The locomotives allocated in South Island were initially classified as DH as they were fitted with adjustable bogies that allowed a higher maximum axle weight and tractive effort.

In the late 1970s, the DG class was reaching the end of its designated working life with a litany of problems: In an attempt to modernise and extend the operational lifespan of the DG class locomotives for a decade to fifteen years,[4] Chief Mechanical Engineer Graham Alecock was instructed to create a proposal to equip them with new cabs that would be more crew-friendly and better equipped.

[4] In mechanical respects, the front traction motor blower was moved to a position above the main generator, and new thermostat valves were installed to prevent the overheating issues that had affected the locomotives under load.

The front ladders were also fitted to allow access to the cab windows, some of which were integrated into the sheet metal profile edge from the frame to the leading headstock.

Even though their new cab was designed with a provision to operate them over the Otago Central Railway in mind, very few of the re-cabbed locomotives ever worked on that line.

It was decided to start withdrawing those locomotives that had not been overhauled to provide parts for those that had, and so the first to be withdrawn, DG 765, was treated on the fact it had an engine block in good condition.

By 1983, most of the unrebuilt DG class locomotives had been withdrawn from service, while the rebuilt ones continued until they either encountered mechanical issues or required major repairs.

On August 28, 1983, the NZR ran a "Farewell to the DG Class" excursion between Christchurch and Arthur's Pass on the Midland line.

The following month, DG2007 failed when it threw a con rod through the engine block and was placed in storage, while DG2468 was sold to the Weka Pass Railway shortly after.

In 1983, Dunedin-based machinery dealers W. Rietveld Limited were contracted by the NZR to scrap the rebuilt DG class locomotives,[5] which were stored in Dunedin.

Some had their EE 525 traction motors removed by the NZR and sold to the National Federation of Railway Societies for other groups who owned the DG class locomotives.

The withdrawn locomotives were stored at the former sidings at Pelichet Bay and stripped of all useful parts before being forwarded to Sims-PMI for scrapping at their Dunedin premises.