In the scenario described, the magnets are repelling each other because their south poles are facing one another. When the upper magnet is released, it accelerates downwards due to the magnetic repulsion, converting some of the potential energy stored in the magnetic field into kinetic energy as it moves.
Once the upper magnet stops 1 cm above the lower magnet, this indicates that some energy is still present in the magnetic field due to the repulsion between the two magnets. Thus, not all of the energy is converted into kinetic or thermal energy; part of it remains as potential energy in the magnetic field.
Given this explanation, the most appropriate response would be:
Some of the energy stored is converted into kinetic, thermal, and gravitational energy.