Currently, the distribution system has been adapted to include a variety of Distributed Energy Resources (DERs). Maximum benefits can be extracted from the distribution system with high penetration of DERs by transforming it into a sustainable, isolated microgrid. The key aspects to be addressed for this transformation are the determination of the slack bus and assurance of reliable supply to the prioritized loads even during contingency. This paper explores the possibilities of transforming the existing distribution system into a sustainable isolated network by determining the slack bus and the optimal locations and capacity of Distributed Generators (DGs) in the isolated network, taking into account the contingencies due to faults in the network. A combined sensitivity index is formulated to determine the most sensitive buses for DG placement. Further, the reliability based on the loss of load in the isolated system when a fault occurs is evaluated, and the modifications required in for reliability improvement are discussed. The supremacy of the transformed isolated network with distributed generators is comprehended by comparing the results from conventional IEEE 33-bus grid connected test system and modified IEEE 33-bus isolated test system having no interconnection with the main grid.