Sounds like you're opening up the actual map. You need to open up the .png image of the watermill map in order to open it. I recommend Gimp or Photoshop.
To make a heightmap you need a drawing software such as Gimp or Photoshop. You need the canvas set as Grayscale and it needs to be 513x513 Pixels. Also make sure that you do this all in one layer, do not make others unless you know you can press down the layers to make one layer on the canvas.
You can basically use any shade of grey you wish to use for your Height map. The dark greys create a lower height in the map, such as a river or pond. White is used mostly for hills and mountains, this gives height to the height map. In between is what many map makers use for the base of the map. For example, the ground.
Once you have done that, save the image as a .png image (For example; Mappymap.png) then save it into LocalDisk(C:)\\FeralHeart\\Media\\Terrains. Open up FeralHeart and then type in the image file name into the box labeled 'height map'.
If you prefer a video, I highly suggest this:
www.youtube.com/watch?v=ZTO8tyhSQPU (http://www.youtube.com/watch?v=ZTO8tyhSQPU)