I've used the 'Happy Bottom' (aka Creature Comfort) seat and it was OK - it was one of the options that Mariner Kayaks in Seattle offered; my wife's Elan came with one. I much prefer seats that are 'slippery' as it's easier to get good rotation for an efficient stroke. The Redfish seats are popular, and I think they come pre-fitted for some Pygmy designs.
You can grind foam with a 36 grit disk in a 5" grinder, but it's tricky. You can also shape foam by hand with rasps and 'DragonSkin' metal abrasive.

Thanks. The CLC seat I'm referring to is this one: http://www.clcboats.com/shop/products/boat-gear/creature-comfort-seat.html Has anyone else here tried one?

I doubt that the builder had actually done that before. I don't think that would be a very waterproof or rot-proof solution, and a 1/2" dowel won't leave enough wall thickness to accommodate even 3/16" line. If you do choose this method, drill the wood before you glue it in place. I've used a plastic (grey PVC) tube roughened and epoxied in place, in some canoes. Or you can do an epoxy end pour and just drill through that; it's a much more reliably waterproof method.
Single-line toggles are much safer than 'strap' or 'rope loop' handles. You can buy the actual rubber handles cheaply on eBay or drill a piece of PVC conduit.

Thanks. How do you do an end pour? It's a looooooong way from the cockpit opening to the tip of the bow and stern, how do you pour resin in there without making a huge mess?