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



FORM 10-Q



ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014o

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)

19104(Zip Code)


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



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 such 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 had 244,072,801 common shares of beneficial interest outstanding as of July 29, 2014.





---





Table of Contents



TABLE OF CONTENTS



PagePART IFINANCIAL INFORMATIONITEM 1.

FINANCIAL STATEMENTS


1Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013


1Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013


2Unaudited Consolidated Statements of Changes in Net Assets for the six months ended June 30, 2014 and 2013


3Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013


4Consolidated Schedules of Investments as of June 30, 2014 (Unaudited) and December 31, 2013


5Notes to Unaudited Consolidated Financial Statements


18ITEM 2.

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


47ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


74ITEM 4.

CONTROLS AND PROCEDURES


75PART IIOTHER INFORMATIONITEM 1.

LEGAL PROCEEDINGS


76ITEM 1A.

RISK FACTORS


76ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


76ITEM 3.

DEFAULTS UPON SENIOR SECURITIES


77ITEM 4.

MINE SAFETY DISCLOSURES


77ITEM 5.

OTHER INFORMATION


77ITEM 6.

EXHIBITS


78SIGNATURES


82


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Table of Contents

PART IFINANCIAL INFORMATION

Item 1.    Financial Statements.



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

June 30, 2014
(Unaudited)

December 31,
2013AssetsInvestments, at fair value (amortized cost$2,866,003 and $2,249,954, respectively)

$
2,954,968

$
2,300,201Cash


142,571


91,084Receivable for investments sold and repaid


22,680


8,306Interest receivable


29,285


25,467Receivable for common shares purchased


182


135Deferred financing costs


3,471


3,445Prepaid expenses and other assets


150


21​
​
​
​
​
​
​
​Total assets

$
3,153,307

$
2,428,659​
​
​
​
​
​
​
​LiabilitiesPayable for investments purchased

$
87,819

$
81,509Credit facilities payable


710,000


624,174Shareholder distributions payable





10,700Management fees payable


14,678


10,751Accrued capital gains incentive fees(1)


19,573


13,850Subordinated income incentive fees payable(1)


10,013


6,786Administrative services expense payable


1,461


418Interest payable


2,063


2,005Trustees' fees payable


227


251Other accrued expenses and liabilities


3,287


1,978​
​
​
​
​
​
​
​Total liabilities


849,121


752,422​
​
​
​
​
​
​
​Commitments and contingencies(2)Shareholders' equityPreferred shares, $0.001 par value, 50,000,000 shares authorized, none issued and outstanding





Common shares, $0.001 par value, 450,000,000 shares authorized, 233,800,135 and 173,532,259 shares issued and outstanding, respectively


234


174Capital in excess of par value


2,209,277


1,622,893Accumulated undistributed net realized gains on investments and gain/loss on foreign currency(3)


15,082


10,898Accumulated distributions in excess of net investment income(3)


(9,374
)

(7,946
)Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency


88,967


50,218​
​
​
​
​
​
​
​Total shareholders' equity


2,304,186


1,676,237​
​
​
​
​
​
​
​Total liabilities and shareholders' equity

$
3,153,307

$
2,428,659​
​
​
​
​
​
​
​Net asset value per common share at period end

$
9.86

$
9.66


(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 9 for a discussion of the Company's commitments and contingencies.(3)See
Note 5 for a discussion of the sources of distributions paid by the Company.




See notes to unaudited consolidated financial statements.

1

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Table of Contents



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

Three Months Ended
June 30,

Six Months Ended
June 30,2014

2013

2014

2013Investment incomeInterest income

$
61,752

$
23,245

$
112,719

$
41,188Fee income


10,255


927


15,844


3,895​
​
​
​
​
​
​
​
​
​
​
​
​
​Total investment income


72,007


24,172


128,563


45,083​
​
​
​
​
​
​
​
​
​
​
​
​
​Operating expensesManagement fees


14,678


6,654


27,545


11,365Capital gains incentive fees(1)


3,015


(1,621
)

8,580


1,989Subordinated income incentive fees(1)


10,013





14,623


753Administrative services expenses


1,008


544


1,943


997Share transfer agent fees


660


475


1,307


875Accounting and administrative fees


288


168


554


308Interest expense


4,096


1,415


8,433


2,657Trustees' fees


135


199


416


399Other general and administrative expenses


1,033


767


1,737


1,210​
​
​
​
​
​
​
​
​
​
​
​
​
​Total operating expenses


34,926


8,601


65,138


20,553Income taxes


51





107


​
​
​
​
​
​
​
​
​
​
​
​
​
​Total expenses


34,977


8,601


65,245


20,553​
​
​
​
​
​
​
​
​
​
​
​
​
​Net investment income


37,030


15,571


63,318


24,530​
​
​
​
​
​
​
​
​
​
​
​
​
​Realized and unrealized gain/lossNet realized gain (loss) on investments


2,411


3,760


4,691


3,421Net realized gain (loss) on total return swap(2)





9,817





12,736Net realized gain (loss) on foreign currency


31





(507
)

10Net change in unrealized appreciation (depreciation) on investments


12,697


(15,946
)

38,718


(3,079
)Net change in unrealized appreciation (depreciation) on total return swap(2)





(5,731
)




(3,141
)Net change in unrealized gain (loss) on foreign currency


(50
)

(25
)

31


(30
)​
​
​
​
​
​
​
​
​
​
​
​
​
​Total net realized and unrealized gain/loss on investments


15,089


(8,125
)

42,933


9,917​
​
​
​
​
​
​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations

$
52,119

$
7,446

$
106,251

$
34,447​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Per share informationbasic and dilutedNet increase (decrease) in net assets resulting from operations (Earnings per Share)

$
0.24

$
0.07

$
0.52

$
0.39​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​Weighted average shares outstanding


219,030,100


100,028,169


203,738,493


87,762,307​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


(1)See
Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and
subordinated income incentive fees.(2)On
May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.




See notes to unaudited consolidated financial statements.

2

---





Table of Contents



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

Six Months Ended
June 30,2014

2013OperationsNet investment income

$
63,318

$
24,530Net realized gain (loss) on investments, total return swap and foreign currency(1)


4,184


16,167Net change in unrealized appreciation (depreciation) on investments


38,718


(3,079
)Net change in unrealized appreciation (depreciation) on total return swap(1)





(3,141
)Net change in unrealized gain (loss) on foreign currency


31


(30
)​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations


106,251


34,447​
​
​
​
​
​
​
​Shareholder distributions(2)Distributions from net investment income


(64,746
)

(29,182
)​
​
​
​
​
​
​
​Net decrease in net assets resulting from shareholder distributions


(64,746
)

(29,182
)​
​
​
​
​
​
​
​Capital share transactionsIssuance of common shares(3)


544,468


443,853Reinvestment of shareholder distributions(3)


48,357


16,554Repurchases of common shares(3)


(3,250
)

(1,017
)Offering costs


(3,131
)

(2,400
)​
​
​
​
​
​
​
​Net increase in net assets resulting from capital share transactions


586,444


456,990​
​
​
​
​
​
​
​Total increase in net assets


627,949


462,255Net assets at beginning of period


1,676,237


602,889​
​
​
​
​
​
​
​Net assets at end of period

$
2,304,186

$
1,065,144​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​Accumulated distributions in excess of net investment income(2)

$
(9,374
)
$
(8,006
)​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


(1)On
May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.(2)See
Note 5 for a discussion of the sources of distributions paid by the Company.(3)See
Note 3 for a discussion of transactions with respect to the Company's common shares during the six months ended June 30, 2014 and 2013.




See notes to unaudited consolidated financial statements.

3

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Table of Contents



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

Six Months Ended
June 30,2014

2013Cash flows from operating activitiesNet increase (decrease) in net assets resulting from operations

$
106,251

$
34,447Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:Purchases of investments


(1,059,647
)

(1,056,798
)Paid-in-kind interest


(6,206
)

Proceeds from sales and repayments of investments


460,436


348,473Net realized (gain) loss on investments


(4,691
)

(3,421
)Net change in unrealized (appreciation) depreciation on investments


(38,718
)

3,079Net change in unrealized (appreciation) depreciation on total return swap(1)





3,141Accretion of discount


(5,941
)

(1,332
)Amortization of deferred financing costs


824


369(Increase) decrease in due from counterparty





56,876(Increase) decrease in receivable for investments sold and repaid


(14,374
)

(78,052
)(Increase) decrease in interest receivable


(3,818
)

(12,306
)(Increase) decrease in receivable due on total return swap(1)





329(Increase) decrease in prepaid expenses and other assets


(129
)

87Increase (decrease) in payable for investments purchased


6,310


144,530Increase (decrease) in management fees payable


3,927


3,132Increase (decrease) in expense recoupment payable to sponsor(2)





(1,083
)Increase (decrease) in accrued capital gains incentive fees


5,723


1,036Increase (decrease) in subordinated income incentive fees payable


3,227


Increase (decrease) in administrative services expense payable


1,043


240Increase (decrease) in interest payable


58


186Increase (decrease) in trustees' fees payable


(24
)

240Increase (decrease) in other accrued expenses and liabilities


1,309


306​
​
​
​
​
​
​
​Net cash used in operating activities


(544,440
)

(556,521
)​
​
​
​
​
​
​
​Cash flows from financing activitiesIssuance of common shares


544,421


443,894Reinvestment of shareholder distributions


48,357


16,554Repurchases of common shares


(3,250
)

(1,017
)Offering costs


(3,131
)

(2,400
)Shareholder distributions


(75,446
)

(26,482
)Borrowings under credit facilities(3)


85,826


167,768Deferred financing costs paid


(850
)

(1,257
)​
​
​
​
​
​
​
​Net cash provided by financing activities


595,927


597,060​
​
​
​
​
​
​
​Total increase (decrease) in cash


51,487


40,539Cash at beginning of period


91,084


48,986​
​
​
​
​
​
​
​Cash at end of period

$
142,571

$
89,525​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​Supplemental disclosureExcise taxes paid

$
225

$
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


(1)On
May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.(2)See
Note 4 for a discussion of expense recoupments paid by the Company to its investment adviser and affiliates.(3)See
Note 8 for a discussion of the Company's credit facilities. During the six months ended June 30, 2014 and 2013, the Company paid $7,551
and $2,102, respectively, in interest expense on the credit facilities.




See notes to unaudited consolidated financial statements.

4

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Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments

As of June 30, 2014

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Senior Secured LoansFirst Lien37.1%Allied Wireline Services, LLC

(j)

Service & Equipment

L+800

1.5%

2/28/19

$
108,625

$
106,930

$
108,625Alon USA Partners, L.P.

(g)(l)

Downstream

L+800

1.3%

11/26/18


4,104


4,251


4,279AP Exhaust Acquisition, LLC

(h)

Service & Equipment

L+775

1.5%

1/16/21


15,000


15,000


15,000Astoria Generating Co.

(g)(h)(k)

Power

L+700

1.5%

10/26/17


26,538


27,401


27,334Atlas Energy, L.P.

(g)(l)

Midstream

L+550

1.0%

7/31/19


5,514


5,466


5,600Azure Midstream Energy LLC

(g)

Midstream

L+550

1.0%

11/15/18


13,163


12,985


13,302BBH Operating LLC



Upstream

Prime+500

3.3%

2/26/15


18,500


18,500


18,546BBH Operating LLC

(e)

Upstream

Prime+500

3.3%

2/26/15


11,500


11,500


11,529BL Sand Hills Unit, L.P.



Upstream

Prime+650

3.5%

12/17/17


7,787


6,763


7,281BL Sand Hills Unit, L.P.

(e)

Upstream

Prime+650

3.5%

12/17/17


51,652


44,857


48,295BlackBrush TexStar L.P.

(f)(g)(h)

Midstream

L+650

1.3%

6/4/19


69,999


69,679


70,760Boomerang Tube, LLC

(f)(g)

Service & Equipment

L+950

1.5%

10/11/17


19,108


18,941


17,388Buffalo Gulf Coast Terminals LLC

(g)

Midstream

L+400

1.3%

10/31/17


6,520


6,624


6,561Crestwood Holdings LLC

(g)(h)(j)

Midstream

L+600

1.0%

6/19/19


33,086


33,258


33,675EnergySolutions, LLC

(f)(g)

Service & Equipment

L+575

1.0%

5/29/20


21,818


21,385


22,100EP Acquisition LLC



Upstream

Prime+500

3.3%

3/31/15


750


750


752FR Dixie Acquisition Corp.

(g)(k)

Service & Equipment

L+475

1.0%

12/18/20


10,224


10,237


10,288FR Utility Services LLC

(g)(k)

Service & Equipment

L+575

1.0%

10/18/19


15,078


14,977


15,248Harvey Gulf International Marine, LLC

(g)

Service & Equipment

L+450

1.0%

6/18/20


7,935


7,844


7,902Hudson Products Holdings Inc.

(g)

Service & Equipment

L+400

1.0%

3/15/19


5,792


5,778


5,819Industrial Group Intermediate Holdings, LLC



Service & Equipment

L+800

1.3%

5/31/20


14,962


14,962


14,962Larchmont Resources, LLC

(g)(h)(k)

Upstream

L+725

1.0%

8/7/19


21,488


21,491


21,971MB Precision Holdings LLC

(h)

Service & Equipment

L+725

1.3%

1/23/20


13,433


13,433


13,433McJunkin Red Man Corp.

(g)(l)

Service & Equipment

L+400

1.0%

11/8/19


1,777


1,777


1,791Moxie Liberty LLC

(g)(h)(j)(k)

Power

L+650

1.0%

8/21/20


32,432


32,571


33,405Moxie Patriot LLC

(j)

Power

L+575

1.0%

12/19/20


2,000


2,044


2,060NES Global Talent Finance US LLC

(g)(h)(l)

Service & Equipment

L+550

1.0%

10/3/19


17,775


17,550


17,819Panda Sherman Power, LLC

(f)(g)(h)(k)

Power

L+750

1.5%

9/14/18


16,909


17,242


17,363Panda Temple Power, LLC (TLA)

(j)

Power

L+700

1.5%

7/17/18


16,200


15,999


16,605Panda Temple Power, LLC (TLB)

(g)(h)(j)

Power

L+1000

1.5%

7/17/18


40,000


39,390


41,083Panda Temple Power II, LLC

(g)(h)

Power

L+600

1.3%

4/3/19


23,809


24,324


24,404PeroxyChem LLC

(h)(j)

Service & Equipment

L+650

1.0%

2/28/20


13,965


13,809


14,105ProPetro Services, Inc.

(h)

Service & Equipment

L+625

1.0%

9/30/19


8,663


8,617


8,771San Pedro Development, LLC



Upstream

Prime+400



6/30/15


21,200


17,685


20,458


See notes to unaudited consolidated financial statements.

5

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Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2014

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Sprint Industrial Holdings LLC

(h)

Service & Equipment

L+575

1.3%

11/14/19

$
14,850

$
14,833

$
14,961Stallion Oilfield Holdings, Inc.

(f)(g)(h)

Service & Equipment

L+675

1.3%

6/19/18


63,868


63,744


64,906Swift Worldwide Resources US Holdings Corp.

(h)(j)

Service & Equipment

L+800

1.3%

4/30/19


59,961


59,961


59,961Tervita Corp.

(g)(h)(k)(l)

Service & Equipment

L+500

1.3%

5/15/18


18,994


18,819


19,093Total Safety U.S., Inc.

(g)

Service & Equipment

L+450

1.3%

3/13/20


4,416


4,479


4,355TPF II LC, LLC

(g)(h)

Power

L+550

1.0%

8/21/19


17,588


17,616


17,940Wastequip, LLC

(g)

Service & Equipment

L+450

1.0%

8/9/19


8,727


8,755


8,793Willbros Group, Inc.

(g)(h)(l)

Service & Equipment

L+975

1.3%

8/7/19


22,085


21,440


22,499​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansFirst Lien















893,667


911,022Unfunded Loan Commitments















(56,357
)

(56,357
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Senior Secured LoansFirst Lien















837,310


854,665​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Senior Secured LoansSecond Lien39.5%Alison US LLC

(j)(k)(l)

Service & Equipment

L+850

1.0%

6/17/22


22,222


21,333


21,750American EnergyUtica, LLC

(h)(j)

Upstream

L+400, 5.5% PIK (5.5% Max PIK)

1.5%

9/30/18


119,306


119,306


121,096American EnergyUtica, LLC



Upstream

L+400, 5.5% PIK (5.5% Max PIK)

1.5%

9/30/18


81,010


81,010


82,225Ameriforge Group Inc.

(f)(h)(j)(k)

Service & Equipment

L+750

1.3%

12/21/20


33,950


34,499


34,798Brock Holdings III, Inc.

(f)(h)(j)

Service & Equipment

L+825

1.8%

3/16/18


33,605


33,848


33,983Chief Exploration & Development LLC

(k)

Upstream

L+650

1.0%

5/16/21


19,576


19,489


20,066Citrus Energy Appalachia, LLC

(g)(j)

Upstream

L+850

1.3%

7/26/18


56,574


55,131


56,716


See notes to unaudited consolidated financial statements.

6

---





Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2014

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Consolidated Precision Products Corp.

(f)(g)(h)(j)

Service & Equipment

L+775

1.0%

4/30/21

$
33,500

$
33,345

$
33,898Drew Marine Group Inc.

(h)(j)(l)

Service & Equipment

L+700

1.0%

5/19/21


10,000


9,977


10,150Extraction Oil & Gas Holdings, LLC



Upstream

11.0%



5/29/19


55,000


55,000


55,000Fieldwood Energy LLC

(k)

Upstream

L+713

1.3%

9/30/20


8,547


8,846


8,830Filtration Group Corp.

(g)

Service & Equipment

L+725

1.0%

11/21/21


2,632


2,607


2,698Horn Intermediate Holdings, Inc.

(h)

Service & Equipment

L+775

1.3%

10/2/18


67,500


67,500


68,175Husky Injection Molding Systems Ltd.

(f)(k)(l)

Service & Equipment

L+625

1.0%

6/30/22


3,000


2,985


3,026Jonah Energy LLC

(f)

Upstream

L+650

1.0%

5/8/21


25,685


25,305


25,952Neff Rental LLC

(f)

Service & Equipment

L+625

1.0%

6/9/21


5,435


5,408


5,431Oxbow Carbon LLC

(h)

Midstream

L+700

1.0%

1/19/20


15,000


14,866


15,394P2 Upstream Acquisition Co.

(f)(h)(j)(k)

Service & Equipment

L+800

1.0%

4/30/21


32,599


32,920


33,237Power Buyer, LLC

(g)

Service & Equipment

L+725

1.0%

11/6/20


3,500


3,530


3,430Sabine Oil & Gas LLC

(f)(g)

Upstream

L+750

1.3%

12/31/18


12,660


12,883


12,913Teine Energy Ltd.

(j)(k)(l)

Upstream

L+625

1.3%

5/17/19


24,794


25,041


25,135Templar Energy LLC

(f)(j)

Upstream

L+700

1.0%

11/25/20


76,923


75,479


76,538Total Safety U.S., Inc.

(g)(h)

Service & Equipment

L+800

1.3%

9/13/20


12,805


13,079


12,837UTEX Industries, Inc.

(g)(h)(j)

Service & Equipment

L+725

1.0%

5/20/22


30,636


30,520


31,058Vantage Energy II, LLC



Upstream

L+750

1.0%

5/8/17


85,000


85,000


85,000Vantage Energy, LLC

(j)

Upstream

L+750

1.0%

12/20/18


30,539


30,329


30,768​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansSecond Lien















899,236


910,104​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Senior Secured Bonds7.4%Erickson Air-Crane Inc.

(f)(i)(l)

Service & Equipment

8.3%



5/1/20


24,725


25,501


25,590FourPoint Energy, LLC



Upstream

8.5%



12/31/20


74,250


64,934


64,226Gastar Exploration USA, Inc.

(i)(l)

Upstream

8.6%



5/15/18


22,000


21,492


23,028Globe Luxembourg SCA

(f)(l)

Service & Equipment

9.6%



5/1/18


10,000


9,672


11,186Mirant Mid-Atlantic Trust

(f)(i)

Power

10.1%



12/30/28


11,643


13,011


13,244Permian Tank & Manufacturing, Inc.

(g)

Service & Equipment

10.5%



1/15/18


4,000


4,082


4,120


See notes to unaudited consolidated financial statements.

7

---



Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2014

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Prince Mineral Holding Corp.

(i)

Service & Equipment

11.5%



12/15/19

$
16,500

$
18,004

$
18,810Ryerson Inc.

(f)(g)

Service & Equipment

9.0%



10/15/17


2,300


2,373


2,470Tervita Corp.

(h)(i)(l)

Service & Equipment

8.0%



11/15/18


8,500


8,620


8,883​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured Bonds















167,689


171,557​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Subordinated Debt37.5%Alta Mesa Holdings, L.P.

(f)

Upstream

9.6%



10/15/18


36,616


36,540


38,742Atlas Energy Holdings Operating Co., LLC

(f)(i)(l)

Upstream

7.8%



1/15/21


21,450


20,586


22,241Atlas Energy Holdings Operating Co., LLC

(i)(l)

Upstream

9.3%



8/15/21


2,563


2,767


2,781Brand Energy & Infrastructure Services, Inc.

(f)(i)

Service & Equipment

8.5%



12/1/21


25,000


25,000


26,563Chaparral Energy Inc.

(f)

Upstream

8.3%



9/1/21


2,000


2,056


2,209Chaparral Energy Inc.

(f)(g)

Upstream

7.6%



11/15/22


15,225


16,304


16,518CHC Helicopter S.A.

(f)(i)(l)

Service & Equipment

9.4%



6/1/21


12,500


12,716


13,379Clayton Williams Energy, Inc.

(i)(l)

Upstream

7.8%



4/1/19


9,300


9,287


9,925Comstock Resources, Inc.

(f)(l)

Upstream

9.5%



6/15/20


5,000


4,809


5,716Crestwood Midstream Partners L.P.

(i)(l)

Midstream

6.1%



3/1/22


5,500


5,500


5,811Crew Energy Inc.

(i)(l)(s)

Upstream

8.4%



10/21/20

C$
11,240


11,506


12,167CrownRock, L.P.

(f)

Upstream

7.1%



4/15/21

$
37,500


37,500


39,747Diamondback Energy, Inc.

(i)(l)

Upstream

7.6%



10/1/21


5,500


5,500


6,097Energy XXI Gulf Coast, Inc.

(i)

Upstream

7.5%



12/15/21


4,000


3,982


4,317EP Energy LLC

(f)(l)

Upstream

7.8%



9/1/22


6,600


6,621


7,471Era Group Inc.

(f)(l)

Service & Equipment

7.8%



12/15/22


7,750


7,633


8,254Everest Acquisition LLC

(f)

Upstream

9.4%



5/1/20


19,250


19,823


22,152Gardner Denver, Inc.

(f)(k)

Service & Equipment

6.9%



8/15/21


735


777


775GenOn Energy, Inc.

(f)(i)

Power

9.9%



10/15/20


23,000


24,311


25,090Global Partners L.P.

(f)(i)(l)

Midstream

6.3%



7/15/22


85,000


85,000


85,425Hercules Offshore, Inc.

(f)(l)

Service & Equipment

8.8%



7/15/21


3,900


3,900


4,153Hercules Offshore, Inc.

(f)(l)

Service & Equipment

7.5%



10/1/21


5,000


5,000


4,800


See notes to unaudited consolidated financial statements.

8

---





Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2014

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate(b)

Floor

Maturity

Principal
Amount(c)

Amortized
Cost

Fair
Value(d)Hercules Offshore, Inc.

(i)(l)

Service & Equipment

6.8%



4/1/22

$
5,000

$
5,000

$
4,775The Hillman Group, Inc.

(f)

Service & Equipment

6.4%



7/15/22


5,000


5,025


5,013Ithaca Energy Inc.

(k)(l)

Upstream

8.1%



7/1/19


2,000


2,000


2,000Jones Energy, Inc.

(i)(l)

Upstream

6.8%



4/1/22


17,000


17,000


18,035The Kenan Advantage Group, Inc.

(f)(i)

Service & Equipment

8.4%



12/15/18


18,000


18,496


19,328Legacy Reserves L.P.

(f)(i)(l)

Upstream

6.6%



12/1/21


14,000


13,818


14,271Legacy Reserves L.P.

(f)(l)

Upstream

8.0%



12/1/20


16,750


16,441


17,973Lightstream Resources Ltd.

(i)(l)

Upstream

8.6%



2/1/20


35,695


35,951


37,606Lonestar Resources America Inc.

(i)

Upstream

8.8%



4/15/19


21,500


21,626


21,728Martin Midstream Partners L.P.

(f)(l)

Midstream

7.3%



2/15/21


3,000


3,000


3,180Memorial Production Partners L.P.

(i)(l)

Upstream

7.6%



5/1/21


7,000


6,804


7,355Memorial Resource Development LLC

(i)

Upstream

10.8% PIK (10.8% Max PIK)



12/15/18


13,300


13,055


13,659The Pantry Inc.

(f)(l)

Service & Equipment

8.4%



8/1/20


250


271


270Peabody Energy Corp.

(f)(l)

Upstream

7.9%



11/1/26


2,000


2,100


2,107Peabody Energy Corp.

(f)(k)(l)

Upstream

6.3%



11/15/21


1,985


1,992


1,994Pinnacle Operating Corp.

(i)

Service & Equipment

9.0%



11/15/20


2,500


2,500


2,725QR Energy, L.P.

(f)(i)(l)

Upstream

9.3%



8/1/20


25,030


25,568


27,533Resolute Energy Corp.

(i)(l)

Upstream

8.5%



5/1/20


6,230


6,574


6,573Rex Energy Corp.

(i)(l)

Upstream

8.9%



12/1/20


14,000


14,010


15,625Rice Energy Inc.

(i)

Upstream

6.3%



5/1/22


7,350


7,350


7,571RKI Exploration & Production, LLC

(f)

Upstream

8.5%



8/1/21


34,100


34,122


37,211Samson Investment Co.

(f)(i)

Upstream

9.8%



2/15/20


25,500


25,751


27,086Sanchez Energy Corp.

(i)(l)

Upstream

7.8%



6/15/21


14,500


14,251


16,030SemGroup Corp.

(f)(l)

Midstream

7.5%



6/15/21


9,400


9,400


10,337Sidewinder Drilling Inc.

(i)

Service & Equipment

9.8%



11/15/19


21,500


21,589


21,984Silver II US Holdings, LLC

(f)

Service & Equipment

7.8%



12/15/20


1,835


1,977


1,973Summit Midstream Holdings, LLC

(f)(l)

Midstream

7.5%



7/1/21


1,000


1,000


1,094Swift Energy Co.

(f)(i)(l)

Upstream

7.9%



3/1/22


20,000


20,048


21,067Talos Production LLC

(f)(i)

Upstream

9.8%



2/15/18


43,250


43,273


46,007Tenrgys, LLC

(j)

Upstream

L+900

2.5%

12/23/18


75,000


75,000


75,750Zachry Holdings, Inc.

(f)

Service & Equipment

7.5%



2/1/20


11,800


12,040


12,715​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Subordinated Debt















824,150


864,908​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to unaudited consolidated financial statements.

9

---



Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2014

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry







Number of
Shares

Amortized
Cost

Fair
Value(d)Equity/Other6.7%(m)Allied Downhole Technologies, LLC, Common Equity

(n)(o)

Service & Equipment








6,600,000

$
6,600

$
10,230Allied Downhole Technologies, LLC, Warrants

(n)(o)

Service & Equipment








5,344,680


1,865


4,490American Energy Ohio Holdings, LLC, Common Equity

(o)(p)

Upstream








14,900,000


14,900


14,900AP Exhaust Holdings, LLC, Common Equity

(n)(o)

Service & Equipment








811


811


924BBH Operating LLC, Common Equity

(o)(q)

Upstream








1,000


1,000


993BL Sand Hills Unit, L.P., Net Profits Interest

(o)(r)

Upstream








N/A


961


1,041BL Sand Hills Unit, L.P. Overriding Royalty Interest

(r)

Upstream








N/A


137


137Extraction Oil & Gas Holdings, LLC, Common Equity

(n)(o)

Upstream








2,794,500


7,500


7,545Fortune Creek Co-Invest I L.P., LP Interest

(l)(s)

Midstream








N/A


17,246


17,440FourPoint Energy, LLC, Common Equity

(n)(o)

Upstream








12,374


8,176


12,374Industrial Group Intermediate Holdings, LLC, Common Equity

(n)(o)

Service & Equipment








371,901


372


372MB Precision Holdings LLC, Common Equity

(o)

Service & Equipment








450,000


450


495Plains Offshore Operations Inc., Preferred Equity

(f)

Upstream








21,067


23,933


26,183Plains Offshore Operations Inc., Warrants

(f)(o)

Upstream








427,005


689


1,110San Pedro Development, LLC, Net Profits Interest

(o)(t)

Upstream








N/A


3,515


4,724Swift Worldwide Resources Holdco Limited, Common Equity

(l)(o)(u)

Service & Equipment








3,750,000


6,029


7,376Synergy Offshore LLC, Preferred Equity

(v)

Upstream








40,000


43,434


43,400​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Equity/Other















137,618


153,734​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​TOTAL INVESTMENTS128.2%














$
2,866,003


2,954,968​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​LIABILITIES IN EXCESS OF OTHER ASSETS(28.2%)


















(650,782
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​NET ASSETS100.0%

















$
2,304,186​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


(a)Security may be an obligation of one or more entities affiliated with the named company.(b)Certain variable rate securities in the Company's
portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis
point spread. As of June 30, 2014, the three-month London Interbank Offered Rate was 0.23% and the U.S. Prime Lending Rate was 3.25%.(c)Denominated in U.S. dollars, unless otherwise
noted.(d)Fair value determined by the Company's board of trustees (see Note 7).(e)Security is an unfunded loan commitment.(f)Security or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under
the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).


See notes to unaudited consolidated financial statements.

10

---



Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of June 30, 2014

(in thousands, except share amounts)

(g)

Security or portion thereof held within EP Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).(h)

Security or portion thereof held within Energy Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Natixis, New York Branch (see
Note 8).(i)

Security or portion thereof held within Berwyn Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage, Inc. Securities
held within Berwyn Funding LLC may be rehypothecated from time to time as permitted under Rule 15c-1(a)(1) of the Securities Exchange Act of 1934, as amended, subject to the terms and conditions of the agreements governing the prime
brokerage facility with BNP Paribas Prime Brokerage, Inc. (See Note 8).(j)

Security or portion thereof held within Gladwyne Funding LLC, a wholly-owned subsidiary of the Company.(k)

Position or portion thereof unsettled as of June 30, 2014.(l)

The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is
made, qualifying assets represent at least 70% of the business development company's total assets. As of June 30, 2014, 81.1% of the Company's total assets represented qualifying assets.(m)

Listed investments may be treated as debt for GAAP or tax purposes.(n)

Security held within FSEP Investments, Inc., a wholly-owned subsidiary of the Company.(o)

Security is non-income producing.(p)

Security held within EP American Energy Investments, Inc., a wholly-owned subsidiary of the Company.(q)

Security held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.(r)

Security held within EP Burnett Investments, Inc., a wholly-owned subsidiary of the Company.(s)

Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of June 30, 2014.(t)

Security held within EP San Pedro Investments, LLC, a wholly-owned subsidiary of the Company.(u)

Investment denominated in British pounds. Amortized cost and fair value are converted into U.S. dollars as of June 30, 2014.(v)

Security held within EP Synergy Investments, Inc., a wholly-owned subsidiary of the Company.


See notes to unaudited consolidated financial statements.

11

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments

As of December 31, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Senior Secured LoansFirst Lien37.9%Alon USA Partners, L.P.

(e)(i)

Downstream

L+800

1.3%

11/26/18

$
4,125

$
4,289

$
4,256Atlas Energy, L.P.

(e)(f)(i)

Midstream

L+550

1.0%

7/31/19


8,534


8,529


8,769Azure Midstream Energy LLC

(e)

Midstream

L+550

1.0%

11/15/18


13,500


13,301


13,601BBH Operating LLC



Upstream

Prime+500

3.3%

2/26/15


17,000


17,000


17,000BBH Operating LLC



Upstream

Prime+500

3.3%

2/26/15


13,000


13,000


13,000BL Sand Hills Unit, L.P.

(h)

Upstream

Prime+650

3.5%

12/17/17


3,431


2,980


2,980BL Sand Hills Unit, L.P.

(h)

Upstream

Prime+650

3.5%

12/17/17


56,569


49,127


49,127BlackBrush TexStar L.P.

(d)(e)(f)

Midstream

L+650

1.3%

6/4/19


60,764


60,416


61,334Boomerang Tube, LLC

(d)(e)

Service & Equipment

L+950

1.5%

10/11/17


19,631


19,443


18,944Brock Holdings III, Inc.

(e)

Service & Equipment

L+450

1.5%

3/16/17


2,763


2,799


2,777Buffalo Gulf Coast Terminals LLC

(e)

Midstream

L+400

1.3%

10/31/17


6,554


6,672


6,619Cedar Bay Generating Co., L.P.

(f)

Power

L+500

1.3%

4/23/20


8,848


8,766


8,920Crestwood Holdings LLC

(e)(f)

Midstream

L+600

1.0%

6/19/19


28,868


28,952


29,734EP Acquisition LLC



Upstream

Prime+500

3.3%

3/31/15


750


750


750FR Utility Services LLC

(e)(f)

Service & Equipment

L+575

1.0%

10/18/19


19,389


19,219


19,389Harvey Gulf International Marine, LLC

(e)

Service & Equipment

L+450

1.0%

6/18/20


9,975


9,848


10,081Hudson Products Holdings Inc.

(e)(f)

Service & Equipment

L+400

1.3%

6/7/17


10,329


10,368


10,415Larchmont Resources, LLC

(e)(f)

Upstream

L+725

1.0%

8/7/19


18,834


18,775


19,187McJunkin Red Man Corp.

(e)(i)

Service & Equipment

L+400

1.0%

11/9/19


5,796


5,796


5,889Moxie Liberty LLC

(e)(f)

Power

L+650

1.0%

8/21/20


27,432


27,419


28,187NES Global Talent Finance US LLC

(e)(f)(i)

Service & Equipment

L+550

1.0%

10/3/19


18,000


17,755


17,978Panda Sherman Power, LLC

(d)(e)

Power

L+750

1.5%

9/14/18


10,909


11,104


11,236Panda Temple Power, LLC (TLA)



Power

L+700

1.5%

7/17/18


16,200


15,981


16,635Panda Temple Power, LLC (TLB)

(e)(f)

Power

L+1000

1.5%

7/17/18


40,000


39,337


41,200Panda Temple Power II, LLC

(e)(f)

Power

L+600

1.3%

4/3/19


18,809


19,212


19,373ProPetro Services, Inc.

(e)(f)(h)

Service & Equipment

L+625

1.0%

9/30/19


8,913


8,861


8,968Prowler Acquisition Corp.

(e)

Service & Equipment

L+475

1.0%

3/19/19


4,813


4,769


4,813San Pedro Development, LLC

(f)

Upstream

Prime+400



6/30/15


19,974


16,662


17,278


See notes to unaudited consolidated financial statements.

12

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)San Pedro Development, LLC

(f)

Upstream

Prime+400



6/30/15

$
26

$
22

$
22Sandy Creek Energy Associates, L.P.

(e)(f)(h)

Power

L+400

1.0%

11/8/20


15,584


15,507


15,614Sprint Industrial Holdings LLC

(f)

Service & Equipment

L+575

1.3%

11/14/19


13,074


13,059


13,237Stallion Oilfield Holdings, Inc.

(d)(e)(f)(h)

Service & Equipment

L+675

1.3%

6/19/18


63,711


63,521


65,145Swift Worldwide Resources US Holdings Corp.



Service & Equipment

L+800

1.3%

4/30/19


60,263


60,263


60,263Total Safety U.S., Inc.

(e)(f)

Service & Equipment

L+450

1.3%

3/13/20


12,858


13,050


12,914TPF II LC, LLC

(e)(f)

Power

L+550

1.0%

8/21/19


17,910


17,938


18,268Wastequip, LLC

(e)

Service & Equipment

L+450

1.0%

8/9/19


8,771


8,801


8,859Westway Group, LLC

(e)

Service & Equipment

L+400

1.0%

2/27/20


8,933


9,030


8,994Willbros Group, Inc.

(e)(f)(i)

Service & Equipment

L+975

1.3%

8/7/19


24,938


24,155


25,312​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansFirst Lien















686,476


697,068Unfunded Loan Commitments















(62,149
)

(62,149
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Senior Secured LoansFirst Lien















624,327


634,919​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Senior Secured LoansSecond Lien40.8%American EnergyUtica, LLC

(f)

Upstream

L+475, 4.8% PIK

1.5%

9/30/18


116,057


116,057


116,057Ameriforge Group Inc.

(d)(f)(h)

Service & Equipment

L+750

1.3%

12/21/20


27,950


28,403


28,579Brock Holdings III, Inc.

(d)(f)(h)

Service & Equipment

L+825

1.8%

3/16/18


33,605


33,874


34,235Citrus Energy Appalachia, LLC

(e)(h)

Upstream

L+850

1.3%

7/26/18


56,829


55,249


56,687Consolidated Precision Products Corp.

(d)(e)(f)

Service & Equipment

L+775

1.0%

4/30/21


33,500


33,337


34,170Drew Marine Group Inc.

(f)(i)

Service & Equipment

L+700

1.0%

5/19/21


10,000


9,975


10,075Filtration Group Corp.

(e)

Service & Equipment

L+725

1.0%

11/21/21


2,632


2,606


2,697Horn Intermediate Holdings, Inc.



Service & Equipment

L+775

1.3%

10/2/18


67,500


67,500


68,175Oxbow Carbon LLC

(f)

Midstream

L+700

1.0%

1/19/20


15,000


14,858


15,309P2 Upstream Acquisition Co.

(f)

Service & Equipment

L+800

1.0%

4/30/21


21,409


21,511


21,837Power Buyer, LLC

(e)(f)

Service & Equipment

L+725

1.0%

11/6/20


7,500


7,495


7,388Rice Drilling B LLC

(f)

Upstream

L+725

1.3%

10/25/18


59,960


59,270


61,309Sabine Oil & Gas LLC

(d)(e)

Upstream

L+750

1.3%

12/31/18


12,660


12,903


12,818Teine Energy Ltd.

(h)(i)

Upstream

L+625

1.3%

5/17/19


19,007


19,076


19,292Templar Energy LLC

(d)

Upstream

L+700

1.0%

11/25/20


76,923


75,396


77,356


See notes to unaudited consolidated financial statements.

13

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)TNT Crane & Rigging, Inc.



Service & Equipment

L+900

1.0%

11/27/21

$
1,500

$
1,381

$
1,448Total Safety U.S., Inc.

(e)(f)

Service & Equipment

L+800

1.3%

9/13/20


12,805


13,095


12,966UTEX Industries, Inc.

(e)(f)(h)

Service & Equipment

L+750

1.3%

4/10/21


31,046


31,313


31,822Vantage Energy, LLC

(h)

Upstream

L+750

1.0%

12/20/18


27,692


27,415


27,692WildHorse Resources, LLC

(e)

Upstream

L+625

1.3%

12/13/18


43,593


42,798


43,811​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured LoansSecond Lien















673,512


683,723​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Senior Secured Bonds4.9%Erickson Air-Crane Inc.

(d)(i)

Service & Equipment

8.3%



5/1/20


10,875


10,919


11,283Gastar Exploration USA, Inc.

(g)(i)

Upstream

8.6%



5/15/18


22,000


21,439


21,850Globe Luxembourg SCA

(d)(i)

Service & Equipment

9.6%



5/1/18


10,000


9,637


10,469Iracore International Holdings, Inc.

(g)

Service & Equipment

9.5%



6/1/18


9,500


9,702


10,077Murray Energy Corp.

(d)

Upstream

8.6%



6/15/21


4,000


4,000


4,147Permian Tank & Manufacturing, Inc.

(e)

Service & Equipment

10.5%



1/15/18


4,000


4,091


3,981Prince Mineral Holding Corp.



Service & Equipment

11.5%



12/15/19


6,500


6,757


7,215Ryerson Inc.

(d)(e)

Service & Equipment

9.0%



10/15/17


3,300


3,465


3,506Shale-Inland Holdings, LLC

(e)(f)

Service & Equipment

8.8%



11/15/19


9,550


9,543


9,956​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Senior Secured Bonds















79,553


82,484​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Subordinated Debt47.1%Abengoa Finance, S.A.U.

(g)(i)

Service & Equipment

7.8%



2/1/20


2,500


2,500


2,606Alta Mesa Holdings, L.P.

(d)

Upstream

9.6%



10/15/18


42,616


42,580


45,792Atlas Energy Holdings Operating Co., LLC

(g)(i)

Upstream

7.8%



1/15/21


16,800


15,878


16,037Aurora USA Oil & Gas, Inc.

(g)(i)

Upstream

9.9%



2/15/17


15,250


15,702


16,433BOE Intermediate Holding Corp.

(g)

Service & Equipment

9.8% PIK



11/1/17


3,398


3,369


3,559Brand Energy & Infrastructure Services, Inc.

(d)(g)

Service & Equipment

8.5%



12/1/21


25,000


25,000


25,500BreitBurn Energy Partners L.P.

(g)(i)

Upstream

7.9%



4/15/22


3,500


3,508


3,654Chaparral Energy Inc.

(d)

Upstream

8.3%



9/1/21


2,000


2,059


2,178Chaparral Energy Inc.

(d)(e)

Upstream

7.6%



11/15/22


15,225


16,352


16,331CHC Helicopter S.A.

(d)(g)(i)

Service & Equipment

9.4%



6/1/21


12,500


12,727


12,754


See notes to unaudited consolidated financial statements.

14

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry

Rate

Floor

Maturity

Principal
Amount(b)

Amortized
Cost

Fair
Value(c)Clayton Williams Energy, Inc.

(g)(i)

Upstream

7.8%



4/1/19

$
9,300

$
9,286

$
9,617Comstock Resources, Inc.

(d)(i)

Upstream

9.5%



6/15/20


5,000


4,797


5,610Crestwood Midstream Partners L.P.

(g)(i)

Midstream

6.1%



3/1/22


5,500


5,500


5,640Crew Energy Inc.

(g)(i)

Upstream

8.4%



10/21/20

C$
10,000


9,615


9,566CrownRock, L.P.

(d)

Upstream

7.1%



4/15/21

$
50,000


50,000


49,712Diamondback Energy, Inc.

(g)(i)

Upstream

7.6%



10/1/21


5,500


5,500


5,801Energy XXI Gulf Coast, Inc.

(g)

Upstream

7.5%



12/15/21


4,000


3,981


4,188EP Energy LLC

(d)

Upstream

7.8%



9/1/22


6,600


6,622


7,417EPE Holdings LLC

(d)

Upstream

8.9% PIK



12/15/17


6,535


6,510


6,805Era Group Inc.

(d)(i)

Service & Equipment

7.8%



12/15/22


7,750


7,628


8,060Everest Acquisition LLC

(d)

Upstream

9.4%



5/1/20


19,250


19,863


22,402Global Partners L.P.

(i)

Midstream

8.0%



2/14/18


70,000


68,197


70,613Global Partners L.P.

(i)

Midstream

7.8%



12/23/18


40,000


40,000


40,000Hercules Offshore, Inc.

(d)(i)

Service & Equipment

8.8%



7/15/21


3,900


3,900


4,293Hercules Offshore, Inc.

(d)(i)

Service & Equipment

7.5%



10/1/21


5,000


5,000


5,299The Kenan Advantage Group, Inc.

(d)(g)

Service & Equipment

8.4%



12/15/18


18,000


18,542


19,035Legacy Reserves L.P.

(d)(i)

Upstream

6.6%



12/1/21


9,600


9,454


9,287Legacy Reserves L.P.

(d)(i)

Upstream

8.0%



12/1/20


16,750


16,424


17,306Martin Midstream Partners L.P.

(d)(i)

Midstream

7.3%



2/15/21


3,000


3,000


3,075Memorial Production Partners L.P.

(g)(i)

Upstream

7.6%



5/1/21


7,000


6,794


7,211Memorial Resource Development LLC

(g)

Upstream

10.8% PIK



12/15/18


13,300


13,034


13,300PetroBakken Energy Ltd.

(g)(i)

Upstream

8.6%



2/1/20


31,295


31,424


31,737Pinnacle Operating Corp.

(g)

Service & Equipment

9.0%



11/15/20


2,500


2,500


2,656QR Energy, L.P.

(d)(g)(i)

Upstream

9.3%



8/1/20


25,030


25,602


26,066Rex Energy Corp.

(g)(i)

Upstream

8.9%



12/1/20


14,000


14,011


15,330RKI Exploration & Production, LLC

(d)

Upstream

8.5%



8/1/21


34,100


34,124


36,096Samson Investment Co.

(d)(h)

Upstream

9.8%



2/15/20


23,000


23,029


25,137Sanchez Energy Corp.

(g)(i)

Upstream

7.8%



6/15/21


14,500


14,238


14,892SemGroup Corp.

(d)(i)

Midstream

7.5%



6/15/21


9,400


9,400


9,955Sidewinder Drilling Inc.



Service & Equipment

9.8%



11/15/19


21,500


21,596


19,028Summit Midstream Holdings, LLC

(d)(i)

Midstream

7.5%



7/1/21


1,000


1,000


1,050Talos Production LLC

(d)(g)

Upstream

9.8%



2/15/18


40,250


40,091


41,256Tenrgys, LLC



Upstream

L+900

2.5%

12/23/18


75,000


75,000


75,000Tervita Corp.

(g)(i)

Service & Equipment

10.9%



2/15/18


10,000


9,689


10,175Zachry Holdings, Inc.

(d)

Service & Equipment

7.5%



2/1/20


11,800


12,057


12,375​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Subordinated Debt















767,083


789,834​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


See notes to unaudited consolidated financial statements.

15

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)

Portfolio Company(a)

Footnotes

Industry







Number of
Shares

Amortized
Cost

Fair
Value(c)Equity/Other6.5%(j)American Energy Ohio Holdings, LLC, Common Equity

(k)(l)

Upstream









7,788,845

$
7,789

$
7,789BBH Operating LLC, Common Equity

(l)(m)

Upstream









1,000


1,000


924BL Sand Hills Unit, L.P., Net Profits Interest

(h)(l)(n)

Upstream









N/A


395


395BL Sand Hills Unit, L.P., Overriding Royalty Interest

(h)(l)(n)

Upstream









N/A


56


56Fortune Creek Co-Invest I L.P., LP Interest

(i)(o)

Midstream









N/A


22,597


22,715Plains Offshore Operations Inc., Preferred Equity

(d)

Upstream









20,000


22,161


25,052Plains Offshore Operations Inc., Warrants

(d)(l)

Upstream









405,378


689


1,054San Pedro Development, LLC, Net Profits Interest

(l)(p)

Upstream









N/A


3,312


3,641Swift Worldwide Resources Holdco Limited, Common Equity

(i)(l)(q)

Service & Equipment









3,750,000


6,029


6,215Synergy Offshore LLC, Preferred Equity

(r)

Upstream









40,000


41,451


41,400​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Equity/Other
















105,479


109,241​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​TOTAL INVESTMENTS137.2%















$
2,249,954


2,300,201​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​LIABILITIES IN EXCESS OF OTHER ASSETS(37.2%)



















(623,964
)​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​NET ASSETS100.0%


















$
1,676,237​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


(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)Security
or portion thereof held within EP Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit
facility with Citibank, N.A. (see Note 8).(f)Security
or portion thereof held within Energy Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit
facility with Natixis, New York Branch (see Note 8).(g)Security
or portion thereof held within Berwyn Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage
facility with BNP Paribas Prime Brokerage, Inc. (see Note 8).(h)Position
or portion thereof unsettled as of December 31, 2013.(i)The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company's total assets. As of December 31, 2013,
78.3% of the Company's total assets represented qualifying assets.(j)Listed
investments may be treated as debt for GAAP or tax purposes.


See notes to unaudited consolidated financial statements.

16

---



Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)

(k)

Security held within EP American Energy Investments, Inc., a wholly-owned subsidiary of the Company.(l)

Security is non-income producing.(m)

Security held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.(n)

Security held within EP Burnett Investments, Inc., a wholly-owned subsidiary of the Company.(o)

Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2013.(p)

Security held within EP San Pedro Investments, LLC, a wholly-owned subsidiary of the Company.(q)

Investment denominated in British pounds. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2013.(r)

Security held within EP Synergy Investments, Inc., a wholly-owned subsidiary of the Company.


See notes to unaudited consolidated financial statements.

17

---





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 investment
operations on July 18, 2011 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of its common shares of beneficial interest, or common shares, in
its continuous public offering to persons who were not affiliated with the Company or the Company's investment adviser, FS Investment Advisor, LLC, or FS Advisor, a private investment firm that
is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company. Prior to satisfying the minimum offering
requirement, the Company had no operations except for matters relating to its organization.

The
Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally
managed, non-diversified, closed-end management investment company that has elected to be treated for federal income tax purposes, and intends to qualify annually, as a regulated investment company,
or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of June 30, 2014, the Company had four wholly-owned financing subsidiaries and
seven wholly-owned subsidiaries through which it holds interests in certain non-controlled and non-affiliated portfolio companies. The unaudited consolidated financial statements include both the
Company's accounts and the accounts of its wholly-owned subsidiaries as of June 30, 2014. All significant intercompany transactions have been eliminated in consolidation. Certain of the
Company's consolidated subsidiaries are subject to U.S. federal and state income taxes.

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

Note 2. Summary of Significant Accounting Policies

Basis of Presentation:The accompanying 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, 2013 included in the Company's annual report on
Form 10-K. Operating results for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31,
2014. The December 31, 2013 consolidated balance sheet and consolidated schedule of investments are derived from the Company's audited consolidated financial statements as of and for the

18

---



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)

year
ended December 31, 2013. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and
Exchange Commission, or the SEC.

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

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

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

In
addition, the Company historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which was terminated on May 24, 2013),
as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FS Advisor with respect to
realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC, or the Staff, informed the Company that it is their interpretation of the
applicable language in the Advisers Act that the Company should "look through" the TRS in calculating its capital gains incentive fee. Under this "look through" methodology, the portion of the net
settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities underlying the TRS
directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FS 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

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 2. Summary of Significant Accounting Policies (continued)

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

Subordinated Income Incentive Fee:Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be
entitled to
receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of the Company's "pre-incentive fee net
investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, 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 be entitled to receive 20.0% of pre-incentive fee net investment income.

Reclassifications:Certain amounts in the unaudited consolidated financial statements for the three and six months ended June 30,
2013 have
been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three and six months ended June 30, 2014. These reclassifications had
no material impact on the Company's consolidated financial position, results of operations or cash flows as previously reported.

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 3. Share Transactions

Below is a summary of transactions with respect to the Company's common shares during the six months ended June 30, 2014 and 2013:

Six Months Ended June 30,2014

2013Shares

Amount

Shares

AmountGross Proceeds from Offering


55,660,059

$
599,756


46,470,564

$
486,802Reinvestment of Distributions


4,940,721


48,357


1,735,054


16,554​
​
​
​
​
​
​
​
​
​
​
​
​
​Total Gross Proceeds


60,600,780


648,113


48,205,618


503,356Commissions and Dealer Manager Fees





(55,288
)




(42,949
)​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Proceeds to Company


60,600,780


592,825


48,205,618


460,407Share Repurchase Program


(332,904
)

(3,250
)

(106,938
)

(1,017
)​
​
​
​
​
​
​
​
​
​
​
​
​
​Net Proceeds from Share Transactions


60,267,876

$
589,575


48,098,680

$
459,390​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


Status of Continuous Public Offering

Since commencing its continuous public offering and through July 29, 2014, the Company has sold 242,924,123 common shares (as
adjusted for share distributions) for gross proceeds of $2,536,600. As of July 29, 2014, the Company had raised total gross proceeds of $2,556,804, including $200 of seed capital contributed by
the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from the principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of the
Company's board of trustees and certain individuals and entities affiliated with GSO Capital Partners LP, or GSO, the Company's investment sub-adviser, in a private placement conducted in April
2011 (see Note 4).

During
the six months ended June 30, 2014 and 2013, the Company sold 60,600,780 and 48,205,618 common shares for gross proceeds of $648,113 and $503,356, respectively, at an
average price per share of $10.69 and $10.44, respectively. The gross proceeds received during the six months ended June 30, 2014 and 2013 include reinvested shareholder distributions of
$48,357 and $16,554, respectively, for which the Company issued 4,940,721 and 1,735,054 common shares, respectively. During the period from July 1, 2014 to July 29, 2014, the Company
sold 10,673,968 common shares for gross proceeds of $116,447 at an average price per share of $10.91.

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 $55,288 and $42,949 for the six months ended June 30, 2014 and 2013, respectively.

Share Repurchase Program

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

21

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 3. Share Transactions (continued)



The
Company currently intends to limit the number of common shares to be repurchased during any calendar year to the number of common shares it can repurchase with the proceeds it
receives from the issuance of common shares under its distribution reinvestment plan. At the discretion of the Company's board of trustees, the Company may also use cash on hand, cash available from
borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase common shares. In addition, the Company will limit the number of common shares
to be repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of common shares
that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such common shares on each date of repurchase at a price equal to
90% of the offering price in effect on the date of repurchase. In months in which the Company repurchases common shares pursuant to its share repurchase program, it expects to conduct repurchases on
the same date that it holds its first weekly closing in such month for the sale of common shares in its public offering. The Company's board of trustees may amend, suspend or terminate the share
repurchase program at any time, upon 30 days' notice. 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 provides information concerning the Company's repurchases of common shares pursuant to its share repurchase program during the six months ended June 30, 2014
and 2013:

For the Three Months Ended

Repurchase
Date

Shares
Repurchased

Percentage
of Shares
Tendered
That Were
Repurchased

Repurchase
Price
Per Share

Aggregate
Consideration
for Repurchased
SharesFiscal 2013December 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228March 31, 2013

April 1, 2013


82,689


100
%
$
9.540

$
789Fiscal 2014December 31, 2013

January 2, 2014


174,181


100
%
$
9.720

$
1,693March 31, 2014

April 2, 2014


158,723


100
%
$
9.810

$
1,557


On
July 2, 2014, the Company repurchased 401,302 common shares (representing 100% of common shares tendered for repurchase) at $9.90 per share for aggregate consideration totaling
$3,973.

22

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 4. Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

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

The
incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of
the Company's "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, 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 be entitled to receive 20.0% of pre-incentive fee net investment income.

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

The
Company reimburses FS Advisor for expenses necessary to perform services related to the Company's administration and operations. 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 factors such as assets, revenues, time allocations and/or
other reasonable metrics. The Company's board of trustees then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated
cost to the Company of obtaining similar services from third-party providers known to be available. In addition, the Company's board of trustees considers whether any single third-party service
provider would be capable of providing all such services at comparable cost and quality. Finally, the Company's board of trustees compares the total amount

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 4. Related Party Transactions (continued)

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 and organization costs funded by FS
Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On July 18, 2011, the Company satisfied the minimum offering requirement. During the six months ended
June 30, 2014 and 2013, Franklin Square Holdings did not fund any of the Company's offering and organization costs, and the Company did not pay any reimbursements to FS Advisor and its
affiliates for offering and organization costs previously funded.

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

The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six
months ended June 30, 2014 and 2013:

Three Months
Ended
June 30,

Six Months
Ended
June 30,Related Party

Source Agreement

Description

2014

2013

2014

2013FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
14,678

$
6,654

$
27,545

$
11,365FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)

$
3,015

$
(1,621
)
$
8,580

$
1,989FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$
10,013

$


$
14,623

$
753FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
1,008

$
544

$
1,943

$
997FS2

Dealer Manager Agreement

Dealer Manager Fee(5)

$
5,608

$
4,747

$
10,646

$
8,922


(1)During
the six months ended June 30, 2014 and 2013, $23,618 and $8,233, respectively, in base management fees were paid to FS Advisor. As of
June 30, 2014, $14,678 in base management fees were payable to FS Advisor.(2)During
the six months ended June 30, 2014 and 2013, the Company accrued capital gains incentive fees of $8,580 and $1,989, respectively, based on the
performance of its portfolio, of which $7,559 and $(33), respectively, was based on unrealized gains (or a decline in unrealized gains) and $1,021 and $2,022, respectively, was based on realized
gains. No such fees are actually payable by the Company with respect to unrealized gains unless and until those gains are actually realized. The Company paid FS Advisor $2,857 and $953 in capital
gains incentive fees during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, the Company had accrued capital gains incentive fees of $19,573, of which
$18,552 was based on unrealized gains and $1,021 was based on realized gains.


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 4. Related Party Transactions (continued)

(3)During
the six months ended June 30, 2014 and 2013, $11,396 and $753, respectively, of subordinated incentive fees on income were paid to FS Advisor.
As of June 30, 2014, a subordinated incentive fee on income of $10,013 was payable to FS Advisor.(4)During
the six months ended June 30, 2014 and 2013, $1,794 and $857, 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 $900 and $757,
respectively, in administrative services expenses to FS Advisor during the six months ended June 30, 2014 and 2013.(5)Represents
aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers.


Capital Contribution by FS Advisor and GSO

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

In
April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common
shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor
remains the Company's investment adviser. In connection with the same private placement, certain members of the Company's board of trustees and other individuals and entities affiliated with FS
Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted
for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, the Company issued an aggregate of 2,244,875
common shares (as adjusted for share distributions) for aggregate proceeds of $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of July 29, 2014, the
Company has issued an aggregate of 3,557,918 common shares (as adjusted for share distributions) for aggregate gross proceeds of $32,143 to members of its board of trustees and individuals and
entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.

Potential Conflicts of Interest

FS Advisor's senior management team is comprised of substantially the same personnel as the senior management teams of FB Income
Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC and FS Global Advisor, LLC, the investment advisers to Franklin Square Holdings' other affiliated BDCs and
affiliated closed-end management investment company. As a result, such personnel provide investment advisory services to the Company and each of FS Investment Corporation, FS Investment Corporation
II, FS Investment Corporation III and FS Global Credit Opportunities Fund. While none of FS Advisor, FB Income Advisor, LLC, FSIC II Advisor, LLC, FSIC III Advisor, LLC or FS
Global Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Investment Corporation, FS Investment Corporation II, FS
Investment Corporation III or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FS Advisor undertakes to provide investment advisory services
to other clients in the future, it

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 4. Related Party Transactions (continued)

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, FS Investment Corporation II, FS Investment Corporation III and/or FS Global Credit Opportunities Fund rather than to the Company.

Exemptive Relief

In an order dated June 4, 2013, the SEC granted exemptive relief permitting the Company, subject to the satisfaction of certain
conditions, to co-invest in certain privately negotiated investment transactions with certain affiliates of FS Advisor, including FS Investment Corporation, FS Investment Corporation II, FS Investment
Corporation III and any future BDCs that are advised by FS Advisor or its affiliated investment advisers, or collectively, the Company's co-investment affiliates. The Company believes this relief may
not only enhance its ability to further its investment objectives and strategies, but may also increase favorable investment opportunities for the Company, in part by allowing it to participate in
larger investments, together with the Company's co-investment affiliates, than would be available to it if it had not obtained such relief. Because the Company did not seek exemptive relief to engage
in co-investment transactions with GSO and its affiliates, it will continue to be permitted to co-invest with GSO and its affiliates only in accordance with existing regulatory guidance.

Expense Reimbursement

Pursuant to an expense support and conditional reimbursement agreement, dated as of February 14, 2012 and amended and restated
as of May 16, 2013, or, as amended and restated, the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient
to ensure that no portion of the Company's distributions to shareholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including
preferred and common equity investments, may
generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Company's distributions to shareholders may also be deemed to
constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to shareholders. Under those
circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the
expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.

Under
the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Company's cumulative
distributions paid to its shareholders in each quarter, less the sum of its net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on
account of 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 has a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under
such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the

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 4. Related Party Transactions (continued)

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

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

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

During
the six months ended June 30, 2014 and 2013, the Company did not accrue any reimbursements from Franklin Square Holdings. As of June 30, 2014 and December 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. During the six months ended June 30, 2014 and 2013, the Company did not accrue any amounts for expense recoupments payable to Franklin Square
Holdings. During the six months ended June 30, 2013, the Company paid $1,083 in expense

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 4. Related Party Transactions (continued)

recoupments
to Franklin Square Holdings. As of June 30, 2014, no further amounts remained subject to repayment by the Company to Franklin Square Holdings in the future.

FS Benefit Trust

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

Note 5. Distributions

The following table reflects the cash distributions per share that the Company has declared and paid on its common shares during the six months ended June 30, 2014 and 2013:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2013March 31, 2013

$
0.1617

$
12,496June 30, 2013

$
0.1634

$
16,686Fiscal 2014March 31, 2014

$
0.1524

$
28,423June 30, 2014

$
0.1680

$
36,323


The
Company authorizes and declares ordinary cash distributions on a weekly basis and pays such distributions on a monthly basis. On June 11, 2014, the Company's board of trustees
determined to increase the amount of the regular weekly cash distributions payable to shareholders of record from $0.012793 per share to $0.013625 per share and declared regular weekly cash
distributions for July 2014 through September 2014. On August 6, 2014, the Company's board of trustees declared regular weekly cash distributions for October 2014 through December 2014. These
distributions have been or will be paid monthly to shareholders of record as of weekly record dates previously determined by the Company's board of trustees in the amount of $0.013625 per share. The
timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company's board of trustees.

The
Company has adopted an "opt in" distribution reinvestment plan for its shareholders. As a result, if the Company makes a cash distribution, its shareholders will receive
distributions in cash unless they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares. However, certain state
authorities or regulators may impose restrictions from time to time that may prevent or limit a shareholder's ability to participate in the distribution reinvestment plan.

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

28

---



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)

For a period of time following commencement of the Company's continuous public offering, substantial portions of the Company's distributions were funded through the reimbursement of
certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that were subject to repayment by the Company within
three years. The purpose of this arrangement was to ensure that no portion of the Company's distributions to shareholders was paid from offering proceeds or borrowings. Any such distributions funded
through expense reimbursements or waivers of advisory fees were not based on the Company's investment performance. No portion of the distributions paid during the six months ended June 30, 2014
or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, the Company's repayment of amounts previously reimbursed or waived by Franklin Square Holdings
and its affiliates reduced the distributions that shareholders may otherwise have received during the six months ended June 30, 2013. During the six months ended June 30, 2014, the
Company did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that the Company will continue to achieve the performance
necessary to sustain its distributions or that the Company will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive
advisory fees or otherwise reimburse expenses in future periods.

The
following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common shares during the six months ended June 30, 2014 and
2013:

Six Months Ended June 30,2014

2013Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$



Borrowings











Net investment income(1)


64,746


100
%

29,182


100
%Short-term capital gains proceeds from the sale of assets











Long-term capital gains proceeds from the sale of assets











Non-capital gains proceeds from the sale of assets











Distributions on account of limited partnership interest











Expense reimbursement from sponsor











​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
64,746


100
%
$
29,182


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


(1)During
the six months ended June 30, 2014 and 2013, 90.6% and 97.0%, respectively, of the Company's gross investment income was attributable to cash
income earned, 4.6% and 3.0%, respectively, was attributable to non-cash accretion of discount and 4.8% and 0.0%, respectively, was attributable to paid-in-kind, or PIK, interest.


The
Company's net investment income on a tax basis for the six months ended June 30, 2014 and 2013 was $66,634 and $29,543, respectively. As of June 30, 2014 and
December 31, 2013, the Company had $21,184 and $10,898, respectively, of undistributed ordinary income and net realized gains on a tax basis.

29

---



Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 5. Distributions (continued)

The
difference between the Company's GAAP-basis net investment income and its tax-basis net investment income is primarily due to the amount by which tax-basis income on a limited
partnership interest differs from its GAAP-basis income, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized
gains are payable by the Company, the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes and,
with respect to the six months ended June 30, 2013, the inclusion of a portion of the periodic net settlement payments due on the Company's total return swap in tax-basis net investment income.

The
following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the six months ended June 30, 2014 and 2013:

Six Months Ended
June 30,2014

2013GAAP-basis net investment income

$
63,318

$
24,530Income on limited partnership interest


(938
)

(1,274
)Reversal of incentive fee accrual on unrealized gains


7,559


(33
)Reclassification of unamortized original issue discount


(3,733
)

(284
)Tax-basis net investment income portion of total return swap payments





6,602Other miscellaneous differences


428


2​
​
​
​
​
​
​
​Tax-basis net investment income

$
66,634

$
29,543​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


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

The
following table reflects the share distribution that the Company has declared on its common shares through June 30, 2014:

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

30

---



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)

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.

As
of June 30, 2014 and December 31, 2013, the components of accumulated earnings on a tax basis were as follows:

June 30, 2014
(Unaudited)

December 31, 2013Distributable ordinary income (income and short-term capital gains)

$
12,839

$
8,073Distributable realized gains (long-term capital gains)


8,345


2,825Distribution receivable on limited partnership interest


28


805Incentive fee accrual on unrealized gains


(18,552
)

(10,993
)Unamortized organization costs


(280
)

(292
)Net unrealized appreciation (depreciation) on investments and unrealized gain/loss on foreign currency(1)


93,215


52,752​
​
​
​
​
​
​
​Total

$
95,595

$
53,170​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


(1)As
of June 30, 2014 and December 31, 2013, the gross unrealized appreciation on the Company's investments and unrealized gain on foreign
currency was $97,083 and $57,499, respectively. As of June 30, 2014 and December 31, 2013, the gross unrealized depreciation on the Company's investments and unrealized loss on foreign
currency was $3,868 and $4,747, respectively.


The
aggregate cost of the Company's investments for federal income tax purposes totaled $2,861,755 and $2,247,420 as of June 30, 2014 and December 31, 2013, respectively.
The aggregate net unrealized appreciation (depreciation) on a tax basis was $93,215 and $52,752 as of June 30, 2014 and December 31, 2013, respectively.

Note 6. Investment Portfolio

The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of June 30, 2014 and December 31, 2013:

June 30, 2014
(Unaudited)

December 31, 2013Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
837,310

$
854,665


29
%
$
624,327

$
634,919


27
%Senior Secured LoansSecond Lien


899,236


910,104


31
%

673,512


683,723


30
%Senior Secured Bonds


167,689


171,557


6
%

79,553


82,484


4
%Subordinated Debt


824,150


864,908


29
%

767,083


789,834


34
%Equity/Other


137,618


153,734


5
%

105,479


109,241


5
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
2,866,003

$
2,954,968


100
%
$
2,249,954

$
2,300,201


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


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


31

---



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)

As
of June 30, 2014, the Company did not "control" and was not an "affiliated person" 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 or it had the power to exercise control over the management or policies of
such portfolio company, and would be an "affiliated person" of a portfolio company if it owned 5% or more of its voting securities.

The
Company's investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested
by portfolio companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014, the Company had two senior secured loan investments with aggregate unfunded
commitments of $56,357 and three equity/other investments with aggregate unfunded commitments of $16,722. As of June 30, 2014, these unfunded equity/other investments were BL Sand Hills
Unit, L.P., net profits interest, BL Sand Hills Unit, L.P., overriding royalty interest and Synergy Offshore LLC. As of December 31, 2013, the Company had three senior
secured loan investments with aggregate unfunded commitments of $62,149 and five equity/other investments with aggregate unfunded commitments of $24,558. As of December 31, 2013, these unfunded
equity/other investments were American Energy Ohio Holdings, LLC, BL Sand Hills Unit, L.P., net profits interest, BL Sand Hills Unit, L.P., overriding royalty interest, San Pedro
Development, LLC and Synergy Offshore LLC. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

The
table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2014
and December 31, 2013:

June 30, 2014
(Unaudited)

December 31, 2013Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
1,479,639


50
%
$
1,112,686


48
%Midstream


268,579


9
%

288,414


13
%Downstream


4,279


0
%

4,256


0
%Power


218,528


8
%

159,433


7
%Service & Equipment


983,943


33
%

735,412


32
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
2,954,968


100
%
$
2,300,201


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


Note 7. Fair Value of Financial Instruments

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

32

---



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. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the
circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:

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

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

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

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

As
of June 30, 2014 and December 31, 2013, the Company's investments were categorized as follows in the fair value hierarchy:

Valuation Inputs

June 30, 2014
(Unaudited)

December 31, 2013Level 1Price quotations in active markets

$


$
Level 2Significant other observable inputs





Level 3Significant unobservable inputs


2,954,968


2,300,201​
​
​
​
​
​
​
​Total

$
2,954,968

$
2,300,201​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


The
Company's investments as of June 30, 2014 consisted primarily of debt securities that were traded on a private over-the-counter market for institutional investors. Except as
described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an
independent third-party pricing service and screened for validity by such service. Fourteen senior secured loan investments, one senior secured bond investment and one subordinated debt investment
were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing
interest rates for like investments, call features, anticipated prepayments and other relevant terms of the debt. All of the Company's equity/other investments were valued by 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. One subordinated
debt investment, which was newly-issued and purchased near June 30, 2014, was valued at cost, as the Company's board of trustees determined that the cost of such investment was the best
indication of its fair value.

33

---



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's investments as of December 31, 2013 consisted primarily of debt securities that were traded on a private over-the-counter market for institutional investors. Except
as described below, the Company valued its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an
independent third-party pricing service and screened for validity by such service. Six senior secured loan investments and two subordinated debt investments, 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, anticipated prepayments and other relevant terms of the debt. Except as described below, 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. One senior secured loan investment, one subordinated debt
investment and two equity/other investments, all of which were newly-issued and purchased near December 31, 2013, were valued at cost, as the Company's board of trustees determined that the
cost of each such investment was the best indication of its fair value.

The
Company periodically benchmarks the bid and ask prices it receives from the third-party pricing service and/or dealers, as applicable, against the actual prices at which the Company
purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company's management in purchasing and selling these investments, the Company believes
that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that
these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods, including the use of an independent valuation firm, 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 or where the Company's board of trustees otherwise
determines that the use of such methods is appropriate. The Company periodically benchmarks the valuations provided by the independent valuation 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.

34

---



Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 7. Fair Value of Financial Instruments (continued)

The following is a reconciliation for the six months ended June 30, 2014 and 2013 of investments for which significant unobservable inputs (Level 3) were used in
determining fair value:

For the Six Months Ended June 30, 2014Senior Secured
Loans
First Lien

Senior Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
634,919

$
683,723

$
82,484

$
789,834

$
109,241

$
2,300,201Accretion of discount (amortization of premium)


418


2,182


290


1,643


1,408


5,941Net realized gain (loss)


368


91


827


3,405





4,691Net change in unrealized appreciation (depreciation)


6,763


657


937


18,007


12,354


38,718Purchases


300,140


365,115


116,066


244,591


33,735


1,059,647Paid-in-kind interest





4,223








1,983


6,206Sales and redemptions


(87,943
)

(145,887
)

(29,047
)

(192,572
)

(4,987
)

(460,436
)Net transfers in or out of Level 3

















​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Fair value at end of period

$
854,665

$
910,104

$
171,557

$
864,908

$
153,734

$
2,954,968​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to
investments still held at the reporting date

$
7,798

$
4,748

$
1,884

$
24,854

$
17,341

$
56,625​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​




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

Senior Secured
Loans
Second Lien

Senior
Secured
Bonds

Subordinated
Debt

Equity/
Other

TotalFair value at beginning of period

$
200,752

$
73,451

$
35,158

$
345,849

$
45,962

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


1,338


244


(46
)

(136
)

(68
)

1,332Net realized gain (loss)


879


(52
)

236


2,358





3,421Net change in unrealized appreciation (depreciation)


(1,198
)

2,125


(1,336
)

(3,764
)

1,094


(3,079
)Purchases


440,555


299,169


56,866


259,208


1,000


1,056,798Sales and redemptions


(198,707
)

(24,387
)

(13,611
)

(111,768
)




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

















​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Fair value at end of period

$
443,619

$
350,550

$
77,267

$
491,747

$
47,988

$
1,411,171​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to
investments still held at the reporting date

$
883

$
2,732

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

$
2,469​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​


35

---



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 as of June 30, 2014 and December 31, 2013 were as
follows:

Type of Investment

Fair Value at
June 30, 2014
(Unaudited)

Valuation
Technique(1)

Unobservable
Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
262,485

Market Comparables

Market Yield (%)

7.5% - 11.3%

9.3%592,180

Market Quotes

Indicative Dealer Quotes

90.0% - 104.8%

101.4%Senior Secured LoansSecond Lien


411,496

Market Comparables

Market Yield (%)

8.3% - 11.3%

9.9%498,608

Market Quotes

Indicative Dealer Quotes

97.1% - 103.6%

100.9%Senior Secured Bonds


64,226

Market Comparables

Market Yield (%)

11.3% - 11.8%

11.5%107,331

Market Quotes

Indicative Dealer Quotes

102.5% - 114.5%

107.9%Subordinated Debt


75,750

Market Comparables

Market Yield (%)

11.0% - 11.5%

11.3%787,158

Market Quotes

Indicative Dealer Quotes

95.0% - 115.4%

106.1%2,000

Cost

Cost

N/A

N/AEquity/Other


153,734

Market Comparables

Market Yield (%)

15.3% - 15.8%

15.5%EBITDA Multiples (x)

5.8x - 8.5x

6.8xProduction Multiples (Mmb/d)

$57,500.0 - $460,000.0

$208,570.9Proved Reserves Multiples (Mmboe)

$9.1 - $88.5

$23.7PV-10 Multiples (x)

0.4x - 3.1x

1.3xDiscounted Cash Flow

Discount Rate (%)

10.8% - 33.0%

21.1%Option Valuation Model

Volatility (%)

45.0% - 47.5%

46.5%​
​
​
​
​
​
​
​
​
​
​
​Total

$
2,954,968​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​


(1)Investments
using a market quotes valuation technique were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the
relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. For investments utilizing a market comparables valuation technique, a
significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation
multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease)
in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant
increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.


36

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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)

Type of Investment(1)

Fair Value at
December 31, 2013(2)

Valuation
Technique(3)

Unobservable
Input

Range

Weighted
AverageSenior Secured LoansFirst Lien

$
108,313

Market Comparables

Market Yield (%)

8.0% - 11.0%

9.2%Senior Secured LoansSecond Lien

$
184,232

Market Comparables

Market Yield (%)

8.5% - 11.3%

10.2%Subordinated Debt

$
110,613

Market Comparables

Market Yield (%)

7.5% - 8.0%

7.8%Equity/Other

$
108,790

Market Comparables

Market Yield (%)

15.3% - 15.8%

15.5%EBITDA Multiples (x)

7.5x - 7.8x

7.6xProduction Multiples (Mmb/d)

$191,000.0 - $194,000.0

$192,500.0Proved Reserves Multiples (Mmboe)

$6.1 - $16.8

$16.3PV-10 Multiples (x)

0.2x - 1.8x

1.0xDiscounted Cash Flow

Discount Rate (%)

9.8% - 28.0%

15.1%Option Valuation Model

Volatility (%)

52.5%

52.5%


(1)Table
includes only those Level 3 assets that were valued by an independent valuation firm as of December 31, 2013.(2)Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices
from dealers as of December 31, 2013, which were provided by an independent third-party pricing service and screened for validity by such service. One senior secured loan investment ($52,107),
one subordinated debt investment ($75,000) and two equity/other investments ($451), all of which were newly-issued and purchased near December 31, 2013, were valued at cost, as the Company's
board of trustees determined that the cost of each such investment was the best indication of its fair value. As of December 31, 2013, $13,022 of the senior secured loansfirst lien
investments valued by the independent valuation firm consisted of unfunded loan commitments.(3)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.


Note 8. Financing Arrangements

The following table presents summary information with respect to the Company's outstanding financing arrangements as of June 30, 2014. For additional information regarding these
financing facilities, please see the notes to the Company's audited consolidated financial statements contained in its annual report on Form 10-K for the fiscal year ended December 31,
2013 and the additional disclosure set forth in this Note 8.

Facility

Type of Facility

Rate

Amount Outstanding

Amount Available

Maturity DateBNP Facility

Prime Brokerage


L + 1.10
%
$
145,000

$
55,000


March 27, 2015
(1)Citibank Credit Facility

Revolving


L + 2.50
%
$
175,000





May 24, 2015Deutsche Bank Credit Facility

Revolving


L + 1.80
%
$
240,000

$
100,000


June 11, 2015Natixis Credit Facility

Revolving


CP + 2.25%
(2)
$
150,000





July 11, 2023


(1)As
described below, the BNP facility generally is terminable upon 270 days' notice by either party. As of June 30, 2014, neither Berwyn
Funding nor BNP had provided notice of its intent to terminate the facility.(2)Prior
to March 2014, borrowings under the Natixis credit facility accrued interest at a rate equal to the three-month London Interbank Offered Rate, or
LIBOR, plus 2.40% per annum. In March 2014, borrowings under the Natixis credit facility began to accrue interest at a rate equal to the applicable commercial paper rate plus 2.25% per annum.


BNP Facility

On December 11, 2013, Berwyn Funding LLC, or Berwyn Funding, the Company's wholly-owned, special-purpose financing
subsidiary, entered into a committed facility arrangement, or the BNP facility,

37

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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)

with
BNP Paribas Prime Brokerage, Inc., or BNP, pursuant to which Berwyn Funding may borrow, from time to time, up to $200,000 from BNP. The BNP facility was effected through a committed
facility agreement by and between Berwyn Funding and BNP, or the committed facility agreement, a U.S. PB Agreement by and between Berwyn Funding and BNP and a special custody and pledge agreement by
and among Berwyn Funding, BNP and State Street Bank and Trust Company, or State Street, as custodian, each dated as of December 11, 2013, and which are collectively referred to herein as the
BNP financing agreements.

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

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

As
of June 30, 2014 and December 31, 2013, $145,000 and $60,000, respectively, was outstanding under the BNP facility. The carrying amount outstanding under the facility
approximates its fair value. The Company incurred costs of $299 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets
and amortizes to interest expense over the 270 day period following the closing date of the BNP facility. As of June 30, 2014, $76 of such deferred financing costs had yet to be
amortized to interest expense.

For
the three and six months ended June 30, 2014, the components of total interest expense for the BNP facility were as follows:

Three Months Ended
June 30, 2014

Six Months Ended
June 30, 2014Direct interest expense

$
398

$
645Non-usage fees


115


287Amortization of deferred financing costs


99


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

$
612

$
1,131​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


38

---



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)

For
the six months ended June 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the BNP facility
were as follows:

Six Months Ended
June 30, 2014Cash paid for interest expense(1)

$
806Average borrowings under the facility

$
96,326Effective interest rate on borrowings


1.33
%Weighted average interest rate (including the effect of non-usage fees)


1.93
%


(1)Interest
under the BNP facility is paid monthly in arrears and commenced on January 2, 2014.


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

Citibank Credit Facility

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

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

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

Beginning
on August 21, 2013, EP Funding became subject to a non-usage fee of 0.50% per annum to the extent that the aggregate principal amount available under the Citibank credit
facility is not borrowed. Outstanding borrowings under the facility will be amortized beginning on November 24, 2014. Any amounts borrowed under the facility will mature, and all accrued and
unpaid interest thereunder will be due and payable, on May 24, 2015.

39

---



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)

As
of June 30, 2014 and December 31, 2013, $175,000 and $174,174, respectively, was outstanding under the Citibank credit facility. The carrying amount outstanding under
the facility approximates its fair value. The Company incurred costs of $657 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated
balance sheets and amortizes to interest expense over the life of the facility. As of June 30, 2014, $295 of such deferred financing costs had yet to be amortized to interest expense.

For
the three and six months ended June 30, 2014 and 2013, the components of total interest expense for the Citibank credit facility were as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,2014

2013

2014

2013Direct interest expense

$
1,208

$
100

$
2,386

$
100Non-usage fees








1


Amortization of deferred financing costs


82


34


163


34​
​
​
​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
1,290

$
134

$
2,550

$
134​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


For
the six months ended June 30, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Citibank credit facility were as follows:

Six Months Ended
June 30,2014

2013Cash paid for interest expense(1)

$
2,401


Average borrowings under the facility(2)

$
174,462

$
69,667Effective interest rate on borrowings


2.74
%

2.85
%Weighted average interest rate (including the effect of non-usage fees)


2.74
%

2.86
%


(1)Interest
under the Citibank credit facility is paid quarterly in arrears and commenced on November 12, 2013.(2)Average
borrowings for the six months ended June 30, 2013 are calculated for the period since the Company commenced borrowings thereunder to
June 30, 2013.


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

Deutsche Bank Credit Facility

On June 24, 2011, FSEP Term Funding, LLC, or FSEP Funding, the Company's wholly-owned, special-purpose financing
subsidiary, entered into a revolving credit facility, or the Deutsche Bank credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent and the lender party
thereto, which provided for borrowings in an aggregate amount of up to $50,000. On May 30, 2012, August 28, 2012 and October 18, 2012, FSEP Funding and Deutsche Bank entered into
separate amendments to the Deutsche Bank credit facility which increased the aggregate

40

---



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)

borrowings
available under the facility to $100,000, $175,000 and $240,000, respectively. On June 24, 2013, FSEP Funding and Deutsche Bank entered into an additional amendment to the Deutsche
Bank credit facility which extended the maturity date of the facility to June 24, 2014 and consolidated the existing four tranches of commitments under the facility into a single tranche of
commitments with an aggregate principal amount of $240,000. On June 11, 2014, FSEP Funding and Deutsche Bank entered into an additional amendment to the Deutsche Bank credit facility which,
among other things, (a) increased the maximum commitments under the facility from $240,000 to $340,000 through the addition of a $100,000 tranche of revolving loan commitments from State Street
Bank and Trust Company, or State Street, and (b) extended the scheduled maturity date from June 24, 2014 to June 11, 2015.

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

Pricing
under the Deutsche Bank credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding,
with the commitments under the facility bearing interest at the rate of LIBOR plus 1.80% per annum. FSEP Funding is subject to a non-usage fee of 0.75% per annum to the extent that the aggregate
principal amount available under the facility is not borrowed. Any amounts borrowed under the Deutsche Bank credit facility will mature, and all accrued and unpaid interest thereunder will be due and
payable, on June 11, 2015.

As
of June 30, 2014 and December 31, 2013, $240,000 was outstanding under the Deutsche Bank credit facility. The carrying amount outstanding under the facility approximates
its fair value. The Company incurred costs of $2,150 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance
sheets and amortizes to interest expense over the life of the facility. As of June 30, 2014, $804 of such deferred financing costs had yet to be amortized to interest expense.

41

---



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)

For
the three and six months ended June 30, 2014 and 2013, the components of total interest expense for the Deutsche Bank credit facility were as follows:

Three Months Ended
June 30,

Six Months Ended
June 30,2014

2013

2014

2013Direct interest expense

$
1,225

$
1,029

$
2,444

$
1,997Non-usage fees


42


84


42


191Amortization of deferred financing costs


186


168


334


335​
​
​
​
​
​
​
​
​
​
​
​
​
​Total interest expense

$
1,453


1,281

$
2,820

$
2,523​
​
​
​
​
​
​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​
​
​
​
​
​
​


For
the six months ended June 30, 2014 and 2013, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the
Deutsche Bank credit facility were as follows:

Six Months Ended
June 30,2014

2013Cash paid for interest expense(1)

$
2,463

$
2,102Average borrowings under the facility

$
240,000

$
192,429Effective interest rate on borrowings


2.02
%

2.07
%Weighted average interest rate (including the effect of non-usage fees)


2.07
%

2.27
%


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


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

Natixis Credit Facility

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

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

42

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

Prior
to March 2014, borrowings under the Natixis credit facility accrued interest at a rate equal to three-month LIBOR plus 2.40% per annum. In March 2014, borrowings under the Natixis
credit facility began to accrue interest at a rate equal to the applicable commercial paper rate plus 2.25% per annum. Borrowings under the facility are subject to compliance with, among other things,
an overcollateralization ratio test with respect to the current value of Energy Funding's portfolio, an interest coverage ratio test with respect to the payments due under the facility and eligibility
criteria with respect to the initial acquisition of each debt security in Energy Funding's portfolio.

Energy
Funding is subject to a non-usage fee of 1.00% per annum to the extent that the aggregate principal amount available under the Natixis credit facility is not borrowed. Any amounts
borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 11, 2023.

As
of June 30, 2014 and December 31, 2013, $150,000 was outstanding under the Natixis credit facility. The carrying amount outstanding under the facility approximates its
fair value. The Company incurred costs of $2,544 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes
to interest expense over the life of the facility. As of June 30, 2014, $2,296 of such deferred financing costs had yet to be amortized to interest expense.

For
the three and six months ended June 30, 2014, the components of total interest expense for the Natixis credit facility were as follows:

Three Months Ended
June 30, 2014

Six Months Ended
June 30, 2014Direct interest expense

$
676

$
1,804Amortization of deferred financing costs


65


128​
​
​
​
​
​
​
​Total interest expense

$
741

$
1,932​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


For
the six months ended June 30, 2014, the cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Natixis credit
facility were as follows:

Six Months Ended
June 30, 2014Cash paid for interest expense(1)

$
1,881Average borrowings under the facility

$
150,000Effective interest rate on borrowings


2.51
%Weighted average interest rate


2.57
%


(1)Interest
under the Natixis credit facility is paid quarterly in arrears and commenced on November 20, 2013.


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

43

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 9. Commitments and Contingencies

The Company enters into contracts that contain a variety of indemnification provisions. The Company's maximum exposure under these arrangements is unknown; however, the Company has not
had prior claims or losses pursuant to these contracts. Management of FS Advisor has reviewed the Company's existing contracts and expects the risk of loss to the Company to be remote.

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

See
Note 6 for a discussion of the Company's unfunded commitments.

44

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 10. Financial Highlights

The following is a schedule of financial highlights of the Company for the six months ended June 30, 2014 and the year ended December 31, 2013:

Six Months Ended
June 30, 2014
(Unaudited)

Year Ended
December 31, 2013Per Share Data:(1)Net asset value, beginning of period

$
9.66

$
9.34Results of operations(2)Net investment income (loss)


0.31


0.58Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency


0.21


0.36​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from operations


0.52


0.94​
​
​
​
​
​
​
​Shareholder distributions(3)Distributions from net investment income


(0.32
)

(0.65
)Distributions from net realized gain on investments





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


(0.32
)

(0.66
)​
​
​
​
​
​
​
​Capital share transactionsIssuance of common shares(4)


0.02


0.09Repurchases of common shares(5)





Offering costs(2)


(0.02
)

(0.05
)​
​
​
​
​
​
​
​Net increase (decrease) in net assets resulting from capital share transactions


0.00


0.04​
​
​
​
​
​
​
​Net asset value, end of period

$
9.86

$
9.66​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​Shares outstanding, end of period


233,800,135


173,532,259​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​Total return(6)


5.38
%

10.49
%​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​Ratio/Supplemental Data:Net assets, end of period

$
2,304,186

$
1,676,237​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​Ratio of net investment income to average net assets(7)


3.20
%

6.04
%Ratio of total expenses to average net assets(7)


3.29
%

5.89
%Portfolio turnover(8)


17.60
%

53.26
%


(1)Per
share data may be rounded in order to recompute the ending net asset value per share.(2)The
per share data was derived by using the weighted average shares outstanding during the applicable period.(3)The
per share data for distributions reflects the actual amount of distributions paid per share during the applicable period.(4)The
issuance of common shares on a per share basis reflects the incremental net asset value changes as a result of the issuance of common shares in the
Company's continuous public offering and pursuant to the Company's distribution reinvestment plan. The issuance of common shares at an offering price, net of sales commissions and dealer manager fees,
that is greater than the net asset value per share results in an increase in net asset value per share.


45

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Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)



Note 10. Financial Highlights (continued)

(5)The
per share impact of the Company's repurchases of common shares is a reduction to net asset value of less than $0.01 per share during the period.(6)The
total return for each period presented was calculated by taking the net asset value per share as of the end of the applicable period, adding the cash
distributions per share which were declared during the applicable period and dividing the total by the net asset value per share at the beginning of the applicable period. The total return does not
consider the effect of the sales load from the sale of the Company's common shares. The total return includes the effect of the issuance of common shares at a net offering price that is greater than
net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in the table should not be considered a representation of the Company's
future total return, which may be greater or less than the return shown in the table due to a number of factors, including the Company's ability or inability to make investments in companies that meet
its investment criteria, the interest rates payable on the debt securities the Company acquires, the level of the Company's expenses, variations in and the timing of the recognition of realized and
unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic conditions. As a result of these factors, results for any previous period should
not be relied upon as being indicative of performance in future periods. The total return calculations set forth above represent the total return on the Company's investment portfolio during the
applicable period and are calculated in accordance with GAAP. These return figures do not represent an actual return to shareholders.(7)Weighted
average net assets during the applicable period are used for this calculation. Ratios for the six months ended June 30, 2014 are not
annualized. The following is a schedule of supplemental ratios for the six months ended June 30, 2014 and the year ended December 31, 2013:


Six Months Ended
June 30, 2014
(Unaudited)

Year Ended
December 31, 2013Ratio of accrued capital gains incentive fees to average net assets


0.43
%

0.75
%Ratio of subordinated income incentive fees to average net assets


0.74
%

0.69
%Ratio of interest expense to average net assets


0.43
%

0.84
%Ratio of income and excise taxes to average net assets


0.01
%

0.07
%


(8)Portfolio
turnover for the six months ended June 30, 2014 is not annualized.


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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 included 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

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actual
results could differ materially from those implied or expressed in the forward-looking statements for any reason. Factors that could cause actual results to differ materially
include:



We
have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on
Form 10-Q. 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
investment operations on July 18, 2011 upon raising gross proceeds in excess of $2,500 from sales of our common shares in our continuous public offering to persons who were not affiliated with
us or FS Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be
treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. Prior to satisfying the minimum offering requirement, we had no operations
except for matters relating to our organization.

Our
investment activities are managed by FS Advisor and supervised by our board of trustees, a majority of whom are independent. Under the 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, including those companies that provide equipment or services to companies engaged in any of the foregoing. 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 investment categories, which we
believe will allow us to generate an attractive total return with an acceptable level of risk.

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

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relationship.
We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

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

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

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

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

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

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Revenues

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

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

Expenses

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

We
reimburse FS Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund
accounting, legal services, investor relations and other administrative services. FS Advisor also performs, or oversees the performance of, our corporate operations and required administrative
services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, FS Advisor
assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing the
payment of our expenses and the performance of administrative and professional services rendered to us by others. 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, 2013.

In
addition, we have contracted with State Street to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information
for review by FS

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Advisor,
preparing and monitoring expense budgets, maintaining accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC
compliance.

Expense Reimbursement

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

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

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

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

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

During
the six months ended June 30, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings. As of June 30, 2014 and December 31, 2013, we
had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed by Franklin Square Holdings may become subject to repayment by us in the future.
During the six months ended June 30, 2014 and 2013, we did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the six months ended June 30, 2013,
we paid $1,083 in expense recoupments to Franklin Square Holdings. As of June 30, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future.

Portfolio Investment Activity for the Three and Six Months Ended June 30, 2014 and for the Year Ended December 31, 2013

During the six months ended June 30, 2014, we made investments in portfolio companies totaling $1,059,647. During the same
period, we sold investments for proceeds of $192,754 and received principal repayments of $267,682. As of June 30, 2014, our investment portfolio, with a total fair value of $2,954,968,
consisted of interests in 120 portfolio companies (29% in first lien senior secured loans, 31% in second lien senior secured loans, 6% in senior secured bonds, 29% in subordinated debt and 5% in
equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $221.8 million. As of June 30, 2014, the investments in
our portfolio were purchased at a weighted average price of 99.5% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated
(constituting approximately 62.4% of our portfolio based on the fair value of our investments) was B3 based upon the ratings scale employed by Moody's Investors Service, Inc., or Moody's, and
our estimated gross annual portfolio yield, prior to leverage (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of
such date), was 8.8% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to shareholders.

Based
on our regular weekly cash distribution rate of $0.013625 per share as of June 30, 2014 and our public offering price of $10.95 per share as of such date, the annualized
distribution rate to shareholders as of June 30, 2014 was 6.47%. 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, 2013 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, 2013, we made investments in portfolio companies totaling $2,295,602. During the same period, we sold investments for proceeds of $521,048 and
received

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principal
repayments of $214,625. As of December 31, 2013, our investment portfolio, with a total fair value of $2,300,201, consisted of interests in 104 portfolio companies (27% in first lien
senior secured loans, 30% in second lien senior secured loans, 4% in senior secured bonds, 34% in subordinated debt and 5% in equity/other). The portfolio companies that comprised our portfolio as of
such date had an
average annual EBITDA of approximately $185.8 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 99.5% of par or stated
value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 63.2% 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 8.8% based upon the amortized cost of our investments. Our gross annual
portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2013. The
portfolio yield does not represent an actual investment return to shareholders.

Based
on our regular weekly cash distribution rate of $0.012675 per share as of December 31, 2013 and our public offering price of $10.80 per share as of such date, the annualized
distribution rate to shareholders as of December 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, 2013 and our other periodic reports filed with
the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three and six months
ended June 30, 2014:

Net Investment Activity

For the Three Months Ended
June 30, 2014

For the Six Months Ended
June 30, 2014Purchases

$
714,676

$
1,059,647Sales and Redemptions


(356,453
)

(460,436
)​
​
​
​
​
​
​
​Net Portfolio Activity

$
358,223

$
599,211​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​




For the Three Months Ended
June 30, 2014

For the Six Months Ended
June 30, 2014New Investment Activity by Asset Class

Purchases

Percentage

Purchases

PercentageSenior Secured LoansFirst Lien

$
123,482


17
%
$
300,140


28
%Senior Secured LoansSecond Lien


351,726


49
%

365,115


35
%Senior Secured Bonds


53,996


8
%

116,066


11
%Subordinated Debt


173,400


24
%

244,591


23
%Equity/Other


12,072


2
%

33,735


3
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
714,676


100
%
$
1,059,647


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


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Table of Contents

The
following table summarizes the composition of our investment portfolio at cost and fair value as of June 30, 2014 and December 31, 2013:

June 30, 2014
(Unaudited)

December 31, 2013Amortized
Cost(1)

Fair Value

Percentage
of Portfolio

Amortized
Cost(1)

Fair Value

Percentage
of PortfolioSenior Secured LoansFirst Lien

$
837,310

$
854,665


29
%
$
624,327

$
634,919


27
%Senior Secured LoansSecond Lien


899,236


910,104


31
%

673,512


683,723


30
%Senior Secured Bonds


167,689


171,557


6
%

79,553


82,484


4
%Subordinated Debt


824,150


864,908


29
%

767,083


789,834


34
%Equity/Other


137,618


153,734


5
%

105,479


109,241


5
%​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
2,866,003

$
2,954,968


100
%
$
2,249,954

$
2,300,201


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


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


The
following table presents certain selected information regarding the composition of our investment portfolio as of June 30, 2014 and December 31, 2013:

June 30, 2014

December 31, 2013Number of Portfolio Companies


120


104% Variable Rate (based on fair value)


60.4
%

60.5
%% Fixed Rate (based on fair value)


34.4
%

34.7
%% Income Producing Equity or Other Investments (based on fair value)


2.9
%

3.9
%% Non-Income Producing Equity or Other Investments (based on fair value)


2.3
%

0.9
%Average Annual EBITDA of Portfolio Companies

$
221,846

$
185,816Weighted Average Purchase Price of Investments (as a % of par or stated value)


99.5
%

99.5
%Weighted Average Credit Rating of Investments that were Rated


B3


B3% of Investments on Non-Accrual





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


8.8
%

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


8.9
%

8.9
%


Direct Originations

The following tables present certain selected information regarding our direct originations for the three and six months ended
June 30, 2014:

Net Direct Originations

For the Three Months Ended
June 30, 2014

For the Six Months Ended
June 30, 2014Total Commitments (including Unfunded Commitments)

$
187,622

$
466,760Exited Investments (including partial paydowns)


(112,158
)

(116,971
)​
​
​
​
​
​
​
​Net Direct Originations

$
75,464

$
349,789​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


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Table of Contents



For the Three Months Ended
June 30, 2014

For the Six Months Ended
June 30, 2014New Direct Originations by Asset Class (including Unfunded Commitments)

Commitment
Amount

Percentage

Commitment
Amount

PercentageSenior Secured LoansFirst Lien

$
15,000


8
%
$
152,636


33
%Senior Secured LoansSecond Lien


140,000


75
%

221,010


47
%Senior Secured Bonds


24,750


13
%

66,073


14
%Equity/Other


7,872


4
%

27,041


6
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
187,622


100
%
$
466,760


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




For the Three Months Ended
June 30, 2014

For the Six Months Ended
June 30, 2014Average New Direct Origination Commitment Amount

$
46,905

$
42,433Weighted Average Maturity for New Direct Originations


9/26/18


3/2/19Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period


9.0
%

9.6
%Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Direct Originations Exited during Period


8.5
%

8.6
%


The
following table presents certain selected information regarding our direct originations as of June 30, 2014 and December 31, 2013:

Characteristics of All Direct Originations held in Portfolio

June 30, 2014

December 31, 2013Number of Portfolio Companies


17


11Average Annual EBITDA of Portfolio Companies

$
28,502

$
42,800Average Leverage Through Tranche of Portfolio CompaniesExcluding Equity/Other Securities


5.1x


3.9x% of Investments on Non-Accrual





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


9.9
%

10.0
%Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during PeriodExcluding Non-Income Producing
Assets


9.4
%

10.1
%Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct OriginationsExcluding Non-Income Producing Assets


10.5
%

10.3
%


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Table of Contents

Portfolio Composition by Strategy and Industry

The table below summarizes the composition of our investment portfolio by strategy and enumerates the percentage, by fair value, of the
total portfolio assets in such strategies as of June 30, 2014 and December 31, 2013:

June 30, 2014

December 31, 2013Portfolio Composition by Strategy

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioDirect Originations

$
967,690


33
%
$
577,357


25
%Opportunistic


692,754


23
%

648,496


28
%Broadly Syndicated/Other


1,294,524


44
%

1,074,348


47
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
2,954,968


100
%
$
2,300,201


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


The
table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of June 30, 2014
and December 31, 2013:

June 30, 2014
(Unaudited)

December 31, 2013Industry Classification

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of PortfolioUpstream

$
1,479,639


50
%
$
1,112,686


48
%Midstream


268,579


9
%

288,414


13
%Downstream


4,279


0
%

4,256


0
%Power


218,528


8
%

159,433


7
%Service & Equipment


983,943


33
%

735,412


32
%​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
2,954,968


100
%
$
2,300,201


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


As
of June 30, 2014, we did not "control" and were not an "affiliated person" 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 or we had the power to exercise control over the management or policies of such portfolio
company, and would be an "affiliated person" of a portfolio company if we owned 5% or more of its voting securities.

Our
investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio
companies in accordance with the terms of the underlying loan agreements. As of June 30, 2014, we had two senior secured loan investments with aggregate unfunded commitments of $56,357 and
three equity/other investments with aggregate unfunded commitments of $16,722. As of June 30, 2014, these unfunded equity/other investments were BL Sand Hills Unit, L.P., net profits
interest, BL Sand Hills Unit, L.P., overriding royalty interest and Synergy Offshore LLC. As of December 31, 2013, we had three senior secured loan investments with aggregate
unfunded commitments of $62,149 and five equity/other investments with aggregate unfunded commitments of $24,558. As of December 31, 2013, these unfunded equity/other investments were American
Energy Ohio Holdings, LLC, BL Sand Hills Unit, L.P., net profits interest, BL Sand Hills Unit, L.P., overriding royalty interest, San Pedro Development, LLC and Synergy
Offshore LLC. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FS Advisor uses an investment rating system to characterize and monitor
the expected level of returns on each investment in our

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portfolio.
FS Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:

Investment
Rating

Summary Description1

Investment exceeding expectations and/or capital gain expected.2

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

Performing investment requiring closer monitoring.4

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

Underperforming investment with expected loss of interest and some principal.


The
following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of June 30, 2014 and December 31, 2013:

June 30, 2014

December 31, 2013Investment Rating

Fair Value

Percentage
of Portfolio

Fair Value

Percentage
of Portfolio1

$
78,257


3
%
$
76,865


3
%2


2,769,164


94
%

2,160,052


94
%3


107,547


3
%

63,284


3
%4











5











​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
2,954,968


100
%
$
2,300,201


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


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

Results of Operations

Comparison of the Three Months Ended June 30, 2014 and 2013

Revenues

We generated investment income of $72,007 and $24,172 for the three months ended June 30, 2014 and 2013, respectively, in the
form of interest and fees earned on senior
secured loans, senior secured bonds and subordinated debt investments in our portfolio and dividends and other distributions earned on equity/other investments in our portfolio. Such revenues
represent $64,206 and $23,239 of cash income earned as well as $7,801 and $933 in non-cash portions relating to accretion of discount, PIK interest and accrual of limited partnership income for the
three months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are
recognized. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases and the proportion of directly originated
investments in our portfolio increases.

Expenses

Our total expenses were $34,977 and $8,601 for the three months ended June 30, 2014 and 2013, respectively. Our expenses include
base management fees attributed to FS Advisor of $14,678 and

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$6,654
for the three months ended June 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FS Advisor of $1,008 and $544 for the three
months ended June 30, 2014 and 2013, respectively.

FS
Advisor is eligible to receive incentive fees based on our performance. During the three months ended June 30, 2014, we accrued subordinated incentive fees on income of $10,013
based on the performance of our portfolio. We did not accrue any subordinated incentive fees on income during the three months ended June 30, 2013. During the three months ended June 30,
2014, we accrued capital gains incentive fees of $3,015 based on the performance of our portfolio. During the three months ended June 30, 2013, we reversed $1,621 of capital gains incentive
fees previously accrued by us based on the performance of our portfolio.

We
recorded interest expense of $4,096 and $1,415 for the three months ended June 30, 2014 and 2013, respectively, in connection with our credit facilities. For the three months
ended June 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $288 and $168, respectively,
and fees and expenses incurred with our share transfer agent totaled $660 and $475, respectively. Fees for our board of trustees were $135 and $199 for the three months ended June 30, 2014 and
2013, respectively.

Our
other general and administrative expenses totaled $1,033 and $767 for the three months ended June 30, 2014 and 2013, respectively, and consisted of the following:

Three Months Ended
June 30,2014

2013Expenses associated with our independent audit and related fees

$
111

$
89Compensation of our chief compliance officer


40


45Legal fees


225


203Printing fees


52


263Insurance expense


57


41Other


548


126​
​
​
​
​
​
​
​Total

$
1,033

$
767​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


We
generally expect our total expenses related to our ongoing operations to decrease as a percentage of our average net assets because of the anticipated growth in the size of our asset
base. During the three months ended June 30, 2014 and 2013, the ratio of our total expenses to our average net assets was 1.64% and 0.90% respectively. During the three months ended
June 30, 2014 and 2013, our ratio of total expenses to average net assets included $4,096 and $1,415, respectively, related to interest expense, $13,028 and $(1,621), respectively, related to
accruals for (or reversals of previously accrued) incentive fees and $51 and $0, respectively, related to accruals for income taxes. Without such expenses, our ratio of total expenses to average net
assets would have been 0.83% and 0.92% for the three months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our
expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.

Expense Reimbursement

During the three months ended June 30, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings, and we
did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the three months ended June 30, 2013, we paid $99 in expense recoupments to Franklin Square
Holdings. For a discussion of the expense reimbursement agreement, see "OverviewExpense Reimbursement."

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Net Investment Income

Our net investment income totaled $37,030 ($0.17 per share) and $15,571 ($0.16 per share) for the three months ended June 30,
2014 and 2013, respectively. The increase in net investment income for the three months ended June 30, 2014 was primarily driven by the growth of our portfolio over the past year and an
increase in the amount of income received from directly originated
and opportunistic investments. However, our net investment income on a per share basis remained relatively unchanged, as these benefits were offset by increases in accruals for incentive fees during
the period.

Net Realized Gains or Losses

We sold investments and received principal repayments of $109,225 and $247,228, respectively, during the three months ended
June 30, 2014, from which we realized a net gain of $2,411. We realized a net gain of $31 from settlements on foreign currency during the three months ended June 30, 2014. We sold
investments and received principal repayments of $211,018 and $101,563, respectively, during the three months ended June 30, 2013, from which we realized a net gain of $3,760. During the three
months ended June 30, 2013, we earned $9,817 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains.

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

For the three months ended June 30, 2014 and 2013, the net change in unrealized appreciation (depreciation) on investments
totaled $12,697 and $(15,946), respectively, and the net change in unrealized gain (loss) on foreign currency was $(50) and $(25), respectively. The net change in unrealized appreciation
(depreciation) on our TRS for the three months ended June 30, 2013 was $(5,731). The change in unrealized appreciation (depreciation) on our investments during the three months ended
June 30, 2014 was primarily driven by the performance of our directly originated and opportunistic investments. The change in unrealized appreciation (depreciation) on our investments and TRS
during the three months ended June 30, 2013 was primarily driven by a general widening of credit spreads during the second quarter of 2013 and the termination of our TRS, which converted
unrealized gains as of March 31, 2013 into realized gains.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended June 30, 2014 and 2013, the net increase (decrease) in net assets resulting from operations was
$52,119 ($0.24 per share) and $7,446 ($0.07 per share), respectively.

Comparison of the Six Months Ended June 30, 2014 and 2013

Revenues

We generated investment income of $128,563 and $45,083 for the six months ended June 30, 2014 and 2013, respectively, in the
form of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments in our portfolio and dividends and other distributions earned on equity/other
investments in our portfolio. Such revenues represent $116,416 and $43,751 of cash income earned as well as $12,147 and $1,332 in non-cash portions relating to accretion of discount, PIK interest and
accrual of limited partnership income for the six months ended June 30, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods
or years after such revenues are recognized. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases and the
proportion of directly originated investments in our portfolio increases.

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Expenses

Our total expenses were $65,245 and $20,553 for the six months ended June 30, 2014 and 2013, respectively. Our expenses include
base management fees attributed to FS Advisor of $27,545 and $11,365 for the six months ended June 30, 2014 and 2013, respectively. Our expenses also include administrative services expenses
attributed to FS Advisor of $1,943 and $997 for the six months ended June 30, 2014 and 2013, respectively.

FS
Advisor is eligible to receive incentive fees based on our performance. During the six months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of
$14,623 and $753, respectively, based on the performance of our portfolio. During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $8,580 and $1,989,
respectively, based on the performance of our portfolio, of which $7,559 and $(33), respectively, was based on unrealized gains (or a decline in unrealized gains) and $1,021 and $2,022, respectively,
was based on realized gains. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See "Critical
Accounting PoliciesCapital Gains Incentive Fee."

We
recorded interest expense of $8,433 and $2,657 for the six months ended June 30, 2014 and 2013, respectively, in connection with our credit facilities. For the six months ended
June 30, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $554 and $308, respectively, and
fees and expenses incurred with our share transfer agent totaled $1,307 and $875, respectively. Fees for our board of trustees were $416 and $399 for the six months ended June 30, 2014 and
2013, respectively.

Our
other general and administrative expenses totaled $1,737 and $1,210 for the six months ended June 30, 2014 and 2013, respectively, and consisted of the following:

Six Months Ended
June 30,2014

2013Expenses associated with our independent audit and related fees

$
205

$
164Compensation of our chief compliance officer


60


55Legal fees


468


403Printing fees


141


277Insurance expense


113


70Other


750


241​
​
​
​
​
​
​
​Total

$
1,737

$
1,210​
​
​
​
​
​
​
​​
​
​
​
​
​
​
​


We
generally expect our total expenses related to our ongoing operations to decrease as a percentage of our average net assets because of the anticipated growth in the size of our asset
base. During the six months ended June 30, 2014 and 2013, the ratio of our total expenses to our average net assets was 3.29% and 2.46% respectively. During the six months ended June 30,
2014 and 2013, our ratio of total expenses to average net assets included $8,433 and $2,657, respectively, related to interest expense, $23,203 and $2,742, respectively, related to accruals for
incentive fees and $107 and $0, respectively, related to accruals for income taxes. Without such expenses, our ratio of total expenses to average net assets would have been 1.69% and 1.81% for the six
months ended June 30, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending
on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.

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Expense Reimbursement

During the six months ended June 30, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings. Under
the expense reimbursement agreement, amounts reimbursed by Franklin Square Holdings may become subject to repayment by us in the future. During the six months ended June 30, 2014 and 2013, we
did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the six months ended June 30, 2013, we paid $1,083 in expense recoupments to Franklin Square
Holdings. As of June 30, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see
"OverviewExpense Reimbursement."

Net Investment Income

Our net investment income totaled $63,318 ($0.31 per share) and $24,530 ($0.28 per share) for the six months ended June 30, 2014
and 2013, respectively. The change in net investment income on a per share basis for the six months ended June 30, 2014 was primarily driven by an increase in the amount of income received from
directly originated and opportunistic investments, which was offset to some extent by increases in accruals for incentive fees during the period.

Net Realized Gains or Losses

We sold investments and received principal repayments of $192,754 and $267,682, respectively, during the six months ended
June 30, 2014, from which we realized a net gain of $4,691. We realized a net loss of $507 from settlements on foreign currency during the six months ended June 30, 2014. We sold
investments and received principal repayments of $212,828 and $135,645, respectively, during the six months ended June 30, 2013, from which we realized a net gain of $3,421. During the six
months ended June 30, 2013, we earned $12,736 from periodic net settlement payments on our TRS and the termination of our TRS, which are reflected as realized gains, and realized a net gain of
$10 from settlements on foreign currency.

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

For the six months ended June 30, 2014 and 2013, the net change in unrealized appreciation (depreciation) on investments totaled
$38,718 and $(3,079), respectively, and the net change in unrealized gain (loss) on foreign currency was $31 and $(30), respectively. The net change in unrealized appreciation (depreciation) on our
TRS for the six months ended June 30, 2013 was $(3,141). The change in unrealized appreciation (depreciation) on our investments during the six months ended June 30, 2014 was primarily
driven by a general tightening of credit spreads and by the performance of our directly originated and opportunistic investments. The change in unrealized appreciation (depreciation) on our
investments and TRS during the six months ended June 30, 2013 was primarily driven by a general widening of credit spreads during the second quarter of 2013 and the termination of our TRS,
which converted unrealized gains as of December 31, 2012 into realized gains.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the six months ended June 30, 2014 and 2013, the net increase (decrease) in net assets resulting from operations was
$106,251 ($0.52 per share) and $34,447 ($0.39 per share), respectively.

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Financial Condition, Liquidity and Capital Resources

As of June 30, 2014, we had $142,571 in cash, which is held in a custodial account, and $155,000 in borrowings available under
our financing facilities. Below is a summary of our outstanding financing facilities as of June 30, 2014:

Facility

Type of Facility

Rate

Amount Outstanding

Amount Available

Maturity DateBNP Facility

Prime Brokerage


L + 1.10
%
$
145,000

$
55,000


March 27, 2015
(1)Citibank Credit Facility

Revolving


L + 2.50
%
$
175,000





May 24, 2015Deutsche Bank Credit Facility

Revolving


L + 1.80
%
$
240,000

$
100,000


June 11, 2015Natixis Credit Facility

Revolving


CP + 2.25%
(2)
$
150,000





July 11, 2023


(1)The
BNP facility generally is terminable upon 270 days' notice by either party. As of June 30, 2014, neither Berwyn Funding nor BNP had
provided notice of its intent to terminate the facility.(2)Prior
to March 2014, borrowings under the Natixis credit facility accrued interest at a rate equal to three-month LIBOR plus 2.40% per annum. In March 2014,
borrowings under the Natixis credit facility began to accrue interest at a rate equal to the applicable commercial paper rate plus 2.25% per annum.


For
additional information regarding our outstanding financing facilities as of June 30, 2014, see Note 8 to our unaudited consolidated financial statements contained in
this quarterly report on Form 10-Q.

During
the six months ended June 30, 2014, we sold 60,600,780 common shares for gross proceeds of $648,113 at an average price per share of $10.69. The gross proceeds received
during the six months ended June 30, 2014 include reinvested shareholder distributions of $48,357, for which we issued 4,940,721 common shares. During the six months ended June 30, 2014,
we also incurred offering costs of $3,131 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 on our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $55,288 for the six months ended
June 30, 2014. These sales commissions and fees include $10,646 retained by the dealer manager, FS2, which is one of our affiliates.

Since
commencing our continuous public offering and through July 29, 2014, we have sold 242,924,123 common shares (as adjusted for share distributions) for gross proceeds of
$2,536,600. As of July 29, 2014, we have raised total gross proceeds of $2,556,804, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in
proceeds raised from the principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of our board of trustees and certain individuals and entities affiliated
with GSO in a private placement conducted in April 2011. As of July 29, 2014, we have sold an aggregate of 3,557,918 common shares (as adjusted for share distributions) for aggregate gross
proceeds of $32,143 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December
2010 and common shares sold in the private placement conducted in April 2011.

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

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

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maturing
in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.

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

The
following table provides information concerning our repurchases of common shares pursuant to our share repurchase program during the six months ended June 30, 2014 and 2013:

For the Three Months Ended

Repurchase
Date

Shares
Repurchased

Percentage
of Shares
Tendered
That Were
Repurchased

Repurchase
Price
Per Share

Aggregate
Consideration
for Repurchased
SharesFiscal 2013December 31, 2012

January 2, 2013


24,249


100
%
$
9.405

$
228March 31, 2013

April 1, 2013


82,689


100
%
$
9.540

$
789Fiscal 2014December 31, 2013

January 2, 2014


174,181


100
%
$
9.720

$
1,693March 31, 2014

April 2, 2014


158,723


100
%
$
9.810

$
1,557


On
July 2, 2014, we repurchased 401,302 common shares (representing 100% of common shares tendered for repurchase) at $9.90 per share for aggregate consideration totaling $3,973.

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 July 29, 2014, we have sold an aggregate of 3,557,918
common shares (as adjusted for share
distributions) for aggregate gross proceeds of $32,143 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold to
Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.

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

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year.
As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions,
distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient
distributions to our shareholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary
income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no federal income taxes.

We
declared our first distribution on July 21, 2011. We authorize and declare ordinary cash distributions on a weekly basis, and pay such distributions on a monthly or quarterly
basis, in each case subject to our board of trustees' discretion and applicable legal restrictions. We will calculate each shareholder's specific distribution amount for the period using record and
declaration dates and each shareholder's distributions will begin to accrue on the date we accept such shareholder's subscription for our common shares. From time to time, we may also pay special
interim distributions in the form of cash or common shares at the discretion of our board of trustees.

During
certain periods, our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our continuous public offering of
common shares. As a result, it is possible that a portion of the distributions we make will represent a return of capital. A return of capital generally is a return of an investor's investment rather
than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including
any fees payable to FS Advisor. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to
our shareholders. No portion of the distributions paid during the six months ended June 30, 2014 and 2013 represented a return of capital.

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

The
following table reflects the cash distributions per share that we have declared and paid on our common shares during the six months ended June 30, 2014 and 2013:

DistributionFor the Three Months Ended

Per Share

AmountFiscal 2013March 31, 2013

$
0.1617

$
12,496June 30, 2013

$
0.1634

$
16,686Fiscal 2014March 31, 2014

$
0.1524

$
28,423June 30, 2014

$
0.1680

$
36,323


On
June 11, 2014, our board of trustees determined to increase the amount of the regular weekly cash distributions payable to shareholders of record from $0.012793 per share to
$0.013625 per share and declared regular weekly cash distributions for July 2014 through September 2014. On August 6, 2014, our board of trustees declared regular weekly cash distributions for
October 2014 through December 2014. These distributions have been or will be paid monthly to shareholders of record as of weekly record dates previously determined by our board of trustees in the
amount of $0.013625 per share. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.

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We
have adopted an "opt in" distribution reinvestment plan for our shareholders. As a result, if we make a distribution, our shareholders will receive distributions in cash unless they
specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares. However, certain state authorities or regulators may impose
restrictions from time to
time that may prevent or limit a shareholder's ability to participate in the distribution reinvestment plan.

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

For
a period of time following commencement of our continuous public offering, substantial portions of our distributions were funded through the reimbursement of certain expenses by
Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that were subject to repayment by us within three years. The purpose of
this arrangement was to ensure that no portion of our distributions to shareholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or
waivers of advisory fees were not based on our investment performance. No portion of the distributions paid during the six months ended June 30, 2014 or 2013 was funded through the
reimbursement of operating expenses by Franklin Square Holdings. However, our repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the
distributions that shareholders may otherwise have received during the six months ended June 30, 2013. During the six months ended June 30, 2014, we did not repay any amounts to Franklin
Square Holdings for expenses previously reimbursed or waived. There can be no assurance that we will continue to achieve the performance necessary to sustain our distributions or that we will be able
to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

The
following table reflects the sources of the cash distributions on a tax basis that we have paid on our common shares during the six months ended June 30, 2014 and 2013:

Six Months Ended June 30,2014

2013Source of Distribution

Distribution
Amount

Percentage

Distribution
Amount

PercentageOffering proceeds

$





$



Borrowings











Net investment income(1)


64,746


100
%

29,182


100
%Short-term capital gains proceeds from the sale of assets











Long-term capital gains proceeds from the sale of assets











Non-capital gains proceeds from the sale of assets











Distributions on account of limited partnership interest











Expense reimbursement from sponsor











​
​
​
​
​
​
​
​
​
​
​
​
​
​Total

$
64,746


100
%
$
29,182


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


(1)During
the six months ended June 30, 2014 and 2013, 90.6% and 97.0%, respectively, of our gross investment income was attributable to cash income
earned, 4.6% and 3.0%, respectively, was attributable to non-cash accretion of discount and 4.8% and 0.0%, respectively, was attributable to PIK interest.


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Our
net investment income on a tax basis for the six months ended June 30, 2014 and 2013 was $66,634 and $29,543, respectively. As of June 30, 2014 and December 31,
2013, we had $21,184 and $10,898, respectively, of undistributed ordinary income and net realized gains on a tax basis.

See
Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions,
including information regarding share distributions declared on our common shares and a reconciliation of our GAAP-basis net investment income and tax-basis net investment income for the six months
ended June 30, 2014 and 2013.

Critical Accounting Policies

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

Valuation of Portfolio Investments

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

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

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



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

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Our
equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of trustees, in its 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 and may apply discounts or premiums, where and as appropriate, due to the higher (or lower) financial risk and/or the size of portfolio companies relative to comparable firms, as well as
such other factors as our board of trustees, in consultation with any third-party valuation firm, if applicable, may consider relevant in assessing fair value. Generally, the value of our equity
interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale
are typically valued at a discount from the public market value of the security.

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

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

Our
investments as of June 30, 2014 consisted primarily of debt securities that were traded on a private over-the-counter market for institutional investors. Except as described
below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party
pricing service and screened for validity by such service. Fourteen senior secured loan investments, one senior secured bond investment and one subordinated debt investment were valued by an
independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates
for like investments, call features, anticipated prepayments and other relevant terms of the debt. All of our equity/other investments were
valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as
various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One subordinated debt investment, which was newly-issued
and purchased near June 30, 2014, was valued at cost, as our board of trustees determined that the cost of such investment was the best indication of its fair value.

Our
investments as of December 31, 2013 consisted primarily of debt securities that were traded on a private over-the-counter market for institutional investors. Except as
described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent
third-party pricing service and screened for validity by such service. Six senior secured loan investments and two subordinated debt investments, 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

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features,
anticipated prepayments and other relevant terms of the debt. Except as described below, all of our equity/other investments were valued by the same independent valuation firm, which
determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash
flows, net income, revenues or, in limited instances, book value or liquidation value. One senior secured loan investment, one subordinated debt investment and two equity/other investments, all of
which were newly-issued and purchased near December 31, 2013, were valued at cost, as our board of trustees determined that the cost of each such investment was the best indication of its fair
value.

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, including the use of an independent valuation firm, 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 or where our board of trustees otherwise determines that the use of such other method is appropriate. We periodically benchmark the valuations
provided by the independent valuation firm against the actual prices at which we purchase and sell our investments. Our valuation committee and board of trustees reviewed and approved the valuation
determinations made with respect to these investments in a manner consistent with our valuation process.

Revenue Recognition

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

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

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

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is
determined and payable in arrears as of the end of each calendar year

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(or
upon termination of such 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 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 were liquidated at its fair value as of the balance sheet date
even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.

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

Subordinated Income Incentive Fee

Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be entitled to receive a subordinated
incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of our "pre-incentive fee net investment income" for the
immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, 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

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pre-incentive
fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. Thereafter, FS Advisor will be entitled to receive 20.0% of pre-incentive fee net
investment income.

Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with
accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements.
Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing
authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the six months ended
June 30, 2014 and 2013, we did not incur any interest or penalties.

Contractual Obligations

We have entered into an agreement with FS Advisor to provide us with investment advisory and administrative services. Payments for
investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets
and (b) an incentive fee based on our performance. FS Advisor, and to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on
our behalf. For the three months ended June 30, 2014 and 2013, we incurred $14,678 and $6,654, respectively, in base management fees and $1,008 and $544, respectively, in administrative
services expenses under the investment advisory and administrative services agreement. For the six months ended June 30, 2014 and 2013, we incurred $27,545 and $11,365, respectively, in base
management fees and $1,943 and $997, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FS Advisor is eligible to
receive incentive fees based on the performance of our portfolio. During the three months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $10,013 and $0,
respectively, based on the performance of our portfolio. During the six months ended June 30, 2014 and 2013, we accrued subordinated incentive fees on income of $14,623 and $753, respectively,
based on the performance of our portfolio and paid FS Advisor $11,396 and $753, respectively, in respect of such fees. As of June 30, 2014, a subordinated incentive fee on income of $10,013 was
payable to FS Advisor. During the three months ended June 30, 2014, we accrued capital gains incentive fees of $3,015 based on the performance of our portfolio. During the three months ended
June 30, 2013, we reversed $1,621 of capital gains incentive fees previously accrued. During the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of
$8,580 and $1,989, respectively, based on the performance of our portfolio, of which $7,559 and $(33), respectively, was based on unrealized gains (or a decline in unrealized gains) and $1,021 and
$2,022, respectively, was based on realized gains. We paid FS Advisor $2,857 and $953, respectively, in capital gains incentive fees during the six months ended June 30, 2014 and 2013. As of
June 30, 2014, we had accrued $19,573 in capital gains incentive fees, of which $18,552 was based on unrealized gains and $1,021 was based on realized gains.

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A
summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the BNP facility, the Citibank credit facility, the Deutsche Bank credit
facility and the Natixis credit facility at June 30, 2014 is as follows:

Payments Due By PeriodTotal

Less than
1 year

1-3 years

3-5 years

More than
5 yearsBNP Facility(1)

$
145,000

$
145,000








Citibank Credit Facility(2)

$
175,000

$
43,750

$
131,250





Deutsche Bank Credit Facility(3)

$
240,000

$
240,000








Natixis Credit Facility(4)

$
150,000










$
150,000


(1)At
June 30, 2014, $55,000 remained unused under the BNP facility. The BNP facility generally is terminable upon 270 days' notice by either
party. As of June 30, 2014, neither Berwyn Funding nor BNP had provided notice of its intent to terminate the facility.(2)At
June 30, 2014, no amounts remained unused under the Citibank credit facility. All amounts borrowed under the facility will mature, and all accrued
and unpaid interest thereunder will be due and payable, on May 24, 2015. Amounts due on the facility will begin to amortize on November 24, 2014.(3)At
June 30, 2014, $100,000 remained unused under the Deutsche Bank credit facility. All amounts borrowed under the facility will mature, and all
accrued and unpaid interest thereunder will be due and payable, on June 11, 2015.(4)At
June 30, 2014, no amounts remained unused under the Natixis credit facility. All amounts borrowed under the facility will mature, and all accrued
and unpaid interest thereunder will be due and payable, on July 11, 2023.


Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

None.

Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

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

The
incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears, equals 20.0% of
our "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment
advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. The second part of the incentive fee, which is referred to as the incentive fee on
capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue this incentive fee based on

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net
realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such fee
is payable with respect to unrealized gains unless and until such gains are actually realized. See "Critical Accounting PoliciesCapital Gains Incentive Fee" for a discussion
of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.

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

Franklin
Square Holdings has funded certain of our offering costs and organization costs. These costs have been recorded by us as a contribution to capital. The offering costs were
offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by us. Under the terms of the investment advisory
and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering
until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On July 18, 2011, we satisfied the minimum
offering requirement. During the six months ended June 30, 2014 and 2013, Franklin Square Holdings did not fund any of our offering and organization costs, and we did not pay any reimbursements
to FS Advisor and its affiliates for offering and organization costs previously funded.

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

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The
following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three and six
months ended June 30, 2014 and 2013:

Three Months
Ended
June 30,

Six Months
Ended
June 30,Related Party

Source Agreement

Description

2014

2013

2014

2013FS Advisor

Investment Advisory and Administrative Services Agreement

Base Management Fee(1)

$
14,678

$
6,654

$
27,545

$
11,365FS Advisor

Investment Advisory and Administrative Services Agreement

Capital Gains Incentive Fee(2)

$
3,015

$
(1,621
)
$
8,580

$
1,989FS Advisor

Investment Advisory and Administrative Services Agreement

Subordinated Incentive Fee on Income(3)

$
10,013

$


$
14,623

$
753FS Advisor

Investment Advisory and Administrative Services Agreement

Administrative Services Expenses(4)

$
1,008

$
544

$
1,943

$
997FS2

Dealer Manager Agreement

Dealer Manager Fee(5)

$
5,608

$
4,747

$
10,646

$
8,922


(1)During
the six months ended June 30, 2014 and 2013, $23,618 and $8,233, respectively, in base management fees were paid to FS Advisor. As of
June 30, 2014, $14,678 in base management fees were payable to FS Advisor.(2)During
the six months ended June 30, 2014 and 2013, we accrued capital gains incentive fees of $8,580 and $1,989, respectively, based on the
performance of our portfolio, of which $7,559 and $(33), respectively, was based on unrealized gains (or a decline in unrealized gains) and $1,021 and $2,022, respectively, was based on realized
gains. No such fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. We paid FS Advisor $2,857 and $953 in capital gains incentive fees
during the six months ended June 30, 2014 and 2013, respectively. As of June 30, 2014, we had accrued capital gains incentive fees of $19,573, of which $18,552 was based on unrealized
gains and $1,021 was based on realized gains.(3)During
the six months ended June 30, 2014 and 2013, $11,396 and $753, respectively, of subordinated incentive fees on income were paid to FS Advisor.
As of June 30, 2014, a subordinated incentive fee on income of $10,013 was payable to FS Advisor.(4)During
the six months ended June 30, 2014 and 2013, $1,794 and $857, 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 $900 and $757, respectively, in
administrative services expenses to FS Advisor during the six months ended June 30, 2014 and 2013.(5)Represents
aggregate dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers.


See
Note 4 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our related party
transactions and relationships, including potential conflicts of interest, our exemptive relief order and our expense reimbursement arrangement with Franklin Square Holdings.

Recent Developments

During the period from July 1, 2014 to July 29, 2014, we sold 10,673,968 common shares for gross proceeds of $116,447 at
an average price per share of $10.91.

On
July 1, 2014, we increased our public offering price from $10.95 to $11.00 per share, effective as of our July 2, 2014 weekly closing.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of June 30, 2014, 60.4% of our portfolio
investments (based on fair value) paid variable interest rates, 34.4% paid fixed interest rates, 2.9% were income producing equity or other investments and the remainder (2.3%) consisted of non-income
producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to the variable rate investments we hold and to
declines in the value of any fixed rate investments we hold. However, many of our variable rate investments provide for an interest rate floor, which may prevent our interest income from

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increasing
until benchmark interest rates increase beyond a threshold amount. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest
rates beyond this threshold would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income and may result in a substantial increase in our net
investment income and to the amount of incentive fees payable to FS Advisor with respect to our increased pre-incentive fee net investment income.

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

The
following table shows the effect over a twelve-month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in the
composition of our investment portfolio, including the accrual status of our investments, and our borrowing arrangements in effect as of June 30, 2014 (dollar amounts are presented in
thousands):

Basis Point Change in Interest Rate

Increase
(Decrease) in
Interest
Income

Increase
(Decrease) in
Interest
Expense

Increase
(Decrease) in
Net Interest
Income

Percentage
Change in
Net Interest
IncomeDown 25 basis points

$
(53
)
$
(1,721
)
$
1,668


0.7
%No change











Up 100 basis points


1,795


6,883


(5,088
)

(2.2
)%Up 300 basis points


34,375


20,650


13,725


5.9
%Up 500 basis points


69,167


34,416


34,751


14.9
%


We
expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize
our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes
in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the six months ended June 30, 2014 and
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 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the
participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of
June 30, 2014. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable
assurance that we would meet our disclosure obligations.

There
was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that occurred during the three month
period ended June 30, 2014 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, and, to our knowledge, no material legal proceedings are threatened
against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our
portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that any such proceedings will have a material adverse effect upon our financial
condition or results of operations.

Item 1A.    Risk Factors.

Investing in our common shares involves a number of significant risks. In addition to the other information contained in this quarterly
report on Form 10-Q, investors should consider carefully the risk factors set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our
additional filings with the SEC before making an investment in our common shares.

Risks Related to Our Business and Structure

Pending legislation may allow us to incur additional leverage.

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

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

The table below provides information concerning our repurchases of common shares during the three months ended June 30, 2014
pursuant to our share repurchase program.

Period

Total
Number of
Shares
Purchased

Average
Price Paid
per Share

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

Maximum Number of
Shares that May Yet
Be Purchased
Under the
Plans or ProgramsApril 1 to April 30, 2014


158,723

$
9.81


158,723


(1
)May 1 to May 31, 2014











June 1 to June 30, 2014











​
​
​
​
​
​
​
​
​
​
​
​
​
​Total


158,723

$
9.81


158,723


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


(1)A
description of the maximum number of common shares that may be repurchased 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.

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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 FS Energy and Power Fund.(Incorporated by reference to Exhibit 3.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on
March 13, 2012.)3.2

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

Form of Subscription Agreement.(Incorporated by reference to Appendix A filed with FS Energy and Power Fund's final prospectus filed on April 30, 2014 with the Securities and Exchange
Commission pursuant to Rule 497 of the Securities Act of 1933, as amended.)4.2

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

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

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

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

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

Form of Follow-On Dealer Manager Agreement by and among FS Energy and Power Fund, FS Investment Advisor, LLC and FS2 Capital Partners, LLC.(Incorporated by reference to
Exhibit (h)(2) filed with Pre-Effective Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2(File No. 333-184407) filed on May 10, 2013.)10.6

Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement).(Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to FS Energy
and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.7

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

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


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10.9

Escrow Agreement, dated as of March 29, 2011, by and between FS Energy and Power Fund and UMB Bank, N.A.(Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to FS
Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)10.10

Credit Agreement, dated as of June 24, 2011, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto.(Incorporated by reference to
Exhibit 10.7 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.11

First Amendment to Credit Agreement, dated as of May 30, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 30, 2012.)10.12

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

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

Fourth Amendment to Credit Agreement, dated as of June 24, 2013, by and among FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch.(Incorporated by reference to
Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on June 25, 2013.)10.15

Amended and Restated Credit Agreement, dated as of June 11, 2014, by and among FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch.(Incorporated by reference to
Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on June 17, 2014.)10.16

Asset Contribution Agreement, dated as of June 24, 2011, by and between FS Energy and Power Fund and FSEP Term Funding, LLC.(Incorporated by reference to Exhibit 10.8 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.17

Investment Management Agreement, dated as of June 24, 2011, by and between FS Energy and Power Fund and FSEP Term Funding, LLC.(Incorporated by reference to Exhibit 10.9 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.18

Security Agreement, dated as of June 24, 2011, by and between FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch.(Incorporated by reference to Exhibit 10.10 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)10.19

ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.11 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on August 15, 2011.)10.20

Termination and Release Acknowledgment, dated as of May 11, 2012, by Citibank N.A. in favor of FS Energy and Power Fund.(Incorporated by reference to Exhibit 10.15 to FS Energy and
Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.21

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


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10.22

Amended and Restated Confirmation Letter Agreement, dated as of May 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.17 to FS
Energy and Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)10.23

Amended and Restated Confirmation Letter Agreement, dated as of October 11, 2012, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.1
to FS Energy and Power Fund's Current Report on Form 8-K filed on October 12, 2012.)10.24

Termination Acknowledgment (TRS), dated as of May 24, 2013, by and between EP Investments LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power
Fund's Current Report on Form 8-K filed on May 31, 2013.)10.25

Loan Agreement, dated as of May 24, 2013, by and among EP Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)10.26

Account Control Agreement, dated as of May 24, 2013, by and among EP Funding LLC, Citibank, N.A. and Virtus Group, LP.(Incorporated by reference to Exhibit 10.2 to FS Energy
and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)10.27

Security Agreement, dated as of May 24, 2013, by and between EP Funding LLC and Citibank, N.A.(Incorporated by reference to Exhibit 10.3 to FS Energy and Power Fund's Current
Report on Form 8-K filed on May 29, 2013.)10.28

Investment Management Agreement, dated as of May 24, 2013, by and between FS Energy and Power Fund and EP Funding LLC.(Incorporated by reference to Exhibit 10.4 to FS Energy and
Power Fund's Current Report on Form 8-K filed on May 29, 2013.)10.29

Credit Agreement, dated as of July 11, 2013, by and among Energy Funding LLC, Natixis, New York Branch, Wells Fargo Bank, National Association and the other lenders from time to time party thereto.(Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)10.30

Securities Account Control Agreement, dated as of July 11, 2013, by and among Energy Funding LLC and Wells Fargo Bank, National Association.(Incorporated by reference to
Exhibit 10.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)10.31

Collateral Management Agreement, dated as of July 11, 2013, by and between FS Energy and Power Fund and Energy Funding LLC.(Incorporated by reference to Exhibit 10.3 to FS Energy
and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)10.32

Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated May 16, 2013, by and between FS Energy and Power Fund and Franklin Square Holdings, L.P.(Incorporated by reference to Exhibit 99.1 to FS Energy and Power Fund's Current report on Form 8-K filed on May 17, 2013.)10.33

Committed Facility Agreement, dated as of December 11, 2013, by and between Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc.(Incorporated by reference to
Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)10.34

U.S. PB Agreement, dated as of December 11, 2013, by and between Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc.(Incorporated by reference to Exhibit 10.2 to FS
Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)10.35

Special Custody and Pledge Agreement, dated as of December 11, 2013, by and among State Street Bank and Trust Company, Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc.(Incorporated by reference to Exhibit 10.3 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)


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10.36

Investment Management Agreement, dated as of December 11, 2013, by and between FS Energy and Power Fund and Berwyn Funding LLC.(Incorporated by reference to Exhibit 10.4 to FS Energy
and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)31.1
*
Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.31.2
*
Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.32.1
*
Certification of Chief Executive Officer 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 August 13, 2014.

FS ENERGY AND POWER FUNDBy:

/s/ MICHAEL C. FORMAN Michael C. Forman
Chief 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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