The most common reason for watery squash casserole is not draining the squash well enough. A good solution to this problem is to pat dry the squash with paper towels after boiling. You can also sautee them in a tablespoon of butter instead of boiling/steaming. Another suggestion is to steam the squash and onion instead of boiling it. Lastly, it's good to have just a little bit of breadcrumbs, cracker crumbs or flour in the milk mixture to soak up some of the extra moisture.