding or the Company; (c) the failure of EP Funding to be
beneficially owned and controlled by the Company; (d) the resignation or removal of the Company as EP Funding's investment manager; and (e) GSO (or any affiliate thereof or any
replacement thereof approved in writing by Citibank) no longer serving as the investment sub-adviser to the Company. Upon the occurrence of an event of default, Citibank may declare the outstanding
principal and interest and all other amounts owing under the facility immediately due and payable. During the continuation of an event of default, EP Funding must pay interest at a default rate.

FSEP Funding Credit Facility

On June 24, 2011, FSEP Funding, the Company's wholly-owned, special-purpose financing subsidiary, entered into a revolving
credit facility, or the FSEP Funding credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent and the lender party thereto, which provided for borrowings in
an aggregate amount of up to $50,000. On May 30, 2012, August 28,

33

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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. Financing Arrangements (continued)

2012
and October 18, 2012, FSEP Funding entered into separate amendments to the FSEP Funding credit facility, which increased the aggregate borrowings available under the facility to $100,000,
$175,000 and $240,000, respectively. On June 24, 2013, FSEP Funding entered into an additional amendment to the FSEP Funding credit facility, which extended the maturity date of the facility to
June 24, 2014 and consolidated the existing four tranches of commitments under the facility into a single tranche of commitments with an aggregate principal amount of $240,000.

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

Pricing
under the FSEP Funding 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 the commitments under the facility bearing interest at the rate of LIBOR plus 1.80% per annum. Beginning on June 24, 2013, FSEP became subject to a non-usage fee to the extent that the
aggregate principal amount available under the facility is not borrowed. Interest under the facility is payable quarterly in arrears. Any amounts borrowed under the FSEP Funding credit facility will
mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2014.

As
of June 30, 2013 and December 31, 2012, $240,000 and $185,232, respectively, was outstanding under the FSEP Funding credit facility. The carrying amount of the amount
outstanding under the facility
approximates its fair value. The Company incurred costs of $1,300 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated
balance sheets and amortizes to interest expense over the life of the FSEP Funding credit facility. As of June 30, 2013, $590 of such deferred financing costs had yet to be amortized to
interest expense.

The
effective interest rate under the FSEP Funding credit facility was 2.07% per annum as of June 30, 2013. Interest is paid quarterly in arrears and commenced November 20,
2011. The Company recorded interest expense of $1,281 and $2,523 for the three and six months ended June 30, 2013, respectively, of which $168 and $335, respectively, related to the
amortization of deferred financing costs and $84 and $191, respectively, related to commitment fees on the unused portion of the facility. 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 facility. The Company paid $2,102 and $414 in interest expense for the six months ended June 30, 2013 and 2012, respectively. The average borrowings
under the FSEP Funding credit facility for the six months ended June 30, 2013 and 2012 were $192,429 and $38,289, respectively with a weighted average interest rate of 2.27% and 2.31%,
respectively, which includes commitment fees on the unused portion of the facility.

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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. Financial Highlights

The following is a schedule of financial highlights of the Company for the six months ended June 30, 2013 and the year ended December 31, 2012:

Six Months Ended
June 30, 2013
(Unaudited)

Year Ended
December 31, 2012Per Share Data:(1)Net asset value, beginning of period

$
9.34

$
8.74Results of operations(2)Net investment income (loss)


0.28


0.33Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency


0.11


1.05Net increase (decrease) in net assets resulting from operations


0.39


1.38Shareholder distributions(3)Distributions from net investment income


(0.33
)

(0.49
)Distributions from net realized gain on investments





(0.10
)Distributions representing tax return of capital





(0.04
)Net decrease in net assets resulting from shareholder distributions


(0.33
)

(0.63
)Capital share transactionsIssuance of common shares(4)


0.09


0.02Repurchases of common shares(5)





Offering costs(2)


(0.03
)

(0.12
)Reimbursement to investment adviser(2)





(0.07
)Capital contributions of investment adviser(2)





0.02Net increase (decrease) in net assets resulting from capital share transactions


0.06


(0.15
)Net asset value, end of period

$
9.46

$
9.34Shares outstanding, end of period


112,623,589


64,524,909Total return(6)


4.82
%

14.07
%Ratio/Supplemental Data:Net assets, end of period

$
1,065,144

$
602,889Ratio of net investment income to average net assets(7)


2.94
%

3.64
%Ratio of accrued capital gains incentive fees to average net assets(7)


0.24
%

2.30
%Ratio of subordinated income incentive fees to average net assets(7)


0.09
%

Ratio of interest expense to average net assets(7)


0.32
%

0.77
%Ratio of total operating expenses to average net assets(7)


2.46
%

7.09
%Ratio of expenses reimbursed by sponsor to average net assets(7)





(0.51
)%Ratio of expense recoupment payable to sponsor to average net assets(7)





0.51
%Ratio of net operating expenses to average net assets(7)


2.46
%

7.09
%Portfolio turnover(8)


34.82
%

75.24
%


(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 9. Financial Highlights (continued)

(2)The
per share data was derived by using the weighted average shares outstanding during the applicable period.(3)The
per share data for distributions reflects the actual amount of distributions paid per share (as adjusted for share distributions) during the applicable
period.(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
per share impact of the Company's repurchases of common shares is a reduction to net asset value of less than $0.01 per share during the period.(6)The
total return for the six months ended June 30, 2013 was calculated by taking the net asset value per share as of June 30, 2013, adding the
cash distributions per share which were declared during the period and dividing the total by the net asset value per share on December 31, 2012. The 2012 total return was calculated by taking
the net asset value per share as of December 31, 2012, adding the cash distributions per share which were declared during the calendar year and dividing the total by the net asset value per
share on December 31, 2011. The total return does not consider the effect of the sales load from the sale of the Company's common shares. The total return includes the effect of the issuance of
common shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table
should not be considered a representation of the Company's future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Company's
ability or inability to make investments in companies that meet its investment criteria, the interest rate payable on the debt securities the Company acquires, the level of the Company's expenses,
variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a
result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return as calculated above represents the total
return on the Company's investment portfolio during such period and is calculated in accordance with GAAP. These return figures do not represent an actual return to shareholders.(7)Weighted
average net assets during the six months ended June 30, 2013 and the year ended December 31, 2012 was used for this calculation.
Ratios are not annualized.(8)Portfolio
turnover is not annualized.


Note 10. Subsequent Events

On July 11, 2013, Energy Funding LLC, or Energy Funding, the Company's newly formed, wholly-owned, special-purpose financing subsidiary, entered into a revolving credit
facility, or the Energy Funding credit facility, with Natixis, New York Branch, or Natixis, as administrative agent and lender, Wells Fargo Bank, National Association, as collateral agent and
custodian, and the other lenders from time to time party thereto. The Energy Funding credit facility provides for borrowings in an aggregate principal amount up to $150,000 on a committed basis.

The
Company may contribute cash or debt securities to Energy Funding from time to time, subject to certain restrictions set forth in the Energy Funding credit facility, and will retain a
residual interest in any assets contributed through its ownership of Energy Funding or will receive fair market value for any debt securities sold to Energy Funding. Energy Funding may purchase
additional debt securities from various sources. Energy Funding has appointed the Company to manage its portfolio of debt

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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 10. Subsequent Events (continued)

securities
pursuant to the terms of a collateral management agreement. Energy Funding's obligations to the lenders under the Energy Funding credit facility are secured by a first priority security
interest in substantially all of the assets of Energy Funding, including its portfolio of debt securities. The obligations of Energy Funding under the facility are non-recourse to the Company and the
Company's exposure under the facility is limited to the value of the Company's investment in Energy Funding.

Borrowings
under the Energy Funding credit facility accrue interest at a rate equal to three-month LIBOR plus 2.40% per annum. Interest is payable quarterly in arrears. Borrowings under
the facility are subject to compliance with, among other things, an overcollateralization ratio test with respect to the current value of Energy Funding's portfolio, an interest coverage ratio test
with respect to the
payments due under the facility and eligibility criteria with respect to the initial acquisition of each debt security in Energy Funding's portfolio.

Energy
Funding will be required to pay a non-usage fee to the extent the aggregate principal amount available under the Energy Funding credit facility has not been borrowed. Any amounts
borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 11, 2023. Energy Funding paid a structuring fee and incurred certain
other customary costs and expenses in connection with obtaining the facility.

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

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Table of Contents

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. 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 Securities Exchange Act of 1934,
as amended, or 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 were not affiliated with us or FS
Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for federal
income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. Prior to satisfying the minimum offering requirement, we had no operations except for matters
relating to our organization and registration as a non-diversified, closed-end management investment company.

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

Our
investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies. 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. We have identified and intend to focus on the following five investment categories, which we
believe will allow us to generate an attractive total return with an acceptable level of risk.

Originated/Proprietary Transactions:We intend to leverage our relationship with GSO and their global sourcing and origination platform
to identify
proprietary investment opportunities. We define proprietary investments as any investment originated or structured specifically for us or made by us that was not generally available to the broader
market. Proprietary investments may include both debt and equity components, although we do not expect to make equity investments (other than income-oriented equity investments) independent of having
an existing credit relationship. We believe proprietary transactions may offer attractive investment opportunities as they typically offer higher returns than broadly syndicated transactions.

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

Event Driven:We intend to take advantage of dislocations that arise in the markets due to an impending event and where the market's
apparent
expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse
regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company's financial position. Compared to other investment strategies, event driven
investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven
strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.

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

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

Our
portfolio is comprised primarily of income-oriented securities, which refers to debt securities and income-oriented preferred and common equity interests, of privately-held Energy
companies within the United States. We intend to weight our portfolio towards senior and subordinated debt. In addition to investments purchased from dealers or other investors in the secondary
market, we expect to invest in primary market transactions and 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. We expect that the size of our
individual investments will generally range between $5,000 and $50,000 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.

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Table of Contents

Revenues

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 amortized 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. In future quarters, we do not expect our revenues to include net realized gain on total return swap or net unrealized appreciation and
deprecation on total return swap as a result of the termination of our TRS on May 24, 2013.

We
principally generate revenues in the form of interest income on the debt investments we hold. We also generate revenues in the form of dividends and other distributions on the equity
or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial
assistance, consulting fees, prepayment fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative
services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fees compensate FS Advisor for their 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. Such services include the provision of general ledger accounting, fund
accounting, legal services, investor relations and other administrative services. FS Advisor also performs, or oversees the performance of, our corporate operations and required administrative
services, which includes being responsible for the financial records which we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, FS
Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing
the payment of our expenses and the performance of administrative and professional services rendered to us by others. See "Related Party Transactions" for additional information regarding
the reimbursements payable to FS Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and
transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2012.

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

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Expense Reimbursement

Pursuant to the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is
sufficient to ensure that no portion of our distributions to shareholders will be paid from our offering proceeds or borrowings. 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
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; provided, however, that (i) we will only reimburse
Franklin Square Holdings for expense support payments made by Franklin Square Holdings with respect to any calendar quarter beginning on or after July 1, 2013 to the extent that the payment of
such reimbursement (together with any other reimbursement paid during such fiscal year) does not cause "other operating expenses" (as defined below) (on an annualized basis and net of any expense
reimbursement payments received by us during such fiscal year) to exceed the lesser of (A) 1.75% of our average net assets attributable to common shares for the fiscal year-to-date period after
taking such payments into account and (B) the percentage of our average net assets attributable to common shares represented by "other operating expenses" during the fiscal year in which such
expense support payment from Franklin Square Holdings was made (provided, however, that this clause (B) shall not apply to any reimbursement payment which relates to an expense support payment
from Franklin Square Holdings made during the same fiscal year) and (ii) we will not reimburse Franklin Square Holdings for expense support payments made by Franklin Square Holdings if the
aggregate amount of distributions per share declared by us in such calendar quarter is less than the aggregate amount of distributions per share declared by us in the calendar quarter in which
Franklin Square Holdings made the expense support payment to which such reimbursement relates. "Other operating expenses" means our total "operating expenses" (as defined below), excluding base
management fees, incentive fees, organization and offering expenses, financing
fees and costs, interest expense, brokerage commissions and extraordinary expenses. "Operating expenses" means all operating costs and expenses incurred, as determined in accordance with GAAP for
investment companies.

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.

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

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

During
the six months ended June 30, 2012, we accrued $1,432 for reimbursements that Franklin Square Holdings had agreed to pay. As of June 30, 2013, we had no
reimbursements due from Franklin Square Holdings.

Under
the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future. There were no amounts accrued during
the six months ended June 30, 2013 and 2012 for expense recoupments payable to Franklin Square Holdings.
As of December 31, 2012, we had accrued $1,083 for expense recoupments payable to Franklin Square Holdings, all of which was paid to Franklin Square Holdings during the six months ended
June 30, 2013. As of June 30, 2013, no further amounts remain subject to repayment by us to Franklin Square Holdings in the future.

Portfolio Investment Activity for the Three and Six Months Ended June 30, 2013 and for the Year Ended December 31, 2012

The following table presents certain selected information regarding our portfolio investment activity for the three and six months
ended June 30, 2013.

Total Portfolio Activity

---

Net Investment Activity

Three Months Ended
June 30, 2013

Six Months Ended
June 30, 2013Purchases

$
878,589

$
1,056,798Sales and Redemptions


(312,581
)

(348,473
)Net Portfolio Activity

$
566,008

$
708,325




For the Three Months Ended
June 30, 2013

For the Six Months Ended June 30, 2013New Investment Activity by Asset Class

Purchases

Percentage

Purchases

PercentageSenior Secured LoansFirst Lien

$
425,549


48
%
$
440,555


42
%Senior Secured LoansSecond Lien


263,996


30
%

299,169


28
%Senior Secured Bonds


51,008


6
%

56,866


5
%Subordinated Debt


138,036


16
%

259,208


25
%Equity/Other








1,000


0
%Total

$
878,589


100
%
$
1,056,798


100
%


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Table of Contents



June 30, 2013Total Portfolio Characteristics

Fair Value

Percentage of
PortfolioSenior Secured LoansFirst Lien

$
443,619


31
%Senior Secured LoansSecond Lien


350,550


25
%Senior Secured Bonds


77,267


6
%Subordinated Debt


491,747


35
%Equity/Other


47,988


3
%Total

$
1,411,171


100
%Number of Portfolio Companies


88% Variable Rate (based on fair value)


56.3%% Fixed Rate (based on fair value)


40.3%% Income Producing Equity (based on fair value)


3.3%% Non-Income Producing Equity or Other Investments (based on fair value)


0.1%Average Annual EBITDA of Portfolio Companies


$293,200Weighted Average Credit Rating of Investments that were Rated


B3% of Investments on Non-Accrual


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


8.5%Gross Portfolio Yield Prior to Leverage (based on amortized cost)Excluding Non-Income Producing Assets


8.5%




New Proprietary Activity

Three Months Ended
June 30, 2013Total Commitments (including Unfunded Commitments)

$
Exited Investments (including partial paydowns)


(46,550
)Net Proprietary Activity

$
(46,550
)




Total Proprietary Portfolio CharacteristicsNumber of Funded Proprietary Portfolio Companies


4% of Funded Proprietary Investments on Non-Accrual


Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Proprietary Investments


9.9
%Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Proprietary InvestmentsExcluding Non-Income Producing
Assets


10.0
%


During
the six months ended June 30, 2013, we made investments in portfolio companies totaling $1,056,798. During the same period, we sold investments for proceeds of $212,828 and
received principal repayments of $135,645. As of June 30, 2013, our investment portfolio, with a total fair value of $1,411,171 consisted of interests in 88 portfolio companies (31% in first
lien senior secured loans, 25% in second lien senior secured loans, 6% in senior secured bonds, 35% in subordinated debt and 3% in equity/other). The portfolio companies that comprised our portfolio
as of such date had an average annual EBITDA of approximately $293.2 million. As of June 30, 2013, 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 81.5% of our portfolio based on the fair value of
our investments) was B3 based upon the ratings scale employed by Moody's Investors Service, Inc., or Moody's, and our estimated gross annual portfolio yield, prior to leverage, was 8.5% based
upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the
composition of our portfolio as of June 30, 2013. The portfolio yield does not represent an actual investment return to shareholders.

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Based
on our regular semi-monthly cash distribution rate of $0.027334 per share as of June 30, 2013 and our public offering price of $10.75 per share as of such date, the
annualized distribution rate to shareholders as of June 30, 2013 was 6.10%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include
income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less
than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2012 and our
other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

During
the year ended December 31, 2012, we made investments in portfolio companies totaling $826,011. During the same period, we sold investments for proceeds of $175,782 and
received principal repayments of $68,410. As of December 31, 2012, our investment portfolio, with a total fair value of $701,172, consisted of interests in 64 portfolio companies (29% in first
lien senior secured loans, 10% in second lien senior secured loans, 5% in senior secured bonds, 49% in subordinated debt and 7% in equity/other). The portfolio companies that comprised our portfolio
as of such date had an average annual EBITDA of approximately $504.1 million. As of December 31, 2012, the investments in our portfolio were purchased at a weighted average price of
97.6% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 86.8% 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 9.7% based upon the amortized cost of our investments. Our gross
annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2012. The
portfolio yield does not represent an actual investment return to shareholders.

Based
on our regular semi-monthly cash distribution rate of $0.026824 per share as of December 31, 2012 and our public offering price of $10.40 per share as of such date, the
annualized distribution rate to shareholders as of December 31, 2012 was 6.19%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may
include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater
or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2012 and our other periodic
reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

The
following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2013 and December 31, 2012:

June 30, 2013
(Unaudited)

December 31, 2012Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
439,987

$
443,619


31
%
$
195,922

$
200,752


29
%Senior Secured LoansSecond Lien


346,581


350,550


25
%

71,607


73,451


10
%Senior Secured Bonds


76,811


77,267


6
%

33,366


35,158


5
%Subordinated Debt


481,876


491,747


35
%

332,214


345,849


49
%Equity/Other


45,742


47,988


3
%

44,810


45,962


7
%$
1,390,997

$
1,411,171


100
%
$
677,919

$
701,172


100
%


---

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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.

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, 2013, we had two such investments with an aggregate unfunded commitment of $24,389. As of
December 31, 2012, we had one such investment with an unfunded commitment of $10,000. We maintain sufficient cash on hand to fund such unfunded loan commitments should the need arise.

The
table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2013
and December 31, 2012:

June 30, 2013
(Unaudited)

December 31, 2012Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
568,915


40
%
$
335,486


48
%Midstream


212,711


15
%

60,675


9
%Downstream


4,314


0
%

2,978


0
%Service & Equipment


456,459


33
%

159,268


23
%Power


168,772


12
%

142,765


20
%Total

$
1,411,171


100
%
$
701,172


100
%


As
of June 30, 2013 and December 31, 2012, approximately 49% and 49%, respectively, of our portfolio based on fair value constituted non-broadly syndicated investments. We
define non-broadly syndicated investments as any investment that is considered proprietary, an anchor order or an opportunistic or event driven investment. The table below enumerates the percentage,
by fair value, of the types of investments in our portfolio as of June 30, 2013 and December 31, 2012:

June 30, 2013

December 31, 2012Deal Composition

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioOriginated/Proprietary

$
125,238


9
%
$
80,962


11
%Anchor Order


527,800


37
%

195,411


28
%Opportunistic


42,380


3
%

68,745


10
%Event Driven











Broadly Syndicated/Other


715,753


51
%

356,054


51
%Total

$
1,411,171


100
%
$
701,172


100
%


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Portfolio Asset Quality

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

Investment
Rating

Summary Description1

Investment exceeding expectations and/or capital gain expected.2

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

Performing investment requiring closer monitoring.4

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

Underperforming investment with expected loss of interest and some principal.


The
following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2013 and December 31, 2012:

June 30, 2013

December 31, 2012Investment Rating

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of Portfolio1

$
10,930


1
%
$
34,149


5
%2


1,352,264


96
%

636,590


91
%3


19,953


1
%

3,677


1
%4


28,024


2
%

26,756


3
%5











$
1,411,171


100
%
$
701,172


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.

Results of Operations

Comparison of the Three Months Ended June 30, 2013 and June 30, 2012

Revenues

We generated investment income of $24,172 and $4,337 for the three months ended June 30, 2013 and 2012, respectively, in the
form of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments and dividends and other distributions earned on equity securities in our portfolio.
Such revenues represent $23,239 and $3,970 of cash income earned as well as $933 and $367 in non-cash portions relating to accretion of discount and accrual of limited partnership income for the three
months ended June 30, 2013 and 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
increase in investment income is due primarily to the growth of our portfolio over the last year. 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

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dollar
amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.

Expenses

Our total operating expenses were $8,601 and $1,867 for the three months ended June 30, 2013 and 2012, respectively. Our
operating expenses include base management fees attributed to FS Advisor of $6,654 and $1,277 for the three months ended June 30, 2013 and 2012, respectively. Our operating expenses also
include administrative services expenses attributed to FS Advisor of $544 and $139 for the three months ended June 30, 2013 and 2012, respectively.

FS
Advisor is eligible to receive incentive fees based on performance. During the three months ended June 30, 2013, we did not accrue any subordinated incentive fee on income
based upon the performance of our portfolio and paid FS Advisor $753 in respect of the subordinated income incentive fee accrued as of March 31, 2013. We did not accrue any subordinated
incentive fee on income during the three months ended June 30, 2012. During the three months ended June 30, 2013, we reversed $1,621 of capital gains incentive fees previously accrued by
us based on the performance of our portfolio. 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
recorded interest expense of $1,415 and $264 for the three months ended June 30, 2013 and 2012, respectively, relating to our credit facilities and the amortization of deferred
financing costs incurred in connection with our credit facilities. For the three months ended June 30, 2013 and 2012, fees and expenses incurred with our fund administrator, which provides
various accounting and administrative services to us, totaled $168 and $42, respectively, and fees and expenses incurred with our share transfer agent totaled $475 and $120, respectively. Fees for our
board of trustees were $199 and $81 for the three months ended June 30, 2013 and 2012, respectively.

Our
other general and administrative expenses totaled $767 and $229 for the three months ended June 30, 2013 and 2012, respectively, and consisted of the following:

Three Months Ended
June 30,2013

2012Expenses associated with our independent audit and related fees

$
89

$
89Compensation of our chief compliance officer


45


20Legal fees


203


67Printing fees


263


13Insurance expense


41


21Other


126


19Total

$
767

$
229


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 months ended
June 30, 2013 and 2012, the ratio of our operating expenses to our average net assets was 0.90% and 1.01%, respectively. For the three months ended June 30, 2012, the ratio of our net
operating expenses to our average net assets, which includes $631 of expense reimbursements from Franklin Square Holdings, was 0.67%. During the three months ended June 30, 2013 and 2012, our
ratio of net operating expenses to average net assets included $1,415 and $264, respectively, related to interest expense and $(1,621) and $(285), respectively, related to reversals of previously
accrued incentive fees. Without such expenses, our ratio of net operating expenses to average net assets would have been 0.92% and 0.68% for the three months ended June 30, 2013 and 2012,
respectively. Incentive fees, interest expense and costs relating to our continuous public offering, among other things, may increase or decrease our operating

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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.

During
the three months ended June 30, 2012, we accrued $631 for reimbursements that Franklin Square Holdings had agreed to pay. As of June 30, 2013, we had no
reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future.
There were no amounts accrued during the three months ended June 30, 2013 and 2012 for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, we had accrued
$1,083 for expense recoupments payable to Franklin Square Holdings, all of which was paid to Franklin Square Holdings during the six months ended June 30, 2013. As of June 30, 2013, no
further amounts remain subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see "OverviewExpense
Reimbursement."

Net Investment Income

Our net investment income totaled $15,571 ($0.16 per share) and $3,101 ($0.15 per share) for the three months ended June 30,
2013 and 2012, respectively.

Net Realized Gains or Losses

We sold investments and received principal repayments of $211,018 and $101,563, respectively, during the three months ended
June 30, 2013, from which we realized a net gain of $3,760. During the three months ended June 30, 2013, we earned $9,817 from periodic net settlement payments on our TRS and the
termination of our TRS, which are reflected as realized gains. We sold investments and received principal repayments of $33,110 during the three months ended June 30, 2012, from which we
realized a net gain of $224. During the three months ended June 30, 2012, we earned $368 from periodic net settlement payments on our TRS, which are reflected as realized gains.

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

For the three months ended June 30, 2013 and 2012, the net change in unrealized appreciation (depreciation) on investments
totaled $(15,946) and $(2,327), respectively; net change in unrealized appreciation (depreciation) on our TRS was $(5,731) and $311, respectively; and the net change in unrealized gain (loss) on
foreign currency was $(25) and $(6), respectively. The change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended June 30, 2013 was primarily
driven by a general widening of credit spreads and the termination of our TRS which converted unrealized gains as of March 31, 2013 into realized gains.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended June 30, 2013 and 2012, the net increase (decrease) in net assets resulting from operations was
$7,446 ($0.07 per share) and $1,671 ($0.08 per share), respectively.

Comparison of the Six Months Ended June 30, 2013 and June 30, 2012

Revenues

We generated investment income of $45,083 and $7,055 for the six months ended June 30, 2013 and 2012, respectively, in the form
of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments and dividends and other distributions earned on equity securities in our portfolio. Such
revenues represent $43,751 and $6,251 of cash income earned as well

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as
$1,332 and $804 in non-cash portions relating to accretion of discount and accrual of limited partnership income for the six months ended June 30, 2013 and 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 increase in investment income is due primarily to the growth of our
portfolio over the last year. 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.

Expenses

Our total operating expenses were $20,553 and $3,846 for the six months ended June 30, 2013 and 2012, respectively. Our
operating expenses include base management fees attributed to FS Advisor of $11,365 and $2,052 for the six months ended June 30, 2013 and 2012, respectively. Our operating expenses also include
administrative services expenses attributed to FS Advisor of $997 and $201 for the six months ended June 30, 2013 and 2012, respectively.

FS
Advisor is eligible to receive incentive fees based on performance. During the six months ended June 30, 2013, we accrued a subordinated incentive fee on income of $753 based
upon the performance of our portfolio. We did not accrue any subordinated incentive fee on income during the six months ended June 30, 2012. During the six months ended June 30, 2013 and
2012, we accrued capital gains incentive fees of $1,989 and $234, respectively, based on the performance of our portfolio, of which $(33) and $234, respectively, was based on the unrealized gains (or
a decline in unrealized gains) and $2,022 and $0, respectively, was based on realized 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 $2,657 and $533 for the six months ended June 30, 2013 and 2012, respectively, relating to our credit facilities and the amortization of deferred
financing costs incurred in connection with our credit facilities and the establishment of our TRS. For the six months ended June 30, 2013 and 2012, fees and expenses incurred with our fund
administrator, which provides various accounting and administrative services to us, totaled $308 and $80, respectively, and fees and expenses incurred with our share transfer agent totaled $875 and
$179, respectively. Fees for our board of trustees were $399 and $163 for the six months ended June 30, 2013 and 2012, respectively.

Our
other general and administrative expenses totaled $1,210 and $404 for the six months ended June 30, 2013 and 2012, respectively, and consisted of the following:

Six Months Ended
June 30,2013

2012Expenses associated with our independent audit and related fees

$
164

$
173Compensation of our chief compliance officer


55


32Legal fees


403


98Printing fees


277


27Insurance expense


70


41Other


241


33Total

$
1,210

$
404


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 six months ended
June 30, 2013 and 2012, the ratio of our operating expenses to our average net assets was 2.46% and 2.72%, respectively. For the six months ended June 30, 2012, the ratio of our net
operating expenses to our average net

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assets,
which includes $1,432 of expense reimbursements from Franklin Square Holdings, was 1.70%. During the six months ended June 30, 2013 and 2012, our ratio of net operating expenses to
average net assets included $2,657 and $533, respectively, related to interest expense and $2,742 and $234, respectively, related to accruals for incentive fees. Without such expenses, our ratio of
net operating expenses to average net assets would have been 1.81% and 2.18% for the six months ended June 30, 2013 and 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.

During
the six months ended June 30, 2012, we accrued $1,432 for reimbursements that Franklin Square Holdings had agreed to pay. As of June 30, 2013, we had no
reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future.
There were no amounts accrued during the six months ended June 30, 2013 and 2012 for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, we had accrued
$1,083 for expense recoupments payable to Franklin Square Holdings, all of which was paid to Franklin Square Holdings during the six months ended June 30, 2013. As of June 30, 2013, no
further amounts remain subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see "OverviewExpense
Reimbursement."

Net Investment Income

Our net investment income totaled $24,530 ($0.28 per share) and $4,641 ($0.29 per share) for the six months ended June 30, 2013
and 2012, respectively.

Net Realized Gains or Losses

We sold investments and received principal repayments of $212,828 and $135,645, respectively, during the six months ended
June 30, 2013, from which we realized a net gain of $3,421. During the six months ended June 30, 2013, we earned $12,736 from periodic net settlement payments on our TRS and the
termination of our TRS, which are reflected as realized gains, and realized a net gain of $10 from settlements on foreign currency. We sold investments and received principal repayments of $61,776
during the six months ended June 30, 2012, from which we realized a net gain of $554. During the six months ended June 30, 2012, we earned $487 from periodic net
settlement payments on our TRS which are reflected as realized gains and $9 from settlements on foreign currency.

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

For the six months ended June 30, 2013 and 2012, the net change in unrealized appreciation (depreciation) on investments totaled
$(3,079) and $(485), respectively; net change in unrealized appreciation (depreciation) on our TRS was $(3,141) and $611, respectively; and the net change in unrealized gain (loss) on foreign currency
was $(30) and $(3), respectively. The change in unrealized appreciation (depreciation) on our investments and TRS during the six months ended June 30, 2013 was primarily driven by a general
widening of credit spreads during the second quarter of 2013 and the termination of our TRS which, converted unrealized gains as of March 31, 2013 into realized gains.

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Net Increase (Decrease) in Net Assets Resulting from Operations

For the six months ended June 30, 2013 and 2012, the net increase (decrease) in net assets resulting from operations was $34,447
($0.39 per share) and $5,814 ($0.37 per share), respectively.

Financial Condition, Liquidity and Capital Resources

Overview

As of June 30, 2013, we had $89,525 in cash, which we hold in a custodial account, and $62,000 in borrowings available under our
financing facilities. Below is a summary of our outstanding financing facilities as of June 30, 2013:

Facility

Type of Facility

Rate

Amount
Outstanding

Amount
Available

Maturity DateEP Funding Credit Facility

Revolving

L + 2.50%

$
113,000

$
62,000

May 24, 2015FSEP Funding Credit Facility

Revolving

L + 1.80%

$
240,000

$


June 24, 2014


During
the six months ended June 30, 2013, we sold 48,205,618 common shares for gross proceeds of $503,356 at an average price per share of $10.50. The gross proceeds received
during the six months ended June 30, 2013 include reinvested shareholder distributions of $16,554 for which we issued 1,735,054 common shares. During the six months ended June 30, 2013,
we also incurred offering costs of $2,400 in connection with the sale of our common shares, which consisted primarily of legal, due diligence and printing fees. 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 $42,949 for the six months ended
June 30, 2013. These sales commissions and fees include $8,922 retained by the dealer manager, FS2, which is one of our affiliates.

Since
commencing our continuous public offering and through August 13, 2013, we have sold 13,806,018 common shares (as adjusted for share distributions) for gross proceeds of
$144,917. As of August 13, 2013, we have raised total gross proceeds of $1,290,524, 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. As of August 13, 2013, we have sold an aggregate of 3,301,813 common shares (as adjusted for share distributions) for aggregate gross
proceeds of $29,646 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.

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 and from sales and paydowns of existing investments primarily in
cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election
and our election to be taxed as a RIC.

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

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The
following table sets forth the number of common shares repurchased by us under our share repurchase program during the six months ended June 30, 2013:

For the Three Months Ended

Repurchase Date

Shares
Repurchased

Percentage
of Shares
Tendered
That Were
Repurchased

Repurchase
Price
Per Share

Aggregate
Consideration
for Repurchased
SharesDecember 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228March 31, 2013

April 1, 2013


82,689


100
%
$
9.540

$
789


On
July 1, 2013, we repurchased 76,858 common shares (representing 100% of common shares tendered for repurchase) at $9.675 per share for aggregate consideration totaling $744.

Total Return Swap

On May 24, 2013, our wholly-owned, special-purpose financing subsidiary, EP Investments, and Citibank entered into the
termination acknowledgment pursuant to which EP Investments and Citibank agreed to immediately terminate the TRS Agreement and all transactions thereunder.

The
TRS was for a portfolio of senior secured floating rate loans and other debt securities with a maximum notional amount of $200,000. EP Investments received from Citibank all interest
and fees payable in respect of the assets underlying the TRS. EP Investments paid to Citibank interest at a rate equal to one-month LIBOR plus 1.30% per annum on the full notional amount of the assets
subject to the TRS. In addition, upon the termination or repayment of any asset subject to the TRS, EP Investments either received from Citibank the appreciation in the value of such asset or paid to
Citibank any depreciation in the value of such asset.

EP
Investments was permitted to terminate the TRS upon prior written notice to Citibank, and no termination fee was payable in connection with the termination of the TRS.

Upon
the termination of the TRS, we recognized $9,011 of gains, $2,467 of which represented periodic net settlement payments due on the TRS.

EP Funding Credit Facility

On May 24, 2013, EP Funding, our newly formed, wholly-owned, special-purpose financing subsidiary, entered into the EP Funding
credit facility with Citibank, as administrative agent, and the financial institutions and other lenders from time to time party thereto. The EP Funding credit facility provides for borrowings in an
aggregate principal amount up to $175,000 on a committed basis.

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

Borrowings
under the EP Funding credit facility accrue interest at a rate equal to three-month LIBOR plus 2.50% per annum during the first eighteen months of the facility and three-month
LIBOR plus 2.75% per annum thereafter. Borrowings under the facility are subject to compliance with an equity coverage ratio with respect to the current value of EP Funding's portfolio and a loan
compliance test with respect to the initial acquisition of each debt security in EP Funding's portfolio.

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Beginning
August 21, 2013, EP Funding will be required to pay a non-usage fee to the extent the aggregate principal amount available under the EP Funding credit facility has not
been borrowed. Outstanding borrowings under the facility will be amortized beginning six months prior to the scheduled maturity date of May 24, 2015. Any amounts borrowed under the facility
will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 24, 2015.

As
of June 30, 2013, $113,000 was outstanding under the EP Funding credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value.
We incurred costs of $657 in connection with obtaining the facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the
life of the facility. As of June 30, 2013, $623 of such deferred financing costs had yet to be amortized to interest expense.

The
effective interest rate under the EP Funding credit facility was 2.85% per annum as of June 30, 2013. Interest is payable quarterly in arrears. We recorded interest expense of
$134 for the three and six months ended June 30, 2013, of which $34 related to the amortization of deferred financing costs. We did not pay any interest expense for the six months ended
June 30, 2013. The average borrowings under the facility for the period since we commenced borrowing thereunder to June 30, 2013 were $69,667, with a weighted average interest rate of
2.86%.

Under
the EP Funding credit facility, EP 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 facility contains the following events of default: (a) the
failure to make principal or interest payments within five business days of when due; (b) the insolvency or bankruptcy of EP Funding or us; (c) the failure of EP Funding to be
beneficially owned and controlled by us; (d) our resignation or removal as EP Funding's investment manager; and (e) GSO (or any affiliate thereof or any replacement thereof approved in
writing by Citibank) no longer serving as our investment sub-adviser. Upon the occurrence of an event of default, Citibank may declare the outstanding principal and interest and all other
amounts owing under the facility immediately due and payable. During the continuation of an event of default, EP Funding must pay interest at a default rate.

FSEP Funding Credit Facility

On June 24, 2011, FSEP Funding, our wholly-owned, special-purpose financing subsidiary, entered into the FSEP Funding credit
facility with Deutsche Bank, as administrative agent and the lender party thereto, which provided for borrowings in an aggregate amount of up to $50,000. On May 30, 2012, August 28, 2012
and October 18, 2012, FSEP Funding entered into separate amendments to the FSEP Funding credit facility, which increased the aggregate borrowings available under the facility to $100,000,
$175,000 and $240,000, respectively. On June 24, 2013, FSEP Funding entered into an additional amendment to the FSEP Funding credit facility, which extended the maturity date of the facility to
June 24, 2014 and consolidated the existing four tranches of commitments under the facility into a single tranche of commitments with an aggregate principal amount of $240,000.

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

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Pricing
under the FSEP Funding 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 the commitments under the facility bearing interest at the rate of LIBOR plus 1.80% per annum. Beginning on June 24, 2013, FSEP became subject to a non-usage fee to the extent that the
aggregate principal amount available under the facility is not borrowed. Interest under the facility is payable quarterly in arrears. Any amounts borrowed under the FSEP Funding credit facility will
mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2014.

As
of June 30, 2013 and December 31, 2012, $240,000 and $185,232, respectively, was outstanding under the FSEP Funding credit facility. The carrying amount of the amount
outstanding under the facility approximates its fair value. We incurred costs of $1,300 in connection with obtaining and amending the facility, which we have recorded as deferred financing costs on
our consolidated balance sheets and amortize to interest expense over the life of the facility. As of June 30, 2013, $590 of such deferred financing costs had yet to be amortized to interest
expense.

The
effective interest rate under the FSEP Funding credit facility was 2.07% per annum as of June 30, 2013. Interest is payable quarterly in arrears and commenced
November 20, 2011. We recorded interest expense of $1,281 and $2,523 for the three and six months ended June 30, 2013, respectively, of which $168 and $335, respectively, related to the
amortization of deferred financing costs and $84 and $191, respectively, related to commitment fees on the unused portion of the facility. 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 facility. We paid $2,102 and $414 in interest expense for the six months ended June 30, 2013 and 2012, respectively. The average borrowings under
the facility for the six months ended June 30, 2013 and 2012 were $192,429 and $38,289, respectively, with a weighted average interest rate of 2.27% and 2.31%, respectively, which includes
commitment fees on the unused portion of the facility.

Capital Contribution by FS Advisor and GSO

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

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains our investment adviser. In connection with the same private placement, certain members of our board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase
1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions),
in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, we issued an aggregate of 2,244,875 common shares (as adjusted for share
distributions) for aggregate proceeds of $20,004 upon satisfaction of the minimum offering requirement on July 18, 2011. As of August 13, 2013, we have sold an aggregate of 3,301,813
common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,646 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO,
including common shares sold in the private placement conducted in April 2011.

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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 later of the fifteenth day of the ninth month following the close of the taxable year or 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 will 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 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, 2013 and 2012:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2012March 31, 2012(1)

$
0.1555

$
1,789June 30, 2012

$
0.1563

$
3,419Fiscal 2013March 31, 2013

$
0.1617

$
12,496June 30, 2013

$
0.1634

$
16,686


(1)The
per share distribution has been retroactively adjusted to reflect the share distribution declared in February 2012 as discussed in Note 5 to our
unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.


On
July 1, 2013, our board of trustees declared two regular semi-monthly cash distributions of $0.027334 per share each, which were paid on July 31, 2013 to shareholders of
record on July 15, 2013

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and
July 30, 2013, respectively. On August 8, 2013, our board of trustees declared two regular semi-monthly cash distributions of $0.027334 per share each, which will be paid on
August 30, 2013 to shareholders of record on August 15, 2013 and August 29, 2013, 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
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.

We
expect that for a period of time following commencement of our continuous public offering, which time period may be significant, substantial portions of our distributions may be
funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that are subject to
repayment by us within three years. The purpose of this arrangement is to ensure that no portion of our distributions to shareholders will be paid from offering proceeds or borrowings. Any such
distributions funded through expense reimbursements or waivers of advisory fees are not based on our investment performance and can only be sustained if we achieve positive investment performance in
future periods and/or Franklin Square Holdings continues to make such reimbursements or waivers of such fees. Our future repayments of amounts reimbursed or waived by Franklin Square Holdings and its
affiliates will reduce the distributions that shareholders would otherwise receive in the future. There can be no assurance that we will achieve the performance necessary to sustain our distributions
or that we will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in
future periods. For the six months
ended June 30, 2013, no portion of the distributions paid during such period was funded through the reimbursement of operating expenses by Franklin Square Holdings.

The
following table reflects the sources of the cash distributions on a tax basis that we have paid on our common shares during the six months ended June 30, 2013 and 2012:

Six Months Ended June 30,2013

2012Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$



Borrowings











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


29,182


100
%

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

$
29,182


100
%
$
5,208


100
%


(1)During
the six months ended June 30, 2013 and 2012, 97% and 89%, respectively, of our gross investment income was attributable to cash interest
earned and 3% and 11%, respectively, was attributable to non-cash accretion of discount.


Our
net investment income on a tax basis for the six months ended June 30, 2013 and 2012 was $29,827 and $4,066, respectively. As of June 30, 2013, we had
$645 of undistributed net investment income on a tax basis. As of December 31, 2012, we had distributed all of our net investment income on a tax basis.

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See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding
our distributions, including information regarding share distributions declared on our common shares and a reconciliation of our GAAP-basis net investment income and tax-basis net investment income
for the six months ended June 30, 2013 and 2012.

Critical Accounting Policies

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

Valuation of Portfolio Investments

We determine the net asset value of our investment portfolio each quarter. Securities 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 provides our board of trustees with portfolio company valuations which are based on relevant inputs, including, but not limited to, indicative dealer quotes, values of like
securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

Accounting
Standards Codification Topic 820,Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the Financial Accounting
Standards Board, 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:



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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 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

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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, 2013 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 by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and
screened for validity by such service. Two senior secured loan investments and one subordinated debt investment, for which broker quotes were not available, were valued by an independent valuation
firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments,
call features and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by
considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited
instances, book value or liquidation value. One subordinated debt investment, which was newly-issued and purchased near June 30, 2013, was valued at cost, as our board of trustees determined
that the cost of such investment was the best indication of its fair value.

Our
investments as of December 31, 2012 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 by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent
third-party pricing service and screened for validity by such service. One senior secured loan investment, for which broker quotes were not available, was valued by an independent valuation firm,
which determined the fair value of such investment by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call
features and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by
considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited
instances, book value or liquidation value. We valued our TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS was based on the increase or decrease in the
value of the assets underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The assets underlying the TRS were valued by
Citibank. Citibank based 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 were sent to us for review and testing. Our valuation committee and board of trustees reviewed and approved the value of the TRS, as well as the value of the assets 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 had any questions or concerns regarding the
valuation of the assets underlying the TRS, such valuation was discussed or challenged pursuant to the terms of the TRS.

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

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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.

Revenue Recognition

Security transactions are accounted for on the trade date. We record interest income on an accrual basis to the extent that we expect
to collect such amounts. We record dividend income on the ex-dividend date. We do not accrue as a receivable interest or dividends on loans and securities if we have reason to doubt our ability to
collect such income. Loan origination fees, original issue discount and market discount are capitalized and we amortize such amounts as interest income over the respective term of the loan or
security. Upon prepayment of a loan or security, any unamortized loan origination fees and original issue discount are recorded as fee income. Upfront structuring fees are recorded as income when
earned. We record prepayment premiums on loans and securities as fee income when we receive such amounts.

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

Gains or losses on the sale of investments are calculated by using the specific identification method. We measure realized gains or
losses by the difference between the net proceeds from the repayment or sale and the amortized cost basis of the investment, without regard to unrealized appreciation or depreciation previously
recognized, but considering unamortized 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.

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement we entered into with FS Advisor, the incentive
fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). Such fee will
equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, 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.

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

Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be entitled to receive a subordinated
incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of "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 our pre-incentive fee net investment income for such quarter exceeds the
hurdle rate of 1.625%. Once our 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 our pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. Thereafter, FS
Advisor will receive 20.0% of pre-incentive fee net investment income.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with
accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements.
Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing
authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the six months ended
June 30, 2013 and 2012, we did not incur any interest or penalties.

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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 months ended June 30, 2013 and 2012, we incurred $6,654 and $1,277, respectively, in base management fees and $544 and $139, respectively, in administrative services
expenses under the investment advisory and administrative services agreement. For the six months ended June 30, 2013 and 2012, we incurred $11,365 and $2,052, respectively, in base management
fees and $997 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 the performance of our portfolio. During the three months ended June 30, 2013, we paid FS Advisor $753 in respect of the subordinated incentive fee on income that was accrued as
of March 31, 2013. During the three months ended June 30, 2013 and 2012, we reversed $1,621 and $285, respectively, of capital gains incentive fees previously accrued based on the
performance of our portfolio. During the six months ended June 30, 2013 and 2012, we accrued capital gains incentive fees of $1,989 and $234, respectively, based on the performance of our
portfolio, of which $(33) and $234, respectively, was based on unrealized gains (or a decline in unrealized gains) and $2,022 and $0, respectively, was based on realized gains. As of
December 31, 2012, $953 in capital gains incentive fees were payable by us to FS Advisor, all of which was paid to FS Advisor during the six months ended June 30, 2013. As of
June 30, 2013, we had accrued $7,518 in capital gains incentive fees, $5,496 of which was based on unrealized gains and $2,022 of which was based on realized gains.

A
summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the EP Funding credit facility and the FSEP Funding credit facility at
June 30, 2013 is as follows:

Payments Due By PeriodTotal

Less than
1 year

1-3 years

3-5 years

More than
5 yearsBorrowings of EP Funding(1)

$
113,000




$
113,000





Borrowings of FSEP Funding(2)

$
240,000

$
240,000











(1)At
June 30, 2013, $62,000 remained unused under the EP Funding credit facility. All amounts borrowed under the facility will mature, and all accrued
and unpaid interest thereunder will be due and payable, on May 24, 2015.(2)At
June 30, 2013, no amounts remained unused under the FSEP Funding credit facility. All amounts borrowed under the facility will mature, and all
accrued and unpaid interest thereunder will be due and payable, on June 24, 2014.


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

None.

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Related Party Transactions

Compensation of the Dealer Manager and Investment Adviser

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

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%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains,
is accrued for on a quarterly basis and, if earned, is paid annually. We accrue this incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and
administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually
realized. See "Critical Accounting PoliciesCapital Gains Incentive Fee" for a discussion of the treatment of the TRS with respect to the calculation of the capital gains
incentive fee.

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 allocations and/or 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 thirdparty service provider would be capable of providing all such services at
comparable cost and quality. Finally, 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.

Franklin
Square Holdings has funded certain of our offering costs and organization costs. 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 the consolidated financial statements and the organization costs were charged to expense as incurred by us. 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. Since inception through June 30, 2013, Franklin Square Holdings has funded $3,143 in offering and organization costs. During the six months ended June 30, 2013 and
2012, we paid total reimbursements of $0 and $2,051, respectively, to FS Advisor and its affiliates. The reimbursements were recorded as a reduction of capital. As of June 30, 2013, no amounts
remain reimbursable to FS Advisor and its affiliates under this arrangement.

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

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The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six
months ended June 30, 2013 and 2012:

Three Months
Ended
June 30,

Six Months
Ended
June 30,Related Party

Source Agreement

Description

2013

2012

2013

2012FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
6,654

$
1,277

$
11,365

$
2,052FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)

$
(1,621
)
$
(285
)
$
1,989

$
234FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$


$


$
753

$
FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
544

$
139

$
997

$
201FS2

Dealer Manager Agreement

Dealer Manager Fee(5)

$
4,747

$
2,390

$
8,922

$
3,666


(1)During
the six months ended June 30, 2013 and 2012, $8,233 and $0, respectively, in base management fees were paid to FS Advisor. During the six
months ended June 30, 2012, $1,121 in base management fees were applied to offset the liability of Franklin Square Holdings under the expense reimbursement agreement. Of the $6,654 in base
management fees accrued and payable as of June 30, 2013, it is intended that the entire amount will be paid to FS Advisor.(2)During
the three months ended June 30, 2013 and 2012, we reversed $1,621 and $285, respectively, of capital gains incentive fees previously accrued
based on the performance of our portfolio. During the six months ended June 30, 2013 and 2012, we accrued capital gains incentive fees of $1,989 and $234, respectively, based on the performance
of our portfolio, of which $(33) and $234, respectively, was based on unrealized gains (or a decline in unrealized gains) and $2,022 and $0, respectively, was based on realized gains. No such fees are
actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. As of December 31, 2012, $953 in capital gains incentive fees were payable by us
to FS Advisor, all of which was paid to FS Advisor during the six months ended June 30, 2013. We did not pay any amounts to FS Advisor in respect of the capital gains incentive fee during the
six months ended June 30, 2012.(3)During
the six months ended June 30, 2013, we accrued a subordinated incentive fee on income of $753 based upon the performance of our portfolio. As
of June 30, 2013, all of the subordinated incentive fee on income was paid to FS Advisor.(4)During
the six months ended June 30, 2013 and 2012, $857 and $144, respectively, of the accrued administrative services expenses related to the
allocation of costs of administrative personnel for services rendered to us by FS Advisor and the remainder related to other reimbursable expenses. We paid $757 and $232 in administrative services
expenses to FS Advisor during the six months ended June 30, 2013 and 2012, respectively.(5)Represents
aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers.


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

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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 approximately $20,004, upon satisfaction of the minimum offering
requirement on July 18, 2011. As of August 13, 2013, we have sold an aggregate of 3,301,813 common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,646 to
members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.

Potential Conflicts of Interest

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.

Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting us, subject to the satisfaction of certain
conditions, to co-invest in certain privately negotiated investment transactions with affiliates of FS Advisor, including FS Investment Corporation and FS Investment Corporation II and any future BDCs
that are advised by FS Advisor or its affiliated investment advisers. Because we did not seek exemptive relief to engage in co-investment transactions with GSO and its affiliates, we will be permitted
to co-invest with GSO and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

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

During
the six months ended June 30, 2012, we accrued $1,432 for reimbursements that Franklin Square Holdings had agreed to pay. As of June 30, 2013, we had no
reimbursements due from Franklin Square Holdings.

Under
the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future. There were no amounts accrued during
the six months ended June 30, 2013 and 2012 for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, we had accrued $1,083 for expense recoupments payable to
Franklin Square Holdings, all of which was paid to Franklin Square Holdings during the six months

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ended
June 30, 2013. As of June 30, 2013, no further amounts remain subject to repayment by us to Franklin Square Holdings in the future.

FS Benefit Trust

On May 30, 2013, FS Trust was formed as a Delaware statutory trust for the purpose of awarding equity incentive compensation to
employees of Franklin Square Holdings and its affiliates. In connection with our semi-monthly closing occurring on June 17, 2013, FS Trust purchased approximately $43 of our common shares at a
purchase price equal to 90% of the offering price in effect on such date, or $9.675 per share.

Recent Developments

During the period from July 1, 2013 to August 13, 2013, we sold 13,806,018 common shares for gross proceeds of $144,917
at an average price per share of $10.50.

On
July 11, 2013, Energy Funding, our newly formed, wholly-owned, special-purpose financing subsidiary, entered into the Energy Funding credit facility with Natixis, as
administrative agent and lender, Wells Fargo Bank, National Association, as collateral agent and custodian, and the other lenders from time to time party thereto. The Energy Funding credit facility
provides for borrowings in an aggregate principal amount up to $150,000 on a committed basis.

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

Borrowings
under the Energy Funding credit facility accrue interest at a rate equal to three-month LIBOR plus 2.40% per annum. Interest is payable quarterly in arrears. Borrowings under
the facility are subject to compliance with, among other things, an overcollateralization ratio test with respect to the current value of Energy Funding's portfolio, an interest coverage ratio test
with respect to the payments due under the facility and eligibility criteria with respect to the initial acquisition of each debt security in Energy Funding's portfolio.

Energy
Funding will be required to pay a non-usage fee to the extent the aggregate principal amount available under the Energy Funding credit facility has not been borrowed. Any amounts
borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 11, 2023. Energy Funding paid a structuring fee and incurred certain
other customary costs and expenses in connection with obtaining the facility.

In
connection with the credit facility, Energy Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other
customary requirements for similar facilities. 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 five business days of when due; (b) Energy Funding becoming an investment company required to be
registered under the 1940 Act; (c) certain events of insolvency or bankruptcy of Energy Funding; (d) our resignation or removal as Energy Funding's collateral manager; (e) FS
Advisor or any replacement thereof approved in writing by

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the
majority lenders no longer serving as our investment adviser; and (f) GSO or any replacement thereof approved in writing by the majority lenders no longer serving as investment sub-adviser.
Upon the occurrence of an event of default, the majority lenders or Natixis (acting at the discretion of the majority lenders) may declare the outstanding principal and interest and all other amounts
owing under the facility immediately due and payable. During the continuation of an event of default, Energy Funding must pay interest at a default rate.

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, 2013, 56.3% of our portfolio
investments (based on fair value) paid variable interest rates, 40.3% paid fixed interest rates and the remainder (3.4%) consisted of
non-income producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to 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 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 $175 million credit facility which EP Funding maintains with Citibank, EP Funding borrows at a floating rate based on LIBOR. Pursuant to the terms of
the $240 million credit facility which FSEP Funding maintains with Deutsche Bank, FSEP Funding borrows at a floating rate based on LIBOR. To the extent that any present or future credit
facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to
changes in market interest rates. In periods of rising interest rates when we or our subsidiaries have such debt outstanding or financing arrangements in effect, our interest expense would increase,
which could reduce our net investment income, especially to the extent we hold fixed rate investments.

The
following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our
investment portfolio and borrowing arrangements in effect as of June 30, 2013 (dollar amounts are presented in thousands):

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 30 basis points

$
(120
)
$
(1,059
)
$
939


0.9
%Current LIBOR











Up 100 basis points


969


3,530


(2,561
)

(2.3
)%Up 300 basis points


15,859


10,590


5,269


4.8
%Up 500 basis points


31,106


17,650


13,456


12.3
%


(1)Assumes
no change in defaults or prepayments by portfolio companies over the next twelve months.


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

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condition
and results of operations. During the six months ended June 30, 2013, 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."

Item 4.    Controls and Procedures.

As required by Rule 13(a)-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, 2013. 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 13(a)-15(f) or 15(d)-15(f) of the Exchange Act) that occurred during the three months
ended June 30, 2013 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 from the risk factors set forth in our annual report on Form 10-K for the year ended
December 31, 2012.

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

The table below provides information concerning our repurchases of common shares during the quarter ended June 30, 2013 pursuant
to our share repurchase program.

Period

Total
Number of
Shares
Purchased

Average
Price Paid
per Share

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

Maximum Number of
Shares that May Yet
Be Purchased
Under the
Plans or ProgramsApril 1 to April 30, 2013


82,689

$
9.54


82,689


(1
)May 1 to May 31, 2013











June 1 to June 30, 2013











Total


82,689

$
9.54


82,689


(1
)


(1)A
description of the maximum number of common shares that may be purchased under our share repurchase program is set forth in Note 3 to our unaudited
consolidated financial statements contained in this quarterly report on Form 10-Q.


See
Note 3 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for a more detailed discussion of the terms of our share
repurchase program.

Item 3.    Defaults upon Senior Securities.

Not applicable.

Item 4.    Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

Not applicable.

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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 filed with the Company's final prospectus on Form 497 (File No. 333-169679) filed on May 14,
2013.)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 Pre-Effective 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.(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 13, 2012.)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 Pre-Effective 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
Pre-Effective 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 Pre-Effective Amendment No. 3
to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.6

Form of Follow-On Dealer Manager Agreement by and among the Company, FS Investment Advisor, LLC and FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)
(2) filed with Pre-Effective Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-184407) filed on May 10, 2013.)10.7

Form of Follow-On Selected Dealer Agreement(Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(4) filed with
Pre-Effective Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-184407) filed on May 10, 2013.)10.8

Custodian Agreement, dated as of November 14, 2011, by and between the Company and State Street Bank and Trust Company.(Incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-Q filed on November 14, 2011.)10.9

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 Pre-Effective Amendment No. 3 to
the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.10

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.)


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10.11

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.)10.12

Second Amendment to Credit Agreement, dated as of August 28, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch and the other lenders party thereto.(Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on August 30, 2012.)10.13

Third Amendment to Credit Agreement, dated as of October 18, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch and the other lenders party thereto.(Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 18, 2012.)10.14

Fourth Amendment to Credit Agreement, dated as of June 24, 2013, by and between FSEP Term Funding, LLC and 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 June 25, 2013.)10.15

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.)10.16

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.)10.17

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.)10.18

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.)10.19

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.)10.20

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.)10.21

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.)10.22

Termination and Release Acknowledgment, 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.)10.23

Amendment Agreement, dated as of May 11, 2012, to the ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, by and between EP Investments LLC and Citibank,
N.A.(Incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2012.)


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10.24

Amended and Restated Confirmation Letter Agreement, dated as of May 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.17 to the
Company's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.25

Amended and Restated Confirmation Letter Agreement, dated as of October 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K filed on October 12, 2012.)10.26

Termination Acknowledgment (TRS), dated as of May 24, 2013, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K filed on May 31, 2013.)10.27

Loan Agreement, dated as of May 24, 2013, by and among EP Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent.(Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 29, 2013.)10.28

Account Control Agreement, dated as of May 24, 2013, by and among EP Funding, Citibank, N.A. and Virtus Group, LP.(Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K filed on May 29, 2013.)10.29

Security Agreement, dated as of May 24, 2013, by and between EP Funding LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.3 to the Company's Current Report on
Form 8-K filed on May 29, 2013.)10.30

Investment Management Agreement, dated as of May 24, 2013, by and between the Company and EP Funding LLC.(Incorporated by reference to Exhibit 10.4 to the Company's Current
Report on Form 8-K filed on May 29, 2013.)10.31

Credit Agreement, dated as of July 11, 2013, by and among Energy Funding LLC, as borrower, Natixis, New York Branch, as administrative agent and lender, Wells Fargo Bank, National Association, as collateral
agent and custodian, and the other lenders from time to time party thereto.(Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on July 16, 2013.)10.32

Securities Account Control Agreement, dated as of July 11, 2013, by and among Energy Funding LLC, as debtor, Wells Fargo Bank, National Association, as secured party, and Wells Fargo Bank, National
Association, as custodian and securities intermediary.(Incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on July 16, 2013.)10.33

Collateral Management Agreement, dated as of July 11, 2013, by and between the Company and Energy Funding LLC.(Incorporated by reference to Exhibit 10.3 to the Company's Current
Report on Form 8-K filed on July 16, 2013.)10.34

Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated May 16, 2013, by and between the Company and Franklin Square Holdings, L.P.(Incorporated by
reference to Exhibit 99.1 to the Company's Current report on Form 8-K filed on May 17, 2013.)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 and 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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Table of Contents

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, 2013.

FS ENERGY AND POWER FUNDBy:

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

/s/ EDWARD T. GALLIVAN, JR. Edward T. Gallivan, Jr.Chief Financial Officer
(Principal Financial and Accounting Officer)


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