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EX-32.2 - EX-32.2 - FS Energy & Power Fund | a2209575zex-32_2.htm |
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EX-32.1 - EX-32.1 - FS Energy & Power Fund | a2209575zex-32_1.htm |
EX-31.1 - EX-31.1 - FS Energy & Power Fund | a2209575zex-31_1.htm |
EX-10.17 - EX-10.17 - FS Energy & Power Fund | a2209575zex-10_17.htm |
EX-10.15 - EX-10.15 - FS Energy & Power Fund | a2209575zex-10_15.htm |
EX-10.16 - EX-10.16 - FS Energy & Power Fund | a2209575zex-10_16.htm |
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TABLE OF CONTENTS
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012. |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 814-00841
FS Energy and Power Fund
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
27-6822130 (I.R.S. Employer Identification No.) |
|
Cira Centre 2929 Arch Street, Suite 675 Philadelphia, Pennsylvania 19104 (Address of principal executive office) |
(215) 495-1150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes o No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer, and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
The issuer has 20,384,164 common shares of beneficial interest outstanding as of May 11, 2012.
FS Energy and Power Fund
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
March 31, 2012 (Unaudited) |
December 31, 2011 |
|||||
---|---|---|---|---|---|---|---|
Assets |
|||||||
Investments, at fair value (amortized cost$143,446 and $91,808, respectively) |
$ | 145,122 | $ | 91,642 | |||
Cash |
40,093 | 10,810 | |||||
Due from counterparty |
8,168 | 7,878 | |||||
Receivable for investments sold and repaid |
4 | | |||||
Receivable for overfunded investment |
| 434 | |||||
Reimbursement from sponsor(1) |
1,310 | 533 | |||||
Interest receivable |
1,377 | 656 | |||||
Receivable for common shares purchased |
244 | 99 | |||||
Deferred financing costs |
180 | 222 | |||||
Receivable due on total return swap(2) |
76 | 260 | |||||
Unrealized appreciation on total return swap(2) |
421 | 121 | |||||
Prepaid expenses and other assets |
59 | 77 | |||||
Total assets |
$ | 197,054 | $ | 112,732 | |||
Liabilities |
|||||||
Payable for investments purchased |
$ | 12,183 | $ | 23,503 | |||
Credit facility payable |
50,000 | 20,518 | |||||
Shareholder distributions payable |
729 | 374 | |||||
Management fees payable |
1,177 | 346 | |||||
Capital gains incentive fee payable(3) |
586 | 67 | |||||
Administrative services fee payable |
114 | 52 | |||||
Interest payable |
163 | 109 | |||||
Other accrued expenses and liabilities |
181 | 78 | |||||
Total liabilities |
65,133 | 45,047 | |||||
Shareholders' equity |
|||||||
Preferred 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, 14,759,948 and 7,746,643 shares issued and outstanding, respectively(4) |
15 | 8 | |||||
Capital in excess of par value |
130,046 | 68,171 | |||||
Accumulated undistributed net realized gains on investments and total return swap and gain/loss on foreign currency |
119 | | |||||
Accumulated distributions in excess of net investment income(5) |
(342 | ) | (432 | ) | |||
Net unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency |
2,083 | (62 | ) | ||||
Total shareholders' equity |
131,921 | 67,685 | |||||
Total liabilities and shareholders' equity |
$ | 197,054 | $ | 112,732 | |||
Net asset value per common share at period end |
$ | 8.94 | $ | 8.74 |
- (1)
- See
Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates.
- (2)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (3)
- See
Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.
- (4)
- As
discussed in Note 5, the Company paid a 1% share distribution in February 2012. The outstanding shares and net asset value per share reflect this
distribution on a retroactive basis.
- (5)
- See Note 5 for a discussion of the source of distributions paid by the Company.
See notes to unaudited consolidated financial statements.
1
FS Energy and Power Fund
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2012 | 2011 | |||||
Investment Income |
|||||||
Interest income |
$ | 2,718 | $ | | |||
Total investment income |
2,718 | | |||||
Operating expenses |
|||||||
Management fees |
775 | | |||||
Capital gains incentive fees(1) |
519 | | |||||
Administrative services expenses |
62 | | |||||
Share transfer agent fees |
59 | | |||||
Accounting and administrative fees |
38 | | |||||
Interest expense |
269 | | |||||
Organization costs |
| 93 | |||||
Other general and administrative expenses |
257 | | |||||
Total operating expenses |
1,979 | 93 | |||||
Less: Expense reimbursement from sponsor(2) |
(801 | ) | | ||||
Net expenses |
1,178 | 93 | |||||
Net investment income (loss) |
1,540 | (93 | ) | ||||
Realized and unrealized gain/loss |
|||||||
Net realized gain on investments |
330 | | |||||
Net realized gain on total return swap(3) |
119 | | |||||
Net realized gain on foreign currency |
9 | ||||||
Net change in unrealized appreciation (depreciation) on investments |
1,842 | | |||||
Net change in unrealized appreciation (depreciation) on total return swap(3) |
300 | | |||||
Net change in unrealized gain/loss on foreign currency |
3 | | |||||
Total net realized and unrealized gain/loss on investments |
2,603 | | |||||
Net increase (decrease) in net assets resulting from operations |
$ | 4,143 | $ | (93 | ) | ||
Per share informationbasic and diluted(4) |
|||||||
Net increase (decrease) in net assets resulting from operations |
$ | 0.38 | $ | (4.14 | ) | ||
Weighted average shares outstanding |
10,889,229 | 22,444 | |||||
- (1)
- See
Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fee.
- (2)
- See
Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates.
- (3)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (4)
- As discussed in Note 5, the Company paid a 1% share distribution in February 2012. The weighted average shares used in the per share computation of the net increase (decrease) in net assets resulting from operations is based on the weighted average shares outstanding during the three months ended March 31, 2012 and reflects the share distribution on a retroactive basis.
See notes to unaudited consolidated financial statements.
2
FS Energy and Power Fund
Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2012 | 2011 | |||||
Operations |
|||||||
Net investment income (loss) |
$ | 1,540 | $ | (93 | ) | ||
Net realized gain (loss) on investments, total return swap and foreign currency |
458 | | |||||
Net change in unrealized appreciation (depreciation) on investments |
1,842 | | |||||
Net change in unrealized appreciation (depreciation) on total return swap(1) |
300 | | |||||
Net change in unrealized gain/loss on foreign currency |
3 | | |||||
Net increase (decrease) in net assets resulting from operations |
4,143 | (93 | ) | ||||
Shareholder distributions(2) |
|||||||
Distributions from net investment income |
(1,450 | ) | | ||||
Distributions from net realized gain on investments |
(339 | ) | | ||||
Net decrease in net assets resulting from shareholder distributions |
(1,789 | ) | | ||||
Capital share transactions |
|||||||
Issuance of common shares |
62,208 | | |||||
Reinvestment of shareholder distributions |
696 | | |||||
Offering costs |
(418 | ) | (186 | ) | |||
Reimbursement of investment adviser(3) |
(1,022 | ) | | ||||
Capital contributions of investment adviser |
418 | 279 | |||||
Net increase in net assets resulting from capital share transactions |
61,882 | 93 | |||||
Total increases in net assets |
64,236 | | |||||
Net assets at beginning of period |
67,685 | 200 | |||||
Net assets at end of period |
$ | 131,921 | $ | 200 | |||
- (1)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (2)
- See
Note 5 for a discussion of the source of distributions paid by the Company.
- (3)
- See Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.
See notes to unaudited consolidated financial statements.
3
FS Energy and Power Fund
Unaudited Consolidated Statements of Cash Flows
(in thousands)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2012 | 2011 | |||||
Cash flows from operating activities |
|||||||
Net increase (decrease) in net assets resulting from operations |
$ | 4,143 | $ | (93 | ) | ||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: |
|||||||
Purchases of investments |
(79,537 | ) | | ||||
Paid-in-kind interest |
| | |||||
Proceeds from sales and repayments of investments |
28,666 | | |||||
Net realized (gain) loss on investments |
(330 | ) | | ||||
Net change in unrealized (appreciation) depreciation on investments |
(1,842 | ) | | ||||
Net change in unrealized (appreciation) depreciation on total return swap(1) |
(300 | ) | | ||||
Accretion of discount |
(437 | ) | | ||||
Amortization of deferred financing costs |
42 | | |||||
(Increase) decrease in due from counterparty |
(290 | ) | | ||||
(Increase) decrease in receivable for investments sold and repaid |
(4 | ) | | ||||
(Increase) decrease in receivable for overfunded investment |
434 | ||||||
(Increase) decrease in reimbursement from sponsor(2) |
(777 | ) | | ||||
(Increase) decrease in interest receivable |
(721 | ) | | ||||
(Increase) decrease in receivable due on total return swap(1) |
184 | | |||||
(Increase) decrease in prepaid expenses and other assets |
18 | | |||||
Increase (decrease) in payable for investments purchased |
(11,320 | ) | | ||||
Increase (decrease) in management fees payable |
831 | | |||||
Increase (decrease) in capital gains incentive fee payable |
519 | | |||||
Increase (decrease) in administrative services fees payable |
62 | | |||||
Increase (decrease) in interest payable |
54 | | |||||
Increase (decrease) in other accrued expenses and liabilities |
103 | | |||||
Net cash used in operating activities |
(60,502 | ) | $ | (93 | ) | ||
Cash flows from financing activities |
|||||||
Issuance of common shares |
62,063 | | |||||
Reinvestment of shareholder distributions |
696 | | |||||
Offering costs |
(418 | ) | (186 | ) | |||
Capital contributions of investment adviser |
418 | 279 | |||||
Reimbursement of investment adviser(3) |
(1,022 | ) | | ||||
Shareholder distributions |
(1,434 | ) | | ||||
Borrowings under credit facility(4) |
29,482 | | |||||
Net cash provided by financing activities |
89,785 | 93 | |||||
Total increase in cash |
29,283 | | |||||
Cash at beginning of period |
10,810 | 200 | |||||
Cash at end of period |
$ | 40,093 | $ | 200 | |||
- (1)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (2)
- See
Note 4 for a discussion of reimbursements paid to the Company by its investment adviser and affiliates.
- (3)
- See
Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.
- (4)
- During the three months ended March 31, 2012, the Company paid $173 in interest expense on the credit facility.
See notes to unaudited consolidated financial statements.
4
FS Energy and Power Fund
Unaudited Consolidated Schedule of Investments
As of March 31, 2012
(in thousands)
Portfolio Company(a) | Industry | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Secured LoansFirst Lien32.2% |
||||||||||||
Crestwood Holdings LLC, L+825, 1.5% LIBOR Floor, 3/26/18 |
Midstream | $ | 6,286 | $ | 6,192 | $ | 6,411 | |||||
Dynegy Holdings Inc. (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d) |
Power | 1,567 | 1,540 | 1,608 | ||||||||
Dynegy Holdings Inc. (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d) |
Power | 4,403 | 4,382 | 4,618 | ||||||||
Frac Tech International, LLC, L+475, 1.5% LIBOR Floor, 5/6/16(d) |
Service & Equipment | 4,537 | 4,497 | 4,527 | ||||||||
FREIF North American Power I LLC (TLB), L+450, 1.5% LIBOR Floor, 3/2/19 |
Midstream | 2,801 | 2,745 | 2,801 | ||||||||
FREIF North American Power I LLC (TLC), L+450, 1.5% LIBOR Floor, 3/2/19 |
Midstream | 440 | 431 | 440 | ||||||||
Hudson Products Holdings Inc., Prime+400, 4.5% Prime Floor, 8/25/15 |
Service & Equipment | 1,680 | 1,608 | 1,554 | ||||||||
PL Propylene LLC, L+575, 1.3% LIBOR Floor, 3/23/17 |
Downstream | 10,000 | 9,800 | 10,025 | ||||||||
Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17(d) |
Upstream | 3,464 | 3,420 | 3,473 | ||||||||
Total Safety U.S., Inc., L+625, 1.3% LIBOR Floor, 4/28/18(d) |
Service & Equipment | 2,993 | 2,879 | 2,963 | ||||||||
Willbros Group, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(e) |
Service & Equipment | 4,000 | 3,990 | 4,000 | ||||||||
Total Senior Secured LoansFirst Lien |
41,484 | 42,420 | ||||||||||
Senior Secured LoansSecond Lien4.4% |
||||||||||||
Astoria Generating Company, L.P., L+375, 8/23/13(d) |
Power | 2,000 | 1,870 | 1,852 | ||||||||
Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d) |
Service & Equipment | 2,500 | 2,569 | 2,447 | ||||||||
Southern Pacific Resource Corp., Prime+750, 1/7/16(d)(f) |
Upstream | 1,489 | 1,501 | 1,503 | ||||||||
Total Senior Secured LoansSecond Lien |
5,940 | 5,802 | ||||||||||
Senior Secured Bonds0.8% |
||||||||||||
United Refining Co., 10.5%, 2/28/18(d) |
Downstream | 1,000 | 1,027 | 1,032 | ||||||||
Total Senior Secured Bonds |
1,027 | 1,032 | ||||||||||
Subordinated Debt39.5% |
||||||||||||
Alta Mesa Holdings, LP, 9.6%, 10/15/18(e) |
Upstream | 8,425 | 8,510 | 8,413 | ||||||||
Antero Resources Corp., 9.4%, 12/1/17(d) |
Upstream | 2,000 | 2,173 | 2,170 | ||||||||
Aurora USA Oil & Gas, Inc., 9.9%, 2/15/17(d)(f) |
Upstream | 4,000 | 3,943 | 4,140 | ||||||||
Chaparral Energy Inc., 8.3%, 9/1/21(d) |
Upstream | 3,500 | 3,547 | 3,752 | ||||||||
Chaparral Energy Inc., 8.9%, 2/1/17(d) |
Upstream | 1,750 | 1,801 | 1,830 | ||||||||
GulfMark Offshore, Inc., 6.4%, 3/15/22(d)(f) |
Service & Equipment | 3,500 | 3,500 | 3,527 | ||||||||
Lone Pine Resources Canada Ltd., 10.4%, 2/15/17(d)(f) |
Upstream | 5,000 | 4,929 | 5,174 | ||||||||
NRG Energy, Inc., 8.3%, 9/1/20(d)(f) |
Power | 4,750 | 4,672 | 4,687 | ||||||||
Quicksilver Resources Inc., 7.1%, 4/1/16(d)(f) |
Upstream | 2,250 | 2,138 | 2,083 | ||||||||
Samson Investment Company, 9.8%, 2/15/20(d) |
Upstream | 10,000 | 10,000 | 10,169 | ||||||||
SandRidge Energy, Inc., 7.5%, 3/15/21(d)(f) |
Upstream | 1,250 | 1,308 | 1,236 | ||||||||
Vanguard Natural Resources, LLC, 7.9%, 4/1/20(e)(f) |
Upstream | 5,000 | 4,964 | 4,964 | ||||||||
Total Subordinated Debt |
51,485 | 52,145 | ||||||||||
Equity/Other33.2%(g) |
|
Number of Shares |
Amortized Cost |
Fair Value |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Fortune Creek Co-Invest I L.P., L.P. Interest(f)(h) |
Midstream | N/A | 22,986 | 23,085 | ||||||||
Plains Offshore Operations Inc., Preferred Equity(d) |
Upstream | 205,334 | 19,835 | 19,949 | ||||||||
Plains Offshore Operations Inc., Strike: $20.00, Warrants(d) |
Upstream | 405,378 | 689 | 689 | ||||||||
Total Equity/Other |
43,510 | 43,723 | ||||||||||
TOTAL INVESTMENTS110.1% |
$ | 143,446 | 145,122 | |||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(10.1)% |
(13,201 | ) | ||||||||||
NET ASSETS100% |
$ | 131,921 | ||||||||||
5
FS Energy and Power Fund
Unaudited Consolidated Schedule of Investments (Continued)
As of March 31, 2012
(in thousands)
Total Return Swap | Notional Amount |
Unrealized Appreciation |
|||||
---|---|---|---|---|---|---|---|
Citibank TRS Facility (Note 8)(f) |
$ | 19,042 | $ | 421 | |||
- (a)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (b)
- Denominated
in U.S. dollars.
- (c)
- Fair
value determined by the Company's board of trustees (see Note 7).
- (d)
- Security
or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving
credit facility with Deutsche Bank AG, New York Branch (see Notes 10 and 11).
- (e)
- Position
or portion thereof unsettled as of March 31, 2012.
- (f)
- The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. As of March 31, 2012, 72.6% of the Company's
total assets represent qualifying assets. In addition, as described in Note 8, the Company also calculates its compliance with the qualifying asset test on a "look through" basis by
disregarding the value of the Total Return Swap itself and treating each loan underlying the Total Return Swap as either a qualifying asset or non-qualifying asset based on whether the
obligor is an eligible portfolio company. On this basis, 72.8% of the Company's total assets are qualifying assets as of March 31, 2012.
- (g)
- Listed
investments may be treated as debt for GAAP or tax purposes.
- (h)
- Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of March 31, 2012.
See notes to unaudited consolidated financial statements.
6
FS Energy and Power Fund
Consolidated Schedule of Investments
As of December 31, 2011
(in thousands)
Portfolio Company(a) | Industry | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Secured LoansFirst Lien33.6% |
||||||||||||
Dalbo Holdings, Inc., L+500, 2.0% LIBOR Floor, 8/27/12(d) |
Service & Equipment | $ | 1,906 | $ | 1,864 | $ | 1,798 | |||||
Dynegy Holdings Inc. (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d) |
Power | 1,571 | 1,542 | 1,585 | ||||||||
Dynegy Holdings Inc. (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d)(e) |
Power | 4,414 | 4,392 | 4,485 | ||||||||
First Reserve Crestwood Holdings LLC, L+850, 2.0% LIBOR Floor, 10/3/16 |
Midstream | 2,446 | 2,458 | 2,488 | ||||||||
Frac Tech International, LLC, L+475, 1.5% LIBOR Floor, 5/6/16(d)(e) |
Service & Equipment | 4,537 | 4,495 | 4,484 | ||||||||
Hudson Products Holdings Inc., L+500, 3.0% LIBOR Floor, 8/25/15 |
Service & Equipment | 1,684 | 1,607 | 1,478 | ||||||||
Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17(d) |
Upstream | 3,500 | 3,454 | 3,507 | ||||||||
Total Safety U.S., Inc., L+625, 1.3% LIBOR Floor, 4/28/18(d) |
Service & Equipment | 3,000 | 2,882 | 2,895 | ||||||||
Total Senior Secured LoansFirst Lien |
22,694 | 22,720 | ||||||||||
Senior Secured LoansSecond Lien8.2% |
||||||||||||
Astoria Generating Company, L.P., L+375, 8/23/13(d) |
Power | 2,000 | 1,849 | 1,769 | ||||||||
Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d) |
Service & Equipment | 2,500 | 2,571 | 2,307 | ||||||||
Southern Pacific Resource Corp., L+850, 2.0% LIBOR Floor, 1/7/16(d)(f) |
Upstream | 1,492 | 1,506 | 1,501 | ||||||||
Total Senior Secured LoansSecond Lien |
5,926 | 5,577 | ||||||||||
Senior Secured Bonds7.2% |
||||||||||||
Hexion Specialty Chemicals, Inc., 8.9%, 2/1/18(d) |
Service & Equipment | 2,750 | 2,486 | 2,598 | ||||||||
Homer City Funding LLC, 8.1%, 10/1/19(d) |
Power | 1,525 | 1,431 | 1,335 | ||||||||
United Refining Co., 10.5%, 2/28/18(d) |
Downstream | 1,000 | 1,028 | 942 | ||||||||
Total Senior Secured Bonds |
4,945 | 4,875 | ||||||||||
Subordinated Debt52.9% |
||||||||||||
Antero Resources Corp., 9.4%, 12/1/17(d) |
Upstream | 2,000 | 2,185 | 2,161 | ||||||||
Chaparral Energy Inc., 8.3%, 9/1/21(d) |
Upstream | 3,500 | 3,547 | 3,553 | ||||||||
Chaparral Energy Inc., 8.9%, 2/1/17(d) |
Upstream | 1,750 | 1,806 | 1,817 | ||||||||
NRG Energy, Inc., 8.3%, 9/1/20(d)(f) |
Power | 4,750 | 4,671 | 4,770 | ||||||||
Quicksilver Resources Inc., 7.1%, 4/1/16(d)(f) |
Upstream | 2,250 | 2,133 | 2,250 | ||||||||
Samson Investment Company, L+650, 1.5% LIBOR Floor, 12/27/12(d)(e) |
Upstream | 20,000 | 20,000 | 20,000 | ||||||||
SandRidge Energy, Inc., 7.5%, 3/15/21(d)(f) |
Upstream | 1,250 | 1,310 | 1,238 | ||||||||
Total Subordinated Debt |
35,652 | 35,789 | ||||||||||
Equity/Other33.5%(g) |
|
Number of Shares |
Amortized Cost |
Fair Value |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Fortune Creek Co-Invest I L.P., LP Interest(f)(h) |
Midstream | N/A | 22,591 | 22,681 | ||||||||
Total Equity/Other |
22,591 | 22,681 | ||||||||||
TOTAL INVESTMENTS135.4% |
$ | 91,808 | 91,642 | |||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(35.4)% |
(23,957 | ) | ||||||||||
NET ASSETS100.0% |
$ | 67,685 | ||||||||||
7
FS Energy and Power Fund
Consolidated Schedule of Investments (Continued)
As of December 31, 2011
(in thousands)
Total Return Swap | Notional Amount |
Unrealized Appreciation |
|||||
---|---|---|---|---|---|---|---|
Citibank TRS Facility (Note 8)(f) |
$ | 12,205 | $ | 121 | |||
- (a)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (b)
- Denominated
in U.S. dollars.
- (c)
- Fair
value determined by the Company's board of trustees (see Note 7).
- (d)
- Security
or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving
credit facility with Deutsche Bank AG, New York Branch (see Notes 10 and 11).
- (e)
- Position
or portion thereof unsettled as of December 31, 2011.
- (f)
- The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets.
- (g)
- Listed
investments may be treated as debt for GAAP or tax purposes.
- (h)
- Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of the acquisition date and as of December 31, 2011, respectively.
See notes to unaudited consolidated financial statements.
8
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Energy and Power Fund, or the Company, was formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced operations on July 18, 2011 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of its common shares of beneficial interest, or common shares, in its continuous public offering to persons who are not affiliated with the Company or the Company's investment adviser, FS Investment Advisor, LLC, or FS Advisor, a private investment firm that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and an affiliate of the Company. Prior to satisfying the minimum offering requirement, the Company had no operations except for matters relating to its organization and registration as a non-diversified, closed-end management investment company.
The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of March 31, 2012, the Company had two wholly-owned financing subsidiaries, FSEP Term Funding, LLC, or FSEP Funding, which was established on June 16, 2011, and EP Investments LLC, or EP Investments, which was established on June 24, 2011. The consolidated financial statements include both the Company's accounts and the accounts of its wholly-owned financing subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Since commencing its initial public offering and through May 11, 2012, the Company has sold 18,116,845 common shares (as adjusted for share distributions) for gross proceeds of $177,944. As of May 11, 2012, the Company had raised total gross proceeds of $198,148, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of the Company's board of trustees and certain individuals and entities affiliated with GSO Capital Partners LP, or GSO, the sub-adviser to FS Advisor, in a private placement conducted in April 2011 (see Note 4). During the three months ended March 31, 2012, the Company sold 7,013,305 common shares (as adjusted for share distributions) for gross proceeds of $68,894 at an average price per share of $9.82. The gross proceeds received during the three months ended March 31, 2012 include reinvested shareholder distributions of $696 for which the Company issued 77,778 common shares. During the period from April 1, 2012 to May 11, 2012, the Company sold 5,624,216 common shares for gross proceeds of $55,678 at an average price per share of $9.90.
The proceeds from the issuance of common shares as presented on the Company's consolidated statements of changes in net assets and consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $5,990 for the three months ended March 31, 2012.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
9
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (Continued)
GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company's interim unaudited consolidated financial statements should be read in conjunction with its audited financial statements as of and for the year ended December 31, 2011 included in the Company's annual report on Form 10-K. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The December 31, 2011 balance sheet and schedule of investments is derived from the 2011 audited financial statements. The Company has evaluated the impact of subsequent events through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.
Use of Estimates: The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.
Reclassifications: Certain amounts in the 2011 financial statements have been reclassified to conform to the classifications used to prepare the 2012 financial statements. These reclassifications had no material impact on the Company's consolidated financial position, results of operations or cash flows as previously reported.
Capital Gains Incentive Fee: Pursuant to the terms of the investment advisory and administrative services agreement the Company entered into with FS Advisor, the incentive fee on capital gains earned on liquidated investments of the Company's portfolio during operations prior to a liquidation of the Company is determined and payable in arrears as of the end of each calendar year. 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 each calendar year, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the investment advisory and administrative services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute for Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company's methodology for accruing for this incentive fee includes unrealized gains in the calculation of the capital gains incentive fee expense and related capital gains incentive fee payable. This accrual reflects the incentive fees that would be payable to FS Advisor if the Company's entire portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. During the year ended December 31, 2011, the Company accrued a capital gains incentive fee of $67 based on the performance of its
10
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)
portfolio, all of which was based on unrealized gains and none of which was payable to FS Advisor. During the three months ended March 31, 2012, the Company accrued an additional capital gains incentive fee of $519 based on the performance of its portfolio, of which $436 was based on unrealized gains and $83 was based on realized gains.
Note 3. Recently Issued Accounting Standards
In May 2011, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance represents the converged guidance of the FASB and the International Accounting Standards Board, or collectively, the Accounting Boards, on fair value measurement. The collective efforts of the Accounting Boards reflected in this guidance have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value" and enhanced disclosure requirements for investments that do not have readily determinable fair values. The Accounting Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments to the FASB codification in this guidance are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. The Company has implemented this guidance and it did not have a material impact on its consolidated financial statements, except for enhanced disclosures around fair value measurements.
Note 4. Related Party Transactions
The Company has entered into an investment advisory and administrative services agreement with FS Advisor. Pursuant to the investment advisory and administrative services agreement, FS Advisor is entitled to an annual base management fee of 2.0% of the average value of the Company's gross assets and an incentive fee based on the Company's performance.
The incentive fee consists of three parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0% of "pre-incentive fee net investment income" for the immediately preceding quarter and is subordinated to a preferred return on adjusted capital, as defined in the Company's investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized rate of 6.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains during operations, is an incentive fee on capital gains earned on liquidated investments from the Company's portfolio during operations prior to a liquidation of the Company and 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 equals the Company's realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gain incentive fees. The third part of the incentive fee, which is referred to as the subordinated liquidation
11
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (Continued)
incentive fee, equals 20.0% of the net proceeds from a liquidation of the Company in excess of adjusted capital, as calculated immediately prior to liquidation.
The Company commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of operations. During the three months ended March 31, 2012, FS Advisor earned $775 in base management fees. Management fees are paid on a quarterly basis in arrears. It is intended that such fees will be applied to offset the liability of Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate of FS Advisor, under the expense reimbursement agreement discussed below.
The Company accrues for the capital gains incentive fee on a quarterly basis by calculating such fee as if it were due and payable as of the end of such period. While the investment advisory and administrative services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related capital gains incentive fee payable. This accrual reflects the incentive fees that would be payable to FS Advisor if the Company's entire portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. During the three months ended March 31, 2012, the Company accrued a capital gains incentive fee of $519 based on the performance of its portfolio, of which $436 was based on unrealized gains and $83 was based on realized gains.
The Company also reimburses FS Advisor for expenses necessary for its performance of services related to administering and operating the Company, provided that such reimbursement is equal to the lower of FS Advisor's actual costs or the amount that the Company would be required to pay for comparable services in the same geographic location, and provided further that such costs are reasonably allocated to the Company on the basis of assets, revenues, time records or other reasonable methods. During the three months ended March 31, 2012, the Company incurred administrative services charges of $62 attributable to FS Advisor. Of these charges, $51 related to the allocation of costs of administrative personnel for services rendered to the Company by employees of FS Advisor and the remainder related to other reimbursable expenses. It is intended that such fees will be applied to offset Franklin Square Holdings' liability under the expense reimbursement agreement discussed below.
Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate of FS Advisor, has funded offering costs and organization costs in the amount of $418 and $279 for the three months ended March 31, 2012 and March 31, 2011, respectively. These costs have been recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par on the financial statements and the organization costs were charged to expense as incurred by the Company. The Company incurred organization costs of $93 during the three months ended March 31, 2011. Since inception, Franklin Square Holdings has funded $3,056 in offering and organization costs.
The dealer manager for the Company's public offering is FS2 Capital Partners, LLC, which is one of the Company's affiliates. During the three months ended March 31, 2012, FS2 Capital Partners, LLC,
12
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)
retained $1,276 for selling commissions and dealer manager fees in connection with the sale of the Company's common shares.
Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On July 18, 2011, the Company exceeded the minimum offering requirement. The Company paid total reimbursements of $1,022 to FS Advisor and its affiliates during the three months ended March 31, 2012. As of March 31, 2012, $942 remains reimbursable to FS Advisor and its affiliates under this arrangement and will be paid during the offering period, provided that 1.5% of gross proceeds raised are sufficient to cover such expenses. The reimbursements are recorded as a reduction of capital.
In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of approximately $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 will not tender these common shares for repurchase as long as FS Advisor remains the Company's investment adviser.
In April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals will not tender these common shares for repurchase as long as FS Advisor remains the Company's investment adviser. In connection with the same private placement, other individuals and entities affiliated with FS Advisor and certain members of the Company's board of trustees agreed to purchase 1,459,320 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 the satisfaction of the minimum offering requirement on July 18, 2011.
FS Advisor's senior management team is comprised of the same personnel as the senior management team of FB Income Advisor, LLC and FSIC II Advisor, LLC, the investment advisers to Franklin Square Holdings' other affiliated BDCs, FS Investment Corporation and FS Investment Corporation II, respectively. As a result, such personnel provide investment advisory services to each of the Company, FS Investment Corporation and FS Investment Corporation II. While none of FS Advisor, FB Income Advisor, LLC or FSIC II Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Investment Corporation and FS Investment Corporation II, respectively, any, or all, may do so in the future. FS Advisor intends to allocate investment opportunities in a fair and equitable manner consistent with the Company's investment objectives and strategies so that the Company will not be disadvantaged in relation to any other client of FS Advisor or its management team. It is possible, however, that some investment opportunities may be provided to FS Investment Corporation and/or FS Investment Corporation II rather than to the Company.
13
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)
Prior to February 14, 2012, Franklin Square Holdings agreed to reimburse the Company for expenses in an amount that was sufficient to ensure that, for tax purposes, the Company's net investment income and net capital gains were equal to or greater than the cumulative distributions paid to its shareholders in each quarter. This arrangement was designed to ensure that no portion of the Company's distributions represented a return of capital for its shareholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of the Company's expenses.
Pursuant to an Expense Support and Conditional Reimbursement Agreement, dated as of February 14, 2012, or the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company's distributions to shareholders will be paid from its offering proceeds or borrowings. However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Company's distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Company's cumulative distributions paid to its shareholders in each quarter, less the sum of the Company's net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, the Company will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Company's net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to shareholders.
The Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until it deems that the Company has achieved economies of scale sufficient to ensure that the Company bears a reasonable level of expenses in relation to its income. If the Company terminates the investment advisory and administrative services agreement with FS Advisor, the Company will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square Holdings within three years of the date of termination.
14
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (Continued)
The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by the Company's chairman, president and chief executive officer, Michael C. Forman, and the Company's vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Company's expenses in future quarters.
During the three months ended March 31, 2012, the Company accrued $801 for reimbursements that Franklin Square Holdings has agreed to pay. As discussed more fully above, it is intended that these reimbursements will be funded through the offset of fees otherwise payable by the Company to FS Advisor. Under the expense reimbursement agreement, such amounts may become subject to repayment by the Company in the future.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company has declared and paid on its common shares through March 31, 2012:
|
Distribution | ||||||
---|---|---|---|---|---|---|---|
For the Three Months Ended | Per Share | Amount | |||||
Fiscal 2012 |
|||||||
March 31, 2012(1) |
$ | 0.1555 | $ | 1,789 |
- (1)
- The amount of each per share distribution has been retroactively adjusted to reflect the share distribution declared in February 2012 as discussed below.
On April 9, 2012, the Company's board of trustees declared two regular semi-monthly cash distributions of $0.02605 per share each, which were paid on April 30, 2012 to shareholders of record on April 13, 2012 and April 30, 2012, respectively. On May 2, 2012, the Company's board of trustees declared two regular semi-monthly cash distributions of $0.02605 per share each, which will be paid on May 31, 2012 to shareholders of record on May 15, 2012 and May 30, 2012, respectively. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company's board of trustees.
The Company has adopted an "opt in" distribution reinvestment plan for its shareholders. As a result, if the Company makes a distribution, its shareholders will receive distributions in cash unless they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares of the Company.
The Company may fund its cash distributions to shareholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to it on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make distributions. The following table
15
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (Continued)
reflects the sources of the cash distributions that the Company has paid on its common shares during the three months ended March 31, 2012:
|
Three Months Ended March 31, 2012 |
||||||
---|---|---|---|---|---|---|---|
Source of Distribution | Distribution Amount |
Percentage | |||||
Offering proceeds |
$ | | | ||||
Borrowings |
| | |||||
Net investment income (prior to expense reimbursement)(1) |
649 | 36 | % | ||||
Capital gains proceeds from the sale of assets |
339 | 19 | % | ||||
Non-capital gains proceeds from the sale of assets |
| | |||||
Distributions on account of preferred and common equity |
| | |||||
Expense reimbursement from sponsor |
801 | 45 | % | ||||
Total |
$ | 1,789 | 100 | % | |||
- (1)
- During the three months ended March 31, 2012, 84% of the Company's gross investment income was attributable to cash interest earned and 16% was attributable to non-cash accretion of discount.
The Company's net investment income on a tax-basis for the three months ended March 31, 2012 was $1,450. The Company distributed all of its tax-basis net investment income earned as of March 31, 2012.
The difference between the Company's GAAP-basis net investment income and its tax-basis net investment income is due to the accrual for GAAP purposes of income on a limited partnership interest, the tax-basis amortization of organization and start-up costs incurred prior to the commencement of the Company's operations, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company, the inclusion of realized gains on the total return swap in tax-basis net investment income and the accretion of discount on the total return swap. The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2012:
|
Three Months Ended March 31, 2012 |
|||
---|---|---|---|---|
GAAP-basis net investment income |
$ | 1,540 | ||
Accrued income on limited partnership |
(657 | ) | ||
Amortization of organizational costs |
(6 | ) | ||
Reversal of incentive fee accrual on unrealized gains |
436 | |||
GAAP realized gains on total return swap |
119 | |||
Accretion of discount on total return swap |
18 | |||
Tax-basis net investment income |
$ | 1,450 | ||
16
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 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 a Form 1099-DIV.
The following table reflects the share distribution per share that the Company has declared on its common shares to date:
Date Declared | Record Date | Distribution Date | Distribution Percentage |
Shares Issued | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal 2012 |
|||||||||||
February 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 deduction of 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 shares outstanding, thereby reducing the Company's net asset value per share. However, because the share distribution was issued to all existing shareholders 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 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 existing shareholders. As the share distribution did not change any shareholder's proportionate interest in the Company, it is not expected to represent a taxable distribution. Specific tax characteristics of all distributions are reported to shareholders annually on Form 1099-DIV.
17
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (Continued)
As of March 31, 2012 and December 31, 2011, the components of accumulated earnings on a tax-basis were as follows:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||
---|---|---|---|---|---|---|---|
Distributable ordinary income |
$ | | $ | | |||
Limited partnership receivable |
262 | | |||||
Incentive fee accrual on unrealized gains |
(503 | ) | (67 | ) | |||
Unamortized organizational costs |
(332 | ) | (338 | ) | |||
Net unrealized appreciation (depreciation) on investments and total return swap and loss on foreign currency(1) |
2,433 | (89 | ) | ||||
|
$ | 1,860 | $ | (494 | ) | ||
- (1)
- As of March 31, 2012 and December 31, 2011, the gross unrealized appreciation on the Company's investments and total return swap was $2,868 and $761, respectively. As of March 31, 2012 and December 31, 2011, the gross unrealized depreciation on the Company's investments and loss on foreign currency was $435 and $850, respectively.
The aggregate cost of the Company's investments for federal income tax purposes totaled $143,051 and $91,808 as of March 31, 2012 and December 31, 2011, respectively. The aggregate net unrealized appreciation (depreciation) on a tax-basis, including the Company's total return swap, or TRS, with Citibank, N.A., or Citibank, was $2,447 and $(72) as of March 31, 2012 and December 31, 2011, respectively.
Note 6. Investment Portfolio
The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of March 31, 2012 and December 31, 2011:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||
Senior Secured LoansFirst Lien |
$ | 41,484 | $ | 42,420 | 29 | % | $ | 22,694 | $ | 22,720 | 25 | % | |||||||
Senior Secured LoansSecond Lien |
5,940 | 5,802 | 4 | % | 5,926 | 5,577 | 6 | % | |||||||||||
Senior Secured Bonds |
1,027 | 1,032 | 1 | % | 4,945 | 4,875 | 5 | % | |||||||||||
Subordinated Debt |
51,485 | 52,145 | 36 | % | 35,652 | 35,789 | 39 | % | |||||||||||
Equity/Other |
43,510 | 43,723 | 30 | % | 22,591 | 22,681 | 25 | % | |||||||||||
|
$ | 143,446 | $ | 145,122 | 100 | % | $ | 91,808 | $ | 91,642 | 100 | % | |||||||
- (1)
- Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
The Company does not "control" and is not an "affiliate" of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to
18
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)
"control" a portfolio company if it owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if it owned 5% or more of its voting securities.
The Company's investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2012, the Company had two such investments with an aggregate unfunded commitment of $18,666.
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2012 and December 31, 2011:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Industry Classification | Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
|||||||||
Upstream |
$ | 69,545 | 48 | % | $ | 36,027 | 39 | % | |||||
Midstream |
32,737 | 22 | % | 25,169 | 28 | % | |||||||
Downstream |
11,057 | 8 | % | 942 | 1 | % | |||||||
Service & Equipment |
19,018 | 13 | % | 15,560 | 17 | % | |||||||
Power |
12,765 | 9 | % | 13,944 | 15 | % | |||||||
Total |
$ | 145,122 | 100 | % | $ | 91,642 | 100 | % | |||||
Note 7. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.
Level 3: Inputs that are unobservable for an asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
19
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (Continued)
As of March 31, 2012 and December 31, 2011, the Company's investments were categorized as follows in the fair value hierarchy:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Valuation Inputs | Investments | Total Return Swap | Investments | Total Return Swap | |||||||||
Level 1Price quotations in active markets |
$ | | $ | | $ | | $ | | |||||
Level 2Significant other observable inputs |
| | | | |||||||||
Level 3Significant unobservable inputs |
145,122 | 421 | 91,642 | 121 | |||||||||
|
$ | 145,122 | $ | 421 | $ | 91,642 | $ | 121 | |||||
The Company's investments as of March 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued all of its investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by the service. The Company's three equity/other investments were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such interests, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows and net income. One of the Company's subordinated debt investments, which was purchased near March 31, 2012, was valued at cost, as the Company's board of trustees determined that the cost of the investment was the best indication of its fair value. The Company valued its TRS in accordance with the agreements governing such arrangement. Pursuant to those agreements, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the Company for review and testing. The Company's valuation committee and board of trustees review and approve the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent the Company's valuation committee or board of trustees has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on the Company's TRS, see Note 8.
The Company's investments as of December 31, 2011 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued all of its investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by the service. The Company's one equity investment and one of its subordinated debt investments, both of which were purchased near December 31, 2011, were valued at cost, as the Company's board of trustees determined that the cost of the investments was the best indication of their fair value. The Company valued its TRS in accordance with the agreements governing such arrangement. Pursuant to those agreements, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense
20
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)
and certain other expenses incurred under the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the Company for review and testing. The Company's valuation committee and board of trustees review and approve the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent the Company's valuation committee or board of trustees has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on the Company's TRS, see Note 8.
The Company periodically benchmarks the bid and ask prices received from the third-party pricing service against the actual prices at which it purchases and sells its investments. Based on the results of the benchmark analysis and the Company's experience in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through its third-party pricing service, including the use of an independent valuation firm. The Company will periodically benchmark the valuations provided by the independent valuation firm against the prices at which it purchases and sells its investments. The Company's valuation committee and board of trustees reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company's valuation process.
The following is a reconciliation for the three months ended March 31, 2012 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
|
For the three months ended March 31, 2012 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Senior Secured Loans First Lien |
Senior Secured Loans Second Lien |
Senior Secured Bonds |
Subordinated Debt |
Equity/ Other |
Total | |||||||||||||
Fair value at beginning of period |
$ | 22,720 | $ | 5,577 | $ | 4,875 | $ | 35,789 | $ | 22,681 | $ | 91,642 | |||||||
Accretion of discount (amortization of premium) |
28 | 18 | 6 | (10 | ) | 395 | 437 | ||||||||||||
Net realized gain |
18 | | 312 | | | 330 | |||||||||||||
Net change in unrealized appreciation (depreciation) |
911 | 211 | 75 | 522 | 123 | 1,842 | |||||||||||||
Purchases |
23,157 | | | 35,844 | 20,536 | 79,537 | |||||||||||||
Paid-in-kind interest |
| | | | | | |||||||||||||
Sales and redemptions |
(4,414 | ) | (4 | ) | (4,236 | ) | (20,000 | ) | (12 | ) | (28,666 | ) | |||||||
Net transfers in or out of Level 3 |
| | | | | | |||||||||||||
Fair value at end of period |
$ | 42,420 | $ | 5,802 | $ | 1,032 | $ | 52,145 | $ | 43,723 | $ | 145,122 | |||||||
The amount of total gains for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date |
$ | 875 | $ | 211 | $ | 91 | $ | 522 | $ | 123 | $ | 1,822 | |||||||
21
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (Continued)
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets as of March 31, 2012 were as follows:
Type of Investment | Fair Value at March 31, 2012(1) |
Valuation Technique(2) | Unobservable Input | Range | |||||
---|---|---|---|---|---|---|---|---|---|
Equity/Other |
$ | 43,723 | Market Comparables | Market Yield (%) | 15.5% - 16.0% | ||||
|
Discounted Cash Flow | Discount Rate (%) | 11.5% - 17.5% | ||||||
|
Option Valuation Model | Volatility (%) | 42.0% - 42.0% |
- (1)
- Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using an independent third-party pricing service, which
provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by the service. The TRS was valued in accordance with the agreements
governing such arrangement as discussed above. One of the Company's subordinated debt investments, which was purchased near March 31, 2012, was valued at cost ($4,964), as the Company's board
of trustees determined that the cost of the investment was the best indication of its fair value.
- (2)
- For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.
Note 8. Total Return Swap
On August 11, 2011, EP Investments entered into a TRS for one or more senior secured floating rate loans with Citibank. On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of loans which may be subject to the TRS from $25,000 to $100,000.
A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.
The TRS with Citibank enables the Company, through its ownership of EP Investments, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to EP Investments borrowing funds to acquire loans and incurring interest expense to a lender.
22
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 8. Total Return Swap (Continued)
The obligations of EP Investments under the TRS are non-recourse to the Company and the Company's exposure under the TRS is limited to the value of the Company's investment in EP Investments, which generally will equal the value of cash collateral provided by EP Investments under the TRS. Pursuant to the terms of the TRS, EP Investments may select one or more loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $100,000, or such greater amount as may be agreed to by Citibank. Loans proposed by EP Investments to be included in the TRS will be approved or rejected by Citibank, in its sole discretion, on a trade-by-trade basis. EP Investments is required to initially cash collateralize a percentage of each loan (such percentage to be proposed in each instance by EP Investments and accepted or rejected by Citibank in its sole discretion) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, EP Investments has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral nor any other assets of EP Investments are available to pay the Company's debts.
Pursuant to the terms of an investment management agreement that the Company has entered into with EP Investments, the Company acts as the manager of the rights and obligations of EP Investments under the TRS, including selecting the specific loans to be included in the TRS. Accordingly, the loans selected by EP Investments for purposes of the TRS are selected by the Company in accordance with its investment objectives and strategy to generate current income and long-term capital appreciation. In addition, pursuant to the terms of the TRS, EP Investments may select any loan or obligation available in the market to be included in the TRS that meets the obligation criteria set forth in the agreements between EP Investments and Citibank which collectively establish the TRS and are collectively referred to herein as the TRS Agreement.
Each loan included in the TRS must meet criteria described in the TRS Agreement, including a requirement that each loan be rated by Moody's and S&P and quoted by a nationally-recognized pricing service. EP Investments receives from Citibank all interest and fees payable in respect of the loans included in the TRS. EP Investments pays to Citibank interest at a rate equal to the one-month London Interbank Offered Rate, or LIBOR, + 1.30% per annum (which rate was one-month LIBOR + 1.35% per annum prior to the increase in the size of the TRS to $100,000). In addition, upon the termination or repayment of any loan subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.
Under the terms of the TRS, EP Investments may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The amount of collateral that may be required to be posted by EP Investments is determined primarily on the basis of the aggregate value of the underlying loans. The limit on the additional collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included in the TRS).
The Company has no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. The Company may, but is not obligated to, increase its equity investment
23
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 8. Total Return Swap (Continued)
in EP Investments for the purpose of funding any additional collateral or payment obligations for which EP Investments may become obligated during the term of the TRS. If the Company does not make any such additional investment in EP Investments and EP Investments fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by EP Investments under the TRS.
Citibank may terminate the TRS on or after May 11, 2013. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon providing no more than 30 days, and no less than 7 days, prior notice to Citibank. EP Investments will pay Citibank customary fees in connection with the establishment and maintenance of the TRS.
The value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to EP Investments. As of March 31, 2012 and December 31, 2011, the fair value of the TRS was $421 and $121, respectively. The fair value of the TRS is reflected as an unrealized gain on the consolidated balance sheets. The change in value of the TRS is reflected in the statements of operations as net change in unrealized appreciation on total return swap. As of March 31, 2012, EP Investments had selected 8 underlying loans with a total notional amount of $19,042 and posted $8,168 in cash collateral held by Citibank (of which only $7,966 was required to be posted), which is reflected in due from counterparty on the consolidated balance sheet. As of December 31, 2011, EP Investments had selected 6 underlying loans with a total notional amount of $12,205 and posted $7,878 in cash collateral held by Citibank (of which only $5,096 was required to be posted), which is reflected in due from counterparty on the consolidated balance sheet.
The Company incurred costs of $16 in connection with obtaining the TRS, which the Company has recorded as deferred financing costs on its consolidated balance sheet and amortizes to interest expense over the life of the TRS. As of March 31, 2012, $3 of such deferred financing costs have yet to be amortized to interest expense.
For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by EP Investments under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.
Further, for purposes of Section 55(a) under the 1940 Act, the Company treats each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.
24
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 8. Total Return Swap (Continued)
The following is a summary of the underlying loans subject to the TRS as of March 31, 2012:
Underlying Loan(1) | Industry | Notional Amount |
Market Value |
Unrealized Appreciation / (Depreciation) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Allison Transmission, Inc., L+350, 8/30/17(2) |
Service & Equipment | $ | 1,844 | $ | 1,974 | $ | 130 | |||||
Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17 |
Service & Equipment | 2,911 | 2,874 | (37 | ) | |||||||
BRSP LLC, L+450, 3.0% LIBOR Floor, 6/15/14 |
Power | 2,412 | 2,442 | 30 | ||||||||
Dynegy Holdings Inc. (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16 |
Power | 2,998 | 3,061 | 63 | ||||||||
Hercules Offshore, 7.1%, 4/1/17(2) |
Service & Equipment | 1,000 | 999 | (1 | ) | |||||||
La Paloma Generating Company, L+550, 1.5% LIBOR Floor, 5/15/18 |
Power | 1,649 | 1,717 | 68 | ||||||||
Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17 |
Upstream | 963 | 989 | 26 | ||||||||
Willbros Group, Inc., L+750, 2.0% LIBOR Floor, 6/30/14 |
Service & Equipment | 5,265 | 5,232 | (33 | ) | |||||||
TOTAL |
$ | 19,042 | $ | 19,288 | 246 | |||||||
|
Total TRS Accrued Income and Liabilities: | 175 | ||||||||||
|
Total TRS Fair Value: | $ | 421 | |||||||||
- (1)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (2)
- The investment is not a qualifying asset under the 1940 Act. A BDC may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets.
The following is a summary of the underlying loans subject to the TRS as of December 31, 2011:
Underlying Loan(1)(2) | Industry | Notional Amount |
Market Value |
Unrealized Appreciation / (Depreciation) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Allison Transmission, Inc., L+275, 8/15/14 |
Service & Equipment | $ | 1,844 | $ | 1,934 | $ | 90 | |||||
Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17 |
Service & Equipment | 3,007 | 2,893 | (114 | ) | |||||||
BRSP LLC, L+450, 3.0% LIBOR Floor, 6/15/14 |
Power | 2,413 | 2,431 | 18 | ||||||||
La Paloma Generating Company, L+550, 1.5% LIBOR Floor, 5/15/18 |
Power | 1,653 | 1,691 | 38 | ||||||||
Sheridan Production Co., LLC, L+450, 2.0% LIBOR Floor, 4/20/17 |
Upstream | 973 | 1,000 | 27 | ||||||||
Willbros Group, Inc., L+750, 2.0% LIBOR Floor, 6/30/14 |
Service & Equipment | 2,315 | 2,290 | (25 | ) | |||||||
TOTAL |
$ | 12,205 | $ | 12,239 | 34 | |||||||
|
Total TRS Accrued Income and Liabilities: | 87 | ||||||||||
|
Total TRS Fair Value: | $ | 121 | |||||||||
- (1)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (2)
- All investments are qualifying assets under the 1940 Act. A BDC may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets.
25
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 9. Share Repurchase Program
Beginning in the fourth calendar quarter of 2012, and on a quarterly basis thereafter, the Company intends to offer to repurchase common shares on such terms as may be determined by the Company's board of trustees in its complete and absolute discretion unless, in the judgment of the independent trustees of the Company's board of trustees, such repurchases would not be in the best interests of the Company's shareholders or would violate applicable law. The Company will conduct such repurchase offers in accordance with the requirements of Rule 13e-4 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the 1940 Act. In months in which the Company repurchases common shares, it intends to conduct repurchases on the same date that it holds its first semi-monthly closing for the sale of common shares in its public offering. The offer to repurchase common shares will be conducted solely through tender offer materials mailed to each shareholder.
The Company's board of trustees will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase common shares and under what terms:
-
- the effect of such repurchases on the Company's qualification as a RIC (including the consequences of any necessary asset
sales);
-
- the liquidity of its assets (including fees and costs associated with disposing of assets);
-
- the Company's investment plans and working capital requirements;
-
- the relative economies of scale with respect to the Company's size;
-
- the Company's history in repurchasing common shares or portions thereof; and
-
- the condition of the securities markets.
The Company currently intends to limit the number of common shares to be repurchased during any calendar year to the number of common shares it can repurchase with the proceeds it receives from the sale of common shares under its distribution reinvestment plan. At the discretion of the Company's board of trustees, the Company may also use cash on hand, cash available from borrowings and cash from liquidation of securities investments as of the end of the applicable period to repurchase common shares. In addition, the Company will limit the number of common shares to be repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of common shares that the Company offers to repurchase may be less in light of the limitations noted above. The Company will offer to repurchase such common shares on each date of repurchase at a price equal to 90% of the current offering price in effect on each date of repurchase. The Company's board of trustees may amend, suspend or terminate the repurchase program at any time, upon 30 days' notice.
Note 10. Revolving Credit Facility
On June 24, 2011, FSEP Funding entered into a revolving credit facility, or the credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank. Deutsche Bank is the sole lender and serves as administrative agent under the credit facility. The credit facility provides for borrowings in an aggregate amount up to $50,000 on a committed basis.
26
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 10. Revolving Credit Facility (Continued)
The Company may contribute cash or securities to FSEP Funding from time to time and will retain a residual interest in any assets contributed through its ownership of FSEP Funding. FSEP Funding may purchase additional securities from various sources. FSEP Funding has appointed the Company to manage its portfolio of securities pursuant to the terms of an investment management agreement. FSEP Funding's obligations to Deutsche Bank are secured by a first priority security interest in substantially all of the assets of FSEP Funding, including its portfolio of securities. The obligations of FSEP Funding under the credit facility are non-recourse to the Company.
Pricing under the credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, plus a spread of 1.60% per annum for the relevant period. Interest is payable quarterly in arrears. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2013.
As of March 31, 2012, $50,000 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. The Company incurred costs of $257 in connection with obtaining the credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheet and amortizes to interest expense over the life of the credit facility. As of March 31, 2012, $177 of such deferred financing costs have yet to be amortized to interest expense.
The effective interest rate under the credit facility was 2.08% as of March 31, 2012. Interest is paid quarterly in arrears, and commenced November 20, 2011. The Company recorded interest expense of $263 for the three months ended March 31, 2012, of which $36 related to the amortization of deferred financing costs and $20 related to commitment fees on the unused portion of the credit facility. The Company paid $173 in interest expense for the three months ended March 31, 2012. The average borrowings under the credit facility for the three months ended March 31, 2012 were $39,325, with a weighted average interest rate of 2.31%, which includes commitment fees on the unused portion of the credit facility.
Borrowings under the credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to FSEP Funding varies depending upon the types of assets in FSEP Funding's portfolio. The occurrence of certain events described as "Super-Collateralization Events" in the credit agreement that governs the credit facility, or a decline in the Company's net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation, (i) certain key employees ceasing to be directors, principals, officers or investment managers of GSO; (ii) the bankruptcy or insolvency of GSO or FS Advisor; (iii) GSO ceasing to act as the Company's sub-adviser or FS Advisor ceasing to act as the Company's investment adviser; (iv) the Company ceasing to act as FSEP Funding's investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value above a specified threshold; and (v) the Company, GSO or FS Advisor committing fraud or other illicit acts in its or their investment advisory capacities.
In connection with the credit facility, FSEP Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in
27
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 10. Revolving Credit Facility (Continued)
financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the credit facility exceeding the applicable advance rates; (c) the purchase by FSEP Funding of certain ineligible assets; (d) the insolvency or bankruptcy of FSEP Funding or the Company; (e) the Company ceasing to act as investment manager of FSEP Funding's assets; (f) the decline of the Company's net asset value below a specified threshold; and (g) fraud or other illicit acts by the Company, FS Advisor or GSO in its or their investment advisory capacities. During the continuation of an event of default, FSEP Funding must pay interest at a default rate.
Borrowings of FSEP Funding will be considered borrowings of the Company for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Note 11. FSEP Term Funding, LLC
The financial statements of FSEP Funding are maintained separately from those of the Company. The assets of FSEP Funding are pledged as collateral supporting the amounts outstanding under the credit facility and, as such, are not available to pay the debts of the Company. The following is the balance sheet of FSEP Funding as of March 31, 2012 and December 31, 2011:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||
---|---|---|---|---|---|---|---|
Assets |
|||||||
Investments, at fair value (amortized cost$82,220 and $65,152, respectively) |
$ | 83,429 | 64,995 | ||||
Cash |
18,552 | 953 | |||||
Interest receivable |
672 | 633 | |||||
Deferred financing costs |
177 | 213 | |||||
Total assets |
$ | 102,830 | $ | 66,794 | |||
Liabilities |
|||||||
Payable for investments purchased |
$ | 54 | $ | 23,503 | |||
Credit facility payable |
50,000 | 20,518 | |||||
Due to FS Energy and Power Fund |
36 | 50 | |||||
Interest payable |
163 | 109 | |||||
Accrued expenses |
4 | 12 | |||||
Total liabilities |
50,257 | 44,192 | |||||
Member's equity |
52,573 | 22,602 | |||||
Total liabilities and member's equity |
$ | 102,830 | $ | 66,794 | |||
28
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 12. Financial Highlights
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2012 and the year ended December 31, 2011.
|
Three Months Ended March 31, 2012 (Unaudited) |
Year Ended December 31, 2011 |
|||||
---|---|---|---|---|---|---|---|
Per Share Data(1): |
|||||||
Net asset value, beginning of period |
$ | 8.74 | $ | 8.91 | |||
Results of operations(2) |
|||||||
Net investment income |
0.14 | 0.16 | |||||
Net realized and unrealized appreciation (depreciation) on investments and total return swap and loss on foreign currency |
0.24 | 0.07 | |||||
Net increase (decrease) in net assets resulting from operations |
0.38 | 0.23 | |||||
Shareholder distributions(3) |
|||||||
Distributions from net investment income |
(0.13 | ) | (0.27 | ) | |||
Distributions from net realized gain on investments |
(0.03 | ) | (0.01 | ) | |||
Net decrease in net assets resulting from shareholder distributions |
(0.16 | ) | (0.28 | ) | |||
Capital share transactions |
|||||||
Issuance of common shares(4) |
0.07 | 0.10 | |||||
Offering costs(2) |
(0.04 | ) | (0.39 | ) | |||
Reimbursement to investment adviser(2) |
(0.09 | ) | (0.26 | ) | |||
Capital contributions of investment adviser(2) |
0.04 | 0.43 | |||||
Net increase (decrease) in net assets resulting from capital share transactions |
(0.02 | ) | (0.12 | ) | |||
Net asset value, end of period |
$ | 8.94 | $ | 8.74 | |||
Shares outstanding, end of period |
14,759,948 | 7,746,643 | |||||
Total return(5) |
4.04 | % | 1.23 | % | |||
Ratio/Supplemental Data: |
|||||||
Net assets, end of period |
$ | 131,921 | $ | 67,685 | |||
Ratio of net investment income to average net assets(6) |
1.59 | % | 1.83 | % | |||
Ratio of incentive fees to average net assets(6) |
0.54 | % | 0.19 | % | |||
Ratio of interest expense to average net assets(6) |
0.28 | % | 0.79 | % | |||
Ratio of operating expenses to average net assets(6) |
2.04 | % | 4.11 | % | |||
Ratio of expenses reimbursed by sponsor to average net assets(6) |
(0.83 | %) | (2.03 | %) | |||
Ratio of net operating expenses to average net assets(6) |
1.21 | % | 2.08 | % | |||
Portfolio turnover(6) |
24.86 | % | 12.77 | % | |||
- (1)
- The share information utilized to determine per share data has been retroactively adjusted to reflect the share distribution discussed in Note 5.
29
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (Continued)
(in thousands, except share and per share amounts)
Note 12. Financial Highlights (Continued)
- (2)
- The
per share data was derived by using the weighted average shares outstanding during the three months ended March 31, 2012 and the period from
July 18, 2011 (commencement of operations) through December 31, 2011.
- (3)
- The
per share data for distributions reflects the actual amount of distributions paid per share (as adjusted for share distributions) during the period.
- (4)
- The
issuance of common shares on a per share basis reflects the incremental net asset value changes as a result of the issuance of common shares in the
Company's continuous public offering and pursuant to the Company's distribution reinvestment plan. The issuance of common shares at an offering price, net of sales commissions and dealer manager fees,
that is greater than the net asset value per share results in an increase in net asset value per share.
- (5)
- The
total return for the three months ended March 31, 2012 was calculated by taking the net asset value as of March 31, 2012, adding the cash
distributions per share which were declared during the period (as adjusted for share distributions) and dividing the total by the net asset value per share on December 31, 2011. The 2011 total
return is based on an initial investment at $8.91 per share, which represents the initial offering price per share, net of sales commissions and dealer manager fees, after taking into account the
share distribution to shareholders described in Note 5. The 2011 total return was calculated by taking the net asset value per share as of December 31, 2011, adding the cash
distributions per share which were declared during the calendar year and dividing the total by the net asset value per share at the beginning of the period. The total return does not consider the
effect of the sales load from the sale of the Company's common shares. The total return includes the effect of the issuance of common shares at a net offering price that is greater than net asset
value per share, which causes an increase in net asset value per share.
- (6)
- Weighted average net assets during the three months ended March 31, 2012 and the period from July 18, 2011 (commencement of operations) through December 31, 2011 are used for this calculation. Ratios and portfolio turnover are not annualized.
Note 13. Subsequent Events
On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of loans which may be subject to the TRS from $25,000 to $100,000. In connection with such amendment, the date that Citibank may terminate the TRS changed from May 11, 2012 to May 11, 2013, the interest rate paid by EP Investments to Citibank changed from one-month LIBOR + 1.35% per annum to one-month LIBOR + 1.30% per annum and the Company's guarantee of the obligations of EP Investments under the TRS has been terminated and released.
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except share and per share amounts)
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us," "our" and the "Company" refer to FS Energy and Power Fund.
Forward-Looking Statements
The following discussion should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q.
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
-
- our future operating results;
-
- our business prospects and the prospects of our portfolio companies;
-
- the impact of the investments that we expect to make;
-
- the ability of our portfolio companies to achieve their objectives;
-
- our current and expected financings and investments;
-
- the adequacy of our cash resources, financing sources and working capital;
-
- the timing and amount of cash flows, distributions and dividends, if any, from our portfolio companies;
-
- our contractual arrangements and relationships with third parties;
-
- actual and potential conflicts of interest with FS Advisor, FB Income Advisor, LLC, FSIC II Advisor, LLC, FS
Investment Corporation, FS Investment Corporation II, GSO or any of their affiliates;
-
- the dependence of our future success on the general economy and its effect on the industries in which we invest;
-
- our use of financial leverage;
-
- the ability of FS Advisor to locate suitable investments for us and to monitor and administer our investments;
-
- the ability of FS Advisor or its affiliates to attract and retain highly talented professionals;
-
- our ability to qualify and maintain our qualification as a RIC and as a BDC;
-
- the impact on our business of the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules and
regulations issued thereunder;
-
- the effect of changes to tax legislation and our tax position; and
-
- the tax status of the enterprises in which we invest.
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
31
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:
-
- changes in the economy;
-
- risks associated with possible disruption in our operations or the economy generally due to terrorism or natural
disasters; and
-
- future changes in laws or regulations and conditions in our operating areas.
We have based the forward-looking statements included in this quarterly report on Form 10-Q on information available to us on the date of this quarterly report on Form 10-Q, and we assume no obligation to update any such forward-looking statements. Except as required by the federal securities laws, we undertake no obligation to revise or update any forward-looking statements, whether as a result of new information, future events or otherwise. Shareholders are advised to consult any additional disclosures that we may make directly to shareholders or through reports that we may file in the future with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K. The forward-looking statements and projections contained in this quarterly report on Form 10-Q are excluded from the safe harbor protection provided by Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act.
Overview
We were formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced operations on July 18, 2011 upon raising gross proceeds in excess of $2,500 from sales of our common shares in our continuous public offering to persons who are not affiliated with us or FS Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be treated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under the Code. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization and registration as a non-diversified, closed-end management investment company.
Our investment policy is to invest, under normal circumstances, at least 80% of our assets in securities of energy and power, or Energy, related companies. We consider Energy companies to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power. This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such change.
Our investment objectives are to generate current income and long-term capital appreciation. Our portfolio is comprised primarily of income-oriented securities, which refers to debt securities and income-oriented preferred and common equity interests, of privately-held Energy companies within the United States. We currently intend to weight our portfolio towards senior and subordinated debt. In addition to investments purchased from other dealers or investors in the secondary market, we expect to invest in primary market transactions and originated investments as this will provide us with the ability to tailor investments to best match a project's or company's needs with our investment objectives. Our portfolio may also be comprised of select income-oriented preferred or common equity interests, which refers to equity interests that pay consistent, high-yielding dividends, that we believe will produce both current income and long-term capital appreciation. These income-oriented preferred or common equity interests may include interests in master limited partnerships. In connection with certain of our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. Once we raise sufficient capital, we expect that our investments will generally range between $5,000 and $25,000 each, although investments may vary as the size of our
32
capital base changes and will ultimately be at the discretion of FS Advisor, subject to oversight by our board of trustees. Prior to raising sufficient capital, we may make smaller investments due to liquidity constraints.
Our investment activities are managed by FS Advisor and supervised by our board of trustees, a majority of whom are independent. Under our investment advisory and administrative services agreement, we have agreed to pay FS Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. See "Contractual Obligations." FS Advisor has engaged GSO to act as our investment sub-adviser. GSO is a subsidiary of The Blackstone Group L.P. GSO assists FS Advisor in identifying investment opportunities and makes investment recommendations for approval by FS Advisor according to asset allocation and other guidelines set by FS Advisor.
Revenues
The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain on investments, net realized gain on total return swap, net unrealized appreciation and depreciation on investments, net unrealized appreciation and depreciation on total return swap and net unrealized gains and losses on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain on investments is the difference between the proceeds received from dispositions of portfolio investments and their stated cost. Net realized gain on total return swap is the net monthly settlement payments received on the TRS. Net unrealized appreciation and depreciation on investments is the net change in the fair value of our investment portfolio. Net unrealized appreciation and depreciation on total return swap is the net change in fair value of our total return swap. Net unrealized gains and losses on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.
We may generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.
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 also reimburse FS Advisor for its performance of services related to our administration and operation, provided that such reimbursement must be the lower of FS Advisor's actual costs or the amount that we would be required to pay for comparable administrative services in the same geographic location, and provided further that such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. We do not reimburse FS Advisor for any services for which it receives a separate fee, or for rent, depreciation, utilities, capital equipment or other administrative items allocated to a controlling person of FS Advisor. We bear all other expenses of our operations and transactions, including (without limitation) fees and expenses relating to:
-
- corporate and organizational expenses relating to offerings of our common shares, subject to limitations included in the investment advisory and administrative services agreement;
33
-
- the cost of calculating our net asset value, including the cost of any third-party pricing or valuation services;
-
- the cost of effecting sales and repurchases of our common shares and other securities;
-
- investment advisory fees;
-
- fees payable to third parties relating to, or associated with, making investments and valuing investments, including fees
and expenses associated with performing due diligence reviews of prospective investments;
-
- interest payments on our debt or related obligations;
-
- transfer agent and custodial fees;
-
- fees and expenses associated with marketing efforts;
-
- federal and state registration fees;
-
- federal, state and local taxes;
-
- fees and expenses of trustees not also serving in an executive officer capacity for us or FS Advisor;
-
- costs of proxy statements, shareholders' reports and notices;
-
- fidelity bond, trustees and officers/errors and omissions liability insurance and other insurance premiums;
-
- direct costs such as printing, mailing, long distance telephone and staff;
-
- fees and expenses associated with independent audits and outside legal costs, including compliance with the Sarbanes-Oxley
Act of 2002;
-
- costs associated with our reporting and compliance obligations under the 1940 Act and applicable federal and state
securities laws;
-
- brokerage commissions for the purchase and sale of our investments;
-
- costs associated with our chief compliance officer; and
-
- all other expenses incurred by FS Advisor, GSO or us in connection with administering our business, including expenses incurred by FS Advisor or GSO in performing administrative services for us and administrative personnel paid by FS Advisor, to the extent they are not controlling persons of FS Advisor or any of its affiliates, subject to the limitations included in the investment advisory and administrative services agreement.
Portfolio Investment Activity For The Three Months Ended March 31, 2012 and For The Year Ended December 31, 2011
During the three months ended March 31, 2012, we made investments in portfolio companies totaling $79,537. During the same period we sold investments totaling $4,248 and received principal repayments of $24,418.
As of March 31, 2012, our investment portfolio, with a total fair value of $145,122, consisted of interests in 27 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $318,716. As of March 31, 2012, the investments in our portfolio were purchased at an average price of 99.3% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 63.0% of our portfolio based on the fair value of our investments) was B2 based upon
34
the Moody's scale and our estimated gross annual portfolio yield, prior to leverage, was 9.9% based upon the purchase price of our investments.
As of December 31, 2011, our investment portfolio, with a total fair value of $91,642, consisted of interests in 21 portfolio companies. The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $374,800. As of December 31, 2011, the investments in our portfolio were purchased at an average price of 99.5% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 48.1% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage, was 9.8% based upon the purchase price of our investments.
The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2012 and December 31, 2011:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||
Senior Secured LoansFirst Lien |
$ | 41,484 | $ | 42,420 | 29 | % | $ | 22,694 | $ | 22,720 | 25 | % | |||||||
Senior Secured LoansSecond Lien |
5,940 | 5,802 | 4 | % | 5,926 | 5,577 | 6 | % | |||||||||||
Senior Secured Bonds |
1,027 | 1,032 | 1 | % | 4,945 | 4,875 | 5 | % | |||||||||||
Subordinated Debt |
51,485 | 52,145 | 36 | % | 35,652 | 35,789 | 39 | % | |||||||||||
Equity/Other |
43,510 | 43,723 | 30 | % | 22,591 | 22,681 | 25 | % | |||||||||||
|
$ | 143,446 | $ | 145,122 | 100 | % | $ | 91,808 | $ | 91,642 | 100 | % | |||||||
- (1)
- Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
We do not "control" and are not an "affiliate" of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to "control" a portfolio company if we owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if we owned 5% or more of its voting securities.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2012, we held two such investments with an aggregate unfunded commitment of $18,666.
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2012 and December 31, 2011:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Industry Classification | Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
|||||||||
Upstream |
$ | 69,545 | 48 | % | $ | 36,027 | 39 | % | |||||
Midstream |
32,737 | 22 | % | 25,169 | 28 | % | |||||||
Downstream |
11,057 | 8 | % | 942 | 1 | % | |||||||
Service & Equipment |
19,018 | 13 | % | 15,560 | 17 | % | |||||||
Power |
12,765 | 9 | % | 13,944 | 15 | % | |||||||
Total |
$ | 145,122 | 100 | % | $ | 91,642 | 100 | % | |||||
35
Portfolio Asset Quality
In addition to various risk management and monitoring tools, FS Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FS Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
Investment Rating |
Summary Description | |
---|---|---|
1 | Investment exceeding expectations and/or capital gain expected. | |
2 |
Performing investment generally executing in accordance with the portfolio company's business planfull return of principal and interest expected. |
|
3 |
Performing investment requiring closer monitoring. |
|
4 |
Underperforming investmentsome loss of interest or dividend expected, but still expecting a positive return on investment. |
|
5 |
Underperforming investment with expected loss of interest and some principal. |
The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2012 and December 31, 2011:
|
March 31, 2012 | December 31, 2011 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Investment Rating | Investments at Fair Value |
Percentage of Portfolio |
Investments at Fair Value |
Percentage of Portfolio |
|||||||||
1 |
$ | | | $ | 5,087 | 5 | % | ||||||
2 |
143,039 | 99 | % | 85,077 | 93 | % | |||||||
3 |
2,083 | 1 | % | 1,478 | 2 | % | |||||||
4 |
| | | | |||||||||
5 |
| | | | |||||||||
|
$ | 145,122 | 100 | % | $ | 91,642 | 100 | % | |||||
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
We commenced operations on July 18, 2011, when we raised in excess of $2,500 from persons who are not affiliated with us or FS Advisor. As a result, no comparisons with the comparable 2011 period have been included. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization and registration as a non-diversified, closed-end management investment company. For the three months ended March 31, 2011, we incurred organization costs of $93 and offering costs of $186 which were funded by Franklin Square Holdings and recorded as a contribution to capital.
36
Results of Operations for the three months ended March 31, 2012
Revenues
We generated investment income of $2,718 for the three months ended March 31, 2012 in the form of interest earned on senior secured loans, senior secured bonds, subordinated debt and other investments in our portfolio. Such revenues represent $2,281 of cash interest earned as well as $437 in non-cash portions relating to accretion of discount for the three months ended March 31, 2012. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The level of interest income we receive is directly related to the balance of interest-bearing investments multiplied by the weighted average yield of our investments. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.
Expenses
Our total operating expenses were $1,979 for the three months ended March 31, 2012. Our operating expenses include base management fees and administrative services expenses attributed to FS Advisor of $775 and $62, respectively, for the three months ended March 31, 2012.
FS Advisor is eligible to receive incentive fees based on performance. We accrued incentive fee expenses during the three months ended March 31, 2012 of $519, of which $436 was based on unrealized gains and $83 was based on realized gains. No such fee is actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See "Critical Accounting PoliciesCapital Gains Incentive Fee."
We recorded interest expense of $269 for the three months ended March 31, 2012 in connection with our credit facility and the amortization of deferred financing charges on our TRS. Fees and expenses incurred with our accounting and administrative service providers and our share transfer agent totaled $38 and $59, respectively, for the three months ended March 31, 2012.
Our other general and administrative expenses totaled $257 for the three months ended March 31, 2012, and consisted of the following:
|
Three months ended March 31, 2012 |
|||
---|---|---|---|---|
Expenses associated with our independent audit and related fees |
$ | 84 | ||
Compensation of our chief compliance officer |
12 | |||
Legal fees |
31 | |||
Printing fees |
14 | |||
Insurance expense |
20 | |||
Trustee fees |
82 | |||
Other |
14 | |||
Total |
$ | 257 | ||
We generally expect our operating expenses related to our ongoing operations to increase because of the anticipated growth in the size of our asset base. During the three months ended March 31, 2012, the ratio of our operating expenses to our average net assets was 2.04% and the ratio of our net operating expenses to our average net assets, which includes $801 of expense reimbursements from FS Advisor, was 1.21%. Our ratio of operating expenses to average net assets includes $269 related to interest expense on our credit facility and TRS. Without such interest expense, our ratio of expenses to average net assets would have been 1.76%. Incentive fees, interest expense and costs relating to our continuous public offering, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance,
37
changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors.
Expense Reimbursement
Prior to February 14, 2012, Franklin Square Holdings agreed to reimburse us for expenses in an amount that was sufficient to ensure that, for tax purposes, our net investment income and net capital gains were equal to or greater than the cumulative distributions paid to our shareholders in each quarter. This arrangement was designed to ensure that no portion of our distributions represented a return of capital for our shareholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of our expenses.
Pursuant to the expense reimbursement agreement entered into on February 14, 2012, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to shareholders will be paid from our offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our shareholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, we will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders.
We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income. If we terminate the investment advisory and administrative services agreement with FS Advisor, we will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square Holdings within three years of the date of termination.
The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael Forman, and our vice-chairman, David 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.
38
During the three months ended March 31, 2012, we accrued $801 for reimbursements that Franklin Square Holdings has agreed to pay. It is intended that these reimbursements will be funded through the offset of fees otherwise payable by us to FS Advisor. Under the expense reimbursement agreement with Franklin Square Holdings, such amounts may become subject to repayment by us in the future.
Net Investment Income
Our net investment income totaled $1,540 for the three months ended March 31, 2012.
Net Realized Gains or Losses
We sold investments and received principal repayments of $28,666 during the three months ended March 31, 2012, from which we realized net gains of $330. We earned $119 from periodic net settlement payments on our TRS which are reflected as realized gains and $9 from settlements on foreign currency.
Net Change in Unrealized Appreciation (Depreciation) on Investments and Total Return Swap and Unrealized Gain/Loss on Foreign Currency
For the three months ended March 31, 2012, the net change in unrealized appreciation (depreciation) on investments totaled $1,842 and the net change in unrealized gain/loss on foreign currency was $3. The change in unrealized appreciation (depreciation) on our TRS was $300 during this period. The change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2012 was primarily driven by continued improvement in the credit markets during the first quarter of 2012.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended March 31, 2012, the net increase (decrease) in net assets resulting from operations was $4,143.
Financial Condition, Liquidity and Capital Resources
During the three months ended March 31, 2012, we sold 7,013,305 common shares (as adjusted for share distributions) for gross proceeds of $68,894. The gross proceeds received during the three months ended March 31, 2012 include reinvested shareholder distributions of $696 for which we issued 77,778 common shares. During the three months ended March 31, 2012, we also incurred offering costs of $418 in connection with the sale of our common shares, which consisted primarily of legal, due diligence and printing fees. Franklin Square Holdings funded these offering costs, which were recorded as a contribution of capital. The offering costs were offset against capital in excess of par in our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $5,990 for the three months ended March 31, 2012. These sales commissions and fees include $1,276 retained by the dealer manager, FS2 Capital Partners, LLC, which is one of our affiliates.
As of May 11, 2012, we have sold 20,384,164 common shares (as adjusted for share distributions) for gross proceeds of $198,148, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of our board of trustees and certain individuals and entities affiliated with GSO in a private placement conducted in April 2011.
We generate cash primarily from the net proceeds of our ongoing continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal
39
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 shares at semi-monthly closings at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.
Prior to investing in securities of portfolio companies, we invest the net proceeds from our continuous public offering primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.
As of March 31, 2012, we had $40,093 in cash, which we have invested in interest bearing accounts, and $8,168 in cash held as collateral by Citibank under the terms of the TRS.
Revolving Credit Facility
On June 24, 2011, our newly-formed, wholly-owned special purpose financing subsidiary, FSEP Funding, entered into the credit facility with Deutsche Bank. Deutsche Bank is the sole lender and serves as administrative agent under the credit facility. The credit facility provides for borrowings in an aggregate amount up to $50,000 on a committed basis.
We may contribute cash or securities to FSEP Funding from time to time and will retain a residual interest in any assets contributed through our ownership of FSEP Funding. FSEP Funding may purchase additional securities from various sources. FSEP Funding has appointed us to manage its portfolio of securities pursuant to the terms of an investment management agreement. FSEP Funding's obligations to Deutsche Bank are secured by a first priority security interest in substantially all of the assets of FSEP Funding, including its portfolio of securities. The obligations of FSEP Funding under the credit facility are non-recourse to us.
Pricing under the credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, plus a spread of 1.60% per annum for the relevant period. Interest is payable quarterly in arrears. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2013.
As of March 31, 2012, $50,000 was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. We incurred costs of $257 in connection with obtaining the credit facility, which we have recorded as deferred financing costs on our consolidated balance sheet and amortize to interest expense over the life of the credit facility. As of March 31, 2012, $177 of such deferred financing costs have yet to be amortized to interest expense.
The effective interest rate under the credit facility was 2.08% as of March 31, 2012. Interest is paid quarterly in arrears and commenced November 20, 2011. We recorded interest expense of $263 for the three months ended March 31, 2012, of which $36 related to the amortization of deferred financing costs and $20 related to commitment fees on the unused portion of the credit facility. We paid $173 in interest expense for the three months ended March 31, 2012. The average borrowings under the credit facility for the three months ended March 31, 2012 were $39,325, with a weighted average interest rate of 2.31%, which includes commitment fees on the unused portion of the credit facility.
Borrowings under the credit facility are subject to compliance with a borrowing base, pursuant to which the amount of funds advanced to FSEP Funding varies depending upon the types of assets in FSEP Funding's portfolio. The occurrence of certain events described as "Super-Collateralization Events" in the credit agreement that governs the credit facility, or a decline in our net asset value below a specified threshold, results in a lowering of the amount of funds that will be advanced against such assets. Super-Collateralization Events include, without limitation: (i) certain key employees ceasing to be directors, principals, officers or investment managers of GSO; (ii) the bankruptcy or insolvency of
40
GSO or FS Advisor; (iii) GSO ceasing to act as our sub-adviser or FS Advisor ceasing to act as our investment adviser; (iv) our ceasing to act as FSEP Funding's investment manager, becoming bankrupt or insolvent, defaulting on certain material agreements or failing to maintain a net asset value above a specified threshold; and (v) us, GSO or FS Advisor committing fraud or other illicit acts in our or their investment advisory capacities.
In connection with the credit facility, FSEP Funding has made certain representations and warranties and is required to comply with various covenants, reporting requirements and other customary requirements for similar facilities. In addition to customary events of default included in financing transactions, the credit facility contains the following events of default: (a) the failure to make principal payments when due or interest payments within three business days of when due; (b) borrowings under the credit facility exceeding the applicable advance rates; (c) the purchase by FSEP Funding of certain ineligible assets; (d) the insolvency or bankruptcy of FSEP Funding or us; (e) our ceasing to act as investment manager of FSEP Funding's assets; (f) the decline of our net asset value below a specified threshold; and (g) fraud or other illicit acts by us, FS Advisor or GSO in our or their investment advisory capacities. During the continuation of an event of default, FSEP Funding must pay interest at a default rate. FSEP Funding was in compliance with the terms of the credit facility as of March 31, 2012.
Borrowings of FSEP Funding will be considered borrowings by us for purposes of complying with the asset coverage requirements under the 1940 Act applicable to BDCs.
Total Return Swap
On August 11, 2011, our newly-formed, wholly-owned special purpose financing subsidiary, EP Investments, entered into the TRS for one or more senior secured floating rate loans with Citibank. On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of loans which may be subject to the TRS from $25,000 to $100,000.
The TRS with Citibank enables us, through our ownership of EP Investments, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to EP Investments borrowing funds to acquire loans and incurring interest expense to a lender.
The obligations of EP Investments under the TRS are non-recourse to us and our exposure under the TRS is limited to the value of our investment in EP Investments, which generally will equal the value of cash collateral provided by EP Investments under the TRS. Pursuant to the terms of the TRS, EP Investments may select one or more loans with a maximum aggregate market value (determined at the time each such loan becomes subject to the TRS) of $100,000, or such greater amount as may be agreed to by Citibank. Loans proposed by EP Investments to be included in the TRS will be approved or rejected by Citibank, in its sole discretion, on a trade-by-trade basis. EP Investments is required to initially cash collateralize a percentage of each loan (such percentage to be proposed in each instance by EP Investments and accepted or rejected by Citibank in its sole discretion) included under the TRS in accordance with margin requirements described in the agreements governing the TRS. Under the terms of the TRS, EP Investments has agreed not to draw upon, or post as collateral, such cash collateral in respect of other financings or operating requirements prior to the termination of the TRS. Neither the cash collateral nor any other assets of EP Investments are available to pay our debts.
Pursuant to the terms of an investment management agreement that we entered into with EP Investments, we act as the manager of the rights and obligations of EP Investments under the TRS, including selecting the specific loans to be included in the TRS. Accordingly, the loans selected by EP Investments for purposes of the TRS are selected by us in accordance with our investment objectives and strategy to generate current income and long-term capital appreciation. In addition, pursuant to
41
the terms of the TRS, EP Investments may select any loan or obligation available in the market to be included in the TRS that meets the obligation criteria set forth in the TRS Agreement.
Each loan included in the TRS must meet criteria described in the TRS Agreement, including a requirement that each loan be rated by Moody's and S&P and quoted by a nationally-recognized pricing service. EP Investments receives from Citibank all interest and fees payable in respect of the loans included in the TRS. EP Investments pays to Citibank interest at a rate equal to one-month LIBOR + 1.30% per annum (which rate was one-month LIBOR + 1.35% per annum prior to the increase in the size of the TRS to $100,000). In addition, upon the termination or repayment of any loan subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such loan or pay to Citibank any depreciation in the value of such loan.
Under the terms of the TRS, EP Investments may be required to post additional cash collateral, on a dollar-for-dollar basis, in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The amount of collateral that may be required to be posted by EP Investments is determined primarily on the basis of the aggregate value of the underlying loans. The limit on the additional collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included in the TRS).
We have no contractual obligation to post any such additional collateral or to make any interest payments to Citibank. We may, but are not obligated to, increase our equity investment in EP Investments for the purpose of funding any additional collateral or payment obligations for which EP Investments may become obligated during the term of the TRS. If we do not make any such additional investment in EP Investments and EP Investments fails to meet its obligations under the TRS, then Citibank will have the right to terminate the TRS and seize the cash collateral posted by EP Investments under the TRS.
Citibank may terminate the TRS on or after May 11, 2013. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon providing no more than 30 days, and no less than 7 days, prior notice to Citibank. EP Investments will pay Citibank customary fees in connection with the establishment and maintenance of the TRS.
The value of the TRS is based primarily on the valuation of the underlying portfolio of loans subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying loan in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the loan in the open market. Citibank reports the mark-to-market values of the underlying loans to EP Investments. As of March 31, 2012 and December 31, 2011, the fair value of the TRS was $421 and $121, respectively. The fair value of the TRS is reflected as an unrealized gain on our consolidated balance sheets. The change in value of the TRS is reflected in the statements of operations as net change in unrealized appreciation on total return swap. As of March 31, 2012, EP Investments had selected 8 underlying loans with a total notional amount of $19,042 and posted $8,168 in cash collateral held by Citibank (of which only $7,966 was required to be posted), which is reflected in due from counterparty on our consolidated balance sheet. As of December 31, 2011, EP Investments had selected 6 underlying loans with a total notional amount of $12,205 and posted $7,878 in cash collateral held by Citibank (of which only $5,096 was required to be posted), which is reflected in due from counterparty on the consolidated balance sheet.
We incurred costs of $16 in connection with obtaining the TRS, which we have recorded as deferred financing costs on our consolidated balance sheet and amortize to interest expense over the life of the TRS. As of March 31, 2012, $3 of such deferred financing costs have yet to be amortized to interest expense.
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For purposes of the asset coverage ratio test applicable to us as a BDC, we treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by EP Investments under the TRS, as a senior security for the life of that instrument. We may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.
Further, for purposes of Section 55(a) under the 1940 Act, we treat each loan underlying the TRS as a qualifying asset if the obligor on such loan is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. We may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the staff of the SEC.
Capital Contribution by FS Advisor and GSO
In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of approximately $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 will not tender these common shares for repurchase as long as FS Advisor remains our investment adviser.
In April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals will not tender these common shares for repurchase as long as FS Advisor remains our investment adviser. In connection with the same private placement, other individuals and entities affiliated with FS Advisor and certain members of our board of trustees agreed to purchase 1,459,320 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 the satisfaction of the minimum offering requirement on July 18, 2011.
RIC Status and Distributions
We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must distribute at least 90% of our "investment company taxable income," as defined by the Code, each year. As long as the distributions are declared by the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our shareholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no federal income taxes.
We declared our first distribution on July 21, 2011. Subject to our board of trustees' discretion and applicable legal restrictions, we intend to authorize and declare distributions on either a semi-monthly or monthly basis and pay distributions on either a monthly or quarterly basis. We will calculate each shareholder's specific distribution amount for the period using record and declaration dates and each shareholder's distributions will begin to accrue on the date we accept each shareholder's subscription for our common shares. From time to time, we may also pay special interim distributions in the form of cash or common shares at the discretion of our board of trustees. During certain periods, our distributions may exceed our earnings, especially during the period before we have substantially
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invested the proceeds from our continuous public offering of common shares. As a result, it is possible that a portion of the distributions we make may represent a return of capital for tax purposes. Each year a statement on Form 1099-DIV identifying the source of the distributions will be mailed to our shareholders. No portion of the distributions paid during the three months ended March 31, 2012 represented a return of capital for tax purposes.
We 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 the U.S. shareholder.
The following table reflects the cash distributions per share that we have declared and paid on our common shares through March 31, 2012:
|
Distribution | ||||||
---|---|---|---|---|---|---|---|
For the Three Months Ended | Per Share | Amount | |||||
Fiscal 2012 |
|||||||
March 31, 2012(1) |
$ | 0.1555 | $ | 1,789 |
- (1)
- The amount of each per share distribution has been retroactively adjusted to reflect the share distribution declared in February 2012 as discussed below.
On April 9, 2012, our board of trustees declared two regular semi-monthly cash distributions of $0.02605 per share each, which were paid on April 30, 2012 to shareholders of record on April 13, 2012 and April 30, 2012, respectively. On May 2, 2012, our board of trustees declared two regular semi-monthly cash distributions of $0.02605 per share each, which will be paid on May 31, 2012 to shareholders of record on May 15, 2012 and May 30, 2012, respectively. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.
We have adopted an "opt in" distribution reinvestment plan for our shareholders. As a result, if we make a distribution, our shareholders will receive distributions in cash unless they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares.
We may fund our cash distributions to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions. The following table reflects
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the sources of the cash distributions that we have paid on our common shares during the three months ended March 31, 2012:
|
Three Months Ended March 31, 2012 |
||||||
---|---|---|---|---|---|---|---|
Source of Distribution | Distribution Amount | Percentage | |||||
Offering proceeds |
$ | | | ||||
Borrowings |
| | |||||
Net investment income (prior to expense reimbursement)(1) |
649 | 36 | % | ||||
Capital gains proceeds from the sale of assets |
339 | 19 | % | ||||
Non-capital gains proceeds from the sale of assets |
| | |||||
Distributions on account of preferred and common equity |
| | |||||
Expense reimbursement from sponsor |
801 | 45 | % | ||||
Total |
$ | 1,789 | 100 | % | |||
- (1)
- During the three months ended March 31, 2012, 84% of our gross investment income was attributable to cash interest earned and 16% was attributable to non-cash accretion of discount.
Our net investment income on a tax-basis for the three months ended March 31, 2012 was $1,450. We distributed all of our tax-basis net investment income earned as of March 31, 2012.
The difference between our GAAP-basis net investment income and our tax-basis net investment income is due to the accrual for GAAP purposes of income on a limited partnership interest, the tax-basis amortization of organization and start-up costs incurred prior to the commencement of our operations, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by us, the inclusion of realized gains on the TRS in tax-basis net investment income and the accretion of discount on the TRS. The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2012:
|
Three Months Ended March 31, 2012 |
|||
---|---|---|---|---|
GAAP-basis net investment income |
$ | 1,540 | ||
Accrued income on limited partnership |
(657 | ) | ||
Amortization of organizational costs |
(6 | ) | ||
Reversal of incentive fee accrual on unrealized gains |
436 | |||
GAAP realized gains on total return swap |
119 | |||
Accretion of discount on total return swap |
18 | |||
Tax-basis net investment income |
$ | 1,450 | ||
The determination of the tax attributes of our distributions is made annually as of the end of our fiscal year based upon our taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of our distributions for a full year. The actual tax characteristics of distributions to shareholders are reported to shareholders annually on a Form 1099-DIV.
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The following table reflects the share distribution per share that we have declared on our common shares to date:
Date Declared | Record Date | Distribution Date | Distribution Percentage |
Shares Issued |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal 2012 |
|||||||||||
February 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 deduction of selling commissions and dealer manager fees, as required by the 1940 Act, subject to certain limited exceptions. Our board of trustees determined that our portfolio performance sufficiently warranted taking this action.
The share distribution increased the number of shares outstanding, thereby reducing our net asset value per share. However, because the share distribution was issued to all existing shareholders 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 shares owned by each investor. As the overall value to an investor's position was not reduced as a result of the special share distribution, our board of trustees determined that this issuance would not be dilutive to existing shareholders. As the share distribution did not change any shareholder's proportionate interest in us, it is not expected to represent a taxable distribution. Specific tax characteristics of all distributions are reported to shareholders annually on Form 1099-DIV.
As of March 31, 2012 and December 31, 2011, the components of accumulated earnings on a tax-basis were as follows:
|
March 31, 2012 (Unaudited) |
December 31, 2011 | |||||
---|---|---|---|---|---|---|---|
Distributable ordinary income |
$ | | $ | | |||
Limited partnership receivable |
262 | | |||||
Incentive fee accrual on unrealized gains |
(503 | ) | (67 | ) | |||
Unamortized organizational costs |
(332 | ) | (338 | ) | |||
Net unrealized appreciation (depreciation) on investments and total return swap and loss on foreign currency(1) |
2,433 | (89 | ) | ||||
|
$ | 1,860 | $ | (494 | ) | ||
- (1)
- As of March 31, 2012 and December 31, 2011, the gross unrealized appreciation on our investments and total return swap was $2,868 and $761, respectively. As of March 31, 2012 and December 31, 2011, the gross unrealized depreciation on our investments and loss on foreign currency was $435 and $850, respectively.
The aggregate cost of our investments for federal income tax purposes totaled $143,051 and $91,808 as of March 31, 2012 and December 31, 2011, respectively. The aggregate net unrealized appreciation (depreciation) on a tax-basis, including our TRS, was $2,447 and $(72) as of March 31, 2012 and December 31, 2011, respectively.
Critical Accounting Policies
Our financial statements are prepared in conformity with GAAP, which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Critical accounting policies are those that require the application of management's most difficult, subjective or complex judgments, often because of the need to make estimates about the effect of
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matters that are inherently uncertain and that may change in subsequent periods. In preparing the financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. In preparing the financial statements, management has utilized available information, including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments, giving due consideration to materiality. Actual results may differ from these estimates. In addition, other companies may utilize different estimates, which may impact the comparability of our results of operations to those of companies in similar businesses. As our expected operating plans occur, we will describe additional critical accounting policies in the notes to our future financial statements in addition to those discussed below.
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 prepares portfolio company valuations using relevant inputs, including, but not limited to, indicative dealer quotes, values of like securities, recent portfolio company financial statements and forecasts, and valuations prepared by third-party valuation services.
Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosure, or ASC Topic 820, issued by the FASB clarifies the definition of fair value and requires companies to expand their disclosure about the use of fair value to measure assets and liabilities in interim and annual periods subsequent to initial recognition. ASC Topic 820 defines fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 also establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, which includes inputs such as quoted prices for similar securities in active markets and quoted prices for identical securities where there is little or no activity in the market; and Level 3, defined as unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
With respect to investments for which market quotations are not readily available, we undertake a multi-step valuation process each quarter, as described below:
-
- our quarterly valuation process begins with each portfolio company or investment being initially valued by FS Advisor's
management team, with such valuation potentially taking into account information received from our sub-adviser or an independent valuation firm, if applicable;
-
- preliminary valuation conclusions are then documented and discussed with our valuation committee;
-
- our valuation committee reviews the preliminary valuation, and FS Advisor's management team, together with our independent
valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and
-
- our board of trustees discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FS Advisor, the valuation committee and any third-party valuation firm, if applicable.
Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations on our consolidated financial statements. Below is a
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description of factors that our board of trustees may consider when valuing our debt and equity investments.
Valuation of fixed income investments, such as loans and debt securities, depends upon a number of factors, including prevailing interest rates for like securities, expected volatility in future interest rates, call features, put features and other relevant terms of the debt. For investments without readily available market prices, we may incorporate these factors into discounted cash flow models to arrive at fair value. Other factors that our board of trustees may consider include the borrower's ability to adequately service its debt, the fair market value of the portfolio company in relation to the face amount of its outstanding debt and the quality of collateral securing our debt investments.
Our equity interests in portfolio companies for which there is no liquid public market are valued at fair value. Our board of trustees, in its analysis of fair value, may consider various factors, such as multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. All of these factors may be subject to adjustments based upon the particular circumstances of a portfolio company or our actual investment position. For example, adjustments to EBITDA may take into account compensation to previous owners or acquisition, recapitalization, restructuring or other related items.
Our board of trustees may also look to private merger and acquisition statistics, public trading multiples discounted for illiquidity and other factors, valuations implied by third-party investments in the portfolio companies or industry practices in determining fair value. Our board of trustees may also consider the size and scope of a portfolio company and its specific strengths and weaknesses, as well as any other factors it deems relevant in assessing the value. Generally, the value of our equity interests in public companies for which market quotations are readily available is based upon the most recent closing public market price. Portfolio securities that carry certain restrictions on sale are typically valued at a discount from the public market value of the security.
The fair values of our investments are determined in good faith by our board of trustees. Our board of trustees is solely responsible for the valuation of our portfolio investments at fair value as determined in good faith pursuant to our valuation policy and consistently applied valuation process.
Our investments as of March 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued all of our investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by the service. Our three equity/other investments were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such interests, as well as various income scenarios and multiples of EBITDA, cash flows and net income. One of our subordinated debt investments, which was purchased near March 31, 2012, was valued at cost, as our board of trustees determined that the cost of the investment was the best indication of its fair value. We valued the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to us for review and testing. Our valuation committee and board of trustees review and approve the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent our valuation committee or board of trustees has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on our TRS, see "Financial Condition, Liquidity and Capital ResourcesTotal Return Swap."
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Our investments as of December 31, 2011 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued all of our investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by the service. Our one equity investment and one of our subordinated debt investments, both of which were purchased near December 31, 2011, were valued at cost, as our board of trustees determined that the cost of the investments was the best indication of their fair value. We valued the TRS in accordance with the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the loans underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The loans underlying the TRS are valued by Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to us for review and testing. Our valuation committee and board of trustees review and approve the value of the TRS, as well as the value of the loans underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent our valuation committee or board of trustees has any questions or concerns regarding the valuation of the loans underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional disclosures on our TRS, see "Financial Condition, Liquidity and Capital ResourcesTotal Return Swap."
We periodically benchmark the bid and ask prices we receive from the third-party pricing service against the actual prices at which we purchase and sell our investments. Based on the results of the benchmark analysis and our management's experience in purchasing and selling these investments, we believe that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), we believe that these valuation inputs are classified as Level 3 within the fair value hierarchy. We may also use other methods to determine fair value for securities for which we cannot obtain prevailing bid and ask prices through our third-party pricing service, including the use of an independent valuation firm. We will periodically benchmark the valuations provided by the independent valuation firm against the 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. We record prepayment premiums on loans and securities as interest income when we receive such amounts.
Net Realized Gains or Losses and 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
49
when gains or losses are realized. Net change in unrealized gains or losses on foreign currency reflects the change in the value of receivables or accruals during the reporting period due to the impact of foreign currency fluctuations.
Capital Gains Incentive Fee
Pursuant to the terms of the investment advisory and administrative services agreement we entered into with FS Advisor, the incentive fee on capital gains earned on liquidated investments of our portfolio during operations prior to our liquidation is determined and payable in arrears as of the end of each calendar year. Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of each calendar year, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the investment advisory and administrative services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related capital gains incentive fee payable. This accrual reflects the incentive fees that would be payable to FS Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. During the year ended December 31, 2011, we accrued a capital gains incentive fee of $67 based on the performance of our portfolio, all of which was based on unrealized gains and none of which was payable to FS Advisor. During the three months ended March 31, 2012, we accrued an additional capital gains incentive fee of $519 based on the performance of our portfolio, of which $436 was based on unrealized gains and $83 was based on realized gains.
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 liabilities in the financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in the Statements of Operations. As of March 31, 2012, we had not incurred any interest or penalties.
Contractual Obligations
We have entered into an agreement with FS Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FS Advisor and, to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on our behalf. For the three months ended March 31, 2012, we incurred $775 in base management fees and $62 in administrative services expenses under the investment advisory and administrative services agreement. In addition, FS Advisor is eligible to receive incentive fees based on performance. During the three months ended March 31, 2012, we accrued $83 in capital gains incentive fees based on realized gains in our investment portfolio that are payable to FS Advisor under the investment advisory and administrative services agreement. We have also recorded $436 in incentive
50
fees based on unrealized gains in our investment portfolio as of March 31, 2012; however, such fees are not due and payable to FS Advisor unless and until such time as the gains become realized.
As of March 31, 2012, $50,000 was outstanding under the credit facility between FSEP Funding and Deutsche Bank. All such amounts will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2013.
A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the credit facility between FSEP Funding and Deutsche Bank at March 31, 2012 is as follows:
|
Payments Due By Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Total | Less than 1 year |
1-3 years | 3-5 years | More than 5 years |
|||||||||||
Borrowings(1) |
$ | 50,000 | $ | | $ | 50,000 | $ | | $ | |
- (1)
- At March 31, 2012, no amounts remained unused under the revolving credit facility.
Off-Balance Sheet Arrangements
We currently have no off-balance sheet arrangements, including any risk management of commodity pricing or other hedging practices.
Recently Issued Accounting Standards
In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This guidance represents the converged guidance of the Accounting Boards, on fair value measurement. The collective efforts of the Accounting Boards reflected in this guidance have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value" and enhanced disclosure requirements for investments that do not have readily determinable fair values. The Accounting Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with GAAP and International Financial Reporting Standards. The amendments to the FASB codification in this guidance are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. We have implemented this guidance and it did not have a material impact on our consolidated financial statements, except for enhanced disclosures around fair value measurements.
Related Party Transactions
We have entered into an investment advisory and administrative services agreement with FS Advisor. Pursuant to the investment advisory and administrative services agreement, FS Advisor is paid a base management fee of 2% of average gross assets and an incentive fee of 20% of net investment income, subject to an annualized 6.5% hurdle, and 20% of net realized capital gains, if applicable. We commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of our operations. During the three months ended March 31, 2012, FS Advisor earned $775 in base management fees. Management fees are paid on a quarterly basis in arrears. It is intended that such fees will be applied to offset the liability of Franklin Square Holdings under the expense reimbursement agreement discussed below.
We accrue for the capital gains incentive fee, on a quarterly basis by calculating such fee as if it were due and payable as of the end of such period. While the investment advisory and administrative
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services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an AICPA Technical Practice Aid for investment companies, we include unrealized gains in the calculation of the capital gains incentive fee expense and related capital gains incentive fee payable. This accrual reflects the incentive fees that would be payable to FS Advisor if our entire portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized. During the three months ended March 31, 2012, we accrued a capital gains incentive fee of $519 based on the performance of our portfolio, of which $436 was based on unrealized gains and $83 was based on realized gains.
We also reimburse FS Advisor for expenses necessary for its performance of services related to our administration and operation, provided that such reimbursement is equal to the lower of FS Advisor's actual costs or the amount that we would be required to pay for comparable services in the same geographic location, and provided further that such costs are reasonably allocated to us on the basis of assets, revenues, time records or other reasonable methods. During the three months ended March 31, 2012, we incurred administrative services charges of $62 attributable to FS Advisor. Of these charges, $51 related to the allocation of costs of administrative personnel for services rendered to us by employees of FS Advisor and the remainder related to other reimbursable expenses. It is intended that such fees will be applied to offset Franklin Square Holdings' liability under the expense reimbursement agreement discussed below.
Franklin Square Holdings has funded offering costs and organization costs in the amount of $418 and $279 for the three months ended March 31, 2012 and March 31, 2011, respectively. These costs have been recorded by us as a contribution to capital. The offering costs were offset against capital in excess of par on the financial statements and the organization costs were charged to expense as incurred by us. We incurred organization costs of $93 during the three months ended March 31, 2011. Since inception, Franklin Square Holdings has funded $3,056 in offering and organization costs.
The dealer manager for our public offering is FS2 Capital Partners, LLC, which is one of our affiliates. During the three months ended March 31, 2012, FS2 Capital Partners, LLC retained $1,276 for selling commissions and dealer manager fees in connection with the sale of our common shares.
Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On July 18, 2011, we exceeded our minimum offering requirement. We paid total reimbursements of $1,022 to FS Advisor and its affiliates during the three months ended March 31, 2012. As of March 31, 2012, $942 remains reimbursable to FS Advisor and its affiliates under this arrangement and will be paid during the offering period, provided that 1.5% of gross proceeds raised are sufficient to cover such expenses. The reimbursements are recorded as a reduction of capital.
In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of approximately $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 will not tender these common shares for repurchase as long as FS Advisor remains our investment adviser.
In April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals will not tender these common shares for repurchase as long as FS Advisor remains our investment adviser. In connection with the same private placement, other individuals and entities affiliated with FS Advisor and certain members of our board of trustees agreed to purchase 1,459,320 common shares (as
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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 the satisfaction of the minimum offering requirement on July 18, 2011.
FS Advisor's senior management team is comprised of the same personnel as the senior management team of FB Income Advisor, LLC and FSIC II Advisor, LLC, the investment advisers to Franklin Square Holdings' other affiliated BDCs, FS Investment Corporation and FS Investment Corporation II, respectively. As a result, such personnel provide investment advisory services to us and each of FS Investment Corporation and FS Investment Corporation II. While none of FS Advisor, FB Income Advisor, LLC or FSIC II Advisor, LLC is currently making private corporate debt investments for clients other than us, FS Investment Corporation and FS Investment Corporation II, respectively, any, or all, may do so in the future. FS Advisor intends to allocate investment opportunities in a fair and equitable manner consistent with our investment objectives and strategies so that we will not be disadvantaged in relation to any other client of FS Advisor or its management team. It is possible, however, that some investment opportunities may be provided to FS Investment Corporation and/or FS Investment Corporation II rather than to us.
Prior to February 14, 2012, Franklin Square Holdings agreed to reimburse us for expenses in an amount that was sufficient to ensure that, for tax purposes, our net investment income and net capital gains were equal to or greater than the cumulative distributions paid to our shareholders in each quarter. This arrangement was designed to ensure that no portion of our distributions represented a return of capital for our shareholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of our expenses.
Pursuant to the expense reimbursement agreement entered into on February 14, 2012, Franklin Square Holdings has agreed to reimburse us for expenses in an amount that is sufficient to ensure that no portion of our distributions to shareholders will be paid from our offering proceeds or borrowings. However, because certain investments we may make, including preferred and common equity investments, may generate dividends and other distributions to us that are treated for tax purposes as a return of capital, a portion of our distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our shareholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, we will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders.
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We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income. If we terminate the investment advisory and administrative services agreement with FS Advisor, we will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square Holdings within three years of the date of termination.
The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters.
During the three months ended March 31, 2012, we accrued $801 for reimbursements that Franklin Square Holdings has agreed to pay. As discussed more fully above, it is intended that these reimbursements will be funded through the offset of fees otherwise payable by us to FS Advisor. Under the expense reimbursement agreement, such amounts may become subject to repayment by us in the future.
Recent Developments
For the period from April 1, 2012 to May 11, 2012, we have sold 5,624,216 common shares for gross proceeds of $55,678 at an average price per share of $9.90.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are subject to financial market risks, including changes in interest rates. As of March 31, 2012, approximately 33% of our portfolio investments paid variable interest rates and the remainder (approximately 67%) paid fixed interest rates. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to any variable rate investments we hold and to declines in the value of any fixed rate investments we hold. To the extent that a sizeable portion of our investments may be in variable rate investments, an increase in interest rates would make it easier for us to meet or exceed our incentive fee preferred return, as defined in the investment advisory and administrative services agreement we have entered into with FS Advisor, and may result in a substantial increase in our net investment income and 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 $50,000 credit facility which FSEP Funding maintains with Deutsche Bank, FSEP Funding borrows at a floating rate based on LIBOR. Under the terms of the TRS between EP Investments and Citibank, EP Investments pays fees to Citibank at a floating rate based on LIBOR in exchange for the right to receive the economic benefit of one or more loans having a maximum notional amount of $100,000 (which maximum notional amount was 25,000 prior to May 11, 2012), or such greater amount as may be agreed to by Citibank. We expect any future credit facilities, total return swap agreements or other financing arrangements that we or any of our subsidiaries may enter into will also be based on a floating interest rate. As a result, we are subject to risks relating to changes in market interest rates. In periods of rising interest rates, when we or our subsidiaries have debt outstanding or swap agreements in effect, our interest expense would increase, which could reduce our net investment income, especially to the extent we hold fixed rate investments.
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The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our investment portfolio and borrowing arrangements in effect as of March 31, 2012:
LIBOR Basis Point Change | Interest Income(1) |
Interest Expense |
Net Interest Income |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Down 50 basis points |
$ | 14,048 | $ | (906 | ) | $ | 13,142 | |||
Up 100 basis points |
13,977 | (1,656 | ) | 12,321 | ||||||
Up 200 basis points |
14,402 | (2,156 | ) | 12,246 | ||||||
Up 300 basis points |
14,914 | (2,656 | ) | 12,258 |
- (1)
- Includes the net effect of the change in interest rates on the unrealized appreciation (depreciation) on the TRS. Assumes no change in defaults or prepayments by portfolio companies.
We expect that our long-term investments will be financed primarily with equity and long-term debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the three months ended March 31, 2012, we did not engage in interest rate hedging activities.
In addition, we may have risk regarding portfolio valuation. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting PoliciesValuation of Portfolio Investments."
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2012. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.
There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.
Investing in our common shares involves a number of significant risks. In addition to the other information contained in this quarterly report on Form 10-Q and the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011, you should consider carefully the following information before making an investment in our common shares.
The risk factor contained in our Annual Report on Form 10-K for the year ended December 31, 2011 entitled "Investors will not know the purchase price per share at the time they submit their subscription agreements and could pay a premium for their common shares if our board of trustees does not decrease the offering price in the event of a decline in our net asset value per share" is deleted in its entirety.
The risk factor contained in our Annual Report on Form 10-K for the year ended December 31, 2011 entitled "We may enter into total return swap agreements or other derivative transactions which expose us to certain risks, including market risk, liquidity risk and other risks similar to those associated with the use of leverage" is amended by replacing such risk factor in its entirety with the following:
We may enter into total return swap agreements or other derivative transactions which expose us to certain risks, including market risk, liquidity risk and other risks similar to those associated with the use of leverage.
EP Investments has entered into a TRS for one or more senior secured floating rate loans with Citibank. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital ResourcesTotal Return Swap" in our Annual Report on Form 10-K for the year ended December 31, 2011 for a more detailed discussion of the terms of the TRS between EP Investments and Citibank.
A TRS is a contract in which one party agrees to make periodic payments to another party based on the change in the market value of the assets underlying the TRS, which may include a specified security, basket of securities or securities indices during the specified period, in return for periodic payments based on a fixed or variable interest rate. A TRS effectively adds leverage to a portfolio by providing investment exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. Because of the unique structure of a TRS, a TRS often offers lower financing costs than are offered through more traditional borrowing arrangements.
The TRS with Citibank enables us, through our ownership of EP Investments, to obtain the economic benefit of owning the loans subject to the TRS, without actually owning them, in return for an interest-type payment to Citibank. As such, the TRS is analogous to EP Investments borrowing funds to acquire loans and incurring interest expense to a lender.
The TRS is subject to market risk, liquidity risk and risk of imperfect correlation between the value of the TRS and the loans underlying the TRS. In addition, we may incur certain costs in connection with the TRS that could in the aggregate be significant.
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A TRS is also subject to the risk that a counterparty will default on its payment obligations thereunder or that we will not be able to meet our obligations to the counterparty. In the case of the TRS with Citibank, EP Investments is required to post cash collateral amounts to secure its obligations to Citibank under the TRS. Citibank, however, is not required to collateralize any of its obligations to EP Investments under the TRS. EP Investments bears the risk of depreciation with respect to the value of the loans underlying the TRS and is required under the terms of the TRS to post additional collateral on a dollar-for-dollar basis in the event of depreciation in the value of the underlying loans after such value decreases below a specified amount. The amount of collateral required to be posted by EP Investments is determined primarily on the basis of the aggregate value of the underlying loans.
The limit on the additional collateral that EP Investments may be required to post pursuant to the TRS is equal to the difference between the full notional amount of the loans underlying the TRS and the amount of cash collateral already posted by EP Investments (determined without consideration of the initial cash collateral posted for each loan included in the TRS). EP Investments' maximum liability under the TRS is the amount of any decline in the aggregate value of the loans subject to the TRS, less the amount of the cash collateral previously posted by EP Investments. Therefore, the absolute risk of loss with respect to the TRS is the notional amount of the TRS.
In addition to customary events of default and termination events included in the form ISDA 2002 Master Agreement, the TRS Agreement contains the following termination events: (a) a failure to post initial cash collateral or additional collateral as required by the TRS Agreement; (b) a default by EP Investments or us with respect to indebtedness in an amount equal to or greater than the lesser of $10.0 million and 2% of our net asset value at such time; (c) a merger of EP Investments or us meeting certain criteria; (d) either us or EP Investments amending its constituent documents in a manner that has or could reasonably be expected to have a material adverse effect; (e) our ceasing to be the sole owner of EP Investments; (f) our ceasing to be the investment manager of EP Investments or having authority to enter into transactions under the TRS on behalf of EP Investments, and not being replaced by an entity reasonably acceptable to Citibank; (g) FS Advisor ceasing to be our investment adviser or GSO ceasing to be the sub-adviser to FS Advisor; (h) EP Investments failing to comply with its investment strategies or restrictions to the extent such non-compliance has or could reasonably be expected to have a material adverse effect; (i) EP Investments becoming liable in respect of any obligation for borrowed money, other than arising under the TRS Agreement; (j) we dissolve or liquidate; (k) there occurs, without the prior consent of Citibank, any material change to or departure from our policies or the policies of EP Investments that may not be changed without the vote of our shareholders and that relates to EP Investments' performance of its obligations under the TRS Agreement; and (l) we violate certain provisions of the 1940 Act or our election to be regulated as a BDC is revoked or withdrawn. In addition, Citibank may terminate any specific loan underlying the TRS that fails to satisfy the obligation criteria set forth in the TRS Agreement for at least 30 days.
In addition to the rights of Citibank to terminate the TRS following an event of default or termination event as described above, Citibank may terminate the TRS on or after May 11, 2013. EP Investments may terminate the TRS, in whole or in part with respect to any loan subject to the TRS, at any time upon providing no more than 30 days, and no less than 7 days, prior notice to Citibank. Upon any termination of the TRS, EP Investments will be required to pay Citibank the amount of any decline in the aggregate value of the loans subject to the TRS or, alternatively, will be entitled to receive the amount of any appreciation in the aggregate value of such loans. In the event that Citibank chooses to exercise its termination rights, it is possible that EP Investments will owe more to Citibank or, alternatively, will be entitled to receive less from Citibank than it would
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have if EP Investments controlled the timing of such termination due to the existence of adverse market conditions at the time of such termination.
In addition, because a TRS is a form of synthetic leverage, such arrangements are subject to risks similar to those associated with the use of leverage. See "Risks Relating to Debt Financing" in our Annual Report on Form 10-K for the year ended December 31, 2011.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Not applicable.
Item 3. Defaults upon Senior Securities.
Not applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of loans which may be subject to the TRS from $25,000 to $100,000. In connection with such amendment, the date that Citibank may terminate the TRS changed from May 11, 2012 to May 11, 2013, the interest rate paid by EP Investments to Citibank changed from one-month LIBOR + 1.35% per annum to one-month LIBOR + 1.30% per annum and our guarantee of the obligations of EP Investments under the TRS has been terminated and released.
The summary descriptions of the amendment to the TRS and ancillary agreements contained in this quarterly report on Form 10-Q are qualified in their entirety by the full text of such agreements, copies of which are attached to this quarterly report on Form 10-Q as Exhibits 10.15, 10.16 and 10.17 and are incorporated herein by reference.
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3.1 | Third Amended and Restated Declaration of Trust of the Company. (Incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on March 13, 2012.) | ||
3.2 |
Amended and Restated Bylaws of the Company. (Incorporated by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed on March 13, 2012.) |
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4.1 |
Form of Subscription Agreement. (Incorporated by reference to Appendix A to the prospectus filed with Post-Effective Amendment No. 2 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 11, 2012.) |
||
4.2 |
Amended and Restated Distribution Reinvestment Plan of the Company. (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on November 14, 2011.) |
||
10.1 |
Investment Advisory and Administrative Services Agreement, dated as April 28, 2011, by and between the Company and FS Investment Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.) |
||
10.2 |
Investment Sub-advisory Agreement, dated as April 28, 2011, between FS Investment Advisor, LLC and GSO Capital Partners LP. (Incorporated by reference to Exhibit (g)(2) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.) |
||
10.3 |
Dealer Manager Agreement, dated as April 28, 2011, by and between the Company and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.) |
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10.4 |
Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.) |
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10.5 |
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 the Company's Quarterly Report on Form 10-Q filed on November 14, 2011.) |
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10.6 |
Escrow Agreement, dated as March 29, 2011, by and between the Company and UMB Bank, N.A. (Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to the Company's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.) |
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10.7 |
Credit Agreement, dated as of June 24, 2011, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.) |
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10.8 |
Asset Contribution Agreement, dated as of June 24, 2011, by and between the Company and FSEP Term Funding, LLC. (Incorporated by reference to Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.) |
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10.9 |
Investment Management Agreement, dated as of June 24, 2011, by and between the Company and FSEP Term Funding, LLC. (Incorporated by reference to Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.) |
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10.10 |
Security Agreement, dated as of June 24, 2011, by and between FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q filed on June 27, 2011.) |
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10.11 | ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q filed on August 15, 2011.) | ||
10.12 |
Confirmation Letter Agreement, dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.12 to the Company's Quarterly Report on Form 10-Q filed on August 15, 2011.) |
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10.13 |
Guarantee, dated as of August 11, 2011, by the Company in favor of Citibank, N.A. (Incorporated by reference to Exhibit 10.13 to the Company's Quarterly Report on Form 10-Q filed on August 15, 2011.) |
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10.14 |
Investment Management Agreement, dated as of August 11, 2011, by and between the Company and EP Investments LLC. (Incorporated by reference to Exhibit 10.14 to the Company's Quarterly Report on Form 10-Q filed on August 15, 2011.) |
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10.15 |
* |
Termination and Release Acknowledgement, dated as of May 11, 2012, by Citibank N.A. in favor of the Company. |
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10.16 |
* |
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. |
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10.17 |
* |
Amended and Restated Confirmation Letter Agreement, dated as of May 11, 2012, by and between EP Investments LLC and Citibank, N.A. |
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31.1 |
* |
Certification of Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. |
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31.2 |
* |
Certification of Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended. |
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32.1 |
* |
Certification of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32.2 |
* |
Certification of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
- *
- Filed herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 15, 2012.
FS ENERGY AND POWER FUND | ||||
By: |
/s/ MICHAEL C. FORMAN Michael C. Forman Chief Executive Officer (Principal Executive Officer) |
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By: |
/s/ WILLIAM GOEBEL William Goebel Chief Financial Officer (Principal Financial and Accounting Officer) |
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