There may be a basic incompatibility between your lwo terrain and a heightfield that would prevent you from doing what you're attempting. A heightfield is NOT a mesh object, it is a series of height values only, which is loaded as an evenly spaced grid of varying heights.
In terms of a "Y is up" system, a height field is only the Y values, the X and Z values are left up to the renderer to figure out. A mesh object, including a lwo object, has all three (X, Y, and Z) included in the file.
If your lwo has been optimized (merging faces, etc), or if it was created with an object editor instead of as a heightfield, then I don't believe it will be possible to convert it to a heightfield.