Metallic sodium is volatile and explodes when it comes into contact with water. The water and sodium combine to form the highly caustic chemical sodium hydroxide (NaOH), hydrogen gas, and lots of heat. It’s the heat igniting the hydrogen gas that produces the impressive display.
According to the video below, the War Assets Administration was unable to sell the excess sodium to industry because no one was willing to risk transporting it.
Dumping sodium into a body of water (especially that much sodium) would be lethal for any animal or plant living in the vicinity. Not just from the explosion, but also from the sodium hydroxide. Lake Lenore is already alkaline because of the geology of the area. Nowadays, I think the disposal would have been handled differently.
The video is short and worth watching for the history and the memories of middle school chemistry.
Lake Lenore photo via IMLS Digital Collections and Content