Thank you all for your great replies so far! You have all suggested such great things to be concerned about-- honor societies, dances, student council, etc. I may check into a few of these though in most cases, sleep wins anyway. I'm not sure I've seen an item that would cause us to send her to PE. Please do keep them coming though! This is what I was hoping to learn from this community.
We are in California. I spoke again with the administration. Her options are 1) go to PE or 2) take the "F". There is no PE exemption, home study, etc. available in our district for middle school.
I also talked to my DD about the F (decided to put it all out there). She gets it and is okay with it. She gets all As in other classes, cares about grades immensely, but understands the situation here. Sadly, she ends practice at 8:30 PM, commutes 30 minutes, and needs 11 hours sleep minimum. Which makes it tricky to even get her there for second period! Sigh.