Energy in 3 consecutive forms: potential, kinetic, internal (Photo credit: Wikipedia)
A rock has potential energy (PE) localized in it when you lift it up above the ground. The rock is the system; everything else it encounters is the surroundings. Drop the rock and its PE changes to kinetic energy (energy of movement, KE), pushing air aside as it falls (therefore spreading out the rock’s KE a bit) before it hits the ground, dispersing a tiny bit of sound energy (compressed air) and causing a little heating (molecular motion energy) of the ground it hits and in the rock itself. The rock is unchanged (after a minute when it disperses to the air the small amount of heat it got from hitting the ground). But the potential energy that your muscles localized in by lifting it up is now totally spread out and dispersed all over in a little air movement and a little heating of the air and ground.
A hot frying pan? The iron atoms in a hot frying pan (system) in a room (surroundings) are vibrating very rapidly, like fast "dancing in place". Therefore, considering both the pan and the room, the motion energy in the hot pan is localized. That motion energy will disperse—if it is not hindered, according to the second law. Whenever the less rapidly moving molecules in the cooler air of the room hit the hot pan, the fast-vibrating iron atoms transfer some of their energy to the air molecules. The pan’s localized energy thus becomes dispersed, spread out more widely to molecules in the room air.