The movie opens with the original theme of TUGS. The Star Fleet, a tugboat company owned by Captain Ronald Star, has just regained the Ocean Liner Contract for the second year running, and their first ship, the Princess Alice, is due to be docked a week later. The fleet consists of Ten Cents and Sunshine, both switchers, Big Mac, O.J., and Warrior, the harbor tugs, Hercules, an ocean tug, a switcher on loan from Ggibs City, Emily McAllister and Top Hat, a railway tug. The movie starts with Captain Starr announcing the receival of the contract, and the Stars are rewarded with complete overhauls once they dock the Princess.
Meanwhile, the star Fleet's rivals, the Z-stacks, are sore that the Stars have got the contract for the second year in a row, and due to the approaching recession and a lack of money, they decide to sabotage the Star Fleet's efforts, and to this end they enlist the help of one Johnny Cuba.
Cuba suggests that the Z-Stacks sink the Pricess Alice in the estuary while the Star Tugs are bringing her in, thereby ensuring that they have the Docks to themselves. The plan goes off without a hitch - The Princess is turned lengthways to block the estuary, and then sunk, while the Z-Stacks embark all passengers. Unbeknownst to them, Dingo, the narrow gauge tug, has seen them, and he goes hunting for another way to leave the port. However, he accidentally informs Scuttlebutt Pete the dredger, who subsequently spreads the news around the harbour. The Z-Stacks get news of the escape attempt from Clark the engine, and capture Dingo, who is placed in Johhny Cuba's hold. Sally Seaplane is also grounded by Zip and Zug, who steal her fuel. Billy Shoepack, meanwhile, comes to town with a load of dynamite, and hears of Dingo's imprisonment. While searching for Dingo, Billy comes across him and Cuba, and while the tramper nods off, the two make a plan - Shoepack will return later that night and blow Dingo free, which will also scuttle Cuba and put him out of the way.
Meanwhile, out in the estuary, Emily notices that O.J. is sinking. He is so old and needs an overhaul so badly that his hull is rusting through. Hercules offers to tow O.J. to the repair yards in Ggibs, and the two depart. However, O.J. makes one request - if he gets too much of a burden, Hecules is to leave him to founder.
Back in port, Billy arrives to help Dingo escape. As he lights the fuse, Johnny wakes up and tries to move, but gets stuck. The dynamite goes off, and Cuba starts to sink. Billy, needless to say, makes himself scarce moments before the Z-Stacks arrive, and Zebedee has the not-so-bright idea of towing Johnny out into deeper water. The tramper sinks without trace, and Dingo floats free. He then tries to escape with the Z-Stacks in hot pursuit, but luckily Grampus appears and causes the Z-Stacks to ram each other while trying to avoid him.
Dingo and Billy set off Up River until they reach the Logging Yard, where they discuss the problem of rescuing the Stars. An old barge tells them that the river in Bigg City and Ggibs City is the same, and the junction is way up in the mountains. Dingo sets off to find it.
Out on the ocean, Hecules is tiring. O.J. tells him to abandon ship, but Hercules will not leave his old friend. The two find a cove to shelter in, and wait.
Meanwhile Dingo finds the junction and sets off for Ggibs, where he tells the Moon Fleet about Bigg City's blockage. Meg, Penny, Dingo and Raindrop set off to help, and en-route to the harbour, they find Hecules and O.J. Meg decides to tow the pair to Ggibs, and with help from Hecules, the trio arrives safely and O.J. is brought to the yards.
Even with the help of the Moon Fleet the Stars cannot clear the blockage and the Z-Stacks refuse to help. Ten Cents warns them that when the port's fuel supplies run out there will not be any more. The Z-Stacks have amassive argument among themselves, which ends in an offer of help to the Star Tugs. The blockage is cleared, and the tugs enter port, where Customs promptly arrest the Z-Stacks for delibarately sinking the liner. Warrior tells the Customs to release the Z-Stacks as they helped out in the end, and without them there would be no competition, which wouldn't be fair on Captain Zero. Captain Star then calls a meeting, and informs both fleets that the Z-Stacks had not been on the databases of the Port Authorities, and have since been added to it. As a result, he says, the OLC has been awarded to both fleets. After a short period of celebration, during which the purchase of Dingo by the Starr Fleet is announced, normal work resumes, and Bigg City Port is tranquil once again.