When the upper magnet is released and accelerates downward, it converts some of the energy stored in the magnetic field into kinetic energy as it moves. As it approaches the lower magnet, the opposing magnetic force also does work that converts some of this energy into thermal energy (due to vibrations and other frictional effects) as well as into gravitational potential energy as it descends.
Since the upper magnet stops 1 cm above the lower magnet, not all of the energy has been converted as there is still magnetic repulsion acting on the upper magnet, which indicates that some energy remains in the magnetic field system.
Therefore, the best response that reflects this situation is:
Some of the energy stored is converted into kinetic, thermal, and gravitational energy.