I believe that cloud-init is working as intended here. I'm unfamiliar
with the Ubuntu Image tool, but it looks like there is overlap between
the user-creation from that tool and cloud-init.

When cloud-init runs, it will by default create a distro-default user with no 
password and password login disabled. On Ubuntu, this user is 'ubuntu'. This 
behavior can be overridden using user data alongside the network-config.
The user data file is described here:
https://cloudinit.readthedocs.io/en/latest/reference/datasources/nocloud.html#file-formats

Whereas the user data for creating users is described here:
https://cloudinit.readthedocs.io/en/latest/reference/modules.html#users-and-groups

It describes how the default user can be overridden.

Based on this, I think I can explain your 3 scenarios:
1. Cloud-init created user ubuntu with no password which somehow superseded the 
Ubuntu image user creation.
2. 1 happened, but since you also specified another user, that user got created 
and so works as expected.
3. With no NoCloud seed data, cloud-init didn't run and didn't attempt to 
create any default user.

Does that help?



** Changed in: cloud-init (Ubuntu)
       Status: New => Incomplete

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https://bugs.launchpad.net/bugs/2054785

Title:
  cloud-init destroys the password of existing 'ubuntu' account

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