After being forced to kill his evil ex-father Douglas, Charlie develops a sour mood and is very unwelcoming to newcomer PSA agent Megg, known by many on Club Penguin as Spike Hike's intern, and is one of the most popular penguins of all time. Charlie soon becomes suspicious of Megg and fears her to be a double agent. The only two that support Charlie in his theory are his stepfather Jim and his brother Adam, the latter of whom happens to be a Frost Bite penguin. Jim is currently away on a solo mission in the Pie Dimension to destroy it and all its inhabitants.
Every day after coming home, Charlie tells his wife McKenzie many stories of his adventures. McKenzie is beginning to grow jealous and decides that she wants to go on a mission of her own. Charlie dissmisses this, saying that she would need to go through training and a long initiation process before joining the agency, which could possibly fly in the way of her caring for their pookie Grace while Charlie is away. McKenzie, however, still wants to go on a mission.
One day Charlie is stunned to find Megg trying to hack files on the PSA's "super-computer" and attempts to arrest her, only to be stopped by the other agents, who refuse to believe Charlie's claim. Due to their belief that he is lying, Charlie is demoted from vice-director of the PSA and is replaced by Megg. Distraut, Charlie relives himself of his PSA duties and leaves.
Charlie comes home and tells McKenzie about the day's events, much to her dismay, as now she has no chance at all of becoming an agent someday. She spends the day with Grace, and tells her about her thoughts. Grace, parodying the character of Michelle from the TV series "Full House" attempts to give McKenzie advice, but doesn't make much sense.
The next day Charlie and Adam are jetskiing when they are attacked by a large megladon shark. Charlie and Adam escape unscathed by fendin the megladon off with their ice powers, but Charlie is now extremely suspicious that someone sent the megladon to kill them.
Charlie and Adam return to the island to find that all electricity has been cut off, and penguins everywhere are panicking. Charlie and Adam make their way to the top of the Dance Club, and using a megaphone Charlie created with the Snowstone, try to calm every down. This is unsuccessful, as Charlie's speech is interuppted by a strange glowing robot that siezes Adam. Charlie attempts to free Adam from the robot's grasp, but the robot, which proves to be much stronger than Charlie, knocks him off of the roof of the Dance Club and teleports away. Charlie tries to activate his jetpack, but for some reason it won't turn on. Luckily, he is saved at the last minute by Jim, who catches him in his spaceship. Charlie finds that McKenzie is in the spaceship too, and had alerted Jim when the island blacked out (she got her friend Candice to watch over Grace) Charlie is proud of McKenzie, finally accepting that she could make a good agent.
The spaceship, called the "Spagheghap" manages to track down Adam's location and they discover that he has been teleported to the lighthouse. McKenzie prepares to break in with Charlie and Jim, but Charlie tells her that for her safety she should stay and keep watch in the Spagheghap, to which McKenzie reluctantly agrees. They break inside and look around for Adam but are immmediately knocked out by an unseen penguin. When they awake they find themselves inside of a laser cage, with Megg watching over them.
Megg reveals that she was not only the megladon, but that she is a shape-shifter, and a cousin of Douglas. Wanting vengeance on Charlie for killing Douglas, she had joined the agency to steal their secrets and destroy him. She then reveals her boss, who happens to be Smulley, having heavily upgraded himself. Charlie demands that Smulley tell him where Adam is, to which Smulley reveals that he has hypnotized Adam and made him his minion, whom he orders to kill Charlie. Adam shoots an ice blast at Charlie, but ends up accidentally freeing him and Jim. Jim grabs his donut launcher and goes to fight Smulley while Charlie dodges Adam's attacks and tries to break the hypnosis.
Using his donut launcher, Jim manages to severely damage Smulley's mainframe and trap Megg. Smulley, ignoring Megg's plead for help, teleports away, taking Adam with him before Charlie can reason with him. Jim hops into the ship and, revealing he had placed a tracking device onto Smulley during their fight, manages to get the ship to take them straight to his current location, which turns out to be the Puffle Hotel, which has been closed for renovation.
The three are stunned to see not a penguin in sight, but instead Smulley's minions roaming the island. Again telling McKenzie to stay in the Spagheghap much to her annoyance, Charlie and Jim break into the Puffle Hotel from the top and go to the lobby to find Smulley holding a large detonator remote. Smulley reveals that with the press of the remote, he can detonate the entire Town Center, which all the penguins have been forced into. Charlie and Jim try to stop him, but he runs into the elevator before they can reach him and starts to head to the top to press it. Luckily, due to the Puffle Hotel being under maintanence, the elevator climbs slow enough for Jim to beat him to the top. Charlie attempts to follow but is again attacked by Adam. McKenzie hears Charlie's yells and runs to his rescue.
By the time McKenzie gets through the front doors, Adam has knocked Charlie into the Coat Check room. McKenzie only hears the sound of Jim and Smulley fighting on the top floor and takes the slow elevator to the top. By the time she gets to the top to see Smulley and Jim fighting, Charlie and Adam have stumbled into the elevator and fought there way into the second floor. Charlie finally manages to come through to Adam and the hypnosis is broken.
Meanwhile on the top floor, Smulley shoots Jim with a temporary blinding ray, knocking him back. Smulley grabs McKenzie and runs into the elevator, while Jim, who now can't see, tells Charlie and Adam via Charlie's headset that he has heard Smulley enter the elevator (the second McKenzie reached the top, Smulley ran in and grabbed her). Charlie and Adam take an employee door and end up in the elevator socket. Together they create a large ice blast that freezes the elevator cables, and punch them, shattering them, and sending the elevator plummeting three stories, where it hits the ground very hard.
Charlie, Adam, and Jim come down and run into the Puffle Hotel lobby to see that the badly damaged elevator has fallen out of the socket and now lays on the floor. Lifting it up, they are stunned to see McKenzie in there, and that the elevator crash has killed both her and Smulley. Charlie breaks down at the sight of his dead wife and is comforted by Adam and Jim.
A few days later, Pixie, the director of the PSA comes to Charlie and tells him that Megg has been arrested, proving that Charlie was telling the truth. She then asks him if he wishes to rejoin the PSA, but Charlie declines, distraut about McKenzie. Pixie sits with Charlie on his porch and gives a short speech about how making sacrafices is what being an agent is all about, and that rejoining is what McKenzie would want him to do, before leaving.
Charlie reaches into his pocket and pulls out his old PSA badge. Realizing that Pixie was right, he puts it on, accepting his duty as a protector of the island.
An epilogue depicts Charlie being visited by his future self, telling him that there may be a way that he can still save McKenzie, setting the stage for the next story.