To determine the appropriate extent to which Terna S.p.A. should utilize hybrid bonds, we must analyze its current capital structure, financial performance, refinancing needs, and the cost environment, applying the S&P Global Ratings methodology for Regulated Utilities.

**1. Current Capital Structure and Hybrid Status**
*   **Equity:** As of December 31, 2022, Total Equity is €6,169.1 million.
*   **Existing Hybrids:** The report lists "Equity Instruments Perpetual Hybrid Bonds" with a balance of €989 million. This amount is already included in the Equity figure (specifically under "Capital Instruments Bonds Hybrid Perpetual").
*   **Debt:**
    *   Long-term Borrowings: €8,416.7 million
    *   Short-term Borrowings: €444.1 million
    *   Current Portion of Long-term Borrowings: €1,909.3 million
    *   Total Interest-Bearing Debt (approximate): €8,416.7 + €444.1 + €1,909.3 = €10,770.1 million.
    *   *Note:* For S&P adjusted capital calculations, we typically look at Total Adjusted Capital = Equity + Adjusted Debt. Let's estimate Adjusted Debt. S&P often adds back certain items or adjusts for leases, but using reported debt is a strong baseline.
    *   Total Adjusted Capital ≈ Equity (€6,169.1m) + Debt (€10,770.1m) = €16,939.2 million.
*   **Current Hybrid Ratio:** The existing €989 million in hybrids represents approximately 5.8% of the Total Adjusted Capital (€989m / €16,939m). This indicates the company already has a moderate level of hybridization in its capital structure.

**2. Financial Performance and Cash Flow**
*   **Profitability:** Net Profit attributable to owners is €857 million. EBITDA (approximated by Operating Profit + Depreciation) is €1,333.5m + €725.7m = €2,059.2 million.
*   **Cash Flow:** Cash Flow from Operating Activities is strong at €2,323.7 million.
*   **Investing Activities:** Cash used in investing activities is €1,855.4 million, primarily driven by purchases of Property, Plant, and Equipment (€1,492.3 million) and Intangible Assets (€212.4 million). This reflects a high capital expenditure (Capex) intensity typical of a transmission system operator maintaining and expanding the grid.
*   **Financing Activities:** The company paid dividends of €595.8 million. Net cash from financing was positive €92.5 million, indicating manageable financing needs despite high Capex and dividends.

**3. Refinancing Needs and Leverage**
*   **Debt Maturity:** The current portion of long-term borrowings is €1,909.3 million, and short-term borrowings are €444.1 million. Total near-term debt obligations are roughly €2.35 billion.
*   **Leverage:** Debt/EBITDA is approximately €10,770m / €2,059m ≈ 5.2x. For regulated utilities, this is a manageable but notable leverage level. S&P typically looks for FFO/Debt ratios. FFO (Funds From Operations) can be approximated by Operating Cash Flow + Interest Paid + Taxes Paid (or derived from Net Income + Depreciation). Using Operating Cash Flow (€2,323m) as a proxy for strong cash generation, the coverage is healthy.
*   **Need for Optimization:** While the company generates strong cash flows, the high Capex requirements (€1.7bn+ annually) and significant dividend payouts create a continuous need for funding. Issuing hybrids can help optimize the leverage ratio by treating a portion of the instrument as equity (up to 15% limit), thereby lowering the reported debt-to-capital ratio and potentially supporting the credit rating.

**4. Cost of Capital and Market Environment**
*   **Interest Rates:** The swap curves for 2022 show a significant increase in rates compared to 2020-2021 (e.g., 10Y swap average rose from -0.143% in 2020 to 1.927% in 2022). The cost of issuing new debt or hybrids has increased materially.
*   **Hybrid Cost:** Hybrids carry a higher coupon than senior debt due to their subordinated nature and deferrable interest features. In a rising rate environment, the cost of hybrids increases.
*   **Guideline Check:**
    *   **0%:** Incorrect. The company has existing hybrids and ongoing high Capex needs.
    *   **3.75%:** This would imply maintaining the status quo or very slight increase. Given the existing 5.8% hybrid ratio, moving to 3.75% would actually mean *reducing* hybrids, which is unlikely given the capital intensity. However, if the question asks for the *target* level relative to the cap, we must look at whether they need *more* hybrid capacity.
    *   **7.5%:** This represents a moderate increase from the current ~5.8%. It aligns with "Moderate refinancing or acquisition needs" and "Rating headroom moderately constrained." Terna is a regulated monopoly with stable cash flows, but it has significant investment plans (energy transition, grid resilience). Using hybrids up to 7.5% of total adjusted capital allows for efficient capital structure management without over-leveraging with expensive subordinated debt.
    *   **11.25% / 15%:** These levels are reserved for "High capex intensity OR large acquisition pipeline" with "Significant leverage pressure" or "Material downgrade risk." Terna's cash flow from operations (€2.3bn) comfortably covers its Capex (€1.7bn) and dividends (€0.6bn), leaving a surplus. There is no evidence of material downgrade risk or distress that would necessitate pushing hybrid usage to the maximum 15% limit, especially given the high cost of issuance in 2022/2023.

**Conclusion:**
Terna already has ~5.8% of its capital in hybrids. The company has strong, stable cash flows typical of a regulated utility with a "Strong" regulatory advantage. It faces high but manageable Capex. Issuing additional hybrids to reach a target of **7.5%** of total adjusted capital provides a prudent buffer for leverage optimization and funds future investments without incurring the excessive cost associated with higher hybrid ratios (11.25% or 15%) in a high-interest-rate environment. It balances the benefit of equity credit against the higher cost of hybrid coupons. The 7.5% level is consistent with "Moderate refinancing... needs" and "meaningfully improves adjusted leverage metrics" without signaling distress.

<answer>7.5%</answer>