Minecraft wiki entry for Development, associated text: Water was made transparent before the release of 0.0.12a. To do this, Notch had to make it render on a new layer, which is why it lost its shadows. Water would stay without shadows until the release of 0.0.14a_08.
The terrain generation files for this version can be found in the 0.0.13a jar provided in the launcher. When ported to 0.0.13a, it is possible to see how the terrain worked. There are variables to enable/disable the water spreading from the borders, the uniform dirt layer and blocks being able to generate on ocean level.