Select the Plane object in viewport. Then Choose "Boolean" as Object Type under Compound Objects category. In the Pick Boolean roll-out click "Pick Operand B" button and then in the viewport click on Ground_Cutout to pick it for the Boolean process. Alternatively you could use Select by Names dialogue box for picking this.
Go to Display panel and in the Hide rollout click Hide Unselected while Plane01 is still selected. You will see that a hole has been made on the plane. Click Unhide All button to unhide all the objects again.
Now, open the Material Editor and select the first Sample Slot. Name it Water. Choose the diffuse color as R = 138, G = 200 & B = 220. Set the Opacity value = 50. Choose Noise map (with Size value = 5 in the Noise parameter) for the Bump slot and Raytrace map for the Reflection slot.
