Progress in describing thermodynamic phase transitions in quantum systems is obtained by noticing that the Gibbs operator $e^{-\beta H}$ for a two-dimensional (2D) lattice system with a Hamiltonian $H$ can be represented by a three-dimensional tensor network, the third dimension being the imaginary time (inverse temperature) $\beta$. Coarse-graining the network along $\beta$ results in a 2D projected entangled-pair operator (PEPO) with a finite bond dimension $D$. The coarse-graining is performed by a tree tensor network of isometries. The isometries are optimized variationally --- taking into account full tensor environment --- to maximize the accuracy of the PEPO. The algorithm is applied to the isotropic quantum compass model on an infinite square lattice near a symmetry-breaking phase transition at finite temperature. From the linear susceptibility in the symmetric phase and the order parameter in the symmetry-broken phase the critical temperature is estimated at ${\cal T}_c=0.0606(4)J$, where $J$ is the isotropic coupling constant between $S=1/2$ pseudospins.
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