It takes place during Christmas at Shining Time Station. The scene opens with Mr. Conductor (Ringo Starr) with an axe over one shoulder, dragging a miniature evergreen along the top of a bench heading towards his home.
The station is filled with people trying to catch trains to take them to see their families. Even Schemer (Brian O'Connor) is in a good mood, because the Indian Valley committee is putting on a Christmas pageant and he is almost certain to get the part of Santa's helper. The kids, Matt (Jason Woliner) and Tanya (Nicole Leach), write letters to Santa Claus and Mr. Conductor sends them on their way. Then, he once more tells the kids the story of the time Thomas met Terence, shown in the episode "Thomas, Terence, and the Snow".
In the story, Thomas meets a friendly tractor named Terence and mocks his use of his caterpillars. Winter soon arrives, and Thomas is forced to wear an uncomfortable snowplow. He bangs it so much that by the end of the day it's too damaged to use again. The next day he continues his work without it, much to his delight. Unfortunately, he quickly comes across a snowdrift and crashes right into it, ending up trapped in it. Instantly he begins to regret breaking his snowplow. Bertie arrives to take Thomas' passengers and Terence comes to the rescue, taking Annie and Clarabel away before rescuing Thomas from the snow. A grateful Thomas thanks Terence and apologizes for mocking him earlier.
An old man, Mr. Nicholas (Lloyd Bridges), enters the station carrying a Christmas tree with Harry's cousin, Tucker Cupper (Ardon Bess), and immediately knows everything about Stacy Jones (Didi Conn) from when she was a little girl. He says he is there to catch the Northern Star, a train that doesn't run on that railway, but he is confident it will come.
Meanwhile, Stacy agrees to watch Claire's (Judy Marshak) daughter, Vickie (Rachel Miner), a bratty little girl, at the station. Matt and Tanya dislike her because of her attitude. She meets Mr. Nicholas who teaches her to be nice to people and it soon begins to work; Schemer's mom has made him a Santa's helper costume and he begins his campaign against Stacy by telling Midge Smoot (Bobo Lewis), J.B. King (Mart Hulswit), and the Mayor (Jerome Dempsey) untrue things about her. Mr. Conductor tells the kids another story from the Island of Sodor - "Thomas' Christmas Party".
After the story, Mr. Nicholas (actually Santa Claus) is still waiting for the Northern Star. To everyone's surprise, it pulls into the station as he had predicted. Meanwhile, the fighting continues over who will play the part of Santa's helper. Mr. Nicholas encourages Vickie to use her gift of song to quell the conflict. Her singing of the 1848 Shaker song "Simple Gifts" reminds them all of the true spirit of Christmas. Harmony is restored as all gather around the tree to celebrate the power of believing.
The second season casting change from Starr to George Carlin as Mr. Conductor would be explained by Starr's character having left the station to go with Mr. Nicholas to the North Pole. While there is a brief encounter at the end of this episode between them, nothing in the story actually mentions Mr. Conductor's departure.
The snowy winter footage used for the opening and closing sequences was filmed at the Grand Canyon Railway between Williams, Arizona and the South Rim of the Grand Canyon. The final filmed scene of the title sequence shows the train pulling into the former Santa Fe Railway station at Grand Canyon Village on the South Rim. The historic Bright Angel Lodge and El Tovar Hotel are in the background nearby. The steam locomotive shown is #18, a 2-8-0 type. It appears again during the third musical number, "It's Christmastime at the Railway Station" and also contributes the sound of its whistle, a Southern Pacific six-chime, for Mr. Nicholas's heard-but-not-seen "Northern Star." It now resides at the Mount Hood Railroad in Oregon.