To determine the appropriate extent to which Naturgy Energy Group SA should rely on hybrid bonds in its capital structure, we must analyze the company's financial health, cost of capital environment, and strategic needs based on the provided 2022 annual report data and market conditions.

**1. Financial Health and Leverage Analysis:**
*   **Equity Base:** Total Equity is €9,979 million. Equity attributable to owners is €7,574 million.
*   **Debt Load:** Noncurrent Financial Liabilities are €13,999 million, and Current Financial Liabilities are €2,302 million. Total Financial Debt is approximately €16,301 million.
*   **Leverage Ratio:** The Debt-to-Equity ratio is roughly 1.63x (€16,301m / €9,979m). This indicates a moderately leveraged position, typical for utility companies with stable cash flows but significant infrastructure assets.
*   **Interest Coverage:** EBITDA is €4,954 million. Finance Costs are €837 million. The EBITDA/Interest Coverage ratio is ~5.9x. This is a healthy coverage ratio, suggesting the company can comfortably service its debt obligations. However, finance costs increased significantly from €598 million in the previous year, reflecting the rising interest rate environment.

**2. Cost of Capital and Market Environment (2022):**
*   **Rising Rates:** The swap curves show a dramatic increase in rates from 2021 to 2022. For example, the 10Y swap average went from 0.053% in 2021 to 1.927% in 2022. The Bear case is even higher at 2.227%.
*   **Credit Spreads:** The iBoxx EUR Non-Financial IG spread average increased from 1.298% in 2021 to 2.295% in 2022.
*   **Implication:** The cost of issuing new senior debt has risen substantially. Hybrid bonds, which sit between debt and equity, typically offer a higher coupon than senior debt but lower than the cost of equity. In a rising rate environment, locking in long-term capital via hybrids can be attractive if the coupon is fixed, but the absolute cost is higher than in previous years. However, hybrids often provide rating agency equity credit (usually 50-100%), which helps maintain investment grade ratings without diluting existing shareholders.

**3. Strategic Considerations for Hybrid Bonds:**
*   **Rating Protection:** Utilities are sensitive to credit ratings. A downgrade can significantly increase borrowing costs. Hybrids help strengthen the balance sheet from a rating agency perspective (treating a portion as equity) while being cheaper than issuing actual equity.
*   **Dilution Avoidance:** Issuing new equity dilutes existing shareholders. With a stable dividend policy (€1.2/share paid, €0.5 proposed), management likely prefers instruments that do not dilute earnings per share immediately. Hybrids pay distributions that are often tax-deductible (depending on jurisdiction and structure) or deferred, and they don't carry voting rights.
*   **Refinancing Needs:** The company has significant long-term borrowings (€12,689 million non-current). As these mature, refinancing in a high-rate environment is costly. Hybrids can extend the duration of the debt profile.

**4. Evaluating the Options:**
*   **0%:** Relying solely on senior debt and equity ignores the benefits of hybrids in optimizing the weighted average cost of capital (WACC) and protecting credit ratings. Given the leverage level, some hybrid usage is standard for European utilities.
*   **100%:** Relying entirely on hybrids is impractical. Hybrids are more expensive than senior debt. A capital structure cannot consist entirely of quasi-equity instruments without access to cheaper senior funding for day-to-day operations and project finance. It would also signal distress or an overly complex structure to the market.
*   **75%:** This is too high. Senior debt should remain the primary source of external financing due to its lower cost. A 75% reliance on hybrids would drastically increase the overall cost of capital.
*   **50%:** This is a very aggressive target for hybrid reliance. While some highly leveraged firms might approach this, Naturgy has a solid investment grade profile. A 50% mix of hybrid/debt vs senior debt/equity is likely too skewed towards expensive capital.
*   **25%:** This is the most balanced and realistic option for a large, investment-grade utility like Naturgy.
    *   It allows the company to treat a meaningful portion of its capital as equity for rating purposes (e.g., if hybrids are 10-15% of total capitalization, they might get 50-100% equity credit, effectively boosting the equity base by 5-15%).
    *   It keeps the majority of financing in cheaper senior debt.
    *   It avoids the dilution of pure equity issuance.
    *   Industry peers in the European utility sector typically maintain hybrid bonds at around 10-20% of their total capitalization or slightly higher as a strategic buffer. A 25% *reliance* in the context of "extent to which it should rely" suggests a significant but not dominant role, fitting the profile of a company managing leverage in a rising rate environment.

**Conclusion:**
Naturgy has a strong operating cash flow (EBITDA €4.95bn) but faces rising finance costs. To optimize its capital structure, maintain investment grade ratings, and manage refinancing risks without diluting shareholders, it should utilize hybrid bonds as a supplementary tool. A 25% reliance represents a strategic allocation that balances cost efficiency with financial flexibility and rating stability, which is standard practice for major European utilities.

<answer>25%</answer>