I'm not sure of the setting that is causing this, but I think it is the "Upper/Lower Case" settings set to lowercase. But, when I have a unicode/nvarchar string literal the capital "N" is being set to lowercase. It would be nice if formatting didn't change this. For example:
select coalesce(columnname, N'foo') as newcolumnname from dbo.bar
Become this after formatting:
select coalesce(columnname, n'foo') as newcolumnname from dbo.bar
Which is invalid for SQL Server.