FS Energy & Power Fund - FORM 10-Q

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TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q


ý		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2014
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)		19104 (Zip Code)

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

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

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

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


Large accelerated filer o		Accelerated filer o		Non-accelerated filer ý (Do not check if a smaller reporting company)		Smaller reporting company o

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

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

The issuer had 210,706,026 common shares of beneficial interest outstanding as of April 29, 2014.

Table of Contents

TABLE OF CONTENTS



PART I—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS	1
	Consolidated Balance Sheets as of March 31, 2014 (Unaudited) and December 31, 2013	1
	Unaudited Consolidated Statements of Operations for the three months ended March 31, 2014 and 2013	2
	Unaudited Consolidated Statements of Changes in Net Assets for the three months ended March 31, 2014 and 2013	3
	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	4
	Consolidated Schedules of Investments as of March 31, 2014 (Unaudited) and December 31, 2013	5
	Notes to Unaudited Consolidated Financial Statements	16
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	43
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	67
ITEM 4.	CONTROLS AND PROCEDURES	68
PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	69
ITEM 1A.	RISK FACTORS	69
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	69
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	69
ITEM 4.	MINE SAFETY DISCLOSURES	69
ITEM 5.	OTHER INFORMATION	69
ITEM 6.	EXHIBITS	70
	SIGNATURES	74

Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FS Energy and Power Fund

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

	March 31, 2014 (Unaudited)			December 31, 2013

Assets
Investments, at fair value (amortized cost—$2,497,568 and $2,249,954, respectively)	$	2,573,836		$	2,300,201
Cash		95,083			91,084
Foreign currency, at fair value (cost—$5,175 and $0, respectively)		5,236			—
Receivable for investments sold and repaid		9,199			8,306
Interest receivable		31,176			25,467
Receivable for common shares purchased		—			135
Deferred financing costs		3,054			3,445
Prepaid expenses and other assets		128			21


Total assets	$	2,717,712		$	2,428,659


Liabilities
Payable for investments purchased	$	49,795		$	81,509
Credit facilities payable		644,174			624,174
Shareholder distributions payable		—			10,700
Management fees payable		12,867			10,751
Accrued capital gains incentive fees⁽¹⁾		16,558			13,850
Subordinated income incentive fees payable⁽¹⁾		4,610			6,786
Administrative services expense payable		1,187			418
Interest payable		1,856			2,005
Trustees' fees payable		301			251
Other accrued expenses and liabilities		2,434			1,978
Commitments and contingencies⁽²⁾		—			—


Total liabilities		733,782			752,422


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, 202,584,157 and 173,532,259 shares issued and outstanding, respectively		203			174
Capital in excess of par value		1,904,848			1,622,893
Accumulated undistributed net realized gains on investments and gain/loss on foreign currency⁽³⁾		12,640			10,898
Accumulated distributions in excess of net investment income⁽³⁾		(10,081	)		(7,946	)
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency		76,320			50,218


Total shareholders' equity		1,983,930			1,676,237


Total liabilities and shareholders' equity	$	2,717,712		$	2,428,659


Net asset value per common share at period end	$	9.79		$	9.66

(1): See Note 2 and Note 4 for a discussion of the methodology employed by the Company in calculating the capital gains incentive fees and subordinated income incentive fees.
(2): See Note 9 for a discussion of the Company's commitments and contingencies.
(3): See Note 5 for a discussion of the sources of distributions paid by the Company.

See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund

Unaudited Consolidated Statements of Operations

(in thousands, except share and per share amounts)

	Three Months Ended March 31,

	2014			2013
Investment income
Interest income	$	50,967		$	17,943
Fee income		5,589			2,968


Total investment income		56,556			20,911


Operating expenses
Management fees		12,867			4,711
Capital gains incentive fees⁽¹⁾		5,565			3,610
Subordinated income incentive fees⁽¹⁾		4,610			753
Administrative services expenses		935			453
Share transfer agent fees		647			400
Accounting and administrative fees		266			140
Interest expense		4,337			1,242
Trustees' fees		281			200
Other general and administrative expenses		704			443


Total operating expenses		30,212			11,952


Net investment income before taxes		26,344			8,959
Income taxes		56			—


Net investment income		26,288			8,959


Realized and unrealized gain/loss
Net realized gain (loss) on investments		2,280			(339	)
Net realized gain (loss) on total return swap⁽²⁾		—			2,919
Net realized gain (loss) on foreign currency		(538	)		10
Net change in unrealized appreciation (depreciation) on investments		26,021			12,867
Net change in unrealized appreciation (depreciation) on total return swap⁽²⁾		—			2,590
Net change in unrealized gain (loss) on foreign currency		81			(5	)


Total net realized and unrealized gain (loss) on investments		27,844			18,042


Net increase (decrease) in net assets resulting from operations	$	54,132		$	27,001




Per share information—basic and diluted
Net increase (decrease) in net assets resulting from operations (Earnings per Share)	$	0.29		$	0.36




Weighted average shares outstanding		188,276,979			75,360,255

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

See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund

Unaudited Consolidated Statements of Changes in Net Assets

(in thousands)

	Three Months Ended March 31,

	2014			2013
Operations
Net investment income	$	26,288		$	8,959
Net realized gain (loss) on investments, total return swap and foreign currency⁽¹⁾		1,742			2,590
Net change in unrealized appreciation (depreciation) on investments		26,021			12,867
Net change in unrealized appreciation (depreciation) on total return swap⁽¹⁾		—			2,590
Net change in unrealized gain (loss) on foreign currency		81			(5	)


Net increase (decrease) in net assets resulting from operations		54,132			27,001


Shareholder distributions⁽²⁾
Distributions from net investment income		(28,423	)		(12,496	)


Net decrease in net assets resulting from shareholder distributions		(28,423	)		(12,496	)


Capital share transactions
Issuance of common shares⁽³⁾		259,663			209,986
Reinvestment of shareholder distributions⁽³⁾		25,214			6,971
Repurchases of common shares⁽³⁾		(1,693	)		(228	)
Offering costs		(1,200	)		(1,200	)


Net increase in net assets resulting from capital share transactions		281,984			215,529


Total increase in net assets		307,693			230,034
Net assets at beginning of period		1,676,237			602,889


Net assets at end of period	$	1,983,930		$	832,923




Accumulated distributions in excess of net investment income⁽²⁾	$	(10,081	)	$	(6,891	)

(1): On May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.
(2): See Note 5 for a discussion of the sources of distributions paid by the Company.
(3): See Note 3 for a discussion of transactions with respect to the Company's common shares during the three months ended March 31, 2014 and 2013.

See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund

Unaudited Consolidated Statements of Cash Flows

(in thousands)

	Three Months Ended March 31,

	2014			2013
Cash flows from operating activities
Net increase (decrease) in net assets resulting from operations	$	54,132		$	27,001
Adjustments to reconcile net increase (decrease) in net assets resulting from operations to net cash used in operating activities:
Purchases of investments		(344,971	)		(178,209	)
Paid-in-kind interest		(2,600	)		—
Proceeds from sales and repayments of investments		103,983			35,892
Net realized (gain) loss on investments		(2,280	)		339
Net change in unrealized (appreciation) depreciation on investments		(26,021	)		(12,867	)
Net change in unrealized (appreciation) depreciation on total return swap⁽¹⁾		—			(2,590	)
Accretion of discount		(1,746	)		(399	)
Amortization of deferred financing costs		391			167
(Increase) decrease in foreign currency		(5,236	)		—
(Increase) decrease in due from counterparty		—			(19,400	)
(Increase) decrease in receivable for investments sold and repaid		(893	)		9,243
(Increase) decrease in interest receivable		(5,709	)		(3,975	)
(Increase) decrease in receivable due on total return swap⁽¹⁾		—			(1,526	)
(Increase) decrease in prepaid expenses and other assets		(107	)		38
Increase (decrease) in payable for investments purchased		(31,714	)		(11,624	)
Increase (decrease) in management fees payable		2,116			1,540
Increase (decrease) in expense recoupment payable to sponsor⁽²⁾		—			(984	)
Increase (decrease) in accrued capital gains incentive fees		2,708			2,752
Increase (decrease) in subordinated income incentive fees payable		(2,176	)		753
Increase (decrease) in administrative services expense payable		769			216
Increase (decrease) in interest payable		(149	)		43
Increase (decrease) in trustees' fees payable		50			200
Increase (decrease) in other accrued expenses and liabilities		456			458


Net cash used in operating activities		(258,997	)		(152,932	)


Cash flows from financing activities
Issuance of common shares		259,798			209,886
Reinvestment of shareholder distributions		25,214			6,971
Repurchases of common shares		(1,693	)		(228	)
Offering costs		(1,200	)		(1,200	)
Shareholder distributions		(39,123	)		(11,258	)
Borrowings under credit facilities⁽³⁾		20,000			2,000


Net cash provided by financing activities		262,996			206,171


Total increase (decrease) in cash		3,999			53,239
Cash at beginning of period		91,084			48,986


Cash at end of period	$	95,083		$	102,225




Supplemental disclosure
Excise taxes paid	$	225		$	—

(1): On May 24, 2013, the Company terminated its total return swap agreement with Citibank, N.A.
(2): See Note 4 for a discussion of expense recoupments paid by the Company to its investment adviser and affiliates.
(3): See Note 8 for a discussion of the Company's credit facilities. During the three months ended March 31, 2014 and 2013, the Company paid $4,095 and $1,032, respectively, in interest expense on the credit facilities.

See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments

As of March 31, 2014

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Senior Secured Loans—First Lien—39.4%
Allied Wireline Services, LLC		Service & Equipment	L+800	1.5%	2/28/19	$	110,000	$	108,174	$	108,213
Alon USA Partners, L.P.	(g)(k)	Downstream	L+800	1.3%	11/26/18		4,115		4,270		4,269
AP Exhaust Acquisition, LLC	(h)	Service & Equipment	L+775	1.5%	1/16/21		15,000		15,000		15,000
Atlantic Power L.P.	(h)(j)(k)	Power	L+375	1.0%	2/24/21		5,780		5,723		5,806
Atlas Energy, L.P.	(g)(k)	Midstream	L+550	1.0%	7/31/19		5,528		5,478		5,687
Azure Midstream Energy LLC	(g)	Midstream	L+550	1.0%	11/15/18		13,331		13,143		13,481
BBH Operating LLC		Upstream	Prime+500	3.3%	2/26/15		17,750		17,750		17,794
BBH Operating LLC	(e)	Upstream	Prime+500	3.3%	2/26/15		12,250		12,250		12,281
BL Sand Hills Unit, L.P.		Upstream	Prime+650	3.5%	12/17/17		3,431		2,980		2,994
BL Sand Hills Unit, L.P.	(e)	Upstream	Prime+650	3.5%	12/17/17		56,569		49,127		49,356
BlackBrush TexStar L.P.	(f)(g)(h)	Midstream	L+650	1.3%	6/4/19		60,611		60,277		61,312
Boomerang Tube, LLC	(f)(g)	Service & Equipment	L+950	1.5%	10/11/17		19,370		19,192		18,885
Brock Holdings III, Inc.	(g)	Service & Equipment	L+450	1.5%	3/16/17		2,446		2,476		2,464
Buffalo Gulf Coast Terminals LLC	(g)	Midstream	L+400	1.3%	10/31/17		6,537		6,648		6,602
Crestwood Holdings LLC	(g)(h)	Midstream	L+600	1.0%	6/19/19		33,511		33,695		34,161
EP Acquisition LLC		Upstream	Prime+500	3.3%	3/31/15		750		750		752
FR Dixie Acquisition Corp.	(g)	Service & Equipment	L+475	1.0%	12/18/20		5,250		5,224		5,299
FR Utility Services LLC	(g)	Service & Equipment	L+575	1.0%	10/18/19		12,469		12,363		12,547
Harvey Gulf International Marine, LLC	(g)	Service & Equipment	L+450	1.0%	6/18/20		7,950		7,855		7,976
Hudson Products Holdings Inc.	(g)	Service & Equipment	L+400	1.0%	3/15/19		8,807		8,785		8,873
Larchmont Resources, LLC	(g)(h)(j)	Upstream	L+725	1.0%	8/7/19		21,532		21,535		21,962
MB Precision Holdings LLC	(h)	Service & Equipment	L+725	1.3%	1/23/20		13,466		13,466		13,466
McJunkin Red Man Corp.	(g)(k)	Service & Equipment	L+400	1.0%	11/8/19		5,782		5,782		5,865
Moxie Liberty LLC	(g)(h)	Power	L+650	1.0%	8/21/20		27,432		27,420		28,187
Moxie Patriot LLC	(j)	Power	L+575	1.0%	12/19/20		2,000		2,045		2,045
NES Global Talent Finance US LLC	(g)(h)(k)	Service & Equipment	L+550	1.0%	10/3/19		17,888		17,652		17,932
Panda Sherman Power, LLC	(f)(g)	Power	L+750	1.5%	9/14/18		10,909		11,093		11,236
Panda Temple Power, LLC (TLA)		Power	L+700	1.5%	7/17/18		16,200		15,990		16,635
Panda Temple Power, LLC (TLB)	(g)(h)	Power	L+1000	1.5%	7/17/18		40,000		39,363		41,000
Panda Temple Power II, LLC	(g)(h)	Power	L+600	1.3%	4/3/19		18,809		19,194		19,350
PeroxyChem LLC	(h)	Service & Equipment	L+650	1.0%	2/28/20		14,000		13,836		14,070
ProPetro Services, Inc.	(g)(h)	Service & Equipment	L+625	1.0%	9/30/19		8,775		8,726		8,906
San Pedro Development, LLC		Upstream	Prime+400		6/30/15		21,200		17,685		18,868

See notes to unaudited consolidated financial statements.

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FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2014

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity	Principal Amount^(c)		Amortized Cost			Fair Value^(d)
Sandy Creek Energy Associates, L.P.	(g)(h)	Power	L+400	1.0%	11/9/20	$	15,545	$	15,470		$	15,575
Sprint Industrial Holdings LLC	(h)	Service & Equipment	L+575	1.3%	11/14/19		13,041		13,027			13,139
Stallion Oilfield Holdings, Inc.	(f)(g)(h)(j)	Service & Equipment	L+675	1.3%	6/19/18		64,033		63,901			65,593
Swift Worldwide Resources US Holdings Corp.	(h)	Service & Equipment	L+800	1.3%	4/30/19		60,112		60,112			61,314
Total Safety U.S., Inc.	(g)(h)	Service & Equipment	L+450	1.3%	3/13/20		12,825		13,011			12,890
TPF II LC, LLC	(g)(h)	Power	L+550	1.0%	8/21/19		17,865		17,892			18,178
Wastequip, LLC	(g)	Service & Equipment	L+450	1.0%	8/9/19		8,749		8,778			8,837
Westway Group, LLC	(g)	Service & Equipment	L+350	1.0%	2/27/20		8,910		9,003			8,960
Willbros Group, Inc.	(g)(h)(k)	Service & Equipment	L+975	1.3%	8/7/19		24,647		23,898			24,966


Total Senior Secured Loans—First Lien									830,039			842,726
Unfunded Loan Commitments									(61,377	)		(61,377	)


Net Senior Secured Loans—First Lien									768,662			781,349


Senior Secured Loans—Second Lien—34.3%
American Energy—Utica, LLC	(h)	Upstream	L+400, 5.5% PIK (5.5% Max PIK)	1.5%	9/30/18		117,670		117,670			117,670
American Energy—Utica, LLC	(e)	Upstream	L+400, 5.5% PIK (5.5% Max PIK)	1.5%	9/30/18		81,010		81,010			81,010
Ameriforge Group Inc.	(f)(h)	Service & Equipment	L+750	1.3%	12/21/20		30,950		31,486			31,801
Brock Holdings III, Inc.	(f)(h)	Service & Equipment	L+450	1.5%	3/16/18		33,605		33,862			34,130
Citrus Energy Appalachia, LLC	(g)	Upstream	L+850	1.3%	7/26/18		56,717		55,203			56,716
Consolidated Precision Products Corp.	(f)(g)(h)	Service & Equipment	L+775	1.0%	4/30/21		33,500		33,341			34,044
Drew Marine Group Inc.	(h)(k)	Service & Equipment	L+700	1.0%	5/19/21		10,000		9,976			10,100
Filtration Group Corp.	(g)	Service & Equipment	L+725	1.0%	11/21/21		2,632		2,606			2,696
Horn Intermediate Holdings, Inc.		Service & Equipment	L+775	1.3%	10/2/18		67,500		67,500			68,175
Oxbow Carbon LLC	(h)	Midstream	L+700	1.0%	1/19/20		15,000		14,862			15,375
P2 Upstream Acquisition Co.	(f)(h)(j)	Service & Equipment	L+800	1.0%	4/30/21		27,842		28,085			28,416
Power Buyer, LLC	(g)	Service & Equipment	L+725	1.0%	11/6/20		3,500		3,531			3,478
Rice Drilling B LLC	(h)(k)	Upstream	L+725	1.3%	10/25/18		52,827		52,257			53,949
Sabine Oil & Gas LLC	(f)(g)	Upstream	L+750	1.3%	12/31/18		12,660		12,893			12,858
Teine Energy Ltd.	(j)(k)	Upstream	L+625	1.3%	5/17/19		17,962		18,114			18,231
Templar Energy LLC	(f)	Upstream	L+700	1.0%	11/25/20		76,923		75,437			77,837
Total Safety U.S., Inc.	(g)(h)	Service & Equipment	L+450	1.3%	9/13/20		12,805		13,087			12,901
UTEX Industries, Inc.	(g)(h)	Service & Equipment	L+750	1.3%	4/10/21		31,046		31,306			31,512
Vantage Energy, LLC	(j)	Upstream	L+750	1.0%	12/20/18		30,623		30,400			30,891
WildHorse Resources, LLC	(g)	Upstream	L+625	1.3%	12/13/18		38,593		37,924			39,365


Total Senior Secured Loans—Second Lien									750,550			761,155
Unfunded Loan Commitments									(81,010	)		(81,010	)


Net Senior Secured Loans—Second Lien									669,540			680,145

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2014

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Senior Secured Bonds—6.3%
Erickson Air-Crane Inc.	(f)(i)(k)	Service & Equipment	8.3%		5/1/20	$	20,725	$	21,326	$	21,917
FourPoint Energy, LLC		Upstream	8.5%		12/31/20		49,500		40,473		40,590
Gastar Exploration USA, Inc.	(i)(k)	Upstream	8.6%		5/15/18		22,000		21,466		22,648
Globe Luxembourg SCA	(f)(k)	Service & Equipment	9.6%		5/1/18		10,000		9,655		10,874
Murray Energy Corp.	(f)	Upstream	8.6%		6/15/21		4,000		4,000		4,229
Permian Tank & Manufacturing, Inc.	(g)	Service & Equipment	10.5%		1/15/18		4,000		4,086		4,075
Prince Mineral Holding Corp.	(i)	Service & Equipment	11.5%		12/15/19		16,500		18,053		18,563
Ryerson Inc.	(f)(g)	Service & Equipment	9.0%		10/15/17		2,300		2,378		2,493


Total Senior Secured Bonds									121,437		125,389


Subordinated Debt—43.0%
Alta Mesa Holdings, L.P.	(f)	Upstream	9.6%		10/15/18		36,616		36,543		39,505
Atlas Energy Holdings Operating Co., LLC	(i)(k)	Upstream	7.8%		1/15/21		17,800		16,928		18,607
Atlas Energy Holdings Operating Co., LLC	(i)(k)	Upstream	9.3%		8/15/21		2,563		2,772		2,806
Aurora USA Oil & Gas, Inc.	(i)(k)	Upstream	9.9%		2/15/17		15,250		15,669		16,910
BOE Intermediate Holding Corp.	(i)	Service & Equipment	9.8% PIK (9.8% Max PIK)		11/1/17		3,398		3,370		3,704
Brand Energy & Infrastructure Services, Inc.	(f)(i)	Service & Equipment	8.5%		12/1/21		25,000		25,000		26,500
BreitBurn Energy Partners L.P.	(i)(k)	Upstream	7.9%		4/15/22		3,500		3,508		3,820
Calumet Specialty Products Partners, L.P.	(k)	Downstream	6.5%		4/15/21		5,250		5,250		5,280
Chaparral Energy Inc.	(f)	Upstream	8.3%		9/1/21		2,000		2,057		2,190
Chaparral Energy Inc.	(f)(g)	Upstream	7.6%		11/15/22		15,225		16,328		16,437
CHC Helicopter S.A.	(f)(i)(k)	Service & Equipment	9.4%		6/1/21		12,500		12,721		13,363
Clayton Williams Energy, Inc.	(i)(k)	Upstream	7.8%		4/1/19		9,300		9,287		9,942
Comstock Resources, Inc.	(f)(k)	Upstream	9.5%		6/15/20		5,000		4,802		5,721
Crestwood Midstream Partners L.P.	(i)(k)	Midstream	6.1%		3/1/22		5,500		5,500		5,742
Crew Energy Inc.	(i)(k)(p)	Upstream	8.4%		10/21/20	C$	12,000		11,510		11,453
CrownRock, L.P.	(f)	Upstream	7.1%		4/15/21	$	50,000		50,000		52,473
Diamondback Energy, Inc.	(i)(k)	Upstream	7.6%		10/1/21		5,500		5,500		5,950
Energy XXI Gulf Coast, Inc.	(i)	Upstream	7.5%		12/15/21		4,000		3,982		4,195
EP Energy LLC	(f)(k)	Upstream	7.8%		9/1/22		6,600		6,622		7,402
Era Group Inc.	(f)(k)	Service & Equipment	7.8%		12/15/22		7,750		7,630		8,215
Everest Acquisition LLC	(f)	Upstream	9.4%		5/1/20		19,250		19,843		22,347
Global Partners L.P.	(k)	Midstream	8.0%		2/14/18		70,000		68,288		70,613
Global Partners L.P.	(k)	Midstream	7.8%		12/23/18		40,000		40,000		40,000
Hercules Offshore, Inc.	(f)(k)	Service & Equipment	8.8%		7/15/21		3,900		3,900		4,268
Hercules Offshore, Inc.	(f)(k)	Service & Equipment	7.5%		10/1/21		5,000		5,000		5,074

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2014

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate^(b)	Floor	Maturity	Principal Amount^(c)		Amortized Cost		Fair Value^(d)
Hercules Offshore, Inc.	(i)(k)	Service & Equipment	6.8%		4/1/22	$	5,000	$	5,000	$	4,875
Jones Energy, Inc.	(i)(j)	Upstream	6.8%		4/1/22		17,000		17,000		17,382
The Kenan Advantage Group, Inc.	(f)(i)	Service & Equipment	8.4%		12/15/18		18,000		18,519		19,305
Legacy Reserves L.P.	(f)(k)	Upstream	6.6%		12/1/21		9,600		9,457		9,634
Legacy Reserves L.P.	(f)(k)	Upstream	8.0%		12/1/20		16,750		16,431		17,776
Lightstream Resources Ltd.	(i)(k)	Upstream	8.6%		2/1/20		35,695		35,958		35,995
Martin Midstream Partners L.P.	(f)(k)	Midstream	7.3%		2/15/21		3,000		3,000		3,129
Memorial Production Partners L.P.	(i)(k)	Upstream	7.6%		5/1/21		7,000		6,800		7,419
Memorial Resource Development LLC	(i)	Upstream	10.8% PIK (10.8% Max PIK)		12/15/18		13,300		13,042		13,832
Parsley Energy, LLC		Upstream	7.5%		2/15/22		1,550		1,550		1,639
Pinnacle Operating Corp.	(i)	Service & Equipment	9.0%		11/15/20		2,500		2,500		2,694
QR Energy, L.P.	(f)(i)(k)	Upstream	9.3%		8/1/20		25,030		25,583		27,045
Resolute Energy Corp.	(i)(k)	Upstream	8.5%		5/1/20		6,230		6,586		6,561
Rex Energy Corp.	(i)(k)	Upstream	8.9%		12/1/20		14,000		14,010		15,471
RKI Exploration & Production, LLC	(f)	Upstream	8.5%		8/1/21		34,100		34,123		36,999
Samson Investment Co.	(f)	Upstream	9.8%		2/15/20		23,000		23,028		25,130
Sanchez Energy Corp.	(i)(k)	Upstream	7.8%		6/15/21		14,500		14,243		15,535
SemGroup Corp.	(f)(k)	Midstream	7.5%		6/15/21		9,400		9,400		10,197
Sidewinder Drilling Inc.	(i)	Service & Equipment	9.8%		11/15/19		21,500		21,593		21,305
Summit Midstream Holdings, LLC	(f)(k)	Midstream	7.5%		7/1/21		1,000		1,000		1,074
Swift Energy Co.	(f)(i)(j)(k)	Upstream	7.9%		3/1/22		15,000		15,038		15,023
Talos Production LLC	(f)(i)	Upstream	9.8%		2/15/18		43,250		43,276		45,715
Tenrgys, LLC		Upstream	L+900	2.5%	12/23/18		75,000		75,000		75,750
Tervita Corp.	(i)(k)	Service & Equipment	10.9%		2/15/18		7,500		7,278		7,556
Zachry Holdings, Inc.	(f)	Service & Equipment	7.5%		2/1/20		11,800		12,048		12,833


Total Subordinated Debt									813,473		852,391

				Amortized Cost		Fair Value^(d)

Equity/Other—6.8%^(l)
Allied Downhole Technologies, LLC, Common Equity	(m)(n)	Service & Equipment	6,600,000	$	6,600	$	6,600
Allied Downhole Technologies, LLC, Warrants	(m)(n)	Service & Equipment	5,344,680		1,865		2,352
American Energy Ohio Holdings, LLC, Common Equity	(n)(o)	Upstream	11,347,053		11,347		11,347
AP Exhaust Holdings, LLC, Common Equity	(m)(n)	Service & Equipment	811		811		811
BBH Operating LLC, Common Equity	(n)(p)	Upstream	1,000		1,000		1,060
BL Sand Hills Unit, L.P., Net Profits Interest	(n)(q)	Upstream	N/A		395		425
BL Sand Hills Unit, L.P. Overriding Royalty Interest	(n)(q)	Upstream	N/A		56		59

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Unaudited Consolidated Schedule of Investments (continued)

As of March 31, 2014

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Number of Shares		Amortized Cost		Fair Value^(d)
Fortune Creek Co-Invest I L.P., LP Interest	(k)(r)	Midstream		N/A	$	17,513	$	17,427
FourPoint Energy, LLC, Common Equity	(m)(n)	Upstream		12,374		8,176		12,374
MB Precision Holdings LLC, Common Equity	(n)	Service & Equipment		450,000		450		450
Plains Offshore Operations Inc., Preferred Equity	(f)	Upstream		21,067		23,573		25,594
Plains Offshore Operations Inc., Warrants	(f)(n)	Upstream		427,005		689		1,196
San Pedro Development, LLC, Net Profits Interest	(n)(s)	Upstream		N/A		3,515		4,339
Swift Worldwide Resources Holdco Limited, Common Equity	(k)(n)(t)	Service & Equipment		3,750,000		6,029		8,128
Synergy Offshore LLC, Preferred Equity	(u)	Upstream		40,000		42,437		42,400


Total Equity/Other						124,456		134,562


TOTAL INVESTMENTS—129.8%					$	2,497,568		2,573,836




LIABILITIES IN EXCESS OF OTHER ASSETS—(29.8%)								(589,906	)


NET ASSETS—100.0%							$	1,983,930

(a): Security may be an obligation of one or more entities affiliated with the named company.
(b): Certain variable rate securities in the Company's portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. As of March 31, 2014, the three-month London Interbank Offered Rate was 0.23% and the U.S. Prime Lending Rate was 3.25%.
(c): Denominated in U.S. dollars, unless otherwise noted.
(d): Fair value determined by the Company's board of trustees (see Note 7).
(e): Security is an unfunded loan commitment.
(f): Security or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).
(g): Security or portion thereof held within EP Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).
(h): Security or portion thereof held within Energy Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Natixis, New York Branch (see Note 8).
(i): Security or portion thereof held within Berwyn Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage, Inc. (see Note 8).
(j): Position or portion thereof unsettled as of March 31, 2014.
(k): The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company's total assets. As of March 31, 2014, 76.4% of the Company's total assets represented qualifying assets.
(l): Listed investments may be treated as debt for GAAP or tax purposes.
(m): Security held within FSEP Investments, Inc., a wholly-owned subsidiary of the Company.
(n): Security is non-income producing.
(o): Security held within EP American Energy Investments, Inc., a wholly-owned subsidiary of the Company.
(p): Security held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.
(q): Security held within EP Burnett Investments, Inc., a wholly-owned subsidiary of the Company.
(r): Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of March 31, 2014.
(s): Security held within EP San Pedro Investments, LLC, a wholly-owned subsidiary of the Company.
(t): Investment denominated in British pounds. Amortized cost and fair value are converted into U.S. dollars as of March 31, 2014.
(u): Security held within EP Synergy Investments, Inc., a wholly-owned subsidiary of the Company.

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments

As of December 31, 2013

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate	Floor	Maturity		Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Senior Secured Loans—First Lien—37.9%
Alon USA Partners, L.P.	(e)(i)	Downstream	L+800	1.3%		11/26/18	$	4,125	$	4,289	$	4,256
Atlas Energy, L.P.	(e)(f)(i)	Midstream	L+550	1.0%		7/31/19		8,534		8,529		8,769
Azure Midstream Energy LLC	(e)	Midstream	L+550	1.0%		11/15/18		13,500		13,301		13,601
BBH Operating LLC		Upstream	Prime+500	3.3%		2/26/15		17,000		17,000		17,000
BBH Operating LLC		Upstream	Prime+500	3.3%		2/26/15		13,000		13,000		13,000
BL Sand Hills Unit, L.P.	(h)	Upstream	Prime+650	3.5%		12/17/17		3,431		2,980		2,980
BL Sand Hills Unit, L.P.	(h)	Upstream	Prime+650	3.5%		12/17/17		56,569		49,127		49,127
BlackBrush TexStar L.P.	(d)(e)(f)	Midstream	L+650	1.3%		6/4/19		60,764		60,416		61,334
Boomerang Tube, LLC	(d)(e)	Service & Equipment	L+950	1.5%		10/11/17		19,631		19,443		18,944
Brock Holdings III, Inc.	(e)	Service & Equipment	L+450	1.5%		3/16/17		2,763		2,799		2,777
Buffalo Gulf Coast Terminals LLC	(e)	Midstream	L+400	1.3%		10/31/17		6,554		6,672		6,619
Cedar Bay Generating Co., L.P.	(f)	Power	L+500	1.3%		4/23/20		8,848		8,766		8,920
Crestwood Holdings LLC	(e)(f)	Midstream	L+600	1.0%		6/19/19		28,868		28,952		29,734
EP Acquisition LLC		Upstream	Prime+500	3.3%		3/31/15		750		750		750
FR Utility Services LLC	(e)(f)	Service & Equipment	L+575	1.0%		10/18/19		19,389		19,219		19,389
Harvey Gulf International Marine, LLC	(e)	Service & Equipment	L+450	1.0%		6/18/20		9,975		9,848		10,081
Hudson Products Holdings Inc.	(e)(f)	Service & Equipment	L+400	1.3%		6/7/17		10,329		10,368		10,415
Larchmont Resources, LLC	(e)(f)	Upstream	L+725	1.0%		8/7/19		18,834		18,775		19,187
McJunkin Red Man Corp.	(e)(i)	Service & Equipment	L+400	1.0%		11/9/19		5,796		5,796		5,889
Moxie Liberty LLC	(e)(f)	Power	L+650	1.0%		8/21/20		27,432		27,419		28,187
NES Global Talent Finance US LLC	(e)(f)(i)	Service & Equipment	L+550	1.0%		10/3/19		18,000		17,755		17,978
Panda Sherman Power, LLC	(d)(e)	Power	L+750	1.5%		9/14/18		10,909		11,104		11,236
Panda Temple Power, LLC (TLA)		Power	L+700	1.5%		7/17/18		16,200		15,981		16,635
Panda Temple Power, LLC (TLB)	(e)(f)	Power	L+1000	1.5%		7/17/18		40,000		39,337		41,200
Panda Temple Power II, LLC	(e)(f)	Power	L+600	1.3%		4/3/19		18,809		19,212		19,373
ProPetro Services, Inc.	(e)(f)(h)	Service & Equipment	L+625	1.0%		9/30/19		8,913		8,861		8,968
Prowler Acquisition Corp.	(e)	Service & Equipment	L+475	1.0%		3/19/19		4,813		4,769		4,813
San Pedro Development, LLC	(f)	Upstream	Prime+400			6/30/15		19,974		16,662		17,278
San Pedro Development, LLC	(f)	Upstream	Prime+400			6/30/15		26		22		22
Sandy Creek Energy Associates, L.P.	(e)(f)(h)	Power	L+400	1.0%		11/8/20		15,584		15,507		15,614

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate	Floor	Maturity		Principal Amount^(b)		Amortized Cost			Fair Value^(c)
Sprint Industrial Holdings LLC	(f)	Service & Equipment	L+575	1.3%		11/14/19	$	13,074	$	13,059		$	13,237
Stallion Oilfield Holdings, Inc.	(d)(e)(f)(h)	Service & Equipment	L+675	1.3%		6/19/18		63,711		63,521			65,145
Swift Worldwide Resources US Holdings Corp.		Service & Equipment	L+800	1.3%		4/30/19		60,263		60,263			60,263
Total Safety U.S., Inc.	(e)(f)	Service & Equipment	L+450	1.3%		3/13/20		12,858		13,050			12,914
TPF II LC, LLC	(e)(f)	Power	L+550	1.0%		8/21/19		17,910		17,938			18,268
Wastequip, LLC	(e)	Service & Equipment	L+450	1.0%		8/9/19		8,771		8,801			8,859
Westway Group, LLC	(e)	Service & Equipment	L+400	1.0%		2/27/20		8,933		9,030			8,994
Willbros Group, Inc.	(e)(f)(i)	Service & Equipment	L+975	1.3%		8/7/19		24,938		24,155			25,312


Total Senior Secured Loans—First Lien										686,476			697,068
Unfunded Loan Commitments										(62,149	)		(62,149	)


Net Senior Secured Loans—First Lien										624,327			634,919


Senior Secured Loans—Second Lien—40.8%
American Energy—Utica, LLC	(f)	Upstream	L+475, 4.8% PIK	1.5%		9/30/18		116,057		116,057			116,057
Ameriforge Group Inc.	(d)(f)(h)	Service & Equipment	L+750	1.3%		12/21/20		27,950		28,403			28,579
Brock Holdings III, Inc.	(d)(f)(h)	Service & Equipment	L+825	1.8%		3/16/18		33,605		33,874			34,235
Citrus Energy Appalachia, LLC	(e)(h)	Upstream	L+850	1.3%		7/26/18		56,829		55,249			56,687
Consolidated Precision Products Corp.	(d)(e)(f)	Service & Equipment	L+775	1.0%		4/30/21		33,500		33,337			34,170
Drew Marine Group Inc.	(f)(i)	Service & Equipment	L+700	1.0%		5/19/21		10,000		9,975			10,075
Filtration Group Corp.	(e)	Service & Equipment	L+725	1.0%		11/21/21		2,632		2,606			2,697
Horn Intermediate Holdings, Inc.		Service & Equipment	L+775	1.3%		10/2/18		67,500		67,500			68,175
Oxbow Carbon LLC	(f)	Midstream	L+700	1.0%		1/19/20		15,000		14,858			15,309
P2 Upstream Acquisition Co.	(f)	Service & Equipment	L+800	1.0%		4/30/21		21,409		21,511			21,837
Power Buyer, LLC	(e)(f)	Service & Equipment	L+725	1.0%		11/6/20		7,500		7,495			7,388
Rice Drilling B LLC	(f)	Upstream	L+725	1.3%		10/25/18		59,960		59,270			61,309
Sabine Oil & Gas LLC	(d)(e)	Upstream	L+750	1.3%		12/31/18		12,660		12,903			12,818
Teine Energy Ltd.	(h)(i)	Upstream	L+625	1.3%		5/17/19		19,007		19,076			19,292
Templar Energy LLC	(d)	Upstream	L+700	1.0%		11/25/20		76,923		75,396			77,356
TNT Crane & Rigging, Inc.		Service & Equipment	L+900	1.0%		11/27/21		1,500		1,381			1,448
Total Safety U.S., Inc.	(e)(f)	Service & Equipment	L+800	1.3%		9/13/20		12,805		13,095			12,966

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate	Floor	Maturity		Principal Amount^(b)		Amortized Cost		Fair Value^(c)
UTEX Industries, Inc.	(e)(f)(h)	Service & Equipment	L+750	1.3%		4/10/21	$	31,046	$	31,313	$	31,822
Vantage Energy, LLC	(h)	Upstream	L+750	1.0%		12/20/18		27,692		27,415		27,692
WildHorse Resources, LLC	(e)	Upstream	L+625	1.3%		12/13/18		43,593		42,798		43,811


Total Senior Secured Loans—Second Lien										673,512		683,723


Senior Secured Bonds—4.9%
Erickson Air-Crane Inc.	(d)(i)	Service & Equipment	8.3%			5/1/20		10,875		10,919		11,283
Gastar Exploration USA, Inc.	(g)(i)	Upstream	8.6%			5/15/18		22,000		21,439		21,850
Globe Luxembourg SCA	(d)(i)	Service & Equipment	9.6%			5/1/18		10,000		9,637		10,469
Iracore International Holdings, Inc.	(g)	Service & Equipment	9.5%			6/1/18		9,500		9,702		10,077
Murray Energy Corp.	(d)	Upstream	8.6%			6/15/21		4,000		4,000		4,147
Permian Tank & Manufacturing, Inc.	(e)	Service & Equipment	10.5%			1/15/18		4,000		4,091		3,981
Prince Mineral Holding Corp.		Service & Equipment	11.5%			12/15/19		6,500		6,757		7,215
Ryerson Inc.	(d)(e)	Service & Equipment	9.0%			10/15/17		3,300		3,465		3,506
Shale-Inland Holdings, LLC	(e)(f)	Service & Equipment	8.8%			11/15/19		9,550		9,543		9,956


Total Senior Secured Bonds										79,553		82,484


Subordinated Debt—47.1%
Abengoa Finance, S.A.U.	(g)(i)	Service & Equipment	7.8%			2/1/20		2,500		2,500		2,606
Alta Mesa Holdings, L.P.	(d)	Upstream	9.6%			10/15/18		42,616		42,580		45,792
Atlas Energy Holdings Operating Co., LLC	(g)(i)	Upstream	7.8%			1/15/21		16,800		15,878		16,037
Aurora USA Oil & Gas, Inc.	(g)(i)	Upstream	9.9%			2/15/17		15,250		15,702		16,433
BOE Intermediate Holding Corp.	(g)	Service & Equipment	9.8% PIK			11/1/17		3,398		3,369		3,559
Brand Energy & Infrastructure Services, Inc.	(d)(g)	Service & Equipment	8.5%			12/1/21		25,000		25,000		25,500
BreitBurn Energy Partners L.P.	(g)(i)	Upstream	7.9%			4/15/22		3,500		3,508		3,654
Chaparral Energy Inc.	(d)	Upstream	8.3%			9/1/21		2,000		2,059		2,178
Chaparral Energy Inc.	(d)(e)	Upstream	7.6%			11/15/22		15,225		16,352		16,331
CHC Helicopter S.A.	(d)(g)(i)	Service & Equipment	9.4%			6/1/21		12,500		12,727		12,754
Clayton Williams Energy, Inc.	(g)(i)	Upstream	7.8%			4/1/19		9,300		9,286		9,617
Comstock Resources, Inc.	(d)(i)	Upstream	9.5%			6/15/20		5,000		4,797		5,610
Crestwood Midstream Partners L.P.	(g)(i)	Midstream	6.1%			3/1/22		5,500		5,500		5,640

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Rate	Floor	Maturity		Principal Amount^(b)		Amortized Cost		Fair Value^(c)
Crew Energy Inc.	(g)(i)	Upstream	8.4%			10/21/20	C$	10,000	$	9,615	$	9,566
CrownRock, L.P.	(d)	Upstream	7.1%			4/15/21	$	50,000		50,000		49,712
Diamondback Energy, Inc.	(g)(i)	Upstream	7.6%			10/1/21		5,500		5,500		5,801
Energy XXI Gulf Coast, Inc.	(g)	Upstream	7.5%			12/15/21		4,000		3,981		4,188
EP Energy LLC	(d)	Upstream	7.8%			9/1/22		6,600		6,622		7,417
EPE Holdings LLC	(d)	Upstream	8.9% PIK			12/15/17		6,535		6,510		6,805
Era Group Inc.	(d)(i)	Service & Equipment	7.8%			12/15/22		7,750		7,628		8,060
Everest Acquisition LLC	(d)	Upstream	9.4%			5/1/20		19,250		19,863		22,402
Global Partners L.P.	(i)	Midstream	8.0%			2/14/18		70,000		68,197		70,613
Global Partners L.P.	(i)	Midstream	7.8%			12/23/18		40,000		40,000		40,000
Hercules Offshore, Inc.	(d)(i)	Service & Equipment	8.8%			7/15/21		3,900		3,900		4,293
Hercules Offshore, Inc.	(d)(i)	Service & Equipment	7.5%			10/1/21		5,000		5,000		5,299
The Kenan Advantage Group, Inc.	(d)(g)	Service & Equipment	8.4%			12/15/18		18,000		18,542		19,035
Legacy Reserves L.P.	(d)(i)	Upstream	6.6%			12/1/21		9,600		9,454		9,287
Legacy Reserves L.P.	(d)(i)	Upstream	8.0%			12/1/20		16,750		16,424		17,306
Martin Midstream Partners L.P.	(d)(i)	Midstream	7.3%			2/15/21		3,000		3,000		3,075
Memorial Production Partners L.P.	(g)(i)	Upstream	7.6%			5/1/21		7,000		6,794		7,211
Memorial Resource Development LLC	(g)	Upstream	10.8% PIK			12/15/18		13,300		13,034		13,300
PetroBakken Energy Ltd.	(g)(i)	Upstream	8.6%			2/1/20		31,295		31,424		31,737
Pinnacle Operating Corp.	(g)	Service & Equipment	9.0%			11/15/20		2,500		2,500		2,656
QR Energy, L.P.	(d)(g)(i)	Upstream	9.3%			8/1/20		25,030		25,602		26,066
Rex Energy Corp.	(g)(i)	Upstream	8.9%			12/1/20		14,000		14,011		15,330
RKI Exploration & Production, LLC	(d)	Upstream	8.5%			8/1/21		34,100		34,124		36,096
Samson Investment Co.	(d)(h)	Upstream	9.8%			2/15/20		23,000		23,029		25,137
Sanchez Energy Corp.	(g)(i)	Upstream	7.8%			6/15/21		14,500		14,238		14,892
SemGroup Corp.	(d)(i)	Midstream	7.5%			6/15/21		9,400		9,400		9,955
Sidewinder Drilling Inc.		Service & Equipment	9.8%			11/15/19		21,500		21,596		19,028
Summit Midstream Holdings, LLC	(d)(i)	Midstream	7.5%			7/1/21		1,000		1,000		1,050
Talos Production LLC	(d)(g)	Upstream	9.8%			2/15/18		40,250		40,091		41,256
Tenrgys, LLC		Upstream	L+900	2.5%		12/23/18		75,000		75,000		75,000
Tervita Corp.	(g)(i)	Service & Equipment	10.9%			2/15/18		10,000		9,689		10,175
Zachry Holdings, Inc.	(d)	Service & Equipment	7.5%			2/1/20		11,800		12,057		12,375


Total Subordinated Debt										767,083		789,834

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)



Portfolio Company^(a)	Footnotes	Industry	Number of Shares		Amortized Cost		Fair Value^(c)
Equity/Other—6.5%^(j)
American Energy Ohio Holdings, LLC, Common Equity	(k)(l)	Upstream		7,788,845	$	7,789	$	7,789
BBH Operating LLC, Common Equity	(l)(m)	Upstream		1,000		1,000		924
BL Sand Hills Unit, L.P., Net Profits Interest	(h)(l)(n)	Upstream		N/A		395		395
BL Sand Hills Unit, L.P., Overriding Royalty Interest	(h)(l)(n)	Upstream		N/A		56		56
Fortune Creek Co-Invest I L.P., LP Interest	(i)(o)	Midstream		N/A		22,597		22,715
Plains Offshore Operations Inc., Preferred Equity	(d)	Upstream		20,000		22,161		25,052
Plains Offshore Operations Inc., Warrants	(d)(l)	Upstream		405,378		689		1,054
San Pedro Development, LLC, Net Profits Interest	(l)(p)	Upstream		N/A		3,312		3,641
Swift Worldwide Resources Holdco Limited, Common Equity	(i)(l)(q)	Service & Equipment		3,750,000		6,029		6,215
Synergy Offshore LLC, Preferred Equity	(r)	Upstream		40,000		41,451		41,400


Total Equity/Other						105,479		109,241


TOTAL INVESTMENTS—137.2%					$	2,249,954		2,300,201




LIABILITIES IN EXCESS OF OTHER ASSETS—(37.2%)								(623,964	)


NET ASSETS—100.0%							$	1,676,237

(a): Security may be an obligation of one or more entities affiliated with the named company.
(b): Denominated in U.S. dollars, unless otherwise noted.
(c): Fair value determined by the Company's board of trustees (see Note 7).
(d): Security or portion thereof held within FSEP Term Funding, LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Deutsche Bank AG, New York Branch (see Note 8).
(e): Security or portion thereof held within EP Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Citibank, N.A. (see Note 8).
(f): Security or portion thereof held within Energy Funding LLC and is pledged as collateral supporting the amounts outstanding under the revolving credit facility with Natixis, New York Branch (see Note 8).
(g): Security or portion thereof held within Berwyn Funding LLC and is pledged as collateral supporting the amounts outstanding under the prime brokerage facility with BNP Paribas Prime Brokerage, Inc. (see Note 8).
(h): Position or portion thereof unsettled as of December 31, 2013.
(i): The investment is not a qualifying asset under the Investment Company Act of 1940, as amended. A business development company may not acquire any asset other than a qualifying asset, unless, at the time the acquisition is made, qualifying assets represent at least 70% of the business development company's total assets. As of December 31, 2013, 78.3% of the Company's total assets represented qualifying assets.
(j): Listed investments may be treated as debt for GAAP or tax purposes.
(k): Security held within EP American Energy Investments, Inc., a wholly-owned subsidiary of the Company.

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Consolidated Schedule of Investments (continued)

As of December 31, 2013

(in thousands, except share amounts)



(l)		Security is non-income producing.
(m)		Security held within FSEP-BBH, Inc., a wholly-owned subsidiary of the Company.
(n)		Security held within EP Burnett Investments, Inc., a wholly-owned subsidiary of the Company.
(o)		Investment denominated in Canadian dollars. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2013.
(p)		Security held within EP San Pedro Investments, LLC, a wholly-owned subsidiary of the Company.
(q)		Investment denominated in British pounds. Amortized cost and fair value are converted into U.S. dollars as of December 31, 2013.
(r)		Security held within EP Synergy Investments, Inc., a wholly-owned subsidiary of the Company.

See notes to unaudited consolidated financial statements.

Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements

(in thousands, except share and per share amounts)

Note 1. Principal Business and Organization

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

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, 2014, the Company had four wholly-owned financing subsidiaries and six wholly-owned subsidiaries through which it holds interests in certain non-controlled and non-affiliated portfolio companies. The unaudited consolidated financial statements include both the Company's accounts and the accounts of its wholly-owned subsidiaries as of March 31, 2014. All significant intercompany transactions have been eliminated in consolidation. Certain of the Company's consolidated subsidiaries are subject to U.S. federal and state income taxes.

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

Note 2. Summary of Significant Accounting Policies

Basis of Presentation: The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For a more complete discussion of significant accounting policies and certain other information, the Company's interim unaudited consolidated financial statements should be read in conjunction with its audited consolidated financial statements as of and for the year ended December 31, 2013 included in the Company's annual report on Form 10-K. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The December 31, 2013 consolidated balance sheet and consolidated schedule of investments are derived from the Company's audited consolidated financial statements as of and for the year ended

Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

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

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

Capital Gains Incentive Fee: The Company 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 such agreement). Such fee will equal 20.0% of the Company's incentive fee capital gains (i.e., the Company's realized capital gains on a cumulative basis from inception, calculated as of the end of the applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, the Company accrues for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

While the investment advisory and administrative services agreement neither includes nor contemplates the inclusion of unrealized gains in the calculation of the capital gains incentive fee, pursuant to an interpretation of an American Institute of Certified Public Accountants, or AICPA, Technical Practice Aid for investment companies, the Company includes unrealized gains in the calculation of the capital gains incentive fee expense and related accrued capital gains incentive fee. This accrual reflects the incentive fees that would be payable to FS Advisor if the Company's entire portfolio 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 historically treated all net settlement payments received by the Company pursuant to its total return swap, or TRS (which was terminated on May 24, 2013), as realized capital gains and included only the aggregate amount of unrealized depreciation on the TRS as a whole in calculating the capital gains incentive fee payable to FS Advisor with respect to realized gains, in each case, in accordance with GAAP. However, the staff of the Division of Investment Management of the SEC, or the Staff, informed the Company that it is their interpretation of the applicable language in the Advisers Act that the Company should "look through" the TRS in calculating its capital gains incentive fee. Under this "look through" methodology, the portion of the net settlement payments received by the Company pursuant to the TRS which would have represented net investment income to the Company had the Company held the loans or securities underlying the TRS directly would be treated as net investment income subject to the subordinated incentive fee on income payable to FS Advisor pursuant to the investment advisory and administrative services agreement, rather than as realized capital gains in accordance with GAAP, and any unrealized depreciation on individual loans or

Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 2. Summary of Significant Accounting Policies (continued)

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

Subordinated Income Incentive Fee: Pursuant to the investment advisory and administrative services agreement, FS Advisor may also be entitled to receive a subordinated incentive fee on income. The subordinated incentive fee on income, which is calculated and payable quarterly in arrears, equals 20.0% of "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, 2013 have been reclassified to conform to the classifications used to prepare the unaudited consolidated financial statements for the three months ended March 31, 2014. These reclassifications had no material impact on the Company's consolidated financial position, results of operations or cash flows as previously reported.

Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions

Below is a summary of transactions with respect to the Company's common shares during the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,

	2014						2013
	Shares			Amount			Shares			Amount
Gross Proceeds from Offering		26,640,958		$	285,620			22,205,144		$	229,963
Reinvestment of Distributions		2,585,121			25,214			738,729			6,971


Total Gross Proceeds		29,226,079			310,834			22,943,873			236,934
Commissions and Dealer Manager Fees		—			(25,957	)		—			(19,977	)


Net Proceeds to Company		29,226,079			284,877			22,943,873			216,957
Share Repurchase Program		(174,181	)		(1,693	)		(24,249	)		(228	)


Net Proceeds from Share Transactions		29,051,898		$	283,184			22,919,624		$	216,729

Status of Continuous Public Offering

Since commencing its continuous public offering and through April 29, 2014, the Company has sold 209,156,046 common shares (as adjusted for share distributions) for gross proceeds of $2,172,373. As of April 29, 2014, the Company had raised total gross proceeds of $2,192,577, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from the principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of the Company's board of trustees and certain individuals and entities affiliated with GSO Capital Partners LP, or GSO, the Company's investment sub-adviser, in a private placement conducted in April 2011 (see Note 4).

During the three months ended March 31, 2014 and 2013, the Company sold 29,226,079 and 22,943,873 common shares for gross proceeds of $310,834 and $236,934, respectively, at an average price per share of $10.64 and $10.33, respectively. The gross proceeds received during the three months ended March 31, 2014 and 2013 include reinvested shareholder distributions of $25,214 and $6,971, respectively, for which the Company issued 2,585,121 and 738,729 common shares, respectively. During the period from April 1, 2014 to April 29, 2014, the Company sold 8,280,592 common shares for gross proceeds of $89,499 at an average price per share of $10.81.

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 $25,957 and $19,977 for the three months ended March 31, 2014 and 2013, respectively.

Share Repurchase Program

The Company intends to conduct quarterly tender offers pursuant to its share repurchase program. The Company's board of trustees will consider the following factors, among others, in making its

Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 3. Share Transactions (continued)

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 the Company's 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 issuance of common shares under its distribution reinvestment plan. At the discretion of the Company's board of trustees, the Company may also use cash on hand, cash available from borrowings and cash from the liquidation of securities investments as of the end of the applicable period to repurchase common shares. In addition, the Company will limit the number of common shares to be repurchased in any calendar year to 10% of the weighted average number of common shares outstanding in the prior calendar year, or 2.5% in each quarter, though the actual number of common shares that the Company offers to repurchase may be less in light of the limitations noted above. The Company intends to offer to repurchase such common shares on each date of repurchase at a price equal to 90% of the offering price in effect on the date of repurchase. In months in which the Company repurchases common shares pursuant to its share repurchase program, it expects to conduct repurchases on the same date that it holds its first weekly closing in such month for the sale of common shares in its public offering. The Company's board of trustees may amend, suspend or terminate the share repurchase program at any time, upon 30 days' notice. The first such tender offer commenced in August 2012, and the repurchase occurred in connection with the Company's October 1, 2012 semi-monthly closing.

The following table provides information concerning the Company's repurchases of common shares pursuant to its share repurchase program during the three months ended March 31, 2014 and 2013:

For the Three Months Ended	Repurchase Date				Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares

Fiscal 2013
December 31, 2012	January 2, 2013	24,249	100	%	$	9.405	$	228
Fiscal 2014
December 31, 2013	January 2, 2014	174,181	100	%	$	9.720	$	1,693

On April 2, 2014, the Company repurchased 158,723 common shares (representing 100% of common shares tendered for repurchase) at $9.81 per share for aggregate consideration totaling $1,557.

Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FS Advisor is entitled to an annual base management fee of 2.0% of the average value of the Company's gross assets and an incentive fee based on the Company's performance. The Company commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of the Company's 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, 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 pre-incentive fee net investment income.

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

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

Table of Contents

FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

paid to FS Advisor for such services as a percentage of the Company's net assets to the same ratio as reported by other comparable BDCs.

Franklin Square Holdings, L.P., or Franklin Square Holdings, the Company's sponsor and an affiliate of FS Advisor, has funded certain of the Company's offering costs and organization costs. These costs have been recorded by the Company as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by the Company. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised in the Company's continuous public offering until all offering and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On July 18, 2011, the Company satisfied the minimum offering requirement. During the three months ended March 31, 2014 and 2013, Franklin Square Holdings did not fund any of the Company's offering and organization costs, and the Company did not pay any reimbursements to FS Advisor and its affiliates for offering and organization costs previously funded.

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

The following table describes the fees and expenses accrued under the investment advisory and administrative services agreement and the dealer manager agreement during the three months ended March 31, 2014 and 2013:

			Three Months Ended March 31,

Related Party	Source Agreement	Description	2014		2013
FS Advisor	Investment Advisory and Administrative Services Agreement	Base Management Fee⁽¹⁾	$	12,867	$	4,711
FS Advisor	Investment Advisory and Administrative Services Agreement	Capital Gains Incentive Fee⁽²⁾	$	5,565	$	3,610
FS Advisor	Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income⁽³⁾	$	4,610	$	753
FS Advisor	Investment Advisory and Administrative Services Agreement	Administrative Services Expenses⁽⁴⁾	$	935	$	453
FS²	Dealer Manager Agreement	Dealer Manager Fee⁽⁵⁾	$	5,038	$	4,175

(1): During the three months ended March 31, 2014 and 2013, $10,751 and $3,171, respectively, in base management fees were paid to FS Advisor. As of March 31, 2014, $12,867 in base management fees were payable to FS Advisor.
(2): During the three months ended March 31, 2014 and 2013, the Company accrued capital gains incentive fees of $5,565 and $3,610, respectively, based on the performance of its portfolio, of which $4,596 and $2,861, respectively, was based on unrealized gains and $969 and $749, respectively, was based on realized gains. No capital gains incentive fees are actually payable by the Company with respect to unrealized gains unless and until those gains are actually realized. The Company paid FS Advisor $2,857 and $858 in capital gains incentive fees during the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, the Company had accrued capital gains incentive fees of $16,558, of which $15,589 was based on unrealized gains and $969 was based on realized gains.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

(3): During the three months ended March 31, 2014 and 2013, $6,786 and $0, respectively, of subordinated incentive fees on income were paid to FS Advisor. As of March 31, 2014, a subordinated incentive fee on income of $4,610 was payable to FS Advisor.
(4): During the three months ended March 31, 2014 and 2013, $872 and $326, 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 $166 and $237, respectively, in administrative services expenses to FS Advisor during the three months ended March 31, 2014 and 2013.
(5): Represents aggregate dealer manager fees retained by FS² and not re-allowed to selected broker-dealers.

Capital Contribution by FS Advisor and GSO

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

In April 2011, pursuant to a private placement, Messrs. Forman and Adelman agreed to purchase, through affiliated entities controlled by each of them, 224,444 additional common shares (as adjusted for share distributions) at $8.91 per share (as adjusted for share distributions). The principals have agreed not to tender these common shares for repurchase as long as FS Advisor remains the Company's investment adviser. In connection with the same private placement, certain members of the Company's board of trustees and other individuals and entities affiliated with FS Advisor agreed to purchase 1,459,320 common shares (as adjusted for share distributions), and certain individuals and entities affiliated with GSO agreed to purchase 561,111 common shares (as adjusted for share distributions), in each case at a price of $8.91 per share (as adjusted for share distributions). In connection with the private placement, the Company issued an aggregate of 2,244,875 common shares (as adjusted for share distributions) for aggregate proceeds of $20,004, upon satisfaction of the minimum offering requirement on July 18, 2011. As of April 29, 2014, the Company has issued an aggregate of 3,504,922 common shares (as adjusted for share distributions) for aggregate gross proceeds of $31,621 to members of its board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.

Potential Conflicts of Interest

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

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

or FS Global Credit Opportunities Fund, respectively, any, or all, may do so in the future. In the event that FS Advisor undertakes to provide investment advisory services to other clients in the future, it intends to allocate investment opportunities in a fair and equitable manner consistent with the Company's investment objectives and strategies, if necessary, so that the Company will not be disadvantaged in relation to any other client of FS Advisor or its management team. In addition, even in the absence of FS Advisor retaining additional clients, it is possible that some investment opportunities may be provided to FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III and/or FS Global Credit Opportunities Fund rather than to the Company.

Exemptive Relief

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

Expense Reimbursement

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

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

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

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

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

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

During the three months ended March 31, 2014 and 2013, the Company did not accrue any reimbursements from Franklin Square Holdings. As of March 31, 2014 and December 31, 2013, the Company had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed to the Company by Franklin Square Holdings may

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 4. Related Party Transactions (continued)

become subject to repayment by the Company in the future. During the three months ended March 31, 2014 and 2013, the Company did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the three months ended March 31, 2013, the Company paid $984 in expense recoupments to Franklin Square Holdings. As of March 31, 2014, no further amounts remained subject to repayment by the Company to Franklin Square Holdings in the future.

Note 5. Distributions

The following table reflects the cash distributions per share that the Company has declared and paid on its common shares during the three months ended March 31, 2014 and 2013:

	Distribution

For the Three Months Ended	Per Share		Amount
Fiscal 2013
March 31, 2013	$	0.1617	$	12,496
Fiscal 2014
March 31, 2014	$	0.1524	$	28,423

The Company authorizes and declares ordinary cash distributions on a weekly basis and pays such distributions on a monthly basis. On March 12, 2014, the Company's board of trustees declared regular weekly cash distributions for April 2014 through June 2014, which have been or will be paid monthly to shareholders of record as of weekly record dates previously determined by the Company's board of trustees in the amount of $0.012793 per share. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of the Company's board of trustees.

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

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

For a period of time following commencement of the Company's continuous public offering, substantial portions of the Company's distributions were funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that were subject to repayment by the Company within three years. The purpose of this arrangement was to ensure that no portion of the Company's distributions to shareholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on the Company's investment

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

performance. No portion of the distributions paid during the three months ended March 31, 2014 or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, the Company's repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that shareholders may otherwise have received during the three months ended March 31, 2013. During the three months ended March 31, 2014, the Company did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that the Company will continue to achieve the performance necessary to sustain its distributions or that the Company will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

The following table reflects the sources of the cash distributions on a tax basis that the Company has paid on its common shares during the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,

	2014					2013
Source of Distribution	Distribution Amount		Percentage			Distribution Amount		Percentage
Offering proceeds	$	—		—		$	—		—
Borrowings		—		—			—		—
Net investment income⁽¹⁾		28,423		100	%		12,496		100	%
Short-term capital gains proceeds from the sale of assets		—		—			—		—
Long-term capital gains proceeds from the sale of assets		—		—			—		—
Non-capital gains proceeds from the sale of assets		—		—			—		—
Distributions on account of limited partnership interest		—		—			—		—
Expense reimbursement from sponsor		—		—			—		—


Total	$	28,423		100	%	$	12,496		100	%

(1): During the three months ended March 31, 2014 and 2013, 92.3% and 98.1%, respectively, of the Company's gross investment income was attributable to cash interest earned, 3.1% and 1.9%, respectively, was attributable to non-cash accretion of discount and 4.6% and 0.0%, respectively, was attributable to paid-in-kind, or PIK, interest.

The Company's net investment income on a tax basis for the three months ended March 31, 2014 and 2013 was $30,092 and $13,608, respectively. As of March 31, 2014 and December 31, 2013, the Company had $14,411 and $10,898, respectively, of undistributed ordinary income and net realized gains on a tax basis.

The difference between the Company's GAAP-basis net investment income and its tax-basis net investment income is primarily due to the amount by which tax-basis income on a limited partnership interest differs from its GAAP-basis income, the reversal of the required accrual for GAAP purposes of incentive fees on unrealized gains even though no such incentive fees on unrealized gains are payable by the Company, the reclassification of unamortized original issue discount recognized upon prepayment of loans from income for GAAP purposes to realized gains for tax purposes and, with

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

respect to the three months ended March 31, 2013, the inclusion of a portion of the periodic net settlement payments due on the Company's total return swap in tax-basis net investment income.

The following table sets forth a reconciliation between GAAP-basis net investment income and tax-basis net investment income during the three months ended March 31, 2014 and 2013:

	Three Months Ended March 31,

	2014			2013
GAAP-basis net investment income	$	26,288		$	8,959
Income on limited partnership interest		(783	)		(646	)
Reversal of incentive fee accrual on unrealized gains		4,596			2,861
Reclassification of unamortized original issue discount		(40	)		(213	)
Tax-basis net investment income portion of total return swap payments		—			2,639
Other miscellaneous differences		31			8


Tax-basis net investment income	$	30,092		$	13,608

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, 2014:

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.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 5. Distributions (continued)

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

	March 31, 2014 (Unaudited)			December 31, 2013

Distributable ordinary income (income and short-term capital gains)	$	10,834		$	8,073
Distributable realized gains (long-term capital gains)		3,577			2,825
Distribution receivable on limited partnership interest		37			805
Incentive fee accrual on unrealized gains		(15,589	)		(10,993	)
Unamortized organization costs		(286	)		(292	)
Net unrealized appreciation (depreciation) on investments and gain/loss on foreign currency⁽¹⁾		80,404			52,752


	$	78,977		$	53,170

(1): As of March 31, 2014 and December 31, 2013, the gross unrealized appreciation on the Company's investments and gain on foreign currency was $82,088 and $57,499, respectively. As of March 31, 2014 and December 31, 2013, the gross unrealized depreciation on the Company's investments and loss on foreign currency was $1,684 and $4,747, respectively.

The aggregate cost of the Company's investments for federal income tax purposes totaled $2,493,484 and $2,247,420 as of March 31, 2014 and December 31, 2013, respectively. The aggregate net unrealized appreciation (depreciation) on a tax basis was $80,404 and $52,752 as of March 31, 2014 and December 31, 2013, respectively.

Note 6. Investment Portfolio

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

	March 31, 2014 (Unaudited)							December 31, 2013

	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	768,662	$	781,349		30	%	$	624,327	$	634,919		27	%
Senior Secured Loans—Second Lien		669,540		680,145		27	%		673,512		683,723		30	%
Senior Secured Bonds		121,437		125,389		5	%		79,553		82,484		4	%
Subordinated Debt		813,473		852,391		33	%		767,083		789,834		34	%
Equity/Other		124,456		134,562		5	%		105,479		109,241		5	%


	$	2,497,568	$	2,573,836		100	%	$	2,249,954	$	2,300,201		100	%

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

As of March 31, 2014, the Company did not "control" and was 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.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 6. Investment Portfolio (continued)

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, 2014, the Company had three senior secured loan investments with aggregate unfunded commitments of $142,387 and four equity/other investments with aggregate unfunded commitments of $20,996. As of March 31, 2014, these unfunded equity/other investments were American Energy Ohio Holdings, LLC, BL Sand Hills Unit, L.P. net profits interest and overriding royalty interest, and Synergy Offshore LLC. As of December 31, 2013, the Company had three senior secured loan investments with aggregate unfunded commitments of $62,149 and five equity/other investments with aggregate unfunded commitments of $24,558. As of December 31, 2013, these unfunded equity/other investments were American Energy Ohio Holdings, LLC, BL Sand Hills Unit, L.P. net profits interest and overriding royalty interest, San Pedro Development, LLC and Synergy Offshore LLC. The Company maintains sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

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

	March 31, 2014 (Unaudited)					December 31, 2013

Industry Classification	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Upstream	$	1,223,072		48	%	$	1,112,686		48	%
Midstream		284,800		11	%		288,414		13	%
Downstream		9,549		0	%		4,256		0	%
Power		158,012		6	%		159,433		7	%
Service & Equipment		898,403		35	%		735,412		32	%


Total	$	2,573,836		100	%	$	2,300,201		100	%

Note 7. Fair Value of Financial Instruments

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

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

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

Valuation Inputs	March 31, 2014 (Unaudited)		December 31, 2013

Level 1—Price quotations in active markets	$	—	$	—
Level 2—Significant other observable inputs		—		—
Level 3—Significant unobservable inputs		2,573,836		2,300,201


	$	2,573,836	$	2,300,201

The Company's investments as of March 31, 2014 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 its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. Ten senior secured loan investments, one senior secured bond investment and three subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms of the debt. 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.

The Company's investments as of December 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 its investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. Six senior secured loan investments and two subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms of the debt. Except as described below, all of the Company's equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value. One senior secured loan investment, one subordinated debt investment and two equity/other investments, all of which were newly-issued and purchased near December 31, 2013, were valued at cost, as the Company's board of trustees determined that the cost of each such investment was the best indication of its fair value.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

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 periodically benchmarks the valuations provided by the independent valuation firm against the actual prices at which it purchases and sells its investments. The Company's valuation committee and board of trustees reviewed and approved the valuation determinations made with respect to these investments in a manner consistent with the Company's valuation process.

The following is a reconciliation for the three months ended March 31, 2014 and 2013 of investments for which significant unobservable inputs (Level 3) were used in determining fair value:

	For the Three Months Ended March 31, 2014

	Senior Secured Loans— First Lien			Senior Secured Loans— Second Lien			Senior Secured Bonds			Subordinated Debt			Equity/ Other			Total
Fair value at beginning of period	$	634,919		$	683,723		$	82,484		$	789,834		$	109,241		$	2,300,201
Accretion of discount (amortization of premium)		134			134			134			29			1,315			1,746
Net realized gain (loss)		312			517			509			942			—			2,280
Net change in unrealized appreciation (depreciation)		2,095			394			1,021			16,167			6,344			26,021
Purchases		176,658			13,389			62,070			71,191			21,663			344,971
Paid-in-kind interest		—			1,614			—			—			986			2,600
Sales and redemptions		(32,769	)		(19,626	)		(20,829	)		(25,772	)		(4,987	)		(103,983	)
Net transfers in or out of Level 3		—			—			—			—			—			—


Fair value at end of period	$	781,349		$	680,145		$	125,389		$	852,391		$	134,562		$	2,573,836




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	$	2,843		$	1,191		$	1,820		$	18,397		$	6,344		$	30,595

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

	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

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, 2014 and December 31, 2013 were as follows:

Type of Investment	Fair Value at March 31, 2014⁽¹⁾ (Unaudited)		Valuation Technique⁽²⁾	Unobservable Input	Range	Weighted Average

Senior Secured Loans—First Lien	$	300,038	Market Comparables	Market Yield (%)	7.8% - 11.0%	9.6%
Senior Secured Loans—Second Lien	$	266,855	Market Comparables	Market Yield (%)	8.5% - 11.3%	10.4%
Senior Secured Bonds	$	40,590	Market Comparables	Market Yield (%)	12.3% - 12.8%	12.5%
Subordinated Debt	$	186,363	Market Comparables	Market Yield (%)	7.5% - 11.5%	9.2%
Equity/Other	$	134,562	Market Comparables	Market Yield (%)	15.3% - 15.8%	15.5%
				EBITDA Multiples (x)	5.8x - 8.5x	6.9x
				Production Multiples (Mmb/d)	$35,000.0 - $163,000.0	$47,323.6
				Proved Reserves Multiples (Mmboe)	$7.5 - $16.8	$14.5
				PV-10 Multiples (x)	0.3x - 1.9x	1.1x
			Discounted Cash Flow	Discount Rate (%)	10.3% - 33.0%	19.1%
			Option Valuation Model	Volatility (%)	47.5% - 52.5%	50.0%

(1): The remaining Level 3 assets were valued by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. As of March 31, 2014, $61,377 of the senior secured loans—first lien investments and $81,010 of the senior secured loans—second lien investments valued by the independent valuation firm 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.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 7. Fair Value of Financial Instruments (continued)

Type of Investment	Fair Value at December 31, 2013⁽¹⁾		Valuation Technique⁽²⁾	Unobservable Input	Range	Weighted Average

Senior Secured Loans—First Lien	$	108,313	Market Comparables	Market Yield (%)	8.0% - 11.0%	9.2%
Senior Secured Loans—Second Lien	$	184,232	Market Comparables	Market Yield (%)	8.5% - 11.3%	10.2%
Subordinated Debt	$	110,613	Market Comparables	Market Yield (%)	7.5% - 8.0%	7.8%
Equity/Other	$	108,790	Market Comparables	Market Yield (%)	15.3% - 15.8%	15.5%
				EBITDA Multiples (x)	7.5x - 7.8x	7.6x
				Production Multiples (Mmb/d)	$191,000.0 - $194,000.0	$192,500.0
				Proved Reserves Multiples (Mmboe)	$6.1 - $16.8	$16.3
				PV-10 Multiples (x)	0.2x - 1.8x	1.0x
			Discounted Cash Flow	Discount Rate (%)	9.8% - 28.0%	15.1%
			Option Valuation Model	Volatility (%)	52.5%	52.5%

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

Note 8. Financing Arrangements

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

Facility	Type of Facility			Amount Outstanding		Amount Available

BNP Facility	Prime Brokerage	L + 1.10	%	$	80,000	$	120,000	December 24, 2014	⁽¹⁾
Citibank Credit Facility	Revolving	L + 2.50	%	$	174,174	$	826	May 24, 2015
Deutsche Bank Credit Facility	Revolving	L + 1.80	%	$	240,000		—	June 24, 2014
Natixis Credit Facility	Revolving	CP + 2.25	%⁽²⁾	$	150,000		—	July 11, 2023

(1): As described below, the BNP facility generally is terminable upon 270 days' notice by either party. As of March 31, 2014, neither Berwyn Funding nor BNP had provided notice of its intent to terminate the facility.
(2): Prior to March 2014, borrowings under the Natixis credit facility accrued interest at a rate equal to the three-month London Interbank Offered Rate, or LIBOR, plus 2.40% per annum. Beginning in March 2014, borrowings under the Natixis credit facility accrue interest at a rate equal to the applicable commercial paper rate plus 2.25% per annum.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

BNP Facility

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

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

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

As of March 31, 2014 and December 31, 2013, $80,000 and $60,000, respectively, was outstanding under the BNP facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $299 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the 270 day period following the closing date of the BNP facility. As of March 31, 2014, $176 of such deferred financing costs had yet to be amortized to interest expense.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

For the three months ended March 31, 2014, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the BNP facility were as follows:

	Three Months Ended March 31, 2014

Direct interest expense	$	247
Non-usage fees		173
Amortization of deferred financing costs		99


Total interest expense	$	519




Cash paid for interest expense⁽¹⁾	$	479
Average borrowings under the facility	$	74,000
Effective interest rate on borrowings		1.33	%
Weighted average interest rate (including the effect of non-usage fees)		2.27	%

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

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

Citibank Credit Facility

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

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

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

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

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

As of March 31, 2014 and December 31, 2013, $174,174 was outstanding under the Citibank credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $657 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2014, $377 of such deferred financing costs had yet to be amortized to interest expense.

	Three Months Ended March 31, 2014

Direct interest expense	$	1,178
Non-usage fees		1
Amortization of deferred financing costs		81


Total interest expense	$	1,260




Cash paid for interest expense⁽¹⁾	$	1,195
Average borrowings under the facility	$	174,174
Effective interest rate on borrowings		2.73	%
Weighted average interest rate (including the effect of non-usage fees)		2.74	%

(1): Interest under the Citibank credit facility is paid quarterly in arrears and commenced on November 12, 2013.

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

Deutsche Bank Credit Facility

On June 24, 2011, FSEP Term Funding, LLC, or FSEP Funding, the Company's wholly-owned, special-purpose financing subsidiary, entered into a revolving credit facility, or the Deutsche Bank credit facility, with Deutsche Bank AG, New York Branch, or Deutsche Bank, as administrative agent and the lender party thereto, which provided for borrowings in an aggregate amount of up to $50,000. On May 30, 2012, August 28, 2012 and October 18, 2012, FSEP Funding and Deutsche Bank entered into separate amendments to the Deutsche Bank credit facility which increased the aggregate borrowings available under the facility to $100,000, $175,000 and $240,000, respectively. On June 24, 2013, FSEP Funding and Deutsche Bank entered into an additional amendment to the Deutsche Bank credit facility which extended the maturity date of the facility to June 24, 2014 and consolidated the

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

existing four tranches of commitments under the facility into a single tranche of commitments with an aggregate principal amount of $240,000.

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

Pricing under the Deutsche Bank credit facility is based on LIBOR for an interest period equal to the weighted average LIBOR interest period of eligible securities owned by FSEP Funding, with the commitments under the facility bearing interest at the rate of LIBOR plus 1.80% per annum. FSEP Funding is subject to a non-usage fee of 0.75% per annum to the extent that the aggregate principal amount available under the facility is not borrowed. Any amounts borrowed under the Deutsche Bank credit facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2014.

As of March 31, 2014 and December 31, 2013, $240,000 was outstanding under the Deutsche Bank credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $1,300 in connection with obtaining and amending the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2014, $140 of such deferred financing costs had yet to be amortized to interest expense.

For the three months ended March 31, 2014 and 2013, the components of total interest expense, cash paid for interest expense, average borrowings, effective interest rate and weighted average interest rate for the Deutsche Bank credit facility were as follows:

	Three Months Ended March 31,

	2014			2013
Direct interest expense	$	1,219		$	968
Non-usage fees		—			107
Amortization of deferred financing costs		148			167


Total interest expense	$	1,367		$	1,242




Cash paid for interest expense⁽¹⁾	$	1,275		$	1,032
Average borrowings under the facility	$	240,000		$	186,543
Effective interest rate on borrowings		2.03	%		2.07	%
Weighted average interest rate (including the effect of non-usage fees)		2.03	%		2.30	%

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

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

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

Natixis Credit Facility

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

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

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

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

As of March 31, 2014 and December 31, 2013, $150,000 was outstanding under the Natixis credit facility. The carrying amount of the amount outstanding under the facility approximates its fair value. The Company incurred costs of $2,544 in connection with obtaining the facility, which the Company has recorded as deferred financing costs on its consolidated balance sheets and amortizes to interest expense over the life of the facility. As of March 31, 2014, $2,361 of such deferred financing costs had yet to be amortized to interest expense.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 8. Financing Arrangements (continued)

	Three Months Ended March 31, 2014

Direct interest expense	$	1,128
Amortization of deferred financing costs		63


Total interest expense	$	1,191




Cash paid for interest expense⁽¹⁾	$	1,146
Average borrowings under the facility	$	150,000
Effective interest rate on borrowings		2.51	%
Weighted average interest rate		3.01	%

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

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

Note 9. Commitments and Contingencies

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

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

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

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 10. Financial Highlights

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

	Three Months Ended March 31, 2014 (Unaudited)			Year Ended December 31, 2013

Per Share Data:
Net asset value, beginning of period	$	9.66		$	9.34
Results of operations⁽¹⁾
Net investment income (loss)		0.14			0.58
Net realized and unrealized appreciation (depreciation) on investments and total return swap and gain/loss on foreign currency		0.15			0.36


Net increase (decrease) in net assets resulting from operations		0.29			0.94


Shareholder distributions⁽²⁾
Distributions from net investment income		(0.15	)		(0.65	)
Distributions from net realized gain on investments		—			(0.01	)


Net decrease in net assets resulting from shareholder distributions		(0.15	)		(0.66	)


Capital share transactions
Issuance of common shares⁽³⁾		—			0.09
Repurchases of common shares⁽⁴⁾		—			—
Offering costs⁽¹⁾		(0.01	)		(0.05	)


Net increase (decrease) in net assets resulting from capital share transactions		(0.01	)		0.04


Net asset value, end of period	$	9.79		$	9.66




Shares outstanding, end of period		202,584,157			173,532,259




Total return⁽⁵⁾		2.90	%		10.49	%




Ratio/Supplemental Data:
Net assets, end of period	$	1,983,930		$	1,676,237




Ratio of net investment income to average net assets⁽⁶⁾		1.44	%		6.04	%
Ratio of total expenses to average net assets⁽⁶⁾		1.66	%		5.89	%
Portfolio turnover⁽⁷⁾		4.24	%		53.26	%

(1): The per share data was derived by using the weighted average shares outstanding during the applicable period.
(2): The per share data for distributions reflects the actual amount of distributions paid per share during the applicable period.
(3): 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.

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FS Energy and Power Fund

Notes to Unaudited Consolidated Financial Statements (continued)

(in thousands, except share and per share amounts)

Note 10. Financial Highlights (continued)

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



Ratio of accrued capital gains incentive fees to average net assets	0.31	%	0.75	%
Ratio of subordinated income incentive fees to average net assets	0.25	%	0.69	%
Ratio of interest expense to average net assets	0.24	%	0.84	%
Ratio of income and excise taxes to average net assets	0.00	%	0.07	%

(7): Portfolio turnover for the three months ended March 31, 2014 is not annualized.

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

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

Forward-Looking Statements

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

•: our future operating results;
•: our business prospects and the prospects of the companies in which we may invest;
•: 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, FSIC III Advisor, LLC, FS Global Advisor, LLC, FS Investment Corporation, FS Investment Corporation II, FS Investment Corporation III, FS Global Credit Opportunities Fund, 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 may 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

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

•: 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. 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.

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

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

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

Direct Originations: We intend to leverage our relationship with GSO and its global sourcing and origination platform to directly source investment opportunities. Such investments are originated or structured specifically for us or made by us and are not generally available to the broader market. These investments may include both debt and equity components, although we do not expect to make

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equity investments (other than income-oriented equity investments) independent of having an existing credit relationship. We believe directly originated investments may offer higher returns and more favorable protections than broadly syndicated transactions.

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

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

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

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

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

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Revenues

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

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

Expenses

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

We reimburse FS Advisor for expenses necessary to perform services related to our administration and operations. Such services include the provision of general ledger accounting, fund accounting, legal services, investor relations and other administrative services. FS Advisor also performs, or oversees the performance of, our corporate operations and required administrative services, which includes being responsible for the financial records that we are required to maintain and preparing reports for our shareholders and reports filed with the SEC. In addition, FS Advisor assists us in calculating our net asset value, overseeing the preparation and filing of tax returns and the printing and dissemination of reports to our shareholders, and generally overseeing the payment of our expenses and the performance of administrative and professional services rendered to us by others. See "—Related Party Transactions" for additional information regarding the reimbursements payable to FS Advisor for administrative services and the methodology for determining the amount of any such reimbursements. We bear all other expenses of our operations and transactions. For additional information regarding these expenses, please see our annual report on Form 10-K for the year ended December 31, 2013.

In addition, we have contracted with State Street Bank and Trust Company to provide various accounting and administrative services, including, but not limited to, preparing preliminary financial information for review by FS Advisor, preparing and monitoring expense budgets, maintaining

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accounting and corporate books and records, processing trade information provided by us and performing testing with respect to RIC compliance.

Expense Reimbursement

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

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

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

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

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

During the three months ended March 31, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings. As of March 31, 2014 and December 31, 2013, we had no reimbursements due from Franklin Square Holdings. Under the expense reimbursement agreement, amounts reimbursed by Franklin Square Holdings may become subject to repayment by us in the future. During the three months ended March 31, 2014 and 2013, we did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the three months ended March 31, 2013, we paid $984 in expense recoupments to Franklin Square Holdings. As of March 31, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future.

Portfolio Investment Activity for the Three Months Ended March 31, 2014 and for the Year Ended December 31, 2013

During the three months ended March 31, 2014, we made investments in portfolio companies totaling $344,971. During the same period, we sold investments for proceeds of $83,529 and received principal repayments of $20,454. As of March 31, 2014, our investment portfolio, with a total fair value of $2,573,836, consisted of interests in 110 portfolio companies (30% in first lien senior secured loans, 27% in second lien senior secured loans, 5% in senior secured bonds, 33% in subordinated debt and 5% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $185.1 million. As of March 31, 2014, the investments in our portfolio were purchased at a weighted average price of 99.2% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 61.0% of our portfolio based on the fair value of our investments) was B3 based upon the ratings scale employed by Moody's Investors Service, Inc., or Moody's, and our estimated gross annual portfolio yield, prior to leverage (which represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of such date), was 8.8% based upon the amortized cost of our investments. The portfolio yield does not represent an actual investment return to shareholders.

Based on our regular weekly cash distribution rate of $0.012793 per share as of March 31, 2014 and our public offering price of $10.90 per share as of such date, the annualized distribution rate to shareholders as of March 31, 2014 was 6.10%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

During the year ended December 31, 2013, we made investments in portfolio companies totaling $2,295,602. During the same period, we sold investments for proceeds of $521,048 and received

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principal repayments of $214,625. As of December 31, 2013, our investment portfolio, with a total fair value of $2,300,201, consisted of interests in 104 portfolio companies (27% in first lien senior secured loans, 30% in second lien senior secured loans, 4% in senior secured bonds, 34% in subordinated debt and 5% in equity/other). The portfolio companies that comprised our portfolio as of such date had an average annual EBITDA of approximately $185.8 million. As of December 31, 2013, the investments in our portfolio were purchased at a weighted average price of 99.5% of par or stated value, as applicable, the weighted average credit rating of the investments in our portfolio that were rated (constituting approximately 63.2% of our portfolio based on the fair value of our investments) was B3 based upon the Moody's scale, and our estimated gross annual portfolio yield, prior to leverage, was 8.8% based upon the amortized cost of our investments. Our gross annual portfolio yield, prior to leverage, represents the expected yield to be generated by us on our investment portfolio based on the composition of our portfolio as of December 31, 2013. The portfolio yield does not represent an actual investment return to shareholders.

Based on our regular weekly cash distribution rate of $0.012675 per share as of December 31, 2013 and our public offering price of $10.80 per share as of such date, the annualized distribution rate to shareholders as of December 31, 2013 was 6.10%. The distribution rate to shareholders does not represent an actual investment return to shareholders and may include income, realized capital gains and a return of investors' capital. Our gross annual portfolio yield and distribution rate to shareholders are subject to change and in the future may be greater or less than the rates set forth above. See the section entitled "Risk Factors" in our annual report on Form 10-K for the fiscal year ended December 31, 2013 and our other periodic reports filed with the SEC for a discussion of the uncertainties, risks and assumptions associated with these statements.

Total Portfolio Activity

The following tables present certain selected information regarding our portfolio investment activity for the three months ended March 31, 2014 and the year ended December 31, 2013:

Net Investment Activity	For the Three Months Ended March 31, 2014			For the Year Ended December 31, 2013

Purchases	$	344,971		$	2,295,602
Sales and Redemptions		(103,983	)		(735,673	)


Net Portfolio Activity	$	240,988		$	1,559,929

	For the Three Months Ended March 31, 2014					For the Year Ended December 31, 2013

New Investment Activity by Asset Class	Purchases		Percentage			Purchases		Percentage
Senior Secured Loans—First Lien	$	176,658		51	%	$	880,162		38	%
Senior Secured Loans—Second Lien		13,389		4	%		658,910		29	%
Senior Secured Bonds		62,070		18	%		80,924		3	%
Subordinated Debt		71,191		21	%		617,025		27	%
Equity/Other		21,663		6	%		58,581		3	%


Total	$	344,971		100	%	$	2,295,602		100	%

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

	March 31, 2014 (Unaudited)							December 31, 2013

	Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio			Amortized Cost⁽¹⁾		Fair Value		Percentage of Portfolio
Senior Secured Loans—First Lien	$	768,662	$	781,349		30	%	$	624,327	$	634,919		27	%
Senior Secured Loans—Second Lien		669,540		680,145		27	%		673,512		683,723		30	%
Senior Secured Bonds		121,437		125,389		5	%		79,553		82,484		4	%
Subordinated Debt		813,473		852,391		33	%		767,083		789,834		34	%
Equity/Other		124,456		134,562		5	%		105,479		109,241		5	%


	$	2,497,568	$	2,573,836		100	%	$	2,249,954	$	2,300,201		100	%

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

	March 31, 2014			December 31, 2013

Number of Portfolio Companies		110			104
% Variable Rate (based on fair value)		59.8	%		60.5	%
% Fixed Rate (based on fair value)		35.0	%		34.7	%
% Income Producing Equity or Other Investments (based on fair value)		3.3	%		3.9	%
% Non-Income Producing Equity or Other Investments (based on fair value)		1.9	%		0.9	%
Average Annual EBITDA of Portfolio Companies	$	185,103		$	185,816
Weighted Average Purchase Price of Investments (as a % of par or stated value)		99.2	%		99.5	%
Weighted Average Credit Rating of Investments that were Rated		B3			B3
% of Investments on Non-Accrual		—			—
Gross Portfolio Yield Prior to Leverage (based on amortized cost)		8.8	%		8.8	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost)—Excluding Non-Income Producing Assets		9.0	%		8.9	%

Direct Originations

The following tables present certain selected information regarding our direct originations for the three months ended March 31, 2014 and the year ended December 31, 2013:

New Direct Originations	For the Three Months Ended March 31, 2014			For the Year Ended December 31, 2013

Total Commitments (including Unfunded Commitments)	$	279,138		$	625,627
Exited Investments (including partial paydowns)		(4,813	)		(60,000	)


Net Direct Originations	$	274,325		$	565,627

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	For the Three Months Ended March 31, 2014					For the Year Ended December 31, 2013

New Direct Originations by Asset Class (including Unfunded Commitments)	Commitment Amount		Percentage			Commitment Amount		Percentage
Senior Secured Loans—First Lien	$	137,636		49	%	$	174,800		28	%
Senior Secured Loans—Second Lien		81,010		29	%		182,500		29	%
Senior Secured Bonds		41,323		15	%		—		—
Subordinated Debt		—		—			185,000		30	%
Equity/Other		19,169		7	%		83,327		13	%


Total	$	279,138		100	%	$	625,627		100	%

	For the Three Months Ended March 31, 2014			For the Year Ended December 31, 2013

Average New Direct Origination Commitment Amount	$	39,877		$	56,875
Weighted Average Maturity for New Direct Originations		10/16/19			4/13/18
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period		9.7	%		9.8	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Investments Exited during Period		11.6	%		9.5	%

Characteristics of All Direct Originations held in Portfolio	March 31, 2014			December 31, 2013

Number of Portfolio Companies		15			11
Average Annual EBITDA of Portfolio Companies	$	40,284		$	42,800
Average Leverage Through Tranche of Portfolio Companies—Excluding Equity/Other Securities		4.7x			3.9x
% of Investments on Non-Accrual		—			—
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations		9.8	%		10.0	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of New Direct Originations during Period—Excluding Non-Income Producing Assets		10.7	%		10.1	%
Gross Portfolio Yield Prior to Leverage (based on amortized cost) of Funded Direct Originations—Excluding Non-Income Producing Assets		10.4	%		10.3	%

Portfolio Composition by Strategy and Industry

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

	March 31, 2014					December 31, 2013

Portfolio Composition by Strategy	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Direct Originations	$	786,021		30	%	$	577,357		25	%
Opportunistic		636,626		25	%		648,496		28	%
Broadly Syndicated/Other		1,151,189		45	%		1,074,348		47	%


Total	$	2,573,836		100	%	$	2,300,201		100	%

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	March 31, 2014 (Unaudited)					December 31, 2013

Industry Classification	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
Upstream	$	1,223,072		48	%	$	1,112,686		48	%
Midstream		284,800		11	%		288,414		13	%
Downstream		9,549		0	%		4,256		0	%
Power		158,012		6	%		159,433		7	%
Service & Equipment		898,403		35	%		735,412		32	%


Total	$	2,573,836		100	%	$	2,300,201		100	%

As of March 31, 2014, we did not "control" and were 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, 2014, we had three senior secured loan investments with aggregate unfunded commitments of $142,387 and four equity/other investments with aggregate unfunded commitments of $20,996. As of March 31, 2014, these unfunded equity/other investments were American Energy Ohio Holdings, LLC, BL Sand Hills Unit, L.P. net profits interest and overriding royalty interest, and Synergy Offshore LLC. As of December 31, 2013, we had three senior secured loan investments with aggregate unfunded commitments of $62,149 and five equity/other investments with aggregate unfunded commitments of $24,558. As of December 31, 2013, these unfunded equity/other investments were American Energy Ohio Holdings, LLC, BL Sand Hills Unit, L.P. net profits interest and overriding royalty interest, San Pedro Development, LLC and Synergy Offshore LLC. We maintain sufficient cash on hand and available borrowings to fund such unfunded commitments should the need arise.

Portfolio Asset Quality

In addition to various risk management and monitoring tools, FS Advisor uses an investment rating system to characterize and monitor the expected level of returns on each investment in our 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, 2014 and December 31, 2013:

	March 31, 2014					December 31, 2013

Investment Rating	Fair Value		Percentage of Portfolio			Fair Value		Percentage of Portfolio
1	$	77,731		3	%	$	76,865		3	%
2		2,448,359		95	%		2,160,052		94	%
3		47,746		2	%		63,284		3	%
4		—		—			—		—
5		—		—			—		—


	$	2,573,836		100	%	$	2,300,201		100	%

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

Results of Operations

Comparison of the Three Months Ended March 31, 2014 and 2013

Revenues

We generated investment income of $56,556 and $20,911 for the three months ended March 31, 2014 and 2013, respectively, in the form of interest and fees earned on senior secured loans, senior secured bonds and subordinated debt investments in our portfolio and dividends and other distributions earned on equity/other investments in our portfolio. Such revenues represent $52,210 and $20,512 of cash income earned as well as $4,346 and $399 in non-cash portions relating to accretion of discount, PIK interest and accrual of limited partnership income for the three months ended March 31, 2014 and 2013, respectively. Cash flows related to such non-cash revenues may not occur for a number of reporting periods or years after such revenues are recognized. 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 and the proportion of directly originated investments in our portfolio increases.

Expenses

Our total expenses were $30,268 and $11,952 for the three months ended March 31, 2014 and 2013, respectively. Our expenses include base management fees attributed to FS Advisor of $12,867 and $4,711 for the three months ended March 31, 2014 and 2013, respectively. Our expenses also include administrative services expenses attributed to FS Advisor of $935 and $453 for the three months ended March 31, 2014 and 2013, respectively.

FS Advisor is eligible to receive incentive fees based on performance. During the three months ended March 31, 2014 and 2013, we accrued subordinated incentive fees on income of $4,610 and $753, respectively, based on the performance of our portfolio. During the three months ended March 31, 2014 and 2013, we accrued capital gains incentive fees of $5,565 and $3,610, respectively based on the performance of our portfolio, of which $4,596 and $2,861, respectively, was based on unrealized gains and $969 and $749, respectively, was based on realized gains. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. See "—Critical Accounting Policies—Capital Gains Incentive Fee."

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We recorded interest expense of $4,337 and $1,242 for the three months ended March 31, 2014 and 2013, respectively, in connection with our credit facilities. For the three months ended March 31, 2014 and 2013, fees and expenses incurred with our fund administrator, which provides various accounting and administrative services to us, totaled $266 and $140, respectively, and fees and expenses incurred with our share transfer agent totaled $647 and $400, respectively. Fees for our board of trustees were $281 and $200 for the three months ended March 31, 2014 and 2013, respectively.

Our other general and administrative expenses totaled $704 and $443 for the three months ended March 31, 2014 and 2013, respectively, and consisted of the following:

	Three Months Ended March 31,

	2014		2013
Expenses associated with our independent audit and related fees	$	94	$	75
Compensation of our chief compliance officer		20		10
Legal fees		243		200
Printing fees		89		14
Insurance expense		56		29
Other		202		115


Total	$	704	$	443

We generally expect our total expenses related to our ongoing operations to decrease as a percentage of our average net assets because of the anticipated growth in the size of our asset base. During the three months ended March 31, 2014 and 2013, the ratio of our total expenses to our average net assets was 1.66% and 1.68% respectively. During the three months ended March 31, 2014 and 2013, our ratio of total expenses to average net assets included $4,337 and $1,242, respectively, related to interest expense, $10,175 and $4,363, respectively, related to accruals for incentive fees and $56 and $0, respectively, related to accruals for income taxes. Without such expenses, our ratio of total expenses to average net assets would have been 0.86% and 0.89% for the three months ended March 31, 2014 and 2013, respectively. Incentive fees and interest expense, among other things, may increase or decrease our expense ratios relative to comparative periods depending on portfolio performance and changes in benchmark interest rates such as LIBOR, among other factors.

Expense Reimbursement

During the three months ended March 31, 2014 and 2013, we did not accrue any reimbursements from Franklin Square Holdings. As of March 31, 2014 and December 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. During the three months ended March 31, 2014 and 2013, we did not accrue any amounts for expense recoupments payable to Franklin Square Holdings. During the three months ended March 31, 2013, we paid $984 in expense recoupments to Franklin Square Holdings. As of March 31, 2014, no further amounts remained subject to repayment by us to Franklin Square Holdings in the future. For a discussion of the expense reimbursement agreement, see "—Overview—Expense Reimbursement."

Net Investment Income

Our net investment income totaled $26,288 ($0.14 per share) and $8,959 ($0.12 per share) for the three months ended March 31, 2014 and 2013, respectively.

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Net Realized Gains or Losses

We sold investments and received principal repayments of $83,529 and $20,454, respectively, during the three months ended March 31, 2014, from which we realized a net gain of $2,280. We realized a net loss of $538 from settlements on foreign currency during the three months ended March 31, 2014. 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 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.

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, 2014 and 2013, the net change in unrealized appreciation (depreciation) on investments totaled $26,021 and $12,867, respectively, and the net change in unrealized gain (loss) on foreign currency was $81 and $(5), respectively. The net change in unrealized appreciation (depreciation) on our TRS for the three months ended March 31, 2013 was $2,590. The change in unrealized appreciation (depreciation) on our investments during the three months ended March 31, 2014 was primarily driven by a general tightening of credit spreads and by the performance of our directly originated and opportunistic investments. The change in unrealized appreciation (depreciation) on our investments and TRS during the three months ended March 31, 2013 was primarily driven by a continuation of the tightening of credit spreads that occurred during 2012.

Net Increase (Decrease) in Net Assets Resulting from Operations

For the three months ended March 31, 2014 and 2013, the net increase (decrease) in net assets resulting from operations was $54,132 ($0.29 per share) and $27,001 ($0.36 per share), respectively.

Financial Condition, Liquidity and Capital Resources

As of March 31, 2014, we had $100,319 in cash and foreign currency, which are each held in a custodial account, and $120,826 in borrowings available under our financing facilities. Below is a summary of our outstanding financing facilities as of March 31, 2014:

Facility	Type of Facility			Amount Outstanding		Amount Available

BNP Facility	Prime Brokerage	L + 1.10%		$	80,000	$	120,000	December 24, 2014	⁽¹⁾
Citibank Credit Facility	Revolving	L + 2.50%		$	174,174	$	826	May 24, 2015
Deutsche Bank Credit Facility	Revolving	L + 1.80%		$	240,000		—	June 24, 2014
Natixis Credit Facility	Revolving	CP + 2.25%	⁽²⁾	$	150,000		—	July 11, 2023

(1): The BNP facility generally is terminable upon 270 days' notice by either party. As of March 31, 2014, neither Berwyn Funding nor BNP had provided notice of its intent to terminate the facility.
(2): Prior to March 2014, borrowings under the Natixis credit facility accrued interest at a rate equal to three-month LIBOR plus 2.40% per annum. Beginning in March 2014, borrowings under the Natixis credit facility accrue interest at a rate equal to the applicable commercial paper rate plus 2.25% per annum.

For additional information regarding our outstanding financing facilities as of March 31, 2014, see Note 8 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q.

During the three months ended March 31, 2014, we sold 29,226,079 common shares for gross proceeds of $310,834 at an average price per share of $10.64. The gross proceeds received during the three months ended March 31, 2014 include reinvested shareholder distributions of $25,214, for which

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we issued 2,585,121 common shares. During the three months ended March 31, 2014, 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 on our consolidated financial statements. The sales commissions and dealer manager fees related to the sale of our common shares were $25,957 for the three months ended March 31, 2014. These sales commissions and fees include $5,038 retained by the dealer manager, FS², which is one of our affiliates.

Since commencing our continuous public offering and through April 29, 2014, we have sold 209,156,046 common shares (as adjusted for share distributions) for gross proceeds of $2,172,373. As of April 29, 2014, we have raised total gross proceeds of $2,192,577, including $200 of seed capital contributed by the principals of FS Advisor in December 2010 and $20,004 in proceeds raised from the principals of FS Advisor, other individuals and entities affiliated with FS Advisor, certain members of our board of trustees and certain individuals and entities affiliated with GSO in a private placement conducted in April 2011. As of April 29, 2014, we have sold an aggregate of 3,504,922 common shares (as adjusted for share distributions) for aggregate gross proceeds of $31,621 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.

We generate cash primarily from the net proceeds of our continuous public offering and from cash flows from fees, interest and dividends earned from our investments as well as principal repayments and proceeds from sales of our investments. We are engaged in a continuous public offering of our common shares. We accept subscriptions on a continuous basis and issue common shares at weekly closings. Prior to September 11, 2013, we issued common shares on a semi-monthly basis. Shares are issued at prices that, after deducting selling commissions and dealer manager fees, must be above our net asset value per share.

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

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

The following table provides information concerning our repurchases of common shares pursuant to our share repurchase program during the three months ended March 31, 2014 and 2013:

For the Three Months Ended	Repurchase Date				Repurchase Price Per Share		Aggregate Consideration for Repurchased Shares

Fiscal 2013
December 31, 2012	January 2, 2013	24,249	100	%	$	9.405	$	228
Fiscal 2014
December 31, 2013	January 2, 2014	174,181	100	%	$	9.720	$	1,693

On April 2, 2014, we repurchased 158,723 common shares (representing 100% of common shares tendered for repurchase) at $9.81 per share for aggregate consideration totaling $1,557.

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Capital Contribution by FS Advisor and GSO

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 April 29, 2014, we have sold an aggregate of 3,504,922 common shares (as adjusted for share distributions) for aggregate gross proceeds of $31,621 to members of our board of trustees and individuals and entities affiliated with FS Advisor and GSO, including common shares sold to Messrs. Forman and Adelman in December 2010 and common shares sold in the private placement conducted in April 2011.

RIC Status and Distributions

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

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

During certain periods, our distributions may exceed our earnings, especially during the period before we have substantially invested the proceeds from our continuous public offering of common shares. As a result, it is possible that a portion of the distributions we make will represent a return of capital. A return of capital generally is a return of an investor's investment rather than a return of earnings or gains derived from our investment activities and will be made after deducting the fees and expenses payable in connection with our continuous public offering, including any fees payable to FS

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Advisor. Each year a statement on Form 1099-DIV identifying the sources of the distributions will be mailed to our shareholders. No portion of the distributions paid during the three months ended March 31, 2014 and 2013 represented a return of capital.

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

The following table reflects the cash distributions per share that we have declared and paid on our common shares during the three months ended March 31, 2014 and 2013:

	Distribution

For the Three Months Ended	Per Share		Amount
Fiscal 2013
March 31, 2013	$	0.1617	$	12,496
Fiscal 2014
March 31, 2014	$	0.1524	$	28,423

On March 12, 2014, our board of trustees declared regular weekly cash distributions for April 2014 through June 2014, which have been or will be paid monthly to shareholders of record as of weekly record dates previously determined by our board of trustees in the amount of $0.012793 per share. The timing and amount of any future distributions to shareholders are subject to applicable legal restrictions and the sole discretion of our board of trustees.

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

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

For a period of time following commencement of our continuous public offering, substantial portions of our distributions were funded through the reimbursement of certain expenses by Franklin Square Holdings and its affiliates, including through the waiver of certain investment advisory fees by FS Advisor, that were subject to repayment by us within three years. The purpose of this arrangement was to ensure that no portion of our distributions to shareholders was paid from offering proceeds or borrowings. Any such distributions funded through expense reimbursements or waivers of advisory fees were not based on our investment performance. No portion of the distributions paid during the three months ended March 31, 2014 or 2013 was funded through the reimbursement of operating expenses by Franklin Square Holdings. However, our repayment of amounts previously reimbursed or waived by Franklin Square Holdings and its affiliates reduced the distributions that shareholders may otherwise have received during the three months ended March 31, 2013. During the three months ended March 31, 2014, we did not repay any amounts to Franklin Square Holdings for expenses previously reimbursed or waived. There can be no assurance that we will continue to achieve the performance necessary to sustain our distributions or that we will be able to pay distributions at a specific rate or at all. Franklin Square Holdings and its affiliates have no obligation to waive advisory fees or otherwise reimburse expenses in future periods.

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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, 2014 and 2013:

	Three Months Ended March 31,

	2014					2013
Source of Distribution	Distribution Amount		Percentage			Distribution Amount		Percentage
Offering proceeds	$	—		—		$	—		—
Borrowings		—		—			—		—
Net investment income⁽¹⁾		28,423		100	%		12,496		100	%
Short-term capital gains proceeds from the sale of assets		—		—			—		—
Long-term capital gains proceeds from the sale of assets		—		—			—		—
Non-capital gains proceeds from the sale of assets		—		—			—		—
Distributions on account of limited partnership interest		—		—			—		—
Expense reimbursement from sponsor		—		—			—		—


Total	$	28,423		100	%	$	12,496		100	%

(1): During the three months ended March 31, 2014 and 2013, 92.3% and 98.1%, respectively, of our gross investment income was attributable to cash interest earned, 3.1% and 1.9%, respectively, was attributable to non-cash accretion of discount and 4.6% and 0.0%, respectively, was attributable to PIK interest.

Our net investment income on a tax basis for the three months ended March 31, 2014 and 2013 was $30,092 and $13,608, respectively. As of March 31, 2014 and December 31, 2013, we had $14,411 and $10,898, respectively, of undistributed ordinary income and net realized gains on a tax basis.

See Note 5 to our unaudited consolidated financial statements contained in this quarterly report on Form 10-Q for additional information regarding our distributions, including information regarding share distributions declared on our common shares and a reconciliation of our GAAP-basis net investment income and tax-basis net investment income for the three months ended March 31, 2014 and 2013.

Critical Accounting Policies

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

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Valuation of Portfolio Investments

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

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

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

•: our quarterly valuation process begins with FS Advisor's management team providing a preliminary valuation of each portfolio company or investment to our valuation committee, which valuation may be obtained from an independent valuation firm, if applicable;
•: preliminary valuation conclusions are then documented and discussed with our valuation committee;
•: our valuation committee reviews the preliminary valuation and FS Advisor's management team, together with our independent valuation firm, if applicable, responds and supplements the preliminary valuation to reflect any comments provided by the valuation committee; and
•: our board of trustees discusses valuations and determines the fair value of each investment in our portfolio in good faith based on various statistical and other factors, including the input and recommendation of FS Advisor, the valuation committee and any third-party valuation firm, if applicable.

Determination of fair value involves subjective judgments and estimates. Accordingly, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations and any change in such valuations on our consolidated financial statements. Below is a description of factors that our board of trustees may consider when valuing our debt and equity investments.

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

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

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

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

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

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

Our investments as of March 31, 2014 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. Ten senior secured loan investments, one senior secured bond investment and three subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features, anticipated prepayments and other relevant terms of the debt. All of our equity/other investments were valued by the same independent valuation firm, which determined the fair value of such investments by considering, among other factors, contractual rights ascribed to such investments, as well as various income scenarios and multiples of EBITDA, cash flows, net income, revenues or, in limited instances, book value or liquidation value.

Our investments as of December 31, 2013 consisted primarily of debt securities that are traded on a private over-the-counter market for institutional investors. Except as described below, we valued our investments by using the midpoint of the prevailing bid and ask prices from dealers on the date of the relevant period end, which were provided by an independent third-party pricing service and screened for validity by such service. Six senior secured loan investments and two subordinated debt investments, for which broker quotes were not available, were valued by an independent valuation firm, which determined the fair value of such investments by considering, among other factors, the borrower's ability to adequately service its debt, prevailing interest rates for like investments, call features,

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

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

Revenue Recognition

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

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

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

Capital Gains Incentive Fee

Pursuant to the terms of the investment advisory and administrative services agreement, the incentive fee on capital gains is determined and payable in arrears as of the end of each calendar year (or upon termination of such agreement). Such fee will equal 20.0% of our incentive fee capital gains (i.e., our realized capital gains on a cumulative basis from inception, calculated as of the end of the

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applicable period, net of all realized capital losses and unrealized capital depreciation on a cumulative basis), less the aggregate amount of any previously paid capital gains incentive fees. On a quarterly basis, we accrue for the capital gains incentive fee by calculating such fee as if it were due and payable as of the end of such period.

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

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

Subordinated Income Incentive Fee

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

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Uncertainty in Income Taxes

We evaluate our tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax benefits or liabilities in our consolidated financial statements. Recognition of a tax benefit or liability with respect to an uncertain tax position is required only when the position is "more likely than not" to be sustained assuming examination by taxing authorities. We recognize interest and penalties, if any, related to unrecognized tax liabilities as income tax expense in our consolidated statements of operations. During the three months ended March 31, 2014 and 2013, we did not incur any interest or penalties.

Contractual Obligations

We have entered into an agreement with FS Advisor to provide us with investment advisory and administrative services. Payments for investment advisory services under the investment advisory and administrative services agreement are equal to (a) an annual base management fee of 2.0% of the average value of our gross assets and (b) an incentive fee based on our performance. FS Advisor, and to the extent it is required to provide such services, our sub-adviser, are reimbursed for administrative expenses incurred on our behalf. For the three months ended March 31, 2014 and 2013, we incurred $12,867 and $4,711, respectively, in base management fees and $935 and $453, respectively, in administrative services expenses under the investment advisory and administrative services agreement. In addition, FS Advisor is eligible to receive incentive fees based on the performance of our portfolio. During the three months ended March 31, 2014 and 2013, we accrued subordinated incentive fees on income of $4,610 and $753, respectively, based on the performance of our portfolio and paid FS Advisor $6,786 and $0, respectively, in respect of such fees. As of March 31, 2014, a subordinated incentive fee on income of $4,610 was payable to FS Advisor. During the three months ended March 31, 2014 and 2013, we accrued capital gains incentive fees of $5,565 and $3,610, respectively, based on the performance of our portfolio, of which $4,596 and $2,861, respectively, was based on unrealized gains and $969 and $749, respectively, was based on realized gains. We paid FS Advisor $2,857 and $858, respectively, in capital gains incentive fees during the three months ended March 31, 2014 and 2013. As of March 31, 2014, we had accrued $16,558 in capital gains incentive fees, of which $15,589 was based on unrealized gains and $969 was based on realized gains.

A summary of our significant contractual payment obligations for the repayment of outstanding borrowings under the BNP facility, the Citibank credit facility, the Deutsche Bank credit facility and the Natixis credit facility at March 31, 2014 is as follows:

	Payments Due By Period

	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
BNP Facility⁽¹⁾	$	80,000	$	80,000		—		—		—
Citibank Credit Facility⁽²⁾	$	174,174	$	43,750	$	130,424		—		—
Deutsche Bank Credit Facility⁽³⁾	$	240,000	$	240,000		—		—		—
Natixis Credit Facility⁽⁴⁾	$	150,000		—		—		—	$	150,000

(1): At March 31, 2014, $120,000 remained unused under the BNP facility. The BNP facility generally is terminable upon 270 days' notice by either party. As of March 31, 2014, neither Berwyn Funding nor BNP had provided notice of its intent to terminate the facility.
(2): At March 31, 2014, $826 remained unused under the Citibank credit facility. All amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on May 24, 2015. Amounts due on the facility will begin to amortize on November 24, 2014.

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(3): At March 31, 2014, no amounts remained unused under the Deutsche Bank credit facility. All amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on June 24, 2014.
(4): At March 31, 2014, no amounts remained unused under the Natixis credit facility. All amounts borrowed under the facility will mature, and all accrued and unpaid interest thereunder will be due and payable, on July 11, 2023.

Off-Balance Sheet Arrangements

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

Recently Issued Accounting Standards

None.

Related Party Transactions

Compensation of the Investment Adviser and Dealer Manager

Pursuant to the investment advisory and administrative services agreement, FS Advisor is entitled to an annual base management fee of 2.0% of the average value of our gross assets and an incentive fee based on our performance. We commenced accruing fees under the investment advisory and administrative services agreement on July 18, 2011, upon commencement of our 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, equals 20.0% of "pre-incentive fee net investment income" for the immediately preceding quarter and is subject to a hurdle rate, expressed as a rate of return on adjusted capital, as defined in the investment advisory and administrative services agreement, equal to 1.625% per quarter, or an annualized hurdle rate of 6.5%. The second part of the incentive fee, which is referred to as the incentive fee on capital gains, is accrued for on a quarterly basis and, if earned, is paid annually. We accrue this incentive fee based on net realized and unrealized gains; however, under the terms of the investment advisory and administrative services agreement, the fee payable to FS Advisor is based on realized gains and no such fee is payable with respect to unrealized gains unless and until such gains are actually realized. See "—Critical Accounting Policies—Capital Gains Incentive Fee" for a discussion of the treatment of the TRS with respect to the calculation of the capital gains incentive fee.

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

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Franklin Square Holdings has funded certain of our offering costs and organization costs. These costs have been recorded by us as a contribution to capital. The offering costs were offset against capital in excess of par value on the consolidated financial statements and the organization costs were charged to expense as incurred by us. Under the terms of the investment advisory and administrative services agreement, upon satisfaction of the minimum offering requirement, FS Advisor became entitled to receive 1.5% of gross proceeds raised in our continuous public offering until all offering costs and organization costs funded by FS Advisor or its affiliates (including Franklin Square Holdings) had been recovered. On July 18, 2011, we satisfied the minimum offering requirement. During the three months ended March 31, 2014 and 2013, Franklin Square Holdings did not fund any of our offering and organization costs, and we did not pay any reimbursements to FS Advisor and its affiliates for offering and organization costs previously funded.

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

			Three Months Ended March 31,

Related Party	Source Agreement	Description	2014		2013
FS Advisor	Investment Advisory and Administrative Services Agreement	Base Management Fee⁽¹⁾	$	12,867	$	4,711
FS Advisor	Investment Advisory and Administrative Services Agreement	Capital Gains Incentive Fee⁽²⁾	$	5,565	$	3,610
FS Advisor	Investment Advisory and Administrative Services Agreement	Subordinated Incentive Fee on Income⁽³⁾	$	4,610	$	753
FS Advisor	Investment Advisory and Administrative Services Agreement	Administrative Services Expenses⁽⁴⁾	$	935	$	453
FS²	Dealer Manager Agreement	Dealer Manager Fee⁽⁵⁾	$	5,038	$	4,175

(1): During the three months ended March 31, 2014 and 2013, $10,751 and $3,171, respectively, in base management fees were paid to FS Advisor. As of March 31, 2014, $12,867 of base management fees were payable to FS Advisor.
(2): During the three months ended March 31, 2014 and 2013, we accrued capital gains incentive fees of $5,565 and $3,610, respectively, based on the performance of our portfolio, of which $4,596 and $2,861, respectively, was based on unrealized gains and $969 and $749, respectively, was based on realized gains. No capital gains incentive fees are actually payable by us with respect to unrealized gains unless and until those gains are actually realized. We paid FS Advisor $2,857 and $858 in capital gains incentive fees during the three months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, we had accrued capital gains incentive fees of $16,558, of which $15,589 was based on unrealized gains and $969 was based on realized gains.
(3): During the three months ended March 31, 2014 and 2013, $6,786 and $0, respectively, of subordinated incentive fees on income were paid to FS Advisor. As of March 31, 2014, a subordinated incentive fee on income of $4,610 was payable to FS Advisor.
(4): During the three months ended March 31, 2014 and 2013, $872 and $326, respectively, of the accrued administrative services expenses related to the allocation of costs of administrative personnel for services rendered to us by FS Advisor and the remainder related to other reimbursable expenses. We paid $166 and $237 in administrative services expenses to FS Advisor during the three months ended March 31, 2014 and 2013, respectively.
(5): Represents aggregate dealer manager fees retained by FS² and not re-allowed to selected broker-dealers.

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

Recent Developments

During the period from April 1, 2014 to April 29, 2014, we sold 8,280,592 common shares for gross proceeds of $89,499 at an average price per share of $10.81.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are subject to financial market risks, including changes in interest rates. As of March 31, 2014, 59.8% of our portfolio investments (based on fair value) paid variable interest rates, 35.0% paid fixed interest rates, 3.3% were income producing equity or other investments and the remainder (1.9%) consisted of non-income producing equity or other investments. A rise in the general level of interest rates can be expected to lead to higher interest rates applicable to certain variable rate investments we hold and to declines in the value of any fixed rate investments we hold. To the extent that a substantial portion of our investments may be in variable rate investments, an increase in interest rates would make it easier for us to meet or exceed the hurdle rate applicable to the subordinated incentive fee on income and may result in a substantial increase in our net investment income and to the amount of incentive fees payable to FS Advisor with respect to our increased pre-incentive fee net investment income.

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

The following table shows the effect over a twelve month period of changes in interest rates on our interest income, interest expense and net interest income, assuming no changes in our investment portfolio and borrowing arrangements in effect as of March 31, 2014 (dollar amounts are presented in thousands):

LIBOR Basis Point Change	Increase (Decrease) in Interest Income⁽¹⁾		Increase (Decrease) in Interest Expense			Increase (Decrease) in Net Interest Income

Down 25 basis points	$	—	$	(1,610	)	$	1,610		0.8	%
Current LIBOR		—		—			—		—
Up 100 basis points		1,103		6,442			(5,339	)	(2.6	)%
Up 300 basis points		28,780		19,325			9,455		4.7	%
Up 500 basis points		58,392		32,209			26,183		12.9	%

(1): Assumes no defaults or prepayments by portfolio companies over the next twelve months.

We expect that our long-term investments will be financed primarily with equity and debt. If deemed prudent, we may use interest rate risk management techniques in an effort to minimize our exposure to interest rate fluctuations. These techniques may include various interest rate hedging activities to the extent permitted by the 1940 Act. Adverse developments resulting from changes in

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interest rates or hedging transactions could have a material adverse effect on our business, financial condition and results of operations. During the three months ended March 31, 2014 and 2013, we did not engage in interest rate hedging activities.

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

Item 4. Controls and Procedures.

As required by Rule 13(a)-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2014. Based on the foregoing, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that we would meet our disclosure obligations.

There was no change in our internal control over financial reporting (as defined in Rules 13(a)-15(f) or 15(d)-15(f) under the Exchange Act) that occurred during the three month period ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

We are not currently subject to any material legal proceedings, and, to our knowledge, no material legal proceedings are threatened against us. From time to time, we may be party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts with our portfolio companies. While the outcome of any legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material adverse effect upon our financial condition or results of operations.

Item 1A. Risk Factors.

There have been no material changes from the risk factors set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2013.

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

The table below provides information concerning our repurchases of common shares during the three months ended March 31, 2014 pursuant to our share repurchase program.

Period		Average Price Paid per Share

January 1 to January 31, 2014	174,181	$	9.72	174,181	(1	)
February 1 to February 28, 2014	—		—	—	—
March 1 to March 31, 2014	—		—	—	—


Total	174,181	$	9.72	174,181	(1	)

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

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

Item 3. Defaults upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

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Item 6. Exhibits.


	3.1		Third Amended and Restated Declaration of Trust of FS Energy and Power Fund. (Incorporated by reference to Exhibit 3.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on March 13, 2012.)
	3.2		Amended and Restated Bylaws of FS Energy and Power Fund. (Incorporated by reference to Exhibit 3.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on March 13, 2012.)
	4.1		Form of Subscription Agreement. (Incorporated by reference to Appendix A filed with FS Energy and Power Fund's final prospectus filed on April 30, 2014 with the Securities and Exchange Commission pursuant to Rule 497 of the Securities Act of 1933, as amended.)
	4.2		Amended and Restated Distribution Reinvestment Plan of FS Energy and Power Fund. (Incorporated by reference to Exhibit 4.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on November 14, 2011.)
	10.1		Investment Advisory and Administrative Services Agreement, dated as of April 28, 2011, by and between FS Energy and Power Fund and FS Investment Advisor, LLC. (Incorporated by reference to Exhibit (g)(1) filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)
	10.2		Amendment No. 1 dated as of August 10, 2012, to Investment Advisory and Administrative Services Agreement, dated as of April 28, 2011, by and between FS Energy and Power Fund and FS Investment Advisor, LLC. (Incorporated by reference to Exhibit 10.2 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on August 14, 2012.)
	10.3		Investment Sub-advisory Agreement, dated as of April 28, 2011, by and between FS Investment Advisor, LLC and GSO Capital Partners LP. (Incorporated by reference to Exhibit (g) (2) filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)
	10.4		Dealer Manager Agreement, dated as of April 28, 2011, by and between FS Energy and Power Fund and FS2 Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)
	10.5		Form of Follow-On Dealer Manager Agreement by and among FS Energy and Power Fund, FS Investment Advisor, LLC and FS² Capital Partners, LLC. (Incorporated by reference to Exhibit (h)(2) filed with Pre-Effective Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2(File No. 333-184407) filed on May 10, 2013.)
	10.6		Form of Selected Dealer Agreement (Included as Appendix A to the Dealer Manager Agreement). (Incorporated by reference to Exhibit (h)(1) filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)
	10.7		Form of Follow-On Selected Dealer Agreement. (Included as Exhibit A to the Form of Follow-On Dealer Manager Agreement.) (Incorporated by reference to Exhibit (h)(2) filed with Pre-Effective Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2(File No. 333-184407) filed on May 10, 2013.)
	10.8		Custodian Agreement, dated as of November 14, 2011, by and between State Street Bank and Trust Company and FS Energy and Power Fund. (Incorporated by reference to Exhibit 10.6 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on November 14, 2011.)

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	10.9		Escrow Agreement, dated as of March 29, 2011, by and between FS Energy and Power Fund and UMB Bank, N.A. (Incorporated by reference to Exhibit (k) filed with Amendment No. 3 to FS Energy and Power Fund's registration statement on Form N-2 (File No. 333-169679) filed on May 6, 2011.)
	10.10		Credit Agreement, dated as of June 24, 2011, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.7 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)
	10.11		First Amendment to Credit Agreement, dated as of May 30, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 30, 2012.)
	10.12		Second Amendment to Credit Agreement, dated as of August 28, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on August 30, 2012.)
	10.13		Third Amendment to Credit Agreement, dated as of October 18, 2012, by and among FSEP Term Funding, LLC, Deutsche Bank AG, New York Branch, and the other lenders party thereto. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on October 18, 2012.)
	10.14		Fourth Amendment to Credit Agreement, dated as of June 24, 2013, by and among FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on June 25, 2013.)
	10.15		Asset Contribution Agreement, dated as of June 24, 2011, by and between FS Energy and Power Fund and FSEP Term Funding, LLC. (Incorporated by reference to Exhibit 10.8 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)
	10.16		Investment Management Agreement, dated as of June 24, 2011, by and between FS Energy and Power Fund and FSEP Term Funding, LLC. (Incorporated by reference to Exhibit 10.9 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)
	10.17		Security Agreement, dated as of June 24, 2011, by and between FSEP Term Funding, LLC and Deutsche Bank AG, New York Branch. (Incorporated by reference to Exhibit 10.10 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on June 27, 2011.)
	10.18		ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, each dated as of August 11, 2011, by and between EP Investments LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.11 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on August 15, 2011.)
	10.19		Termination and Release Acknowledgment, dated as of May 11, 2012, by Citibank N.A. in favor of FS Energy and Power Fund. (Incorporated by reference to Exhibit 10.15 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)
	10.20		Amendment Agreement, dated as of May 11, 2012, to the ISDA 2002 Master Agreement, together with the Schedule thereto and Credit Support Annex to such Schedule, by and between EP Investments LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.16 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)
	10.21		Amended and Restated Confirmation Letter Agreement, dated as of May 11, 2012, by and between EP Investments LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.17 to FS Energy and Power Fund's Quarterly Report on Form 10-Q filed on May 15, 2012.)

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	10.22		Amended and Restated Confirmation Letter Agreement, dated as of October 11, 2012, by and between EP Investments LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on October 12, 2012.)
	10.23		Termination Acknowledgment (TRS), dated as of May 24, 2013, by and between EP Investments LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 31, 2013.)
	10.24		Loan Agreement, dated as of May 24, 2013, by and among EP Funding LLC, the financial institutions and other lenders from time to time party thereto and Citibank, N.A., as administrative agent. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)
	10.25		Account Control Agreement, dated as of May 24, 2013, by and among EP Funding LLC, Citibank, N.A. and Virtus Group, LP. (Incorporated by reference to Exhibit 10.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)
	10.26		Security Agreement, dated as of May 24, 2013, by and between EP Funding LLC and Citibank, N.A. (Incorporated by reference to Exhibit 10.3 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)
	10.27		Investment Management Agreement, dated as of May 24, 2013, by and between the FS Energy and Power Fund and EP Funding LLC. (Incorporated by reference to Exhibit 10.4 to FS Energy and Power Fund's Current Report on Form 8-K filed on May 29, 2013.)
	10.28		Credit Agreement, dated as of July 11, 2013, by and among Energy Funding LLC, Natixis, New York Branch, Wells Fargo Bank, National Association and the other lenders from time to time party thereto. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)
	10.29		Securities Account Control Agreement, dated as of July 11, 2013, by and among Energy Funding LLC and Wells Fargo Bank, National Association. (Incorporated by reference to Exhibit 10.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)
	10.30		Collateral Management Agreement, dated as of July 11, 2013, by and between FS Energy and Power Fund and Energy Funding LLC. (Incorporated by reference to Exhibit 10.3 to FS Energy and Power Fund's Current Report on Form 8-K filed on July 16, 2013.)
	10.31		Amended and Restated Expense Support and Conditional Reimbursement Agreement, dated May 16, 2013, by and between FS Energy and Power Fund and Franklin Square Holdings, L.P. (Incorporated by reference to Exhibit 99.1 to FS Energy and Power Fund's Current report on Form 8-K filed on May 17, 2013.)
	10.32		Committed Facility Agreement, dated as of December 11, 2013, by and between Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc. (Incorporated by reference to Exhibit 10.1 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)
	10.33		U.S. PB Agreement, dated as of December 11, 2013, by and between Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc. (Incorporated by reference to Exhibit 10.2 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)
	10.34		Special Custody and Pledge Agreement, dated as of December 11, 2013, by and among State Street Bank and Trust Company, Berwyn Funding LLC and BNP Paribas Prime Brokerage, Inc. (Incorporated by reference to Exhibit 10.3 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)
	10.35		Investment Management Agreement, dated as of December 11, 2013, by and between FS Energy and Power Fund and Berwyn Funding LLC. (Incorporated by reference to Exhibit 10.4 to FS Energy and Power Fund's Current Report on Form 8-K filed on December 17, 2013.)

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31.1	*	Certification of Chief Executive Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.
31.2	*	Certification of Chief Financial Officer pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended.
32.1	*	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*: Filed herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 14, 2014.


		FS ENERGY AND POWER FUND
		By:		/s/ MICHAEL C. FORMAN Michael C. Forman Chief Executive Officer (Principal Executive Officer)
		By:		/s/ EDWARD T. GALLIVAN, JR. Edward T. Gallivan, Jr. Chief Financial Officer (Principal Financial and Accounting Officer)

FS Energy & Power Fund - FORM 10-Q - May 14, 2014

Attached files

FS Energy & Power Fund Reports