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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, 2011.o

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


COMMISSION FILE NUMBER: 814-00841



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



Delaware(State or other jurisdiction of
incorporation or organization)

27-6822130(I.R.S. Employer
Identification No.)


Cira Centre
2929 Arch Street, Suite 675
Philadelphia, Pennsylvania 19104(Address of principal executive office)

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



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

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

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

Large accelerated filer o

Accelerated filer o

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

Smaller reporting company o


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

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

The
issuer has 2,826,432 shares of Common Shares outstanding as of August 12, 2011.



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TABLE OF CONTENTS



PagePART IFINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTS


1Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010


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


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


3Unaudited Consolidated Statement of Cash Flows for the six months ended June 30, 2011


4Notes to Unaudited Consolidated Financial Statements


5ITEM 2.

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


15ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


29ITEM 4.

CONTROLS AND PROCEDURES


29PART IIOTHER INFORMATIONITEM 1.

LEGAL PROCEEDINGS


31ITEM 1A.

RISK FACTORS


31ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


32ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


33ITEM 4.

RESERVED


33ITEM 5.

OTHER INFORMATION


33ITEM 6.

EXHIBITS


36SIGNATURES


38


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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, 2011
(unaudited)

December 31,
2010AssetsCash and cash equivalents

$
180

$
200Deferred financing costs


131


Total assets

$
311

$
200LiabilitiesFinancing costs payable


111


Total liabilities

$
111

$
Shareholders' EquityPreferred shares, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding

$


$
Common shares, $0.001 par value, 450,000,000 shares authorized, 22,222 shares issued and outstanding





Capital in excess of par value


550


383Accumulated loss


(350
)

(183
)Total shareholders' equity

$
200

$
200Net asset value per common share at period end

$
9.00

$
9.00


See notes to unaudited consolidated financial statements.

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

Three Months Ended
June 30, 2011

Six Months Ended
June 30, 2011Operating expensesOrganization costs

$
74

$
167Net decrease in net assets resulting from operations

$
(74
)
$
(167
)


See notes to unaudited consolidated financial statements.

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

Six Months Ended
June 30, 2011OperationsNet decrease in net assets resulting from operations

$
(167
)Capital share transactionsCapital contributions of investment adviser


944Offering costs


(777
)Net increase in net assets resulting from capital share transactions


167Total increase in net assets


Net assets at beginning of period


200Net assets at end of period

$
200


See notes to unaudited consolidated financial statements.

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

Six Months Ended
June 30, 2011Cash flows from operating activitiesNet decrease in net assets resulting from operations

$
(167
)Net cash used in operating activities


(167
)Cash flows from financing activitiesCapital contributions of investment adviser


944Offering costs


(777
)Deferred financing costs paid


(20
)Net cash provided by financing activities


147Total decrease in cash and cash equivalents


(20
)Cash and cash equivalents at beginning of period


200Cash and cash equivalents at end of period

$
180


See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund        Notes to Unaudited Consolidated Financial Statements        (in thousands, except share and per share information)

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
effective on July 18, 2011 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of its common shares in its continuous public offering to persons who
are not affiliated with the Company or the Company's investment adviser, FS Investment Advisor, LLC, or FS Advisor, a private investment firm that is registered as an investment adviser under
the Investment Advisers Act of 1940, as amended, 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 intends to elect to be treated for federal income tax purposes 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, 2011, the Company had one wholly-owned financing subsidiary, FSEP Term
Funding, LLC, or FSEP Funding, which was established on June 24, 2011. The consolidated financial statements include both the Company's accounts and the accounts of its wholly-owned
financing subsidiary. All significant intercompany transactions have been eliminated in consolidation.

Since
commencing its initial public offering and through August 12, 2011, the Company has sold 581,562 common shares for gross proceeds of $5,476. As of August 12, 2011,
the Company had raised total gross proceeds of $25,680, 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).

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 financial statements as of and for the period from
September 16, 2010 (inception) through December 31, 2010 included in the Company's Registration Statement on Form N-2 (File No. 333-169679) filed on
May 5, 2011. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31,
2011. The December 31, 2010 balance sheet is derived from the 2010 audited financial statements. The Company has evaluated the impact of subsequent events through the date the

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 2. Summary of Significant Accounting Policies (Continued)

consolidated
financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.

Use of Estimates:The preparation of the financial statements in conformity with GAAP requires management to make estimates and
assumptions that
affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share information.

Organization Costs:Organization costs include, among other things, the cost of organizing as a Delaware statutory trust, including the
cost of legal
services and other fees pertaining to the Company's organization. These costs are expensed as incurred. For the three and six months ended June 30, 2011, the Company incurred organization costs
of $74 and $167, respectively, which were paid on behalf of the Company by Franklin Square Holdings, L.P., or Franklin Square Holdings, an affiliate of FS Advisor, and have been recorded
as a contribution to capital (see Note 4).

Offering Costs:The Company's offering costs include, among other things, legal fees and other costs pertaining to the preparation of
the Company's
Registration Statement on Form N-2 relating to its continuous public offering of its common shares. The Company has charged offering
costs against capital in excess of par value on the balance sheet. For the three and six months ended June 30, 2011, the Company incurred offering costs of $591 and $777, respectively, which
were paid on behalf of the Company by Franklin Square Holdings and have been recorded as a contribution to capital (see Note 4).

Income Taxes:The Company intends to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code.
To maintain
qualification as a RIC, the Company must, among other things, meet certain source-of-income and asset diversification requirements and distribute to its shareholders, for each
taxable year, at least 90% of its "investment company taxable income," which is generally the Company's net ordinary income plus the excess, if any, of realized net short-term capital
gains over realized net long-term capital losses. The Company will not have to pay corporate-level federal income taxes on any income that it distributes to its shareholders. The Company
intends to make distributions in an amount sufficient to maintain its RIC status each year and to avoid any federal income taxes on income. The Company will also be subject to nondeductible federal
excise taxes if it does 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 for which it paid
no federal income taxes.

Uncertainty in Income Taxes:The Company evaluates its tax positions to determine if the tax positions taken meet the minimum
recognition threshold
in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements.
Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing
authorities. The Company recognizes interest and penalties, if

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 2. Summary of Significant Accounting Policies (Continued)

any,
related to unrecognized tax liabilities as income tax expense in the Statement of Operations. During the six months ended June 30, 2011, the Company did not incur any interest or
penalties.

Note 3. Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2010-06, which provides additional guidance to improve
disclosures regarding fair value measurements. This guidance requires two new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the transfers and
(2) a gross presentation of activity within the Level 3 roll forward. The guidance also includes clarifications to existing disclosure requirements on the level of disaggregation and
disclosures regarding inputs and valuation techniques. The guidance applies to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The effective date of
this guidance is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward information, which is
required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. As the Company did not begin formal operations until
July 18, 2011 upon satisfying the minimum offering requirement, the adoption of this guidance, including the gross presentation of Level 3 roll forward information, did not have a
significant impact on the Company's consolidated financial statements or disclosures.

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

Note 4. Related Party Transactions

The Company has entered into an investment advisory and administrative services agreement with FS Advisor. Pursuant to the investment advisory and administrative services agreement, FS
Advisor will be entitled to an annual base management fee of 2.0% of the average value of the Company's gross assets and an incentive fee based on the Company's performance.

The
incentive fee consists of three parts. The first part, which is referred to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears and will
equal 20.0% of "pre-incentive fee net investment income" for the immediately preceding quarter and will be

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 4. Related Party Transactions (Continued)

subordinated
to a preferred return on adjusted capital, as defined in the Company's investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized rate of
6.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains during operations, will be an incentive fee on capital gains earned on liquidated investments
from the Company's portfolio during operations prior to a liquidation of the Company and will be 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 will equal 20.0% of the Company's incentive fee capital gains, which will equal the Company's realized capital gains on a
cumulative basis from inception, calculated as of the end of each calendar year, 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 third part of the incentive fee, which is referred to as the subordinated liquidation incentive fee, will equal 20.0% of the
net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation.

The
Company commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, when it formally commenced operations upon satisfaction
of the minimum offering requirement. Management fees will be paid on a quarterly basis in arrears. The Company will accrue for the capital gains incentive fee on a quarterly basis by calculating such
fee as if it were due
and payable as of the end of such period. While the investment advisory and administrative services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the
calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute for Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the
Company will include unrealized gains in the calculation of the capital gains incentive fee expense and related capital gains incentive fee payable. This accrual will reflect the incentive fees that
would be payable to FS Advisor if the Company's entire portfolio were to be 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.

The
Company will also reimburse FS Advisor for expenses necessary for its performance of services related to administering and operating the Company, provided that such reimbursement is
equal to the lower of FS Advisor's actual costs or the amount that the Company would be required to pay for comparable services in the same geographic location, and provided further that such costs
are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods.

Franklin
Square Holdings has funded offering costs and organization costs in the amount of $944 for the six months ended June 30, 2011. These costs have been recorded by the
Company as a contribution to capital. The offering costs were offset against capital in excess of par on the financial statements and the organization costs were charged to expense as incurred by the
Company (see Note 2). Since inception, Franklin Square Holdings has funded $1,815 in offering and organization costs.

Under
the terms of the investment advisory and administrative services agreement, there is no liability on the Company's part for the offering or organization costs funded by FS Advisor
or its affiliates (including Franklin Square Holdings) until the investment advisory and administrative services agreement is effective. The investment advisory and administrative services agreement
became effective

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 4. Related Party Transactions (Continued)

upon
satisfaction of the minimum offering requirement on July 18, 2011. At such time, FS Advisor became entitled to receive 1.5% of the gross proceeds raised from outside investors until all
offering costs and organization costs funded by FS Advisor or its affiliates have been recovered.

In
December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of approximately $200 to purchase 22,222 common shares at $9.00 per
share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals will not 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, 222,222 additional common
shares at $9.00 per share. The principals will not tender these common shares for repurchase as long as FS Advisor remains the Company's investment adviser. In connection with the same private
placement, other individuals and entities affiliated with FS Advisor and certain members of the Company's board of trustees agreed to purchase 1,444,871 common shares, and certain individuals and
entities affiliated with GSO agreed to purchase 555,555 common shares, in each case at a price of $9.00 per share. In connection with the private placement, the Company issued an aggregate of
2,222,648 common shares for aggregate proceeds of $20,004, upon the satisfaction of the minimum offering requirement on July 18, 2011.

FS
Advisor's senior management team is comprised of the same personnel as the senior management team of FB Income Advisor, LLC, the investment adviser to Franklin Square Holdings'
first affiliated BDC, FS Investment Corporation. As a result, such members provide investment advisory services to both the Company and FS Investment Corporation. FB Income Advisor, LLC, which
is controlled by Mr. Forman, the Company's chairman, president and chief executive officer, was organized for the purpose of sourcing and managing income-oriented investments for institutions
and high net worth individuals. While neither FS Advisor nor FB Income Advisor, LLC is currently making private corporate debt investments for clients other than the Company and FS Investment
Corporation, respectively, either one, or both, may do so in the future. In the event that FS Advisor undertakes to provide investment advisory services to other clients in the future, it intends to
allocate investment opportunities in a fair and equitable manner consistent with the Company's investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in
relation to any other client of FS Advisor or its management team. In addition, even in the absence of FS Advisor retaining additional clients, it is possible that some investment opportunities may be
provided to FS Investment Corporation rather than to the Company.

The
Company's affiliate, Franklin Square Holdings, has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that, for tax purposes, the Company's net
investment income and net capital gains are equal to or greater than the cumulative distributions paid to the Company's shareholders in each quarter. This arrangement is designed to ensure that no
portion of the Company's distributions will represent a return of capital for the Company's shareholders. Franklin Square Holdings has no obligation to reimburse any portion of the Company's expenses
but 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 can bear a reasonable level of
expenses in relation to its income. The specific amount of expenses reimbursed by Franklin Square

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 4. Related Party Transactions (Continued)

Holdings,
if any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by the Company's chairman, president and chief executive officer, Michael Forman, and its
vice-chairman, David Adelman. There can be no assurance that Franklin Square Holdings will reimburse any portion of the Company's expenses in future quarters.

The
dealer manager for the Company's public offering is FS2 Capital Partners, LLC, or FS2, which is one of the Company's affiliates and also serves as
the dealer manager for FS Investment Corporation's continuous public offering of shares.

Note 5. Share Repurchase Program

Beginning with the first calendar quarter following July 18, 2012, and on a quarterly basis thereafter, the Company intends to offer to repurchase common shares on such terms as
may be determined by the Company's board of trustees in its complete and absolute discretion unless, in the judgment of the independent trustees of the Company's board of trustees, such repurchases
would not be in the best interests of the Company's shareholders or would violate applicable law. The Company will conduct such repurchase offers in accordance with the requirements of
Rule 13e-4 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the 1940 Act. In months in which the Company repurchases common shares, it intends to conduct
repurchases on the same date that it holds its first semi-monthly closing for the sale of common shares in its public offering. The offer to repurchase common shares will be conducted
solely through tender offer materials mailed to each shareholder.

The
Company's board of trustees will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase common shares
and under what terms:



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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 5. Share Repurchase Program (Continued)

The Company currently intends to limit the number of common shares to be repurchased during any calendar year to the number of common shares it can repurchase with the proceeds it
receives from the sale of common shares under its distribution reinvestment plan. At the discretion of the Company's board of trustees, the Company may also use cash on hand, cash available from
borrowings and cash from liquidation of securities investments as of the end of the applicable period to repurchase common shares. In addition, the Company will limit the number of common shares to be
repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of common shares that
the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such common shares on each date of repurchase at a price equal to 90%
of the current offering price in effect on each date of repurchase. The Company's board of trustees may amend, suspend or terminate the repurchase program at any time, upon 30 days' notice.

Note 6. Revolving Credit Facility

On June 24, 2011, FSEP Funding entered into a revolving credit facility, or the credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank. Deutsche Bank is the
sole lender and serves as administrative agent under the credit facility.

The
credit facility provides for borrowings in an aggregate amount up to $50,000. Prior to the time that the Company's net assets exceed $25,000, the credit facility is provided by
Deutsche Bank to FSEP Funding on a non-committed basis. Once the Company's net assets exceed $25,000, the credit facility will be provided on a committed basis.

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

Pricing
under the credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, plus a spread
of 1.60% per annum for the relevant period. Interest is payable quarterly in arrears. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be
due and payable, on June 24, 2013.

As
of June 30, 2011, no amounts were outstanding under the credit facility. The Company incurred costs of $131 in connection with obtaining the credit facility, which the Company
has recorded as deferred financing costs on its balance sheet and amortizes to interest expense over the life of the credit facility.

Borrowings
under the credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds that Deutsche Bank will advance to FSEP Funding varies
depending upon the types of assets in FSEP Funding's portfolio. The occurrence of certain events described as "Super-Collateralization Events" in the credit agreement that governs the credit facility,
or a decline in the

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 6. Revolving Credit Facility (Continued)

Company's
net asset value below a specified threshold, results in a lowering of the amount of funds that Deutsche Bank will advance against such assets. Super-Collateralization Events include, without
limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of GSO, the sub-adviser to FS Advisor; (ii) the bankruptcy or
insolvency of GSO or FS Advisor; (iii) GSO ceasing to act as the Company's sub-adviser or FS Advisor ceasing to act as the Company's investment adviser; (iv) the Company
ceasing to act as FSEP Funding's investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value above a specified threshold; and
(v) the Company, GSO or FS Advisor committing fraud or other illicit acts in its or their investment advisory capacities.

In
connection with the credit facility, FSEP Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other
customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default:
(a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the credit facility exceeding the applicable advance
rates; (c) the purchase by FSEP Funding of certain ineligible assets; (d) the insolvency or bankruptcy of FSEP Funding or the Company; (e) the Company ceasing to act as investment
manager of FSEP Funding's assets; (f) the decline of the Company's net asset value below a specified threshold; and (g) fraud or other illicit acts by the Company, FS Advisor or GSO in
its or their investment advisory capacities. During the continuation of an event of default, FSEP Funding must pay interest at a default rate.

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

Note 7. Subsequent Events

Satisfaction of Minimum Offering Requirement and Commencement of Operations

On July 18, 2011, the Company satisfied its minimum offering requirement and formally commenced its operations upon raising
gross proceeds in excess of $2,500 from sales of its common shares in its continuous public offering to persons who are not affiliated with the Company or FS Advisor. On such date, the Company sold
357,921 common shares for gross proceeds of $3,294 pursuant to its public offering. Upon satisfaction of the minimum offering requirement, the Company also issued to 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 an aggregate of 2,222,648 common shares
for aggregate proceeds of $20,004 in connection with the closing of the private placement conducted in April 2011.

Total Return Swap

On August 11, 2011, EP Investments LLC, or EP Investments, the Company's newly-formed, wholly-owned financing subsidiary,
entered into a total return swap, or TRS, for one or more senior secured floating rate loans with Citibank, N.A., or Citibank.

A
TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a
specified

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 7. Subsequent Events (Continued)

security,
basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a
portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a
TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

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

Pursuant
to the terms of the TRS, EP Investments may select one or more loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of
$25,000, or such greater amount as may be agreed to by Citibank. Loans proposed by EP Investments to be included in the TRS will be approved or rejected by Citibank, in its sole discretion, on a
trade-by-trade basis. EP Investments is required to initially cash collateralize a percentage of each loan (such percentage to be proposed in each instance by EP Investments
and accepted or rejected by Citibank in its sole discretion) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, EP
Investments has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash
collateral nor any other assets of EP Investments are available to pay the debts of the Company. The obligations of EP Investments under the TRS are guaranteed by the Company.

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

Each
loan included in the TRS must meet criteria described in the TRS Agreement, including a requirement that each loan be rated by Moody's and S&P and quoted by a nationally-recognized
pricing service. EP Investments receives from Citibank all interest and fees payable in respect of the loans included in the TRS. EP Investments pays to Citibank interest at a rate equal to
one-month LIBOR + 1.35% per annum. In addition, upon the termination
or repayment of any loan subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.

Under
the terms of the TRS, EP Investments may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the
value of the underlying loans after such value decreases below a specified amount. The amount of collateral required to be posted by EP Investments is determined primarily on the basis of the
aggregate value of the underlying loans.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (Continued)

(in thousands, except share and per share information)

Note 7. Subsequent Events (Continued)

Pursuant
to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would
receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to EP Investments. The limit on the additional
collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral
already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included in the TRS).

Citibank
may terminate the TRS on or after May 11, 2012. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon
providing no more than 30 days, and no less than 7 days, prior notice to Citibank. EP Investments will pay Citibank customary fees in connection with the establishment and maintenance of
the TRS.

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

Forward-Looking Statements

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

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:



We
have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on
Form 10-Q, and we assume no obligation to update any such forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to revise or
update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised to consult any additional disclosures that we may make directly to you or
through reports that we in the future may file with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on

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Form 8-K.
The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.

Overview

We were formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced
operations on July 18, 2011 upon raising gross proceeds in excess of $2,500 from sales of our common shares in our continuous public offering to persons who are not affiliated with us or FS
Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a BDC under the 1940 Act and intends to elect
to be treated for federal income tax purposes, and intends to qualify annually thereafter, as a RIC under the Code.

Our
investment policy is to invest, under normal circumstances, at least 80% of our assets in securities of energy and power, or Energy, related companies. We consider Energy companies
to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or marketing of natural gas,
natural gas liquids, crude oil, refined products, coal or power. This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such
change.

Our
investment objectives are to generate current income and long-term capital appreciation. We anticipate that our portfolio will be 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 currently intend to weight our
portfolio towards senior and subordinated debt. In addition to investments purchased from other dealers or investors in the secondary market, we expect to invest in primary market transactions and
originated investments as this will provide us with the ability to tailor investments to best match a project's or company's needs with our investment objectives. Our portfolio may also be comprised
of select income-oriented preferred or common equity interests, which refers to equity interests that pay consistent, high-yielding dividends, that we believe will produce both current
income and long-term capital appreciation. These income-oriented preferred or common equity interests may include interests in master limited partnerships. In connection with certain of
our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. Once we raise sufficient capital, we expect that our investments will
generally range between $5,000 and $25,000 each, although investments may vary as the size of our capital base changes and will ultimately be at the discretion of FS Advisor, subject to oversight by
our board of trustees. Prior to raising sufficient capital, we may make smaller investments due to liquidity constraints.

Our
investment activities are managed by FS Advisor and supervised by our board of trustees, a majority of whom are independent. Under our investment advisory and administrative services
agreement, we have agreed to pay FS Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. See "Contractual Obligations." FS
Advisor has engaged GSO to act as our investment sub-adviser. GSO is a subsidiary of The Blackstone Group L.P., or Blackstone. GSO assists FS Advisor in identifying investment
opportunities and makes investment recommendations for approval by FS Advisor according to asset allocation and other guidelines set by FS Advisor.

Revenues

We plan to generate revenue in the form of interest earned on the debt securities that we hold. We may also generate revenues in the
form of dividends on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, origination, structuring or diligence

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fees,
monitoring fees, fees for providing managerial assistance, consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.

Expenses

Following the satisfaction of the minimum offering requirement on July 18, 2011, our primary operating expenses are the payment
of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our
investment advisory fee compensates FS Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FS Advisor is responsible for compensating our
investment sub-adviser.

We
also reimburse FS Advisor for its performance of services related to our administration and operation, provided that such reimbursement is equal to the lower of FS Advisor's actual
costs or the amount that we would be required to pay for comparable administrative services in the same geographic location, and provided further that such costs are reasonably allocated to us on the
basis of assets, revenues, time records or other reasonable methods. We do not reimburse FS Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital
equipment or other administrative items allocated to a controlling person of FS Advisor. We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses
relating to:



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Expense Reimbursement

Franklin Square Holdings, an affiliate of FS Advisor, has agreed to reimburse us for expenses in an amount that is sufficient to ensure
that, for tax purposes, our net investment income and net capital gains are equal to or greater than the cumulative distributions paid to our shareholders in each quarter. This arrangement is designed
to ensure that no portion of our distributions will represent a return of capital for our shareholders. Franklin Square Holdings has no obligation to reimburse any portion of our expenses but 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. The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by our chairman, president
and chief executive officer, Michael Forman, and our vice-chairman, David Adelman. There can be no assurance that Franklin Square Holdings will reimburse any portion of our expenses in
future quarters.

Financial Condition, Liquidity and Capital Resources

We generate cash primarily from the net proceeds of our ongoing 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. Since commencing our initial public offering and through August 12, 2011, we
have sold 581,562 common shares for gross proceeds of $5,476. As of August 12, 2011, we have raised total gross proceeds of $25,680, 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.

We
will sell our common shares on a continuous basis at an initial offering price of $10.00; however, to the extent that our net asset value per share increases, we will sell at a price
necessary to ensure that common shares are not sold at a price, after deduction of selling commissions and dealer manager fees, that is below our net asset value per share. In the event of a material
decline in our net asset value per share, which we consider to be a 5% decrease, subject to certain conditions, we will reduce our offering price accordingly. In connection with each
semi-monthly closing on the sale of our common shares, our board of trustees or a committee thereof will be required to make the determination that we are not selling our common shares at
a price below our then current net asset value within 48 hours of the time that we price our common shares.

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

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We
may borrow funds to make investments, to the extent we determine that additional capital would allow us to take advantage of additional investment opportunities, if the market for
debt financing presents attractively priced debt financing opportunities, or if our board of trustees determines that leveraging our portfolio would be in our best interests and the best interests of
our shareholders.



On June 24, 2011, our newly-formed, wholly-owned special purpose financing subsidiary, FSEP Funding, entered into a credit
facility with Deutsche Bank. Deutsche Bank is the sole lender and serves as administrative agent under the credit facility.

The
credit facility provides for borrowings in an aggregate amount up to $50,000. Prior to the time that our net assets exceed $25,000, the credit facility is provided by Deutsche Bank
to FSEP Funding on a non-committed basis. Once our net assets exceed $25,000, the credit facility will be provided on a committed basis.

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

Pricing
under the credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, plus a spread
of 1.60% per annum for the relevant period. Interest is payable quarterly in arrears. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be
due and payable, on June 24, 2013.

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

In
connection with the credit facility, FSEP Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other
customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default:
(a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the credit facility exceeding the applicable advance
rates; (c) the purchase by FSEP Funding of certain ineligible assets; (d) the insolvency or bankruptcy of FSEP Funding or us; (e) our ceasing to act as investment manager of FSEP
Funding's assets; (f) the decline of our net asset value below a specified threshold; and (g) fraud or other illicit acts by us, FS Advisor or GSO in our or

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their
investment advisory capacities. During the continuation of an event of default, FSEP Funding must pay interest at a default rate. As of June 30, 2011, no amounts were outstanding under
the credit facility. FSEP Funding was in compliance with the terms of the credit facility as of June 30, 2011.

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



On August 11, 2011, our newly-formed, wholly-owned special purpose financing subsidiary, EP Investments, entered into a TRS for
one or more senior secured floating rate loans with Citibank.

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

Pursuant
to the terms of the TRS, EP Investments may select one or more loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of
$25,000, or such greater amount as may be agreed to by Citibank. Loans proposed by EP Investments to be included in the TRS will be approved or rejected by Citibank, in its sole discretion, on a
trade-by-trade basis. EP Investments is required to initially cash collateralize a percentage of each loan (such percentage to be proposed in each instance by EP Investments
and accepted or rejected by Citibank in its sole discretion) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, EP
Investments has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash
collateral nor any other assets of EP Investments are available to pay our debts. The obligations of EP Investments under the TRS are guaranteed by us.

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

Each
loan included in the TRS must meet criteria described in the TRS Agreement, including a requirement that each loan be rated by Moody's and S&P and quoted by a nationally-recognized
pricing service. EP Investments receives from Citibank all interest and fees payable in respect of the loans included in the TRS. EP Investments pays to Citibank interest at a rate equal to
one-month LIBOR + 1.35% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, EP Investments will either receive from Citibank the
appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.

Under
the terms of the TRS, EP Investments may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the
value of the underlying loans after such value decreases below a specified amount. The amount of collateral required to be posted by EP Investments is determined primarily on the basis of the
aggregate value of the underlying loans. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by
determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to EP
Investments. The limit on the additional collateral that EP Investments may be required to post

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pursuant
to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by EP Investments (determined without
consideration of the initial cash collateral posted for each loan included in the TRS).

Citibank
may terminate the TRS on or after May 11, 2012. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon
providing no more than 30 days, and no less than 7 days, prior notice to Citibank. EP Investments will pay Citibank customary fees in connection with the establishment and maintenance of
the TRS.

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 approximately $200
to purchase 22,222 common shares at $9.00 per share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals will not
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, 222,222 additional common
shares at $9.00 per share. The principals will not tender these common shares for repurchase as long as FS Advisor remains our investment adviser. In connection with the same private placement, other
individuals and entities affiliated with FS Advisor and certain members of our board of trustees agreed to purchase 1,444,871 common shares, and certain individuals and entities affiliated with GSO
agreed to purchase 555,555 common shares, in each case at a price of $9.00 per share. In connection with the private placement, we issued an aggregate of 2,222,648 common shares for aggregate proceeds
of $20,004, upon the satisfaction of the minimum offering requirement on July 18, 2011.

RIC Status and Distributions

We intend to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. Generally, a RIC is
entitled to a deduction for federal income tax purposes for distributions paid to shareholders if it distributes at least 90% of its "Investment Company Taxable Income," as defined by the Code, each
year. To qualify for and maintain RIC tax treatment, we must among other things, distribute at least 90% of our ordinary income and realized net short-term capital gains in excess of
realized net long-term capital losses, if any. In order to avoid certain excise taxes imposed on RICs, we currently intend to distribute during each calendar year an amount at least equal
to the sum of (1) 98% of our ordinary income for the calendar year, (2) 98.2% of our capital gains in excess of capital losses for the one-year period ending on
October 31 of the calendar year and (3) any ordinary income and net capital gains for preceding years that were not distributed during such years and on which we paid no federal income
tax.

Subject
to our board of trustees' discretion and applicable legal restrictions, our board of trustees intends to authorize and declare distributions on either a semi-monthly
or monthly basis and pay distributions on either a monthly or quarterly basis. On July 21, 2011, our board of trustees declared our first regular semi-monthly cash distribution of
$0.02605 per common share, payable on July 29, 2011 to shareholders of record on July 28, 2011. On August 10, 2011, our board of trustees declared two regular
semi-monthly cash distributions of $0.02605 per common share each, which are expected to be paid on August 31, 2011 to shareholders of record on August 15, 2011 and
August 30, 2011, respectively.

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We will calculate each shareholder's specific distribution amount for the period using record and declaration dates and each shareholder's distributions will
begin to accrue on the date we accept each shareholder's subscription for our common shares. From time to time, we may also pay special interim distributions in the form of cash or common shares at
the discretion of our board of trustees. During certain periods, our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our
continuous public offering of common shares. As a result, it is possible that a portion of the distributions we make may represent a return of capital for tax purposes. Each year a statement on
Form 1099-DIV identifying the source of the distribution (i.e., paid from ordinary income, paid from net capital gains on the sale of
securities, and/or a return of paid-in capital surplus which is a nontaxable distribution) will be mailed to our shareholders.

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

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

We
may fund our cash distributions to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital
gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets and expense reimbursements from Franklin Square Holdings.

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 our expected operating plans occur we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below:



We intend to determine the net asset value of our investment portfolio each quarter. Securities that are publicly-traded will be valued
at the reported closing price on the valuation date. Securities that are not publicly-traded will be valued at fair value as determined in good faith by our board of trustees. In connection with that
determination, FS Advisor will prepare portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities,

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recent
portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.

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

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



Determination
of fair value involves subjective judgments and estimates. Accordingly, the notes to our financial statements refer to the uncertainty with respect to the possible effect
of such valuations, and
any change in such valuations on our financial statements. Below is a description of factors that our board of trustees may consider when valuing our equity and debt 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 will incorporate these factors into discounted
cash flow models to arrive at fair value. Other factors that our board of trustees will 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.

Our
equity interests in portfolio companies for which there is no liquid public market will be valued at fair value. Our board of trustees, in its analysis of fair value, may consider
various factors, such as multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation
value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or 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.

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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
will be based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale will typically be valued at a discount from the public market value of the
security.

The
fair values of our investments will be 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. We intend to value all of our Level 2 and Level 3 assets by using
an independent third-party pricing service, which will provide prevailing bid and ask prices that are screened for validity by the service from dealers on the date of the relevant period end. For
investments for which the third-party pricing service is unable to obtain quoted prices, we intend to obtain bid and ask prices directly from dealers who make a market in such investments. To the
extent that we hold investments for which no active secondary market exists and, therefore, no bid and ask prices can be readily obtained, our valuation committee will utilize an independent
third-party valuation service to value such investments. We will value the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, Citibank will
value the loans underlying the TRS based on quotes received from third-party dealers. The value of the TRS will be based on the increase or decrease in the value of the loans underlying the TRS,
together with accrued interest income, interest expense and certain other expenses incurred under the TRS.

We
will periodically benchmark the bid and ask prices received from the third-party pricing service and valuations received from the third-party valuation service, as applicable, against
the actual prices at which we purchase and sell our investments. We believe that these prices will be reliable indicators of fair value.



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



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



Organization costs include, among other things, the cost of organizing as a Delaware statutory trust, including the cost of legal
services and other fees pertaining to our organization. These costs are

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expensed
as incurred. For the three and six months ended June 30, 2011, we incurred organization costs of $74 and $167, respectively, which have been paid on our behalf by Franklin Square
Holdings and have been recorded as a contribution to capital. From our inception in September 2010 through June 30, 2011, we incurred aggregate organization costs of $350, which have been paid
on our behalf by Franklin Square Holdings and have been recorded as a contribution to capital. See also "Related Party Transactions."



Our offering costs include, among other things, legal fees and other costs pertaining to the preparation of the Registration Statement
on Form N-2 relating to our continuous public offering of our common shares. We have charged offering costs against capital in excess of par value on the balance sheet. For the
three and six months ended June 30, 2011, we incurred offering costs of $591 and $777, respectively, which have been paid on our behalf by Franklin Square Holdings and have been recorded as a
contribution to capital. From our inception in September 2010 through June 30, 2011, we incurred aggregate offering costs of $1,465, which have been paid on our behalf by Franklin Square
Holdings and have been recorded as a contribution to capital. See also "Related Party Transactions."



We intend to elect to be treated for federal income tax purposes as a RIC under Subchapter M of the Code. To maintain
qualification as a RIC, we must, among other things, meet certain source-of-income and asset diversification requirements and distribute to our shareholders, for each taxable
year, at least 90% of our "investment company taxable income," which is generally our net ordinary income plus the excess, if any, of realized net short-term capital gains over realized
net long-term capital losses. We will not have to pay corporate-level federal income taxes on any income that we distribute to our
shareholders. We intend to make distributions in an amount sufficient to maintain our RIC status each year and to avoid any federal income taxes on income. We will also be 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 for which
we paid no federal 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 liabilities in the financial statements. Recognition of a tax
benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. We recognize
interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. As of June 30, 2011, we had not incurred any interest or
penalties.



Distributions to our common shareholders are recorded as of the record date. 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 either a monthly or
quarterly basis. Net realized capital gains, if any, will be distributed or deemed distributed at least annually.

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Pursuant to the terms of the investment advisory and administrative services agreement we entered into with FS Advisor, the incentive
fee on capital gains earned on
liquidated investments of our portfolio during operations prior to our liquidation will be determined and payable in arrears as of the end of each calendar year. 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 each calendar year, 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 will 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 will include unrealized gains in the calculation of the capital gains incentive fee
expense and related capital gains incentive fee payable. This accrual will reflect the incentive fees that would be payable to FS Advisor as if our entire portfolio was liquidated at its fair value as
of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

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 will be 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, will be reimbursed for
administrative expenses incurred on our behalf.

The
incentive fee consists of three parts. The first part, which we refer to as the subordinated incentive fee on income, will be calculated and payable quarterly in arrears and will
equal 20.0% of "pre-incentive fee net investment income" for the immediately preceding quarter and will be subordinated to a preferred return on adjusted capital, as defined in our
investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized rate of 6.5%. The second part of the incentive fee, which we refer to as the incentive fee on
capital gains during operations, will be an incentive fee on capital gains earned on liquidated investments from the portfolio during operations prior to our liquidation and will be 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 will equal 20.0% of our incentive fee capital
gains, which will equal our realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, 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 third part of the incentive fee, which we refer to as the subordinated
liquidation incentive fee, will equal 20.0% of the net proceeds from our liquidation in excess of adjusted capital, as calculated immediately prior to liquidation.

We
commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, when we formally commenced operations upon satisfaction of the
minimum offering requirement.

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From time to time, FS Advisor may enter into sub-advisory relationships with registered investment advisers that possess skills or attributes that FS
Advisor believes will aid it in achieving our investment objectives. FS Advisor has engaged GSO to act as our investment sub-adviser. GSO is a subsidiary of Blackstone. GSO assists FS
Advisor in identifying investment opportunities and makes investment recommendations for approval by FS Advisor according to asset allocation and other guidelines set by FS Advisor.

FS
Advisor has agreed to provide us with general ledger accounting, fund accounting and investor and other administrative services. FS Advisor has contracted with Vigilant Compliance
Services, LLC to provide us with a chief compliance officer, Salvatore Faia, a principal with that firm.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which provides additional guidance to
improve disclosures regarding fair value measurements. This guidance requires two new disclosures: (1) transfers in and out of Level 1 and 2 measurements and the reasons for the
transfers and (2) a gross presentation of activity within the Level 3 roll forward. The guidance also includes clarifications to existing disclosure requirements on the level of
disaggregation and disclosures regarding inputs and valuation techniques. The guidance applies to all entities required to make disclosures about recurring and nonrecurring fair value measurements.
The effective date of this guidance is the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 roll forward
information, which is required for annual reporting periods beginning after December 15, 2010 and for interim reporting periods within those years. As we did not begin formal operations until
July 18, 2011 upon satisfying the minimum offering requirement, the adoption of this guidance, including the gross presentation of Level 3 roll forward information, did not have a
significant impact on the Company's consolidated financial statements or disclosures.

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

Related Party Transactions

We have entered into an investment advisory and administrative services agreement with FS Advisor. Pursuant to the investment advisory
and administrative services agreement, FS Advisor is paid 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, if applicable. See "Contractual Obligations." We

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also
reimburse FS Advisor for expenses necessary for its performance of services related to our administration and operation, provided that such reimbursement is equal to the lower of FS Advisor's
actual costs or the amount that we would be required to pay for comparable services in the same geographic location, and provided further that such costs are reasonably allocated to us on the basis of
assets, revenues, time records or other reasonable methods.

Since
inception, Franklin Square Holdings has funded offering costs and organization costs in the amount of $1,815. We have recorded these as a contribution to capital. The offering
costs were offset against capital in excess of par on the 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, there is no liability on our part for the offering or organization costs funded by FS Advisor or its
affiliates (including Franklin Square Holdings) until the investment advisory and administrative services agreement is effective. The investment advisory and administrative services agreement became
effective upon satisfaction of the minimum offering requirement on July 18, 2011. At such time, FS Advisor became entitled to receive 1.5% of the gross proceeds raised from outside investors
until all offering costs and organization costs funded by FS Advisor or its affiliates have been recovered.

In
December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of approximately $200 to purchase 22,222 common shares at $9.00 per
share, which represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. The principals will not 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, 222,222 additional common
shares at $9.00 per share. The principals will not tender these common shares for repurchase as long as FS Advisor remains our investment adviser. In connection with the same private placement, other
individuals and entities affiliated with FS Advisor and certain members of our board of trustees agreed to purchase
1,444,871 common shares, and certain individuals and entities affiliated with GSO agreed to purchase 555,555 common shares, in each case at a price of $9.00 per share. In connection with the private
placement, we issued an aggregate of 2,222,648 common shares for aggregate proceeds of $20,004, upon the satisfaction of the minimum offering requirement on July 18, 2011.

FS
Advisor's senior management team is comprised of the same personnel as the senior management team of FB Income Advisor, LLC, the investment adviser to FS Investment
Corporation. As a result, such members provide investment advisory services to both us and FS Investment Corporation. FB Income Advisor, LLC, which is controlled by Mr. Forman, our
chairman, president and chief executive officer, was organized for the purpose of sourcing and managing income-oriented investments for institutions and high net worth individuals. While neither FS
Advisor nor FB Income Advisor, LLC is currently making private corporate debt investments for clients other than us and FS Investment Corporation, respectively, either one, or both, may do so
in the future. In the event that FS Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable
manner consistent with our investment objectives and strategies, if necessary, so that we will not be disadvantaged in relation to any other client of FS Advisor or its management team. In addition,
even in the absence of FS Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation rather than us.

Our
affiliate, Franklin Square Holdings, has agreed to reimburse us for expenses in an amount that is sufficient to ensure that, for tax purposes, our net investment income and net
capital gains are equal to or greater than the cumulative distributions paid to our shareholders in each quarter. This arrangement is designed to ensure that no portion of our distributions will
represent a return of capital

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for
our shareholders. Franklin Square Holdings has no obligation to reimburse any portion of our expenses but has indicated that it expects to continue such reimbursements until it deems that we have
achieved economies of scale sufficient to ensure that we can bear a reasonable level of expenses in relation to our income. The specific amount of expenses reimbursed by Franklin Square Holdings, if
any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael Forman, and our vice-chairman,
David Adelman. There can be no assurance that Franklin Square Holdings will reimburse any portion of our expenses in future quarters.

FS2,
the dealer manager for our continuous public offering, is an affiliate of FS Advisor and also serves as the dealer manager for FS Investment Corporation's continuous
public offering of shares.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk.

We are subject to financial market risks, including changes in interest rates. A rise in the general level of interest rates can be
expected to lead to higher interest rates applicable to our debt investments, especially to the extent that we hold variable rate investments, and to declines in the value of any fixed rate
investments we hold. To the extent that a majority of our investments may be in variable rate investments, an increase in interest rates could make it easier for us to meet or exceed our incentive fee
preferred return, as defined 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 also to the amount of incentive fees payable to FS Advisor with respect to our increased pre-incentive fee net investment income.

On
June 24, 2011, Deutsche Bank agreed to provide a $50,000 revolving credit facility to FSEP Funding, our wholly-owned subsidiary. Pursuant to the terms of the facility, FSEP
Funding will borrow at a floating rate based on LIBOR. Under the terms of the TRS between EP Investments and Citibank, EP Investments pays fees to Citibank at a floating rate based on LIBOR in
exchange for the right to receive the economic benefit of one or more loans having a maximum notional amount of $25,000, or such greater amount as may be agreed to by Citibank. We expect any future
credit facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries may enter into will also be based on a floating interest rate. As a result, we are
subject to risks relating to changes in market interest rates. In periods of rising interest rates, when we or our subsidiaries have debt outstanding or swap agreements in effect, our interest expense
would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.

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

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.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports
filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to
our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required

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disclosure.
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and
procedures.

As
required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the
chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2011. Based on the foregoing, our
chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

There
was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during
the three months ended June 30, 2011 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.

Investing in our common shares involves a number of significant risks. In addition to the other information
contained in this quarterly report on Form 10-Q and the risk factors set forth in our final prospectus filed pursuant to Rule 497 (File No. 333-169679) on
May 12, 2011, as supplemented and amended, you should consider carefully the following information before making an investment in our common shares. If any of the following events occur, our
business, financial condition and results of operations could be materially and adversely affected. In such case, the net asset value of our common shares could decline, and you may lose all or part
of your investment.

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

EP Investments has entered into a TRS for one or more senior secured floating rate loans with Citibank. See "Management's Discussion
and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital Resources" for a more detailed discussion of the terms of the TRS between EP
Investments and Citibank.

A
TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a
specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage
to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure
of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

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

The
TRS is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the TRS and the loans underlying the TRS. In addition, we may incur certain costs
in connection with the TRS that could in the aggregate be significant.

A
TRS is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the counterparty. In the
case of the TRS with Citibank, EP Investments is required to post cash collateral amounts to secure its obligations to Citibank under the TRS. Citibank, however, is not required to collateralize any
of its obligations to EP Investments under the TRS. EP Investments bears the risk of depreciation with respect to the value of the loans underlying the TRS and is required under the terms of the TRS
to post additional collateral on a dollar-for-dollar basis in the event of depreciation in the value of the underlying loans after such value decreases below a specified
amount. The amount of collateral required to be posted by EP Investments is determined primarily on the basis of the aggregate value of the underlying loans.

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The
limit on the additional collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and
the amount of cash collateral already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included in the TRS). We have guaranteed the
obligations of EP Investments under the TRS. Therefore, the absolute risk of loss with respect to the TRS is the notional amount of the TRS.

In
addition to customary events of default and termination events included in the form ISDA 2002 Master Agreement, the TRS Agreement contains the following termination events:
(a) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (b) a default by EP Investments or us with respect to indebtedness in an amount
equal to or greater than the lesser of $10.0 million and 2% of our net asset value at such time; (c) a merger of EP Investments or us meeting certain criteria; (d) either us or EP
Investments amending its constituent documents in a manner that has or could reasonably be expected to have a material adverse effect; (e) our ceasing to be the sole owner of EP Investments;
(f) our ceasing to be the investment manager of EP Investments or having authority to enter into transactions under the TRS on behalf of EP Investments, and not being replaced by an entity
reasonably acceptable to Citibank; (g) FS Advisor ceasing to be our investment adviser or GSO ceasing to be the sub-adviser to FS Advisor; (h) EP Investments failing to
comply with its investment strategies or restrictions to the extent such non-compliance has or could reasonably be expected to have a material adverse effect; (i) EP Investments
becoming liable in respect of any obligation for borrowed money, other than arising under the TRS Agreement; (j) we dissolve or liquidate; (k) there occurs, without the prior consent of
Citibank, any material change to or departure from our policies or the policies of EP Investments that may not be changed without the vote of our shareholders and that relates to EP Investments'
performance of its obligations under the TRS Agreement; and (l) we violate certain provisions of the 1940 Act or our election to be regulated as a BDC is revoked or withdrawn. In addition,
Citibank may terminate any specific loan underlying the TRS that fails to satisfy the obligation criteria set forth in the TRS Agreement for at least 30 days.

In
addition to the rights of Citibank to terminate the TRS following an event of default or termination event as described above, Citibank may terminate the TRS on or after
May 11, 2012. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon providing no more than 30 days, and no less than
7 days, prior notice to Citibank. Upon any termination of the TRS, EP Investments will be required to pay Citibank the amount of any decline in the aggregate value of the loans subject to the
TRS or, alternatively, will be entitled to receive the
amount of any appreciation in the aggregate value of such loans. In the event that Citibank chooses to exercise its termination rights, it is possible that EP Investments will owe more to Citibank or,
alternatively, will be entitled to receive less from Citibank than it would have if EP Investments controlled the timing of such termination due to the existence of adverse market conditions at the
time of such termination.

In
addition, because a TRS is a form of synthetic leverage, such arrangements are subject to risks similar to those associated with the use of leverage.

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

During the three months ended June 30, 2011, pursuant to a private placement of our common shares under Section 4(2) of
the Securities Act of 1933, as amended, conducted in April 2011, we sold an aggregate of 2,222,648 common shares to certain 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. The common shares were sold in the private placement at a price of $9.00 per share, which
represents the initial public offering price of $10.00 per share, net of selling commissions and dealer manager fees. We received aggregate proceeds of $20,004,000 from the private placement.

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Item 3.    Defaults upon Senior Securities.

Not applicable.

Item 4.    Reserved.

Item 5.    Other Information.

Total Return Swap

On August 11, 2011, our newly-formed, wholly-owned special purpose financing subsidiary, EP Investments, entered into a TRS for
one or more senior secured floating rate loans with Citibank.

A
TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a
specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage
to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure
of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.

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

Pursuant
to the terms of the TRS, EP Investments may select one or more loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of
$25,000,000, or such greater amount as may be agreed to by Citibank. Loans proposed by EP Investments to be included in the TRS will be approved or rejected by Citibank, in its sole discretion, on a
trade-by-trade basis. EP Investments is required to initially cash
collateralize a percentage of each loan (such percentage to be proposed in each instance by EP Investments and accepted or rejected by Citibank in its sole discretion) included under the TRS in
accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, EP Investments has agreed not to draw upon, or post as collateral, such cash collateral
in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral nor any other assets of EP Investments are available to pay our debts. The
obligations of EP Investments under the TRS are guaranteed by us.

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

Each
loan included in the TRS must meet criteria described in the TRS Agreement, including a requirement that each loan be rated by Moody's and S&P and quoted by a nationally-recognized
pricing service. EP Investments receives from Citibank all interest and fees payable in respect of the loans included in the TRS. EP Investments pays to Citibank interest at a rate equal to
one-month LIBOR + 1.35% per annum. In addition, upon the termination or repayment of any loan subject to the TRS, EP Investments will either receive from Citibank the
appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.

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Under
the terms of the TRS, EP Investments may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the
value of the underlying loans after such value decreases below a specified amount. The amount of collateral required to be posted by EP Investments is determined primarily on the basis of the
aggregate value of the underlying loans. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by
determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to EP
Investments. The limit on the additional collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying
the TRS and the amount of cash collateral already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included in the TRS).

Citibank
may terminate the TRS on or after May 11, 2012. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon
providing no more than
30 days, and no less than 7 days, prior notice to Citibank. EP Investments will pay Citibank customary fees in connection with the establishment and maintenance of the TRS.

In
connection with the TRS, EP Investments has made customary 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 and termination events included in the form ISDA 2002 Master Agreement, the TRS Agreement contains the following
termination events: (a) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (b) a default by EP Investments or us with respect to
indebtedness in an amount equal to or greater than the lesser of $10.0 million and 2% of our net asset value at such time; (c) a merger of EP Investments or us meeting certain criteria;
(d) either us or EP Investments amending its constituent documents in a manner that has or could reasonably be expected to have a material adverse effect; (e) our ceasing to be the sole
owner of EP Investments; (f) our ceasing to be the investment manager of EP Investments or having authority to enter into transactions under the TRS on behalf of EP Investments, and not being
replaced by an entity reasonably acceptable to Citibank; (g) FS Advisor ceasing to be our investment adviser or GSO ceasing to be the sub-adviser to FS Advisor; (h) EP
Investments failing to comply with its investment strategies or restrictions to the extent such non-compliance has or could reasonably be expected to have a material adverse effect;
(i) EP Investments becoming liable in respect of any obligation for borrowed money, other than arising under the TRS Agreement; (j) we dissolve or liquidate; (k) there occurs,
without the prior consent of Citibank, any material change to or departure from our policies or the policies of EP Investments that may not be changed without the vote of our shareholders and that
relates to EP Investments' performance of its obligations under the TRS Agreement; and (l) we violate certain provisions of the 1940 Act or our election to be regulated as a BDC is revoked or
withdrawn. In addition, Citibank may terminate any specific loan underlying the TRS that fails to satisfy the obligation criteria set forth in the TRS Agreement for at least 30 days.

The
summary descriptions of the TRS and the TRS Agreement contained in this quarterly report on Form 10-Q are qualified in their entirety by the full text of the
agreements constituting the TRS Agreement, copies of which are attached to this quarterly report on Form 10-Q as Exhibits 10.11, 10.12, 10.13 and 10.14 and are incorporated
herein by reference.

Termination of Certain Agreements

On July 15, 2011, we and The Bank of New York Mellon, together with its affiliates, or BNYM, agreed to terminate, effective as
of October 31, 2011 or such later date as the parties mutually agree, the custodian services agreement, dated as of April 1, 2011, between BNYM and us and the administration and
accounting services agreement between the parties. We and BNYM have commenced a transition process and we are currently in discussions with a number of reputable

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financial
institutions that we expect will be able to fulfill our needs in providing the services currently provided by BNYM without disruption. The termination of the custodian services agreement and
the administration and accounting services agreement followed a determination by the parties that the arrangement was no longer mutually beneficial. We do not believe that such termination will have a
material adverse impact on our operations or financial condition.

Under
the custodian services agreement, BNYM holds all of our portfolio securities and cash and transfers such securities or cash pursuant to instructions provided by us. Under the
administration and accounting services agreement, BNYM assists us in performing certain of our administrative and accounting functions, including corporate governance matters and accounting services
relating to management of our portfolio. No termination or other fees are payable in connection with the termination of the custodian services agreement and the administration and accounting services
agreement.

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Item 6.    Exhibits.

3.1

Second Amended and Restated Declaration of Trust of the Company.(Incorporated by reference to Exhibit (a)(3) filed with Amendment No. 3 to the Company's registration statement on
Form N-2 (File No. 333-169679) filed on May 6, 2011.)3.2

Amended and Restated Bylaws of the Company.(Incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.)4.1

Form of Subscription Agreement.(Incorporated by reference to Appendix A filed with prospectus supplement filed pursuant to Rule 497 (File No. 333-169679) filed on August 2,
2011.)4.2

Distribution Reinvestment Plan of the Company.(Incorporated by reference to Exhibit (e) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File
No. 333-169679) filed on May 6, 2011.)10.1

Investment Advisory and Administrative Services Agreement by and between the Company and FS Investment Advisor, LLC.(Incorporated by reference to Exhibit (g)(1) filed with Amendment
No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.2

Investment Sub-advisory Agreement between FS Investment Advisor, LLC and GSO Capital Partners LP.(Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 3 to the
Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.3

Dealer Manager Agreement by and between the Company and FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company's
registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.4

Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement).(Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company's
registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.5

Custody Agreement by and between the Company and The Bank of New York Mellon.(Incorporated by reference to Exhibit (j) filed with Amendment No. 3 to the Company's registration statement
on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.6

Escrow Agreement by and between the Company and UMB Bank, N.A.(Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to the Company's registration statement on Form N-2
(File No. 333-169679) filed on May 6, 2011.)10.7

Credit Agreement, dated as of June 24, 2011, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto.(Incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.8

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.)10.9

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.)10.10

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.)


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10.11
*
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.10.12
*
Confirmation Letter Agreement, dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A.10.13
*
Guarantee, dated as of August 11, 2011, by the Company in favor of Citibank, N.A.10.14
*
Investment Management Agreement, dated as of August 11, 2011, by and between the Company and EP Investments LLC.31.1
*
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.31.2
*
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.32.1
*
Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
*
Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*Filed
herewith.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized on August 15, 2011.

FS ENERGY AND POWER FUNDBy:

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

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


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