Table of Contents



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 MARCH 31, 2013.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 100,125,199 common shares of beneficial interest outstanding as of May 14, 2013.





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TABLE OF CONTENTS



PagePART IFINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTS


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


1Unaudited Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012


2Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2013 and
2012


3Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012


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


5Notes to Unaudited Consolidated Financial Statements


11ITEM 2.

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


36ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


60ITEM 4.

CONTROLS AND PROCEDURES


61PART IIOTHER INFORMATIONITEM 1.

LEGAL PROCEEDINGS


62ITEM 1A.

RISK FACTORS


62ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


62ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


62ITEM 4.

MINE SAFETY DISCLOSURES


62ITEM 5.

OTHER INFORMATION


62ITEM 6.

EXHIBITS


63SIGNATURES


65


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Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    Financial Statements.



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

March 31, 2013
(Unaudited)

December 31, 2012AssetsInvestments, at fair value (amortized cost$820,296 and $677,919, respectively)

$
856,416

$
701,172Cash


102,225


48,986Due from counterparty


76,276


56,876Receivable for investments sold and repaid


131


9,374Interest receivable


13,050


9,075Receivable for common shares purchased


141


41Deferred financing costs


158


325Receivable due on total return swap(1)


1,855


329Unrealized appreciation on total return swap(1)


5,731


3,141Prepaid expenses and other assets


137


175Total assets

$
1,056,120

$
829,494LiabilitiesPayable for investments purchased

$
13,932

$
25,556Credit facility payable


187,232


185,232Shareholder distributions payable


4,587


3,349Management fees payable


5,062


3,522Expense recoupment payable to sponsor(2)


99


1,083Accrued capital gains incentive fees(3)


9,234


6,482Subordinated income incentive fees payable(3)


753


Administrative services expense payable


375


159Interest payable


621


578Other accrued expenses and liabilities


1,302


644Total liabilities


223,197


226,605Shareholders' equityPreferred shares, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding





Common shares, $0.001 par value, 450,000,000 shares authorized, 87,444,533 and 64,524,909 shares issued and outstanding, respectively(4)


87


65Capital in excess of par value(5)


795,283


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


2,590


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


(6,891
)

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


41,854


26,402Total shareholders' equity


832,923


602,889Total liabilities and shareholders' equity

$
1,056,120

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

$
9.53

$
9.34


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




See notes to unaudited consolidated financial statements.

1

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Table of Contents



FS Energy and Power Fund

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)



Three Months Ended
March 31,2013

2012Investment IncomeInterest income

$
17,943

$
2,502Fee income


2,968


216Total investment income


20,911


2,718Operating expensesManagement fees


4,711


775Capital gains incentive fees(1)


3,610


519Subordinated income incentive fees(1)


753


Administrative services expenses


453


62Share transfer agent fees


400


59Accounting and administrative fees


140


38Interest expense


1,242


269Other general and administrative expenses


643


257Total operating expenses


11,952


1,979Less: Expense reimbursement from sponsor(2)





(801
)Net expenses


11,952


1,178Net investment income


8,959


1,540Realized and unrealized gain/lossNet realized gain (loss) on investments


(339
)

330Net realized gain (loss) on total return swap(3)


2,919


119Net realized gain (loss) on foreign currency


10


9Net change in unrealized appreciation (depreciation) on investments


12,867


1,842Net change in unrealized appreciation (depreciation) on total return swap(3)


2,590


300Net change in unrealized gain (loss) on foreign currency


(5
)

3Total net realized and unrealized gain/loss on investments


18,042


2,603Net increase (decrease) in net assets resulting from operations

$
27,001

$
4,143Per share informationbasic and diluted(4)Net increase (decrease) in net assets resulting from operations (Earnings per Share)

$
0.36

$
0.38Weighted average shares outstanding


75,360,255


10,889,229


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




See notes to unaudited consolidated financial statements.

2

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Table of Contents



FS Energy and Power Fund

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)



Three Months Ended
March 31,2013

2012OperationsNet investment income

$
8,959

$
1,540Net realized gain (loss) on investments, total return swap and foreign currency


2,590


458Net change in unrealized appreciation (depreciation) on investments


12,867


1,842Net change in unrealized appreciation (depreciation) on total return swap(1)


2,590


300Net change in unrealized gain (loss) on foreign currency


(5
)

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


27,001


4,143Shareholder distributions(2)Distributions from net investment income


(12,496
)

(1,450
)Distributions from net realized gain on investments





(339
)Net decrease in net assets resulting from shareholder distributions


(12,496
)

(1,789
)Capital share transactionsIssuance of common shares


209,986


62,208Reinvestment of shareholder distributions


6,971


696Repurchases of common shares


(228
)

Offering costs


(1,200
)

(418
)Reimbursement of investment adviser(3)





(1,022
)Capital contributions of investment adviser





418Net increase in net assets resulting from capital share transactions


215,529


61,882Total increase in net assets


230,034


64,236Net assets at beginning of period


602,889


67,685Net assets at end of period

$
832,923

$
131,921Accumulated distributions in excess of net investment income(2)

$
(6,891
)
$
(342
)


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




See notes to unaudited consolidated financial statements.

3

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

Three Months Ended
March 31,2013

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

$
27,001

$
4,143Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:Purchases of investments


(178,209
)

(79,537
)Proceeds from sales and repayments of investments


35,892


28,666Net realized (gain) loss on investments


339


(330
)Net change in unrealized (appreciation) depreciation on investments


(12,867
)

(1,842
)Net change in unrealized (appreciation) depreciation on total return swap(1)


(2,590
)

(300
)Accretion of discount


(399
)

(437
)Amortization of deferred financing costs


167


42(Increase) decrease in due from counterparty


(19,400
)

(290
)(Increase) decrease in receivable for overfunded investment





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


9,243


(4
)(Increase) decrease in reimbursement due from sponsor(2)





(777
)(Increase) decrease in interest receivable


(3,975
)

(721
)(Increase) decrease in receivable due on total return swap(1)


(1,526
)

184(Increase) decrease in prepaid expenses and other assets


38


18Increase (decrease) in payable for investments purchased


(11,624
)

(11,320
)Increase (decrease) in management fees payable


1,540


831Increase (decrease) in expense recoupment payable to sponsor(2)


(984
)

Increase (decrease) in accrued capital gains incentive fees


2,752


519Increase (decrease) in subordinated income incentive fees payable


753


Increase (decrease) in administrative services expense payable


216


62Increase (decrease) in interest payable


43


54Increase (decrease) in other accrued expenses and liabilities


658


103Net cash used in operating activities


(152,932
)

(60,502
)Cash flows from financing activitiesIssuance of common shares


209,886


62,063Reinvestment of shareholder distributions


6,971


696Repurchases of common shares


(228
)

Offering costs


(1,200
)

(418
)Capital contributions of investment adviser





418Reimbursement of investment adviser(3)





(1,022
)Shareholder distributions


(11,258
)

(1,434
)Borrowings under credit facility(4)


2,000


29,482Net cash provided by financing activities


206,171


89,785Total increase (decrease) in cash


53,239


29,283Cash at beginning of period


48,986


10,810Cash at end of period

$
102,225

$
40,093


(1)See
Note 8 for a discussion of the Company's total return swap agreement.(2)See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
payable by the Company to its investment adviser and affiliates.(3)See
Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.(4)During
the three months ended March 31, 2013 and 2012, the Company paid $1,032 and $173, respectively, in interest expense on the credit facility.




See notes to unaudited consolidated financial statements.

4

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Table of Contents



FS Energy and Power Fund        Unaudited Consolidated Schedule of Investments        As of March 31, 2013        (in thousands, except share amounts)

Portfolio Company(a)

Industry

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured LoansFirst Lien24.8%BBH Operating LLC, Prime+500, 3.3% Prime Floor, 2/26/15

Upstream

$
30,000

$
30,000

$
30,000Boomerang Tube, LLC, L+950, 1.5% LIBOR Floor, 10/11/17(d)

Service & Equipment


14,625


14,218


14,808Crestwood Holdings LLC, L+825, 1.5% LIBOR Floor, 3/26/18(d)

Midstream


21,151


21,281


21,795Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)

Power


4,695


4,775


4,902Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)

Power


5,039


5,111


5,262EMG Utica, LLC, L+375, 1.0% LIBOR Floor, 3/27/20(d)(e)

Midstream


2,000


2,020


2,015EP Acquisition LLC, Prime+500, 3.3% Prime Floor, 3/31/15

Upstream


750


750


750EquiPower Resources Holdings, LLC, L+425, 1.3% LIBOR Floor, 12/21/18(d)

Power


1,963


1,970


2,002FREIF North American Power I LLC (TLB), L+450, 1.5% LIBOR Floor, 3/29/19

Power


2,747


2,699


2,774FREIF North American Power I LLC (TLC), L+450, 1.5% LIBOR Floor, 3/29/19

Power


440


432


444Hudson Products Holdings Inc., L+575, 1.3% LIBOR Floor, 6/7/17

Service & Equipment


1,671


1,671


1,688LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19(d)

Power


1,242


1,213


1,261Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18(d)

Power


909


896


923Panda Temple Power, LLC (TLA), L+700, 1.5% LIBOR Floor, 7/17/18

Power


15,000


14,725


15,431Panda Temple Power, LLC (TLB), L+1000, 1.5% LIBOR Floor, 7/17/18

Power


40,000


39,263


40,950Rice Drilling B LLC, Prime+400, 4.0% Prime Floor, 6/30/14

Upstream


60,000


59,023


60,000Star West Generation LLC, L+400, 1.0% LIBOR Floor, 3/13/20(d)(e)

Power


2,000


2,035


2,028Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18(d)

Midstream


2,336


2,314


2,385Texas Competitive Electric Holdings Co. LLC, L+450, 10/10/17(d)

Power


40,009


26,686


28,462Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(d)(f)

Service & Equipment


5,438


5,373


5,424Total Senior Secured LoansFirst Lien







236,455


243,304Unfunded Loan Commitments







(36,500
)

(36,500
)Net Senior Secured LoansFirst Lien







199,955


206,804Senior Secured LoansSecond Lien11.4%Ameriforge Group Inc., L+750, 1.3% LIBOR Floor, 12/19/20(d)

Service & Equipment


19,950


20,324


20,474Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19(d)(e)

Service & Equipment


23,000


22,064


23,000Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d)

Service & Equipment


21,693


21,704


21,992EquiPower Resources Holdings, LLC, L+850, 1.5% LIBOR Floor, 6/21/19(d)

Power


8,000


7,856


8,220Sabine Oil & Gas LLC, L+750, 1.3% LIBOR Floor, 12/31/18(d)(e)

Upstream


7,702


7,823


7,909W3 Co., L+800, 1.3% LIBOR Floor, 9/13/20(d)(e)

Service & Equipment


2,987


2,983


3,061WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20(d)

Service & Equipment


10,000


9,901


10,375Total Senior Secured LoansSecond Lien







92,655


95,031Senior Secured Bonds5.0%CEMEX Finance LLC, 9.4%, 10/12/22(d)(f)

Service & Equipment


4,900


5,087


5,714CVR Refining, LLC, 6.5%, 11/1/22(d)(f)

Downstream


3,000


3,000


3,076Edgen Murray Corp., 8.8%, 11/1/20(d)(f)

Service & Equipment


2,200


2,185


2,299Energy Future Intermediate Holding Co. LLC, 11.8%, 3/1/22(d)

Power


12,000


12,800


13,800Energy Future Intermediate Holding Co. LLC, 6.9%, 8/15/17(d)

Power


1,100


1,100


1,167Prince Mineral Holding Corp., 11.5%, 12/15/19(d)

Service & Equipment


6,500


6,780


7,277Ryerson Inc., 9.0%, 10/15/17

Service & Equipment


1,300


1,300


1,422Shale-Inland Holdings, LLC, 8.8%, 11/15/19(d)

Service & Equipment


7,000


6,955


7,368Total Senior Secured Bonds







39,207


42,123




See notes to unaudited consolidated financial statements.

5

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Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2013

(in thousands, except share amounts)



Portfolio Company(a)

Industry

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Subordinated Debt55.9%Alta Mesa Holdings, L.P., 9.6%, 10/15/18(d)

Upstream

$
42,616

$
42,584

$
45,493Antero Resources Finance Corp., 9.4%, 12/1/17(d)

Upstream


4,753


5,083


5,185Atlas Pipeline Partners, L.P., 6.6%, 10/1/20(d)(f)

Midstream


1,300


1,300


1,363Aurora USA Oil & Gas, Inc., 9.9%, 2/15/17(d)(f)

Upstream


21,250


21,822


23,366BreitBurn Energy Partners L.P., 7.9%, 4/15/22(d)(f)

Upstream


4,000


4,135


4,292Chaparral Energy Inc., 7.6%, 11/15/22(d)

Upstream


9,000


9,294


9,854Chaparral Energy Inc., 8.3%, 9/1/21(d)

Upstream


4,000


4,086


4,532Comstock Resources, Inc., 9.5%, 6/15/20(d)(f)

Upstream


12,000


11,473


13,301Crestwood Midstream Partners L.P., 7.8%, 4/1/19(d)(f)

Midstream


10,000


10,097


10,279CrownRock, L.P., 10.0%, 8/15/16

Upstream


10,000


10,647


10,838EP Energy LLC, 7.8%, 9/1/22(d)

Upstream


6,600


6,624


7,299EPE Holdings LLC, 8.1%, 12/15/17(d)

Upstream


6,000


5,970


6,270EPL Oil & Gas, Inc., 8.3%, 2/15/18(d)(f)

Upstream


3,200


3,170


3,402Era Group Inc., 7.8%, 12/15/22(d)(f)

Service & Equipment


9,750


9,587


10,067Everest Acquisition LLC, 9.4%, 5/1/20(d)

Upstream


19,250


19,920


22,234Foresight Energy LLC, 9.6%, 8/15/17(d)

Upstream


4,000


4,111


4,340Forest Oil Corp., 7.5%, 9/15/20(d)(f)

Upstream


5,250


5,250


5,553Global Partners L.P., 8.0%, 2/14/18(f)

Midstream


70,000


67,932


68,600GulfMark Offshore, Inc., 6.4%, 3/15/22(d)(f)

Service & Equipment


5,925


5,954


6,145Halcón Resources Corporation, 8.9%, 5/15/21(d)(f)

Upstream


11,750


11,790


12,657Heckmann Corp., 9.9%, 4/15/18(d)(f)

Service & Equipment


5,500


5,513


5,884Hercules Offshore, Inc., 10.5%, 10/15/17(d)(f)

Service & Equipment


5,000


5,052


5,450Hiland Partners, L.P., 7.3%, 10/1/20(d)

Midstream


1,750


1,750


1,917Legacy Reserves, L.P., 8.0%, 12/1/20(d)(f)

Upstream


16,750


16,397


17,420Martin Midstream Partners L.P., 7.3%, 2/15/21(d)(f)

Midstream


3,000


3,000


3,049NRG Energy, Inc., 6.6%, 3/15/23(d)(f)

Power


6,750


6,750


7,178NRG Energy, Inc., 8.3%, 9/1/20(d)(f)

Power


4,750


4,677


5,376QR Energy, L.P., 9.3%, 8/1/20(d)(f)

Upstream


15,000


15,110


15,962Resolute Energy Corp., 8.5%, 5/1/20(d)(f)

Upstream


10,800


10,982


11,198Rex Energy Corp., 8.9%, 12/1/20(d)(f)

Upstream


15,000


14,895


15,761Samson Investment Co., 9.8%, 2/15/20(d)

Upstream


25,000


25,032


26,646Seitel, Inc., 9.5%, 4/15/19(d)

Service & Equipment


5,000


5,000


5,004Sidewinder Drilling Inc., 9.8%, 11/15/19(d)

Service & Equipment


21,500


21,605


21,859Silver II US Holdings, LLC, 7.8%, 12/15/20(d)(f)

Service & Equipment


3,000


3,000


3,184Talos Production LLC, 9.8%, 2/15/18(d)

Upstream


15,000


14,855


14,813The Kenan Advantage Group, Inc., 8.4%, 12/15/18(d)

Service & Equipment


10,250


10,426


10,788Vanguard Natural Resources, LLC, 7.9%, 4/1/20(d)(f)

Upstream


4,750


4,750


5,074Zachry Holdings, Inc., 7.5%, 2/1/20(d)

Service & Equipment


13,150


13,431


13,725Total Subordinated Debt







443,054


465,358




See notes to unaudited consolidated financial statements.

6

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Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2013

(in thousands, except share amounts)



Portfolio Company(a)

Industry

Number of
Shares

Amortized
Cost

Fair
Value(c)Equity/Other5.7%(g)BBH Operating, LLC, Common Equity(h)(i)

Upstream


1,000

$
1,000

$
1,000Fortune Creek Co-Invest I L.P., LP Interest(f)(j)

Midstream


N/A


22,636


23,476Plains Offshore Operations Inc., Preferred Equity(d)

Upstream


210,339


21,100


21,975Plains Offshore Operations Inc., Strike: $20.00, Warrants(d)(i)

Upstream


405,378


689


649Total Equity/Other







45,425


47,100TOTAL INVESTMENTS102.8%






$
820,296


856,416LIABILITIES IN EXCESS OF OTHER ASSETS(2.8%)










(23,493
)NET ASSETS100.0%









$
832,923




Total Return Swap



Notional
Amount



Unrealized
AppreciationCitibank TRS Facility (Note 8)(f)



$
192,645




$
5,731


(a)Security
may be an obligation of one or more entities affiliated with the named company.(b)Denominated
in U.S. dollars, unless otherwise noted.(c)Fair
value determined by the Company's board of trustees (see Note 7).(d)Security
or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving
credit facility with Deutsche Bank AG, New York Branch (see Note 8).(e)Position
or portion thereof unsettled as of March 31, 2013.(f)The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. As of March 31, 2013, 71.6% of the Company's
total assets represented qualifying assets. In addition, as described in Note 8, the Company also calculates its compliance with the qualifying asset test on a "look through" basis by
disregarding the value of the Company's total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the
obligor is an eligible portfolio company. On this basis, 72.5% of the Company's total assets represented qualifying assets as of March 31, 2013.(g)Listed
investments may be treated as debt for GAAP or tax purposes.(h)Security
held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.(i)Security
is non-income producing.(j)Investment
denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of March 31, 2013.




See notes to unaudited consolidated financial statements.

7

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Table of Contents

FS Energy and Power Fund        Consolidated Schedule of Investments        As of December 31, 2012        (in thousands, except share amounts)

Portfolio Company(a)

Industry

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured LoansFirst Lien33.3%Boomerang Tube, LLC, L+950, 1.5% LIBOR Floor, 10/11/17(d)

Service & Equipment

$
14,813

$
14,384

$
14,627Crestwood Holdings LLC, L+825, 1.5% LIBOR Floor, 3/26/18(d)

Midstream


21,573


21,710


22,040Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)

Power


4,947


5,029


5,160Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)

Power


5,052


5,129


5,298EquiPower Resources Holdings, LLC, L+425, 1.3% LIBOR Floor, 12/21/18(d)

Power


1,995


2,002


2,027FREIF North American Power I LLC (TLB), L+450, 1.5% LIBOR Floor, 3/29/19

Power


2,786


2,738


2,821FREIF North American Power I LLC (TLC), L+450, 1.5% LIBOR Floor, 3/29/19

Power


440


432


446Hudson Products Holdings Inc., Prime+475, 6/7/17

Service & Equipment


1,671


1,671


1,677LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19(d)

Power


1,864


1,820


1,898NANA Development Corp., L+550, 1.5% LIBOR Floor, 7/22/16

Service & Equipment


1,646


1,620


1,636Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18(d)

Power


909


896


925Panda Temple Power, LLC (TLA), L+700, 1.5% LIBOR Floor, 7/17/18

Power


15,000


14,716


15,225Panda Temple Power, LLC (TLB), L+1000, 1.5% LIBOR Floor, 7/17/18

Power


40,000


39,240


40,700Rice Drilling B LLC, Prime+400, 4.0% Prime Floor, 6/30/14

Upstream


45,000


44,179


45,000Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18(d)

Power


8,338


8,316


8,375Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18(d)

Midstream


2,342


2,319


2,369Texas Competitive Electric Holdings Co. LLC, L+450, 10/10/17(d)(e)

Power


40,009


26,229


26,756Total Safety U.S., Inc., L+625, 1.3% LIBOR Floor, 10/31/17(d)

Service & Equipment


8,211


8,132


8,321Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(d)(f)

Service & Equipment


5,438


5,360


5,451Total Senior Secured LoansFirst Lien







205,922


210,752Unfunded Loan Commitments







(10,000
)

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







195,922


200,752Senior Secured LoansSecond Lien12.2%Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19(d)(e)

Service & Equipment


23,000


22,039


22,732Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d)

Service & Equipment


17,693


17,663


17,826EquiPower Resources Holdings, LLC, L+850, 1.5% LIBOR Floor, 6/21/19(d)

Power


8,000


7,850


8,233Southern Pacific Resource Corp., Prime+750, 1/7/16(d)(f)

Upstream


4,470


4,523


4,530Venoco, Inc., L+700, 1.5% LIBOR Floor, 6/30/17

Upstream


9,821


9,632


10,030WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20(d)(e)

Service & Equipment


10,000


9,900


10,100Total Senior Secured LoansSecond Lien







71,607


73,451Senior Secured Bonds5.8%CEMEX Finance LLC, 9.4%, 10/12/22(d)(f)

Service & Equipment


4,900


5,089


5,539CVR Refining, LLC, 6.5%, 11/1/22(d)(f)

Downstream


3,000


3,000


2,978Edgen Murray Corp., 8.8%, 11/1/20(d)(f)

Service & Equipment


2,200


2,185


2,222Energy Future Intermediate Holding Co. LLC, 6.9%, 8/15/17(d)

Power


1,100


1,100


1,173Energy Future Intermediate Holding Co. LLC, 11.8%, 3/1/22(d)

Power


10,000


10,525


11,175Prince Mineral Holding Corp., 11.5%, 12/15/19(d)

Service & Equipment


3,250


3,212


3,392Ryerson Inc., 9.0%, 10/15/17

Service & Equipment


1,300


1,300


1,321Shale-Inland Holdings, LLC, 8.8%, 11/15/19(d)

Service & Equipment


7,000


6,955


7,358Total Senior Secured Bonds







33,366


35,158




See notes to unaudited consolidated financial statements.

8

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)



Portfolio Company(a)

Industry

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Subordinated Debt57.4%Alta Mesa Holdings, L.P., 9.6%, 10/15/18(d)

Upstream

$
42,616

$
42,577

$
44,052Antero Resources Finance Corp., 9.4%, 12/1/17(d)

Upstream


4,753


5,123


5,245Atlas Pipeline Partners, L.P., 6.6%, 10/1/20(d)(f)

Midstream


1,300


1,300


1,353Aurora USA Oil & Gas, Inc., 9.9%, 2/15/17(d)(f)

Upstream


21,250


21,853


22,922BreitBurn Energy Partners L.P., 7.9%, 4/15/22(d)(f)

Upstream


4,000


4,137


4,170Chaparral Energy Inc., 8.3%, 9/1/21(d)

Upstream


4,000


4,087


4,340Chaparral Energy Inc., 7.6%, 11/15/22(d)

Upstream


9,000


9,299


9,450Comstock Resources, Inc., 9.5%, 6/15/20(d)(f)

Upstream


12,000


11,463


12,744Crestwood Midstream Partners L.P., 7.8%, 4/1/19(d)(f)

Midstream


10,000


10,098


10,413CrownRock, L.P., 10.0%, 8/15/16

Upstream


10,000


10,689


10,738EP Energy LLC, 7.8%, 9/1/22(d)

Upstream


6,600


6,624


7,054EPE Holdings LLC, 8.1%, 12/15/17(d)

Upstream


6,000


5,970


5,948EPL Oil & Gas, Inc., 8.3%, 2/15/18(d)(f)

Upstream


3,200


3,169


3,300Era Group Inc., 7.8%, 12/15/22(d)(f)

Service & Equipment


9,750


9,586


9,628Everest Acquisition LLC, 9.4%, 5/1/20(d)

Upstream


14,250


14,250


16,067Foresight Energy LLC, 9.6%, 8/15/17(d)

Upstream


4,000


4,117


4,260Forest Oil Corp., 7.5%, 9/15/20(d)(f)

Upstream


5,250


5,250


5,502GulfMark Offshore, Inc., 6.4%, 3/15/22(d)(f)

Service & Equipment


5,925


5,954


6,118Halcón Resources Corporation, 8.9%, 5/15/21(d)(f)

Upstream


11,750


11,791


12,535Heckmann Corp., 9.9%, 4/15/18(d)(f)

Service & Equipment


5,500


5,512


5,697Hercules Offshore, Inc., 10.5%, 10/15/17(d)(f)

Service & Equipment


5,000


5,053


5,438Hiland Partners, L.P., 7.3%, 10/1/20(d)

Midstream


1,750


1,750


1,881Legacy Reserves, L.P., 8.0%, 12/1/20(d)(f)

Upstream


16,750


16,390


17,169Lone Pine Resources Canada Ltd., 10.4%, 2/15/17(d)(f)

Upstream


2,000


1,975


1,871NRG Energy, Inc., 6.6%, 3/15/23(d)(f)

Power


6,750


6,750


7,215NRG Energy, Inc., 8.3%, 9/1/20(d)(f)

Power


4,750


4,676


5,338QR Energy, L.P., 9.3%, 8/1/20(d)(f)

Upstream


15,000


15,114


15,881Quicksilver Resources Inc., 7.1%, 4/1/16(d)(f)

Upstream


2,250


2,155


1,806Resolute Energy Corp., 8.5%, 5/1/20(d)(f)

Upstream


10,800


10,986


10,976Rex Energy Corp., 8.9%, 12/1/20(d)(f)

Upstream


15,000


14,896


15,113Samson Investment Co., 9.8%, 2/15/20(d)

Upstream


25,000


25,033


26,500Sidewinder Drilling Inc., 9.8%, 11/15/19(d)

Service & Equipment


19,500


19,587


19,573Silver II US Holdings, LLC, 7.8%, 12/15/20(d)(f)

Service & Equipment


3,000


3,000


3,116The Kenan Advantage Group, Inc., 8.4%, 12/15/18(d)

Service & Equipment


7,250


7,250


7,496Vanguard Natural Resources, LLC, 7.9%, 4/1/20(d)(f)

Upstream


4,750


4,750


4,940Total Subordinated Debt







332,214


345,849




Equity/Other7.6%(g)



Number of
Shares

Amortized
Cost

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

Midstream


N/A


23,345


22,619Plains Offshore Operations Inc., Preferred Equity(d)

Upstream


209,227


20,776


22,370Plains Offshore Operations Inc., Strike: $20.00, Warrants(d)(i)

Upstream


405,378


689


973Total Equity/Other







44,810


45,962TOTAL INVESTMENTS116.3%






$
677,919


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










(98,283
)NET ASSETS100.0%









$
602,889




See notes to unaudited consolidated financial statements.

9

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Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2012

(in thousands, except share amounts)



Total Return Swap



Notional
Amount



Unrealized
AppreciationCitibank TRS Facility (Note 8)(f)



$
131,632




$
3,141


(a)Security
may be an obligation of one or more entities affiliated with the named company.(b)Denominated
in U.S. dollars unless otherwise noted.(c)Fair
value determined by the Company's board of trustees (see Note 7).(d)Security
or portion thereof is held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the credit
facility with Deutsche Bank AG, New York Branch (see Note 8).(e)Position
or portion thereof unsettled as of December 31, 2012.(f)The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. As of December 31, 2012, 72.3% of the
Company's total assets represented qualifying assets. In addition, as described in Note 8, the Company also calculates its compliance with the qualifying asset test on a "look through" basis by
disregarding the value of the Company's total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the
obligor is an eligible portfolio company. On this basis, 72.5% of the Company's total assets represented qualifying assets as of December 31, 2012.(g)Listed
investments may be treated as debt for GAAP or tax purposes.(h)Investment
denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2012.(i)Security
is non-income producing.




See notes to unaudited consolidated financial statements.

10

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Table of Contents



FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share amounts)



Note 1. Principal Business and Organization

FS Energy and Power Fund, or the Company, was formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced operations
on July 18, 2011 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of its common shares of beneficial interest, or common shares, in its
continuous public offering to persons who were not affiliated with the Company or the Company's investment adviser, FS Investment Advisor, LLC, or FS Advisor, a private investment firm that is
registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company. Prior to satisfying the minimum offering requirement,
the Company had no operations except for matters relating to its organization and registration as a non-diversified, closed-end management investment company.

The
Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally
managed, non-diversified, closed-end management investment company that has elected to be treated for federal income tax purposes, and intends to qualify annually, as a
regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of March 31, 2013, the Company had two wholly-owned
financing subsidiaries, FSEP Term Funding, LLC, or FSEP Funding, and EP Investments LLC, or EP Investments, and a third wholly-owned subsidiary, FSEP-BBH, Inc.,
through which it holds its common equity interest in BBH Operating, LLC, a non-control and non-affiliated portfolio company. The consolidated financial statements
include both the Company's accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2013. All significant intercompany transactions have been eliminated in consolidation.

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

Note 2. Summary of Significant Accounting Policies

Basis of Presentation:The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance
with U.S.
generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain
other information, the Company's interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended
December 31, 2012 included in the Company's annual report on Form 10-K. Operating results for the three months ended March 31, 2013 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2013. The December 31, 2012 balance sheet and schedule of investments are derived from the 2012 audited consolidated
financial statements. The Company has evaluated the impact of subsequent events

11

---



Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (continued)

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

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

Capital Gains Incentive Fee:The Company has entered into an investment advisory and administrative services agreement with FS Advisor,
dated as of
April 28, 2011, which was amended on August 10, 2012, and which, as amended, is referred to herein as the investment advisory and administrative services agreement. Pursuant to the terms
of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of
the investment advisory and administrative services agreement). Such fee will equal 20.0% of the Company's incentive fee capital gains (i.e., the Company's realized capital gains on a
cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate
amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of
the end of such period.

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

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

12

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 2. Summary of Significant Accounting Policies (continued)

incentive
fee payable to FS Advisor with respect to realized gains. FS Advisor has voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would
otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on
a "look through" basis under which the Company treats the reference assets underlying the TRS as investments of the Company and (ii) the aggregate amount of subordinated incentive fees on
income which would have been payable to FS Advisor with respect to the portion of the net settlement payments received by the Company pursuant to the TRS which represent net investment income on the
loans or securities underlying the TRS on a "look through" basis. As of March 31, 2013, the aggregate capital gains incentive fees paid to FS Advisor in prior periods and accrued as of such
date with respect to realized gains in accordance with GAAP were less than the fees which would have been payable in accordance with the "look through" methodology.

Subordinated Income Incentive Fee:Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be
entitled to
receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of "pre-incentive fee net
investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative
services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor will not earn this incentive fee for any quarter until the Company's
pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. Once the Company's pre-incentive fee net investment income in any quarter exceeds
the hurdle rate, FS Advisor will be entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the
Company's pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. Thereafter, FS Advisor will receive 20.0% of
pre-incentive fee net investment income.

Reclassifications:Certain amounts in the unaudited consolidated financial statements for the three months ended March 31, 2012
have been
reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three months ended March 31, 2013. These reclassifications had no material
impact on the Company's consolidated financial position, results of operations or cash flows as previously reported.

Note 3. Share Transactions

Below is a summary of transactions with respect to the Company's common shares during the three months ended March 31, 2013 and 2012:

Three Months Ended March 31,2013

2012Shares

Amount

Shares

AmountGross Proceeds from Offering


22,205,144

$
229,963


6,935,527

$
68,198Reinvestment of Distributions


738,729


6,971


77,778


696Total Gross Proceeds


22,943,873


236,934


7,013,305


68,894Commissions and Dealer Manager Fees





(19,977
)




(5,990
)Net Proceeds to Company


22,943,873


216,957


7,013,305


62,904Share Repurchase Program


(24,249
)

(228
)




Net Proceeds from Share Transactions


22,919,624

$
216,729


7,013,305

$
62,904


13

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 3. Share Transactions (continued)



Since commencing its continuous public offering and through May 14, 2013, the Company has sold 98,009,157 common shares (as
adjusted for share distributions) for gross proceeds of $992,973. As of May 14, 2013, the Company had raised total gross proceeds of $1,013,177, 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 Company's sub-adviser, in a private placement conducted in April 2011
(see Note 4). During the three months ended March 31, 2013 and 2012, the Company sold 22,943,873 and 7,013,305 common shares (as adjusted for share distributions) for gross proceeds of
$236,934 and $68,894 at an average price per share of $10.33 and $9.82, respectively. The gross proceeds received during the three months ended March 31, 2013 and 2012 include reinvested
shareholder distributions of $6,971 and $696, respectively, for which the Company issued 738,729 and 77,778 common shares (as adjusted for share distributions), respectively. During the period from
April 1, 2013 to May 14, 2013, the Company sold 12,763,355 common shares for gross proceeds of $133,992 at an average price per share of $10.50.

The
proceeds from the issuance of common shares as presented on the Company's unaudited consolidated statements of changes in net assets and unaudited consolidated statements of cash
flows are presented net of selling commissions and dealer manager fees of $19,977 and $5,990 for the three months ended March 31, 2013 and 2012, respectively.



The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company's board of trustees will
consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase common shares and under what
terms:



The
Company currently intends to limit the number of common shares to be repurchased during any calendar year to the number of common shares it can repurchase with the proceeds it
receives from the sale of common shares under its distribution reinvestment plan. At the discretion of the Company's board of trustees, the Company may also use cash on hand, cash available from
borrowings and cash
from the liquidation of securities investments as of the end of the applicable period to repurchase common shares. In addition, the Company will limit the number of common shares to be

14

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 3. Share Transactions (continued)

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

The
following table sets forth the number of common shares repurchased by the Company under its share repurchase program during the three months ended March 31, 2013:

For the Three Months Ended

Repurchase Date

Shares
Repurchased

Percentage
of Shares
Tendered
That Were
Repurchased

Repurchase
Price
Per Share

Aggregate
Consideration
for Repurchased
SharesDecember 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228


On
April 1, 2013, the Company repurchased 82,689 common shares (representing 100% of common shares tendered for repurchase) at $9.540 per share for aggregate consideration
totaling $789.

Note 4. Related Party Transactions



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

The
incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0%
of "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the
investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor will not earn this incentive fee for any quarter
until the Company's pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. Once the Company's pre-incentive fee net investment income in
any quarter exceeds the hurdle rate, FS Advisor will be entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle
rate, until the Company's pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. This "catch-up" feature allows FS
Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FS Advisor will receive 20.0% of the pre-incentive fee net investment income.

The
second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon
termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Company's

15

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (continued)

incentive
fee capital gains, which equal the Company's realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized
capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains
incentive fee, which, if earned, is paid annually. The Company accrues the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory
and administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually
realized.

The
Company reimburses FS Advisor for expenses necessary to perform services related to the Company's administration and operations. The amount of this reimbursement is set at the lesser
of (1) FS Advisor's actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for
comparable services in the same geographic location. FS Advisor is required to allocate the cost of such services to the Company based on objective factors such as total assets, revenues, time
allocations and/or other reasonable metrics. The Company's board of trustees then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as
compared to the estimated cost to the Company of obtaining similar services from thirdparty providers known to be available. In addition, the Company's board of trustees considers whether any single
thirdparty service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company's board of trustees compares the total amount paid to FS Advisor for
such services as a percentage of the Company's net assets to the same ratio as reported by other comparable BDCs.

Franklin
Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate of FS Advisor, has funded certain of the Company's offering costs and
organization costs. These costs have been recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial
statements and the organization costs were charged to expense as incurred by the Company. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the
minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised in the Company's continuous public offering until all offering costs and organization costs funded by
FS Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On July 18, 2011, the Company satisfied the minimum offering requirement. Since inception through
March 31, 2013, Franklin Square Holdings has funded $3,143 in offering and organization costs. During the three months ended March 31, 2013 and 2012, the Company paid total
reimbursements of $0 and $1,022, respectively, to FS Advisor and its affiliates. The reimbursements were recorded as a reduction of capital. As of March 31, 2013, no amounts remain reimbursable
to FS Advisor and its affiliates under this arrangement.

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

16

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (continued)

The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three months
ended March 31, 2013 and 2012:

Three Months
Ended
March 31,Related Party

Source Agreement

Description

2013

2012FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
4,711

$
775FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)

$
3,610

$
519FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$
753

$
FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
453

$
62FS2

Dealer Manager Agreement

Dealer Manager Fee(5)

$
4,175

$
1,276


(1)During
the three months ended March 31, 2013 and 2012, $3,171 and $0, respectively, in base management fees were paid to FS Advisor. Of the $5,062 in
base management fees accrued and payable as of March 31, 2013, it is intended that the entire amount will be paid to FS Advisor.(2)During
the three months ended March 31, 2013 and 2012, the Company accrued capital gains incentive fees of $3,610 and $519, respectively, based on
the performance of its portfolio, of which $2,861 and $436, respectively, was based on unrealized gains and $749 and $83, respectively, was based on realized gains. No such fees are actually payable
by the Company with respect to such unrealized gains unless and until those gains are actually realized. As of December 31, 2012, $953 in capital gains incentive fees were payable by the
Company to FS Advisor, $858 of which was paid to FS Advisor during the three months ended March 31, 2013. The Company did not pay any amounts to FS Advisor in respect of the capital gains
incentive fee during the three months ended March 31, 2012.(3)During
the three months ended March 31, 2013, the Company accrued a subordinated incentive fee on income of $753 based upon the performance of its
portfolio. As of March 31, 2013, a subordinated incentive fee on income of $753 was payable to FS Advisor.(4)During
the three months ended March 31, 2013 and 2012, $326 and $51, respectively, of the accrued administrative services expenses related to the
allocation of costs of administrative personnel for services rendered to the Company by FS Advisor and the remainder related to other reimbursable expenses. The Company paid $237 in administrative
services expenses to FS Advisor during the three months ended March 31, 2013. The Company did not pay any amounts to FS Advisor in respect of such fee for the three months ended
March 31, 2012.(5)Represents
aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers.




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

17

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (continued)

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains the Company's investment adviser. In connection with the same private placement, certain members of the Company's board of trustees and other individuals and entities affiliated with FS
Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted
for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, the Company issued an aggregate of 2,244,875
common shares (as adjusted for share distributions) for aggregate proceeds of approximately $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of May 14,
2013, the Company has sold an aggregate of 3,246,415 common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,110 to members of its board of trustees and individuals and
entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.



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



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

Pursuant
to an expense support and conditional reimbursement agreement, dated as of February 14, 2012, or the expense reimbursement agreement, Franklin Square Holdings has agreed
to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company's distributions to shareholders will be paid from its offering proceeds or borrowings.

18

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (continued)

However,
because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax
purposes as a return of capital, a portion of the Company's distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use
such dividends or other distribution proceeds to fund its distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such
distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to
shareholders.

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

Pursuant
to the expense reimbursement agreement, the Company will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings
under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Company's
net
investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio
companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to shareholders.

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

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

During
the three months ended March 31, 2012, the Company accrued $801 for reimbursements that Franklin Square Holdings had agreed to pay. As of March 31, 2013, the Company
had no reimbursements due from Franklin Square Holdings.

Under
the expense reimbursement agreement, amounts reimbursed to the Company by Franklin Square Holdings may become subject to repayment by the Company in the future. There were no

19

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 4. Related Party Transactions (continued)

amounts
accrued during the three months ended March 31, 2013 and 2012, for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, the Company had accrued
$1,083 for expense recoupments payable to Franklin Square Holdings, $984 of which was paid to Franklin Square Holdings during the three months ended March 31, 2013 and $99 of which remained
payable by the Company as of March 31, 2013.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company has declared and paid on its common shares during the three months ended March 31, 2013 and 2012:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2012March 31, 2012(1)

$
0.1555

$
1,789Fiscal 2013March 31, 2013

$
0.1617

$
12,496


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


On
April 9, 2013, the Company's board of trustees declared a regular semi-monthly cash distribution of $0.026953 per share payable to shareholders of record on
April 15, 2013 and a regular semi-monthly cash distribution of $0.027207 per share payable to shareholders of record on April 29, 2013, both of which were paid on
April 30, 2013. On May 1, 2013, the Company's board of trustees declared two regular semi-monthly cash distributions of $0.027207 per share each, which will be paid on
May 31, 2013 to shareholders of record on May 15, 2013 and May 30, 2013, respectively. The timing and amount of any future distributions to shareholders are subject to applicable
legal restrictions and the sole discretion of the Company's board of trustees.

The
Company has adopted an "opt in" distribution reinvestment plan for its shareholders. As a result, if the Company makes a distribution, its shareholders will receive distributions in
cash unless they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares.

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

The
Company expects that for a period of time following commencement of its continuous public offering, which time period may be significant, substantial portions of the Company's
distributions may be funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS
Advisor, that are subject to repayment by the Company within three years. The purpose of this arrangement is to ensure

20

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 5. Distributions (continued)

that
no portion of the Company's distributions to shareholders will be paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory
fees are not based on the Company's investment performance and can only be sustained if the Company achieves positive investment performance in future periods and/or Franklin Square Holdings continues
to make such reimbursements or waivers of such fees. The Company's future repayments of amounts reimbursed or waived by Franklin Square Holdings and its affiliates will reduce the distributions that
shareholders would otherwise receive in the future. There can be no assurance that the Company will achieve the performance necessary to sustain its distributions or that the Company will be able to
pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. For the three
months ended March 31, 2013 and 2012, if Franklin Square Holdings had not reimbursed certain of the Company's expenses, 0% and 45%, respectively, of the cash distributions paid during the
respective periods would have been funded from offering proceeds or borrowings.

The
following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common shares during the three months ended March 31, 2013 and
2012:

Three Months Ended March 31,2013

2012Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$



Borrowings











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


12,496


100
%

649


36
%Capital gains proceeds from the sale of assets








339


19
%Non-capital gains proceeds from the sale of assets











Distributions on account of limited partnership interest











Expense reimbursement from sponsor








801


45
%Total

$
12,496


100
%
$
1,789


100
%


(1)During
the three months ended March 31, 2013 and 2012, 98% and 84%, respectively, of the Company's gross investment income was attributable to cash
interest earned and 2% and 16%, respectively, was attributable to non-cash accretion of discount.


The
Company's net investment income on a tax basis for the three months ended March 31, 2013 and 2012 was $13,821 and $1,450, respectively. As of March 31, 2013, the
Company had $1,325 of undistributed tax-basis net investment income. As of March 31, 2012, the Company distributed all of its tax-basis net investment income earned as
of March 31, 2012.

The
difference between the Company's GAAP-basis net investment income and its tax-basis net investment income is due to the accrual for GAAP purposes of income on
a limited partnership interest, the tax-basis deferral and amortization of organization
costs incurred prior to the commencement of the Company's operations, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on
unrealized gains are

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 5. Distributions (continued)

payable
by the Company, the inclusion of a portion of the periodic net settlement payments due on the total return swap in tax-basis net investment income and the accretion of discount on
the total return swap.

The
following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended
March 31, 2013 and 2012:

Three Months Ended
March 31,2013

2012GAAP-basis net investment income

$
8,959

$
1,540Income on limited partnership interest


(646
)

(657
)Tax-basis deferral and amortization of organization costs


(6
)

(6
)Reversal of incentive fee accrual on unrealized gains


2,861


436Tax-basis net investment income portion of total return swap payments


2,639


119Accretion of discount on total return swap


14


18Tax-basis net investment income

$
13,821

$
1,450


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

The
following table reflects the share distribution that the Company has declared on its common shares through March 31, 2013:

Date Declared

Record Date

Distribution Date

Distribution
Percentage

Shares IssuedFebruary 14, 2012

February 15, 2012

February 16, 2012


1.0
%

106,133


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

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

22

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 5. Distributions (continued)

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

March 31, 2013
(Unaudited)

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

$
2,785

$
171Distribution receivable on limited partnership interest


287


270Incentive fee accrual on unrealized gains


(8,390
)

(5,529
)Unamortized organization costs


(309
)

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


43,180


28,451$
37,553

$
23,048


(1)As
of March 31, 2013 and December 31, 2012, the gross unrealized appreciation on the Company's investments and total return swap and gain on
foreign currency was $43,277 and $29,698, respectively. As of March 31, 2013 and December 31, 2012, the gross unrealized depreciation on the Company's investments and loss on foreign
currency was $97 and $1,247, respectively.


The
aggregate cost of the Company's investments for federal income tax purposes totaled $818,909 and $675,823 as of March 31, 2013 and December 31, 2012, respectively. The
aggregate net unrealized appreciation (depreciation) on a tax basis, including the Company's TRS with Citibank, N.A., or Citibank, was $43,180 and $28,451 as of March 31, 2013 and
December 31, 2012, respectively.

Note 6. Investment Portfolio

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

March 31, 2013
(Unaudited)

December 31, 2012Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
199,955

$
206,804


24
%
$
195,922

$
200,752


29
%Senior Secured LoansSecond Lien


92,655


95,031


11
%

71,607


73,451


10
%Senior Secured Bonds


39,207


42,123


5
%

33,366


35,158


5
%Subordinated Debt


443,054


465,358


54
%

332,214


345,849


49
%Equity/Other


45,425


47,100


6
%

44,810


45,962


7
%$
820,296

$
856,416


100
%
$
677,919

$
701,172


100
%


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


The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of March 31, 2013 and
December 31, 2012 to include, on a look-through basis, the

23

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 6. Investment Portfolio (continued)

investments
underlying the TRS, as disclosed in Note 8. The investments underlying the TRS had a notional amount and market value of $192,645 and $197,255, respectively, as of March 31,
2013 and $131,632 and $133,482, respectively, as of December 31, 2012.

March 31, 2013
(Unaudited)

December 31, 2012Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
325,375

$
334,672


32
%
$
291,951

$
298,125


36
%Senior Secured LoansSecond Lien


132,215


135,680


13
%

90,725


92,885


11
%Senior Secured Bonds


51,387


54,758


5
%

38,366


40,333


5
%Subordinated Debt


458,539


481,461


46
%

343,699


357,349


43
%Equity/Other


45,425


47,100


4
%

44,810


45,962


5
%$
1,012,941

$
1,053,671


100
%
$
809,551

$
834,654


100
%


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


The Company does not "control" and is not an "affiliate" of any of its portfolio companies, each as defined in the 1940 Act. In general, under the
1940 Act, the Company would be presumed to "control" a portfolio company if it owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if it owned 5% or more of
its voting securities.

The
Company's investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested
by portfolio
companies in accordance with the terms of the underlying loan agreements. As of March 31, 2013, the Company had two such investments with an aggregate unfunded commitment of $36,500. As of
December 31, 2012, the Company had one such investment with an unfunded commitment of $10,000. The Company maintains sufficient cash on hand to fund such unfunded loan commitments should the
need arise.

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

March 31, 2013
(Unaudited)

December 31, 2012Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
371,273


43
%
$
335,486


48
%Midstream


134,879


16
%

60,675


9
%Downstream


3,076


0
%

2,978


0
%Service & Equipment


207,008


24
%

159,268


23
%Power


140,180


17
%

142,765


20
%Total

$
856,416


100
%
$
701,172


100
%


24

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments

Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction
to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and
minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be
observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from
sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information
available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

Level 1:Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2:Inputs that are quoted prices for similar assets or liabilities in active markets.

Level 3:Inputs that are unobservable for an asset or liability.

A
financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

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

March 31, 2013
(Unaudited)

December 31, 2012Valuation Inputs

Investments

Total Return
Swap

Investments

Total Return
SwapLevel 1Price quotations in active markets

$


$


$


$
Level 2Significant other observable inputs











Level 3Significant unobservable inputs


856,416


5,731


701,172


3,141$
856,416

$
5,731

$
701,172

$
3,141


The Company's investments as of March 31, 2013 consisted primarily of debt securities that are traded on a private
over-the-counter market for institutional investors. Except as described below, the Company valued all of its investments by using an independent third-party pricing service,
which provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by such service. Three senior secured loan investments and one
subordinated debt investment, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other
factors, the borrower's ability to adequately service its debt, prevailing interest rates for like
investments, call features and other relevant terms of the debt. All of the Company's equity/other investments were valued by the same independent valuation firm, which determined the fair value of
such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes,
depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value.

25

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (continued)

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

The
Company's investments as of December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for
institutional investors. Except as described below, the Company valued all of its investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from
dealers on the date of the relevant period end that were screened for validity by such service. One senior secured loan investment, for which broker quotes were not available, was valued by an
independent valuation firm, which determined the fair value of such investment by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for
like investments, call features and other relevant terms of the debt. All of the Company's equity/other investments were valued by the same independent valuation firm, which determined the fair value
of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues
or, in limited instances, book value or liquidation value. The Company valued its TRS in accordance with the TRS Agreement, as described above.

The
Company periodically benchmarks the bid and ask prices it receives from the third-party pricing service against the actual prices at which the Company purchases and sells its
investments. Based on the results of the benchmark analysis and the experience of the Company's management in purchasing and selling these investments, the Company believes that these prices are
reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs
are classified as Level 3 within the
fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through its third-party pricing service or
independent dealers, including the use of an independent valuation firm. The Company will periodically benchmark the valuations provided by the independent valuation firm against the actual prices at
which it purchases and sells its investments. The Company's valuation committee and board of trustees reviewed and approved the valuation determinations made with respect to these investments in a
manner consistent with the Company's valuation process.

26

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (continued)

The
following is a reconciliation for the three months ended March 31, 2013 and 2012 of investments for which significant unobservable inputs (Level 3) were used in
determining fair value:

For the Three Months Ended March 31, 2013Senior Secured
Loans
First Lien

Senior Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
200,752

$
73,451

$
35,158

$
345,849

$
45,962

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


675


218


(17
)

(92
)

(385
)

399Net realized gain (loss)


135


(52
)




(422
)




(339
)Net change in unrealized appreciation (depreciation)


2,019


532


1,124


8,669


523


12,867Purchases


15,006


35,173


5,858


121,172


1,000


178,209Sales and redemptions


(11,783
)

(14,291
)




(9,818
)




(35,892
)Net transfers in or out of Level 3

















Fair value at end of period

$
206,804

$
95,031

$
42,123

$
465,358

$
47,100

$
856,416The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to
investments still held at the reporting date

$
2,283

$
1,138

$
1,124

$
8,214

$
523

$
13,282




For the Three Months Ended March 31, 2012Senior Secured
Loans
First Lien

Senior Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
22,720

$
5,577

$
4,875

$
35,789

$
22,681

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


28


18


6


(10
)

395


437Net realized gain


18





312








330Net change in unrealized appreciation (depreciation)


911


211


75


522


123


1,842Purchases


23,157








35,844


20,536


79,537Sales and redemptions


(4,414
)

(4
)

(4,236
)

(20,000
)

(12
)

(28,666
)Net transfers in or out of Level 3

















Fair value at end of period

$
42,420

$
5,802

$
1,032

$
52,145

$
43,723

$
145,122The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to
investments still held at the reporting date

$
875

$
211

$
91

$
522

$
123

$
1,822


27

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (continued)

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

Type of Investment

Fair Value at
March 31, 2013
(Unaudited)(1)

Valuation Technique(2)

Unobservable Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
90,750

Market Comparables

Market Yield (%)

7.8% - 8.5%

8.1%Subordinated Debt

$
68,600

Market Comparables

Market Yield (%)

8.3% - 8.8%

8.5%Equity/Other

$
47,100

Market Comparables

Market Yield (%)

15.3% - 15.8%

15.5%Production Multiples (Mmb/d)

$1,255.0 - $1,305.0

$1,280.0Proved Reserves Multiples (Mmboe)

$4.0x - $4.5x

$4.3xPV-10 Multiples (x)

0.1x - 0.2x

0.2xDiscounted Cash Flow

Discount Rate (%)

11.0% - 17.3%

12.1%Option Valuation Model

Volatility (%)

36.0%

36.0%


(1)Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using an independent third-party pricing service, which
provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by such service. The TRS was valued in accordance with the TRS Agreement as
discussed above. As of March 31, 2013, $36,500 of the senior secured loans-first lien investments consisted of unfunded loan commitments.(2)For
investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a
significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value
measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher)
fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly
higher (lower) fair value measurement.


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

Type of Investment

Fair Value at
December 31, 2012(1)

Valuation Technique(2)

Unobservable Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
45,000

Market Comparables

Market Yield (%)

8.0%

8.0%Equity/Other

$
45,962

Market Comparables

Market Yield (%)

15.3% - 15.8%

15.5%Discounted Cash Flow

Discount Rate (%)

12.0% - 17.3%

15.2%Option Valuation Model

Volatility (%)

44.0%

44.0%


(1)Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using an independent third-party pricing service, which
provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by such service. The TRS was valued in accordance with the TRS Agreement as
discussed above. As of December 31, 2012, $10,000 of the senior secured loan-first lien investment was an unfunded loan commitment.(2)For
investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a
significantly lower (higher) fair value measurement. For


28

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (continued)

investments
utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value
measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower)
fair value measurement.




Facility

Type of Facility

Rate

Amount
Outstanding

Amount
Available

Maturity DateTotal Return Swap

TRS

L + 1.30%

$
192,645

$
7,355

N/A(1)Credit Facility

Revolving

L + 1.60% to 1.85%

$
187,232

$
52,768

June 24, 2013


(1)The
TRS may be terminated by either party, in whole or in part, upon prior written notice to the other party.




On August 11, 2011, the Company's wholly-owned, special purpose financing subsidiary, EP Investments, entered into the
TRS with Citibank. On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of assets which may be subject to the
TRS from $25,000 to $100,000; and on October 11, 2012, EP Investments entered into a second amendment to the TRS to increase this amount from $100,000 to $200,000.

Under
the TRS, EP Investments receives from Citibank all interest and fees payable in respect of the assets included in the TRS. EP Investments pays to Citibank interest at
a rate equal to the one-month London Interbank Offered Rate, or LIBOR, plus 1.30% per annum on the full notional amount of the assets subject to the TRS. In addition, upon the termination
or repayment of any asset subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such asset or pay to Citibank any depreciation in the value of
such asset.

The
value of the TRS is based primarily on the valuation of the underlying portfolio of assets subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values
each underlying asset in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the asset in the open market. Citibank
reports the mark-to-market values of the underlying assets to EP Investments. As of March 31, 2013 and December 31, 2012, the fair value of the TRS was
$5,731 and $3,141, respectively. The fair value of the TRS is reflected as unrealized appreciation on total return swap on the Company's consolidated balance sheets. The change in value of the TRS is
reflected in the Company's consolidated statements of operations as net change in unrealized appreciation (depreciation) on total return swap. As of March 31, 2013, EP Investments had
selected 30 underlying assets with a total notional amount of $192,645 and posted $76,276 in cash collateral held by Citibank (of which only $76,195 was required to be posted), which is reflected in
due from counterparty on the Company's consolidated balance sheets. As of December 31,

29

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (continued)

2012,
EP Investments had selected 22 underlying assets with a total notional amount of $131,632 and posted $56,876 in cash collateral held by Citibank (of which only $53,565 was required to be
posted), which is reflected in due from counterparty on the Company's consolidated balance sheets.

The
Company incurred costs of $16 in connection with obtaining the TRS, which the Company has recorded as deferred financing costs on its consolidated balance sheets. As of
March 31, 2013, all of such deferred financing costs have been amortized to interest expense.

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

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

30

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (continued)

The
following is a summary of the underlying assets subject to the TRS as of March 31, 2013:

Underlying Asset(1)

Industry

Notional
Amount

Market
Value

Unrealized
Appreciation /
(Depreciation)Alon USA Energy, Inc., L+800, 1.3% LIBOR Floor, 11/13/18(2)

Downstream

$
3,948

$
4,312

$
364Boomerang Tube, LLC, L+950, 1.5% LIBOR Floor, 10/11/17

Service & Equipment


9,458


9,848


390Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19

Service & Equipment


1,920


1,990


70Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17

Service & Equipment


2,826


2,840


14Buffalo Gulf Coast Terminals LLC, L+400, 1.3% LIBOR Floor, 10/31/17

Midstream


6,670


6,719


49Chaparral Energy Inc., 7.6%, 11/15/22

Upstream


11,485


11,968


483Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16

Power


6,016


6,124


108Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16

Power


3,974


3,970


(4
)EMG Utica, LLC, L+375, 1.0% LIBOR Floor, 3/27/20

Midstream


7,828


7,897


69Everest Acquisition LLC, L+400, 1.0% LIBOR Floor, 4/24/18

Upstream


8,558


8,629


71Hudson Products Holdings Inc., L+575, 1.3% LIBOR Floor, 6/7/17

Service & Equipment


2,312


2,346


34La Paloma Generating Co., LLC, L+550, 1.5% LIBOR Floor, 8/25/17

Power


1,628


1,712


84LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19

Power


2,116


2,140


24McJunkin Red Man Corp., L+500, 1.3% LIBOR Floor, 11/8/19(2)

Service & Equipment


9,471


9,674


203Northern Tier Energy LLC, 7.1%, 11/15/20(2)

Downstream


5,000


5,300


300Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18

Power


9,850


10,113


263Permian Tank & Manufacturing, Inc., 10.5%, 9/15/17

Service & Equipment


5,000


5,150


150Ryerson Inc., 9.0%, 10/15/17

Service & Equipment


2,180


2,185


5Sabine Oil & Gas LLC, L+750, 1.3% LIBOR Floor, 12/31/18

Upstream


9,900


10,231


331Samson Investment Co., L+475, 1.3% LIBOR Floor, 9/25/18

Upstream


12,367


12,492


125Star West Generation LLC, L+400, 1.0% LIBOR Floor, 3/13/20

Power


11,392


11,583


191Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18

Midstream


9,875


10,156


281Tervita Corp., 8.0%, 11/15/18(2)

Service & Equipment


4,000


4,135


135Topaz Power Holdings, LLC, L+400, 1.3% LIBOR Floor, 2/26/20

Power


7,770


7,967


197UTEX Industries, Inc., L+550, 1.5% LIBOR Floor, 12/15/16

Service & Equipment


4,456


4,440


(16
)W3 Co., L+450, 1.3% LIBOR Floor, 3/13/20

Service & Equipment


4,450


4,502


52W3 Co., L+800, 1.3% LIBOR Floor, 9/13/20

Service & Equipment


5,473


5,611


138Westway Group, LLC, L+400, 1.0% LIBOR Floor, 2/27/20

Service & Equipment


8,955


9,068


113Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(2)

Service & Equipment


3,867


3,828


(39
)WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20

Service & Equipment


9,900


10,325


425Total



$
192,645

$
197,255


4,610Total TRS Accrued Income and Liabilities:


1,121Total TRS Fair Value:

$
5,731


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


31

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (continued)

The following is a summary of the underlying assets subject to the TRS as of December 31, 2012:

Underlying Asset(1)

Industry

Notional
Amount

Market
Value

Unrealized
Appreciation /
(Depreciation)Alon USA Energy, Inc., L+800, 1.3% LIBOR Floor, 11/13/18(2)

Downstream

$
3,958

$
4,182

$
224Boomerang Tube, LLC , L+950, 1.5% LIBOR Floor, 10/11/17

Service & Equipment


9,579


9,727


148Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19

Service & Equipment


1,920


1,967


47Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17

Service & Equipment


2,833


2,824


(9
)Buffalo Gulf Coast Terminals LLC, L+400, 1.3% LIBOR Floor, 10/31/17

Midstream


6,688


6,703


15Chaparral Energy Inc., 7.6%, 11/15/22

Upstream


11,485


11,500


15Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16

Power


6,338


6,442


104Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16

Power


3,984


3,994


10Everest Acquisition LLC, L+400, 1.0% LIBOR Floor, 4/24/18

Upstream


3,300


3,354


54Hudson Products Holdings Inc., Prime+475, 6/7/17

Service & Equipment


2,312


2,332


20La Paloma Generating Co., LLC, L+550, 1.5% LIBOR Floor, 8/25/17

Power


1,632


1,708


76LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19

Power


3,178


3,222


44McJunkin Red Man Corp., L+500, 1.3% LIBOR Floor, 11/8/19(2)

Service & Equipment


9,495


9,615


120NANA Development Corp., L+550, 1.5% LIBOR Floor, 7/22/16

Service & Equipment


4,721


4,751


30Northern Tier Energy LLC, 7.1%, 11/15/20(2)

Downstream


5,000


5,175


175Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18

Power


9,850


10,125


275Samson Investment Co., L+475, 1.3% LIBOR Floor, 9/25/18

Upstream


7,298


7,417


119Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18

Power


9,877


9,947


70Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18

Midstream


9,900


10,079


179UTEX Industries, Inc., L+550, 1.5% LIBOR Floor, 12/15/16

Service & Equipment


4,517


4,519


2Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(2)

Service & Equipment


3,867


3,849


(18
)WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20

Service & Equipment


9,900


10,050


150Total



$
131,632

$
133,482


1,850Total TRS Accrued Income and Liabilities:


1,291Total TRS Fair Value:

$
3,141


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




On June 24, 2011, the Company's wholly-owned, special purpose financing subsidiary, FSEP Funding, entered into a 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. FSEP Funding
and Deutsche Bank have entered into subsequent amendments to the credit facility, most recently on October 18, 2012, to increase the amount available thereunder. As of March 31, 2013 the
credit facility provided for borrowings of up to $240,000 on a committed basis.

The
Company may contribute cash or securities to FSEP Funding from time to time and will retain a residual interest in any assets contributed through its ownership of FSEP Funding. FSEP
Funding may purchase additional securities from various sources. FSEP Funding'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.

32

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 8. Financing Arrangements (continued)

Pursuant
to the terms of the credit facility, borrowings thereunder may be designated as Tranche A Commitments in an amount up to $50,000, as Tranche B Commitments in an
amount up to $50,000, as Tranche C Commitments in an amount up to $75,000 or as Tranche D Commitments in an amount up to $65,000. Pricing under the credit facility is based on LIBOR for
an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, with the
Tranche A Commitment bearing interest at the rate of LIBOR plus 1.60% per annum and the Tranche B Commitment, Tranche C Commitment and Tranche D Commitment bearing interest
at the rate of LIBOR plus 1.85% per annum. The Tranche A Commitment and Tranche B Commitment are revolving commitments, and the Tranche C Commitment and Tranche D
Commitment are term commitments. 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 March 31, 2013 and December 31, 2012, $187,232 and $185,232, respectively, was outstanding under the credit facility. The carrying amount of the amount outstanding
under the credit facility approximates its fair value. The Company incurred costs of $700 in connection with obtaining and amending the credit facility, which the Company has recorded as deferred
financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the credit facility. As of March 31, 2013, $158 of such deferred financing costs have yet
to be amortized to interest expense.

The
effective interest rate under the credit facility as of March 31, 2013 was 2.07% per annum. Interest is paid quarterly in arrears and commenced November 20, 2011. The
Company recorded interest expense of $1,242 and $263 for the three months ended March 31, 2013 and 2012, respectively, of which $167 and $36, respectively, related to the amortization of
deferred financing costs and $107 and $20, respectively, related to commitment fees on the unused portion of the credit facility. The Company paid $1,032 and $173 in interest expense for the three
months ended March 31, 2013 and 2012, respectively. The average borrowings under the credit facility for the three months ended March 31, 2013 and 2012 were $186,543 and $39,325 with a
weighted average interest rate of 2.30% and 2.31%, respectively, which includes commitment fees on the unused portion of the credit facility.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 9. Financial Highlights

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

Three Months Ended
March 31, 2013
(Unaudited)

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

$
9.34

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


0.12


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


0.24


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


0.36


1.38Shareholder distributions(3)Distributions from net investment income


(0.16
)

(0.49
)Distributions from net realized gain on investments





(0.10
)Distributions on account of limited partnership interest





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


(0.16
)

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


0.01


0.02Offering costs(2)


(0.02
)

(0.12
)Reimbursement to investment adviser(2)





(0.07
)Capital contributions of investment adviser(2)





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


(0.01
)

(0.15
)Net asset value, end of period

$
9.53

$
9.34Shares outstanding, end of period


87,444,533


64,524,909Total return(5)


3.75
%

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

$
832,923

$
602,889Ratio of net investment income to average net assets(6)


1.26
%

3.64
%Ratio of accrued capital gains incentive fees to average net assets(6)


0.51
%

2.30
%Ratio of subordinated income incentive fees to average net assets(6)


0.11
%

Ratio of interest expense to average net assets(6)


0.17
%

0.77
%Ratio of operating expenses to average net assets(6)


1.68
%

7.09
%Ratio of expenses reimbursed by sponsor to average net assets(6)





(0.51
%)Ratio of expense recoupment payable to sponsor to average net assets(6)





0.51
%Ratio of net operating expenses to average net assets(6)


1.68
%

7.09
%Portfolio turnover(7)


4.57
%

75.24
%


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


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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 9. Financial Highlights (continued)

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Table of Contents

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

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

Forward-Looking Statements

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



In
addition, words such as "anticipate," "believe," "expect" and "intend" indicate a forward-looking statement, although not all forward-looking statements include these words. The
forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or
expressed in the

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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. Shareholders are advised to consult any additional disclosures that we may make directly to
shareholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current
reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection
provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.

Overview

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

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

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

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

Originated/Proprietary Transactions:We intend to leverage our relationship with GSO and their global sourcing and origination platform
to identify
proprietary investment opportunities. We define proprietary investments as any investment originated or structured specifically for us or made by us that

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was
not generally available to the broader market. Proprietary investments may include both debt and equity components, although we do not expect to make equity investments (other than incomeoriented
equity investments) independent of having an existing credit relationship. We believe proprietary transactions may offer attractive investment opportunities as they typically offer higher returns than
broadly syndicated transactions.

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

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

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

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

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

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$5 million
and $25 million 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.



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

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



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

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

Portfolio Investment Activity for the Three Months Ended March 31, 2013 and for the Year Ended December 31, 2012

During the three months ended March 31, 2013, we made investments in portfolio companies totaling $178,209. During the same
period, we sold investments totaling $1,810 and received principal repayments of $34,082. As of March 31, 2013, our investment portfolio, with a total fair value of

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$856,416
consisted of interests in 69 portfolio companies (24% in first lien senior secured loans, 11% in second lien senior secured loans, 5% in senior secured bonds, 54% in subordinated debt and 6%
in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $389.5 million. As of March 31, 2013, the investments
in our portfolio were purchased at a weighted average price of 98.1% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated
(constituting approximately 78.5% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage,
was 9.5% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on
the composition of our portfolio as of March 31, 2013. The portfolio yield does not represent an actual investment return to shareholders.

Based
on our regular semi-monthly cash distribution rate of $0.026953 per share as of March 31, 2013 and our public offering price of $10.60 per share as of such date,
the annualized distribution rate to shareholders as of March 31, 2013 was 6.10%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may
include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater
or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2012 and our other
periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

During
the year ended December 31, 2012, we made investments in portfolio companies totaling $826,011. During the same period, we sold investments totaling $175,782 and received
principal repayments of $68,410. As of December 31, 2012, our investment portfolio, with a total fair value of $701,172, consisted of interests in 64 portfolio companies (29% in first lien
senior secured loans, 10% in second lien senior secured loans, 5% in senior secured bonds, 49% in subordinated debt and 7% in equity/other). The portfolio companies that comprised our portfolio as of
such date had an average annual EBITDA of approximately $504.1 million. As of December 31, 2012, the investments in our
portfolio were purchased at a weighted average price of 97.6% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated
(constituting approximately 86.8% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage,
was 9.7% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on
the composition of our portfolio as of December 31, 2012. The portfolio yield does not represent an actual investment return to shareholders.

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

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

March 31, 2013
(Unaudited)

December 31, 2012Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
199,955

$
206,804


24
%
$
195,922

$
200,752


29
%Senior Secured LoansSecond Lien


92,655


95,031


11
%

71,607


73,451


10
%Senior Secured Bonds


39,207


42,123


5
%

33,366


35,158


5
%Subordinated Debt


443,054


465,358


54
%

332,214


345,849


49
%Equity/Other


45,425


47,100


6
%

44,810


45,962


7
%$
820,296

$
856,416


100
%
$
677,919

$
701,172


100
%


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


The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2013 and
December 31, 2012 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 8 to our consolidated financial statements contained in this
quarterly report on Form 10-Q. The investments underlying the TRS had a notional amount and market value of $192,645 and $197,255, respectively, as of March 31, 2013 and
$131,632 and $133,482, respectively, as of December 31, 2012.

March 31, 2013
(Unaudited)

December 31, 2012Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
325,375

$
334,672


32
%
$
291,951

$
298,125


36
%Senior Secured LoansSecond Lien


132,215


135,680


13
%

90,725


92,885


11
%Senior Secured Bonds


51,387


54,758


5
%

38,366


40,333


5
%Subordinated Debt


458,539


481,461


46
%

343,699


357,349


43
%Equity/Other


45,425


47,100


4
%

44,810


45,962


5
%$
1,012,941

$
1,053,671


100
%
$
809,551

$
834,654


100
%


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


We do not "control" and are not an "affiliate" of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act,
we would be presumed to "control" a portfolio company if we owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if we owned 5% or more of its voting
securities.

Our
investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio
companies in accordance
with the terms of the underlying loan agreements. As of March 31, 2013, we had two such investments with an aggregate unfunded commitment of $36,500. As of December 31, 2012, we had one
such investment with an unfunded commitment of $10,000. We maintain sufficient cash on hand to fund such unfunded loan commitments should the need arise.

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

March 31, 2013 (Unaudited)

December 31, 2012Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
371,273


43
%
$
335,486


48
%Midstream


134,879


16
%

60,675


9
%Downstream


3,076


0
%

2,978


0
%Service & Equipment


207,008


24
%

159,268


23
%Power


140,180


17
%

142,765


20
%Total

$
856,416


100
%
$
701,172


100
%


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

March 31, 2013 (Unaudited)

December 31, 2012Deal Composition

Fair Value

Percentage of Portfolio

Fair Value

Percentage of PortfolioOriginated/Proprietary

$
169,950


20
%
$
80,962


11
%Anchor Orders


189,957


22
%

195,411


28
%Event Driven











Opportunistic


59,307


7
%

68,745


10
%Broadly Syndicated/Other


437,202


51
%

356,054


51
%Total

$
856,416


100
%
$
701,172


100
%


Portfolio Asset Quality

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

Investment
Rating

Summary Description1

Investment exceeding expectations and/or capital gain expected.2

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

Performing investment requiring closer monitoring.4

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

Underperforming investment with expected loss of interest and some principal.


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

March 31, 2013
(Unaudited)

December 31, 2012Investment Rating

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of Portfolio1

$
58,456


7
%
$
34,149


5
%2


769,498


90
%

636,590


91
%3








3,677


1
%4


28,462


3
%

26,756


3
%5











$
856,416


100
%
$
701,172


100
%


The
amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new
investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.

Results of Operations



We generated investment income of $20,911 and $2,718 for the three months ended March 31, 2013 and 2012, respectively, in the
form of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments and dividends and other distributions earned on equity securities in our portfolio.
Such revenues represent $20,512 and $2,281 of cash income earned as well as $399 and $437 in non-cash portions relating to accretion of discount, accrual of limited partnership income and
paid-in-kind interest for the three months ended March 31, 2013 and 2012, respectively. Cash flows related to such non-cash revenues may not occur for a
number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year. The level of income we
receive is directly related to the balance of income producing investments multiplied by the weighted average yield of our investments. We expect the dollar amount of interest and any dividend income
that we earn to increase as the size of our investment portfolio increases.



Our total operating expenses were $11,952 and $1,979 for the three months ended March 31, 2013 and 2012, respectively. Our
operating expenses include base management fees attributed to FS Advisor of $4,711 and $775 for the three months ended March 31, 2013 and 2012, respectively. Our operating expenses also include
administrative services expenses attributed to FS Advisor of $453 and $62 for the three months ended March 31, 2013 and 2012, respectively.

FS
Advisor is eligible to receive incentive fees based on performance. During the three months ended March 31, 2013, we accrued a subordinated incentive fee on income of $753
based upon the performance of our portfolio. We did not accrue any subordinated incentive fee on income during the three months ended March 31, 2012. During the three months ended
March 31, 2013 and 2012, we accrued capital gains incentive fees of $3,610 and $519, respectively, based on the performance of our portfolio of which $2,861 and $436, respectively, was based on
unrealized gains and $749 and $83, respectively, was based on realized gains. No such fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually
realized. See "Critical Accounting PoliciesCapital Gains Incentive Fee."

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We
recorded interest expense of $1,242 and $269 for the three months ended March 31, 2013 and 2012, respectively, relating to our credit facility and the amortization of deferred
financing costs incurred in connection with such credit facility and the establishment of our TRS. For the three months ended March 31, 2013 and 2012, fees and expenses incurred with our fund
administrator, which provides various accounting and administrative services to us, totaled $140 and $38, respectively, and fees and expenses incurred with our share transfer agent totaled $400 and
$59, respectively.

Our
other general and administrative expenses totaled $643 and $257 for the three months ended March 31, 2013 and 2012, respectively, and consisted of the following:

Three Months Ended
March 31,2013

2012Expenses associated with our independent audit and related fees

$
75

$
84Compensation of our chief compliance officer


10


12Legal fees


200


31Printing fees


14


14Insurance expense


29


20Trustee fees


200


82Other


115


14Total

$
643

$
257


We
generally expect our operating expenses related to our ongoing operations to increase because of the anticipated growth in the size of our asset base. During the three months ended
March 31, 2013 and 2012, the ratio of our operating expenses to our average net assets was 1.68% and 2.04%, respectively. For the three months ended March 31, 2012, the ratio of our net
operating expenses to our average net assets, which includes $801 of expense reimbursements from Franklin Square Holdings, was 1.21%. During the three months ended March 31, 2013 and 2012, our
ratio of net operating expenses to average net assets included $1,242 and $269, respectively, related to interest expense and $4,363 and $519, respectively, related to accruals for incentive fees.
Without such expenses, our ratio of net operating expenses to average net assets would have been 0.89% and 1.23% for the three months ended March 31, 2013 and 2012, respectively. Incentive
fees, interest expense and costs relating to our continuous public offering, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to
comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors. As the size of our asset base and number
of investors have grown, our general and administrative expenses increased accordingly. Legal fees increased with the increase in the number of filing and the number of shareholders.



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

Pursuant
to the expense reimbursement agreement entered into on February 14, 2012, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient
to ensure that no portion of our distributions to shareholders will be paid from our offering proceeds or borrowings. However, because certain investments we may make, including preferred and common
equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a

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return
of capital, a portion of our distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other
distribution proceeds to fund our distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to shareholders that
represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.

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

Pursuant
to the expense reimbursement agreement, we will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such
agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment
income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the
extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders.

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

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

During
the three months ended March 31, 2012, we accrued $801 for reimbursements that Franklin Square Holdings had agreed to pay. As of March 31, 2013, we had no
reimbursements due from Franklin Square Holdings.

Under
the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future. There were no amounts accrued during
the three months ended March 31, 2013 and 2012, for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, we had accrued $1,083 for expense recoupments
payable to Franklin Square Holdings, $984 of which was paid to Franklin Square Holdings during the three months ended March 31, 2013 and $99 of which remained payable by us as of
March 31, 2013.



Our net investment income totaled $8,959 ($0.12 per share) and $1,540 ($0.14 per share) for the three months ended March 31,
2013 and 2012, respectively.



We sold investments and received principal repayments of $1,810 and $34,082, respectively, during the three months ended
March 31, 2013, from which we realized a net loss of $339. During the three

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months
ended March 31, 2013, we earned $2,919 from periodic net settlement payments on our TRS, which are reflected as realized gains, and realized a net gain of $10 from settlements on foreign
currency. We sold investments and received principal repayments of $28,666 during the three months ended March 31, 2012, from which we realized net gains of $330. We earned $119 from periodic
net settlement payments on our TRS which are reflected as realized gains and $9 from settlements on foreign currency.



For the three months ended March 31, 2013 and 2012, the net change in unrealized appreciation (depreciation) on investments
totaled $12,867 and $1,842, respectively; net change in unrealized appreciation (depreciation) on our TRS was $2,590 and $300, respectively; and the net change in unrealized gain (loss) on foreign
currency was $(5) and $3, respectively. The net change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended March 31, 2013 was primarily driven by
a continuation of the tightening of credit spreads that occurred during 2012. The net change in unrealized appreciation (depreciation) on our investments during each of the three months ended
March 31, 2013 and 2012 was primarily driven by a general strengthening in the credit markets during the prior period and continued tightening of credit spreads in the first quarter of 2013.



For the three months ended March 31, 2013 and 2012, the net increase (decrease) in net assets resulting from operations was
$27,001 ($0.36 per share) and $4,143 ($0.38 per share), respectively.

Financial Condition, Liquidity and Capital Resources



As of March 31, 2013, we had $102,225 in cash, which we hold in a custodial account, and $76,276 in cash held as collateral by
Citibank under the terms of the TRS. In addition, we had $52,768 in borrowings available under the credit facility and $7,355 available under the TRS as of March 31, 2013. Below is a summary of
our outstanding financing facilities as of March 31, 2013:

Facility

Type of Facility

Rate

Amount
Outstanding

Amount Available

Maturity DateTotal Return Swap

TRS

L + 1.30%

$
192,645

$
7,355

N/A(1)Credit Facility

Revolving

L + 1.60% to 1.85%

$
187,232

$
52,768

June 24, 2013


(1)The
TRS may be terminated by either party, in whole or in part, upon prior written notice to the other party.


During
the three months ended March 31, 2013, we sold 22,943,873 common shares for gross proceeds of $236,934 at an average price per share of $10.33. The gross proceeds received
during the three months ended March 31, 2013 include reinvested shareholder distributions of $6,971 for which we issued 738,729 common shares. During the three months ended March 31,
2013, we also incurred offering costs of $1,200 in connection with the sale of our common shares, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset
against capital in excess of par value in our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $19,977 for the three
months ended March 31, 2013. These sales commissions and fees include $4,175 retained by the dealer manager, FS2, which is one of our affiliates.

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Since
commencing our continuous public offering and through May 14, 2013, we have sold 98,009,157 common shares (as adjusted for share distributions) for gross proceeds of
$992,973. As of May 14, 2013, we have raised total gross proceeds of $1,013,177, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in
proceeds raised from principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of our board of trustees and certain individuals and entities affiliated with
GSO in a private placement conducted in April 2011. As of May 14, 2013, we have sold an aggregate of 3,246,415 common shares (as adjusted for share distributions) for aggregate gross proceeds
of $29,110 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.

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

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

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

The
following table sets forth the number of common shares repurchased by us under our share repurchase program during the three months ended March 31, 2013:

For the Three Months Ended

Repurchase Date

Shares
Repurchased

Percentage
of Shares
Tendered
That Were
Repurchased

Repurchase
Price
Per Share

Aggregate
Consideration
for Repurchased SharesDecember 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228


On
April 1, 2013, we repurchased 82,689 common shares (representing 100% of common shares tendered for repurchase) at $9.540 per share for aggregate consideration totaling $789.



On August 11, 2011, EP Investments entered into the TRS with Citibank. On May 11, 2012, EP Investments entered into an
amendment to the TRS to increase the maximum market value of the aggregate amount of assets which may be subject to the TRS from $25,000 to
$100,000; and on October 11, 2012, EP Investments entered into a second amendment to the TRS to increase this amount from $100,000 to $200,000.

Under
the TRS, EP Investments receives from Citibank all interest and fees payable in respect of the assets included in the TRS. EP Investments pays to Citibank interest at a rate equal
to one-month LIBOR plus 1.30% per annum on the full notional amount of the assets subject to the TRS. In addition, upon the termination or repayment of any asset subject to the TRS, EP
Investments will either receive from Citibank the appreciation in the value of such asset or pay to Citibank any depreciation in the value of such asset.

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The
value of the TRS is based primarily on the valuation of the underlying portfolio of assets subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values
each underlying asset in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the asset in the open market. Citibank
reports the mark-to-market values of the underlying assets to EP Investments. As of March 31, 2013 and December 31, 2012, the fair value of the TRS was $5,731 and
$3,141, respectively. The fair value of the TRS is reflected as unrealized appreciation on total return swap on our consolidated balance sheets. The change in value of the TRS is reflected in our
consolidated statements of operations as net change in unrealized appreciation (depreciation) on total return swap. As of March 31, 2013, EP Investments had selected 30 underlying assets with a
total notional amount of $192,645 and posted $76,276 in cash collateral held by Citibank (of which only $76,195 was required to be posted), which is reflected in due from counterparty on our
consolidated balance sheets. As of December 31, 2012, EP Investments had selected 22 underlying assets with a total notional amount of $131,632 and posted $56,876 in cash collateral held by
Citibank (of which only $53,565 was required to be posted), which is reflected in due from counterparty on our consolidated balance sheets.

We
incurred costs of $16 in connection with obtaining the TRS, which we have recorded as deferred financing costs on its consolidated balance sheets. As of March 31, 2013, all of
such deferred financing costs have been amortized to interest expense.

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

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



On June 24, 2011, FSEP Funding entered into the credit facility with Deutsche Bank. Deutsche Bank is the sole lender and serves
as administrative agent under the credit facility. FSEP Funding and Deutsche Bank have entered into subsequent amendments to the credit facility, most recently on October 18, 2012, to increase
the amount available thereunder. As of March 31, 2013 the credit facility provided for borrowings of up to $240,000 on a committed basis.

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

Pursuant
to the terms of the credit facility, borrowings thereunder may be designated as Tranche A Commitments in an amount up to $50,000, as Tranche B Commitments in an
amount up to $50,000, as Tranche C Commitments in an amount up to $75,000 or as Tranche D Commitments in an amount up to $65,000. Pricing under the credit facility is based on LIBOR for
an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, with the Tranche A Commitment bearing interest at the rate of LIBOR plus
1.60% per annum and the Tranche B Commitment, Tranche C Commitment and Tranche D Commitment bearing interest at the rate of LIBOR plus 1.85% per annum. The Tranche A
Commitment and Tranche B Commitment are revolving commitments, and the Tranche C Commitment and Tranche D Commitment are term commitments. 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.

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As of March 31, 2013 and December 31, 2012, $187,232 and $185,232, respectively, was outstanding under the credit facility. The carrying amount of
the amount outstanding under the credit facility approximates its fair value. We incurred costs of $700 in connection with obtaining and amending the credit facility, which we have recorded as
deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the credit facility. As of March 31, 2013, $158 of such deferred financing costs
have yet to be amortized to interest expense.

The
effective interest rate under the credit facility as of March 31, 2013 was 2.07% per annum. Interest is paid quarterly in arrears and commenced November 20, 2011. We
recorded interest expense of $1,242 and $263 for the three months ended March 31, 2013 and 2012, respectively, of which $167 and $36, respectively, related to the amortization of deferred
financing costs and $107 and $20, respectively, related to commitment fees on the unused portion of the credit facility. We paid $1,032 and $173 in interest expense for the three months ended
March 31, 2013 and 2012, respectively. The average borrowings under the credit facility for the three months ended March 31, 2013 and 2012 were $186,543 and $39,325 with a weighted
average interest rate of 2.30% and 2.31%, respectively, which includes commitment fees on the unused portion of the credit facility.

Capital Contribution by FS Advisor and GSO

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

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains our investment adviser. In connection with the same private placement, certain members of our board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase
1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions),
in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, we issued an aggregate of 2,244,875 common shares (as adjusted for share
distributions) for aggregate proceeds of $20,004 upon satisfaction of the minimum offering requirement on July 18, 2011. As of May 14, 2013, we have sold an aggregate of 3,246,415 common
shares (as adjusted for share distributions) for aggregate gross proceeds of $29,110 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including
common shares sold in the private placement conducted in April 2011.

RIC Status and Distributions

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

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We
declared our first distribution on July 21, 2011. Subject to our board of trustees' discretion and applicable legal restrictions, we intend to authorize and declare ordinary
cash distributions on either a semi-monthly or monthly basis and pay such distributions on a monthly basis. We will calculate each shareholder's specific distribution amount for the period
using record and declaration dates and each shareholder's distributions will begin to accrue on the date we accept each shareholder's subscription for our common shares. From time to time, we may also
pay special interim distributions in the form of cash or common shares at the discretion of our board of trustees. During certain periods, our distributions may exceed our earnings, especially during
the period before we have substantially invested the proceeds from our continuous public offering of common shares. As a result, it is possible that a portion of the distributions we make will
represent a return of capital for tax purposes. A return of capital generally is a return of an investor's investment rather than a return of earnings or gains derived from our investment activities
and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FS Advisor. Each year a statement on
Form 1099-DIV identifying the source of the distributions will be mailed to our shareholders.

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

The
following table reflects the cash distributions per share that we have declared and paid on our common shares during the three months ended March 31, 2013 and 2012:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2012March 31, 2012(1)

$
0.1555

$
1,789Fiscal 2013March 31, 2013

$
0.1617

$
12,496


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


On
April 9, 2013, our board of trustees declared a regular semi-monthly cash distribution of $0.026953 per share payable to shareholders of record on April 15,
2013 and a regular semi-monthly cash distribution of $0.027207 per share payable to shareholders of record on April 29, 2013, both of which were paid on April 30, 2013. On
May 1, 2013, our board of trustees declared two regular semi-monthly cash distributions of $0.027207 per share each, which will be paid on May 31, 2013 to shareholders of
record on May 15, 2013 and May 30, 2013, respectively. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole
discretion of our board of trustees.

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

We
expect that for a period of time following commencement of our continuous public offering, which time period may be significant, substantial portions of our distributions may be
funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that are subject to
repayment by us within

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three
years. The purpose of this arrangement is to ensure that no portion of our distributions to shareholders will be paid from offering proceeds or borrowings. Any such distributions funded through
expense reimbursements or waivers of advisory fees are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or Franklin
Square Holdings continues to make such reimbursements or waivers of such fees. Our future repayments of amounts reimbursed or waived by Franklin Square Holdings and its affiliates will reduce the
distributions that shareholders would otherwise receive in the future. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to
pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. For the three
months ended March 31, 2013 and 2012, if Franklin Square Holdings had not reimbursed certain of our expenses, 0% and 45%, respectively, of the cash distributions paid during the respective
periods would have been funded from offering proceeds or borrowings.

The
following table reflects the sources of the cash distributions on a tax basis that we have paid on our common shares during the three months ended March 31, 2013 and 2012:

Three Months Ended March 31,2013

2012Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$



Borrowings











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


12,496


100
%

649


36
%Capital gains proceeds from the sale of assets








339


19
%Non-capital gains proceeds from the sale of assets











Distributions on account of limited partnership interest











Expense reimbursement from sponsor








801


45
%Total

$
12,496


100
%
$
1,789


100
%


(1)During
the three months ended March 31, 2013 and 2012, 98% and 84%, respectively, of our gross investment income was attributable to cash interest
earned and 2% and 16%, respectively, was attributable to non-cash accretion of discount.


Our
net investment income on a tax basis for the three months ended March 31, 2013 and 2012 was $13,821 and $1,450, respectively. As of March 31, 2013, we had $1,325 of
undistributed tax-basis net investment income. As of March 31, 2012, we distributed all of our tax-basis net investment income earned as of March 31, 2012.

See
Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our
distributions, including information regarding share distributions declared on our common shares and a reconciliation of our
GAAP-basis net investment income and tax-basis net investment income for the three months ended March 31, 2013 and 2012.

Critical Accounting Policies

Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are
those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of matters that are inherently
uncertain and that may change in subsequent periods. In preparing the

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financial
statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current
economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies
may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As we execute our operating plans, we will describe
additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.



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

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

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



Determination
of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the
possible effect of such valuations and any change in such valuations on our consolidated financial statements. Below is a

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description
of factors that our board of trustees may consider when valuing our debt and equity investments.

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

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

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

Our
board of trustees may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party
investments in the portfolio companies or industry practices in determining fair value. Our board of trustees may also consider the size and scope of a portfolio company and its specific strengths and
weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of our equity interests in public companies for which market quotations are readily available is
based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.

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

The
fair values of our investments are determined in good faith by our board of trustees. Our board of trustees is solely responsible for the valuation of our portfolio investments at
fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.

Our
investments as of March 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional
investors. Except as described below, we valued all of our investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the
relevant period end that were screened for validity by such service. Three senior secured loan investments and one subordinated debt investment, for which broker quotes were not available, were valued
by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest
rates for like investments, call features and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value
of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues
or, in limited instances, book value or liquidation value. We valued the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is

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

Our
investments as of December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional
investors. Except as described below, we valued all of our investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the
relevant period end that were screened for validity by such service. One senior secured loan investment, for which broker quotes were not available, was valued by an independent valuation firm, which
determined the fair value of such investment by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features
and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among
other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or
liquidation value. We valued the TRS in accordance with the TRS Agreement, as described above.

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



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

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



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

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

In
addition, we have historically treated all net settlement payments received by us pursuant to our TRS (which is described more fully in Note 8 to our unaudited consolidated
financial statements contained in this quarterly report on Form 10-Q), as realized capital gains and have included only the aggregate amount of unrealized depreciation on the TRS as
a whole in calculating the capital gains incentive fee payable to FS Advisor with respect to realized gains, in each case, in
accordance with GAAP. However, the Staff has recently informed us that it is their interpretation of the applicable language in the Advisers Act that we should "look through" the TRS in calculating
our capital gains incentive fee. Under this "look through" methodology, the portion of the net settlement payments received by us pursuant to the TRS which would have represented net investment income
to us had we held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FS Advisor pursuant to
the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities
underlying the TRS would further reduce the capital gains incentive fee payable to FS Advisor with respect to realized gains. FS Advisor has voluntarily agreed to waive any capital gains incentive fee
calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital
gains incentive fee determined in respect of the TRS on a "look through" basis under which we treat the reference assets underlying the TRS as our investments and (ii) the aggregate amount of
subordinated incentive fees on income which would have been payable to FS Advisor with respect to the portion of the net settlement payments

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received
by us pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a "look through" basis. As of March 31, 2013, the aggregate capital
gains incentive fees paid to FS Advisor in prior periods and accrued as of such date with respect to realized gains in accordance with GAAP were less than the fees which would have been payable in
accordance with the "look through" methodology.



Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be entitled to receive a subordinated
incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of "pre-incentive fee net investment income" for the
immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to
1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor will not earn this incentive fee for any quarter until our pre-incentive fee net investment income for
such quarter exceeds the hurdle rate of 1.625%. Once our pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS Advisor will be entitled to a
"catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until our pre-incentive fee net investment income
for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. Thereafter, FS Advisor will receive 20.0% of pre-incentive fee net investment income.



We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with
accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements.
Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing
authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the three months ended
March 31, 2013 and 2012, we did not incur any interest or penalties.

Contractual Obligations

We have entered into an agreement with FS Advisor to provide us with investment advisory and administrative services. Payments for
investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets
and (b) an incentive fee based on our performance. FS Advisor and, to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses
incurred on our behalf. For the three months ended March 31, 2013 and 2012, we incurred $4,711 and $775, respectively, in base management fees and $453 and $62, respectively, in administrative
services expenses under the investment advisory and administrative services agreement. In addition, FS Advisor is eligible to receive incentive fees based on the performance of our portfolio. During
the three months ended March 31, 2013, we accrued a subordinated incentive fee on income of $753 based on the performance of our portfolio and paid FS Advisor $0 in respect of such fee. As of
March 31, 2013, a subordinated incentive fee on income of $753 was payable to FS Advisor. As of December 31, 2012, we had accrued capital gains incentive fees of $6,482 based on the
performance of our portfolio, of which $5,529 was based on unrealized gains and $953 was based on realized gains. During the three months ended March 31, 2013, we paid $858 in capital gains
incentive fees to FS Advisor and accrued capital gains incentive fees of $3,610 based on the performance of our portfolio, of which $2,861 was based on unrealized gains and $749 was based on realized
gains. During the three months ended March 31, 2012, we accrued capital gains incentive fees of $519 based on the performance of our portfolio, of which $436 was based on unrealized gains and
$83 was based on realized gains. As of March 31, 2013, we had accrued $9,234 in capital gains incentive fees, of which only $844 was based on realized gains and was payable to FS Advisor.

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A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the credit facility between FSEP Funding and
Deutsche Bank at March 31, 2013 is as follows:

Payments Due By PeriodTotal

Less than
1 year

1-3 years

3-5 years

More than
5 yearsBorrowing(1)

$
187,232

$
187,232











(1)At
March 31, 2013, $52,768 remained unused under the credit facility. All amounts under the facility will mature, and all accrued and unpaid interest
thereunder will be due and payable on June 24, 2013.


Off-Balance Sheet Arrangements

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

Related Party Transactions



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

The
incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0%
of "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the
investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. The second part of the incentive fee, which is referred to as the
incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). We
accrue for the capital gains incentive fee, which, if earned, is paid annually. We accrue the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the
investment advisory and administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such
gains are actually realized.

We
reimburse FS Advisor for expenses necessary to perform services related to our administration and operations. The amount of this reimbursement is set at the lesser of (1) FS
Advisor's actual costs incurred in providing such services and (2) the amount that we estimate we would be required to pay alternative service providers for comparable services in the same
geographic location. FS Advisor is required to allocate the cost of such services to us based on objective factors such as total assets,
revenues, time allocations and/or other reasonable metrics. Our board of trustees then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as
compared to the estimated cost to us of obtaining similar services from thirdparty providers known to be available. In addition, our board of trustees considers whether any single thirdparty service
provider would be capable of providing all such services at comparable cost and quality. Finally, our board of trustees compares the total amount paid to FS Advisor for such services as a percentage
of our net assets to the same ratio as reported by other comparable BDCs.

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Franklin
Square Holdings has funded certain of our offering costs and organization costs. These costs have been recorded by us as a contribution to capital. The offering costs were
offset against capital in excess of par value on our consolidated financial statements and the organization costs were charged to expense as incurred by us. Under the terms of the investment advisory
and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering
until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On July 18, 2011, we satisfied the minimum
offering requirement. Since inception through March 31, 2013, Franklin Square Holdings has funded $3,143 in offering and organization costs. During the three months ended March 31, 2013
and 2012, we paid total reimbursements of $0 and $1,022, respectively, to FS Advisor and its affiliates. The reimbursements were recorded as a reduction of capital. As of March 31, 2013, no
amounts remain reimbursable to FS Advisor and its affiliates under this arrangement.

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

The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three months
ended March 31, 2013 and 2012:

Three Months
Ended
March 31,Related Party

Source Agreement

Description

2013

2012FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
4,711

$
775FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)

$
3,610

$
519FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$
753

$
FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
453

$
62FS2

Dealer Manager Agreement

Dealer Manager Fee(5)

$
4,175

$
1,276


(1)During
the three months ended March 31, 2013 and 2012, $3,171 and $0, respectively, in base management fees were paid to FS Advisor. Of the $5,062 in
base management fees accrued and payable as of March 31, 2013, it is intended that the entire amount will be paid to FS Advisor.(2)During
the three months ended March 31, 2013 and 2012, we accrued capital gains incentive fees of $3,610 and $519, respectively, based on the
performance of our portfolio, of which $2,861 and $436, respectively, was based on unrealized gains and $749 and $83, respectively, was based on realized gains. No such fees are actually payable by us
with respect to such unrealized gains unless and until those gains are actually realized. As of December 31, 2012, $953 in capital gains incentive fees were payable by us to FS Advisor, $858 of
which was paid to FS Advisor during the three months ended March 31, 2013. We did not pay any amounts to FS Advisor in respect of the capital gains incentive fee during the three months ended
March 31, 2012.(3)During
the three months ended March 31, 2013, we accrued a subordinated incentive fee on income of $753 based upon the performance of our portfolio.
As of March 31, 2013, a subordinated incentive fee on income of $753 was payable to FS Advisor.(4)During
the three months ended March 31, 2013 and 2012, $326 and $51, respectively, of the accrued administrative services expenses related to the
allocation of costs of administrative personnel for services rendered to us by FS Advisor and the remainder related to other reimbursable expenses. We paid $237 in administrative services expenses to
FS Advisor during the three months ended March 31, 2013. We did not pay any amounts to FS Advisor in respect of such fee for the three months ended March 31, 2012.(5)Represents
aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers.


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

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains our investment adviser. In connection with the same private placement, certain members of our board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase
1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions),
in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, we issued an aggregate of 2,244,875 common shares (as adjusted for share
distributions) for aggregate proceeds of approximately $20,004 upon satisfaction of the minimum offering requirement on July 18, 2011. As of May 14, 2013, we have sold an aggregate of
3,246,415 common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,110 to members of our board of trustees and individuals and entities affiliated with FS Advisor and
GSO, including common shares sold in the private placement conducted in April 2011.



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



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

Pursuant
to the expense reimbursement agreement entered into on February 14, 2012, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient
to ensure that no portion of our distributions to shareholders will be paid from our offering proceeds or borrowings.

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See
"Results of OperationsComparison of the Three Months Ended March 31, 2013 and 2012Expense Reimbursement" for a detailed description of the expense
reimbursement agreement.

During
the three months ended March 31, 2012, we accrued $801 for reimbursements that Franklin Square Holdings had agreed to pay. As of March 31, 2013, we had no
reimbursements due from Franklin Square Holdings.

Under
the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future. There were no amounts accrued during
the three months ended March 31, 2013 and 2012, for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, we had accrued $1,083 for expense recoupments
payable to Franklin Square Holdings, $984 of which was paid to Franklin Square Holdings during the three months ended March 31, 2013 and $99 of which remained payable by us as of
March 31, 2013.

Recent Developments

For the period from April 1, 2013 to May 14, 2013, we sold 12,763,355 common shares for gross proceeds of $133,992 at an
average price per share of $10.50.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of March 31, 2013, 35.2% of our portfolio
investments (based on fair value) paid variable interest rates, 59.3% paid fixed interest rates and the remainder (5.5%) consisted of income-producing equity or other investments. A rise in the
general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold.
To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates would make it easier for us to meet or exceed our incentive fee hurdle
rate, as described in the investment advisory and administrative services agreement we have entered into with FS Advisor, and may result in a substantial increase in our net investment income and to
the amount of incentive fees payable to FS Advisor with respect to our increased pre-incentive fee net investment income.

Pursuant
to the terms of the $240 million credit facility which FSEP Funding maintains with Deutsche Bank, FSEP Funding borrows at a floating rate based on LIBOR. Under the terms
of the TRS between EP Investments and Citibank, EP Investments pays fees to Citibank at a floating rate based on LIBOR in exchange for the right to receive the economic benefit of one or more assets
having a maximum notional amount of $200 million or such greater amount as may be agreed to by Citibank. To the extent that any present or future credit facilities, total return swap agreements
or other financing arrangements that we or any of our subsidiaries enter into are based on a floating interest rate, we will be subject to risks relating to changes in market interest rates. In
periods of rising interest rates when we or our subsidiaries have such debt outstanding or swap agreements in effect, our interest expense would increase, which could reduce our net investment income,
especially to the extent we hold fixed rate investments.

The
following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our
investment

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portfolio
and borrowing arrangements in effect as of March 31, 2013 (dollar amounts are presented in thousands):

LIBOR Basis Point Change

Increase
(Decrease)
in Interest
Income(1)

Increase
(Decrease)
in Interest
Expense

Increase
(Decrease) in
Net Interest
Income

Percentage
Change in
Net Interest
IncomeDown 30 basis points

$
458

$
(562
)
$
1,020


1.2
%Current LIBOR











Up 100 basis points


(1,326
)

1,872


(3,198
)

(3.8
)%Up 300 basis points


2,731


5,617


(2,886
)

(3.4
)%Up 500 basis points


7,252


9,362


(2,110
)

(2.5
)%


(1)Includes
the net effect of the change in interest rates on the unrealized appreciation (depreciation) on the TRS. Pursuant to the TRS, EP Investments
receives from Citibank all interest payable in respect of the assets included in the TRS and pays to Citibank interest at a rate equal to one-month LIBOR plus 1.30% per annum on the full
notional amount of the assets subject to the TRS. As of March 31, 2013, 85.4% of the assets underlying the TRS (by fair value) paid variable interest rates. Assumes no change in defaults or
prepayments by portfolio companies over the next twelve months.


We
expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort
to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting
from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the three months ended
March 31, 2013, we did not engage in interest rate hedging activities.

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

Item 4.    Controls and Procedures.

As required by Rule 13(a)-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with
the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of
March 31, 2013. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable
assurance that we would meet our disclosure obligations.

There
was no change in our internal control over financial reporting (as defined in Rules 13(a)-15(f) or 15(d)-15(f) of the Exchange Act) that occurred
during the three months ended March 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART IIOTHER INFORMATION

Item 1.    Legal Proceedings.

We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened
against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our
portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial
condition or results of operations.

Item 1A.    Risk Factors.

There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the year
ended December 31, 2012.

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

The table below provides information concerning our repurchases of common shares during the quarter ended March 31, 2013
pursuant to our share repurchase program.

Period

Total
Number of
Shares
Purchased

Average
Price Paid
per Share

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

Maximum Number of
Shares that May Yet
Be Purchased
Under the
Plans or ProgramsJanuary 1 to January 31, 2013


24,249

$
9.405


24,249


(1
)February 1 to February 28, 2013











March 1 to March 31, 2013











Total


24,249

$
9.405


24,249


(1
)


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


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

Item 3.    Defaults upon Senior Securities.

Not applicable.

Item 4.    Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

Not applicable.

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Item 6.    Exhibits.

3.1

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

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

Form of Subscription Agreement.(Incorporated by reference to Appendix A filed with the Company's final prospectus on Form 497 (File No. 333-169679) filed on May 14,
2013.)4.2

Amended and Restated Distribution Reinvestment Plan of the Company.(Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 14,
2011.)10.1

Investment Advisory and Administrative Services Agreement, dated as of April 28, 2011, by and between the Company and FS Investment Advisor, LLC.(Incorporated by reference to
Exhibit (g)(1) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.2

Amendment No. 1, dated as of August 10, 2012, to Investment Advisory and Administrative Services Agreement, dated as of April 28, 2011, by and between the Company and FS Investment Advisor, LLC.(Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q filed on August 14, 2012.)10.3

Investment Sub-advisory Agreement, dated as of April 28, 2011, by and between FS Investment Advisor, LLC and GSO Capital Partners LP.(Incorporated by reference to Exhibit (g)
(2) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.4

Dealer Manager Agreement, dated as of April 28, 2011, by and between the Company and FS2 Capital Partners, LLC.(Incorporated by reference to Exhibit (h)(1) filed with
Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.5

Form of Selected Dealer Agreement(Included as Appendix A to the Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the
Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.6

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

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

Credit Agreement, dated as of June 24, 2011, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch and the other lenders party thereto.(Incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.9

First Amendment to Credit Agreement, dated as of May 30, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch and the other lenders party thereto.(Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 30, 2012.)10.10

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


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10.11

Third Amendment to Credit Agreement, dated as of October 18, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch and the other lenders party thereto.(Incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on October 18, 2012.)10.12

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.)10.13

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.)10.14

Security Agreement, dated as of June 24, 2011, by and between FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch.(Incorporated by reference to Exhibit 10.10 to the
Company's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.15

ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q filed on August 15, 2011.)10.16

Confirmation Letter Agreement, dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.12 to the Company's
Quarterly Report on Form 10-Q filed on August 15, 2011.)10.17

Guarantee, dated as of August 11, 2011, by the Company in favor of Citibank, N.A.(Incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q filed
on August 15, 2011.)10.18

Investment Management Agreement, dated as of August 11, 2011, by and between the Company and EP Investments LLC.(Incorporated by reference to Exhibit 10.14 to the Company's
Quarterly Report on Form 10-Q filed on August 15, 2011.)10.19

Termination and Release Acknowledgement, dated as of May 11, 2012, by Citibank N.A. in favor of the Company.(Incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q filed on May 15, 2012.)10.20

Amendment Agreement, dated as of May 11, 2012, to the ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, by and between EP Investments LLC and Citibank,
N.A.(Incorporated by reference to Exhibit 10.16 to the Company's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.21

Amended and Restated Confirmation Letter Agreement, dated as of May 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.17 to
the Company's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.22

Amended and Restated Confirmation Letter Agreement, dated as of October 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.1
to the Company's Current Report on Form 8-K filed on October 12, 2012.)31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended.*32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*


*Filed
herewith.


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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 May 15, 2013.

FS ENERGY AND POWER FUNDBy:

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

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


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