Stephen,
I believe the linked branch has a suitable fix for this issue now.

In response to my comment #6, I've realized that the 'replace_fs' in
fs_setup configuration was always ignored, because if a partition is
provided (in the "dotted" format there), then replace_fs is not used.

I've tested the general path on azure by re-formatting/partitioning the
disk into something that looks like a newly partitioned disk and then
rebooting.

** Changed in: cloud-init
       Status: Confirmed => In Progress

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https://bugs.launchpad.net/bugs/1686514

Title:
  Azure: cloud-init does not handle reformatting GPT partition ephemeral
  disks

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