Attached files
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EX-32.1 - EX-32.1 - FS Energy & Power Fund | a2215252zex-32_1.htm |
EX-31.1 - EX-31.1 - FS Energy & Power Fund | a2215252zex-31_1.htm |
EX-31.2 - EX-31.2 - FS Energy & Power Fund | a2215252zex-31_2.htm |
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, 2013. |
||
o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 814-00841
FS Energy and Power Fund
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
27-6822130 (I.R.S. Employer Identification No.) |
|
Cira Centre 2929 Arch Street, Suite 675 Philadelphia, Pennsylvania 19104 (Address of principal executive office) |
(215) 495-1150
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes o No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer, and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
The issuer has 100,125,199 common shares of beneficial interest outstanding as of May 14, 2013.
TABLE OF CONTENTS
FS Energy and Power Fund
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||
---|---|---|---|---|---|---|---|
Assets |
|||||||
Investments, at fair value (amortized cost$820,296 and $677,919, respectively) |
$ | 856,416 | $ | 701,172 | |||
Cash |
102,225 | 48,986 | |||||
Due from counterparty |
76,276 | 56,876 | |||||
Receivable for investments sold and repaid |
131 | 9,374 | |||||
Interest receivable |
13,050 | 9,075 | |||||
Receivable for common shares purchased |
141 | 41 | |||||
Deferred financing costs |
158 | 325 | |||||
Receivable due on total return swap(1) |
1,855 | 329 | |||||
Unrealized appreciation on total return swap(1) |
5,731 | 3,141 | |||||
Prepaid expenses and other assets |
137 | 175 | |||||
Total assets |
$ | 1,056,120 | $ | 829,494 | |||
Liabilities |
|||||||
Payable for investments purchased |
$ | 13,932 | $ | 25,556 | |||
Credit facility payable |
187,232 | 185,232 | |||||
Shareholder distributions payable |
4,587 | 3,349 | |||||
Management fees payable |
5,062 | 3,522 | |||||
Expense recoupment payable to sponsor(2) |
99 | 1,083 | |||||
Accrued capital gains incentive fees(3) |
9,234 | 6,482 | |||||
Subordinated income incentive fees payable(3) |
753 | | |||||
Administrative services expense payable |
375 | 159 | |||||
Interest payable |
621 | 578 | |||||
Other accrued expenses and liabilities |
1,302 | 644 | |||||
Total liabilities |
223,197 | 226,605 | |||||
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, 87,444,533 and 64,524,909 shares issued and outstanding, respectively(4) |
87 | 65 | |||||
Capital in excess of par value(5) |
795,283 | 579,776 | |||||
Accumulated undistributed net realized gains on investments and total return swap and gain/loss on foreign currency(5) |
2,590 | | |||||
Accumulated distributions in excess of net investment income(5) |
(6,891 | ) | (3,354 | ) | |||
Net unrealized appreciation on investments and total return swap and gain/loss on foreign currency |
41,854 | 26,402 | |||||
Total shareholders' equity |
832,923 | 602,889 | |||||
Total liabilities and shareholders' equity |
$ | 1,056,120 | $ | 829,494 | |||
Net asset value per common share at period end |
$ | 9.53 | $ | 9.34 |
- (1)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (2)
- See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
payable by the Company to its investment adviser and affiliates.
- (3)
- See
Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and
subordinated income incentive fees.
- (4)
- As
discussed in Note 5, the Company paid a 1% share distribution in February 2012. The outstanding shares and net asset value per share reflect this
distribution on a retroactive basis.
- (5)
- See Note 5 for a discussion of the sources of distributions paid by the Company.
See notes to unaudited consolidated financial statements.
1
FS Energy and Power Fund
Unaudited Consolidated Statements of Operations
(in thousands, except share and per share amounts)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Investment Income |
|||||||
Interest income |
$ | 17,943 | $ | 2,502 | |||
Fee income |
2,968 | 216 | |||||
Total investment income |
20,911 | 2,718 | |||||
Operating expenses |
|||||||
Management fees |
4,711 | 775 | |||||
Capital gains incentive fees(1) |
3,610 | 519 | |||||
Subordinated income incentive fees(1) |
753 | | |||||
Administrative services expenses |
453 | 62 | |||||
Share transfer agent fees |
400 | 59 | |||||
Accounting and administrative fees |
140 | 38 | |||||
Interest expense |
1,242 | 269 | |||||
Other general and administrative expenses |
643 | 257 | |||||
Total operating expenses |
11,952 | 1,979 | |||||
Less: Expense reimbursement from sponsor(2) |
| (801 | ) | ||||
Net expenses |
11,952 | 1,178 | |||||
Net investment income |
8,959 | 1,540 | |||||
Realized and unrealized gain/loss |
|||||||
Net realized gain (loss) on investments |
(339 | ) | 330 | ||||
Net realized gain (loss) on total return swap(3) |
2,919 | 119 | |||||
Net realized gain (loss) on foreign currency |
10 | 9 | |||||
Net change in unrealized appreciation (depreciation) on investments |
12,867 | 1,842 | |||||
Net change in unrealized appreciation (depreciation) on total return swap(3) |
2,590 | 300 | |||||
Net change in unrealized gain (loss) on foreign currency |
(5 | ) | 3 | ||||
Total net realized and unrealized gain/loss on investments |
18,042 | 2,603 | |||||
Net increase (decrease) in net assets resulting from operations |
$ | 27,001 | $ | 4,143 | |||
Per share informationbasic and diluted(4) |
|||||||
Net increase (decrease) in net assets resulting from operations (Earnings per Share) |
$ | 0.36 | $ | 0.38 | |||
Weighted average shares outstanding |
75,360,255 | 10,889,229 | |||||
- (1)
- See
Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and
subordinated income incentive fees.
- (2)
- See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
payable by the Company to its investment adviser and affiliates.
- (3)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (4)
- As discussed in Note 5, the Company paid a 1% share distribution in February 2012. The weighted average shares used in the per share computation of the net increase (decrease) in net assets resulting from operations is based on the weighted average shares outstanding during the relevant period and reflects the share distribution on a retroactive basis.
See notes to unaudited consolidated financial statements.
2
FS Energy and Power Fund
Unaudited Consolidated Statements of Changes in Net Assets
(in thousands)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Operations |
|||||||
Net investment income |
$ | 8,959 | $ | 1,540 | |||
Net realized gain (loss) on investments, total return swap and foreign currency |
2,590 | 458 | |||||
Net change in unrealized appreciation (depreciation) on investments |
12,867 | 1,842 | |||||
Net change in unrealized appreciation (depreciation) on total return swap(1) |
2,590 | 300 | |||||
Net change in unrealized gain (loss) on foreign currency |
(5 | ) | 3 | ||||
Net increase (decrease) in net assets resulting from operations |
27,001 | 4,143 | |||||
Shareholder distributions(2) |
|||||||
Distributions from net investment income |
(12,496 | ) | (1,450 | ) | |||
Distributions from net realized gain on investments |
| (339 | ) | ||||
Net decrease in net assets resulting from shareholder distributions |
(12,496 | ) | (1,789 | ) | |||
Capital share transactions |
|||||||
Issuance of common shares |
209,986 | 62,208 | |||||
Reinvestment of shareholder distributions |
6,971 | 696 | |||||
Repurchases of common shares |
(228 | ) | | ||||
Offering costs |
(1,200 | ) | (418 | ) | |||
Reimbursement of investment adviser(3) |
| (1,022 | ) | ||||
Capital contributions of investment adviser |
| 418 | |||||
Net increase in net assets resulting from capital share transactions |
215,529 | 61,882 | |||||
Total increase in net assets |
230,034 | 64,236 | |||||
Net assets at beginning of period |
602,889 | 67,685 | |||||
Net assets at end of period |
$ | 832,923 | $ | 131,921 | |||
Accumulated distributions in excess of net investment income(2) |
$ | (6,891 | ) | $ | (342 | ) | |
- (1)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (2)
- See
Note 5 for a discussion of the sources of distributions paid by the Company.
- (3)
- See Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.
See notes to unaudited consolidated financial statements.
3
FS Energy and Power Fund
Unaudited Consolidated Statements of Cash Flows
(in thousands)
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Cash flows from operating activities |
|||||||
Net increase (decrease) in net assets resulting from operations |
$ | 27,001 | $ | 4,143 | |||
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities: |
|||||||
Purchases of investments |
(178,209 | ) | (79,537 | ) | |||
Proceeds from sales and repayments of investments |
35,892 | 28,666 | |||||
Net realized (gain) loss on investments |
339 | (330 | ) | ||||
Net change in unrealized (appreciation) depreciation on investments |
(12,867 | ) | (1,842 | ) | |||
Net change in unrealized (appreciation) depreciation on total return swap(1) |
(2,590 | ) | (300 | ) | |||
Accretion of discount |
(399 | ) | (437 | ) | |||
Amortization of deferred financing costs |
167 | 42 | |||||
(Increase) decrease in due from counterparty |
(19,400 | ) | (290 | ) | |||
(Increase) decrease in receivable for overfunded investment |
| 434 | |||||
(Increase) decrease in receivable for investments sold and repaid |
9,243 | (4 | ) | ||||
(Increase) decrease in reimbursement due from sponsor(2) |
| (777 | ) | ||||
(Increase) decrease in interest receivable |
(3,975 | ) | (721 | ) | |||
(Increase) decrease in receivable due on total return swap(1) |
(1,526 | ) | 184 | ||||
(Increase) decrease in prepaid expenses and other assets |
38 | 18 | |||||
Increase (decrease) in payable for investments purchased |
(11,624 | ) | (11,320 | ) | |||
Increase (decrease) in management fees payable |
1,540 | 831 | |||||
Increase (decrease) in expense recoupment payable to sponsor(2) |
(984 | ) | | ||||
Increase (decrease) in accrued capital gains incentive fees |
2,752 | 519 | |||||
Increase (decrease) in subordinated income incentive fees payable |
753 | | |||||
Increase (decrease) in administrative services expense payable |
216 | 62 | |||||
Increase (decrease) in interest payable |
43 | 54 | |||||
Increase (decrease) in other accrued expenses and liabilities |
658 | 103 | |||||
Net cash used in operating activities |
(152,932 | ) | (60,502 | ) | |||
Cash flows from financing activities |
|||||||
Issuance of common shares |
209,886 | 62,063 | |||||
Reinvestment of shareholder distributions |
6,971 | 696 | |||||
Repurchases of common shares |
(228 | ) | | ||||
Offering costs |
(1,200 | ) | (418 | ) | |||
Capital contributions of investment adviser |
| 418 | |||||
Reimbursement of investment adviser(3) |
| (1,022 | ) | ||||
Shareholder distributions |
(11,258 | ) | (1,434 | ) | |||
Borrowings under credit facility(4) |
2,000 | 29,482 | |||||
Net cash provided by financing activities |
206,171 | 89,785 | |||||
Total increase (decrease) in cash |
53,239 | 29,283 | |||||
Cash at beginning of period |
48,986 | 10,810 | |||||
Cash at end of period |
$ | 102,225 | $ | 40,093 | |||
- (1)
- See
Note 8 for a discussion of the Company's total return swap agreement.
- (2)
- See
Note 4 for a discussion of expense reimbursements paid to the Company by its investment adviser and affiliates and recoupment of such amounts
payable by the Company to its investment adviser and affiliates.
- (3)
- See
Note 4 for a discussion of reimbursements paid by the Company to its investment adviser and affiliates.
- (4)
- During the three months ended March 31, 2013 and 2012, the Company paid $1,032 and $173, respectively, in interest expense on the credit facility.
See notes to unaudited consolidated financial statements.
4
FS Energy and Power Fund
Unaudited Consolidated Schedule of Investments
As of March 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) | Industry | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Secured LoansFirst Lien24.8% |
||||||||||||
BBH Operating LLC, Prime+500, 3.3% Prime Floor, 2/26/15 |
Upstream | $ | 30,000 | $ | 30,000 | $ | 30,000 | |||||
Boomerang Tube, LLC, L+950, 1.5% LIBOR Floor, 10/11/17(d) |
Service & Equipment | 14,625 | 14,218 | 14,808 | ||||||||
Crestwood Holdings LLC, L+825, 1.5% LIBOR Floor, 3/26/18(d) |
Midstream | 21,151 | 21,281 | 21,795 | ||||||||
Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d) |
Power | 4,695 | 4,775 | 4,902 | ||||||||
Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d) |
Power | 5,039 | 5,111 | 5,262 | ||||||||
EMG Utica, LLC, L+375, 1.0% LIBOR Floor, 3/27/20(d)(e) |
Midstream | 2,000 | 2,020 | 2,015 | ||||||||
EP Acquisition LLC, Prime+500, 3.3% Prime Floor, 3/31/15 |
Upstream | 750 | 750 | 750 | ||||||||
EquiPower Resources Holdings, LLC, L+425, 1.3% LIBOR Floor, 12/21/18(d) |
Power | 1,963 | 1,970 | 2,002 | ||||||||
FREIF North American Power I LLC (TLB), L+450, 1.5% LIBOR Floor, 3/29/19 |
Power | 2,747 | 2,699 | 2,774 | ||||||||
FREIF North American Power I LLC (TLC), L+450, 1.5% LIBOR Floor, 3/29/19 |
Power | 440 | 432 | 444 | ||||||||
Hudson Products Holdings Inc., L+575, 1.3% LIBOR Floor, 6/7/17 |
Service & Equipment | 1,671 | 1,671 | 1,688 | ||||||||
LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19(d) |
Power | 1,242 | 1,213 | 1,261 | ||||||||
Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18(d) |
Power | 909 | 896 | 923 | ||||||||
Panda Temple Power, LLC (TLA), L+700, 1.5% LIBOR Floor, 7/17/18 |
Power | 15,000 | 14,725 | 15,431 | ||||||||
Panda Temple Power, LLC (TLB), L+1000, 1.5% LIBOR Floor, 7/17/18 |
Power | 40,000 | 39,263 | 40,950 | ||||||||
Rice Drilling B LLC, Prime+400, 4.0% Prime Floor, 6/30/14 |
Upstream | 60,000 | 59,023 | 60,000 | ||||||||
Star West Generation LLC, L+400, 1.0% LIBOR Floor, 3/13/20(d)(e) |
Power | 2,000 | 2,035 | 2,028 | ||||||||
Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18(d) |
Midstream | 2,336 | 2,314 | 2,385 | ||||||||
Texas Competitive Electric Holdings Co. LLC, L+450, 10/10/17(d) |
Power | 40,009 | 26,686 | 28,462 | ||||||||
Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(d)(f) |
Service & Equipment | 5,438 | 5,373 | 5,424 | ||||||||
Total Senior Secured LoansFirst Lien |
236,455 | 243,304 | ||||||||||
Unfunded Loan Commitments |
(36,500 | ) | (36,500 | ) | ||||||||
Net Senior Secured LoansFirst Lien |
199,955 | 206,804 | ||||||||||
Senior Secured LoansSecond Lien11.4% |
||||||||||||
Ameriforge Group Inc., L+750, 1.3% LIBOR Floor, 12/19/20(d) |
Service & Equipment | 19,950 | 20,324 | 20,474 | ||||||||
Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19(d)(e) |
Service & Equipment | 23,000 | 22,064 | 23,000 | ||||||||
Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d) |
Service & Equipment | 21,693 | 21,704 | 21,992 | ||||||||
EquiPower Resources Holdings, LLC, L+850, 1.5% LIBOR Floor, 6/21/19(d) |
Power | 8,000 | 7,856 | 8,220 | ||||||||
Sabine Oil & Gas LLC, L+750, 1.3% LIBOR Floor, 12/31/18(d)(e) |
Upstream | 7,702 | 7,823 | 7,909 | ||||||||
W3 Co., L+800, 1.3% LIBOR Floor, 9/13/20(d)(e) |
Service & Equipment | 2,987 | 2,983 | 3,061 | ||||||||
WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20(d) |
Service & Equipment | 10,000 | 9,901 | 10,375 | ||||||||
Total Senior Secured LoansSecond Lien |
92,655 | 95,031 | ||||||||||
Senior Secured Bonds5.0% |
||||||||||||
CEMEX Finance LLC, 9.4%, 10/12/22(d)(f) |
Service & Equipment | 4,900 | 5,087 | 5,714 | ||||||||
CVR Refining, LLC, 6.5%, 11/1/22(d)(f) |
Downstream | 3,000 | 3,000 | 3,076 | ||||||||
Edgen Murray Corp., 8.8%, 11/1/20(d)(f) |
Service & Equipment | 2,200 | 2,185 | 2,299 | ||||||||
Energy Future Intermediate Holding Co. LLC, 11.8%, 3/1/22(d) |
Power | 12,000 | 12,800 | 13,800 | ||||||||
Energy Future Intermediate Holding Co. LLC, 6.9%, 8/15/17(d) |
Power | 1,100 | 1,100 | 1,167 | ||||||||
Prince Mineral Holding Corp., 11.5%, 12/15/19(d) |
Service & Equipment | 6,500 | 6,780 | 7,277 | ||||||||
Ryerson Inc., 9.0%, 10/15/17 |
Service & Equipment | 1,300 | 1,300 | 1,422 | ||||||||
Shale-Inland Holdings, LLC, 8.8%, 11/15/19(d) |
Service & Equipment | 7,000 | 6,955 | 7,368 | ||||||||
Total Senior Secured Bonds |
39,207 | 42,123 | ||||||||||
See notes to unaudited consolidated financial statements.
5
FS Energy and Power Fund
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) | Industry | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Subordinated Debt55.9% |
||||||||||||
Alta Mesa Holdings, L.P., 9.6%, 10/15/18(d) |
Upstream | $ | 42,616 | $ | 42,584 | $ | 45,493 | |||||
Antero Resources Finance Corp., 9.4%, 12/1/17(d) |
Upstream | 4,753 | 5,083 | 5,185 | ||||||||
Atlas Pipeline Partners, L.P., 6.6%, 10/1/20(d)(f) |
Midstream | 1,300 | 1,300 | 1,363 | ||||||||
Aurora USA Oil & Gas, Inc., 9.9%, 2/15/17(d)(f) |
Upstream | 21,250 | 21,822 | 23,366 | ||||||||
BreitBurn Energy Partners L.P., 7.9%, 4/15/22(d)(f) |
Upstream | 4,000 | 4,135 | 4,292 | ||||||||
Chaparral Energy Inc., 7.6%, 11/15/22(d) |
Upstream | 9,000 | 9,294 | 9,854 | ||||||||
Chaparral Energy Inc., 8.3%, 9/1/21(d) |
Upstream | 4,000 | 4,086 | 4,532 | ||||||||
Comstock Resources, Inc., 9.5%, 6/15/20(d)(f) |
Upstream | 12,000 | 11,473 | 13,301 | ||||||||
Crestwood Midstream Partners L.P., 7.8%, 4/1/19(d)(f) |
Midstream | 10,000 | 10,097 | 10,279 | ||||||||
CrownRock, L.P., 10.0%, 8/15/16 |
Upstream | 10,000 | 10,647 | 10,838 | ||||||||
EP Energy LLC, 7.8%, 9/1/22(d) |
Upstream | 6,600 | 6,624 | 7,299 | ||||||||
EPE Holdings LLC, 8.1%, 12/15/17(d) |
Upstream | 6,000 | 5,970 | 6,270 | ||||||||
EPL Oil & Gas, Inc., 8.3%, 2/15/18(d)(f) |
Upstream | 3,200 | 3,170 | 3,402 | ||||||||
Era Group Inc., 7.8%, 12/15/22(d)(f) |
Service & Equipment | 9,750 | 9,587 | 10,067 | ||||||||
Everest Acquisition LLC, 9.4%, 5/1/20(d) |
Upstream | 19,250 | 19,920 | 22,234 | ||||||||
Foresight Energy LLC, 9.6%, 8/15/17(d) |
Upstream | 4,000 | 4,111 | 4,340 | ||||||||
Forest Oil Corp., 7.5%, 9/15/20(d)(f) |
Upstream | 5,250 | 5,250 | 5,553 | ||||||||
Global Partners L.P., 8.0%, 2/14/18(f) |
Midstream | 70,000 | 67,932 | 68,600 | ||||||||
GulfMark Offshore, Inc., 6.4%, 3/15/22(d)(f) |
Service & Equipment | 5,925 | 5,954 | 6,145 | ||||||||
Halcón Resources Corporation, 8.9%, 5/15/21(d)(f) |
Upstream | 11,750 | 11,790 | 12,657 | ||||||||
Heckmann Corp., 9.9%, 4/15/18(d)(f) |
Service & Equipment | 5,500 | 5,513 | 5,884 | ||||||||
Hercules Offshore, Inc., 10.5%, 10/15/17(d)(f) |
Service & Equipment | 5,000 | 5,052 | 5,450 | ||||||||
Hiland Partners, L.P., 7.3%, 10/1/20(d) |
Midstream | 1,750 | 1,750 | 1,917 | ||||||||
Legacy Reserves, L.P., 8.0%, 12/1/20(d)(f) |
Upstream | 16,750 | 16,397 | 17,420 | ||||||||
Martin Midstream Partners L.P., 7.3%, 2/15/21(d)(f) |
Midstream | 3,000 | 3,000 | 3,049 | ||||||||
NRG Energy, Inc., 6.6%, 3/15/23(d)(f) |
Power | 6,750 | 6,750 | 7,178 | ||||||||
NRG Energy, Inc., 8.3%, 9/1/20(d)(f) |
Power | 4,750 | 4,677 | 5,376 | ||||||||
QR Energy, L.P., 9.3%, 8/1/20(d)(f) |
Upstream | 15,000 | 15,110 | 15,962 | ||||||||
Resolute Energy Corp., 8.5%, 5/1/20(d)(f) |
Upstream | 10,800 | 10,982 | 11,198 | ||||||||
Rex Energy Corp., 8.9%, 12/1/20(d)(f) |
Upstream | 15,000 | 14,895 | 15,761 | ||||||||
Samson Investment Co., 9.8%, 2/15/20(d) |
Upstream | 25,000 | 25,032 | 26,646 | ||||||||
Seitel, Inc., 9.5%, 4/15/19(d) |
Service & Equipment | 5,000 | 5,000 | 5,004 | ||||||||
Sidewinder Drilling Inc., 9.8%, 11/15/19(d) |
Service & Equipment | 21,500 | 21,605 | 21,859 | ||||||||
Silver II US Holdings, LLC, 7.8%, 12/15/20(d)(f) |
Service & Equipment | 3,000 | 3,000 | 3,184 | ||||||||
Talos Production LLC, 9.8%, 2/15/18(d) |
Upstream | 15,000 | 14,855 | 14,813 | ||||||||
The Kenan Advantage Group, Inc., 8.4%, 12/15/18(d) |
Service & Equipment | 10,250 | 10,426 | 10,788 | ||||||||
Vanguard Natural Resources, LLC, 7.9%, 4/1/20(d)(f) |
Upstream | 4,750 | 4,750 | 5,074 | ||||||||
Zachry Holdings, Inc., 7.5%, 2/1/20(d) |
Service & Equipment | 13,150 | 13,431 | 13,725 | ||||||||
Total Subordinated Debt |
443,054 | 465,358 | ||||||||||
See notes to unaudited consolidated financial statements.
6
FS Energy and Power Fund
Unaudited Consolidated Schedule of Investments (continued)
As of March 31, 2013
(in thousands, except share amounts)
Portfolio Company(a) | Industry | Number of Shares |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Equity/Other5.7%(g) |
||||||||||||
BBH Operating, LLC, Common Equity(h)(i) |
Upstream | 1,000 | $ | 1,000 | $ | 1,000 | ||||||
Fortune Creek Co-Invest I L.P., LP Interest(f)(j) |
Midstream | N/A | 22,636 | 23,476 | ||||||||
Plains Offshore Operations Inc., Preferred Equity(d) |
Upstream | 210,339 | 21,100 | 21,975 | ||||||||
Plains Offshore Operations Inc., Strike: $20.00, Warrants(d)(i) |
Upstream | 405,378 | 689 | 649 | ||||||||
Total Equity/Other |
45,425 | 47,100 | ||||||||||
TOTAL INVESTMENTS102.8% |
$ | 820,296 | 856,416 | |||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(2.8%) |
(23,493 | ) | ||||||||||
NET ASSETS100.0% |
$ | 832,923 | ||||||||||
Total Return Swap | |
Notional Amount |
|
Unrealized Appreciation |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Citibank TRS Facility (Note 8)(f) |
$ | 192,645 | $ | 5,731 | ||||||||
- (a)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (b)
- Denominated
in U.S. dollars, unless otherwise noted.
- (c)
- Fair
value determined by the Company's board of trustees (see Note 7).
- (d)
- Security
or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving
credit facility with Deutsche Bank AG, New York Branch (see Note 8).
- (e)
- Position
or portion thereof unsettled as of March 31, 2013.
- (f)
- The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. As of March 31, 2013, 71.6% of the Company's
total assets represented qualifying assets. In addition, as described in Note 8, the Company also calculates its compliance with the qualifying asset test on a "look through" basis by
disregarding the value of the Company's total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the
obligor is an eligible portfolio company. On this basis, 72.5% of the Company's total assets represented qualifying assets as of March 31, 2013.
- (g)
- Listed
investments may be treated as debt for GAAP or tax purposes.
- (h)
- Security
held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.
- (i)
- Security
is non-income producing.
- (j)
- Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of March 31, 2013.
See notes to unaudited consolidated financial statements.
7
FS Energy and Power Fund
Consolidated Schedule of Investments
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) | Industry | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Secured LoansFirst Lien33.3% |
||||||||||||
Boomerang Tube, LLC, L+950, 1.5% LIBOR Floor, 10/11/17(d) |
Service & Equipment | $ | 14,813 | $ | 14,384 | $ | 14,627 | |||||
Crestwood Holdings LLC, L+825, 1.5% LIBOR Floor, 3/26/18(d) |
Midstream | 21,573 | 21,710 | 22,040 | ||||||||
Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16(d) |
Power | 4,947 | 5,029 | 5,160 | ||||||||
Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16(d) |
Power | 5,052 | 5,129 | 5,298 | ||||||||
EquiPower Resources Holdings, LLC, L+425, 1.3% LIBOR Floor, 12/21/18(d) |
Power | 1,995 | 2,002 | 2,027 | ||||||||
FREIF North American Power I LLC (TLB), L+450, 1.5% LIBOR Floor, 3/29/19 |
Power | 2,786 | 2,738 | 2,821 | ||||||||
FREIF North American Power I LLC (TLC), L+450, 1.5% LIBOR Floor, 3/29/19 |
Power | 440 | 432 | 446 | ||||||||
Hudson Products Holdings Inc., Prime+475, 6/7/17 |
Service & Equipment | 1,671 | 1,671 | 1,677 | ||||||||
LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19(d) |
Power | 1,864 | 1,820 | 1,898 | ||||||||
NANA Development Corp., L+550, 1.5% LIBOR Floor, 7/22/16 |
Service & Equipment | 1,646 | 1,620 | 1,636 | ||||||||
Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18(d) |
Power | 909 | 896 | 925 | ||||||||
Panda Temple Power, LLC (TLA), L+700, 1.5% LIBOR Floor, 7/17/18 |
Power | 15,000 | 14,716 | 15,225 | ||||||||
Panda Temple Power, LLC (TLB), L+1000, 1.5% LIBOR Floor, 7/17/18 |
Power | 40,000 | 39,240 | 40,700 | ||||||||
Rice Drilling B LLC, Prime+400, 4.0% Prime Floor, 6/30/14 |
Upstream | 45,000 | 44,179 | 45,000 | ||||||||
Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18(d) |
Power | 8,338 | 8,316 | 8,375 | ||||||||
Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18(d) |
Midstream | 2,342 | 2,319 | 2,369 | ||||||||
Texas Competitive Electric Holdings Co. LLC, L+450, 10/10/17(d)(e) |
Power | 40,009 | 26,229 | 26,756 | ||||||||
Total Safety U.S., Inc., L+625, 1.3% LIBOR Floor, 10/31/17(d) |
Service & Equipment | 8,211 | 8,132 | 8,321 | ||||||||
Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(d)(f) |
Service & Equipment | 5,438 | 5,360 | 5,451 | ||||||||
Total Senior Secured LoansFirst Lien |
205,922 | 210,752 | ||||||||||
Unfunded Loan Commitments |
(10,000 | ) | (10,000 | ) | ||||||||
Net Senior Secured LoansFirst Lien |
195,922 | 200,752 | ||||||||||
Senior Secured LoansSecond Lien12.2% |
||||||||||||
Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19(d)(e) |
Service & Equipment | 23,000 | 22,039 | 22,732 | ||||||||
Brock Holdings III, Inc., L+825, 1.8% LIBOR Floor, 3/16/18(d) |
Service & Equipment | 17,693 | 17,663 | 17,826 | ||||||||
EquiPower Resources Holdings, LLC, L+850, 1.5% LIBOR Floor, 6/21/19(d) |
Power | 8,000 | 7,850 | 8,233 | ||||||||
Southern Pacific Resource Corp., Prime+750, 1/7/16(d)(f) |
Upstream | 4,470 | 4,523 | 4,530 | ||||||||
Venoco, Inc., L+700, 1.5% LIBOR Floor, 6/30/17 |
Upstream | 9,821 | 9,632 | 10,030 | ||||||||
WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20(d)(e) |
Service & Equipment | 10,000 | 9,900 | 10,100 | ||||||||
Total Senior Secured LoansSecond Lien |
71,607 | 73,451 | ||||||||||
Senior Secured Bonds5.8% |
||||||||||||
CEMEX Finance LLC, 9.4%, 10/12/22(d)(f) |
Service & Equipment | 4,900 | 5,089 | 5,539 | ||||||||
CVR Refining, LLC, 6.5%, 11/1/22(d)(f) |
Downstream | 3,000 | 3,000 | 2,978 | ||||||||
Edgen Murray Corp., 8.8%, 11/1/20(d)(f) |
Service & Equipment | 2,200 | 2,185 | 2,222 | ||||||||
Energy Future Intermediate Holding Co. LLC, 6.9%, 8/15/17(d) |
Power | 1,100 | 1,100 | 1,173 | ||||||||
Energy Future Intermediate Holding Co. LLC, 11.8%, 3/1/22(d) |
Power | 10,000 | 10,525 | 11,175 | ||||||||
Prince Mineral Holding Corp., 11.5%, 12/15/19(d) |
Service & Equipment | 3,250 | 3,212 | 3,392 | ||||||||
Ryerson Inc., 9.0%, 10/15/17 |
Service & Equipment | 1,300 | 1,300 | 1,321 | ||||||||
Shale-Inland Holdings, LLC, 8.8%, 11/15/19(d) |
Service & Equipment | 7,000 | 6,955 | 7,358 | ||||||||
Total Senior Secured Bonds |
33,366 | 35,158 | ||||||||||
See notes to unaudited consolidated financial statements.
8
FS Energy and Power Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Portfolio Company(a) | Industry | Principal Amount(b) |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Subordinated Debt57.4% |
||||||||||||
Alta Mesa Holdings, L.P., 9.6%, 10/15/18(d) |
Upstream | $ | 42,616 | $ | 42,577 | $ | 44,052 | |||||
Antero Resources Finance Corp., 9.4%, 12/1/17(d) |
Upstream | 4,753 | 5,123 | 5,245 | ||||||||
Atlas Pipeline Partners, L.P., 6.6%, 10/1/20(d)(f) |
Midstream | 1,300 | 1,300 | 1,353 | ||||||||
Aurora USA Oil & Gas, Inc., 9.9%, 2/15/17(d)(f) |
Upstream | 21,250 | 21,853 | 22,922 | ||||||||
BreitBurn Energy Partners L.P., 7.9%, 4/15/22(d)(f) |
Upstream | 4,000 | 4,137 | 4,170 | ||||||||
Chaparral Energy Inc., 8.3%, 9/1/21(d) |
Upstream | 4,000 | 4,087 | 4,340 | ||||||||
Chaparral Energy Inc., 7.6%, 11/15/22(d) |
Upstream | 9,000 | 9,299 | 9,450 | ||||||||
Comstock Resources, Inc., 9.5%, 6/15/20(d)(f) |
Upstream | 12,000 | 11,463 | 12,744 | ||||||||
Crestwood Midstream Partners L.P., 7.8%, 4/1/19(d)(f) |
Midstream | 10,000 | 10,098 | 10,413 | ||||||||
CrownRock, L.P., 10.0%, 8/15/16 |
Upstream | 10,000 | 10,689 | 10,738 | ||||||||
EP Energy LLC, 7.8%, 9/1/22(d) |
Upstream | 6,600 | 6,624 | 7,054 | ||||||||
EPE Holdings LLC, 8.1%, 12/15/17(d) |
Upstream | 6,000 | 5,970 | 5,948 | ||||||||
EPL Oil & Gas, Inc., 8.3%, 2/15/18(d)(f) |
Upstream | 3,200 | 3,169 | 3,300 | ||||||||
Era Group Inc., 7.8%, 12/15/22(d)(f) |
Service & Equipment | 9,750 | 9,586 | 9,628 | ||||||||
Everest Acquisition LLC, 9.4%, 5/1/20(d) |
Upstream | 14,250 | 14,250 | 16,067 | ||||||||
Foresight Energy LLC, 9.6%, 8/15/17(d) |
Upstream | 4,000 | 4,117 | 4,260 | ||||||||
Forest Oil Corp., 7.5%, 9/15/20(d)(f) |
Upstream | 5,250 | 5,250 | 5,502 | ||||||||
GulfMark Offshore, Inc., 6.4%, 3/15/22(d)(f) |
Service & Equipment | 5,925 | 5,954 | 6,118 | ||||||||
Halcón Resources Corporation, 8.9%, 5/15/21(d)(f) |
Upstream | 11,750 | 11,791 | 12,535 | ||||||||
Heckmann Corp., 9.9%, 4/15/18(d)(f) |
Service & Equipment | 5,500 | 5,512 | 5,697 | ||||||||
Hercules Offshore, Inc., 10.5%, 10/15/17(d)(f) |
Service & Equipment | 5,000 | 5,053 | 5,438 | ||||||||
Hiland Partners, L.P., 7.3%, 10/1/20(d) |
Midstream | 1,750 | 1,750 | 1,881 | ||||||||
Legacy Reserves, L.P., 8.0%, 12/1/20(d)(f) |
Upstream | 16,750 | 16,390 | 17,169 | ||||||||
Lone Pine Resources Canada Ltd., 10.4%, 2/15/17(d)(f) |
Upstream | 2,000 | 1,975 | 1,871 | ||||||||
NRG Energy, Inc., 6.6%, 3/15/23(d)(f) |
Power | 6,750 | 6,750 | 7,215 | ||||||||
NRG Energy, Inc., 8.3%, 9/1/20(d)(f) |
Power | 4,750 | 4,676 | 5,338 | ||||||||
QR Energy, L.P., 9.3%, 8/1/20(d)(f) |
Upstream | 15,000 | 15,114 | 15,881 | ||||||||
Quicksilver Resources Inc., 7.1%, 4/1/16(d)(f) |
Upstream | 2,250 | 2,155 | 1,806 | ||||||||
Resolute Energy Corp., 8.5%, 5/1/20(d)(f) |
Upstream | 10,800 | 10,986 | 10,976 | ||||||||
Rex Energy Corp., 8.9%, 12/1/20(d)(f) |
Upstream | 15,000 | 14,896 | 15,113 | ||||||||
Samson Investment Co., 9.8%, 2/15/20(d) |
Upstream | 25,000 | 25,033 | 26,500 | ||||||||
Sidewinder Drilling Inc., 9.8%, 11/15/19(d) |
Service & Equipment | 19,500 | 19,587 | 19,573 | ||||||||
Silver II US Holdings, LLC, 7.8%, 12/15/20(d)(f) |
Service & Equipment | 3,000 | 3,000 | 3,116 | ||||||||
The Kenan Advantage Group, Inc., 8.4%, 12/15/18(d) |
Service & Equipment | 7,250 | 7,250 | 7,496 | ||||||||
Vanguard Natural Resources, LLC, 7.9%, 4/1/20(d)(f) |
Upstream | 4,750 | 4,750 | 4,940 | ||||||||
Total Subordinated Debt |
332,214 | 345,849 | ||||||||||
Equity/Other7.6%(g) |
|
Number of Shares |
Amortized Cost |
Fair Value(c) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Fortune Creek Co-Invest I L.P., LP Interest(f)(h) |
Midstream | N/A | 23,345 | 22,619 | ||||||||
Plains Offshore Operations Inc., Preferred Equity(d) |
Upstream | 209,227 | 20,776 | 22,370 | ||||||||
Plains Offshore Operations Inc., Strike: $20.00, Warrants(d)(i) |
Upstream | 405,378 | 689 | 973 | ||||||||
Total Equity/Other |
44,810 | 45,962 | ||||||||||
TOTAL INVESTMENTS116.3% |
$ | 677,919 | 701,172 | |||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS(16.3%) |
(98,283 | ) | ||||||||||
NET ASSETS100.0% |
$ | 602,889 | ||||||||||
See notes to unaudited consolidated financial statements.
9
FS Energy and Power Fund
Consolidated Schedule of Investments (continued)
As of December 31, 2012
(in thousands, except share amounts)
Total Return Swap | |
Notional Amount |
|
Unrealized Appreciation |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Citibank TRS Facility (Note 8)(f) |
$ | 131,632 | $ | 3,141 | ||||||||
- (a)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (b)
- Denominated
in U.S. dollars unless otherwise noted.
- (c)
- Fair
value determined by the Company's board of trustees (see Note 7).
- (d)
- Security
or portion thereof is held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the credit
facility with Deutsche Bank AG, New York Branch (see Note 8).
- (e)
- Position
or portion thereof unsettled as of December 31, 2012.
- (f)
- The
investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset
other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets. As of December 31, 2012, 72.3% of the
Company's total assets represented qualifying assets. In addition, as described in Note 8, the Company also calculates its compliance with the qualifying asset test on a "look through" basis by
disregarding the value of the Company's total return swap and treating each loan underlying the total return swap as either a qualifying asset or non-qualifying asset based on whether the
obligor is an eligible portfolio company. On this basis, 72.5% of the Company's total assets represented qualifying assets as of December 31, 2012.
- (g)
- Listed
investments may be treated as debt for GAAP or tax purposes.
- (h)
- Investment
denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2012.
- (i)
- Security is non-income producing.
See notes to unaudited consolidated financial statements.
10
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements
(in thousands, except share and per share amounts)
Note 1. Principal Business and Organization
FS Energy and Power Fund, or the Company, was formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced operations on July 18, 2011 upon raising gross proceeds in excess of $2,500, or the minimum offering requirement, from sales of its common shares of beneficial interest, or common shares, in its continuous public offering to persons who were not affiliated with the Company or the Company's investment adviser, FS Investment Advisor, LLC, or FS Advisor, a private investment firm that is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, or the Advisers Act, and an affiliate of the Company. Prior to satisfying the minimum offering requirement, the Company had no operations except for matters relating to its organization and registration as a non-diversified, closed-end management investment company.
The Company has elected to be regulated as a business development company, or BDC, under the Investment Company Act of 1940, as amended, or the 1940 Act. The Company is an externally managed, non-diversified, closed-end management investment company that has elected to be treated for federal income tax purposes, and intends to qualify annually, as a regulated investment company, or RIC, as defined under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As of March 31, 2013, the Company had two wholly-owned financing subsidiaries, FSEP Term Funding, LLC, or FSEP Funding, and EP Investments LLC, or EP Investments, and a third wholly-owned subsidiary, FSEP-BBH, Inc., through which it holds its common equity interest in BBH Operating, LLC, a non-control and non-affiliated portfolio company. The consolidated financial statements include both the Company's accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2013. All significant intercompany transactions have been eliminated in consolidation.
The Company's investment objective is to generate current income and long-term capital appreciation by investing primarily in privately-held U.S. companies in the energy and power industry. The Company's investment policy is to invest, under normal circumstances, at least 80% of its total assets in securities of energy and power related, or Energy, companies. The Company considers Energy companies to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company's interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2012 included in the Company's annual report on Form 10-K. Operating results for the three months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. The December 31, 2012 balance sheet and schedule of investments are derived from the 2012 audited consolidated financial statements. The Company has evaluated the impact of subsequent events
11
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
through the date the consolidated financial statements were issued and filed with the Securities and Exchange Commission, or the SEC.
Use of Estimates: The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Many of the amounts have been rounded, and all amounts are in thousands, except share and per share amounts.
Capital Gains Incentive Fee: The Company has entered into an investment advisory and administrative services agreement with FS Advisor, dated as of April 28, 2011, which was amended on August 10, 2012, and which, as amended, is referred to herein as the investment advisory and administrative services agreement. Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). Such fee will equal 20.0% of the Company's incentive fee capital gains (i.e., the Company's realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.
While the investment advisory and administrative services agreement with FS Advisor neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FS Advisor if the Company's entire portfolio was liquidated at its fair value as of the balance sheet date even though FS Advisor is not entitled to an incentive fee with respect to unrealized gains unless and until such gains are actually realized.
In addition, the Company has historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which is described more fully in Note 8), as realized capital gains and has included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FS Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC, or the Staff, has recently informed the Company that it is their interpretation of the applicable language in the Advisers Act that the Company should "look through" the TRS in calculating its capital gains incentive fee. Under this "look through" methodology, the portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FS Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or securities underlying the TRS would further reduce the capital gains
12
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 2. Summary of Significant Accounting Policies (continued)
incentive fee payable to FS Advisor with respect to realized gains. FS Advisor has voluntarily agreed to waive any capital gains incentive fee calculated in accordance with GAAP to which it would otherwise be entitled in respect of the TRS if and to the extent that the amount of such fee exceeds the sum of (i) the amount of capital gains incentive fee determined in respect of the TRS on a "look through" basis under which the Company treats the reference assets underlying the TRS as investments of the Company and (ii) the aggregate amount of subordinated incentive fees on income which would have been payable to FS Advisor with respect to the portion of the net settlement payments received by the Company pursuant to the TRS which represent net investment income on the loans or securities underlying the TRS on a "look through" basis. As of March 31, 2013, the aggregate capital gains incentive fees paid to FS Advisor in prior periods and accrued as of such date with respect to realized gains in accordance with GAAP were less than the fees which would have been payable in accordance with the "look through" methodology.
Subordinated Income Incentive Fee: Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor will not earn this incentive fee for any quarter until the Company's pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. Once the Company's pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS Advisor will be entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company's pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. Thereafter, FS Advisor will receive 20.0% of pre-incentive fee net investment income.
Reclassifications: Certain amounts in the unaudited consolidated financial statements for the three months ended March 31, 2012 have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three months ended March 31, 2013. These reclassifications had no material impact on the Company's consolidated financial position, results of operations or cash flows as previously reported.
Note 3. Share Transactions
Below is a summary of transactions with respect to the Company's common shares during the three months ended March 31, 2013 and 2012:
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||||||||
|
Shares | Amount | Shares | Amount | |||||||||
Gross Proceeds from Offering |
22,205,144 | $ | 229,963 | 6,935,527 | $ | 68,198 | |||||||
Reinvestment of Distributions |
738,729 | 6,971 | 77,778 | 696 | |||||||||
Total Gross Proceeds |
22,943,873 | 236,934 | 7,013,305 | 68,894 | |||||||||
Commissions and Dealer Manager Fees |
| (19,977 | ) | | (5,990 | ) | |||||||
Net Proceeds to Company |
22,943,873 | 216,957 | 7,013,305 | 62,904 | |||||||||
Share Repurchase Program |
(24,249 | ) | (228 | ) | | | |||||||
Net Proceeds from Share Transactions |
22,919,624 | $ | 216,729 | 7,013,305 | $ | 62,904 | |||||||
13
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
Status of Continuous Public Offering
Since commencing its continuous public offering and through May 14, 2013, the Company has sold 98,009,157 common shares (as adjusted for share distributions) for gross proceeds of $992,973. As of May 14, 2013, the Company had raised total gross proceeds of $1,013,177, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of the Company's board of trustees and certain individuals and entities affiliated with GSO Capital Partners LP, or GSO, the Company's sub-adviser, in a private placement conducted in April 2011 (see Note 4). During the three months ended March 31, 2013 and 2012, the Company sold 22,943,873 and 7,013,305 common shares (as adjusted for share distributions) for gross proceeds of $236,934 and $68,894 at an average price per share of $10.33 and $9.82, respectively. The gross proceeds received during the three months ended March 31, 2013 and 2012 include reinvested shareholder distributions of $6,971 and $696, respectively, for which the Company issued 738,729 and 77,778 common shares (as adjusted for share distributions), respectively. During the period from April 1, 2013 to May 14, 2013, the Company sold 12,763,355 common shares for gross proceeds of $133,992 at an average price per share of $10.50.
The proceeds from the issuance of common shares as presented on the Company's unaudited consolidated statements of changes in net assets and unaudited consolidated statements of cash flows are presented net of selling commissions and dealer manager fees of $19,977 and $5,990 for the three months ended March 31, 2013 and 2012, respectively.
Share Repurchase Program
The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company's board of trustees will consider the following factors, among others, in making its determination regarding whether to cause the Company to offer to repurchase common shares and under what terms:
-
- 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 the liquidation of securities investments as of the end of the applicable period to repurchase common shares. In addition, the Company will limit the number of common shares to be
14
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 3. Share Transactions (continued)
repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of common shares that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such common shares on each date of repurchase at a price equal to 90% of the offering price in effect on each date of repurchase. The Company's board of trustees may amend, suspend or terminate the repurchase program at any time, upon 30 days' notice. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with the Company's October 1, 2012 semi-monthly closing.
The following table sets forth the number of common shares repurchased by the Company under its share repurchase program during the three months ended March 31, 2013:
For the Three Months Ended | Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2012 |
January 2, 2013 | 24,249 | 100 | % | $ | 9.405 | $ | 228 |
On April 1, 2013, the Company repurchased 82,689 common shares (representing 100% of common shares tendered for repurchase) at $9.540 per share for aggregate consideration totaling $789.
Note 4. Related Party Transactions
Compensation of the Dealer Manager and Investment Adviser
Pursuant to the investment advisory and administrative services agreement, FS Advisor is entitled to an annual base management fee of 2.0% of the average value of the Company's gross assets and an incentive fee based on the Company's performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of the Company's operations. Management fees are paid on a quarterly basis in arrears.
The incentive fee consists of two parts. The first part, which is referred to as the subordinated incentive fee on income, is calculated and payable quarterly in arrears and equals 20.0% of "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. As a result, FS Advisor will not earn this incentive fee for any quarter until the Company's pre-incentive fee net investment income for such quarter exceeds the hurdle rate of 1.625%. Once the Company's pre-incentive fee net investment income in any quarter exceeds the hurdle rate, FS Advisor will be entitled to a "catch-up" fee equal to the amount of the pre-incentive fee net investment income in excess of the hurdle rate, until the Company's pre-incentive fee net investment income for such quarter equals 2.031%, or 8.125% annually, of adjusted capital. This "catch-up" feature allows FS Advisor to recoup the fees foregone as a result of the existence of the hurdle rate. Thereafter, FS Advisor will receive 20.0% of the pre-incentive fee net investment income.
The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is determined and payable in arrears as of the end of each calendar year (or upon termination of the investment advisory and administrative services agreement). This fee equals 20.0% of the Company's
15
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
incentive fee capital gains, which equal the Company's realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, computed net of all realized capital losses and unrealized capital depreciation on a cumulative basis, less the aggregate amount of any previously paid capital gains incentive fees. The Company accrues for the capital gains incentive fee, which, if earned, is paid annually. The Company accrues the capital gains incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized.
The Company reimburses FS Advisor for expenses necessary to perform services related to the Company's administration and operations. The amount of this reimbursement is set at the lesser of (1) FS Advisor's actual costs incurred in providing such services and (2) the amount that the Company estimates it would be required to pay alternative service providers for comparable services in the same geographic location. FS Advisor is required to allocate the cost of such services to the Company based on objective factors such as total assets, revenues, time allocations and/or other reasonable metrics. The Company's board of trustees then assesses the reasonableness of such reimbursements based on the breadth, depth and quality of such services as compared to the estimated cost to the Company of obtaining similar services from thirdparty providers known to be available. In addition, the Company's board of trustees considers whether any single thirdparty service provider would be capable of providing all such services at comparable cost and quality. Finally, the Company's board of trustees compares the total amount paid to FS Advisor for such services as a percentage of the Company's net assets to the same ratio as reported by other comparable BDCs.
Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate of FS Advisor, has funded certain of the Company's offering costs and organization costs. These costs have been recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by the Company. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised in the Company's continuous public offering until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) have been recovered. On July 18, 2011, the Company satisfied the minimum offering requirement. Since inception through March 31, 2013, Franklin Square Holdings has funded $3,143 in offering and organization costs. During the three months ended March 31, 2013 and 2012, the Company paid total reimbursements of $0 and $1,022, respectively, to FS Advisor and its affiliates. The reimbursements were recorded as a reduction of capital. As of March 31, 2013, no amounts remain reimbursable to FS Advisor and its affiliates under this arrangement.
The dealer manager for the Company's continuous public offering is FS2 Capital Partners, LLC, or FS2, which is one of the Company's affiliates. Under the dealer manager agreement among the Company, FS Advisor and FS2, FS2 is entitled to receive sales commissions and dealer manager fees in connection with the sale of common shares in the Company's continuous public offering, all or a portion of which may be re-allowed to selected broker-dealers.
16
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three months ended March 31, 2013 and 2012:
|
|
|
Three Months Ended March 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Related Party | Source Agreement | Description | 2013 | 2012 | |||||||
FS Advisor |
Investment Advisory and Administrative Services Agreement | Base Management Fee(1) | $ | 4,711 | $ | 775 | |||||
FS Advisor |
Investment Advisory and Administrative Services Agreement | Capital Gains Incentive Fee(2) | $ | 3,610 | $ | 519 | |||||
FS Advisor |
Investment Advisory and Administrative Services Agreement | Subordinated Incentive Fee on Income(3) | $ | 753 | $ | | |||||
FS Advisor |
Investment Advisory and Administrative Services Agreement | Administrative Services Expenses(4) | $ | 453 | $ | 62 | |||||
FS2 |
Dealer Manager Agreement | Dealer Manager Fee(5) | $ | 4,175 | $ | 1,276 |
- (1)
- During
the three months ended March 31, 2013 and 2012, $3,171 and $0, respectively, in base management fees were paid to FS Advisor. Of the $5,062 in
base management fees accrued and payable as of March 31, 2013, it is intended that the entire amount will be paid to FS Advisor.
- (2)
- During
the three months ended March 31, 2013 and 2012, the Company accrued capital gains incentive fees of $3,610 and $519, respectively, based on
the performance of its portfolio, of which $2,861 and $436, respectively, was based on unrealized gains and $749 and $83, respectively, was based on realized gains. No such fees are actually payable
by the Company with respect to such unrealized gains unless and until those gains are actually realized. As of December 31, 2012, $953 in capital gains incentive fees were payable by the
Company to FS Advisor, $858 of which was paid to FS Advisor during the three months ended March 31, 2013. The Company did not pay any amounts to FS Advisor in respect of the capital gains
incentive fee during the three months ended March 31, 2012.
- (3)
- During
the three months ended March 31, 2013, the Company accrued a subordinated incentive fee on income of $753 based upon the performance of its
portfolio. As of March 31, 2013, a subordinated incentive fee on income of $753 was payable to FS Advisor.
- (4)
- During
the three months ended March 31, 2013 and 2012, $326 and $51, respectively, of the accrued administrative services expenses related to the
allocation of costs of administrative personnel for services rendered to the Company by FS Advisor and the remainder related to other reimbursable expenses. The Company paid $237 in administrative
services expenses to FS Advisor during the three months ended March 31, 2013. The Company did not pay any amounts to FS Advisor in respect of such fee for the three months ended
March 31, 2012.
- (5)
- Represents aggregate sales commissions and dealer manager fees retained by FS2 and not re-allowed to selected broker-dealers.
Capital Contribution by FS Advisor and GSO
In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of $200 to purchase 22,444 common shares (as adjusted for share distributions) at $8.91 per share, which represents the initial public offering price (as adjusted for share distributions), net of selling commissions and dealer manager fees. The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains the Company's investment adviser.
17
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
In April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains the Company's investment adviser. In connection with the same private placement, certain members of the Company's board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, the Company issued an aggregate of 2,244,875 common shares (as adjusted for share distributions) for aggregate proceeds of approximately $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of May 14, 2013, the Company has sold an aggregate of 3,246,415 common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,110 to members of its board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.
Potential Conflicts of Interest
FS Advisor's senior management team is comprised of the same personnel as the senior management teams of FB Income Advisor, LLC and FSIC II Advisor, LLC, the investment advisers to Franklin Square Holdings' other affiliated BDCs, FS Investment Corporation and FS Investment Corporation II, respectively. As a result, such personnel provide investment advisory services to the Company and each of FS Investment Corporation and FS Investment Corporation II. While none of FS Advisor, FB Income Advisor, LLC or FSIC II Advisor, LLC is currently making private corporate debt investments for clients other than the Company, FS Investment Corporation and FS Investment Corporation II, respectively, any, or all, may do so in the future. In the event that FS Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company's investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FS Advisor or its management team. In addition, even in the absence of FS Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation and/or FS Investment Corporation II rather than to the Company.
Expense Reimbursement
Prior to February 14, 2012, Franklin Square Holdings agreed to reimburse the Company for expenses in an amount that was sufficient to ensure that, for tax purposes, the Company's net investment income and net capital gains were equal to or greater than the cumulative distributions paid to its shareholders in each quarter. This arrangement was designed to ensure that no portion of the Company's distributions represented a return of capital for its shareholders. Under this arrangement, Franklin Square Holdings had no obligation to reimburse any portion of the Company's expenses.
Pursuant to an expense support and conditional reimbursement agreement, dated as of February 14, 2012, or the expense reimbursement agreement, Franklin Square Holdings has agreed to reimburse the Company for expenses in an amount that is sufficient to ensure that no portion of the Company's distributions to shareholders will be paid from its offering proceeds or borrowings.
18
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
However, because certain investments the Company may make, including preferred and common equity investments, may generate dividends and other distributions to the Company that are treated for tax purposes as a return of capital, a portion of the Company's distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that the Company may use such dividends or other distribution proceeds to fund its distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse the Company for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse the Company for expenses in an amount equal to the difference between the Company's cumulative distributions paid to its shareholders in each quarter, less the sum of the Company's net investment income for tax purposes, net capital gains and dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, the Company will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of the Company's net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to the Company on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by the Company to shareholders.
The Company or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until it deems that the Company has achieved economies of scale sufficient to ensure that the Company bears a reasonable level of expenses in relation to its income. If the Company terminates the investment advisory and administrative services agreement with FS Advisor, the Company will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square Holdings within three years of the date of termination.
The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by the Company's chairman, president and chief executive officer, Michael C. Forman, and the Company's vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of the Company's expenses in future quarters.
During the three months ended March 31, 2012, the Company accrued $801 for reimbursements that Franklin Square Holdings had agreed to pay. As of March 31, 2013, the Company had no reimbursements due from Franklin Square Holdings.
Under the expense reimbursement agreement, amounts reimbursed to the Company by Franklin Square Holdings may become subject to repayment by the Company in the future. There were no
19
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 4. Related Party Transactions (continued)
amounts accrued during the three months ended March 31, 2013 and 2012, for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, the Company had accrued $1,083 for expense recoupments payable to Franklin Square Holdings, $984 of which was paid to Franklin Square Holdings during the three months ended March 31, 2013 and $99 of which remained payable by the Company as of March 31, 2013.
Note 5. Distributions
The following table reflects the cash distributions per share that the Company has declared and paid on its common shares during the three months ended March 31, 2013 and 2012:
|
Distribution | ||||||
---|---|---|---|---|---|---|---|
For the Three Months Ended | Per Share | Amount | |||||
Fiscal 2012 |
|||||||
March 31, 2012(1) |
$ | 0.1555 | $ | 1,789 | |||
Fiscal 2013 |
|||||||
March 31, 2013 |
$ | 0.1617 | $ | 12,496 |
- (1)
- The per share distribution has been retroactively adjusted, as necessary, to reflect the share distribution declared in February 2012 as discussed below.
On April 9, 2013, the Company's board of trustees declared a regular semi-monthly cash distribution of $0.026953 per share payable to shareholders of record on April 15, 2013 and a regular semi-monthly cash distribution of $0.027207 per share payable to shareholders of record on April 29, 2013, both of which were paid on April 30, 2013. On May 1, 2013, the Company's board of trustees declared two regular semi-monthly cash distributions of $0.027207 per share each, which will be paid on May 31, 2013 to shareholders of record on May 15, 2013 and May 30, 2013, respectively. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company's board of trustees.
The Company has adopted an "opt in" distribution reinvestment plan for its shareholders. As a result, if the Company makes a distribution, its shareholders will receive distributions in cash unless they specifically "opt in" to the distribution reinvestment plan so as to have their cash distributions reinvested in additional common shares.
The Company may fund its cash distributions to shareholders from any sources of funds available to it, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to the Company on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. The Company has not established limits on the amount of funds it may use from available sources to make distributions.
The Company expects that for a period of time following commencement of its continuous public offering, which time period may be significant, substantial portions of the Company's distributions may be funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that are subject to repayment by the Company within three years. The purpose of this arrangement is to ensure
20
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
that no portion of the Company's distributions to shareholders will be paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on the Company's investment performance and can only be sustained if the Company achieves positive investment performance in future periods and/or Franklin Square Holdings continues to make such reimbursements or waivers of such fees. The Company's future repayments of amounts reimbursed or waived by Franklin Square Holdings and its affiliates will reduce the distributions that shareholders would otherwise receive in the future. There can be no assurance that the Company will achieve the performance necessary to sustain its distributions or that the Company will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. For the three months ended March 31, 2013 and 2012, if Franklin Square Holdings had not reimbursed certain of the Company's expenses, 0% and 45%, respectively, of the cash distributions paid during the respective periods would have been funded from offering proceeds or borrowings.
The following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common shares during the three months ended March 31, 2013 and 2012:
|
Three Months Ended March 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||||||||
Source of Distribution | Distribution Amount |
Percentage | Distribution Amount |
Percentage | |||||||||
Offering proceeds |
$ | | | $ | | | |||||||
Borrowings |
| | | | |||||||||
Net investment income (prior to expense reimbursement)(1) |
12,496 | 100 | % | 649 | 36 | % | |||||||
Capital gains proceeds from the sale of assets |
| | 339 | 19 | % | ||||||||
Non-capital gains proceeds from the sale of assets |
| | | | |||||||||
Distributions on account of limited partnership interest |
| | | | |||||||||
Expense reimbursement from sponsor |
| | 801 | 45 | % | ||||||||
Total |
$ | 12,496 | 100 | % | $ | 1,789 | 100 | % | |||||
- (1)
- During the three months ended March 31, 2013 and 2012, 98% and 84%, respectively, of the Company's gross investment income was attributable to cash interest earned and 2% and 16%, respectively, was attributable to non-cash accretion of discount.
The Company's net investment income on a tax basis for the three months ended March 31, 2013 and 2012 was $13,821 and $1,450, respectively. As of March 31, 2013, the Company had $1,325 of undistributed tax-basis net investment income. As of March 31, 2012, the Company distributed all of its tax-basis net investment income earned as of March 31, 2012.
The difference between the Company's GAAP-basis net investment income and its tax-basis net investment income is due to the accrual for GAAP purposes of income on a limited partnership interest, the tax-basis deferral and amortization of organization costs incurred prior to the commencement of the Company's operations, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are
21
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
payable by the Company, the inclusion of a portion of the periodic net settlement payments due on the total return swap in tax-basis net investment income and the accretion of discount on the total return swap.
The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2013 and 2012:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
GAAP-basis net investment income |
$ | 8,959 | $ | 1,540 | |||
Income on limited partnership interest |
(646 | ) | (657 | ) | |||
Tax-basis deferral and amortization of organization costs |
(6 | ) | (6 | ) | |||
Reversal of incentive fee accrual on unrealized gains |
2,861 | 436 | |||||
Tax-basis net investment income portion of total return swap payments |
2,639 | 119 | |||||
Accretion of discount on total return swap |
14 | 18 | |||||
Tax-basis net investment income |
$ | 13,821 | $ | 1,450 | |||
The determination of the tax attributes of the Company's distributions is made annually as of the end of the Company's fiscal year based upon the Company's taxable income for the full year and distributions paid for the full year. Therefore, a determination made on a quarterly basis may not be representative of the actual tax attributes of the Company's distributions for a full year. The actual tax characteristics of distributions to shareholders are reported to shareholders annually on Form 1099-DIV.
The following table reflects the share distribution that the Company has declared on its common shares through March 31, 2013:
Date Declared | Record Date | Distribution Date | Distribution Percentage |
Shares Issued | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|
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 deducting selling commissions and dealer manager fees, as required by the 1940 Act, subject to certain limited exceptions. The Company's board of trustees determined that the Company's portfolio performance sufficiently warranted taking this action.
The share distribution increased the number of common shares outstanding, thereby reducing the Company's net asset value per share. However, because the share distribution was issued to all shareholders as of the record date in proportion to their holdings, the reduction in net asset value per share as a result of the share distribution was offset exactly by the increase in the number of common shares owned by each investor. As the overall value to an investor's position was not reduced as a result of the special share distribution, the Company's board of trustees determined that this issuance would not be dilutive to shareholders as of the record date. As the share distribution did not change any shareholder's proportionate interest in the Company, it did not represent a taxable distribution. Specific tax characteristics of all distributions are reported to shareholders annually on Form 1099-DIV.
22
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 5. Distributions (continued)
As of March 31, 2013 and December 31, 2012, the components of accumulated earnings on a tax basis were as follows:
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||
---|---|---|---|---|---|---|---|
Distributable ordinary income net of distributions received on limited partnership interest |
$ | 2,785 | $ | 171 | |||
Distribution receivable on limited partnership interest |
287 | 270 | |||||
Incentive fee accrual on unrealized gains |
(8,390 | ) | (5,529 | ) | |||
Unamortized organization costs |
(309 | ) | (315 | ) | |||
Net unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency(1) |
43,180 | 28,451 | |||||
|
$ | 37,553 | $ | 23,048 | |||
- (1)
- As of March 31, 2013 and December 31, 2012, the gross unrealized appreciation on the Company's investments and total return swap and gain on foreign currency was $43,277 and $29,698, respectively. As of March 31, 2013 and December 31, 2012, the gross unrealized depreciation on the Company's investments and loss on foreign currency was $97 and $1,247, respectively.
The aggregate cost of the Company's investments for federal income tax purposes totaled $818,909 and $675,823 as of March 31, 2013 and December 31, 2012, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis, including the Company's TRS with Citibank, N.A., or Citibank, was $43,180 and $28,451 as of March 31, 2013 and December 31, 2012, respectively.
Note 6. Investment Portfolio
The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of March 31, 2013 and December 31, 2012:
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||
Senior Secured LoansFirst Lien |
$ | 199,955 | $ | 206,804 | 24 | % | $ | 195,922 | $ | 200,752 | 29 | % | |||||||
Senior Secured LoansSecond Lien |
92,655 | 95,031 | 11 | % | 71,607 | 73,451 | 10 | % | |||||||||||
Senior Secured Bonds |
39,207 | 42,123 | 5 | % | 33,366 | 35,158 | 5 | % | |||||||||||
Subordinated Debt |
443,054 | 465,358 | 54 | % | 332,214 | 345,849 | 49 | % | |||||||||||
Equity/Other |
45,425 | 47,100 | 6 | % | 44,810 | 45,962 | 7 | % | |||||||||||
|
$ | 820,296 | $ | 856,416 | 100 | % | $ | 677,919 | $ | 701,172 | 100 | % | |||||||
- (1)
- Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
The following table summarizes the composition of the Company's investment portfolio at cost and fair value as of March 31, 2013 and December 31, 2012 to include, on a look-through basis, the
23
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 6. Investment Portfolio (continued)
investments underlying the TRS, as disclosed in Note 8. The investments underlying the TRS had a notional amount and market value of $192,645 and $197,255, respectively, as of March 31, 2013 and $131,632 and $133,482, respectively, as of December 31, 2012.
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||
Senior Secured LoansFirst Lien |
$ | 325,375 | $ | 334,672 | 32 | % | $ | 291,951 | $ | 298,125 | 36 | % | |||||||
Senior Secured LoansSecond Lien |
132,215 | 135,680 | 13 | % | 90,725 | 92,885 | 11 | % | |||||||||||
Senior Secured Bonds |
51,387 | 54,758 | 5 | % | 38,366 | 40,333 | 5 | % | |||||||||||
Subordinated Debt |
458,539 | 481,461 | 46 | % | 343,699 | 357,349 | 43 | % | |||||||||||
Equity/Other |
45,425 | 47,100 | 4 | % | 44,810 | 45,962 | 5 | % | |||||||||||
|
$ | 1,012,941 | $ | 1,053,671 | 100 | % | $ | 809,551 | $ | 834,654 | 100 | % | |||||||
- (1)
- Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
The Company does not "control" and is not an "affiliate" of any of its portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, the Company would be presumed to "control" a portfolio company if it owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if it owned 5% or more of its voting securities.
The Company's investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require the Company to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2013, the Company had two such investments with an aggregate unfunded commitment of $36,500. As of December 31, 2012, the Company had one such investment with an unfunded commitment of $10,000. The Company maintains sufficient cash on hand to fund such unfunded loan commitments should the need arise.
The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2013 and December 31, 2012:
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Industry Classification | Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
|||||||||
Upstream |
$ | 371,273 | 43 | % | $ | 335,486 | 48 | % | |||||
Midstream |
134,879 | 16 | % | 60,675 | 9 | % | |||||||
Downstream |
3,076 | 0 | % | 2,978 | 0 | % | |||||||
Service & Equipment |
207,008 | 24 | % | 159,268 | 23 | % | |||||||
Power |
140,180 | 17 | % | 142,765 | 20 | % | |||||||
Total |
$ | 856,416 | 100 | % | $ | 701,172 | 100 | % | |||||
24
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments
Under existing accounting guidance, fair value is defined as the price that the Company would receive upon selling an investment or pay to transfer a liability in an orderly transaction to a market participant in the principal or most advantageous market for the investment. This accounting guidance emphasizes that valuation techniques maximize the use of observable market inputs and minimize the use of unobservable inputs. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability, including assumptions about risk. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the assumptions market participants would use in pricing an asset or liability developed based on the best information available in the circumstances. The Company classifies the inputs used to measure these fair values into the following hierarchy as defined by current accounting guidance:
Level 1: Inputs that are quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Inputs that are quoted prices for similar assets or liabilities in active markets.
Level 3: Inputs that are unobservable for an asset or liability.
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
As of March 31, 2013 and December 31, 2012, the Company's investments were categorized as follows in the fair value hierarchy:
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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 |
856,416 | 5,731 | 701,172 | 3,141 | |||||||||
|
$ | 856,416 | $ | 5,731 | $ | 701,172 | $ | 3,141 | |||||
The Company's investments as of March 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued all of its investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by such service. Three senior secured loan investments and one subordinated debt investment, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of the Company's equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of earnings before interest, taxes, depreciation and amortization, or EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value.
25
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The Company valued its TRS in accordance with the agreements between EP Investments and Citibank which collectively establish the TRS and are collectively referred to herein as the TRS Agreement. Pursuant to the TRS Agreement, the value of the TRS is based on the increase or decrease in the value of the assets underlying the TRS, together with accrued interest income, interest expense and certain other expenses incurred under the TRS. The assets underlying the TRS are valued by Citibank. Citibank bases its valuation on the indicative bid prices provided by an independent third-party pricing service. Bid prices reflect the highest price that market participants may be willing to pay. These valuations are sent to the Company for review and testing. The Company's valuation committee and board of trustees review and approve the value of the TRS, as well as the value of the assets underlying the TRS, on a quarterly basis as part of their quarterly determination of net asset value. To the extent the Company's valuation committee or board of trustees has any questions or concerns regarding the valuation of the assets underlying the TRS, such valuation will be discussed or challenged pursuant to the terms of the TRS. For additional information on the TRS, see Note 8.
The Company's investments as of December 31, 2012 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, the Company valued all of its investments by using an independent third-party pricing service, which provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by such service. One senior secured loan investment, for which broker quotes were not available, was valued by an independent valuation firm, which determined the fair value of such investment by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features and other relevant terms of the debt. All of the Company's equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. The Company valued its TRS in accordance with the TRS Agreement, as described above.
The Company periodically benchmarks the bid and ask prices it receives from the third-party pricing service against the actual prices at which the Company purchases and sells its investments. Based on the results of the benchmark analysis and the experience of the Company's management in purchasing and selling these investments, the Company believes that these prices are reliable indicators of fair value. However, because of the private nature of this marketplace (meaning actual transactions are not publicly reported), the Company believes that these valuation inputs are classified as Level 3 within the fair value hierarchy. The Company may also use other methods to determine fair value for securities for which it cannot obtain prevailing bid and ask prices through its third-party pricing service or independent dealers, including the use of an independent valuation firm. The Company will periodically benchmark the valuations provided by the independent valuation firm against the actual prices at which it purchases and sells its investments. The Company's valuation committee and board of trustees reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company's valuation process.
26
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The following is a reconciliation for the three months ended March 31, 2013 and 2012 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:
|
For the Three Months Ended March 31, 2013 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Senior Secured Loans First Lien |
Senior Secured Loans Second Lien |
Senior Secured Bonds |
Subordinated Debt |
Equity/ Other |
Total | |||||||||||||
Fair value at beginning of period |
$ | 200,752 | $ | 73,451 | $ | 35,158 | $ | 345,849 | $ | 45,962 | $ | 701,172 | |||||||
Accretion of discount (amortization of premium) |
675 | 218 | (17 | ) | (92 | ) | (385 | ) | 399 | ||||||||||
Net realized gain (loss) |
135 | (52 | ) | | (422 | ) | | (339 | ) | ||||||||||
Net change in unrealized appreciation (depreciation) |
2,019 | 532 | 1,124 | 8,669 | 523 | 12,867 | |||||||||||||
Purchases |
15,006 | 35,173 | 5,858 | 121,172 | 1,000 | 178,209 | |||||||||||||
Sales and redemptions |
(11,783 | ) | (14,291 | ) | | (9,818 | ) | | (35,892 | ) | |||||||||
Net transfers in or out of Level 3 |
| | | | | | |||||||||||||
Fair value at end of period |
$ | 206,804 | $ | 95,031 | $ | 42,123 | $ | 465,358 | $ | 47,100 | $ | 856,416 | |||||||
The amount of total gains or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date |
$ | 2,283 | $ | 1,138 | $ | 1,124 | $ | 8,214 | $ | 523 | $ | 13,282 | |||||||
|
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 | |||||||||||||
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 or losses for the period included in changes in net assets attributable to the change in unrealized gains or losses relating to investments still held at the reporting date |
$ | 875 | $ | 211 | $ | 91 | $ | 522 | $ | 123 | $ | 1,822 | |||||||
27
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets valued by an independent valuation firm as of March 31, 2013 were as follows:
Type of Investment | Fair Value at March 31, 2013 (Unaudited)(1) |
Valuation Technique(2) | Unobservable Input | Range | Weighted Average |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Senior Secured LoansFirst Lien |
$ | 90,750 | Market Comparables | Market Yield (%) | 7.8% - 8.5% | 8.1% | |||||
Subordinated Debt |
$ | 68,600 | Market Comparables | Market Yield (%) | 8.3% - 8.8% | 8.5% | |||||
Equity/Other |
$ | 47,100 | Market Comparables | Market Yield (%) | 15.3% - 15.8% | 15.5% | |||||
|
Production Multiples (Mmb/d) | $1,255.0 - $1,305.0 | $1,280.0 | ||||||||
|
Proved Reserves Multiples (Mmboe) | $4.0x - $4.5x | $4.3x | ||||||||
|
PV-10 Multiples (x) | 0.1x - 0.2x | 0.2x | ||||||||
|
Discounted Cash Flow | Discount Rate (%) | 11.0% - 17.3% | 12.1% | |||||||
|
Option Valuation Model | Volatility (%) | 36.0% | 36.0% |
- (1)
- Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using an independent third-party pricing service, which
provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by such service. The TRS was valued in accordance with the TRS Agreement as
discussed above. As of March 31, 2013, $36,500 of the senior secured loans-first lien investments consisted of unfunded loan commitments.
- (2)
- For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement, and a significant increase (decrease) in any of the valuation multiples, in isolation, would result in a significantly higher (lower) fair value measurement. For investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.
The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements of assets valued by an independent valuation firm as of December 31, 2012 were as follows:
Type of Investment | Fair Value at December 31, 2012(1) |
Valuation Technique(2) | Unobservable Input | Range | Weighted Average |
||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Senior Secured LoansFirst Lien |
$ | 45,000 | Market Comparables | Market Yield (%) | 8.0% | 8.0% | |||||
Equity/Other |
$ | 45,962 | Market Comparables | Market Yield (%) | 15.3% - 15.8% | 15.5% | |||||
|
Discounted Cash Flow | Discount Rate (%) | 12.0% - 17.3% | 15.2% | |||||||
|
Option Valuation Model | Volatility (%) | 44.0% | 44.0% |
- (1)
- Except
as otherwise described in this footnote, the remaining Level 3 assets were valued by using an independent third-party pricing service, which
provided prevailing bid and ask prices from dealers on the date of the relevant period end that were screened for validity by such service. The TRS was valued in accordance with the TRS Agreement as
discussed above. As of December 31, 2012, $10,000 of the senior secured loan-first lien investment was an unfunded loan commitment.
- (2)
- For investments utilizing a market comparables valuation technique, a significant increase (decrease) in the market yield, in isolation, would result in a significantly lower (higher) fair value measurement. For
28
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 7. Fair Value of Financial Instruments (continued)
investments utilizing a discounted cash flow valuation technique, a significant increase (decrease) in the discount rate, in isolation, would result in a significantly lower (higher) fair value measurement. For investments utilizing an option valuation model valuation technique, a significant increase (decrease) in the volatility, in isolation, would result in a significantly higher (lower) fair value measurement.
Note 8. Financing Arrangements
The following table presents summary information with respect to the Company's outstanding financing arrangements as of March 31, 2013. For additional information regarding these financing facilities, please see the notes to the Company's audited financial statements contained in its annual report on Form 10-K for the year ended December 31, 2012 and the additional disclosure set forth in this Note 8.
Facility | Type of Facility | Rate | Amount Outstanding |
Amount Available |
Maturity Date | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Total Return Swap |
TRS | L + 1.30% | $ | 192,645 | $ | 7,355 | N/A(1) | |||||
Credit Facility |
Revolving | L + 1.60% to 1.85% | $ | 187,232 | $ | 52,768 | June 24, 2013 |
- (1)
- The TRS may be terminated by either party, in whole or in part, upon prior written notice to the other party.
Total Return Swap
On August 11, 2011, the Company's wholly-owned, special purpose financing subsidiary, EP Investments, entered into the TRS with Citibank. On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of assets which may be subject to the TRS from $25,000 to $100,000; and on October 11, 2012, EP Investments entered into a second amendment to the TRS to increase this amount from $100,000 to $200,000.
Under the TRS, EP Investments receives from Citibank all interest and fees payable in respect of the assets included in the TRS. EP Investments pays to Citibank interest at a rate equal to the one-month London Interbank Offered Rate, or LIBOR, plus 1.30% per annum on the full notional amount of the assets subject to the TRS. In addition, upon the termination or repayment of any asset subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such asset or pay to Citibank any depreciation in the value of such asset.
The value of the TRS is based primarily on the valuation of the underlying portfolio of assets subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying asset in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the asset in the open market. Citibank reports the mark-to-market values of the underlying assets to EP Investments. As of March 31, 2013 and December 31, 2012, the fair value of the TRS was $5,731 and $3,141, respectively. The fair value of the TRS is reflected as unrealized appreciation on total return swap on the Company's consolidated balance sheets. The change in value of the TRS is reflected in the Company's consolidated statements of operations as net change in unrealized appreciation (depreciation) on total return swap. As of March 31, 2013, EP Investments had selected 30 underlying assets with a total notional amount of $192,645 and posted $76,276 in cash collateral held by Citibank (of which only $76,195 was required to be posted), which is reflected in due from counterparty on the Company's consolidated balance sheets. As of December 31,
29
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
2012, EP Investments had selected 22 underlying assets with a total notional amount of $131,632 and posted $56,876 in cash collateral held by Citibank (of which only $53,565 was required to be posted), which is reflected in due from counterparty on the Company's consolidated balance sheets.
The Company incurred costs of $16 in connection with obtaining the TRS, which the Company has recorded as deferred financing costs on its consolidated balance sheets. As of March 31, 2013, all of such deferred financing costs have been amortized to interest expense.
For purposes of the asset coverage ratio test applicable to the Company as a BDC, the Company treats the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by EP Investments under the TRS, as a senior security for the life of that instrument. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the Staff.
Further, for purposes of Section 55(a) under the 1940 Act, the Company treats each asset underlying the TRS as a qualifying asset if the obligor on such asset is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. The Company may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the Staff.
30
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The following is a summary of the underlying assets subject to the TRS as of March 31, 2013:
Underlying Asset(1) | Industry | Notional Amount |
Market Value |
Unrealized Appreciation / (Depreciation) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Alon USA Energy, Inc., L+800, 1.3% LIBOR Floor, 11/13/18(2) |
Downstream | $ | 3,948 | $ | 4,312 | $ | 364 | |||||
Boomerang Tube, LLC, L+950, 1.5% LIBOR Floor, 10/11/17 |
Service & Equipment | 9,458 | 9,848 | 390 | ||||||||
Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19 |
Service & Equipment | 1,920 | 1,990 | 70 | ||||||||
Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17 |
Service & Equipment | 2,826 | 2,840 | 14 | ||||||||
Buffalo Gulf Coast Terminals LLC, L+400, 1.3% LIBOR Floor, 10/31/17 |
Midstream | 6,670 | 6,719 | 49 | ||||||||
Chaparral Energy Inc., 7.6%, 11/15/22 |
Upstream | 11,485 | 11,968 | 483 | ||||||||
Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16 |
Power | 6,016 | 6,124 | 108 | ||||||||
Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16 |
Power | 3,974 | 3,970 | (4 | ) | |||||||
EMG Utica, LLC, L+375, 1.0% LIBOR Floor, 3/27/20 |
Midstream | 7,828 | 7,897 | 69 | ||||||||
Everest Acquisition LLC, L+400, 1.0% LIBOR Floor, 4/24/18 |
Upstream | 8,558 | 8,629 | 71 | ||||||||
Hudson Products Holdings Inc., L+575, 1.3% LIBOR Floor, 6/7/17 |
Service & Equipment | 2,312 | 2,346 | 34 | ||||||||
La Paloma Generating Co., LLC, L+550, 1.5% LIBOR Floor, 8/25/17 |
Power | 1,628 | 1,712 | 84 | ||||||||
LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19 |
Power | 2,116 | 2,140 | 24 | ||||||||
McJunkin Red Man Corp., L+500, 1.3% LIBOR Floor, 11/8/19(2) |
Service & Equipment | 9,471 | 9,674 | 203 | ||||||||
Northern Tier Energy LLC, 7.1%, 11/15/20(2) |
Downstream | 5,000 | 5,300 | 300 | ||||||||
Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18 |
Power | 9,850 | 10,113 | 263 | ||||||||
Permian Tank & Manufacturing, Inc., 10.5%, 9/15/17 |
Service & Equipment | 5,000 | 5,150 | 150 | ||||||||
Ryerson Inc., 9.0%, 10/15/17 |
Service & Equipment | 2,180 | 2,185 | 5 | ||||||||
Sabine Oil & Gas LLC, L+750, 1.3% LIBOR Floor, 12/31/18 |
Upstream | 9,900 | 10,231 | 331 | ||||||||
Samson Investment Co., L+475, 1.3% LIBOR Floor, 9/25/18 |
Upstream | 12,367 | 12,492 | 125 | ||||||||
Star West Generation LLC, L+400, 1.0% LIBOR Floor, 3/13/20 |
Power | 11,392 | 11,583 | 191 | ||||||||
Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18 |
Midstream | 9,875 | 10,156 | 281 | ||||||||
Tervita Corp., 8.0%, 11/15/18(2) |
Service & Equipment | 4,000 | 4,135 | 135 | ||||||||
Topaz Power Holdings, LLC, L+400, 1.3% LIBOR Floor, 2/26/20 |
Power | 7,770 | 7,967 | 197 | ||||||||
UTEX Industries, Inc., L+550, 1.5% LIBOR Floor, 12/15/16 |
Service & Equipment | 4,456 | 4,440 | (16 | ) | |||||||
W3 Co., L+450, 1.3% LIBOR Floor, 3/13/20 |
Service & Equipment | 4,450 | 4,502 | 52 | ||||||||
W3 Co., L+800, 1.3% LIBOR Floor, 9/13/20 |
Service & Equipment | 5,473 | 5,611 | 138 | ||||||||
Westway Group, LLC, L+400, 1.0% LIBOR Floor, 2/27/20 |
Service & Equipment | 8,955 | 9,068 | 113 | ||||||||
Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(2) |
Service & Equipment | 3,867 | 3,828 | (39 | ) | |||||||
WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20 |
Service & Equipment | 9,900 | 10,325 | 425 | ||||||||
Total |
$ | 192,645 | $ | 197,255 | 4,610 | |||||||
|
Total TRS Accrued Income and Liabilities: | 1,121 | ||||||||||
|
Total TRS Fair Value: | $ | 5,731 | |||||||||
- (1)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (2)
- The investment is not a qualifying asset under the 1940 Act. A BDC may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets.
31
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
The following is a summary of the underlying assets subject to the TRS as of December 31, 2012:
Underlying Asset(1) | Industry | Notional Amount |
Market Value |
Unrealized Appreciation / (Depreciation) |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Alon USA Energy, Inc., L+800, 1.3% LIBOR Floor, 11/13/18(2) |
Downstream | $ | 3,958 | $ | 4,182 | $ | 224 | |||||
Boomerang Tube, LLC , L+950, 1.5% LIBOR Floor, 10/11/17 |
Service & Equipment | 9,579 | 9,727 | 148 | ||||||||
Brand Energy & Infrastructure Services, Inc., L+975, 1.3% LIBOR Floor, 10/23/19 |
Service & Equipment | 1,920 | 1,967 | 47 | ||||||||
Brock Holdings III, Inc., L+450, 1.5% LIBOR Floor, 3/16/17 |
Service & Equipment | 2,833 | 2,824 | (9 | ) | |||||||
Buffalo Gulf Coast Terminals LLC, L+400, 1.3% LIBOR Floor, 10/31/17 |
Midstream | 6,688 | 6,703 | 15 | ||||||||
Chaparral Energy Inc., 7.6%, 11/15/22 |
Upstream | 11,485 | 11,500 | 15 | ||||||||
Dynegy Midwest Generation LLC (CoalCo), L+775, 1.5% LIBOR Floor, 8/5/16 |
Power | 6,338 | 6,442 | 104 | ||||||||
Dynegy Power, LLC (GasCo), L+775, 1.5% LIBOR Floor, 8/5/16 |
Power | 3,984 | 3,994 | 10 | ||||||||
Everest Acquisition LLC, L+400, 1.0% LIBOR Floor, 4/24/18 |
Upstream | 3,300 | 3,354 | 54 | ||||||||
Hudson Products Holdings Inc., Prime+475, 6/7/17 |
Service & Equipment | 2,312 | 2,332 | 20 | ||||||||
La Paloma Generating Co., LLC, L+550, 1.5% LIBOR Floor, 8/25/17 |
Power | 1,632 | 1,708 | 76 | ||||||||
LSP Madison Funding, LLC, L+425, 1.3% LIBOR Floor, 6/28/19 |
Power | 3,178 | 3,222 | 44 | ||||||||
McJunkin Red Man Corp., L+500, 1.3% LIBOR Floor, 11/8/19(2) |
Service & Equipment | 9,495 | 9,615 | 120 | ||||||||
NANA Development Corp., L+550, 1.5% LIBOR Floor, 7/22/16 |
Service & Equipment | 4,721 | 4,751 | 30 | ||||||||
Northern Tier Energy LLC, 7.1%, 11/15/20(2) |
Downstream | 5,000 | 5,175 | 175 | ||||||||
Panda Sherman Power, LLC, L+750, 1.5% LIBOR Floor, 9/14/18 |
Power | 9,850 | 10,125 | 275 | ||||||||
Samson Investment Co., L+475, 1.3% LIBOR Floor, 9/25/18 |
Upstream | 7,298 | 7,417 | 119 | ||||||||
Star West Generation LLC, L+450, 1.5% LIBOR Floor, 5/17/18 |
Power | 9,877 | 9,947 | 70 | ||||||||
Tallgrass Operations, LLC, L+400, 1.3% LIBOR Floor, 11/13/18 |
Midstream | 9,900 | 10,079 | 179 | ||||||||
UTEX Industries, Inc., L+550, 1.5% LIBOR Floor, 12/15/16 |
Service & Equipment | 4,517 | 4,519 | 2 | ||||||||
Willbros United States Holdings, Inc., L+750, 2.0% LIBOR Floor, 6/30/14(2) |
Service & Equipment | 3,867 | 3,849 | (18 | ) | |||||||
WP CPP Holdings, LLC, L+925, 1.3% LIBOR Floor, 6/28/20 |
Service & Equipment | 9,900 | 10,050 | 150 | ||||||||
Total |
$ | 131,632 | $ | 133,482 | 1,850 | |||||||
|
Total TRS Accrued Income and Liabilities: | 1,291 | ||||||||||
|
Total TRS Fair Value: | $ | 3,141 | |||||||||
- (1)
- Security
may be an obligation of one or more entities affiliated with the named company.
- (2)
- The investment is not a qualifying asset under the 1940 Act. A BDC may not acquire any asset other than qualifying assets, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the company's total assets.
Credit Facility
On June 24, 2011, the Company's wholly-owned, special purpose financing subsidiary, FSEP Funding, entered into a credit facility, or the credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank. Deutsche Bank is the sole lender and serves as administrative agent under the credit facility. FSEP Funding and Deutsche Bank have entered into subsequent amendments to the credit facility, most recently on October 18, 2012, to increase the amount available thereunder. As of March 31, 2013 the credit facility provided for borrowings of up to $240,000 on a committed basis.
The Company may contribute cash or securities to FSEP Funding from time to time and will retain a residual interest in any assets contributed through its ownership of FSEP Funding. FSEP Funding may purchase additional securities from various sources. FSEP Funding's obligations to Deutsche Bank are secured by a first priority security interest in substantially all of the assets of FSEP Funding, including its portfolio of securities. The obligations of FSEP Funding under the credit facility are non-recourse to the Company.
32
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 8. Financing Arrangements (continued)
Pursuant to the terms of the credit facility, borrowings thereunder may be designated as Tranche A Commitments in an amount up to $50,000, as Tranche B Commitments in an amount up to $50,000, as Tranche C Commitments in an amount up to $75,000 or as Tranche D Commitments in an amount up to $65,000. Pricing under the credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, with the Tranche A Commitment bearing interest at the rate of LIBOR plus 1.60% per annum and the Tranche B Commitment, Tranche C Commitment and Tranche D Commitment bearing interest at the rate of LIBOR plus 1.85% per annum. The Tranche A Commitment and Tranche B Commitment are revolving commitments, and the Tranche C Commitment and Tranche D Commitment are term commitments. Interest is payable quarterly in arrears. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2013.
As of March 31, 2013 and December 31, 2012, $187,232 and $185,232, respectively, was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. The Company incurred costs of $700 in connection with obtaining and amending the credit facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the credit facility. As of March 31, 2013, $158 of such deferred financing costs have yet to be amortized to interest expense.
The effective interest rate under the credit facility as of March 31, 2013 was 2.07% per annum. Interest is paid quarterly in arrears and commenced November 20, 2011. The Company recorded interest expense of $1,242 and $263 for the three months ended March 31, 2013 and 2012, respectively, of which $167 and $36, respectively, related to the amortization of deferred financing costs and $107 and $20, respectively, related to commitment fees on the unused portion of the credit facility. The Company paid $1,032 and $173 in interest expense for the three months ended March 31, 2013 and 2012, respectively. The average borrowings under the credit facility for the three months ended March 31, 2013 and 2012 were $186,543 and $39,325 with a weighted average interest rate of 2.30% and 2.31%, respectively, which includes commitment fees on the unused portion of the credit facility.
33
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financial Highlights
The following is a schedule of financial highlights of the Company for the three months ended March 31, 2013 and the year ended December 31, 2012:
|
Three Months Ended March 31, 2013 (Unaudited) |
Year Ended December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Per Share Data:(1) |
|||||||
Net asset value, beginning of period |
$ | 9.34 | $ | 8.74 | |||
Results of operations(2) |
|||||||
Net investment income (loss) |
0.12 | 0.33 | |||||
Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency |
0.24 | 1.05 | |||||
Net increase (decrease) in net assets resulting from operations |
0.36 | 1.38 | |||||
Shareholder distributions(3) |
|||||||
Distributions from net investment income |
(0.16 | ) | (0.49 | ) | |||
Distributions from net realized gain on investments |
| (0.10 | ) | ||||
Distributions on account of limited partnership interest |
| (0.04 | ) | ||||
Net decrease in net assets resulting from shareholder distributions |
(0.16 | ) | (0.63 | ) | |||
Capital share transactions |
|||||||
Issuance of common shares(4) |
0.01 | 0.02 | |||||
Offering costs(2) |
(0.02 | ) | (0.12 | ) | |||
Reimbursement to investment adviser(2) |
| (0.07 | ) | ||||
Capital contributions of investment adviser(2) |
| 0.02 | |||||
Net increase (decrease) in net assets resulting from capital share transactions |
(0.01 | ) | (0.15 | ) | |||
Net asset value, end of period |
$ | 9.53 | $ | 9.34 | |||
Shares outstanding, end of period |
87,444,533 | 64,524,909 | |||||
Total return(5) |
3.75 | % | 14.07 | % | |||
Ratio/Supplemental Data: |
|||||||
Net assets, end of period |
$ | 832,923 | $ | 602,889 | |||
Ratio of net investment income to average net assets(6) |
1.26 | % | 3.64 | % | |||
Ratio of accrued capital gains incentive fees to average net assets(6) |
0.51 | % | 2.30 | % | |||
Ratio of subordinated income incentive fees to average net assets(6) |
0.11 | % | | ||||
Ratio of interest expense to average net assets(6) |
0.17 | % | 0.77 | % | |||
Ratio of operating expenses to average net assets(6) |
1.68 | % | 7.09 | % | |||
Ratio of expenses reimbursed by sponsor to average net assets(6) |
| (0.51 | %) | ||||
Ratio of expense recoupment payable to sponsor to average net assets(6) |
| 0.51 | % | ||||
Ratio of net operating expenses to average net assets(6) |
1.68 | % | 7.09 | % | |||
Portfolio turnover(7) |
4.57 | % | 75.24 | % | |||
- (1)
- The share information utilized to determine per share data has been retroactively adjusted to reflect the share distribution discussed in Note 5.
34
FS Energy and Power Fund
Notes to Unaudited Consolidated Financial Statements (continued)
(in thousands, except share and per share amounts)
Note 9. Financial Highlights (continued)
- (2)
- The
per share data was derived by using the weighted average shares outstanding during the applicable period.
- (3)
- The
per share data for distributions reflects the actual amount of distributions paid per share (as adjusted for share distributions) during the applicable
period.
- (4)
- The
issuance of common shares on a per share basis reflects the incremental net asset value changes as a result of the issuance of common shares in the
Company's continuous public offering and pursuant to the Company's distribution reinvestment plan. The issuance of common shares at an offering price, net of sales commissions and dealer manager fees,
that is greater than the net asset value per share results in an increase in net asset value per share. The per share impact of the Company's repurchases of common shares is a reduction to net asset
value of less than $0.01 per share during the applicable period.
- (5)
- The
total return for the three months ended March 31, 2013 was calculated by taking the net asset value per share as of March 31, 2013, adding
the cash distributions per share which were declared during the period and dividing the total by the net asset value per share on December 31, 2012. The 2012 total return was calculated by
taking the net asset value per share as of December 31, 2012, adding the cash distributions per share which were declared during the calendar year and dividing the total by the net asset value
per share on December 31, 2011. The total return does not consider the effect of the sales load from the sale of the Company's common shares. The total return includes the effect of the
issuance of common shares at a net offering price that is greater than net asset value per share, which causes an increase in net asset value per share. The historical calculation of total return in
the table should not be considered a representation of the Company's future total return, which may be greater or less than the return shown in the table due to a number of factors, including the
Company's ability or inability to make investments in companies that meet its investment criteria, the interest rate payable on the debt securities the Company acquires, the level of the Company's
expenses, variations in and the timing of the recognition of realized and unrealized gains or losses, the degree to which the Company encounters competition in its markets and general economic
conditions. As a result of these factors, results for any previous period should not be relied upon as being indicative of performance in future periods. The total return as calculated above
represents the total return on the Company's investment portfolio during such period and is calculated in accordance with GAAP. These return figures do not represent an actual return to shareholders.
- (6)
- Weighted
average net assets during the three months ended March 31, 2013 and the year ended December 31, 2012 was used for this calculation.
Ratios are not annualized.
- (7)
- Portfolio turnover is not annualized.
35
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(in thousands, except share and per share amounts)
The information contained in this section should be read in conjunction with our unaudited consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us" and "our" refer to FS Energy and Power Fund.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements because they relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q may include statements as to:
-
- 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 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 actual results could differ materially from those implied or expressed in the
36
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 Securities Exchange Act of 1934, as amended, or the Exchange Act.
Overview
We were formed as a Delaware statutory trust under the Delaware Statutory Trust Act on September 16, 2010 and formally commenced operations on July 18, 2011 upon raising gross proceeds in excess of $2,500 from sales of our common shares in our continuous public offering to persons who were not affiliated with us or FS Advisor. We are an externally managed, non-diversified, closed-end management investment company that has elected to be regulated as a BDC under the 1940 Act and has elected to be treated for federal income tax purposes, and intends to qualify annually, as a RIC under Subchapter M of the Code. Prior to satisfying the minimum offering requirement, we had no operations except for matters relating to our organization and registration as a non-diversified, closed-end management investment company.
Our investment activities are managed by FS Advisor and supervised by our board of trustees, a majority of whom are independent. Under our investment advisory and administrative services agreement, we have agreed to pay FS Advisor an annual base management fee based on our gross assets as well as incentive fees based on our performance. FS Advisor has engaged GSO to act as our investment sub-adviser. GSO assists FS Advisor in identifying investment opportunities and makes investment recommendations for approval by FS Advisor according to guidelines set by FS Advisor.
Our investment policy is to invest, under normal circumstances, at least 80% of our total assets in securities of Energy companies. We consider Energy companies to be those companies that engage in the exploration, development, production, gathering, transportation, processing, storage, refining, distribution, mining, generation or marketing of natural gas, natural gas liquids, crude oil, refined products, coal or power. This investment policy may not be changed without at least 60 days' prior notice to holders of our common shares of any such change.
Our investment objectives are to generate current income and long-term capital appreciation. We have identified and intend to focus on the following five investment categories, which we believe will allow us to generate an attractive total return with an acceptable level of risk.
Originated/Proprietary Transactions: We intend to leverage our relationship with GSO and their global sourcing and origination platform to identify proprietary investment opportunities. We define proprietary investments as any investment originated or structured specifically for us or made by us that
37
was not generally available to the broader market. Proprietary investments may include both debt and equity components, although we do not expect to make equity investments (other than incomeoriented equity investments) independent of having an existing credit relationship. We believe proprietary transactions may offer attractive investment opportunities as they typically offer higher returns than broadly syndicated transactions.
Anchor Orders: In addition to proprietary transactions, we will invest in certain opportunities that are originated and then syndicated by a commercial or investment bank but where we provide a capital commitment significantly above the average syndicate participant. Our decision to provide an anchor order to a syndicated transaction is predicated on a rigorous credit analysis, our familiarity with a particular company, Energy industry sub-sector or financial sponsor, and the broader investment experiences of FS Advisor and GSO. In these types of investments, we may receive fees, preferential pricing or other benefits not available to other lenders in return for our significant capital commitment.
Event Driven: We intend to take advantage of dislocations that arise in the markets due to an impending event and where the market's apparent expectation of value differs substantially from our fundamental analysis. Such events may include a looming debt maturity or default, a merger, spin-off or other corporate reorganization, an adverse regulatory or legal ruling, or a material contract expiration, any of which may significantly improve or impair a company's financial position. Compared to other investment strategies, event driven investing depends more heavily on our ability to successfully predict the outcome of an individual event rather than on underlying macroeconomic fundamentals. As a result, successful event driven strategies may offer both substantial diversification benefits and the ability to generate performance in uncertain market environments.
Opportunistic: We intend to seek to capitalize on market price inefficiencies by investing in loans, bonds and other securities where the market price of such investment reflects a lower value than deemed warranted by our fundamental analysis. We believe that market price inefficiencies may occur due to, among other things, general dislocations in the markets, a misunderstanding by the market of a particular company or an Energy industry sub-sector being out of favor with the broader investment community. We seek to allocate capital to these securities that have been misunderstood or mispriced by the market and where we believe there is an opportunity to earn an attractive return on our investment.
Broadly Syndicated/Other: Although our primary focus is to invest in proprietary transactions, in certain circumstances we will also invest in the broadly syndicated loan and high yield markets. Broadly syndicated loans and bonds are generally more liquid than our proprietary investments and provide a complement to our more illiquid proprietary strategies. In addition, and because we typically receive more attractive financing terms on these positions than we do on our less liquid assets, we are able to leverage the broadly syndicated portion of our portfolio in such a way that maximizes the levered return potential of our portfolio.
Our portfolio is comprised primarily of income-oriented securities, which refers to debt securities and income-oriented preferred and common equity interests, of privately-held Energy companies within the United States. We intend to weight our portfolio towards senior and subordinated debt. In addition to investments purchased from dealers or other investors in the secondary market, we expect to invest in primary market transactions and originated investments as this will provide us with the ability to tailor investments to best match a project's or company's needs with our investment objectives. Our portfolio may also be comprised of select income-oriented preferred or common equity interests, which refers to equity interests that pay consistent, high-yielding dividends, that we believe will produce both current income and long-term capital appreciation. These income-oriented preferred or common equity interests may include interests in master limited partnerships. In connection with certain of our debt investments, we may on occasion receive equity interests such as warrants or options as additional consideration. We expect that the size of our individual investments will generally range between
38
$5 million and $25 million each, although investments may vary as the size of our capital base changes and will ultimately be at the discretion of FS Advisor, subject to oversight by our board of trustees.
Revenues
The principal measure of our financial performance is net increase in net assets resulting from operations, which includes net investment income, net realized gain on investments, net realized gain on total return swap, net unrealized appreciation and depreciation on investments, net unrealized appreciation and depreciation on total return swap and net unrealized gain and loss on foreign currency. Net investment income is the difference between our income from interest, dividends, fees and other investment income and our operating expenses. Net realized gain on investments is the difference between the proceeds received from dispositions of portfolio investments and their amortized cost. Net realized gain on total return swap is the net monthly settlement payments received on the TRS. Net unrealized appreciation and depreciation on investments is the net change in the fair value of our investment portfolio. Net unrealized appreciation and depreciation on total return swap is the net change in fair value of the TRS. Net unrealized gain and loss on foreign currency is the net change in the value of receivables or accruals due to the impact of foreign currency fluctuations.
We principally generate revenues in the form of interest income on the debt investments we hold. We also generate revenues in the form of dividends and other distributions on the equity or other securities we may hold. In addition, we may generate revenues in the form of commitment, closing, origination, structuring or diligence fees, monitoring fees, fees for providing managerial assistance, consulting fees and performance-based fees. Any such fees generated in connection with our investments will be recognized as earned.
Expenses
Our primary operating expenses include the payment of advisory fees and other expenses under the investment advisory and administrative services agreement, interest expense from financing facilities and other expenses necessary for our operations. Our investment advisory fees compensate FS Advisor for its work in identifying, evaluating, negotiating, executing, monitoring and servicing our investments. FS Advisor is responsible for compensating our investment sub-adviser.
We reimburse FS Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FS Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records which we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, FS Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. See "Related Party Transactions" for additional information regarding the reimbursements payable to FS Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2012.
Portfolio Investment Activity for the Three Months Ended March 31, 2013 and for the Year Ended December 31, 2012
During the three months ended March 31, 2013, we made investments in portfolio companies totaling $178,209. During the same period, we sold investments totaling $1,810 and received principal repayments of $34,082. As of March 31, 2013, our investment portfolio, with a total fair value of
39
$856,416 consisted of interests in 69 portfolio companies (24% in first lien senior secured loans, 11% in second lien senior secured loans, 5% in senior secured bonds, 54% in subordinated debt and 6% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $389.5 million. As of March 31, 2013, the investments in our portfolio were purchased at a weighted average price of 98.1% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 78.5% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage, was 9.5% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of March 31, 2013. The portfolio yield does not represent an actual investment return to shareholders.
Based on our regular semi-monthly cash distribution rate of $0.026953 per share as of March 31, 2013 and our public offering price of $10.60 per share as of such date, the annualized distribution rate to shareholders as of March 31, 2013 was 6.10%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2012 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.
During the year ended December 31, 2012, we made investments in portfolio companies totaling $826,011. During the same period, we sold investments totaling $175,782 and received principal repayments of $68,410. As of December 31, 2012, our investment portfolio, with a total fair value of $701,172, consisted of interests in 64 portfolio companies (29% in first lien senior secured loans, 10% in second lien senior secured loans, 5% in senior secured bonds, 49% in subordinated debt and 7% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $504.1 million. As of December 31, 2012, the investments in our portfolio were purchased at a weighted average price of 97.6% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 86.8% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale and our estimated gross annual portfolio yield, prior to leverage, was 9.7% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2012. The portfolio yield does not represent an actual investment return to shareholders.
Based on our regular semi-monthly cash distribution rate of $0.026824 per share as of December 31, 2012 and our public offering price of $10.40 per share as of such date, the annualized distribution rate to shareholders as of December 31, 2012 was 6.19%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2012 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.
40
The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2013 and December 31, 2012:
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||
Senior Secured LoansFirst Lien |
$ | 199,955 | $ | 206,804 | 24 | % | $ | 195,922 | $ | 200,752 | 29 | % | |||||||
Senior Secured LoansSecond Lien |
92,655 | 95,031 | 11 | % | 71,607 | 73,451 | 10 | % | |||||||||||
Senior Secured Bonds |
39,207 | 42,123 | 5 | % | 33,366 | 35,158 | 5 | % | |||||||||||
Subordinated Debt |
443,054 | 465,358 | 54 | % | 332,214 | 345,849 | 49 | % | |||||||||||
Equity/Other |
45,425 | 47,100 | 6 | % | 44,810 | 45,962 | 7 | % | |||||||||||
|
$ | 820,296 | $ | 856,416 | 100 | % | $ | 677,919 | $ | 701,172 | 100 | % | |||||||
- (1)
- Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
The following table summarizes the composition of our investment portfolio at cost and fair value as of March 31, 2013 and December 31, 2012 to include, on a look-through basis, the investments underlying the TRS, as disclosed in Note 8 to our consolidated financial statements contained in this quarterly report on Form 10-Q. The investments underlying the TRS had a notional amount and market value of $192,645 and $197,255, respectively, as of March 31, 2013 and $131,632 and $133,482, respectively, as of December 31, 2012.
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
Amortized Cost(1) |
Fair Value | Percentage of Portfolio |
|||||||||||||
Senior Secured LoansFirst Lien |
$ | 325,375 | $ | 334,672 | 32 | % | $ | 291,951 | $ | 298,125 | 36 | % | |||||||
Senior Secured LoansSecond Lien |
132,215 | 135,680 | 13 | % | 90,725 | 92,885 | 11 | % | |||||||||||
Senior Secured Bonds |
51,387 | 54,758 | 5 | % | 38,366 | 40,333 | 5 | % | |||||||||||
Subordinated Debt |
458,539 | 481,461 | 46 | % | 343,699 | 357,349 | 43 | % | |||||||||||
Equity/Other |
45,425 | 47,100 | 4 | % | 44,810 | 45,962 | 5 | % | |||||||||||
|
$ | 1,012,941 | $ | 1,053,671 | 100 | % | $ | 809,551 | $ | 834,654 | 100 | % | |||||||
- (1)
- Amortized cost represents the original cost adjusted for the amortization of premiums and/or accretion of discounts, as applicable, on investments.
We do not "control" and are not an "affiliate" of any of our portfolio companies, each as defined in the 1940 Act. In general, under the 1940 Act, we would be presumed to "control" a portfolio company if we owned 25% or more of its voting securities and would be an "affiliate" of a portfolio company if we owned 5% or more of its voting securities.
Our investment portfolio may contain loans that are in the form of lines of credit or revolving credit facilities, which require us to provide funding when requested by portfolio companies in accordance with the terms of the underlying loan agreements. As of March 31, 2013, we had two such investments with an aggregate unfunded commitment of $36,500. As of December 31, 2012, we had one such investment with an unfunded commitment of $10,000. We maintain sufficient cash on hand to fund such unfunded loan commitments should the need arise.
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The table below describes investments by industry classification and enumerates the percentage, by fair value, of the total portfolio assets in such industries as of March 31, 2013 and December 31, 2012:
|
March 31, 2013 (Unaudited) | December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Industry Classification | Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
|||||||||
Upstream |
$ | 371,273 | 43 | % | $ | 335,486 | 48 | % | |||||
Midstream |
134,879 | 16 | % | 60,675 | 9 | % | |||||||
Downstream |
3,076 | 0 | % | 2,978 | 0 | % | |||||||
Service & Equipment |
207,008 | 24 | % | 159,268 | 23 | % | |||||||
Power |
140,180 | 17 | % | 142,765 | 20 | % | |||||||
Total |
$ | 856,416 | 100 | % | $ | 701,172 | 100 | % | |||||
As of March 31, 2013 and December 31, 2012, approximately 49% and 49%, respectively, of our portfolio based on fair value constituted non-broadly syndicated investments. We define non-broadly syndicated investments as any investment that is considered proprietary, an anchor order or an opportunistic or event driven investment. The table below enumerates the percentage, by fair value, of the types of investments in our portfolio as of March 31, 2013 and December 31, 2012:
|
March 31, 2013 (Unaudited) | December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Deal Composition | Fair Value | Percentage of Portfolio | Fair Value | Percentage of Portfolio | |||||||||
Originated/Proprietary |
$ | 169,950 | 20 | % | $ | 80,962 | 11 | % | |||||
Anchor Orders |
189,957 | 22 | % | 195,411 | 28 | % | |||||||
Event Driven |
| | | | |||||||||
Opportunistic |
59,307 | 7 | % | 68,745 | 10 | % | |||||||
Broadly Syndicated/Other |
437,202 | 51 | % | 356,054 | 51 | % | |||||||
Total |
$ | 856,416 | 100 | % | $ | 701,172 | 100 | % | |||||
Portfolio Asset Quality
In addition to various risk management and monitoring tools, FS Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our portfolio. FS Advisor uses an investment rating scale of 1 to 5. The following is a description of the conditions associated with each investment rating:
Investment Rating |
Summary Description | |
---|---|---|
1 | Investment exceeding expectations and/or capital gain expected. | |
2 |
Performing investment generally executing in accordance with the portfolio company's business plan-full return of principal and interest expected. |
|
3 |
Performing investment requiring closer monitoring. |
|
4 |
Underperforming investment-some loss of interest or dividend possible, but still expecting a positive return on investment. |
|
5 |
Underperforming investment with expected loss of interest and some principal. |
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The following table shows the distribution of our investments on the 1 to 5 investment rating scale at fair value as of March 31, 2013 and December 31, 2012:
|
March 31, 2013 (Unaudited) |
December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Investment Rating | Fair Value | Percentage of Portfolio |
Fair Value | Percentage of Portfolio |
|||||||||
1 |
$ | 58,456 | 7 | % | $ | 34,149 | 5 | % | |||||
2 |
769,498 | 90 | % | 636,590 | 91 | % | |||||||
3 |
| | 3,677 | 1 | % | ||||||||
4 |
28,462 | 3 | % | 26,756 | 3 | % | |||||||
5 |
| | | | |||||||||
|
$ | 856,416 | 100 | % | $ | 701,172 | 100 | % | |||||
The amount of the portfolio in each grading category may vary substantially from period to period resulting primarily from changes in the composition of the portfolio as a result of new investment, repayment and exit activities. In addition, changes in the grade of investments may be made to reflect our expectation of performance and changes in investment values.
Results of Operations
Comparison of the Three Months Ended March 31, 2013 and 2012
Revenues
We generated investment income of $20,911 and $2,718 for the three months ended March 31, 2013 and 2012, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments and dividends and other distributions earned on equity securities in our portfolio. Such revenues represent $20,512 and $2,281 of cash income earned as well as $399 and $437 in non-cash portions relating to accretion of discount, accrual of limited partnership income and paid-in-kind interest for the three months ended March 31, 2013 and 2012, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. The increase in investment income is due primarily to the growth of our portfolio over the last year. The level of income we receive is directly related to the balance of income producing investments multiplied by the weighted average yield of our investments. We expect the dollar amount of interest and any dividend income that we earn to increase as the size of our investment portfolio increases.
Expenses
Our total operating expenses were $11,952 and $1,979 for the three months ended March 31, 2013 and 2012, respectively. Our operating expenses include base management fees attributed to FS Advisor of $4,711 and $775 for the three months ended March 31, 2013 and 2012, respectively. Our operating expenses also include administrative services expenses attributed to FS Advisor of $453 and $62 for the three months ended March 31, 2013 and 2012, respectively.
FS Advisor is eligible to receive incentive fees based on performance. During the three months ended March 31, 2013, we accrued a subordinated incentive fee on income of $753 based upon the performance of our portfolio. We did not accrue any subordinated incentive fee on income during the three months ended March 31, 2012. During the three months ended March 31, 2013 and 2012, we accrued capital gains incentive fees of $3,610 and $519, respectively, based on the performance of our portfolio of which $2,861 and $436, respectively, was based on unrealized gains and $749 and $83, respectively, was based on realized gains. No such fees are actually payable by us with respect to such unrealized gains unless and until those gains are actually realized. See "Critical Accounting PoliciesCapital Gains Incentive Fee."
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We recorded interest expense of $1,242 and $269 for the three months ended March 31, 2013 and 2012, respectively, relating to our credit facility and the amortization of deferred financing costs incurred in connection with such credit facility and the establishment of our TRS. For the three months ended March 31, 2013 and 2012, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $140 and $38, respectively, and fees and expenses incurred with our share transfer agent totaled $400 and $59, respectively.
Our other general and administrative expenses totaled $643 and $257 for the three months ended March 31, 2013 and 2012, respectively, and consisted of the following:
|
Three Months Ended March 31, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Expenses associated with our independent audit and related fees |
$ | 75 | $ | 84 | |||
Compensation of our chief compliance officer |
10 | 12 | |||||
Legal fees |
200 | 31 | |||||
Printing fees |
14 | 14 | |||||
Insurance expense |
29 | 20 | |||||
Trustee fees |
200 | 82 | |||||
Other |
115 | 14 | |||||
Total |
$ | 643 | $ | 257 | |||
We generally expect our operating expenses related to our ongoing operations to increase because of the anticipated growth in the size of our asset base. During the three months ended March 31, 2013 and 2012, the ratio of our operating expenses to our average net assets was 1.68% and 2.04%, respectively. For the three months ended March 31, 2012, the ratio of our net operating expenses to our average net assets, which includes $801 of expense reimbursements from Franklin Square Holdings, was 1.21%. During the three months ended March 31, 2013 and 2012, our ratio of net operating expenses to average net assets included $1,242 and $269, respectively, related to interest expense and $4,363 and $519, respectively, related to accruals for incentive fees. Without such expenses, our ratio of net operating expenses to average net assets would have been 0.89% and 1.23% for the three months ended March 31, 2013 and 2012, respectively. Incentive fees, interest expense and costs relating to our continuous public offering, among other things, may increase or decrease our operating expenses in relation to our expense ratios relative to comparative periods depending on portfolio performance, changes in benchmark interest rates such as LIBOR and offerings of our securities, among other factors. As the size of our asset base and number of investors have grown, our general and administrative expenses increased accordingly. Legal fees increased with the increase in the number of filing and the number of shareholders.
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
44
return of capital, a portion of our distributions to shareholders may also be deemed to constitute a return of capital for tax purposes to the extent that we may use such dividends or other distribution proceeds to fund our distributions to shareholders. Under those circumstances, Franklin Square Holdings will not reimburse us for the portion of such distributions to shareholders that represent a return of capital for tax purposes, as the purpose of the expense reimbursement arrangement is not to prevent tax-advantaged distributions to shareholders.
Under the expense reimbursement agreement, Franklin Square Holdings will reimburse us for expenses in an amount equal to the difference between our cumulative distributions paid to our shareholders in each quarter, less the sum of our net investment income for tax purposes, net capital gains and dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent such amounts are not included in net investment income or net capital gains for tax purposes) in each quarter.
Pursuant to the expense reimbursement agreement, we will have a conditional obligation to reimburse Franklin Square Holdings for any amounts funded by Franklin Square Holdings under such agreement if (and only to the extent that), during any fiscal quarter occurring within three years of the date on which Franklin Square Holdings funded such amount, the sum of our net investment income for tax purposes, net capital gains and the amount of any dividends and other distributions paid to us on account of preferred and common equity investments in portfolio companies (to the extent not included in net investment income or net capital gains for tax purposes) exceeds the distributions paid by us to shareholders.
We or Franklin Square Holdings may terminate the expense reimbursement agreement at any time. Franklin Square Holdings has indicated that it expects to continue such reimbursements until it deems that we have achieved economies of scale sufficient to ensure that we bear a reasonable level of expenses in relation to our income. If we terminate the investment advisory and administrative services agreement with FS Advisor, we will be required to repay Franklin Square Holdings all reimbursements funded by Franklin Square Holdings within three years of the date of termination.
The specific amount of expenses reimbursed by Franklin Square Holdings, if any, will be determined at the end of each quarter. Franklin Square Holdings is controlled by our chairman, president and chief executive officer, Michael C. Forman, and our vice-chairman, David J. Adelman. There can be no assurance that the expense reimbursement agreement will remain in effect or that Franklin Square Holdings will reimburse any portion of our expenses in future quarters.
During the three months ended March 31, 2012, we accrued $801 for reimbursements that Franklin Square Holdings had agreed to pay. As of March 31, 2013, we had no reimbursements due from Franklin Square Holdings.
Under the expense reimbursement agreement, amounts reimbursed to us by Franklin Square Holdings may become subject to repayment by us in the future. There were no amounts accrued during the three months ended March 31, 2013 and 2012, for expense recoupments payable to Franklin Square Holdings. As of December 31, 2012, we had accrued $1,083 for expense recoupments payable to Franklin Square Holdings, $984 of which was paid to Franklin Square Holdings during the three months ended March 31, 2013 and $99 of which remained payable by us as of March 31, 2013.
Net Investment Income
Our net investment income totaled $8,959 ($0.12 per share) and $1,540 ($0.14 per share) for the three months ended March 31, 2013 and 2012, respectively.
Net Realized Gains or Losses
We sold investments and received principal repayments of $1,810 and $34,082, respectively, during the three months ended March 31, 2013, from which we realized a net loss of $339. During the three
45
months ended March 31, 2013, we earned $2,919 from periodic net settlement payments on our TRS, which are reflected as realized gains, and realized a net gain of $10 from settlements on foreign currency. We sold investments and received principal repayments of $28,666 during the three months ended March 31, 2012, from which we realized net gains of $330. We earned $119 from periodic net settlement payments on our TRS which are reflected as realized gains and $9 from settlements on foreign currency.
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, 2013 and 2012, the net change in unrealized appreciation (depreciation) on investments totaled $12,867 and $1,842, respectively; net change in unrealized appreciation (depreciation) on our TRS was $2,590 and $300, respectively; and the net change in unrealized gain (loss) on foreign currency was $(5) and $3, respectively. The net change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended March 31, 2013 was primarily driven by a continuation of the tightening of credit spreads that occurred during 2012. The net change in unrealized appreciation (depreciation) on our investments during each of the three months ended March 31, 2013 and 2012 was primarily driven by a general strengthening in the credit markets during the prior period and continued tightening of credit spreads in the first quarter of 2013.
Net Increase (Decrease) in Net Assets Resulting from Operations
For the three months ended March 31, 2013 and 2012, the net increase (decrease) in net assets resulting from operations was $27,001 ($0.36 per share) and $4,143 ($0.38 per share), respectively.
Financial Condition, Liquidity and Capital Resources
Overview
As of March 31, 2013, we had $102,225 in cash, which we hold in a custodial account, and $76,276 in cash held as collateral by Citibank under the terms of the TRS. In addition, we had $52,768 in borrowings available under the credit facility and $7,355 available under the TRS as of March 31, 2013. Below is a summary of our outstanding financing facilities as of March 31, 2013:
Facility | Type of Facility | Rate | Amount Outstanding |
Amount Available | Maturity Date | |||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Total Return Swap |
TRS | L + 1.30% | $ | 192,645 | $ | 7,355 | N/A(1) | |||||
Credit Facility |
Revolving | L + 1.60% to 1.85% | $ | 187,232 | $ | 52,768 | June 24, 2013 |
- (1)
- The TRS may be terminated by either party, in whole or in part, upon prior written notice to the other party.
During the three months ended March 31, 2013, we sold 22,943,873 common shares for gross proceeds of $236,934 at an average price per share of $10.33. The gross proceeds received during the three months ended March 31, 2013 include reinvested shareholder distributions of $6,971 for which we issued 738,729 common shares. During the three months ended March 31, 2013, we also incurred offering costs of $1,200 in connection with the sale of our common shares, which consisted primarily of legal, due diligence and printing fees. The offering costs were offset against capital in excess of par value in our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $19,977 for the three months ended March 31, 2013. These sales commissions and fees include $4,175 retained by the dealer manager, FS2, which is one of our affiliates.
46
Since commencing our continuous public offering and through May 14, 2013, we have sold 98,009,157 common shares (as adjusted for share distributions) for gross proceeds of $992,973. As of May 14, 2013, we have raised total gross proceeds of $1,013,177, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of our board of trustees and certain individuals and entities affiliated with GSO in a private placement conducted in April 2011. As of May 14, 2013, we have sold an aggregate of 3,246,415 common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,110 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.
We generate cash primarily from the net proceeds of our continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous public offering of our common shares. We accept subscriptions on a continuous basis and issue common shares at semi-monthly closings at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.
Prior to investing in securities of portfolio companies, we invest the net proceeds from our continuous public offering and from sales and paydowns of existing investments primarily in cash, cash equivalents, U.S. government securities, repurchase agreements and high-quality debt instruments maturing in one year or less from the time of investment, consistent with our BDC election and our election to be taxed as a RIC.
To provide our shareholders with limited liquidity, we conduct quarterly tender offers pursuant to our share repurchase program. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with our October 1, 2012 semi-monthly closing.
The following table sets forth the number of common shares repurchased by us under our share repurchase program during the three months ended March 31, 2013:
For the Three Months Ended | Repurchase Date | Shares Repurchased |
Percentage of Shares Tendered That Were Repurchased |
Repurchase Price Per Share |
Aggregate Consideration for Repurchased Shares |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2012 |
January 2, 2013 | 24,249 | 100 | % | $ | 9.405 | $ | 228 |
On April 1, 2013, we repurchased 82,689 common shares (representing 100% of common shares tendered for repurchase) at $9.540 per share for aggregate consideration totaling $789.
Total Return Swap
On August 11, 2011, EP Investments entered into the TRS with Citibank. On May 11, 2012, EP Investments entered into an amendment to the TRS to increase the maximum market value of the aggregate amount of assets which may be subject to the TRS from $25,000 to $100,000; and on October 11, 2012, EP Investments entered into a second amendment to the TRS to increase this amount from $100,000 to $200,000.
Under the TRS, EP Investments receives from Citibank all interest and fees payable in respect of the assets included in the TRS. EP Investments pays to Citibank interest at a rate equal to one-month LIBOR plus 1.30% per annum on the full notional amount of the assets subject to the TRS. In addition, upon the termination or repayment of any asset subject to the TRS, EP Investments will either receive from Citibank the appreciation in the value of such asset or pay to Citibank any depreciation in the value of such asset.
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The value of the TRS is based primarily on the valuation of the underlying portfolio of assets subject to the TRS. Pursuant to the terms of the TRS, on each business day, Citibank values each underlying asset in good faith on a mark-to-market basis by determining how much Citibank would receive on such date if it sold the asset in the open market. Citibank reports the mark-to-market values of the underlying assets to EP Investments. As of March 31, 2013 and December 31, 2012, the fair value of the TRS was $5,731 and $3,141, respectively. The fair value of the TRS is reflected as unrealized appreciation on total return swap on our consolidated balance sheets. The change in value of the TRS is reflected in our consolidated statements of operations as net change in unrealized appreciation (depreciation) on total return swap. As of March 31, 2013, EP Investments had selected 30 underlying assets with a total notional amount of $192,645 and posted $76,276 in cash collateral held by Citibank (of which only $76,195 was required to be posted), which is reflected in due from counterparty on our consolidated balance sheets. As of December 31, 2012, EP Investments had selected 22 underlying assets with a total notional amount of $131,632 and posted $56,876 in cash collateral held by Citibank (of which only $53,565 was required to be posted), which is reflected in due from counterparty on our consolidated balance sheets.
We incurred costs of $16 in connection with obtaining the TRS, which we have recorded as deferred financing costs on its consolidated balance sheets. As of March 31, 2013, all of such deferred financing costs have been amortized to interest expense.
For purposes of the asset coverage ratio test applicable to us as a BDC, we treat the outstanding notional amount of the TRS, less the initial amount of any cash collateral required to be posted by EP Investments under the TRS, as a senior security for the life of that instrument. We may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the Staff.
Further, for purposes of Section 55(a) under the 1940 Act, we treat each asset underlying the TRS as a qualifying asset if the obligor on such asset is an eligible portfolio company and as a non-qualifying asset if the obligor is not an eligible portfolio company. We may, however, accord different treatment to the TRS in the future in accordance with any applicable new rules or interpretations adopted by the Staff.
Credit Facility
On June 24, 2011, FSEP Funding entered into the credit facility with Deutsche Bank. Deutsche Bank is the sole lender and serves as administrative agent under the credit facility. FSEP Funding and Deutsche Bank have entered into subsequent amendments to the credit facility, most recently on October 18, 2012, to increase the amount available thereunder. As of March 31, 2013 the credit facility provided for borrowings of up to $240,000 on a committed basis.
We may contribute cash or securities to FSEP Funding from time to time and will retain a residual interest in any assets contributed through our ownership of FSEP Funding. FSEP Funding may purchase additional securities from various sources. FSEP Funding's obligations to Deutsche Bank are secured by a first priority security interest in substantially all of the assets of FSEP Funding, including its portfolio of securities. The obligations of FSEP Funding under the credit facility are non-recourse to us.
Pursuant to the terms of the credit facility, borrowings thereunder may be designated as Tranche A Commitments in an amount up to $50,000, as Tranche B Commitments in an amount up to $50,000, as Tranche C Commitments in an amount up to $75,000 or as Tranche D Commitments in an amount up to $65,000. Pricing under the credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, with the Tranche A Commitment bearing interest at the rate of LIBOR plus 1.60% per annum and the Tranche B Commitment, Tranche C Commitment and Tranche D Commitment bearing interest at the rate of LIBOR plus 1.85% per annum. The Tranche A Commitment and Tranche B Commitment are revolving commitments, and the Tranche C Commitment and Tranche D Commitment are term commitments. Interest is payable quarterly in arrears. Any amounts borrowed under the credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2013.
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As of March 31, 2013 and December 31, 2012, $187,232 and $185,232, respectively, was outstanding under the credit facility. The carrying amount of the amount outstanding under the credit facility approximates its fair value. We incurred costs of $700 in connection with obtaining and amending the credit facility, which we have recorded as deferred financing costs on our consolidated balance sheets and amortize to interest expense over the life of the credit facility. As of March 31, 2013, $158 of such deferred financing costs have yet to be amortized to interest expense.
The effective interest rate under the credit facility as of March 31, 2013 was 2.07% per annum. Interest is paid quarterly in arrears and commenced November 20, 2011. We recorded interest expense of $1,242 and $263 for the three months ended March 31, 2013 and 2012, respectively, of which $167 and $36, respectively, related to the amortization of deferred financing costs and $107 and $20, respectively, related to commitment fees on the unused portion of the credit facility. We paid $1,032 and $173 in interest expense for the three months ended March 31, 2013 and 2012, respectively. The average borrowings under the credit facility for the three months ended March 31, 2013 and 2012 were $186,543 and $39,325 with a weighted average interest rate of 2.30% and 2.31%, respectively, which includes commitment fees on the unused portion of the credit facility.
Capital Contribution by FS Advisor and GSO
In December 2010, Michael C. Forman and David J. Adelman, the principals of FS Advisor, contributed an aggregate of $200 to purchase 22,444 common shares (as adjusted for share distributions) at $8.91 per share, which represents the initial public offering price (as adjusted for share distributions), net of selling commissions and dealer manager fees. The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains our investment adviser.
In April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains our investment adviser. In connection with the same private placement, certain members of our board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, we issued an aggregate of 2,244,875 common shares (as adjusted for share distributions) for aggregate proceeds of $20,004 upon satisfaction of the minimum offering requirement on July 18, 2011. As of May 14, 2013, we have sold an aggregate of 3,246,415 common shares (as adjusted for share distributions) for aggregate gross proceeds of $29,110 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold in the private placement conducted in April 2011.
RIC Status and Distributions
We have elected to be treated for federal income tax purposes, and intend to qualify annually, as a RIC under Subchapter M of the Code. In order to qualify as a RIC, we must, among other things, distribute at least 90% of our "investment company taxable income," as defined by the Code, each year. As long as the distributions are declared by the later of the fifteenth day of the ninth month following the close of the taxable year or the due date of the tax return, including extensions, distributions paid up to one year after the current tax year can be carried back to the prior tax year for determining the distributions paid in such tax year. We intend to make sufficient distributions to our shareholders to qualify for and maintain our RIC status each year. We are also subject to nondeductible federal excise taxes if we do not distribute at least 98% of net ordinary income, 98.2% of any capital gain net income, if any, and any recognized and undistributed income from prior years on which we paid no federal income taxes.
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We declared our first distribution on July 21, 2011. Subject to our board of trustees' discretion and applicable legal restrictions, we intend to authorize and declare ordinary cash distributions on either a semi-monthly or monthly basis and pay such distributions on a monthly basis. We will calculate each shareholder's specific distribution amount for the period using record and declaration dates and each shareholder's distributions will begin to accrue on the date we accept each shareholder's subscription for our common shares. From time to time, we may also pay special interim distributions in the form of cash or common shares at the discretion of our board of trustees. During certain periods, our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our continuous public offering of common shares. As a result, it is possible that a portion of the distributions we make will represent a return of capital for tax purposes. A return of capital generally is a return of an investor's investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FS Advisor. Each year a statement on Form 1099-DIV identifying the source of the distributions will be mailed to our shareholders.
We intend to continue to make our ordinary distributions in the form of cash out of assets legally available for distribution, unless shareholders elect to receive their distributions in additional common shares under our distribution reinvestment plan. Any distributions reinvested under the plan will nevertheless remain taxable to a U.S. shareholder.
The following table reflects the cash distributions per share that we have declared and paid on our common shares during the three months ended March 31, 2013 and 2012:
|
Distribution | ||||||
---|---|---|---|---|---|---|---|
For the Three Months Ended | Per Share | Amount | |||||
Fiscal 2012 |
|||||||
March 31, 2012(1) |
$ | 0.1555 | $ | 1,789 | |||
Fiscal 2013 |
|||||||
March 31, 2013 |
$ | 0.1617 | $ | 12,496 |
- (1)
- The per share distribution has been retroactively adjusted, as necessary, to reflect the share distribution declared in February 2012 as discussed in Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.
On April 9, 2013, our board of trustees declared a regular semi-monthly cash distribution of $0.026953 per share payable to shareholders of record on April 15, 2013 and a regular semi-monthly cash distribution of $0.027207 per share payable to shareholders of record on April 29, 2013, both of which were paid on April 30, 2013. On May 1, 2013, our board of trustees declared two regular semi-monthly cash distributions of $0.027207 per share each, which will be paid on May 31, 2013 to shareholders of record on May 15, 2013 and May 30, 2013, respectively. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.
We may fund our cash distributions to shareholders from any sources of funds available to us, including offering proceeds, borrowings, net investment income from operations, capital gains proceeds from the sale of assets, non-capital gains proceeds from the sale of assets, dividends or other distributions paid to us on account of preferred and common equity investments in portfolio companies and expense reimbursements from Franklin Square Holdings. We have not established limits on the amount of funds we may use from available sources to make distributions.
We expect that for a period of time following commencement of our continuous public offering, which time period may be significant, substantial portions of our distributions may be funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that are subject to repayment by us within
50
three years. The purpose of this arrangement is to ensure that no portion of our distributions to shareholders will be paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees are not based on our investment performance and can only be sustained if we achieve positive investment performance in future periods and/or Franklin Square Holdings continues to make such reimbursements or waivers of such fees. Our future repayments of amounts reimbursed or waived by Franklin Square Holdings and its affiliates will reduce the distributions that shareholders would otherwise receive in the future. There can be no assurance that we will achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods. For the three months ended March 31, 2013 and 2012, if Franklin Square Holdings had not reimbursed certain of our expenses, 0% and 45%, respectively, of the cash distributions paid during the respective periods would have been funded from offering proceeds or borrowings.
The following table reflects the sources of the cash distributions on a tax basis that we have paid on our common shares during the three months ended March 31, 2013 and 2012:
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Three Months Ended March 31, | ||||||||||||
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2013 | 2012 | |||||||||||
Source of Distribution | Distribution Amount |
Percentage | Distribution Amount |