As I said, I am trying to get away from using Adobe. Skyrim's old engine cannot take uncompressed formats with any size to them, so I usually for the .dds and the _s.dds use either dxt1 or dxt5 depending on whether or no there is an alpha channel. However, -msn.dds files ('normals') tend to get real 'artifacty' if compressed, and the Photoshop format of choice is '8.8.8.8. ARGB 32' which fills in with a nice transparent background. I ended up saving it in a8r8g8b8 style, with mipmaps using fant. (I need to know more about paint.net's mipmaps...) I am not sure that was the best format to use, but there seem to be no artifacts and the file size is pretty similar to what I started with. Also, Nifskope didn't complain.
As to the background issue, I simply did a 'magic wand' on the existing background and used the 'bucket' tool to flood the removed areas. Looked OK in game, the areas that were removed did not show (were transparent). A bit more trouble than PS, but I am tired of being constantly nagged about 'the cloud'.